Morgan Kelly: Ireland’s future depends on breaking free from bailout Post author By Philip Lane Post date May 7, 2011 His new IT article is available here. Categories In Uncategorized 610 Comments on Morgan Kelly: Ireland’s future depends on breaking free from bailout ← Business and Finance Article on Debt Sustainability → An Ill Wind 610 replies on “Morgan Kelly: Ireland’s future depends on breaking free from bailout” Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans. The Invisible Hand was presumably off doing something else at the time, then. Jaysus who are his sources? “National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.” This is the crux of it and we had better get on with it. Dissolve NAMA now and let the ECB swing in the air instead of going along with their dastardly plan to grab our national assets before making us a pariah bankrupt state. Serves them right. Thank’s Morgan you figured it out, others could only talk about asymmetric risks. As a reward I am going to vote for you to deliver the speech from the steps of the GPO in 2016. Yes. It is posssible. That is positive. Wow For once The Dork is speechless. I thought the scenarios outlined by Karl Whelan were depressing, but Morgan Kelly doesn’t leave room for optimism. It is deeply depressing that we have missed so many opportunities to minimise the repercussions of the bank guarantee, but I did hope that the new government would put up a bit of a show in europe. The ECB is picking off the peripherals like flies. Portugal gloating about their better deal, is typical. I think Ireland should be actively forging alliances with Greece Portugal Spain and Italy – and anyone else such as the UK – to try and convince them that we have common interests and that together we could wield the power that we have. Alone we are hard pressed to face the ECB, despite having cards to play. Those cards could have harsh consequences for us, but if we presented a united front of peripherals we could avoid the possibility of the ECB isolating and bullying us. It is a hard ask to create a united front from scared governments who are each hoping to bargain a slighttly better deal for themselves. But I think it is well worth a try. The looming crisis in Greece should make all the peripherals – including Spain and Italy (who of course do not want to be included at all) – look long and hard at the reality of their situations. Maybe standing together we can force the ECB to take a more realistic view of our situations and negotiate the orderly restructuring of debt. I think it may be our last chance – and the Euro’s too. “Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person” PH has at times come across as amiable but casual – certainly about property valuations, but I thought it was forbidden to criticise him. “Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans.” I actually know people with connections to the guys in question who regard the most important thing in career development in Ireland as acceptance into appropriate rugby clubs. This is not a joke. ” The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner” This is the just-keep-your-collateral version of more elaborate debt for equity swaps. The ECB chose the haircuts based on its own risk analysis. It effectively took a position. “So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise. Morgan is evidently refreshingly both self-aware and not afraid of Paul Krugman. What on earth is he doing at a university? “Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position” How insightful. If only this kind of thinking had been allowed into the pre-election discourse! Not sure about the last bit though Where do you get new money to pay the interest if you are not in deficit ? The weakness of all Governments is their dependence on bank issuance. Is he suggesting that the Ireland runs back to the BOE ? I guess they certainly were not as nasty as the ECB at least during most of the 20th century – they wanted the flipping place as a going concern anyway. I applaud the mans candor however – the ICB is the cuckoo in the nest and they are shitting all over the gaff. Much of what he says rings true, at this priority should be given to ensuring that the government gets quality independent economic advice. Given the sheer novelty of the crisis in general, and how much we are being jostled by others, I think we need to reach beyond these shores for economists of global repute to advise Ireland. A council of econmic advisers, with dedicated staff (including banking and legal experts), would seem like a wise investment….cos else no one will make our case effectively Quote, emphasis mine:: Odious debt is an established legal principle. Legally, odious debt is debt that resulted from loans to an illegitimate or dictatorial government that used the money to oppress the people or for personal purposes. Moreover, in cases where borrowed money was used in ways contrary to the people’s interest, with the knowledge of the creditors, the creditors may be said to have committed a hostile act against the people. They cannot legitimately expect repayment of such debts. I consider the majority of imposed debts on Irish citizens, to repay private banking debts to be odious. In addition…. concerning EU and IMF ‘bailout’ as well as ECB, I consider their lending policies as odious, hence, a hostile act against the people of Ireland. @ Grumpy On PH being above criticism. From an earlier post “Hohohan gives his views” and I gave mine! “He’s an academic, he is far too honest and “truthful” , he is out of his depth. There is a huge difference between lecturing and dealing with real life bond speculators/ hedge funds not to mention the various machinations of insolvent banks. NAMA has the whole of the Irish banking system on the wrack, broke, insolvent it, and the guarantee has paved the way for IMF. Meanwhile Honohan is looking for more honesty? Lenihan is at one end of the scale, nobody believes him anymore while Honohan is at the other end of the scale. Someone should tell him that “honesty is not a policy”, too many people believe him and yet he too has been proved wrong, dreadfully wrong in his soothing prognosis.” @Georg – just to be clear, that’s something you are quoting from another piece. Its not from the article. A lot going on here, but most of it probably doesn’t need pointing out. One thing that might be worth saying: if you want to read something more than despair out of the final paragraph, you could speculate that the whole piece – but especially that last paragraph – is a telegraphed message to Leo Varadkar and some other TDs (Richard Bruton? Joan Burton?). @grumpy I thought it was forbidden to criticise [Patrick Honohan] Well, clearly Kelly’s not too concerned about collegiality these days. But I think it’s also evident that he made a conscious decision to influence the public debate by pushing Gov. Honohan off his pedestal. But for deliberate iconoclasm it’s in the ha’penny place to what Kelly says about bank runs (no ‘deposit flight’ here). @Liam, correct, it is not from Morgan’s article. Apologies if that came across as such. It reflects my personal opinion! UNCTAD, United Nations Conference of Trade and Development: The Concept Of Odious Debt in Public International Law http://www.unctad.org/en/docs/osgdp20074_en.pdf http://www.brettonwoodsproject.org/art-557160 Note to Mr. Shatter and Mr. Noonan: Ireland is not South Africa! http://www.unctad.org/en/docs/osgdp20074_en.pdf Political transitions pose complex, multi-faceted challenges for the transitional regime, from accountability for wrongs of the past, to establishing a framework of legal stability and economic reconstruction. Dealing with odious debt from the prior regime usually involves political as well as legal considerations…. …With respect to obligations of debtor States to private, i.e. non-state, creditors, there is no established rule of international law that requires that these be continued in the case of political transition. Only where changes in contractual rights amount to a denial of justice or otherwise fall short of the minimum standard of treatment of aliens in customary international law, or where these changes can be characterized as an expropriation of property rights or unjust enrichment, can any claim be established against the debtor State in international law. Where odiousness can be established, it would be very difficult for a private creditor or a State espousing its claim to argue successfully that the alteration of contractual rights is a denial of justice. Oh, apropos of Timothy Geithner. Geithner is such a powerful and unassailable figure because he has the rock-solid personal support of Barack Obama. The two old Ivy muckers are as thick as thieves. Geithner’s father knew Obama’s mother. It’s every bit as cozy as anything on our little island. But as the whole, wonderful New York article makes clear, it’s not just a personal thing by any means. Obama’s very much in tune with the Summers/Rubin/Geithner philosophy of financial reform and regulation. No need to do anything drastic, the fine Ivy men of Washington and Wall Street have things largely in hand. So … I hope we’re all pumped up to gush forth our unconditional love for Obama in the second half of this month! Ireland is bankrupt now and if restructuring is inevitable in say 2 year’s time, the issue is would triggering a Eurozone crisis now be better for the country? For decades we have had a twin-track economy; in one, world class companies have prospered supplying European markets, relatively independent from the broken governance system and low-level but insidious corruption. Our challenge is to keep the existing foreign companies and being within the euro system is likely seen as a plus; it is much more difficult to win significant new projects as the centre of gravity of world trade moves to Asia. Without the foreign sector, we would look more like a Balkan country than a Northern European one. On swiftly cutting the budget deficit to zero, Ireland would need a level of national solidarity that hasn’t been evident so far. The Department of Finance’s stability update report last week said that while taxation receipts in 2011 are projected to be around 2004 levels, gross voted expenditure of Government Departments and Offices in 2011 is projected to be about 40% above the 2004 level. It is this large gap between the State’s revenues and expenditure that is now being addressed by budgetary policy, and will continue to be in the coming years. In 2004, Gross capital and current spending was €47bn; in 2011 it is forecast at €67bn. Tax, PRSI and other revenues were €45.2 in 2004; in 2011, they are forecast at €48bn. The current estimate of the Exchequer Balance for 2011 is -€18.21bn. The vested interests who remain with bubble gains need to be challenged but it’s evident that for too many of the 85% with jobs, unemployment is not the front burner issue as it is in the US. If we want to embrace an economic emergency, it cannot be left solely to the politicians. Insiders like Morgan Kelly have to come forward and propose what could be done in their own institutions with a lot less. Otherwise, the efforts of political leadership would be sabotaged by the vested interests. There are big unsustainable sums other than easy pickings on the welfare budget; dependence on the Exchequer is hugely expensive. €2.7bn on public staff pensions; science budget €2.5bn; public procurement at €16bn; public legal bill at €500m and on it goes. good article by Morgan. Who is shocked that Fine Gael and Labour show no imagination in dealing with the crisis and are scared to do anthing that might involve them squaring off with the ECB. In 1918 supposedly the Irish home rule party was destroyed. What a nonsense. They went underground and emerged a few years later. We’ve had decades now of Irish govts too polite and too weak to ever stand up for ourselves. Look at Iceland (and I refer not to the banks) and who they tried to stand up for themselves. Could anyone ever see an Irish Taoiseach doing the same? Yeah right. . The prophet has spoken AGAIN. Will we heed him THIS TIME? Or ridicule him as we did LAST TIME. As Greece Considers Exit from Euro Zone http://www.spiegel.de/international/europe/0,1518,761201,00.html . We really need a response/article in light of Kelly’s comments by respected people on this blog. Is a balanced budget, immediately, a good idea? Karl Whelan has said it is bad or impossible in the past, so what does he think of his colleague’s suggestion? And what do our monetary economists think of the idea of independent central bankers pre-empting government policy on banks – efficient, quasi-fascist or both? Is “de facto control” a paranoid cop-out? I hope that Kelly does not expect or enjoy more quiescence from his colleagues than he has shown to Honohan. Go Morgan Kelly! “Houston, we have a problem!” Nothing wrong with the analysis – it is a big bad world out there alright – and one right conclusion. It is an absolute priority that Ireland balance its public accounts as soon as possible and that those whose livelihood depends on the public purse – in particular; government, other public servants and contributory state pensioners – wake up to that fact. The latter two categories – academics included – are doing so because they are seeing their children and their grand-children with no future. Most, but not all, participants in the first category are still stuck in a parallel universe which they think is still occupied by the latter two. Workers in the private sector have to live in the real world. They have the sense to realise that the Irish economy needs retail banks and that the six that caused all the trouble cannot be replaced by banks from our nearest neighbour. They are also aware that the economy is still ticking over and may well have bottomed out. The fulminations of economists are not their major priority. It is by now obvious that it is the larger European banking problem is the reason why Irish banks are being emptied of deposits. But this is a phenomenon that is not confined to Ireland and to see it in the near hysterical terms of the article is frankly ridiculous, especially to take the view that Ireland is the (only) sacrificial lamb. Still, whether you use a foghorn or a digital alarm to sound a necessary wake up call is immaterial. And this article will certainly make waves. As to sources, there is nothing that Morgan Kelly has written that one could not read in the papers (and see adverted to on this blog). @ Michael Hennigan Public procurement 16bn? Is that right? Could you clarify what is being procured? @ DOCM Could you refer me to the previously public source of the Imf`s specfic plan to target bondholders and B Lenihan referring to them as saviours? The lunatic is back, after a six months silence, during which Osama Bin Laden made more public pronouncements than he did. The latest diatribe is full of the usual hysteria. It contains not a word of serious analysis about how the real economy is currently performing, just a pretence, unsupported by any figures, that it is in the process of meltdown. Nothing about: (a) GNP has risen by 4 per cent in the past 9 months (Kelly himself has said repeatedly that it is GNP that is the aggregate that matters) (b) the balance-of-payments is in surplus (which competent economists like John Fitzgerald point out means that Ireland Inc’s debts are falling) (c) tax revenues are above the December budget target (see figures out this week) (d) the live register has been falling since September (see figures out this week) (e) monthly redundancies are failling sharply (see figures out this week) (f) monthly job vacancies (see Irish Employment monitor) are rising sharply (g) competitiveness has been rapidly improving for 4 years (h) manufacturing is growing at its fastest rate since the 1990s (see recent PMIs) (i) FDI is growing rapidly on the back of the improved competitiveness. I could go on and on but, unlike Kelly, I won’t. Noonan should put out a statement saying that this gobsh*te’s comments are unworthy of serious consideration, and simply leave it at that. Whew, thanks, JtO. For a minute there he had me worried. All’s well, then. @ Gavin Kostick You have me on that one. I recall reading several references but would find them difficult to track down. But the situation described can be inferred from the different approaches of the two institutions involved. The IMF is there on German insistence despite its involvement being initially vehemently opposed by Trichet. The idea was to adopt the hard line reputation of the IMF – there are euphemistic references to this repeatedly even in the official documentation – but the instigators overlooked the fact that this hard line approach included taking an equally hard line with private creditors, leaving aside the usual other element in the IMF’s armoury, that of a devaluation. But, as the phrase has it, we are where we are. As to Geithner’s involvement – in case the matter is raised – I do not see how the US, as the largest contributor to the IMF, and the holder of a de facto veto in that organisation, could be expected not to have a say. Indeed, I posted a link to a January interview in the WSJ with Trichet which contained the following. “WSJ: Should senior bondholders of bank debt be forced to accept haircuts in the event of a bailout, as proposed by the European Commission? TRICHET. This is not a European concept. This is a global concept, which is discussed in particular at the level of the Financial Stability Board and of the Basel Committee It is particularly important for so-called systemic financial institutions. Very careful analysis is required on the various possible options – additional capital buffers, contingent capital, bailing in financial instruments, etc. I would say for us it is still a work in progress. In any case I don’t imagine we could have a different solution in Europe than in other advanced economies”. As to Ireland’s relationship with Europe, I have in my head a story I recall of two Irish authors who passed each other every day in Stephens Green but, as one was always looking at the ground and the other at the heavens, they never actually met. @Edward I don’t know if we have figures for the current budget deficit in 2010, but Eurostat reckons the budget deficit for 2009 was 14.4% of GDP. Cutting that to zero implies a fall in GDP of about 28.8%, which in turn implies an increase in our debt burden of 40.4% A first class contribution, with a lot of information about what went on during the bailout, and how it was interpreted by the players at the time, that I had not seen before. Useful in how it takes aim at the Hononohan hagiography. Whether or not there’s a reasonable alternative view, the Governor has had far too much of a free ride to date in public discourse because he seemed like a decent stick who knew his stuff. His actions should not be beyond robust criticism. Useful to know that the perversion of the IMF’s involvement in the bailout, which we understood in broad terms already, is so severe that it may be illegal. It’s very useful to have a clear voice added to the case for achieving a primary surplus immediately, and for returning responsibility for the funds imposed by the ECB Expeditionary Force to their source. The Government and much of the public are living in Cloud Cookoo Land, and we desperately need an antidote. Before this, of the country’s prominent economists, only Colm McCarthy seems to have been prepared to speak the bleeding obvious. Nothing will be done because Ireland is not a society. We cannot work together and share the pain to achieve anything like this. Just look at the responses when someone says we should have debt forgiveness for mortgage holders. We will pay back billions to hedge funds and banks but “by god, there is no way my neighbour will be helped”. The really sad thing is that it seems Greece (‘We are no Ireland’), Portugal (‘We got a better rate’) and Spain (‘We have no problem’) think the same way as we do. There can be no solidarity between us. You can see the difference with the “Core Euro Countries”, even though they hate each other they are all sticking together like glue to make sure this will end in the peripherals. That is solidarity The educated middle class is in disarray, as an article of this type would otherwise never be published in the ‘newspaper of record’. It threatens the standing of our CB and its Governor in a most direct way. I wonder what Mr Elderfield is thinking as he cycles along. For a senior Irish academic, Prof Sheehy pulls remarkably few punches. As he sees it, our economy has received the administrative equivalent of two bullets to the head. He even names the shooters. Absent major surgery, he foresees the imminent demise of our principal remaining support, namely the FDI sector, through the cumulative, confidence-sapping impact of complex litigation, externally enforced corpo tax changes and other systemic interlinkages. The logic seems to be the consequences of bankruptcy at Ireland Inc will redound fatally through the public, financial and non-financial private sectors. A crisis doesn’t have neat boundaries. ‘Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off’ and …………In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico’ I find the argument convincing, and I think his assessment of our capacity to perform the necessary surgery is also pretty accurate. Joe Lee must be shaking his head. @DOCM How the hell can Ireland balance its public accounts if the commercial banks cannot lend ? This is not the 1980s. I like Morgans kellys anylasis but the last bit does not make any sense to me – unless the banks are clean again(which may be possible under his plan) this is crazy. @JTO Good to see you back. Not sure about this article. I think it contains a contradiction: 1: Everyone expects bankruptcy but 2: When the bankrupcy comes it will be unplanned and chaotic. If it’s expected then restructuring is probably already being planned. The other thing is the effect of wage cuts on mortgage defaults. I don’t know how he sees that working through the system. @Paul Q I presume you mean Prof Kelly. On MK’s two points. 1. It’s something that many people have long said…that we need to get out from as much of the banking debt as possible, for moral reasons if nothing else. The political issue in Europe is then “Who pays?”. Passing the debt onto other EU taxpayers is better for Ireland, but will be politically dangerous in the short and long term. Another solution is to be desired. Perhaps a EU-backed levy on those creditors who rotated out before the ECB rotated in? No neat solution presents itself, but unilateralism will remain (I hope) an option only to be considered in true extremis. 2. On adjusting the budget, the difference between MK and – for instance – Karl W seems to be profound. I’m inclined to side with MK, but it’s a question of degree. The differences of option are (IMHO) driven by whether you believe the recession in Ireland is a temporary or permanent loss of output and whether you think that borrowing hard currency to try to stimulate a small open economy is sensible or nuts. Again, I tend to believe “permanent” and “nuts”. I will side with JtO on one thing. Ireland can be a prosperous place if we take sensible decisions. There is a base from which we can work and parts of the Irish economy are, or could be, strong performers and creators of wealth. As Michael H and Paul H often say, these sensible decisions will have to be taken on the basis of economic and societal logic and justice, not on the basis of protecting status quo or old relationships…..and that’s a problem with the current govt. @ Gavin Kostick On public procurement, the figure of €16bn has been used by the DoF in recent years, most recently in April by Minister Brian Hayes. It relates to contracts for works, goods and services, purchased via the tendering system. Add €19bn for public pay and pensions and the cost is equivalent to the tax receipts in 2011 of almost €35bn. There will be additional revenues of about €13bn but there are also additional direct public costs such as personnel expenses etc. Every time we get a new wave of trouble, the usual suspects from Germany come forward to say there can be no easing up, no restructuring, no improvement of the terms. It is, we are told, the future of he Eurozone itself which is at risk. What they are actually to Greece and Ireland is this. YOUR determination, YOUR sacrifice, YOUR suffering will guarantee OUR prosperity. Why is this a sensible bargain for Ireland and Greece? @Michael Hennigan – “Otherwise, the efforts of political leadership would be sabotaged by the vested interests.” History seems to demonstrate that it has always been the vested interests who run politics….. and there are plenty of people now pushing up daisies who tried to wrest their greedy hands from the levers of power. @JTO – “The lunatic is back, after a six months silence, during which Osama Bin Laden made more public pronouncements than he did. ” Yeah yeah yeah ….. but MK isn’t the subject of an extra-judicial killing order (well, who knows after this article?!)…. It’s chaos. Riding a tiger. Prof Honohan is a decent man but this is a structural breakdown. Humpty Dumpty. So many careers have been destroyed already and we are nowhere near equilibrium. The mess just gets messier. It’s will contaminate lots of careers on mainland Europe in time. http://monthlyreview.org/2011/03/01/structural-crisis-in-the-world-system “Premise No. 1 is that all systems—from the astronomical universe to the smallest physical phenomena, and including of course historical social systems—have lives. They come into existence at some point, which needs to be explained. They have “normal” lives, the rules of which need to be explicated. The functioning of their normal lives tends, over time, to move them far from equilibrium, at which point they enter a structural crisis, and in due course cease to exist. The functioning of their normal lives has to be analyzed in terms of cyclical rhythms and secular trends. The cyclical rhythms are sets of systemic fluctuations (upturns and downturns), in which the system regularly returns to equilibrium. However, it is a moving equilibrium since, at the end of a downturn, the system never returns to exactly where it was at the beginning of the upturn. This is because secular trends (slow, long-term increases in some systemic characteristic) push the curve slowly upward, as measured by some percentage of that characteristic in the system. Eventually, the secular trends move the system too near its asymptotes, and the system is unable to continue its normal, regular, slow upward push. Thereupon, it begins to fluctuate wildly and repeatedly, leading to a bifurcation—that is, to a chaotic situation in which a stable equilibrium cannot be maintained. In such a chaotic situation, there are two quite divergent possibilities of recreating order out of chaos, or a new stable system.’ The meetings in Europe and the Greek story is interesting at the moment. There is simply no way that Greece would want to leave the Euro. Greece would want to restructure – certainly not leave. So who’s putting this story out there? Hate to be too cynical but is this not a little barbed threat to Greece timed to coincide with the restructuring talks – unofficially putting Euro exit on the agenda? Now who would do a thing like that? What European institution has an admirable track record in threats issued through media leaks? I have no proof bit wouldn’t be surprised if the ECB is up to its usual tricks. Or maybe I just need to get out more….. Step forward John McHale and all the other apologists for ECB/EU policy. It has long been clear that the solution to the mess is political and using models and crystal balls and talking about the option value of waiting is completely useless. Part of the problem with the Economics profession is that it doesn’t know when its models and predictions are useful and when they are so unreliable that they are harmful. @ Hugh Sheehy On your first point, as Mae West replied to an admirer (when complimented “My goodness, what big diamonds you have”); “goodness had nothing to do with it, dearie”. There is no moral dimension to the problem. You owe money, you pay it back. It is a rule of everyday life which, for some reason, is lost sight of in the academic economic debate. The problem at the moment is that, were Ireland to bail out from its bailout, the private financial institutions concerned, here and in Europe, are too weak to take the hit and their responsible governments would have to call on their taxpayers to take it instead (and on those of the Eurozone in particular in the event of a sovereign default). That is the political reality which seems to escape people in Ireland – including Morgan Kelly – but has certainly not gone unnoticed by the True Finns and taxpayers in the creditor countries generally. Which, no doubt, explains the meeting of their finance ministers of the latter this weekend. On your second point, debating conflicting economic forecasts is (IMHO)largely irrelevant. The only really helpful commentary is in respect of the actions being taken, or failing to be taken, by the authorities to achieving the goal of achieving an improvement in them. http://www.nakedcapitalism.com/2011/05/geithner-blocked-imf-deal-to-haircut-irish-debt.html Goldman Sachs alumni strikes again. It helps if you know who your friends are. I do agree with Morgan that the taxpayer paying him twice the going rate is madness. Morgan paints the reputational damage of sovereign default as the ultimate disaster, making us look to the world like Greece or Argentina, and to be avoided at all costs. Yet he recommends letting our banking system go belly up, burning all bondholders and promissory notes and telling the ECB to stuff their collateral up their fundament. Yes I can see how that would enhance Ireland’s reputation. Morgan’s article provides one answer to the question of what happens next after the Baldini-Wally conversation http://www.irisheconomy.ie/index.php/2011/05/02/promissory-notes-the-movie/ We walk away from the banks, letting the ECB take the collateral underlying the loans, and we also stop paying out on the promissory note. The EU pulls all fiscal support so we have to run a zero primary deficit. It’s undoubtedly a high risk strategy and all sorts of things can go wrong. But then sleepwalking to default on our official sovereign debt isn’t too rosy a scenario either. @ Eureka If I was sitting behind a desk in Berlin, and I was an imaginative – but totally irresponsible in European political terms – adviser, these are some of the thoughts that might be going through my head (i) it was a mistake to allow Greece to join the euro (ii) at the end of the day, were we not conned into allowing it? (iii) which is cheaper, continuing with the present situation, including another bill for Greece in 2012 which will scupper my Chancellor’s chance of re-election or getting the Greeks to shoot themselves in the other foot by exiting the euro? You need to get out more! Two other smaller points. 1. I’ve never heard the Geithner story as told by Morgan. Not saying it’s false. Just thought I’d indicate that this doesn’t seem to be one of those stories that lots of people know about but nobody reported until now. 2. “Unfortunately, most Irish government bonds are held by Irish banks and insurance companies.” This isn’t true. See page 53 of the appendix here http://www.financialregulator.ie/publications/Documents/Quarterly Bulletin Q2.pdf €74 billion of €90 billion in official sovereign debt held by non-residents. That said, the underlying point being made about Irish sovereign debt — that it might be preferable to renege on past commitments to bail out insolvent banks than to default on regular Irish sovereign bonds — seems valid to me. @DOCM On the first point, morality does have a lot to do with it. There are many people in Ireland today who have no responsibility for the banking debts. Those people should NOT – morally – have to pay just because they happen to be living in Ireland today. They did not incur the debt. They can, in practical and legal terms, be made to owe and to pay. The administration can enforce immoral outcomes. It happens all the time, but it shouldn’t. On the second point, assumptions drive actions, so understanding the different assumptions is important. Central Bank website still a disaster. You can find the figures on ownership of sovereign debt at the back of the Quarterly Bulletin which, for now at least, can be found on this page http://www.financialregulator.ie/publications/Pages/default.aspx @Shaun Byrne You are right about Irish society showing no solidarity, and about the peripherals all trying to deny each other. But I believe we should be trying to build a common purpose with the other peripherals. In many ways this is a political crisis as much as an economic one. Ireland is isolated, as are the other peripherals, but instead of looking to each other the peripherals are all trying to distance themsselves one from the other. We peripherals have got to stop trying to cut a “better deal” for ourselves than the other peripherals, and look to presenting a united front to the core. Restructuring is coming of course. Merkel as much as spelt it out some time ago with 2013 as the date. If we don’t stand together the core will screw us all again in 2013. It is about time Honohan’s role during the bailout negotiations is being more closely scrutinized, and there is no doubt that his intervention weakened further any chance that the Irish taxpayer would not be on the hook for the full amount of the bank debt, including all the unguaranteed debt. Here is what was said in the FT article that spooked him into the early morning interview Saving the banking system, however, is not the same as bailing out extant institutions; nor should taxpayers give up even more of their blood to the walking dead. Yet this is what Ireland is being asked to do – borrow money from the EFSF to raise the banks’ equity. Doing so would be an insult to the Irish people (whose incomes will be mortgaged to pay the loan back) and a gratuitous one at that: it defies logic to claim that adding to Dublin’s debt will seduce markets back to Irish sovereign bonds. Honohan’s view on the bailout, and implicitly on the huge (€35bn) commitment to recapitalize the banks with taxpayer money is From my point of view this is the absolutely right and necessary thing to do. He has been very consistent in demanding that recapitalization should be in full and immediate, as was evident when it was delayed by a few weeks due to the election. So we had Honohan lined up with the ECB against Lenihan and the IMF, with the EU Commission somewhere in the middle on the topic of senior debt. So was his position “the absolutely right thing to do” or “an insult to the Irish people”? You be the judge. As for the idea of getting to a primary surplus immediately – it has about as much chance of happening as pigs flying past my window. The reason is because the Irish electorate took fright in the last couple of weeks of the election at the possibility of a single party FG government (who just might have made deeper cuts, though that is debatable) and decided that a “balanced” government was better. Labour would never agree to such a move and so it won’t happen without the government collapsing and another election. This is before the issue of whether a huge adjustment would actually achieve a primary balance in one go anyway. Any significant senior debt haircuts can’t be done because it is too late; tearing up the bailout agreement can’t be done because there is no political or popular will to take the consequences of an immediate end to government borrowing; resolving the insolvent banks and letting losses fall where they should can’t be done because the ECB (and now the US government) won’t let us as long as they are underwriting the bailout. It is all over other than to see what happens to Greece and then prepare for a modified version of that to happen to Ireland, exactly as happened with the bailouts. I don’t think Morgan Kelly can possibly have missed the political realities of bailing from the bailout. Whatever the other political outcomes, I think the True Finns and many others might have a degree of sympathy for us once we brought our primary balance into surplus as Prof. Kelly proposes. At that point, we would be no longer be milking their cow. We might well not be first in line of fire for the consequences of refusing to honour existing debts of various types to EU institutions recklessly lent and recklessly accepted. Let’s face it, Morgan has gone completely OTT here. Not in his predictions of default but in his conspiracy theory and his proposed Final Solution. It was Gerry Adams whom I first heard say that if the ECB has lent us oodles then that is their problem. Where Morgan and Gerry part however is that Morgan thinks the Brits are good guys and that the really evil behind the scenes forces are the Yanks (surprised that he didn’t include Ossama Bin Laden in his conspiracy theory). @Joseph From your reference to ‘extra-judicial killing’, I can only conclude that, during this period of mourning for many in Ireland, you would not find any of my large stock of jokes on Osama’s recent demise to be in good taste, so I will not add to your distress by posting any here (although they are very funny). However, I still think that my analogy between Morgan Kelly and the recently-deceased Osama is accurate in one way. Both operate in a similar manner. They pop up unexpectedly (in Osama’s case, ‘popped up’) every six months or so, predicting doom and destruction. Then, they disappear from sight, leaving no clue as to their whereabouts (in the late Osama’s case, such disappearance will now be permanent), refusing to debate or elaborate on the points they have made, and refusing media interviews, where they might be questioned about their doom predictions. The site organisers should stop posting Kelly’s articles here until such time as he is willing to come on the site and debate them, or debate them with someone, anywhere. At the moment, he simply doesn’t do this. Based on past experience, having got his latest rant out of his system in the IT this morning, he will now disappear totally from public view until near Christmas. Contrast this with other economists like John McHale and Karl Whelan. They write articles in the IT or B&F from time to time. But, they post them on here themselves, and are happy to debate the points they make with posters on here. A serious article about the economy would focus on analysis of the latest economic statistics and trends, relating to such items as GNP growth, government finances, tax revenues, exports, balance-of-payments, live register, industrial production, job redundancy and job vacancy trends, inflation, competitiveness, consumer confidence, investment confidence, and lots of others. That’s what economists in other countries do. Despite the fact that figures on all these have been published in the past few weeks, and they were nearly all better than predicted, Kelly’s IT rant contains nothing about any of them. Therefore, in my opinion, it is not a serious article about the economy, merely the ravings of a psychologically-disfunctional political fanatic, whose reputation will be in ruins if the economic and political collapse he predicts, and is doing his utmost to bring about, does not materialise. As I have said many times, I would be happy to debate all the latest economic statistics and trends with Morgan Kelly himself on this site (although not this weekend, as I am on a train en route to see The Reds clinch the Premiership). The guys pulling the strings…… http://www.bloomberg.com/news/2011-01-15/wall-street-s-secret-society-inducts-members-with-lehman-video.html “Pigs in a blanket” as their main course too!! MK’s immediate budget balancing proposal should looked at seriously. What would it do to the domestic economy, what would it do to GDP, what would it do to mortgages and banking, what would it do to employment and emigration? What percentage of private sector economic activity is dependent on public sector and to what extent is public sector pay a stimulus? If these costs are managable then let’s go for it. If not let’s just bide time and wait for an opportunity to negotiate collectively with the other peripherals. @ Hugh Sheehy If the morality argument is accepted, it applies with equal validity to taxpayers in all countries. Governments bail out their banks because to do so is, to take a moral argument, the lesser of two evils. The argument has the least validity in Ireland’s case. A government which implemented the policies that led Ireland to disaster was returned not once but twice with a near 40% share of the popular vote. That’s democracy! I take your second point. So who is up for 30-40% paycuts and pension entitlements? Next week, in the private sector, people who will not get even get out what has been paid into funds over the past 10 years and likely the next decade, will face a levy. If we want to have some aces in 2 years time, the end of the deficit in that time period will coincide with recession and unemployment rising maybe by 50,000 or more. In 2013, there wil be a clearer outlook on the recovery in the developed countries as the US puts in place big budget. @ Hugh Sheehy Mea culpa. Prof Kelly. A “balanced” budget? Let’s start with some cuts. No one on the State payroll gets more than €100k. No one. No one gets a State pension until they have reached pensionable age and that pension cannot exceed €60k. No one. Cancel ALL foreign aid. Make child benefit taxable. Make all foreign recipients of child benefit reapply. And make them do so every three months. Apply a withholding tax of 50% on foreign recipients of the benefit. @Johntheoptimist Lunatic? Are there no rules here about cowardly anonymous abuse? John Fitzgerald. Competent? Yes. But clued in on this crisis? No. He went on the radio in the summer of 2008 saying if he thought there was a bubble in Irish property prices , he’d sell his house and make a killing. I remember his tone was almost patronising. I respected him and thought for a moment the black was white. Only for a moment. Economics is science and should respect evidence not reputation. Kelly has been right all the way. People like you have been wrong all the way. It could not be chance. Your theory, your ideology, your politics are simply wrong , disproven by the evidence. @DOCM I think we mostly agree. Taxpayers in other countries should also not have to pay Irish banking debts they didn’t incur, and that seems to be the common plan in Ireland…get someone else to pay, anyone else. However, on your point on lesser evil or common good actions, the morality of a common good action is broken when we get to a situation where the scale of the seizure of taxpayer assets exceeds any possible interpretation that protecting banking creditors is for the “common good”. It isn’t the lesser of two evils any more and it ain’t for the common good. So, now. Who does pay? That is the question where – so far – the answer is “whoever happens to be living in Ireland today”. It’s a bad answer because there’s a solid chance that the Irish taxpayer can’t pay and it’s a bad answer because the Irish taxpayer (in general) shouldn’t have to pay. @ Michael Hennigan “Next week, in the private sector, people who will not get even get out what has been paid into funds over the past 10 years and likely the next decade, will face a levy.” I have a suspicion that the levy on pension funds is nothing more or less than a tax. It will be swallowed up by the ongoing deficit. Here’s the thing. Why a levy? Why not allow the pension funds establish a fund and lend the money on a commercial basis. OK. They will lose some but not all of it. The idea that the State should raid private pensions to “create” employment is laughable. @Karl or any other econimist. How can we balance the goverment books if we have no banks to lend out into the economy ? Surely some organisation has to be in defecit in this monetory system ? Is MK suggesting that Ireland come up with a new monetory system of punt tokens ? and if so how can we pay for oil ?………. virgins ? @ Karl Whelan Michael Clifford in last Sunday’s Sunday Times had a similar angle on Geithner’s role: “Decisions were taken in Ireland’s absence on Thursday, November 11 that changed everything. They were made in Seoul, South Korea as well as in Frankfurt, Germany. In Seoul, the G20 group of leaders of the world’s largest economies spent an unexpected amount of time talking about the euro crisis, and how Ireland’s banking problems were contributing to it and needed to be solved quickly. America, in particular, was anxious that a currency crisis be averted. And, conscious of the effect of the collapse of Lehman Brothers, it was concerned that Europe should prevent any large banks going under. That weight of opinion was added to the prevailing EU view that nothing should be done to create massive losses at European banks, such as burning bondholders at the Irish banks. That’s why Olli Rehn, the EU commissioner for economic affairs, who had been in Dublin earlier that week and who had not spoken of a bailout, rang Lenihan from Seoul to tell him things were changing dramatically.” @JtO All good points but unfortunately also all somewhat irrelevant to the central issue. Which is Ireland will almost certainly have to default. Using your new favourite measure of the economy, GNP, the debt will hit 142% of GNP, excluding NAMA. I could be wrong but cannot think of (m)any countries where the public debt has hit almost 150% of the economy, in a fixed exchange rate mechanism in a low inflation environment that have managed to get out of the mess without some form of default. @Eureka You’d need to reduce the tax take shortly after reaching a mild budget surplus in order not to completely banjax the economy, which would be more doable since we wouldn’t have to service the massive bank debts at the same time. Reduce capital redirected into the economy by the government (public cuts), increase capital sloshing around in the economy by reducing taxes. A complex equation, and not to be done on a 1:1 ratio of course. As always though, we need to focus on job creation first and foremost. It’s amazing how many problems reduce or vanish when we get more people off welfare and into well paying jobs. Consider also if you will how much of the public sector expenditure is already going into the banks rather than the wider economy. How many mortgages are held by teachers, guards, nurses, civil servants? Reducing these debts by making upstream lenders take the hit will not adversely affect the functional economy if you reduce those public wages, since they were never going into the economy anyway, merely being poured into the bottomless banking pit. @Nipap That just about sums up the problem with this planet – the F$£kers running it think financial indices IS THE PHYSICAL ECONOMY. The physical economy is serving the indices rather then the other way round. For the first time me thinks the breakdown crisis is the result of lack of understanding of how systems operate rather then pure malice – although there is a lot of that around also The Goldman boys culture is just about getting a yield – their apostles having taken over the planet have no idea that running a planet and a investment house is slightly different in its mechanics and execution. So refreshing to be told the truth in black and white. Yes, NAMA, as I’ve advocated many times, should send its toxic load back to the banks. Yes, as I’ve stated, Honahan has been a disaster touted as a banking genius by FF. Yes, the ECB turned us into roast pig with 5.8% bailout that hung us and protected its international loan sharks. Yes, the FG/Lab coalition, peddling the nonsense of growth and our ability to grow our way out of unsustainable obligations to predator lenders, is a government leading us into default. We should do as Kelly says, bring our balance of payments into line immediately, set losses made by the ECB and our private banks, not against the state, but against the banks. The renewed state could set up a public bank to serve the needs of the people of Ireland along the lines of the Bank of North Dakota, see more about public banking here: http://publicbanking.wordpress.com/ Either we do this, or we come a dominion of the ECB, without a sovereign economy and with a puppet government in service of the ECB/IMF presiding over the decimation of employment in Ireland currently 14.6% with only message of hope to young people, emigRATION ….And austerity is just beginning to cut into the economy…. Time to end the gombeenism! Hard to know if ECB has set this country up as the village idiot, or scarecrow, to frighten Spain as MK believes. @Colm Brazel I agree we should set up a public bank such as the above – but that would entail turfing out the ICB. If we did that the cartel would not recognize our currency as payment for oil. The economic shock would be catostrophic. We must fight a more limited war to stay in the game – the term accounts on deposit can become Goverment money to fund the state for some time. As a matter of political practicality, how can the government turn around and move rapidly to a positive primary balance? Well, it has two contradictory mandates: to take a tough line with the EU and to delay running a positive primary balance for as long as possible. Right now, it has dropped the first in favour of the second. Switching to a strategy that drops the second in favour of the first would have equal democratic legitimacy. If that’s not enough, it can run the referendum on the bailout that so many people want. Give us the choice that was not offered in the election between continuing the naughty puppy act and taking on the institutions of the EU with all that means for sorting out the primary balance pronto. @Beeceetee If it did this the collapse would be total – the only debt with any velocity in the system is goverment debt – but this is also money. Without money as a medium of exchange all of commerce as we know it would break down. We need to remove money without any velocity (term accounts) and feed it to the state. Otherwise farmers going to the pub will be bringing their cows in exchange for pints – a messy business me thinks. well done Morgan Kelly you have done this country a great service outlining our position the approach of “lets kick the can further down the road” and wishful thinking by our political leaderships short vision have ensured we are still digging the hole a some point we have stop digging and face reality of our position by the i fully agree with at needs to be done next, “National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately”. @Karl Whelan We walk away from the banks, letting the ECB take the collateral underlying the loans, and we also stop paying out on the promissory note. The EU pulls all fiscal support so we have to run a zero primary deficit. It’s undoubtedly a high risk strategy and all sorts of things can go wrong. But then sleepwalking to default on our official sovereign debt isn’t too rosy a scenario either. It requires a lot of guts. A huge reduction in public sector salaries etc. But will a continuation of the current ‘phoney plan (war)’ lead to success or failure? It is time the nation started to deal with reality. @eureka The other thing is the effect of wage cuts on mortgage defaults. I don’t know how he sees that working through the system. I don’t think you have grasped the solution proposed. The banks deal with their own losses through hits to bondholders. The biggest bondholder being the ECB. @MH So who is up for 30-40% paycuts and pension entitlements? Kelly says he overpaid by 50%. At the top levels that should be a starting point. Even with a 50% the Bord Gais man will still get 1/4 million per year. Otherwise a finance minister will have to ask the cabinet some morning. Which payroll should I run next month, the Justice Group or the Education group or should I run both and not pay social welfare? Guess what the answer would be! It’s a funny thing but it always seems to get to that point in the private sector before reality hits home. The public sector is no different. @ JtO What’s that Eamonn Dunphy line about “a bottle of whiskey, a shotgun and a dark room”? Well that’s what you need if you read Kelly’s stuff too much. I ain’t calling it right or wrong, but it’s just a tad OTT, only tells half the story, and gets fairly vindictive and venomous yet again, particularly in regard to Prof H. And advanced democratic economies do actually requiring fuctioning banking systems Morgan, not sure how letting ours implode (which is what he de facto argues for) will help our economy or encourage FDI to remain here. @Michael H 7 Gavin S Public procurement and value for money bring to mind that other insane symmetry, the square circle. Everyday I pass by a stretch of road just under one kilometer in length which is in the process of being resurfaced and having a kerbside touch up. It’s a two lane minor road. The work has been ongoing since the beginning of last November. Who knows if it will end? Another small village nearby has had its sewage pipes dug up a relaid four times in five years. Each time the entire 1.7km has to be resurfaced. For more than two years the ‘refitted’ manhole covers were two inches proud of the road surface. At least three groups of contractors have worked on this project. All of this is just money down the drain. If Escher did construction work, maybe he would have felt at home in Ireland. I witnessed a fine 8km stretch of modern two lane road laid in just three months in Italy, admittedly not in the South. Morgan Kelly’s point about reducing government expenditure to zero needs to be set in the context of continued shameful failures to achieve value for money in public projects. Croke Park is still steaming away through the ice floes. Begin the process of reducing expenditure by near-abolishing local authorities – leading experts in hosting squanderfests. @DOC re The Dork of Cork Says “I agree we should set up a public bank such as the above – but that would entail turfing out the ICB. If we did that the cartel would not recognize our currency as payment for oil.” Nope, that’s scaremongering, Public banks can exist happily alongside the ICB as they do under the Fed in the US. No reason why a public bank cannot acquire some of the functions of the ICB. As regards currency problems, perhaps its time we looked at sterling to help with greater 32 county cooperation and our economic relationship with Britain. Time for a chat with Cameron before the ECB blitzes us out of the water. ECB insistence we pay up from the NPRF before they put in their money to our banks, was precisely to ensure we do not do the runner implied by MK The minority of us who agree with MK anyway probably realise all this is a lost cause, we’ve already been sold down the swanee by Geitner, our stakeholder puppets with their begging bowls and the ECB Interesting times, looks like 2016 will be a sad affair @Karl Whelan “We walk away from the banks, letting the ECB take the collateral underlying the loans, and we also stop paying out on the promissory note. The EU pulls all fiscal support so we have to run a zero primary deficit. It’s undoubtedly a high risk strategy and all sorts of things can go wrong. But then sleepwalking to default on our official sovereign debt isn’t too rosy a scenario either.” Yeah, two bad choices. Probably equally bad in the medium-term, but for the long term, which is worse? The current process of marching towards default in 2013 maximises the short-term gain at the expense of the medium and long term. It appears to rely on a level of optimism about future economic activity that is not well grounded. The austerian short-term pain probably has equally optimistic assumptions about how it will all work out in the medium/long term. It does, however, rely less on the unkindness of strangers… @Colm Brazel ECB insistence we pay up from the NPRF before they put in their money to our banks, was precisely to ensure we do not do the runner implied by MK Every bride knows the value of running away money. The ECB was determined that the Irish virgin would have no way out and would continue to present herself and her children on request and on time. The article contributes to my information on the subject. However, he seems to be dealing with the adopted solution primarily from an Irish perspective. Ireland is not an island – not exactly a sovereign in its monetary policies – in this matter; it is a small part of the EZ and EU. Yet he seems to be implying that the EZ ‘s primary concern should have been to get Ireland out of trouble – regardless of the moral hazard implications for various other countries – and then worry about the perhaps consequently further escalated, already perhaps up to the chin, problems of the greater part of the Zone. Sometimes one cannot (immediately) help a family member or friend. One has to be in a position to do so – and he seems to imply that there are plenty of, shall we say, “currency wreckers” in the family. The EZ was probably up to its chin in debt problems and needed to send various EZ countries a wake up call. All of this, I should think, one signs up for in becoming part of a group. If the greater part of the EZ becomes better positioned then they might help us more – as they have often assisted us and others before. If they fail to get on their feet then they go down too – but no point in them going down early out of sympathy with us. I recall Catherine Day finishing a PK radio interview pretty much with these words: “Today’s solutions are not tomorrow’s solutions”. His proposed solution does not seem to show much in the way of team player or family or Union, though I think the Union has always been about trying to keep all boats buoyant, though some of us members though we could have an entirely free ride and at any speed we choose: “This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours. At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government. So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.”. (If we did not have the budget deficit, our problems would be aprox. halved and consequently much less need to do as he suggests to the EZ and EU). As in my opening, perhaps Morgan Kelly should put less weight on seeing this as a matter of national perspective and more as perhaps a matter of EU survival and the spirit of the Union as initially envisaged: “Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival.”. Indeed, there may be a greater perspective that we should all consider: That Europe become more independent of the Anglo-Saxon model of the world than heretofore. So, Prof Kelly to be an appointment to the Senate by the Taoiseach??? Reading some of the contributions here, I start to wonder is it me going mad. The odd voice of sanity (that’s you B_E_B) gives me some hope that perhaps dementia has not after all set in. This purports to be a serious economics blog yet we are seriously giving space to a solution which says walk away from the banking system, the ECB and the EU and immediately lop 50% off the government’s budget. Why am I wasting my time on this silliiness? Why 2013? To give the German banks enough time to fix their balance sheets ahead of inevitable default? @ BW Respectfully, we are at war… The future of the form of the state, and perhaps the state itself is at risk. I don’t buy the European good citizen argument mentioned above. We have witnessed the potential end of the union with the core sacrificing the peripheral for purely reasons of political impotence. @colm Correct me if I am wrong but does not the B of North dakota have local tax raising powers ? You may be thinking of the old ACC and ICC which I believe were state banks independent of the ICB. ACC had independent credit creation from the cartel but it could not get funds via tax. I believe that is a crucial difference – but if I am wrong about the B of N D please feel free to pull me up. @Tim O’Halloran Economics is science and should respect evidence not reputation. Kelly has been right all the way. People like you have been wrong all the way. It could not be chance. Your theory, your ideology, your politics are simply wrong , disproven by the evidence. There is the rub. If a pundit or economist makes predictions that are consistently wrong why exactly are they still listened to? Morgan Kelly (and David McWilliams) have not only not benefited from being closer to the truth than their opponents but have been ridiculed and isolated because of it. Of course the repercussions of not confronting the latest crisis in capitalism are not the only examples of this lack of competition in analytical skills and predictive power in the wider establishment. The media, academia and Internet are still jam packed with people who denied global warming, advocated invading Iraq because of imaginary threats and claimed that more market liberalism would inevitably lead to more growth. Many of these opinion makers and holders have not recanted but instead grandly modified their beliefs (global warming is happening but it does not matter, Iraq is better off having been invaded, sometimes the free market needs a huge infusion of public money to protect civilization as we know it) so as to justify continuing with the exact same course of action, benefiting chiefly the same set of people, except with a very different, sometimes unrecognisably so, rationale. I think myself that self interest, class loyalty and political philosophy are the hidden reasons for the continued policy control success of intellectual failure. If you are invested in the current structures of power, either domestically or in the EU, the thing you least want to do is confront the status quo. Yet obviously it was the status quo that led us here. To go briefly back on topic: * What would be required in taxation increases and cuts in the public wage bill and national infrastructure investment to reach a budget surplus if the difference was to met in equal proportions? * Could the tax increases, wage cuts and benefit cuts be structured in such a way as to favour domestic spending (how much can we soak the rich and spare the poor while not collapsing consumption)? * Is it still practical to follow this course while using the Euro internally? Here’s the film version of this debate with JTO in the role of the Black knight. http://www.youtube.com/watch?v=zKhEw7nD9C4 PS Colm The ICB is acting more as the San Francisco fed or one of the other less powerful subsidiaries then as a semi -independent central bank such as the FED with its own culture. I.e. it follows orders from outside its host state. @Brian Woods 11 This purports to be a serious economics blog yet we are seriously giving space to a solution which says walk away from the banking system, the ECB and the EU and immediately lop 50% off the government’s budget. The figure to be taken off the budget is approx 14 billion from a total of 67 billion(using MH figures) to get to a primary surplus. That about 10% of GNP. Not catastrophic but essential in any case. Still a country where a Supreme court justice can earn €275,000 pa plus a AG pension of approx €94000 pa should be able to manage a few cuts. As for walking away from a banking system. Au contraire. We are detaching ourselves from the runaway train wreck that calls itself a Irish banking system and is currently pulling the country with it right over the cliff. So let it go over the cliff with its €160 billion ECB / ICB carriage attached. After the initial violent recoil, the nation would survive. If the ECB want to save the European banking system, let them hitch some other country to its runaway wagon. Morgan should at least follow up with another article that would consider the practical aspects of his prescriptions. There is a huge appetite in the country for apparently simple solutions that would solve Ireland’s problems. There is also no shortage of eejits who want the bubble gains to continue and I would suspect that some of the cheerleaders of Morgan’s views would curse politicians who would seek to close the budget deficit in less than a year. Most of the people who opine on these issues, do so from comfortable positions; the typical SME owner is seldom heard and for surviving firms that have absorbed the debts of over 3,000 failed firms, collapsed banks are not an inviting prospect. The Irish record of project management has been dismal – even when the Exchequer was awash with cash. It took more than 40 years to complete a motorway from Naas to Cork; so who can have confidence that a major dislocation would be handled properly? How could we stay in the EMU, we we give the other countries a big PFO. By all means leave the euro if that is a panacea but nobody, including McWilliams have made a case for such a move, other than to fools. The problem with the bailout now, if we piss-off both the IMF and the ECB, who will be our support. Putin? Finally, again I say that almost 4 years after the music stopped for international credit, the Irish have shown no interest in overdue structural reform; the attitude appears to be that the tooth fairy may arrive to the rescue. @Shay ” What would be required in taxation increases and cuts in the public wage bill and national infrastructure investment to reach a budget surplus if the difference was to be met in equal proportions?” I’ll have a go. That’s 10bn extra tax and 10bn less spending. Various ways to cut the cloth but let’s say income tax is doubled. Not across the board you understand because twce 52% is 104%. I suggest the top rate would go to 80% and all other income would be taxed at 40%. On the expenditure side say 33% off all public service pay, pensions and social welfare, and a cessation of capital spend. But this is an economics site, so it is not so simple. If Morgan was made MOF for a day the above measures would be implemented but they would result in maybe a 30% fall in GDP and unemployment approaching 30%. So we would need round 2, where tax rates go to 98% (yes they were once this in the UK) and a further 50% cut in public expenditure, and then, you must know the plot by now, round 3 and before long we will be the North Korea of the western world. No place to hide, like Osama we can run but when reality catches up our chances for survival range between zero and remote and the remote got lost in the cushions along time ago. @Michael H “the attitude appears to be that the tooth fairy may arrive to the rescue” … or Greece will default and Ireland can ‘draft’ to use a cycling term on the rush to sort out a restructuring program. Pure speculation on my part, but the tortoise pace of reform is consistent with the suspicion that the government is literally sitting around waiting for the Greek situation to boil over. Maybe some ‘cute hoor’ spread the rumour yesterday that Greece might be on the verge of bailing out of the euro? Yves Smith picks up the story, focussing on what American readers will undoubtedly find most interesting – the allegation that Tim Geithner blocked the IMF’s proposal for haircuts. How long before Brad DeLong and/or Paul Krugman pick this up? @Brian Woods II “I’ll have a go. That’s 10bn extra tax and 10bn less spending. Various ways to cut the cloth but let’s say income tax is doubled. Not across the board you understand because twce 52% is 104%. I suggest the top rate would go to 80% and all other income would be taxed at 40%. On the expenditure side say 33% off all public service pay, pensions and social welfare, and a cessation of capital spend.” We wouldn’t need anything like those type of measures to close the deficit. From this thread http://www.irisheconomy.ie/index.php/2011/05/01/government-revenues-and-spending/ €10bn would correspond to a 20% increase in taxes and a 14% decrease in spending. Or some mixture in between. @Brian Woods II I can’t believe it I agree you – lets kiss and make up. No doubt all of the Morgan Kelly article is true, and some of the comments here only serve to confirm that we are, indeed, heading towards a chaotic ending. If we go there Ireland’s reputation will be destroyed and our ability to fund the very basis of our past success, our educations system, mortally compromised. We are on our own, it is indeed like the over indebted family with irresponsible parents. Nobody can help Ireland until it knuckles down and helps itself but the parents, those that have the power to sign the cheques, are still in denial. They talk about European solidarity, no this trick will do it, let’s just wait and see, but everyone else, including the kids, can see that it won’t work, but they are powerless unless they can convince the parents that radical action is needed now. Our advantages lie in our educated diaspora AND the fact that the US insists on recreating the over leveraged ponzi finance system that caused the mess. They can’t allow derivatives, CDS, leveraged loans etc etc, to go away with the dodo because if they do, no government will be able to fill in the losses. We are a small country, we have to fix the bank liability mistakes and then we have to call on Irish citizens abroad (I am one) to step up and help smooth the transition to more normal government financing. We have to TRY something on our own, raise money, pay back the international agencies and get out from under this. The transition is going to be horrendously painful we have to accept that..but today we don’t accept it…we look for someone to blame and for nice, neat solutions that burn the creditor. They won’t work, they will only destroy everything we have built. I would happily and proudly invest, but only if I believe that the smal minded, in crowd, Sunday independent types that have destroyed the country are safely removed and have no power to do this stuff ever again. @ Dreaded_Estate, etc. But the underlying issue remains. It would be great to snap one’s fingers and be running a surplus, but the question is how much damage would it do to the economy, and then how much more would be required. After all, we’d look fairly silly if we shouted yah-boo-sucks, jumped out of the train crash, and found ourselves stranded without any money. Philip Lane, in a public lecture, suggested there had been a fairly constant relationship between defecit cutting and harm to growth – I wonder if any economist would care to comment on what that constant is and whether it would be expected to change if something on this scale was attempted. I agree with Michael Hennigan about the lure of wizzo-schemes (I have a very nice pen and often sit and wonder at the amount of billions it could save at a single stroke). But, as we’re here, how about making all the banks write off all mortgages in Ireland, then whacking the taxes on and passing over the remains of the banks to the ECB with a note of apology attached? @ Joseph Thanks for the clarification. Does this mean that we end up with no banks then? @Gavin Kostick “But the question is how much damage would it do to the economy, and then how much more would be required.” Massive damage I would say but it is going to have to happen anyway. The real question is whether it is better done over a few years or over 1. I definitely don’t think this would be easy, in fact I’m not even sure it is possible. @ Hugh Sheehy As to who will pay, my own view is that, in the end, private creditors will get together with the countries in difficulty and agree a deal. That is the Eurozone plan. But only when it has become clear that the debtors have demonstrated without any doubt that they have reached the limit of their capacity to repay. Ireland is far from that stage. Not so Greece. Again, morality has little or nothing to do with it. It is the attitude since time immemorial that creditors have taken to debtors. The curiosity of the situation is, of course, that the nominal creditors are, given their “systemic importance”, simply front men for the creditor countries. They are not commercially strong enough to take the hit at this stage. It is a classic Mexican standoff and the first that can make it move stands to earn a fortune if they have been investing in the “right” outcome: hence the continuous spate of rumours to put pressure on Greece. The interest of Morgan Kelly’s piece is not that it is off the wall, which it is, but that it contains a sufficient degree of truth in relation to a number of very uncomfortable facts, notably the confusion that evidently arose about responsibility for what were fundamentally political choices. I’m a public servant (teacher) and I’d love to see the defecit closed in a year. Bring on the pay cuts and strip out the waste. There’s loads of it. 33 vocational educational committees each with CEOs, headquarters blah blah blah. For a population of 4.5 million. Assistant Principal posts attracting a 8000 euro top up so that someone can organised a fire drill or book sale. Special Duties post attracting a top up of 4000 so that someone can send in few emails to the local rag re the school. Joke. And yes I have a mortgage. But I’m quite prepared to go to the bank and tell them that I can’t afford to pay that amount anymore. Reposess the house? Fire away. There are plenty of houses going for very affordable rent. I read Morgan in the original article in 2006 and thought yep, this is it. At the moment, I think I’d refuse to stand for amhran na bhfiann. @ D_E Okay, thanks for the clarification, but, as you concede, the immediate application of such a dramatic correction would surely be calamitous and would only make our economic plight much worse. The point is that Morgan Kelly is a Professor of economics. He has written a full page article in our most respected newspaper in which he advocates such a course. It is highly irresponsible. Morgan was right about the state of the banks’ balance sheets. But he must know that the simplistic solution he is proposing now would be catastrophic. He has moved from predictive analysis to the David McWilliams playground of proposing outrageous silver bullet solutions which he knows can never be implemented and therefore leave no hostages to fortune. On the contrary, as things get worse and it seems they will, he will point back and say “told you so, should have implemented my plan”. maybe we should have a new entry to this blog on how it is possible to reduce the 14 billion deficit through higher taxes lower spending that enhances the domestic economy introduce salary caps,more vigor in the promotion of irish produce we at war unfortunatly our goverment just did`nt no it don`t know it we need pull out all the stops to safe guard the future and stop pussy footing with EU partners who have put us in quarantine and have looked to safe gaurd the core countries EU banks it is very clear that we need to re set the economy on sustainable levels at the moment their no money in the irish system and we are dying by a slow drip process with belief that reproduce the bubble maybe we should have a new entry to this blog on how it is possible to reduce the 14 billion deficit through higher taxes lower spending that enhances the domestic economy introduce salary caps,more vigor in the promotion of irish produce we at war unfortunatly our goverment just did`nt no it don`t know it we need pull out all the stops to safe guard the future and stop pussy footing with EU partners who have put us in quarantine and have looked to safe gaurd the core countries EU banks it is very clear that we need to re set the economy on sustainable levels at the moment their no money in the irish system and we are dying by a slow drip process with belief that reproduce the bubble In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome. This was so obvious at the time… We are heading for a positive primary balance by around 2015 anyway. All Prof. Kelly is suggesting is moving forward the target date. There is no good reason to think that it will be more calamitous if we do it all at once than if we stretch it out over the next four years. @ BW II & BEB Why are you so attached to the Irish banking system? It’s not clear to me that funnelling all this money into a black hole is really helping us in the long run. Modern economies do indeed need banks in some form and if the Irish system lived in a vacuum we’d have a problem letting them go. Luckily we don’t live in a vacuum and: (i) not all bank restructuring result in empty cash machines; and (ii) when it’s allowed to work, the capitalist system does a great job of allowing new competitors to quickly step in where old ones fail. An excellent real-world example of allowing nature to take its course happened after the collapse of Creditanstalt in 1931when Adolph Miller at the Fed actually allowed banks in the US to fail – the result of this policy is that from 1933 to 1937 the economy grew like the clappers, stumbled a bit and then by the time it entered WWII the US was an industrial powerhouse and the bona fide super power it is today. Contrast that with the situation in Japan, after its 1980s bubble, where the government took the now familiar approach of propping up clubby banks by denying the scope of problem, obscuring the facts and liberally adding taxpayer capital. What have Japanese taxpayers received for their largesse? Two lost decades. I appreciate that no two situations are the same, but given the alternative, the bogeyman of banking failure does not scare me. @DOCM I suspect you’re right in what will happen. Meantime, for Dreaded Estate and co, if you raise marginal income taxes much more (let alone to 80%) you’ll kill or force out a lot of businesses that Ireland really needs to stay alive and in Ireland. If you cut the salary of a high court judge by 50% he’s less likely to leave the country and bring his skills with him than a pharma engineer or supply chain logistics expert if you increase his marginal tax rate to 80%. Would we like to have an economy in a few years? If yes then more taxation on hard-to-replace skills is not the answer. The targeted nastiness of the article is hard to understand – whatever the overwhelming approval it gets here. A few responses to the content: 1. The main argument in the first part of the article is that the guarantee should have been rescinded. This is certainly a defensible position. But given the emphasis that he puts on reputation as for a stable business environment later on, as well as the fact the guarantee was a sovereign undertaking, can he not accept that reasonable people might come to a different evaluation of the overall costs and benefits of reneging? Is the questioning of the integrity and competence of Patrick Honohan for coming to a different conclusion really necessary? 2. The main argument in the middle part of the article is that official sector policy towards Ireland was all about stopping the crisis spreading to Spain, with Ireland effectively a sacrificial lamb. While again it is reasonable to disagree intensely with how the crisis was handled, this is extremely simplistic. Going back at least to the Mexican crisis, official policy (led by the U.S. Treasury) has put great emphasis on stopping contagion by avoiding default. The policy has been one of putting in place credible adjustment policies backed up by significant funding. Reasonable people can disagree on the right balance between bailouts and bail-ins in any given circumstances (pre-existing guarantees, systemically important institutions, legal equivalence between classes of creditors, etc.), but why is it necessary to get so personally abusive towards those who weigh up what in difficult circumstances differently to you? 3. The proposed solution is renege on the bank guarantees – reputation now be damned – and turn the banking system over to the ECB. I don’t think anyone can be certain how the ECB would respond, but the chances of a complete freeze of the credit system and a freeze on less sophisticated deposits that can’t flee on time looks like a good bet. The ECB could isolate the Irish banking system by offering unlimited liquidity to the rest of the Euro zone banks. Of course, we can’t be sure any of that would happen – but who on earth would want to take the risk of economic collapse and impoverishment that would follow. On fiscal policy, default is now amazingly ruled out on reputation grounds. It is recognised that all fiscal support is likely to cease. With no default and no outside assistance, it is not just the primary deficit that would have to be brought to zero, but the overall deficit. And all bond redemptions would have to be met as well. A Great Depression would not come near describing the effects on the economy that would result from such a fiscal contraction unless you believe in the mother of all expansionary fiscal contractions. Bottom line: this is crazy stuff, and all the more bewildering because it is coming from one of the heroes that stopped the original credit-fuelled bubble getting even bigger. The Irish state must balance its budget or borrow. It cannot borrow on the market for a long time .It cannot balance its budget either for several years ,trying to do so would contract the economy so much it would be self-defeating (the tax base would collapse).Therefore it will have to borrow more from the EZ. Whether those debts can be repaid remain to be seen, but it is a problem for the next decade ,not for the short term. This whole discussion is surreal. @BwII “Okay, thanks for the clarification, but, as you concede, the immediate application of such a dramatic correction would surely be calamitous and would only make our economic plight much worse.” I said such a correction would be very bad but I don’t know if it would make matters worse. “He has moved from predictive analysis to the David McWilliams playground of proposing outrageous silver bullet solutions which he knows can never be implemented and therefore leave no hostages to fortune. ” I think it is completely incorrect to say that MK is proposing what he thinks is an easy painless solution to our problems. If anything it is the complete opposite. He is suggesting we take all our pain up front rather than spread it out over the next few years. Because no matter how draconian/calamitous you think it would be to reduce the deficit to zero as MK suggests they will have to happen any way, the only question is over what period. @ DOCM That outcome makes sense. But I just wonder if some people have actually a lot of money to make through default as well (bear with me!!) by betting on drop in the Euro? We have already seen the effect of a rumour of Greece leaving on the value of the currency. Imagine – a few more rumours, an actual default etc. They could make money during the decline and also make money on the eventual recovery after the weaker countries devise alternative currency arrangements. In this way – the really smart guys could actually be playing the ECB by ostensibly pushing for repayment of bonds while surreptitiously engineering defaults to destabilize the currency. This may be ridiculous – i don’t know @John McHale “On fiscal policy, default is now amazingly ruled out on reputation grounds. ” Yes, because if you expect to have continued funding for the sovereign in the future, you have to have maintained a good payment record. It is the difference, perhaps, between defaulting on your mortgage and on your credit card. @ John Mc Phew, the cavalry has arrived to talk a bit of sense. Ta. The MK articles of late have been curiously vindictive, he really feels sleighted… @ Overseas the perception of choice I think is th greatest misperception, its akin to a life saving operation that you may not survive. Immediate balancing of the budget would be truamatic, however, it is inevitable, the more we borrow the deeper the hole. Immediate correction of all public sector wages will have drastic impact on private sector, price falls and the domestic economy will contract. Similar to currency devaluation but of wages and prices instead. This will make Ireland much more attractive to foreign investors and we retain the lure of being in the EU and the euro. Growth will begin again. Legacy issues around debt – mortgages etc will be an issue but then every economic disaster has its casualties – ca la vie I hate to say it but yee guys are economic illiterates – even a Dork knows something has to be in deficit. If the banks can’t lend the goverment must be in deficit. Your proposals to cut the goverment deficit will result us exporting everything including the kitchen sink to service fictitious debts. There will be no internal commerce – people will decide to take a farmers crops rather then exchange symbolic tokens for the stuff – chaos will ensue. All money is debt – money is only a tool for the physical economy – yee people are prepared to destroy all productivity and civility for flawed economic indices. Only the Irish could display such a combination of foolishness and madness in one final dramatic expression of Gombeenism. @Dork “If the banks can’t lend the goverment must be in deficit.” Er, yeah, if you have your own currency and you are in a country that does not have a bust banking sector, bust households and a bust public sector… Minsky must not be on your literacy list. I am surprised at some of the above comments. Kelly says as much himself that the basic issues are plain arithmetic. Some of the above comments about how well the economy is doing are merely observing how well the band is playing once the ship has been holed. The central point is the liabilities the state has taken on. The argument that if we try and ignore these and play nice we will be looked after are plainly idiotic given the evidence of our own lying eyes. So where is Kelly wrong, in either tone or content? Good for you Dork, good for you, but the adults are talking…. @ John McHale 1. Its not a popularity contest 2. Truth Hurts 3. Morgan Kelly has been rubbished with every article he has published in the Irish Times, yet every point he has made has come to pass. Yes, I agree he takes no prisoners but who cares at this stage when our futures are on the line. Its not personal, if you can,t take the hits get out of the kitchen. Remeber Honohan said BOI and AiB were attractive buys 18months. Peronsally I thought he,d save us but has gone all native. Morgan Kelly does,nt do Politics and is not seeking a govt position in the long run. Personally I wish he was in charge and I,d see some hope. John, you seem to be a cautious guy but jesus at this stage where are the options. Dan O Brien had a article in the IT a while back and he rekconed if Spain goes under we are all doomed to a Great Depression. From my humble point of view his article makes perfect sense, get our deficit down asap. As Colm McCarthy mentioned its the only thing we can control @Hoganmahew The money is still in Ireland – its just lost all its velocity as it is backing a illusion – Minsky advocated extreme Keynesian measures during his moment if I remember correctly. Do you want another Yugoslavia Grow up Hogan We just need to vapourise house prices in a cash only market – imagine the amount of money that could be used if people were not servicing ridiculous mortgages that feed into the shadow banking sector – their savings would flow to Goverment coffers. we are holding the can ok we play the good Eurpeans do what were told show no national determination see the bail out as a good thing believe we can trade our way of this crisis ect , down the line ECB /EU partners will come to our rescue in 2013 ? what if that analyst is wrong whats PLAN B @BW II “round 3 and before long we will be the North Korea of the western world.” Good gracious, and you paint MK at the scaremonger? @Dork I lived in Yugoslavia… My money, such as it is, is not in Ireland, where’s yours? Again, I’ll say that you appear to think that this is economically an island. As foolish a view as thinking that deposits can’t leave is the view that somehow a mass mortgage default is a silver bullet. There aren’t any silver bullets. There are a series of nasty choices. Moderation is not always seen as a virtue to the mob when there is a search for scapegoats. Prof. John McHale always comes across with a moderate argument on issues. At a time when the dogs are bating for blood. I do hope that Prof. Honohan ignores convention if it exists an defends himself.! @ John McHale I could not agree more. On the issue of timing and what the government of the day was trying to achieve, especially by repeating the mantra that the country was “fully funded until April of next year”, I can resist no longer the Irish joke about Paddy who falls out of a twenty storey building and passing, let’s say the 13th floor, is heard to remark “well I am OK so far”. If the government had a plan, the concomitant was to restore the credibility of the Irish sovereign by a Latvian style solution i.e. dramatic cuts in public expenditure (which Morgan Kelly in his confusion now also seems to be advocating; too late!). This was not a matter of being told by some mentor, such as the ECB or the Commission or whatever, that it was the right thing to do but the logical consequence of the policy it was purporting to pursue. As Peter Nyberg pointed out at his press conference “everything that happens in a country is the responsibility of its government”. The Finns need no instruction on what constitutes sovereignty. We evidently still do. @ All Remember the rule! DNFTT @ John McHale ‘Bottom line: this is crazy stuff, and all the more bewildering because it is coming from one of the heroes that stopped the original credit-fuelled bubble getting even bigger’ You are right to appeal for reason and civility. Everyone makes mistakes, and some judgement calls have to be made. It’s natural to lay the blame on key individuals, but it is the forces which are brought to bear on them which, I think, should interest us more. Those pressures are going to intensify fiercely in coming years, and in ways we cannot imagine. One of the reasons for frustration, including that shown on this board, is the lack of transparency which characterises our institutions. There is also the groupthink factor which Nyberg identified, and which hasn’t gone away. Today’s groupthink is ‘ we know we are in a bit of trouble, but lets keep the head down until things get back to normal’. If I am not mistaken, the Irisheconomy.ie is generally agin that. People like MK strike a chord, even if there are a few sour notes. As DOCM pointed out, there is enough truth in what he says to make the establishment uncomfortable. That’s surely a healthy development, because we simply cannot resolve this crisis by resorting to the usual reassuring nostrums. Nor will be rescued. I don’t know why the Prof prefers to speak ex cathedra, rather than join the debate. A robust interaction with some of the hard chaws on this board might have the dual benefit of shapening his analysis, and blunting some of his barbs. We all need that. Prof. Kelly: ‘The eventual outcome will likely see Ireland as some sort of EU protectorate …’ What’s so bad about that? Let’s face it: our best chance of getting good governance, in all its aspects, is through some external agency. We are a failed political entity. We have been given an island with a temperate climate, rich seas, largely fertile soil, etc., etc. We should have a population of at least 20 million living in prosperous circumstances. Instead, we have historically had high emigration, low self-esteem as a country, and a seeming continuing inability to run our affairs properly. At a very simple level, our best chance of getting clean drinking water is through EU Directives and threats of fines. How can this be so? Similarly for introducing real competition into the economy. An ‘EU protectorate’? Bring it on! @Hogon I keep all of my liquid funds in the post office , I have a checking account in a bank also. Again the debate as a whole displays a ignorance of the difference between money and credit. This sort of crisis has been played out in Ireland before , infact looking at the figures for the past 21 years and possibly throughout our history we export more of our goods then we import but now its gone crazy again. Ask yourself why can we export to a market – because our trading partners have symbolic money to spend on goods and services. Our symbolic money is backing the new generation of famine house – that money can be divorced from those dead assets and begin to increase velocity and internal trade. The purpose of economic trade is not to export – its to increase wealth – we are engaging in a crazy pseudo Maoist exporting drive. I am sure our executives will ask us to mass produce Pig Iron soon as it may be part of a future economic index. Pure Madness. @Dork “the debate as a whole displays a ignorance of the difference between money and credit.” Er yeah. And of monetary union and currency… @Shay Begorrah I would suggest the last of your questions here should be focussed on by everybody. “* What would be required in taxation increases and cuts in the public wage bill and national infrastructure investment to reach a budget surplus if the difference was to met in equal proportions? * Could the tax increases, wage cuts and benefit cuts be structured in such a way as to favour domestic spending (how much can we soak the rich and spare the poor while not collapsing consumption)? * Is it still practical to follow this course while using the Euro internally?” @Hogan As far as I can make out the ECB and their FF Irish goverment cretins have broken contractual law by not allowing losses down the capital structure. Whats to stop a forcefull Irish executive engaging in emergency legislation to divorce term deposit / credit and turn it into money ? If the ECB can break all the rules , why not a democratically elected executive who campaigned for losses on risk capital ? Give them their filthy assets and let them try to get their money back in a cash only market. @Dork “As far as I can make out the ECB and their FF Irish goverment cretins have broken contractual law by not allowing losses down the capital structure.” Not sure whose fault it is, but I agree with you as to what they have done. I suspect the fault is at home, though, and is ideological in bent. “Whats to stop a forcefull Irish executive engaging in emergency legislation to divorce term deposit / credit and turn it into money ? If the ECB can break all the rules , why not a democratically elected executive who campaigned for losses on risk capital ?” Recognition. They are not a monetary authority. They run into the same credibility problem that a newly independent currency would. So if you are going to go that far, you might as well try and reintroduce a new currency. @Karl: I had heard the Geithner story a few months ago, from a trustworthy source. @all: there is an important accounting identity we need to bear in mind, viz net public savings + net private savings = current account This is always true, by definition. By definition, therefore, if we want to get to primary balance quickly, we either need the private sector to move towards net borrowing, by the same amount (same percentage of GDP); or we need an improvement in the current account by the same amount. The former would seem to be ruled out, as a result of debt and bank deleveraging, etc; so we would need a big big current account surplus to emerge *very quickly*. Hard to see how this could be achieved quickly without leaving the euro. Which would be very good in some ways, and very bad in others. In the good times, people on above average incomes but short of rich were taxed about in line with what’s normal in the developed world. People on low to median incomes paid very little tax by comparison with their counterparts in other countries. After the downturn hit, taxation on people on above average incomes was quickly pushed to around the limit beyond which it really messes up their incentives. Taxation on people on low to average incomes was pushed up a smidgin. Starting from that point, it is really difficult to change the tax system in a way that further soaks the rich and spares the poor, without screwing up economic incentives and thereby threatening future growth potential. BBC is picking up that Ireland is going to get a 1% reduction on the cost of the EU/IMF borrowings: http://www.bbc.co.uk/news/business-13321551 @KO’R, you are obviously right on the need for a big current account surplus. Perhaps you could explain in more detail why it is difficult to achieve it without leaving the euro. Surely, if the government cut spending and raised taxes this would be the natural outcome. Once again Prof. Kelly has produced a hugely thought provoking article. In general, it is hard to dispute much of what is said because it is based on supposition and opinion. Everyone is entitled to their views. In my opinion, the personal attacks are over the top. In general there is an absence of facts to support the colourful claims. One supporting piece of evidence offered is that the end-2014 debt level will be “closer to €250 billion” once all assets and disposals have been netted off. We are not told how the debt is going to get to €250 billion but in my view the debt will something around €205 billion. The article suggests that such “differences are immaterial”. They are not. €250 billion of debt by 2014 is definately unsustainable. The same may not be true for €200 billion, but a common view is that default has to be sold as an inevitability rather than a choice. Yes but, if we go back to the Punt and peserve the numerical order of our external debts, our debts both internal and external will have to be all re dominated in a grossly undervalued punt. But given we are running such a huge surplus already this would increase the trade surplus to gross levels via even more import austerity. Although the nationalist side of my mind likes the Punt illusion – we never really had a true sovergin currency with the BOE dictating things in the past. From a gaming perspective we would be best to externalise the losses but preserving the buying power of the Euro. Anyhow as you infer the local CB cartel has expertise in these matters – I doubt if the Irish exchequer would know what to do if decided to eject the priests. From a practicality perspective its probably best to run towards the BOE – they may have been bastards but in fairness the last time they acted like the ECB was the 19th century. @ DOCM Workers in the private sector have to live in the real world. Like bankers, protected professions and bosses with massive bonuses (even still, today)? @ Michael Hennigan Cry me a river. The pension funds in the private sector seem to mainly fall under two categories: piggy-banks for the employer to raid, or else tax-avoidance schemes for the better-paid. A proper national pension scheme (with mandatory employer contributions) with cast-iron firebreak from the State would be vastly safer and fairer – and I say this as someone with final-wage defined benefit, who would presumably lose out under such an agreement. @Kevin: “Hard to see how this could be achieved quickly without leaving the euro. Which would be very good in some ways, and very bad in others.” Kevin, I leaving the euro is bad all the time, in every possible way and under all circumstances. Always and forever. Amen. (any inference drawn that arguments against leaving the euro sound more like articles of faith than analysis is purely accidental) @John McHale Re “The targeted nastiness of the article is hard to understand – whatever the overwhelming approval it gets here.” There is a nastiness in your remark there that is hard to understand. Call it polite bullying, if you will, some appeal to a Nyberg groupthink on some assumed comedy of manners. MK tells it like it is, its the Boston version of Irish diffusion of responsibility, lack of accountability. Its direct, to the point, ‘the buck stops here’. We need more of this. There is also a childish nonsense behind your remark as MK is criticising Honahan policy and actions, not particular aspects of Honahan’s personality; we shouldn’t be bullied into silence when there are glaring aspects of economic policy and decision making that are being scrutinised. There is also the agenda in McHale’s remarks, that the logical and compelling economic soundness of MK’s remarks be reduced to the level of personal abusiveness. So I reject that as well. Honahan is fond of references to Egypt Egyptian metaphors that use the word ‘camel’. I see Honahan’s Irish camel being led across the Irish desert of austerity occasionally watered by the ECB. To this I say, hump it! This is a disastrous policy that so far has brought us to junk status with the IMF in situ. Re “Of course, we can’t be sure any of that would happen – but who on earth would want to take the risk of economic collapse and impoverishment that would follow.” The risk taking has already occurred and has failed. NAMA has failed. Bailout has been a disaster, growth in the economy has almost disappeared and outlook is worsening. The IMF/ECB run the place. A new word should be invented to describe the Irish risk taking on the ECB and the banks. Here it is, SCAMBLING, risk taking we are currently enjoying is gambling on the scam. And what is the scam, you’ll need to figure that one out for yourself? MK does not deserve the level of abusive criticism McHale makes against him in his remarks above. Kevin O’Rourke: Hard to see how [a big big current account surplus] could be achieved quickly without leaving the euro. Which would be very good in some ways, and very bad in others. Well, one way it could be achieved quickly is through an austerity-induced slump, which would shrink demand for imports. But that’s an especially hard road. Since Morgan Kelly knows his stuff, I guess he accepts that his preferred policy does indeed require leaving the euro. Yes, that is very bad in some ways but surely it is less bad than any available alternative? Time to weigh it up, I think. Over to you sir – please don’t leave it to the economic illiterates! Some chess genius remarked that in a bad position, all the moves are bad. That’s the pickle we’re in. And in economics there is no way one can just resign. @ Colm Brazel Scambling is my new favourite word (having displaced truthiness). @ EWI If you believe most workers in the private sector can be compared with bankers, then you are an idiot and delusional to boot. You say: “The pension funds in the private sector seem to mainly fall under two categories: piggy-banks for the employer to raid, or else tax-avoidance schemes for the better-paid. The majority of private sector workers have NO occupational and again, the statement you make in respect of those who have, is rubbish. Crime is a reality but most people aren’t criminals. @ Kevin O’Rourke In an economy dominated by foreign firms responsible for 90% of tradeable exports, can we not have a current account surplus and still be in the knacker’s yard? Well lads I think its time to hit the red button – its better to go down with a element of glory then with a whimper. The executive needs to assert its independence – if it does not it will release the monsters from their cage. This outright attack on the national narrative will give nothing to people who want to hold onto something beyond money. This is really about honour now. But lets not shoot into the ground next time http://www.youtube.com/watch?v=6bos2ZTGNZc http://www.youtube.com/watch?v=rDupoFh5Op0 @ John McHale I hope the IT contact you or alternatively that you contact them. They normally feel embarrassed to give a right of reply to a MK outrage. Last time it was some stockbroker guy. He was good but open to taunts of conflicts of interest. Last time, MK was predicting a mortgage default meltdown. It was a plausible opinion. This time MK has simply gone off the wall as you have highlighted so eloquently. If you get the chance to reply in the IT it will be a walk in the park. A tip though, no need to give any concessionary plaudits to MK. This time he has got it way wrong, don’t go easy on him. @ Al Respectfully, we are at war…The future of the form of the state, and perhaps the state itself is at risk. I don’t buy the European good citizen argument mentioned above. We have witnessed the potential end of the union with the core sacrificing the peripheral for purely reasons of political impotence. I wrote in Dec 2008: “The Irish economy is facing the worst crisis in decades and to borrow from American philosopher William James’ famous 1906 essay, The Moral Equivalent of War, the country should be on the equivalent of a war footing. Dell may close its Limerick plant in the New Year and by February, there will be many business collapses. It is imperative that we avoid another lost decade like the 1980’s and the inept approach up to now, has put the economy on course for such an eventuality.” If we are at war as you say, how come it’s only when there’s an external ‘enemy’ in the cross hairs that we get such a response as in this thread? A thread on job creation or reform would get a fraction of the responses, even though these are areas where we can have some control. The funny aspect of this indignation is that Harney in 2000 sneered at the Germans who were encountering problems because of their reunification spending; there is some hope that the new government will push through a programme of reform but up to now, we want more from Europe without having to cull any sacred cows at home. Since 1973, we have not contributed on an net basis 1 cent to the European Union’s budget. John Banville, the Irish writer, wrote in The New York Times last November, that we Celtic Tiger cubs set up a great roaring and ranting in response to the economic crash. Who is to blame for our sudden travails? we demanded – – somebody must be to blame. The bankers? Them, certainly. The politicians? Well, the politicians are always to blame, so nothing new there. The markets, those shadowy entities that seem to operate by whim? Ourselves, perhaps? — now, there was a sobering possibility. Banville said: “There used to be a nice acronym that neatly expressed how the Irish people conceive of themselves: MOPE, that is, Most Oppressed People Ever.” So throw off the victims’ cross and sort out what we can at home. Then we will be in a stronger position to make demands in Europe. “So throw off the victims’ cross and sort out what we can at home. Then we will be in a stronger position to make demands in Europe.” To be fair to Prof. Kelly, that is exactly what he is proposing. @ Michael Hennigan If you believe most workers in the private sector can be compared with bankers, then you are an idiot and delusional to boot. Never said that “most workers in the private sector” are like bankers, but clearly “workers in the private sector” who are “living in the real world” includes these and the others that I mentioned – just like the conditions of political appointees and senior public servants appears to segue into being assumed for all public sector workers, might I add. The majority of private sector workers have NO occupational and again, the statement you make in respect of those who have, is rubbish. Again, where have I claimed that the “majority of private sector workers” have occupational? As to the state of private sector pensions, I’ll say that it’s you who is delusional. Private sector pensions arrangements are scandalous (including, as you mention yourself, that many workers don’t even have entitlement to what little there is). I’ll re-iterate that I think that a proper universal pension scheme is needed – included some adjustment down on public sector pension entitlements. I believe that TASc and/or Michael Taft have done some work on these numbers in the past. If nothing else, the prospect will sort out those for whom public-sector pensions is just faux-outrage, and it’s really that the plebs are getting something (a decent pension) to which our glorious middle-class Galts feel that only they are entitled. @ Michael Hennigan There was a lady from DCU on VB the other night who made some claims about the economic wealth that Ireland’s participation in Common Fisheries has transferred to the rest of the EU (she also referred to processed-vs-raw catch values). She stated that the net transfers into Ireland from the EU was much less than what people thought. Some figures from the academics on this would be welcome. @EWI i seen that she stated that EU countries take fish worth 8 Billion Euro every year if you processed the fish it would be worth double? Greetings, Fascinating – and depressing – article by Professor Kelly. I’m not an economics’ buff, just the “armchair” variety, my background being in the computer industry, but here are some things which have puzzled me and some suggestions… There is one thing that’s always puzzled me about the bailout. Given that the IMF’s rate on its €22.5 billion tranche was just above 3%, whilst the ECB’s rate on its tranche was higher, why didn’t the previous government maximize the IMF part at a lower rate and minimize (if not do without) the ECB’s “contribution”? How much would the IMF be willing to lend at 4%, 5% or 6%? (If I remember correctly, 6% or 6.5% was the break-even point.) This is something which the current government could “correct” in renegotiating the bailout deal. The important point being to ensure that the total interest rate on the loan is sustainable – ie, repayable – unlike at present. Even if, having gained the maximum amount from the IMF at a sustainable rate of interest, we still fell short of what is required, and if the ECB wasn’t willing to reduce the interest rate on the balance to a reasonable/sustainable level, Ireland could simply give back the ECB’s money and then look to cut the balance out of the debt by separating the bank debt from the sovereign debt, and not guaranteeing coverage for (all/most/part of) the former. Further, the public sector payroll needs to be cut – properly. That means collapsing the upper pay brackets – like a circus tent – whilst leaving the lower brackets unchanged. No negotiations needed – just do it! In fact, overall, the public payroll should be not more than (in my opinion, say) 80% that of the private sector’s, since the latter fund the former, and are struggling to sustain this weight whilst having difficulty getting credit from banks, resulting in continuing “down-sizing”- making the public payroll even less sustainable. The pay-packet of ministers – TDs, Senators, Cabinet ministers and even An Taoiseach – should be set at the average public wage for all of them, regardless: that way, it would reflect how well they were serving the private sector – their pay would only go up if the private sector’s improves and go down when the private sector took a economic hit. For the private sector, given Ireland’s efforts to go “greener” than others, South Carolina passed a bill where utilities could lend to consumers to replace less efficient electric appliances with newer, more efficient ones – the loans would be replaced over time through savings to the utilities in producing electricity. A similar government policy for energy (and water) might prove effective in encouraging innovation in the private sector to develop/manufacture more efficient appliances – TVs, fridges, etc, along with water-saving devices – which could not only be sold to the home market but exported to Europe and elsewhere, thus increasing the income from our exports. In fact, a extension of this policy to the business community would be even more helpful. Businesses could upgrade their computers/IT equipment to ones which had a lower carbon-footprint and/or were more energy efficient, for example, thus helping businesses cut their overheads. Kindest regards, James @ clintideal i seen that she stated that EU countries take fish worth 8 Billion Euro every year if you processed the fish it would be worth double? Yes, that was the sum of it. I didn’t catch her name. (A related question to be answered, though, is whether the €8 billion annual catch is sustainable. It seems clear that it isn’t, due to declining fish stocks) @ EWI Net receipts from EU 1973-2009 €41bn; average 2.9% of GDP; 6.2% in 1991. The EU hadn’t existed during the Famine when there was starvation in West Cork coastal areas. The claim that we couldn’t develop our fishing industry because of the EU is a fairytale. @ Michael Hennigan The claim that we couldn’t develop our fishing industry because of the EU is a fairytale. I’m not sure what target you’re aiming at with this (or the Famine comment). The topic under discussion is the money coming in to us via the EU, versus money going back out (in this case, including via access to our fish stocks). The matter of West Cork famine and the relevance (or otherwise) of fishing during that period is one beyond my expertise. What frightens me, what really frightens me is that any folks are still willing to believe the latest economic stats as reported by any government. Of course here, as with pretty much every financial blog, there will always be a vested Pied Optomist happy to pipe you over the cliff before you realise what’s happening. @Micheal I must look up the history of 19th century industrial inventions again – I did not think sonar and Diesel engines were so far developed at that time – fascinating. I suggest you walk slowly through Castletownbere – its center is surrounded by trophy houses while its fishing industry is very very quiet. I remember smaller fishing towns such as Dingle in the late 70s , early 80s – they were declining back then but I still believe they were pretty vigorous. You should get out more and perhaps remember the past with greater accuracy. @Micheal Hennigan at the time of entry to the then EU in 1973 we have given away our fishing waters in return for farm subsidies N receipts don’t take this in to account remember why Norway refused to enter the EU the major reason was access by other EU countries to its fishing waters i agree the has been very good for ireland ,but i agree with Morgan Kelly that we we are put in a straight jacket for reasons that are not for our good @ James Burke In fact, overall, the public payroll should be not more than (in my opinion, say) 80% that of the private sector’s. Perhaps you will volunteer to be first in the door to the public sector under those conditions, once the recruitment embargo ends. You can console yourself with the thought of your patriotism. @ EW, “the economic wealth that Ireland’s participation in Common Fisheries has transferred to the rest of the EU … Some figures from the academics on this would be welcome.”: I hope they make allowance for all the fish that would have died of old age, as we would not have fished them. This discussion has wandered from the main point! @Kevin O’Rourke It is not implausible to expect the private sector’s saving ratio to fall from its present high level and the current account to continue to move into surplus – just what the doctor ordered. @ John McHale If you have a moment. A portion of what is being discussed is the immediate closing of the gap between government income and expenditure. I attended a lecture by Philip Lane in which he put a figure on the impact on economic growth as a result of deficit cutting. I don’t have the notes, but it was a fairly simple for X billion of deficit cutting revise growth % down by Y. For the sake of clarity here, do you work by such figures, and what might they be? Ignoring real world problems for the moment (such as the collapse of the government) do you think that growth would be better served by doing this all in one year, or over 3/4 years as envisaged? Thanks. @ Seamus Coffey With your hard stats and John Mc’s thoughtful arguments, we may have a solid counter argument to MK’s rather depressing supposition. Many thanks to both of you. @ James Burke The IMF rate isn’t really 3%, or rather that’s what it is right now, but it’s a floating, multi currency-based rate, so it will, in all likelihood, go higher in the future. What’s more important is that it’s roughly speaking a 200bps margin vs the EFSF/EFSM 300-350bps margin. However, the EU and IMF felt, not without good reason, that this was primarily, though not exclusively, an EU/EZ problem which needed to be solved primarily by the EU/EZ. Think about whether the IMF should be heavily involved in any bailout of California?. @Eoin California isn’t an individual paid-up member of the IMF, Ireland is. Its not entirely clear why we could not have been bailed out by doing a bilateral deal with the IMF, except that Greece set a precedent. Greetings, @EWI “Perhaps you will volunteer to be first in the door to the public sector under those conditions, once the recruitment embargo ends. You can console yourself with the thought of your patriotism.” The 80% relates to the total public sector payroll – not individual salaries. Bearing in mind that the following compares 2009 figures (I’d be interested in seeing current figures), the article makes a good point of their unsustainable relationship: http://www.ronanlyons.com/2009/07/13/public-sector-versus-private-sector-pay-update/ Kindest regards, James Greetings, @ Bond, Eoin Bond Thanks for the clarification regarding the interest rate. I understand your point about it being a EU/EZ problem but there are two points in favour of their involvement: 1) It’s not called the International Monetary Fund for nothing, and 2) If one’s looking for a loan, one should take the best deal on offer. Kindest regards, James Ajaj “The Chopper” Chopra, 17 December 2010: QUESTIONER: I’m particularly interested in what kinds of losses the government and the IMF and the E.U. might require of bank bondholders as part of following through with these agreements. MR. CHOPRA: As you know, the authorities have launched an exchange of the subordinated debt of Anglo Irish at a discount of about 80 percent. This approach reflects the view that such debt holders are next in line to absorb losses after equity and the Letter of Intent and the Memorandum makes clear that under the program the government is exploring the option of a similar exchange for the subordinated debt of other banks and that’s what’s contained in the program. QUESTIONER: Is there anything that might affect senior bondholders? MR. CHOPRA: On this, Minister Lenihan has clearly stated, and I quote, “There is simply no way that this country [Ireland] whose banks are so dependent on international investors can unilaterally renege on senior bondholders against the wishes of the ECB.” So far the view of European partners has been that the systemic impact of reneging on senior bondholders would be too great. In light of this, any decision on senior bondholders will need to be taken in consultation with the European partners. QUESTIONER: Is that the IMF’s view that the impact of reneging on senior bondholders would be too great? MR. CHOPRA: This is a common view at this point, yes. QUESTIONER: So that this is a view that the IMF shares? MR. CHOPRA: It’s a view that in consultation with our European partners we have adopted. Doesn’t sound like Timmy G is on his mind as the source of the prohibition on restructuring. @bazza California isn’t an individual paid-up member of the IMF, Ireland is. Its not entirely clear why we could not have been bailed out by doing a bilateral deal with the IMF, except that Greece set a precedent. It’s even more straightforward than that. The Treaty of Lisbon specifically bans intra-EU deals like the EFSF/EFSM. It permits external assistance from the IMF. @Gavin, Philip Lane and Agustin Benetrix did a nice paper a couple of years back in which they looked at the impact of shocks to Government expenditure on Irish economic activity. When I try to apply the response charts it presents to our current circumstances it looks to me as if a cut in government expendure of 1% of GDP will cause GDP to fall by about 1% on average. For some reason, shocks to spending on public service pay don’t seem to affect GDP much, while shocks to some other forms of expenditure have a greater than average impact. Make what you will of that until someone comes up with something better. @Colm Brazel Totally agree with you. Have to admit I did,nt put it together as well as you did. It comes across as McHale is slapping down Morgan Kelly for sticking his head above the conventional wisdom which for McHale and many others is being a good European and get on with the pain. My ideal guests on Vincent Browne would be 1. Morgan Kelly 2. Max Keiser. 3. John McHale 3. Pat Honahan. Bring it on Vincent. Going by his article on Wed in the IT, Vincent is on the green tablets right now to steady the nerves and could even step down from TV3. I applaud Morgan Kellys Jacksonian like comments – ,Jackson was right to break free from the cartel but made one grave mistake. He reduced the debt to zero but what he should have done was shift the debt to the treasuary itself rather then a private bank. This resulted in a depression in the States eventhough most of the populace could feed themselves without money. Without recognizing that money has a time component – his efforts will be for nought. @ All, THERE IS A PROBLEM, IN THE ANALYSIS OF IRISH ECONOMICS BY MANY FOLK I HAVE READ HERE, IN THE LAST COUPLE OF YEARS. The voice of macro-economics, environmental economics, behavioral economics, property economics, depression economics . . . lots of different variants are in evidence, in attendance and well accounted for. What I haven’t come across as yet, is an outstanding voice in Ireland as yet, in the area of Labour Economics. That is, the understanding of human capital as, and on whose bottom line it ends up. I have listened to Paul Woolley of the LSE, speaking about the principal agency problem in modern day finance. He talked about the ability of the financial industry to capture the bulk of the benefits arising out of activities of the productive sector of the economy. I believe that Europe needs to stop looking at the problem in terms of nations, such as the ‘Irish’ problem, or the Spanish problem. And to realize this has far less to do with nations and a lot more to do with how the profile of industry in the west has altered so much in the last quarter of a century. I think that Robert Pye expressed it a lot better yesterday in his Irish Times article, in saying: “With a 40 per cent fall in its industrial capacity in just 25 years, a staggering and unsustainable trade deficit, and a massive burden of unfunded liabilities (social security and medicare), the US economy could only be held together by a dangerous expansion of its money supply (“quantitative easing” is now in full swing).” He also said a lot more than that, and his views are an important consideration in the context of the Morgan Kelly article of today, or the Colm McCarthy Sunday Independent article of a week ago, ECB is leading Ireland and the eurozone to disaster. What we need actually at the moment, is someone such as professor Patrick Honohan, doing the job he aught to be doing. That is, assisting the European institutions, and the most powerful nation states on our globe to gain a clearer, longer term picture of what has/is/will happen to the industrial and labour profile in our economies over the next quarter of a century. Everything else, and Ireland’s sovereign debt problem into the bargain, just pales by comparison to that mounting problem. The thing that is so difficult for us as Irish men and women to accept, is that we cannot solve the ‘Irish’ problem, without solving the ‘European’ problem first. BOH. @ James/Bazza The IMF usually seeks a currency devaluation as part of their aid efforts, as well as aiding developing world explore where an economic policy overhaul can create a huge economic rebound. Dealing with highly leveraged advanced economies is not their area of expertise. @ Colm Brazel/John McHale Peace be to yiz. You guys both blog under your own names, and have made many thoughtful and enlightening contributions. For which much thanks. John has deplored the personalisation of what is a systemic crisis. There are also academic sensitivities, which matter a lot to some of us. Colm wants accountability, and insists that a spade is not called a digging implement. We surely need that now. With all due respect to our academics, the current state of the country is no academic matter. The government wanted a clean pair of hands for the CB, and they got them. Given the barefaced carry-on of the bubble era, that has to be a plus. It is hardly fair, however, to expect someone, no matter how well qualified in theory, to enter the shark infested waters of central banking or capital markets, and not get eaten. If we are to follow MK’s line of argument, it looks like that may have happened. I guess he has placed the ball firmly in the Governor’s court and I doubt we have heard the last of it. @ Gavin Kostick, re”I attended a lecture by Philip Lane in which he put a figure on the impact on economic growth as a result of deficit cutting. I don’t have the notes, but it was a fairly simple for X billion of deficit cutting revise growth % down by Y. For the sake of clarity here, do you work by such figures, and what might they be? Pity you didn’t take that figure down, perhaps Philip can enlighten us more there. Bugs me also given the desperate measures imposed by the bailout, that we have nt got a 5 year plan from the DoF, on its proposed austerity adjustment. Don’t we have an ESRI, where the hell are their stats? Truth is government has fallen for the scam of ‘possible’ future adjustments of the noose. But they choose to ignore the overwhelming evidence of danger facing us with the fail IMF/ECB intervention here; MK is registering alarm bells and warnings. Belatedly Brian Lenihan is waking up to the fact of his shafting by the ECB. Perhaps Michael Martin who bravely forged new ground with his Anti smoking bill copied across Europe, will have a wake up moment as the clock ticks to default and become an Irish PuntNua Watership Down Fiver to save the rest of the rabbits:) I wouldn’t wait around for that:) Perhaps those swans:) – cheerleaders of the ECB, might like to put their names to a published rebuttal of MK, so we can remind ourselves how we got into the mess! Or will we get the silence of submissive hopeless inaction we’re used to by now? @Michael Hennigan ‘I do hope that Prof. Honohan ignores convention if it exists an defends himself.! Agree. A good ol’ expressions of staunch opinions, the equivalent of the meedja duel, would certainly brighten up the public sphere. It is probably also in the public interest – as through present, apathy, apprehension, ignorance, stockholm syndrome, or otherwise – to generate as much relevant discussion on Ireland’s present ‘ludicrous supine position’ and the real choices that are available. This serf is particularly up-to-here with the dominant discourse that all the ills and real losses of the risk takers in the financial system be paid for by the sweat and blood of the serfs who bear no direct responsibility for such risks. @ Peter Kinane ‘I hope they make allowance for all the fish that would have died of old age, as we would not have fished them’ 🙂 Why do people seem to think that the rules that apply to sovereign debt are the same as those applied to personal debt? You can’t repossess a country! You can’t have collateral on a country. @ Peter Kinnane I hope they make allowance for all the fish that would have died of old age, as we would not have fished them. Well, seeing as though uncaught fish would presumably breed, we can take that this returns a benefit (in continuing the population of stocks). @ Eureka You can’t repossess a country! Tell that to Germany, France, Spain or the UK? All of which have made efforts in that direction as regards us, historically 😉 @ James My apologies. One problem with that, though, is that payroll does not necessarily equate to wealth. How many employees do the tech giants in the US have, versus their profits? As to Ronan Lyons, I refer you to “lies, damned lies and statistics”. If he wants to compare the same professions and trades in the public and private sectors, then I’d be interested. Seeing as though he apparently has no desire to do so… @EWI “As to Ronan Lyons, I refer you to “lies, damned lies and statistics”. If he wants to compare the same professions and trades in the public and private sectors, then I’d be interested. Seeing as though he apparently has no desire to do so…” They also say you can tell a scoundrel by what he doesn’t read… clearly you didn’t read the post referred to… @ PQ Was intended as somewhat humorous, thx. @EWI, I concede that it was not a well rounded response, to say the least. @Eureka, “Why do people seem to think that the rules that apply to sovereign debt are the same as those applied to personal debt?”: Honour- -ethics? The solution that Morgan Kelly proposes (ditch the banks and balance the budget) is crazy and would be catastrophic if implemented. However, as I see it, any alternative would be worse. That is the predicament we face. http://www.raywhitebunbury.com/property-info.html?feed=House&uid=BUN3357406 Does this make sense to anyone? Can they do this? Sorry wrong link – how about this? (please delete previous- thank you) http://www.bloomberg.com/news/2011-05-07/eu-said-to-consider-requiring-more-collateral-for-extra-greek-aid-on-debt.html Is it possible? @ Peter Kinane Like the Hokey Cokey It ain’t what you do it’s the way that you do it ‘ With its string of nineteenth century defaults, Spain took the mantle for most defaults from France, which had abrogated its debt obligations on eight occasions between 1500 and 1800. Because during episodes of external debt default the French monarchs had a hibit of executing major domestic creditors (an early and decisive form of ‘debt restructuring’), the population came to refer to these episodes as ‘bloodletting’. The French finance minister Abbe Terray, who served from 1776 to 1774, once opined that governments should default at least once evey hundred years in order to restore equilibrium’ This Time is Different: Eight centuries of financial folly Reinhardt and Rogoff 2009. They also say you can tell a scoundrel by what he doesn’t read… clearly you didn’t read the post referred to… I did read it – for the umpteenth time. It has been referred to here and elsewhere many times in the past. I particularly enjoyed his claim “that grade for grade, age for age, hour for hour, the public sector enjoy a huge premium of anything up to 70% (on a per hour basis) over their private sector colleauges.” The ‘anything up to’ seals it as a classic, in my mind. In the very same paragraph he himself goes from claiming 30% differential (ESRI) to 70% differential (Davys). As he says himself, “how much more evidence do we need?!” I don’t believe fro a second that the ESRI is as impartial as he claims – their codology over public sector pay (the curiously-timed reports), the incinerator in Ringsend and (especially) climate change in the last couple of years has put paid to that. why has a top level Goverment Team ie Minister of Finance and our Taoiseach have not traveled to Greece ,Portugal and Spain to create a influential bloc as we have so much in common right now and their is strength in numbers rather each country getting picked off one by one @EWI The picture, the picture… PS I also think the private sector pays itself too much… eureka, I certainly don’t think the rules for sovereign debt are the same as those for private sector debt. It is true you can’t repo a country, but you can ex IDE one, you can erect trade barriers, you can even invade one if you make enough excuses. Ireland is an open economy with high wages and all that’s (almost) fine because we are educated and can trade freely with a huge economic block (the EU)…our politicians lost their heads when they allowed a property bubble to inflate and then put your money on the line to bail out their banker friends ( and pissed off every responsible politician across Europe in the process) and now we blame the ECB? I am all in favor of allowing the banks take their hits, but we have to make sure that we have a plan B before we piss everyone off again. There is no plan B as far as I can see, just recrimination and despairing paralysis. It really is painful to watch… Can somebody tell thosepoliticans to get off their backsides and think of something…it’s not difficult to see what to do…we desperately need a new source of funding while we work down the deficits, if we can get that we can fix the mistake of the bank guarantees, if we can’t then we are on the path to ruin (and I mean total and utter ruin). Given the seriousness of the situation, and our almost innate propensity for group think, there is no excuse for reputations to be beyond the pale. It is childish in the extreme for commentators not to talk about WHO made what decisions in their official capacities and what consequences flowed from those decisions, especially when what we are talking about is loss of sovereignty and economic collapse on an unprecedented scale. These are highly paid jobs at the front line and we need battle hardened people not people who want to hide behind titles and theories. I for one, think it was most disingenuous of Patrick Honohan to say at one point that he was “not interested in naming names”. This is the theoretical approach, and it gets us nowhere. This approach contributes to people saying ‘no one is responsible, no one will be held accountable, no one will be sent to jail and then they follow up those comments with ” I am taking what is left of my money out of the Irish banking system” where no one is accountable for anything. It will also contribute to social unrest. Nyberg, followed up that logic with the idea that we were “All” accountable. Nobody in their right mind believes that for a minute. Indeed by saying that Nyberg was contributing to his own “group think’ solution of his peers. @ John McHale Our sovereign undertakings cannot be predicated on lies, intimidation and group think. If someone lies to me and then says “but Robert I have a contract with you’ the contract is ultra vires. You cannot make something legal that was illegal to begin with and you cannot run to the law to have an illegal contract “enforced” as the ECB insists must happen. Kelly’s assertion that the EU were paranoid, is not, a Kelly idea as such since it has been repeated ad nauseum in the MSM. On your second point, are you afraid that as a people, we might have a disorderly march along the road to economic ruin? Because, that is precisely what we have had since the crisis began. NAMA “only game in town’, cash or more accurately debt for trash was wrong. The guarantee hammered out in the early hours of the morning with John Gormley stumbling out of his bed, was wrong. The IMF deal announced on Morning Ireland was wrong and the slavish endeavor to convert ECB lender of last resort, short term loan facilities into long term government debt is wrong. Over 70bn of ECB lending to Ireland has been used to repay senior debt and there is much more to come. This is not a bailout. As for; “who on earth would want to take the risk of economic collapse and impoverishment that would follow” It is already here. Have we not 443,000 people unemployed with another 100,000 on schemes? Will 300,000 people not have left the country by the end of this year? That is an economic collapse and the debt being piled high is totally unsustainable and Morgan Kelly knows it but he has probably got right up peoples noses when he says that lecturers and professors like himself are paid twice what they should be. Something that Edward Walsh has also said. However, just because salaries still come out of ATM’s does not mean that we should not face reality no matter how painful that reality is. Your approach is to kick the can down the road. Constantine Gurdgiev has already said a lot of what Morgan Kelly has said, Kelly is certainly not the only one saying these things but he certainly has said them in the most blunt and comprehensive manner. Robert, Respectfully, all of the pay issues will be dealt with one way or another. In a default scenario, the reckoning will come hard and fast, in a scenario where our deficits are negotiated down, it will be noisy, painful and slow. The fact is that wages are double the amount that is affordable. Benchmarks are irrelevant because every public sector employee, lecturers included, will have the same hard choice that some in the private sector have already faced, take the pay cut or go…the cupboard is bare. The issue is whether to default or not and, if we decide not to default, are the things we are giving up for this “bailout” worth more than the benefit of being good EZ citizens. I believe we should fight with every last breadth to fight a default, but I also believe that the price of “support” is too high…we have to a) accept we are bust b) line up financing from outside the EZ c) set limits on the liability (no bank debt or atleast as little as possible) and then d) start the hard work of moving our deficits into lien with the reality that exists. Nobody wants to do this and the only reason that this can make sense to me is that most, and especially politicians, are still in the denial phase of grief….some here are in anger phase…but remember, we are grieving which means we are working through a process of accepting a hard hard fact….were ducked and we have to accept it. Accepting it does NOT mean we have to be victims….we have tools, but while we bicker and argue about benchmarks for public sector employees and ECB mendacity, we are wasting time….we need a plan and our poltiticians don’t have one…. @ PQ Ooh ho, hokey pokey 🙂 Oh now, I should think one would not take a cue from others as to how they act or from precedence (of Middle Ages monarchs. Though I’m not for a moment paying any compliments to the intellectual calibre of the modern world). After all one only gets one chance to do the hokey pokey, so better make it one’s own dance. Someone has to try to give direction to … form; rather than simply add to the force of a race to the bottom. Ok, our recent culture got us to where we are – currency wreckers and financially very embarrassed. I think we should now be quite disposed to listen to our family- -friends rather than preach; take a break from digging; sack cloth and ashes for a while might be what our character- -culture needs as the foundation to the future. Unfortunately I’m concerned that the rest of the old G7 world may catch up with us in our demise, and that may be the future. Where does this all leave the NTMA roadshow? @Peter Kinane you mean that G7 are following in our lead ? that the west is at a structual endgame ie Brian O Hanlons post earlier @ clintideal, Pretty much; the old G7 has pursued astonishing polices during the naughties – banking policy and rapid liberalisation of trade. Also, the Western world (as well as pretty much the rest of the world) is informed through Classical Philosophy, which in turn is informed by Bronze Age concepts – not a recipe for logical authority, though it may have served us well in the age of brawn. Robert Browne writes, Given the seriousness of the situation, and our almost innate propensity for group think, there is no excuse for reputations to be beyond the pale. It is childish in the extreme for commentators not to talk about WHO made what decisions in their official capacities and what consequences flowed from those decisions, especially when what we are talking about is loss of sovereignty and economic collapse on an unprecedented scale. It’s kinda weird to be reading these sorts of paragraphs today in Ireland isn’t it? I mean, who would have guessed that such a paragraph could have had any relevance in the context of Ireland, only a few years ago? I mean, who? If I had read that paragraph, then, I might have assumed it was about some far off developing nation with a dictator for a leader. Certainly not Ireland. Well done Robert. Couldn’t have said it any better. BOH. @James Burke Further, the public sector payroll needs to be cut – properly. That means collapsing the upper pay brackets – like a circus tent – whilst leaving the lower brackets unchanged. No negotiations needed – just do it! Now there is a good idea! for a moment a had thought that “the Dork from Cork” may be our enlightend one but he kinda trailed off on his own steam but i am certain the financial sector has been on some sort of crusade for the last few years that has gone on un checked every time i look at the oil price i ask myself how has come so high in that bulk of the western world is going through tough times which makes it hard to understand i accept that developing world is seeing real growth through higher export orders it makes me question are at fundamental wealth transfer timefrom west to east Clintideal suggests, that the west is at a structual endgame There is an intellectual slant to it also, in how young folk in the west use their brainpower today, versus the same in other parts of the world. Edward De Bono has commented on this quite a bit, in how parts of the world are more open these days to new ideas as regards education and so forth. It is twenty years now, since I sat a Leaving Cert exam in Ireland. That is an interesting time frame to look at, as many of the policy decisions we are making today, may need that kind of period to bed in. But what strikes me is as follows. Twenty years ago, I found myself in a higher mathematics class in a secondary school of about population 600. I recall there were roughly six students in my year of approx 120, that came out of that school with a C-grade or higher in the mathematics paper. That is, about 1 in 20 students. But what was noticeable, was that 3-4 of those students used to do their private tuition exercises in separate notebooks in the class, and ignore the teacher who was teaching them the course on the blackboard. Those 3-4 students I remember, did so, as they had already decided to pursue a career in the field of engineering. They understood they would not even get through a first year in third level, never mind pass their Leaving Cert mathematics if they stuck with the meals they were dished out at my school. If anyone had asked me, as a 17 year old twenty years ago, what my observations on the system were, I would have promptly told them. I was one of the six who scraped a C-grade out of my Leaving Cert, though I did not do any private tuition, nor had I intended to pursue an engineering career. In fact, my first choice was to go to Art college. The fact of the matter is, we are making a lot of policy decisions at the moment, based on the opinions and observations of people who are a lot older than 17 years of age. Furthermore, we do not seem to rate very highly the opinions or observations of young people of that age. I wonder very much if the Irish are worthy of the duty of developing our human resources over a time frame of two decades into the future? The interesting observation I can make, is that highly paid, top civil servants are making a big fanfare today about their new mathematics program and their smart economic plans. I think the smart thing to do, really, is to simply chat to some smart 17 years old right now, and inquire from them. But I guess, unless your pay grade is over €100k, no one listens. It is kind of insulting though, to listen to the same speak of startling new discovers, about problems in our system, when little was done to ask the right questions, decades earlier. That is the one area, where the Irish (over the G7 nations), cannot afford to be so lazy in future. BOH. Morgan Kelly’s article added two things to my view of the situation. Most importantly, he gave us his analysis that sovereign default will damn a generation. This is the opposite of the view that we will be best off if we default on the ECB’s terms. The view that “sure nobody expects us to pay all that back so we’ll get a deal in the end” may be accurate but it doesn’t mean that course of action won’t yield the worst possible result for our nation. Interestingly, but less importantly, MK gave us some new insights into the negotiations. However, apart from the Geithner snippet, a lot of it is a subjective analysis of other people’s behaviour. Whether it is right or not does not matter hugely. The personal vitriol in the article does not bother me one bit. That is the way MK is. It appears he is not beholden to anybody and is not mindful of anyone’s feelings. It may seem harsh but you know that, apart from the judgments on other people’s characters, what you are getting is the unvarnished truth as MK sees it. The insults are a very small matter beside whether Morgan Kelly is right on the prospects for Ireland’s future. My own analysis have evolved to mirror MK’s analysis over time albeit I have been hoping there is a possible endgame that will allow recovery. I have also reached the view that our civil servants and the cognoscenti of politics and business are psychologically incapable of taking any course of action other than persisting in keeping in lock-step with the ECB. There are loads of reasons for this – a lack of capacity to understand the situation, the life experiences of your average Irish 50-70yr old, incompetence, exhaustion, cowardice, fear, mental capture by the EU bureaucracy of our ruling classes, inferiority complexes and so on. I have been resigned to this up until now. When I read Morgan Kelly’s article I feel like going out and looking for a fight. I am full of fear that if we do not fight for the state to walk away from the banks and the ECB now then we will end up having much more horrible fights amongst ourselves in this country. BTW congrats to Jagdip Singh / Namawinelake on the ultimate hat tip from Morgan Kelly. Well deserved. @ EWI I don’t believe fro a second that the ESRI is as impartial as he claims – their codology over public sector pay (the curiously-timed reports), the incinerator in Ringsend and (especially) climate change in the last couple of years has put paid to that. You unwittingly provide an excellent illustration of the common mindset that is part of the culture that brought the country to its knees. I suppose the CSO staff who produced similar research on pay differentials for comparable jobs, were on the payroll of the Bilderburg Group? Perish the thought that we could have a national waste management policy like that of a well run country like Austria. We need the reviled EU to force us to clean up the water supply and end the current landfill system! @ The Dork of Cork You should get out more and perhaps remember the past with greater accuracy. Tim Pat Coogan has a commnetary here on the fishing industry: http://bit.ly/k1jenf Rather than address shortcomings, the default is to blame the foreigner. Tim Pat refers to an RTÉ flash which read: “A large hole has opened on the Naas dual carriageway and the Gardai are looking into it.” There was an interesting example of Ireland at work in 2006, when a burst pipe triggered the biggest traffic jam in Irish history: The Indo reported: “Five ministers were on hand to reveal plans for a fabulous new Dublin Metro line. On the same day, commuters witnessed the biggest traffic jam in Irish history. Thanks to a spot of bother with a pipe, motorists were stuck in a snarl-up for up to seven hours. Lots of time to unwind.” @ Karl Whelan It’s undoubtedly a high risk strategy and all sorts of things can go wrong. But then sleepwalking to default on our official sovereign debt isn’t too rosy a scenario either. We have had over 200 posts and nothing really that would help the Minister for Finance. Isn’t it time to get the ball rolling on specifics? Unless people like yourself in secure employment and able to command media attention, end this dancing around the issue and make radical proposals that would likely shock colleagues, we will continue with the same slow-motion scenario that exists in so many areas of Irish society. Brendan Howlin said on Friday: “The number of posts has been reduced by 2000 in the three months to end March 2011. We are on track to achieve the end 2011 target of 302,000 public service posts. The latest figures show that the Exchequer pay bill outturn for the first three months of the year is in line with the 2011 pay bill targets. The total Exchequer pay bill for 2011 is estimated at €15.7bn. Public service numbers have fallen by 16,400 since 2008.” What he didn’t say was that the pensions bill has increased by 35% since 2008. There are 2.5 workers per pensioner. So in this big spending area, severance deals and pensions have to be set against gains from a lower payroll. Howlin’s data on job numbers excludes about 36,000 in local authorities. Today’s Sindo quotes the comments of Karl Whelan and John McHale in this thread, without mentioning that this is where the comments first appeared. What is it with journalists that they are so reluctant to acknowledge blogs? @ BeeCeeTee, Colm Brazil, zhou_enlai and others. Thanks to the tip a while back, BeeCeeTee, I have gone away and found this: “The Impact of Fiscal Shocks on the Irish Economy”, Lane, Benetrix http://www.esr.ie/Vol40_4/Benetrix.pdf Two points: (a) Another illuminating aspect of Kelly’s narrative is the complete lack of concern for Irish Law in the discussions with the ECB/IMF. I always thought the ‘we can’t burn bondholders because we learned bits of dog-latin at College’, was a bit of a red herring (perhaps we could fish and export red herring? We’re good at that and we won’t run out). Also with what’s happening with Greece now, economic decisions will get made in realpolitic terms, and law straightened up after. (b) For what it’s worth, I remain a bit disappointed by the final third of a tremendous article where he goes for stiffing the ECB and by virtue of halving his own wages closing the deficit. I thought he was on stronger ground last time when he spelled out the facts then said he had no instant magic formula to offer. Mind you, in playing the ‘if I were the government’ game, I would call him in for a more detailed set of proposals. So to Michael Hennigan on the subject of the usefulness of all this, note to government, first this Monday, call Morgan Kelly and ask him to quietly expand on this. For myself: http://www.youtube.com/watch?v=VM6j14DDtGI @ Kevin Donoghue Thanks for the tip. I wonder is that ethical or even legal? I fuly sympathise with Michael H’s frustration after more than 200 posts here, but, insofar as the volume and intensity of exchanges might reflect – and, perhaps, in some limited way, inform – public opinion, in a slightly perverse way, all this might strengthen the Government’s hand in its exchanges with the EU’s Grand Panjandrums. We have Morgan Kelly, who has achieved justified international recognition for his straight-talking, highlighting the perils of continuing on the current course and we have Karl Whelan, who, equally, has a justified ‘standing’ in the academic and public sphere, highlighting the serious risks of ‘sleep-walking’ to default. Colm McCarthy has been no less forceful – and, indeed, probably more persistent – in highlighting these risks. And there is, probably a 9:1 ratio of commenters accepting the basis of this analysis and advocating some form of unilateral action by Ireland. The Government, in its exchanges with out EU partners, can point to the fact that those who help to inform – and form – public opinion in Ireland on economic matters are increasingly highlighting the fact the the current course is unsustainable – and that a lot of the public opinion that’s being expressed is advocating unilateral action by Ireland to save itself. It makes communicating the Government’s message easier. Something has to give; and, more importantly, they have to give something – and something that is meaningful and substantive. So, perhaps, those of us who recognise (1) the madness of taking unilateral action, (2) the badly executed, but utilitarian and pragmatic, approach the EU is pursuing, (3) that the layer of global financialisation involving the banking and shadow banking sectors (that generates little of social or economic value and was the principal cause of the current crisis) has yet to be tackled effectively, (4) the need for further institutional reform in the EU (including refrom of democratic governance), (5) the fact that the EU only ever evolves and develops in response to crises and (6) the significiant structural reforms that are completely within the Government’s sovereignty to pursue and which would generate significant economic benefits (but which are only being fiddled with) should pipe down for a little while. It is unlikely rationality will prevail here and seeking to secure its proper primacy, perversely, may help to weaken the Government’s hand. Honahan to be on News At One today. Hopefully he will be questioned deeply on the truthiness of our scambling bailout: 1. Identify the impact on Government expenditure of the bailout for the next 5 years. 2. Define his projections for growth in the economy over the next 5 years. 3. Given the economic impact of the economic decisions taken, should citizens be given the opportunity to have a say on his opinions. 4. Will Honahan be producing a White Paper to educate people and help them understand the colossal decisions that he has helped make on their behalf? 5. Then on to mathematics with chart overheads on GNP/GDP, ICB promissory note support, bondholder maturity payments, and the rationale for unsustainable debt repayments….simple arithmetic Doubt if the truthiness we’ll get today will uncover any of the scambling behind those decisions:) Perhaps after default we may in the future have something similar to the Senate Hearings in the US and we could have Honahan in for the day, a questionnaire template with Q’s added to it from posters here and other commentators from at home and abroad. But doubt it! Bring handkerchiefs along for our Default Swan Song:-( @ Paul Hunt, “(4) the need for further institutional reform in the EU (including refrom of democratic governance), “: Just to say on this point that it rather seems to me that the EU has always been better than a democratic system – democratic system in the sense of counting hands until one has more than 50%. It has operated as a family – always bending over backwards to get and keep everyone on board, rather than just 50%. But perhaps that spoiled some children Many thanks to all for a fascinating and straight-talking thread. Damien Kiberd writes in the Sunday Times today. ‘The European Union/International Monetary Fund (IMF) programme of financial support for Ireland is addressed to Jean-Claude Trichet of the European central bank (ECB), Jean-Claude Juncker, the chairman of the Eurogroup of finance ministers, a Hungarian minister called Gyorgy Matolcsy, Dominique Strauss-Kahn of the IMF and Olli Rehn, an EU commissioner. It contains letters of intent signed off by Michael Noonan, the finance minister, and Patrick Honohan, the governor of the Central Bank of Ireland. The programme is a tightly written, legally constructed document that commits us to put our economy into lockdown for five years; obliges us to report every economic development to the EU/ECB/IMF, sometimes within a seven-day deadline; provides for the run-off of two banks and “non-core” parts of others; sets virtually impossible deadlines for bank reform, including the break-up of Irish Life & Permanent (IL&P); and provides for a savage austerity programme, including a two-stage property tax. It undertakes to make the austerity measures legally enforceable through an Oireachtas act. It can only be described as a surrender treaty. Yet this is not the full extent of the pain. There is also the commitment to unspecified “corrective action” that may be needed if “circumstances change”. The rest of the piece, which is as trenchant as anything written by Morgan Kelly, can be found at the Namawinelake link below. Can anyone provide a link to the document itself ? http://namawinelake.wordpress.com/2011/05/07/morgan-kelly%e2%80%99s-plea-to-confront-the-bailout-now/ @ Paul Quigley Wow looks like we are being led over the cliff alright if Damien Kiberd is correct then decisions that are being taken by our new FF/LAB goverment that seem even more reckless than the old FF/GR goverment @PQ, We had a post on this – which is what I think you’re after. Didn’t attract much traffic. It seems it’s much more fun to rant than to read and then to communicate: http://www.irisheconomy.ie/index.php/2011/05/03/revised-euimf-mou/ @ Colm Brazel The Governor was always going to be a prisoner of circumstances but he still has choices. As the saying goes, it’s good to talk. @Gavin Kostick I wonder is that ethical or even legal? IANAL but I’m pretty sure there’s no legal problem, but it strikes me as shabby conduct. Journalists obviously get a lot of their information from blogs like this one and they should acknowledge that. When quoting comments made at a conference, they typically mention the conference sponsors and the same should go for blogs. Having said that, I’ve seen a lot worse. American journalists have been known to publish stories researched by bloggers as if they did the legwork themselves. @Zhou: Plaudits to you for admitting how your views, always honestly arrived at and expressed, have evolved as evidence has emerged. It was always a debate, always an interprtation of partial evidence and incomplete models of how small open economies work. We, and others, crossed swords years ago about whether or not to nationalise, as opposed to guarantee, the banks. Perhaps we would have neded up in the same place whichever path was chosen. But there is now, I think, abundant evidence to support the assertion that we are on a path to disaster, much bigger than anything that has befallen us so far. And, contrary to much of the discussion above, there is no ‘solution’, easy or hard, other than to accept the inevitable and now, finally, to get on with it. And see where the dice fall. Out of the gloom we can discern a number of facts. First, we have nobody externally that thinks of our interests. Second, as you say, we don’t have anybody domestically, who sees this. Europe is getting its banks in as good a shape as possible to prepare for our collapse. We choose to accept this path or not. Their timetable or ours: it ends at the same point. At that point, our banks will have no ECB funding and our Exchequer will have no EU/IMF borrowing facility. So, whichever tiemtable, we have to have a primary budget surplus. @All: particulalrly K O’R and all of the other neo-Keynesians out there (I am a fully paid-up member of this club, so the following question really hurts). Is there anything to be gained by not moving to a primary surplus straight away, giving its inevitability? The bit that keeps getting at me is that this guy is a PROFESSOR. Jayz if a mathematics professor grabbed a headline by arguing that the calculus is fundamentally unsound, she would be out of a job. @BWII, Think Howard Beale in ‘Network’ (1976): “Let’s all stick our heads out the window and shout ‘We’re as mad as hell. And we’re not taking it anymore.'” @Michael Hennigan We have had over 200 posts and nothing really that would help the Minister for Finance. Not True. The contribution from James Burke below was an excellent suggestion. And completely within the authority if not within the competence or motivation of the Irish government to do it. Further, the public sector payroll needs to be cut – properly. That means collapsing the upper pay brackets – like a circus tent – whilst leaving the lower brackets unchanged. No negotiations needed – just do it! @ Michael Hennigan “Greg Says: May 7th, 2011 at 11:26 am A “balanced” budget? Let’s start with some cuts. No one on the State payroll gets more than €100k. No one. No one gets a State pension until they have reached pensionable age and that pension cannot exceed €60k. No one. Cancel ALL foreign aid. Make child benefit taxable. Make all foreign recipients of child benefit reapply. And make them do so every three months. Apply a withholding tax of 50% on foreign recipients of the benefit.” @ Paul Quigley, You may be interested in this, particularly p43 on debt sustainability. It has IMF and other gambling bets that further losses in the banks will not occur, has projections on growth 2.25% over 2011-14 already broken and dodgy obscurities on external assets http://www.imf.org/external/pubs/ft/scr/2010/cr10366.pdf “Ireland gross external liabilities are very large in relation to GDP, but these are mostly offset by external assets. Ireland’s gross non-resident liabilities are large at 1,057 percent of GDP (as of end-March 2010). But this due mainly to the presence of a large international financial services (IFSC) industry, which also possesses sizeable external assets. Indeed, a more comprehensive measure of Irish external liabilities is the international Investment Position (IIP).1 According to this measure, when holdings of foreign assets are taken into consideration, the Irish external position is a net liability of circa 90 percent of GDP.” ….Much more attention should be given to the role of the IFSC industry about which above statements on external assets raise more questions than answers! @simpleton “We, and others, crossed swords years ago about whether or not to nationalise, as opposed to guarantee, the banks.” Liquidate! It is not too late! (As Mr. Kelly points out, it is all that is left to us). “Is there anything to be gained by not moving to a primary surplus straight away, giving its inevitability?” It is a really painful question with really painful outcomes either way. 1. I don’t think a primary surplus is enough. We may need an absolute surplus. Default on bank debt will help in achieving this in that interest and promissory note payments will be lower (for all that promissory note interest is paid ‘after’ the capital payments). 2. The main advantage to a longer adjustment is that it gives people time to adjust. This only works, though, if they know what they have to adjust. Neither the last nor the current government have spelled out what changes they will make to taxation or to spending (both have impacts on citizens). If a government was prepared to stand up and say Budget 2012 will do this, Budget 2013 will do this and Budget 2014 will do this, then there might be some advantage. It would be possible for people to say “okay, that will cost me x, so I need to do y to get through it”. 3. As no political party will spell this out and, I believe, the DoF is incapable of producing those figures, we are left in the position that we are utterly reliant on external funding and so powerless to resist the demands of those external funders, while at the same time you and I and most other people still don’t know what is going to happen next to our after tax income and services. As it was nearly three years ago, so it is now – it is about survival, not success. How do we avoid a lost decade? Well, we’re already three years on the path of it. Anyone fancy another seven years? @ Paul Hunt “We are not taking any more” Apologies if you have been particularly burnt but at a mactro level what exactly have we taken? Unemployment is now higher than EU average but way lower than e.g. Spain. Public Servants have seen their remuneration reduced but still 50% above EU average. Social welfare has been reduced but still twice that in the UK. Income tax remains relatively very low. It is almost that we have been so spooked by the banking crisis that we are screaming “please give us the worst”. For sure, if we adopt Morgan’s proposal it will has he admits be far from painless. @Tim “Yet every point [kelly] he has made has come to pass.” Not true I think. What happened to the mass evictions? I think Kelly has made a series of diabolical predictions some of which have materialised and others that haven’t but in true confirmation bias we remember those that have and leave aside those that haven’t. I wonder do most of the (anonymous) cheerleaders for Kelly here have the faintest idea what immediately balancing the budget would mean? I see the teacher cheers on the abolition of VEC committees. Try a 30% pay cut and teachers being fired and he might change his tune. @BWII, There’s been so much traffic here you probably haven’t spotted my 8:37am comment above. I tried to provide some context – probably in vain. Actually I don’t subscribe to this ‘race to the bottom’ which is frequently used pejoratively to oppose the proposals you advance. I find myself focusing on this Eurostat table which shows comparative prices levels for private household consumption (incl. indirect taxes): http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsier010&plugin=1 Ireland is 20% above the EZ average. (For some reason 2010 data have not yet been released, but I doubt they would show much change.) Pay and social welfare rates in Ireland are high because costs and prices are too high – mainly because of profit-gouging and glorious inefficiencies in the public, private and semi-state (sheltered) sectors. Stripping out these excessive profits and unjustified inefficiencies would increase the profitability of all businesses and the disposable incomes of all households. Much of this could be done initially with the stroke of a pen and then by empowering the Competition Authority. We can then talk about cutting pay and social welfare rates and increasing taxation. Hi Sarah. A 30% paycut? Talk about lighting the Blue Touch Paper, and failing to retire! Poking at a Hornet nest? Is MK just being deliberately provocative? Like, he is serious, but he is not sort of thing? Quirky bloke. A think a bit of triage may be in order. ID the doable. BpW @Sarah Carey Kelly was right in relation to mortgage arrears (defaults). Evictions have only been avoided by leaving the debt on the balance sheets of the banks. We in turn borrow the money to support the banks. The establishment both in Ireland and Europe is too fearful of the social chaos to proceed with evictions of paupers by multimillionaire financiers. And they are right to be. Kelly has two main proposals. 1. Balance the budget. This is supported and encouraged by most commentators, though with a longer time frame. [Colm McCarthy, …..] 2. Puts the bank into receivership. A perfectly reasonable proposal for any insolvent institution and let capitalism takes its course. Teachers have been fired or not hired. Librarians have been fired/not hired, council workers have been fired/not hired. The permanent ones haven’t been fired but the temporaries have. The people at the top have kept the dosh. That is where the anger is coming from. And it is justifiable anger. The issue on the front page of yesterdays Irish Times says it all. Legal luminaries pleading special privileges because multi million pensions pots are in danger of having their gold bands removed. Inside Kelly tells us rightly that the country is bankrupt and proposes a solution. Who gets the headlines. Any country worth its salt would have told the legal luminaries where to get off by lunchtime yesterday. Honohan will get on the news at one today to defend himself. The first question he should be asked is can this bankrupt country afford to pay him, the interviewer and the aforementioned legal luminaries salaries commensurate with those of an oil sheikdom. Instead Honohan’s reputation will top the agenda. Leadership is about leading by example. A bloated and pampered officer corps that sends the infantry over the top, while they wine and dine like General Haig in WW1, should be removed en masse from the positions. I support a nuanced version Kelly’s approach and under my own name. Views from todays Observer: See the bottom article: “Please, Greece don’t bring back the drachma” http://www.guardian.co.uk/business/2011/may/08/payment-protection-insurance-lloyds-hsbc-barclays-rbs “The eurozone is only as strong as its weakest member.” And William Keegan carrying on the impact of cutting in the UK. http://www.guardian.co.uk/business/2011/may/08/bankers-still-in-denial-about-causes-of-financial-crisis?INTCMP=SRCH @ Kevin Donoghue It’s tricky, but I think blog acknowledgement is good (the article does mention social sites), as there is an element of ‘thinking out loud’ here, which may not be definitive positions. It would be a shame if contributors with a public profile felt inhibited in putting out a comment. Five years of pain,as Paul Quigley notes above, or a swift dramatic implosion. surely we would be better served by waiting for Greece to explode, as seems inevitable. Despite all the denials that a meeting was taking place Der Spiegal got it right, presumably well briefed by German officials. To day the Telegraph reports the Greek finance minister admitting they need more money. A Friday night meeting in Luxembourg hastily arranged and denied can only mean one thing… The Greeks threatening to go nuclear. I’d like to point out some numbers in relation to the effect of civil service pay cuts, numbers that should be obvious to everyone but apparently aren’t. I’m a civil servant on less than €30,000 a year. My marginal take home pay, taking PAYE, PRSI, USC, pension deductions and the so-called pension levy etc. into account, is 61 cent in the euro. So if the government were to cut my pay by €1, then assuming no multiplier effects, it would save 61c. If it cut my pay by €5,000, then it would save more than €3,050, because much of the income it would be cutting would be subject to lower USC and pension levy rates. This illustrates two facts: Firstly, a cut of public pay by any amount you please will definitely not reduce the deficit by the same amount, even absent multiplier effects, because cuts start at the top, and the structure of our tax system is such that it’s the top that yields the least benefits. The yield at my rate of income starts at 61% and increases after a thousand or two has been cut. The yield at PO or AP level will start somewhere around 20-30%, and even at EO level you’re only talking 40% or less. Or to put it another way, a €10bn cut might only yield a €4bn reduction in the deficit (again, not taking multiplier effects into consideration). Secondly, it follows logically that any cuts, in order to be effective, must cut pay at all levels, but especially the bottom, because that’s where the money is. Not only are there are more people at the bottom (and more still in the middle) than at the top, but you also get a better yield from them. It’s unjust, and runs counter to what you would like to do in order to reduce adverse multiplier effects, but that’s how it is. Incidentally, anyone who thinks that our circumstances are as favourable as they were in the 1980s needs to think again. In the 1980s we had an independent currency, which could be devalued. We had an independent central bank with an inflation-cutting mandate, which meant that the deflationary effects of fiscal cuts would be partially offset by interest rate cuts, and our inflation rate wasn’t exceptionally low, which meant that such cuts could have confidence boosting effects. None of these factors apply any more. I don’t know what data Philip Lane was using in his analysis that suggested a multiplier around 1, but if it was based on the 1980s and 1990s, then we can be sure that the figure in our current circumstances is significantly higher. Greetings, @ Bond, Eoin bond Agreed – the IMF do generally include devaluation as part of their loan programmes, however, as Ireland’s part of the Eurozone, it is practically impossible for them to insist upon, hence allowing Ireland to maximize the IMF contribution without such a condition being imposed. Of course, the IMF could just refuse – but I don’t think they would, as it’s in everyone’s best interest for Ireland not to default, lest they then trigger a EZ-wide collapse. The fact that Ireland may otherwise need to let the junior bondholders – at least! – go to the wall by not covering all bank debt, would also act as a incentive for the IMF to help as much as possible, since a EZ collapse would be the straw which breaks the US’ fragile economic recovery’s back. Kindest regards, James How do we fix the banks? First up, clear out the current crop and bring back the protestants. Zhou Enlai wrote, BTW congrats to Jagdip Singh / Namawinelake on the ultimate hat tip from Morgan Kelly. Well deserved. I refer to my earlier comment above in relation to labour economics. I find that Jagdip’s grasp of market economics is dangerously unsound and mis-informed. Furthermore, the Namawinelake view exhibits a dangerous misplaced respect for the property market as a functional market with the Irish economy, and as I said, that gets me back to my point – the absence of a clear and brilliant counter balancing voice in Irish Economics to look at and study how we develop our human capital over decades into something of value. I would reference a comment by a certain battalion commander at the end of World War II, having assisted in the creation of a parachute regiment in the US army, decided to stick around in peace times, so that the company would not tear itself apart. His argument being, the little company had become too valuable a resource within the context of the army and the regiment, to allow such a breakup to occur. What we do not seem to have after a boom era in the Irish context is identification of what exactly are our most valuable resources. Furthermore, there does not appear to be a voice present who will stand up on behalf of the same, and still see the longer term. That is what was missing at the table when the Irish sat down with the ECB and IMF. That is why there was no fight in us. No one present had any clue as to what might be worth defending. That is what sets Ireland of 2011 apart most of all, from Ireland of 100 years ago. BOH. @BWII Apologies if you have been particularly burnt but at a mactro level what exactly have we taken? At a macro level Ireland has experienced one of the largest depressions, outside periods of war, on record. What we are/have gone through could probably end up being one of the 5 largest economic collapses of a developed country in the last 100 years. The fall of communism, the American Great Depression, Saudi Arabia in the 80’s, the collapse of Argentina in the late 90’s, then it is close but in GNP terms Ireland in the noughties might comes next. http://www.economist.com/node/12852043?story_id=12852043 It is almost that we have been so spooked by the banking crisis that we are screaming “please give us the worst”. For sure, if we adopt Morgan’s proposal it will has he admits be far from painless. But the most painful aspect of Morgan’s proposal is that we should cut the deficit to zero immediately. Regardless of how painful the measures needed to get to that situation will be they will have to be implemented anyway. The only difference between MK’s suggestions and the government’s strategy is that of timing. All the measures immediately or spread over 3/4 years. There are arguments on both sides as to which strategy will end up being the most painful. A short sharp shock could potentially kill the economy but may allow us to look forward to years without more austerity ahead. Spreading the austerity over a number of years allows people time to adjust but we may become drained by year after year of austerity, remain in paralysis because we don’t know what is planned for next years and we will end up with a much larger debt pile to repay at the end which could need more austerity to remove. @Greg I fail to see any benefit in forcing foreign receipients of child benefit to reapply. Do you imagine that Social Welfare offices are some kind of holiday camp, and the employees there need more make-work? Why should the State arbitrarily deny people their legal entitlements on the basis of nationality? Is there now an emerging consensus that, for a variety of reasons, reducing the budget deficit as soon as practicable is the best course of action? @christy Even if there is such a consensus it doesn’t mean much. It’s easy to get agreement that a deficit should be reduced, hard to get agreement on actual measures that do that. @Christy Not by this Dork – it will just be a even greater transfer of wealth to the core – remember fiscal debt is MONEY – credit is a private contract. Why should the core have money to buy goods & services and we cannot ? @ Kevin Walsh What entitlements. They don’t live here. There are 440,000 unemployed here. Many with university education. Hire 50 @ €25,000 a peice (on average). Give them a postal budget, a few computers (bought in bulk of course)and a empty office block and let them have at it. “Parents from EU states who travel to Ireland to work are eligible for the same level of child benefit payments as Irish parents even when they leave their child behind to live in their own state. The parent’s home country usually pays the standard rate of child benefit in that country, which in Poland is €11 per month. The Irish exchequer must then top up this payment to the full Irish child benefit rate worth €140 per month for a first and second child. Minister for Social Protection Joan Burton said yesterday the issue of child benefit payments for non-resident children would have to be looked at in an EU context.” http://www.irishtimes.com/newspaper/ireland/2011/0321/1224292709236.html Or perhaps you believe it makes sense for a country in receipt of IMF/EU loans (not bailout) to pay child benefit to non-residents. Which is fine. I don’t. I also dion’t believe a bankrupt country should be borrowing €600m from the IMF/EU to dispense in overseas aid. If “overseas” has a problem let them apply to the IMF. Did I just hear the Prof say that risk sharing is on the cards if the growth target is not met? @ Joseph Ryan The biggest pay differentials are at the lower end of the public pay pyramid and that’s not accounting for the contrast in pensions coverage and benefits. @ Ceteris paribus Five years of pain, as Paul Quigley notes above, or a swift dramatic implosion. surely we would be better served by waiting for Greece to explode, as seems inevitable. Last week, Vincent Browne acknowledged that proposals from individuals in well-off positions could have serious collateral damage on people who have little. Inconvenient truth it may be, but people with guaranteed employment and pensions, can make proposals that have downsides which they would be protected from themselves – – the additional people consigned to the dole heap would be essentially invisible. As Ireland and Greece are more dependent on foreign borrowing than any other developed countries, generating a primary surplus while burning bridges with the ECB and IMF, could leave the economy in a pathetic state. A negotiated restructuring seems a more rational option. It should be remembered that it took 7 years to sort out the Latin American debt crisis. At the outset, it was feared that recognition of losses would collapse big US and European banks. During this period, countries introduced reform (the taboo word for a lot of Irish) and in 1989, a proposal from Nicholas Brady, the US treasury secretary, provided a solution. So all you breast beating folk, why is it important that the IMF stays involved to ensure reform of the system that following the FDI boom in the 1990s, destroyed the best opportunity in history to put the Irish economy on a sustainable course? If the IMF were told take a hike in the morning, the vested interests would declare victory and it would surely be a disgusting scenario to behold. The Prof also said that the markets accepted the credibility Of Ire following the stress tests… Huh…..10.25% 10 yr. @ Michael Hennigan “A negotiated restructuring seems a more rational option.” Except there isn’t one. Unless I’ve missed something. @Michael Hennigan I was not advocating either course merely pointing out that strategically we should wait for Greece to explode and then we will be in a position to assess the best course forward. The Prof’s interview on RTE did not inspire me. @Greg I don’t recall expressing any opinion on the desirability or otherwise of any particular legal entitlement. I simply stated my belief that a policy of obstructing people from claiming their legal entitlements is neither just nor sensible. If you think the law should be changed, then work to change it. But it is not the business of either government or civil servants to obstruct the implementation of the law. I will further note that the comment to which I replied did not distinguish between resident and non-resident children, or suggest either a change in the law with regard to the entitlements of parents with non-resident children, or any improvement in the enforcement of existing rules (by e.g. hiring more social welfare inspectors). Instead, you proposed adding to the already considerable administrative burden of local social welfare offices for no benefit whatsoever. Pat Rabbit didn’t know about Friday night meeting ….. Says it was a G 20 meeting with Greece invited. Give us a break Pat. Surpasses Lenny @CP “The Prof’s interview on RTE did not inspire me.” Likewise. I sense that phone interviews don’t work well for him (or us). Patrick Honohan responded on RTE radio, probably available on the website. Have to say I quite like PH. He’s the only central banker I wouldn’t mind spending an evening in a pub with. Most are just slippery bullshitters. Patrick seems more comfortable being straight. A tad disappointing that he resorted to spinning that there was only one banking guarantee throughout and that its sovereign, irrevocable nature meant that had it ended last year it would in itself have been a sovereign default. For readers that don’t know, the original guarantee was replaced – it expired. A decision was therefore made under his watch, under the influence of his assessment of the likely situation of the bank’s balance sheets. It would have been more impressive to have defended this reality rather than a similar one that is incorrect, but easier to defend. Difficult also to accept that his announcement of the bailout on Morning Ireland “had no effect whatsoever on the negotiations”. This is just not credible. With regard to “lashing out” and John McH’s remarks about vindictiveness, I would suggest there is an academic cultural aspect here. On dealing desks and trading floors where people had positions and are trying to analyse quickly and correctly, four letter words, rows and no-holds barred discussions are quite usual. It can be very constructive and ensures a full discussion. If the discussion is obviously aimed at furthering analysis, people remain friends and colleagues. PH’s decisions have been positions of way more import than those of guys on bond desks. There should be no prohibition on full and frank exchanges of views. From listening to PH and PR this morning I think it is becoming very apparent that the official policy is that we are heading towards a structured default. The only argument between all parties at the moment is whether we will have to wait until 2013 or whether the new structure will be brought forward to now. @ Ceteris paribus/Greg I wasn’t suggesting that CP was advocating any particular course of action. As for Greg, we are part of the EMU, so by 2013, the reality will be the reality. The Irish and Greek situation cannot be wished away by the 14 countries without a bailout. Pat Rabbitte made a pertinent point that there has been a ghoulish fascination with MK’s analysis which he agrees with; in contrast, there has been little reaction to the implications of the swift elimination of the deficit and the ongoing obligation even after a surplus, to fund maturing debt. We want swift early action but again where is the interest in reform absent the IMF? @all Kelly, The Governor, & Pat Rabbitte Newz at 1. Good for the public sphere! Referring to Greece, and to procedures/mechanisms re [Deauville] 2013, Pat Rabbitte asks a good question: ‘ … why not make it accessible NOW?’ Why not? Why not here? Why not now? I have listened to Patrick Honohan and Pat Rabbitte on the radio. Neither Honohan or Rabbitte disagreed with Morgan Kelly’s analysis of what the future holds. There is effective consensus on this. It’s not just simpleton and I! Honohan said we still have cards to play nand had to choose the right time to play them. Honohan also defended himself saying he did not toe the ECB line in negotiations and there was not an opportunity to avoid disorderly default at the end of the guarantee. However, he agreed we are up a creek if growth does not return. Pat Rabbitte simply could not countenance cutting the deficit to zero. He spoke about it as if having to implement such draconian cuts would be the worst thing that could happen to us. This was the typical of politicians who exercise power by spending money and who live in a 4/5 year electoral cycle whereas the consequences of the bail-out may last for 50 years. Pat Rabbitte said there was a dynamic in Europe but Pat Rabbitte did not display any understanding of that dynamic and gave no cogent analysis of how the dynamic could or would work to our favour. @BO’H The property sector is very important when so much debt guaranteed by the government is secured on Irish property. JTO made some points about good economic figures. However, ultimately the debt gets you. It is no good to be like the lighthouse cinema or certain hotels and restaurants who say they are making profits if you don’t take having to pay the rent into account. @MH IT reporting Pat Rabbit saying debt MUST be rescheduled. I did not hear that bit. Is this Gov policy or a kite by Pat. @Grumpy Would be great (esp if you’re a banker). You could both have a great old time and he’d land the other punters with the bill! @Michael Hennigan The biggest pay differentials are at the lower end of the public pay pyramid and that’s not accounting for the contrast in pensions coverage and benefits. I doubt that very much. But in any case differentials are far less important than absolutes at the lower levels. The country should aim for a decent floor rather than a well measured staircase. @ zhou_enlai So what are your cut proposals to eliminate the defict of €18bn in say 12 months? This is a fair question given your criticism of Rabbitte. Remember, you have to allow for a contraction in tax revenues in response to a further tightening of the domestic sector. If we balance the budget we will fall into our captors hands – it would be absolutely the wrong thing to do in this gigantic European game of prisoners dilemma. At any given time there is a fixed money stock in a one currency area – if we reduce our money stock to self flagellate ourselfs some other state withen the Euro area will get the surplus. Tax Funds sweet FA in this monetory system – its simply is a function of who has the money and who has not. Now MK is proposing that we simply give that money away. Its a econimic suicide note. @MH On reflection, the country should aim for a decent floor that starts at ground level rather than a well measured staircase that starts in the cellar. Zhou Enlai says, The property sector is very important when so much debt guaranteed by the government is secured on Irish property. What is that professor Kelly said about using the eraser? Rub out the word ‘creditor’ and scribble in ‘owner’ in it’s place instead. The way the Europeans know they have lost the game already, is that nowhere in their wildest forward planning, did they expect to arrive here. To own a few acres of rubbish real estate in Ireland of all places! The only thing that ever made that pathetic few acres of land worth anything at all, was that it was a tax haven for the rest of the European continent. Take that away, and what have you got? A bird sanctuary perhaps, or the potential for a good salmon fishery or two. Some day, the European banks will have to own up to the true state of their balance sheets, and tell their citizens, Hans and Pierre, Gee fellas, guess what! We blew it on bog land! When that penny drops, it will not be Paddy who will be standing between the continental mob and EU bureaucrats. There will be no one standing there, and at that point it is game over. In the meantime, expect Europe to do what it does best. Waste away the next few decades engaging in some kind of new cold war attempt at stability. BOH. I would like to see the following happen: 1. The Gov should make no further arguments for the interest rate to be cut. They should tell our international counterparts to do whatever they think is in their best interest and we will do the same. 2. The opposition parties should indicate that they are willing to support the Govt if it decides to renege on guarantee/promissory notes/implement resolution/act unilaterally separate from the rest of the EU. They should not direct the Govt to do so but rather suggest that they are willing to provide national unity. @dreaded Estates. With a Government minister calling for the debt to be rescheduled (which is effective default) and the Governor of the Central Bank admitting that if growth rates are not met (and we know they won’t) as someone above put it we are up the creek. Only a question of timing and the Greeks will determine that. @BOH The ECB accepted NAMA bonds because they were guaranteed. They only own it if we renege on that guarantee. I note MK made the same point I made here previously that the IMF appears to be acting illegally and against its best judgment. It makes sense that Geithner must have backed the plan for the IMF to behave in this way. @ Michael Hennigan Did respond but comment lost in the blogoshpere. @ Zhou, It would also make sense, that Geithner and company are the wrong sorts of commanders to have in charge at the moment, following the shell shock that north America experienced in recent times. I would feel a lot more comfortable, if we had some new people involved at this stage, to bring some kind of fresh perspective to things. Obviously Geithner and company do not wish to see the European Union in any perceived difficulty at the moment, in case it might pose the question, after the EU who comes next? But like I said above, if you look at this from the European perspective, from the perspective of those European wide bureaucrats (of which Patrick Honohan is a fully paid up member as we speak), there was no way, in their wildest imagination, they considered the possibility of ending up where they are. We are all focussed too much in our strategy in Ireland, of Ireland, and how we ended up where we are. Much more to the point (and I believe it is a relevant point that professor Kelly brought to bear in the discussion), is Europe itself is being held together at the moment, with bits of string and Sellotape. Furthermore, the north Americans, Japanese, Australians, United Kingdom and all and sundry know this to be the case. The European Union blew all their chips in places like Ireland. That is the significance in my mind, of the US presidential visit to Ireland, and a lot less to do with small towns in Offaly. BOH. @Joseph Ryan My understanding, which may be incorrect, is that there is a gap between the staff of large organisations and the staff of small organisations, and that typically the former earn more than the latter. Since the State is a large organisation, its employees earn more in general than private sector employees, as the private sector consists of both large and small organisations. Second attempt. @ Michael Hennigan “I wasn’t suggesting that CP was advocating any particular course of action. As for Greg, we are part of the EMU, so by 2013, the reality will be the reality.” Why 2013? Why not now? The bad debts of the core Euro banks get loaded onto the Irish Sovereign? Then we become an indebted vassal state to the EU. Yup sounds like a plan alright. Or maybe there’s a more benign outcome. One so good that they want to keep it a secret. Just like they kept the Luxemburg meeting secret from Noonan. Second attempt @ Kevin Walsh I was referring exclusively to non-residents. Changing the law would take time and political commitment. I voted, we have a government, that’s it. It is there job to govern and make or change law. No mine. I also suggested in a different comment above that Child benefit should be taxed and that a withholding tax at the top marginal rate be applied. On second thoughts the USC should also be applied. A withholding tax of at least 50% should be applied to non-resident child benefit payments. I did not suggest adding to the burden on Social Welfare offices. I suggested something entirely different. I can’t help being impatient with much of this discussion. @Christy “emerging consensus to cut deficit” Emerging? @DE “From listening to PH and PR this morning I think it is becoming very apparent that the official policy is that we are heading towards a structured default.” “Becoming apparent”? That has been accepted wisdom since the bailout. (e.g. that was said on the Midweek programme I presented on TV3 back in December). We’ll restructure once the pension fund is spent and we’ve flogged off state assets. @Joseph teachers fired? Sure, teachers have been hired and we’re still running a massive deficit. How many would have to go to balance the budget? (And UK house repossessions are still way ahead of Ireland’s AFAIK.) The IMF lost the row in November. That was well known. The Geithner intervention is news to me but explains a lot. Aside from this gem, Kelly’s article has little to offer. @ CP He was referring, I believe, to a rescheduling of the tenor of the EU/IMF loans, not our existing sovereign debt. Greetings, @ EWI I also apologize for my contribution to the misunderstanding regarding the 80% figure. I noted the following articles… Public sector salaries: http://namawinelake.wordpress.com/2011/04/09/list-of-public-sector-salaries-shows-the-extent-of-enda-kenny%E2%80%99s-challenge-to-impose-wage-ceilings/ Multiple pensions (which is also part of the public sector payroll issue): http://www.independent.ie/national-news/elections/latest-news/teachertds-in-line-for-double-pension-bonanza-2550100.html No public sector pay cuts in the near future http://www.thejournal.ie/taoiseach-vows-that-there-will-be-no-public-pay-cuts-at-all-costs-despite-growth-downgrade-129446-May2011/ So it appears that, despite the case for addressing such issues, the government is not ready to grasp the nettle. Having said that, as Ronan (sorry EWI!) points out in a comment to the following article, the savings to be made at the top-end is around €125 million, which would agree with Michael Hennigan’s point (which I accept) – from a different perspective – about where savings could be made and how much would actually be gained. http://www.ronanlyons.com/2011/04/26/%E2%80%9Cslash-and-burn%E2%80%9D-anything-but-the-need-for-realism-in-budget-2012/ @ Joseph Ryan Thank you for the support! 😉 There are several options as I see it: 1) Reduce the top-echelon public sector salaries/pensions No lay-offs – potential savings of a couple/few hundred million Euros 2) Reduce the top-echelon public sector salaries/pensions and use savings to hire more low-echelon staff (nurses, teachers, etc) No savings – increased staff, reduce unemployment/social welfare cost and increase economic activity. 3) Reduce public sector staff Lay-offs and wages/pension savings – increased unemployment/social welfare costs and reduced economic activity. I’d be interested in knowing how the economists among you would judge which is best – personally, I’d favour option 2. Kindest regards, James @ All “Referring to Greece, and to procedures/mechanisms re [Deauville] 2013, Pat Rabbitte asks a good question: ‘ … why not make it accessible NOW?’” (David O’Donnell). The short answer is that the ESM does not yet exist. Pat Rabbitte was, presumably, referring to the elements that it contains e.g. the agreement on the margin of 200 basis point over the cost of raising loans and the arrangements for possible burden-sharing through CACs. The answer to this question has been given repeatedly by various contributors to this blog and can be best summed up as “kicking the can down the road” to (i) allow the core euro area economy to pick up which would (ii) allow banks to strengthen their trading positions which would (iii) put them in a better position to share some of the burden of the inevitable restructuring of sovereign and bank debt (iv) all nicley timed to allow Merkel to go the polls in 2013 with a good political position. Unfortunately, the wheels appear to be coming off this strategy and Pat Rabbitte may get an answer to his question earlier than expected (a possibility whic the governor of the CB seemed to leave open, which distinguishes his position from that of the ECB). @ Greg Various senior politicians of the Eurozone have said that the EU-IMF plan is only a few months in operation – – the Finnish finance minister Jyri Katanian who is expected to be PM is among those who rejected any negotiation of the plan ; so should the Government declare a default even though we have a current funding agreement? If it happens earlier for Greece it will be because of input from the IMF; similarly for ireland, not through threats. We can emote about being a vassal state, Versailles and all that crap and walk away from the IMF and EU. It’s Ireland will be at the loss if we opt for unilateral action and we will not be able to play off the EU against the IMF. We set up new banks with a new punt? How stupid would it be to have no lender of last resort? @ zhou_enlai Awaiting your I year Shock Therapy Budget details. @ Joseph Ryan You may be unaware the industrial hourly wage for electricity/gas workers is double the average industrial wage. As for my point on low pay, I didn’t dream that up; there are 3 papers available from 2004 on the issue and a CSO report. … “a holding strategy”: … a holding strategy in the hope of good fortune in the dynamic of life rather than give in immediately to … well let’s not say. I reckon that’s where we are, and the EU too, and the old G7 and some new satellites of same. @ BOH and Zhou, The USA and EU are somewhat in competition regarding whose currency will be the reserve currency going forward (and of course we are wrecking Europe’s prospects in that too). @Greg What you said was “Make all foreign recipients of child benefit reapply. And make them do so every three months. Apply a withholding tax of 50% on foreign recipients of the benefit.” If that’s not what you’re proposing, then my interpretation of your position is incorrect, but I don’t see how can I be held responsible for responding to what you post instead of what you mean. Also, if you can’t see how forcing people to reapply for benefits (which, after their reapplication is successful, will then be paid to them, backdated to the time of reapplication) isn’t a totally unnecessary expense, then I don’t know what to say. @Greg Also, the word foreign doesn’t mean non-resident. You could be resident in the country for 60 years and still not be a citizen. @ Michael Hennigan “Various senior politicians of the Eurozone have said that the EU-IMF plan is only a few months in operation – – the Finnish finance minister Jyri Katanian who is expected to be PM is among those who rejected any negotiation of the plan ; so should the Government declare a default even though we have a current funding agreement?” The government slash the deficit. All foreign aid should be cancelled. Child benefit should be taxed and a withholding tax applied to non-resident recipients. No one on the state payroll should receive more than €100k gross. No one a state pension should receive more than €60k gross. All this and more by referendum if necessary. “If it happens earlier for Greece it will be because of input from the IMF; similarly for ireland, not through threats.” If what happens earlier for Greece? The sequestration of €50bn of Greek state assets? So the core states are going to extract as much as possible from each of the troubled states on a case by case basis. Divide and conquer. Solidarity my backside. I’ll take a guess at what Plan B is. Extract as much as they can before 2013 and then change the rules and lock the troubled states out of funding completely unless all resources are pledged or sold. Or maybe Plan B is that there is no Plan B and that the EU is hopelessly conflicted on what to do. An even worse vista. Because the world will not wait. The US must raise its debt ceiling yet again. China wants to diversify its reserves away from US government assets. Deficit or not we could be locked out of the market for Sovereign debt for a decade. A vassal state. There is only one solution to the mess that the EU has created. Monetise the lot. Create €1.5 trillion of new credit/debt and put the banking fire out. Nationalise and breakup the banks and give the citizens shares. Then let the market sort out the value of a clean banking system. In the absence of a radical solution to the bankruptcy of core euro banks Ireland has no choice but to take radical measures on its own. […] irisheconomy.ie website, economist and professor at the National University of Ireland in Galway, John McHale produces a rebuttal of some of the argument in the newspaper article. Professor McHale says that repudiating the […] @sarah With respect, what was said last December could only have been mere speculation. Since then we have been rated junk, growth forecasts more than halved and today a Government minister states we must reschedule ( per IT) and to cap it all the Governor of the Central Bank admits that if we do not meet growth forecasts then the game is up. So why impatient? @Sarah Carey That has been accepted wisdom since the bailout. (e.g. that was said on the Midweek programme I presented on TV3 back in December). We’ll restructure once the pension fund is spent and we’ve flogged off state assets. Accepted wisdom but not official government policy. @ Kevin Walsh Apologies. Wrong choice of word. I meant non-resident. Foreign is a little loose. I suppose I meant it in the sense of “someone not here”. @ Kevin Walsh “Also, if you can’t see how forcing people to reapply for benefits (which, after their reapplication is successful, will then be paid to them, backdated to the time of reapplication) isn’t a totally unnecessary expense, then I don’t know what to say.” I take a wild guess. Many of the original claimants are no longer resident here and nobody has updated the database. Bravo MK – and you are right not to dilute the force of your arguments by constant reiteration. Either the assertions are correct or not. What was Geithner’s role for example? I was also expecting BLTD to be interviewd but so far nothing from that quarter. Patrick Honohan has been equivocal in his statements about whether he supported the original guarantee. I think we can accept at this stage that Brian Lenihan was telling the truth on that score also. As to the legality of reneging on the guarantee – Honahan said he sough legal advice on that. The only legal advice we should accept should be the result of a court decision and so far the constitutionality of it has not been tested. It beggars belief that it can be constitutional to take money from my pocket to pay for bankers debt. @Edward v2.0 “BWII and BEB Why are you so attached to the Irish banking system?” I think you may find they are employed of the financial sector and Mandy-Rice Davies comment “he would say that wouldn’t he!” can be applied. @Chris Dornan “Some of the above comments about how well the economy is doing are merely observing how well the band is playing once the ship has been holed” Excellent metaphorical response to Jto’s (in particular) comments. Care to expand it to include the taxpayers baling out below decks while the ECB etc. is busy making the hole bigger. @Eoin Bond Then how do you explain a Government Minister saying the debt must be rescheduled… See Irish Times. Think you are wrong there Eoin @MH You may be unaware the industrial hourly wage for electricity/gas workers is double the average industrial wage. I am aware of that. And fully agree with you that such Elec/Gas/ workers are grossly overpaid. That is why I would collapse the tent as per James Burke suggestion-and I presume Morgan Kelly. I also have a very near relative who works permanent/ part time (25hrs) per week in a third level institution. Gross approx €300pw. No chance of increased hours. Yet the people at and around the top of such organizations are paid mega salaries, twice what is paid in Europe. I will try to look at the CSO report but as stated I don’t buy into the an evaluation based on percentage differentials. A Poolbeg worker earning €150,000 pa is an insult and a deliberate two fingers to all people paying electricity bills. Despite my conditional support for the Kelly proposal, if I were a European, I would not concede one red cent until all higher public sector salaries were dramatically reduced, starting with the Judiciary. “Europe wants to delay that at least until 2013, when new rules are supposed to kick in that would let official creditors — such as Europe’s bailout fund — do better in a deal than private creditors. But it seems less and less likely that the inevitable can be delayed that long.” http://www.nytimes.com/2011/05/06/business/06norris.html?pagewanted=2&_r=1 Well someone at least has an opinion on why 2013 is so important to the EU. @Joseph I think people are missing something in the economic / debt circle – sure 150,000 is too much for a industrial worker but what happens when you cut his wages ? He spends less and saves less. The primary problem as I see it is that Irish peoples assets are chiefly in property and bank deposits – these are not financing the debt. We have assets that can finance the debt – if we divorce deposits from bank assets. I continue to think that half of peoples liquid assets should be in Irish Goverment debt and the other half in Gold – so that in event of another double cross from the ECB we will have real money to stick up their fundament. But thats just my humble opinion The broader context … Wolfgang Munchau a must-read. We are in a confederacy of dunces. Does anyone know the FT article to which CBI governor, Patrick Honohan, was referring to today on RTE This Week, the article to which he was alerted when he arrived back in his hotel presumably on the 17th November, 2010. He concluded the FT article required him to intervene on his own account to ensure the stability of the Irish banks. There’s an implication that there might have been a catastrophic bank run if he had not rang in to Morning Ireland on 18th November, 2010 to state that he expected the government to seek a bailout in the tens of billions. Was this the article that caused all the trouble? http://www.ft.com/cms/s/aabdc6d6-f285-11df-a2f3-00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Faabdc6d6-f285-11df-a2f3-00144feab49a.html&_i_referer= @ All Breaking news. The UK does not wish to give more assistance to Greece. http://www.irishtimes.com/newspaper/breaking/2011/0508/breaking8.html How the Chancellor can put out this line with a straight face escapes me. What is at issue, one would assume, is raising additional funds through the EFSM on the strength of the EU’s budget. There is no question of a direct transfer of cash, only the possibility of a contingent liability via the EU budget should Greece fail to repay or negotiate a restructuring. As the EU budgetary rebate has greatly reduced the level of the UK’s contribution to said budget, the grand-standing by the UK is even less impressive. What the comments of the Chancellor do confirm, however, if confirmation were needed, is the increasingly semi-detached status of the UK in the EU. On the basis of many of the comments on this thread, many think that Ireland should follow suit. Jagdip, I believe it was indeed that editorial which in turn extrapolated scenarios from this analysis http://www.ft.com/cms/s/0/19cc74a0-f277-11df-a2f3-00144feab49a.html#axzz1LmHhSKQw Greetings, @DOCM In my opinion, I think the UK doesn’t want to be pulled in all directions, rack-like, helping the PIGS – if push comes to shove, they’ll choose Ireland, if only due to the considerable links between both countries. Kindest regards, James @Frank, Thanks. There seems to be a conflict between Morgan Kelly’s assertion that Patrick Honohan cut Minister Lenihan off at the ankles and on the other hand Patrick Honohan’s claim that he was merely seeking to stabilise the Irish banking system. As far as I can tell, the FT starts publishing articles online from about 11pm, articles that will appear in the following day’s newspapers. I don’t know at what time, Patrick Honohan read the article or when he concluded he needed to intervene. But say, at the worst case it was the witching hour. Given the gravity of the situation, could he not have put a call into Minister Lenihan at 3am to say that he felt the situation was so serious that an announcement was required. This is what Morgan Kelly wrote “At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”. Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.” Perhaps this has all been squared previously but on the face of it, the intervention without apparent consultation with, or notification to, Minister Lenihan seems curious. The more I read this blog, the more I am wondering whether I should repatriate the money I have in a mutual fund located in Ireland (Vanguard not to name it – invested in European equities). Sovereign defaults can have unpredictable consequences, and I do not want to discover one day that my savings have been stolen by the Irish. @sarah carey I suppose there is no consensus – pat rabitte put an end to that today – looks as if the government would need to fall before we could accelerate the closing of the deficit @Incognito There are already proposals to tax foreign assets held be domestic institutions in order to meet our foreign liabilities – see irish times a few days ago and a post on here a few days ago @ Incognito “The more I read this blog, the more I am wondering whether I should repatriate the money I have in a mutual fund located in Ireland (Vanguard not to name it – invested in European equities).” Located? I presume you mean the IFSC. Check out who the responsible Regulator is. “Sovereign defaults can have unpredictable consequences, and I do not want to discover one day that my savings have been stolen by the Irish.” What us “steal” your money? Don’t worry the Irish Government has a lot more stealing to do from its own people before they come for yours. @ James Burke No problem. I admit to being somewhat grumpy yesterday, from lack of sleep (and not from being on the tear, unfortunately) and your thoughtful comments really didn’t merit such a response, for which I again apologise. @ Michael Hennigan You unwittingly provide an excellent illustration of the common mindset that is part of the culture that brought the country to its knees. I suppose the CSO staff who produced similar research on pay differentials for comparable jobs, were on the payroll of the Bilderburg Group? How is this related to my comment on the ESRI…? Perish the thought that we could have a national waste management policy like that of a well run country like Austria. This country is nothing like “well run”, and never has been in the sense that northern European nations are. I think even the pro-incinerator/reflexive anti-Green types would agree on that score. We need the reviled EU to force us to clean up the water supply and end the current landfill system! Given that the people who have caused us to attract fines in the past (remember the Dublin sludge boat?) are the very ones pushing incineration, I’d be careful of over-reliance on that argument if I were you. @ Joseph Ryan Yet the people at and around the top of such organizations are paid mega salaries, twice what is paid in Europe. Without naming names, I think that a good deal has emerged about academics’ lack of faith in the top management over the past decade or so, and this is just one more item on that list. @Greg “What us “steal” your money? Don’t worry the Irish Government has a lot more stealing to do from its own people before they come for yours.” If so many people support the idea of someone like Morgan Kelly to basically con the ECB and the rest of the EU, why could they not go a few steps further and con a simple European saver like me? Greetings, @ EWI That’s alright – watching Vincent Browne and his guests crying into their cups every night will do that to you. I feel the same way – crying, that is (“Why did I ever come back to Ireland? Oh yes – to look after my mother!”). Kindest regards, James @ Jagdip Singh “Perhaps this has all been squared previously but on the face of it, the intervention without apparent consultation with, or notification to, Minister Lenihan seems curious.” Rather the point is it not. Don’t tell me Lenihan was “out of range” again. Honohan stabbed him in the back. His performance today on RTE was that of a school boy having been caught out snitching of the smokers behind the bike shed. How is it possible for the Governor of the Irish Central Bank not to come to an agreed statement with the Minister of Finance on a matter of such importance? They may have disagreed. But a joint statement was required. It’s not as if he was door stepped. He was the one who phoned RTE. His excuse that he feared a run is at best flimsy (the run was already well underway). I think his excuse is just plain old baloney. Made up on the spot. That’s why all the nervous laughter. But let’s be absolutely clear here. As I have said before the Governor of the Central Bank of Ireland does not work for the Irish people. He works for the ECB. What is Patrick Honohan’s current relationship with Michael Noonan? Is he being economic with the truth about 2013? @Greg Re stealing from our own, I see that the pension industry is set to legally challenge the proposed 450 m per year rip off. With the AIB bondholder challenge already under way it looks like the Gov will be challenged all the way. Wonder how their Wigships will interpret the exigencies of the common good? @ James Burke There is the rub! If everybody can dine a la carte at the EU menu, what is the point of the EU? P.S. The UK came gave its assistance to Ireland because of the exposure of its banks, notably RBS, to the Irish property collapse. @ Incognito “If so many people support the idea of someone like Morgan Kelly to basically con the ECB and the rest of the EU, why could they not go a few steps further and con a simple European saver like me?” Not sure what you mean by “con the ECB”. I rather think it’s the other way around. Ireland got conned by the ECB. Anglo Irish and Irish Nationwide should have been thrown to the dogs on day one. The wagons should have been circled around BofI and Allied Irish. Yes. A temporary closure of the banking system and emergency legislation over the weekend. Equity holders wiped out. Subordinates wiped out. Seniors given the keys and told to get on with it. The ECB wanted it otherwise. “Don’t let any of your banks fail” and the threat (the ongoing threat) we’ll pull the plug if you do. I’ve a feeling none of this matters. I’ve a feeling the Euro project is dead. Just a feeling. Maybe you should cash in your “mutual”, must have had a good run by now, and turn half of it into physical gold and silver while the crisis at the heart of the money system, not Ireland, blows over. @ Ceteris paribus “Re stealing from our own, I see that the pension industry is set to legally challenge the proposed 450 m per year rip off.” So they should. I was ridiculed on this blog, about a year ago, when I suggested that they would come after private pensions. 0.5% is only the start. Here’s my logic. The government (I refuse to use a capital “G” anymore for this shower of Muppets) is going to “levy” 0.5% for four years on fund values. They claim they are going to use this for “job creation” buy setting up a fund to advance “credit” to SMEs. Are they going to give the money back after they have made successful credit decisions? No. They’re going to waste the money. Why can they not negotiate with the pensions industry and allow them set up their own fund which will lend on the basis of risk and return. It is straightforward legalised theft. “With the AIB bondholder challenge already under way it looks like the Gov will be challenged all the way. Wonder how their Wigships will interpret the exigencies of the common good?” The Four Goldmines is looking Goldier every day. Great thread, Great Article – Worrying times. The UK, if it doesn’t back the Greek bailout is signaling a real lack of confidence in the project. It also reflects a market intention to force a default now as opposed to continuing with the charade. It would be interesting to see if British banks have managed to divest themselves of Greek and Irish bonds etc recently. I suspect they know the writing is on the wall. Our government is banking on its austerity being rewarded with another bailout on better terms in 12 months or so. Hate to tell you guys – it ain’t going to happen. Between the True Finns in Finland, Merkel and Cameron and its own fundamental weaknesses, Europe will not be able to deliver. So, absent that bailout we are going to have to default in a massive way. It actually doesn’t matter what savings we make getting to there (defaulting on 120 billion isn’t that different from defaulting on 129 billion). There will be some radical adjustments after it though. But it’s possible that those adjustments will be made with the aid of devaluing our own currency. So the actual least bad option is to run down our current bailout, make some stab at fiscal restructuring and then default for 100% and recover with our own currency and central bank. We should look on default like war and the run-in to it like drills. Any restructuring that happens now should only be with the aim of making us more capable of battling through. Before anybody starts saying they’ll never forgive us – just look at Germany. The world is forward looking @ Eureka “The UK, if it doesn’t back the Greek bailout is signaling a real lack of confidence in the project. It also reflects a market intention to force a default now as opposed to continuing with the charade.” As I see it the immediate consequence of pushing Greece over the edge, once the common or garden Greek understands what’s happening, is a retail bank run. They will want to get their hands on Euro notes rather than digits in cyberspace. The wholesale bank run(s) have already happened and the EU/ECB are trying to contain the damage. However, once the “common man” looses faith in his government and Central Bank (the protectors of the money system) the money system collapses. I’ve said it before the only way out of this is for the EU/ECB to recognise the catastrophic engineering failure that is the Euro and print €1.5Tn to fill the holes. At this stage anything else is for the insane asylum. To pay core Euro banks for their bad lending by insisting on economy crippling “austerity” is something only the Marquis de Sade could truly appreciate. Greetings, @ DOCM [i]”There is the rub! If everybody can dine a la carte at the EU menu, what is the point of the EU? P.S. The UK came gave its assistance to Ireland because of the exposure of its banks, notably RBS, to the Irish property collapse.”[/i] That’s to what I was referring – apart from the historical, cultural, etc, connections – as they’ve put a lot of money into the Irish banks to start “bailing out” Greece, Portugal and Spain, if it’s so inclined to go that way. Rumours seem to be the only thing going round at the moment… Greece maybe pulling out of EU: http://www.bbc.co.uk/news/business-13317770 Already there’s talk of Portugal going into recession next year – http://www.bbc.co.uk/news/business-13293706 – and I also saw a report that Portuguese job-seekers are giving up (can’t find the article at the moment). Kindest regards, James I hope there’s a plan B because it’s a mess beyond Ireland. the growth thesis is very optimistic. Where will it come from ? Who is going to buy all the exports when every country’s plan to escape the debt legacy is growth by exports ? Throw in commodity volatility and the dependence of the financial markets on QE2. It’s fascinating to watch but it’s a bordel de merde. @Greg I reckon that would be too destabilizing to Euro exchange rates with respect to the dollar and other currencies. My bet is the BIS acting as dealer will mount a cash / physical auction only for Gold on the world market. Its just a matter of time now me thinks. Roosevelt beat the depression by devaluing the dollar against Gold and this depression will be solved using a similar mechanism. Once Gold is 10,000 Euros a ounce there should be a lot more Euro money available to balance Euro credit. @DOCM Re: the UK I’d say it’s more likely they are adopting the German finance ministry view – the bailouts are lies, kicking heavy cans down roads to nowhere. Better to do something about the problem of excessive debt than burning more money in Hyde Park and hoping that some miracle will occur. @seafoid “Who is going to buy all the exports when every country’s plan to escape the debt legacy is growth by exports ?” Hush now, you’ll bring wrath down upon you… @ The Dork of Cork “I reckon that would be too destabilizing to Euro exchange rates with respect to the dollar and other currencies.” Well it was a response to Incognito. And to be clear it was not “investment advice”. It was simply my take on what is going on. The “money” “system” is broken, in my opinion and, in the opinion of others. (No. I don’t intend polluting this blog with links.) I think the reason for this is not Sovereign insolvents & deficits, insolvent banks failing to attract “liquidity”. It is the Derivative Death Star. If that thing is allowed to fire up it will take out half the planet. http://static.howstuffworks.com/gif/death-star-1.jpg That’s why Geithner and the US refuse to allow any default. Their banks are absolutely and completely dependent on nobody calling in a CDS bet. Why? Call one call all. The system implodes. “My bet is the BIS acting as dealer will mount a cash / physical auction only for Gold on the world market.” And what in the name of God was Honohan doing in Basle today? I hope it was a wedding. “Roosevelt beat the depression by devaluing the dollar against Gold and this depression will be solved using a similar mechanism.” In short he devalued the currency and forced people to spend. We are not in the same place now. Globalisation has changed everything. “Once Gold is 10,000 Euros a ounce there should be a lot more Euro money available to balance Euro credit.” The Euro will be dead before Gold hits €10,000 an ounce. If, by chance, it gets there we will already have experienced hyperinflation. And you and I may be dead because someone wanted to steal the spinach you or I have lovingly grown. They need to print €1.5Tn now and deal with inflation later. Gold can only go to €10,000 per ounce in a hyperinflationary depression. Peter Kinane writes, The USA and EU are somewhat in competition regarding whose currency will be the reserve currency going forward (and of course we are wrecking Europe’s prospects in that too). It has all a lot of shades of 1945 about it, doesn’t it? President Obama might be inclined to say in his own mind, I have not been elected to preside over the liquidation of the dollar (as in Churchill and empire in early 1940s). BOH. @ James Burke That was not really my point. The UK is only marginally involved because it is outside the euro (“we always told those Continentals that it would never work, you know”) but, if it believes in the overall European project, the least one would expect is that it would not make life more difficult for those that are in the euro area. Mind you, the latter are making a good job of messing things up on their own. I have just seen a Reuters report that the Netherlands was not invited to the not so secret meeting. This is hardly accidental. Wolfgang Munchau has a good article in tomorrow’s FT which concludes on the point I have been banging on about for weeks now. http://www.ft.com/cms/s/0/3eb6bbc8-796c-11e0-86bd-00144feabdc0.html#axzz1LmpyMLkl “You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up. Europe’s political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable. This is not a debt crisis. This is a political crisis. The eurozone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back. We know Mr Schäuble has contemplated, and rejected, the latter. We also know that he prefers the former. It is time to say so”. There is, in fact, no need for – or, indeed, possibility of – a political union overnight, just an acceptance by Germany that there is no cost-free solution and that some mutualisation of credit risk across the euro area is absolutely essential to convince the markets. They should simply concede -no matter how domestically politically difficult it is – that the ESM will have the power to intervene in bond markets and, pending it coming into force, the EFSF will be amended to enable it to do so, allowing the ECB to withdraw from its “unconventional” meaures. However, as the German finance minister has blown hot and cold on the crisis since the start, I would not hold my breath @ Hoganmahew, DoC, Seafoid. Thanks lads. Best laughs I had in ages. 🙂 BpW @James Burke Cutting numbers in the public sector must be the priority. @EWI “Yet the people at and around the top of such organizations are paid mega salaries, twice what is paid in Europe.” Without naming names, I think that a good deal has emerged about academics’ lack of faith in the top management over the past decade or so, and this is just one more item on that list. EWI My comments were intended to include all academics as well. I failed, unlike Morgan Kelly-, to make that clear. @Greg I disagree – there will be no hyperinflation in Europe. Ask yourself why oil is trading north of $100 dollars a barrel in a depression ? Its because Dollars need a yield if they are to remain something of worth. If the worlds dollar reserves flow into a asset that does not do anything but sit there it will kill the global inflation that we have been living with for the last 60 years. All commodities will crash to the floor – only Gold will survive. DOCM @ Wolfgang Munchau “This is not a debt crisis. This is a political crisis. The eurozone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back.” You are wrong on both counts. It is a debt crisis for those holding the debt. It is not a political crisis. It is a democratic crisis. The people have been lied to for at least the last fifteen years. And when they express their will as demos they are told they are ignorant by their political leadership. This is not a political crisis. This is the result of political elites undermining the very people they are supposed to serve. And for what? A big car, fancy meals and a little bunga bunga. Traitors all. Greetings, @ DOCM I understand your point – just commenting on the other reasons: the UK’s sunk (more than) enough money into Ireland without getting involved in similar escapades elsewhere. Personally, at the time, I thought that the political wish to accomplish a single currency was the stupidest reason for doing so – they should have gone for the “soft” Euro option. Now they’re stuck with a “hard” Euro without the political unity required. Something’s bound to give! @ The Alchemist Possibly – but it were best if they started at the top to get rid of the “executives” and try their best to keep the bottom echelon: the nurses. teachers, etc, who are actually needed to do the real work. Kindest regards, James @ Paul Hunt Many thanks for the heads up. I didn’t make that connection. As you say, the comments were few, but Ciaran O’Hagan said: ‘It seems that certain courses of action are mapped out by the authorities, with some foreseeable consequences, though they are not mapped here’ Hmmm. No point in stampeding the citizens. They wll find out soon enough. @ Colm Brazel Interesting. I won’t pretend to be able to comment on what goes on in the IFSC, but the depfa story is probably just the tip of the iceberg. By the way, I see that one of our leading hairdressers says the country is b****x*d. If only we had had more haircuts for bondholders, that line of business would be thriving 🙂 @ The Dork of Cork “Once Gold is 10,000 Euros a ounce there should be a lot more Euro money available to balance Euro credit.” “I disagree – there will be no hyperinflation in Europe.” I’m afraid I cannot reconcile those two statements. Perhaps I misinterpret. However, let me see if I understand. Gold can go to €10,000 per ounce without hyperinflation? And I did say a hyperinflationary depression. Which is a place where economic activity goes to survival level and the value of the “currency” “chosen” by the previous political elite is seen as useless. So the complete loss of faith in the currency (and that is all currency has backing it) results in the people exchanging that currency for Gold. So Gold goes to €10,000 an ounce. It is, I think, logically impossible for food and everything else not to follow Gold. Why would one, if one believed that next month Gold (or Silver for that matter) would increase by 25% hold any currency? It would be stupid. You buy Gold (or Silver or Whiskey or Cigarettes or anything you can get your hands on) and barter later because the “currency” has failed. That is the only way hyperinflation can happen. It is impossible for Gold to be “worth” €10,000 per ounce without a hyperinflationary collapse. Or, if it is worth €10,000 per ounce then a loaf of bread will cost (or is “worth”) €10. That’s game over. They must monetise the bank debt. This will not create inflation. The inflation has already happened and is unwinding. But it was asset price inflation and it was Euro regional. The core Euro banks knew what they were doing. They were chasing yield. They must monetise the bank debt. If they don’t the Euro dies. And certain Germans know it. But the folk memory is too strong. @ BOH and DOCM, “but, if [the UK] believes in the overall European project, the least one would expect is that it would not make life more difficult for those that are in the euro area.”: Again, this may have to do with competition between the Euro and the Dollar for primacy. (It is a theory that is almost too unpleasant to express. Yet, a collision between Anglo-Saxon monetary theory and German or Austrian monetary culture would seem to be increasingly inescapable – and I’ve already kinda said that Europe needs to stand on its own feet more on monetary theory, as the current model is rather crazy- -self-destructive. Yet, it is a whole separate subject to the internal EZ wrecking of the Euro, though no issue is an island). DOCM, “They should simply concede -no matter how domestically politically difficult it is – that the ESM will have the power to intervene in bond markets and, pending it coming into force, the EFSF will be amended to enable it to do so, allowing the ECB to withdraw from its “unconventional” meaures.”: I guess it would keep the wolf from the door as an immediate measure. Then there would be the problem of the economic management of the various countries that would be acceptable of all participants. @Greg et al (Today’s RTE interview with Honohan can be found here). His excuse that he feared a run is at best flimsy (the run was already well underway). I think his excuse is just plain old baloney. Made up on the spot. That’s why all the nervous laughter. Exactly. The idea that there was an imminent retail bank run as a result of an article published in the FT is simply not credible. A few points: (i) The ‘corporate’ bank run had already occurred and had been widely discussed in the FT and elsewhere for a week or more before the Nov 18 interview. This discussion was based on information published by BoI, ILP and the ICB (e.g. the figure of €130bn ECB support at end of Oct and the start of significant ICB liquidity provisions). As usual AIB were late to the party and had not provided any updates, but the facts of the large loss of deposits were already well known, as was the fact that these were mainly corporate deposits. The run had occurred primarily in Aug/Sep, and the banks claimed that things had stabilized since early October. There was no specific new news or trigger on Nov 17 related to this. (ii) The idea that any significant amount retail depositors would wake up Thursday, read their FT over their cornflakes, and then decide to go to straight to their bank to withdraw their money is just bizarre and not credible. (iii) It is clear from his interview that he regarded himself as playing for Team Ireland, not Team ECB, on the basis that the bailout discussions were outside the scope of the competencies of the ECB as defined by Treaty, and thus outside the scope where he must, under law, act under instruction of the Governing Council. (This raises lots of other points too, but that’s for another day). He also claims that his interview had no impact on the discussions. Yet why do the interview at all, if not to have an impact on the course of events? Cowen was furious at the intervention. How could such an obvious rift in Team Ireland not have weakened the negotiating position? In reality his views matched those of the ECB in all important aspects (e.g. who pays), if not in some second order aspects (e.g. loan vs insurance). His intervention was done to help create an environment where his views would prevail. (iv) Honohan claims today on the bailout “I don’t see it as in itself something that damaged or caused pain to taxpayers”. Huh? A commitment to not to hit unguaranteed senior debt and to recap the banks to the tune of €35bn, doesn’t cause any pain? (v) He also seems to claim the fact that he consistently underestimated the extent of the problem (e.g. bailout will be max of 20% GDP; Anglo was the problem – AIB is fine etc) didn’t really matter, and had no impact. The fact that the markets could see that there was a huge problem alongside an ineffective and slow-motion response were the trigger for the corporate bank run in the first place, that ultimately led to the bailout. Being consistently wrong does matter. (vi) He wasn’t asked the obvious question of whether the IMF wanted to haircut the unguaranteed seniors, and what his position was on this. Maybe next time. The combination of a number of statements and positions that are simply not credible, along with a history of poor judgement, does not inspire any confidence for the future. In many ways at this point it doesn’t even matter, since all major decisions will be made outside the country anyway. Reuters are repeating a Mail on Sunday story of a senior Government minister saying we will have to default within three years. That won’t do much for our bonds when they open in the morning….. But then you never know… No default by Greece today as expected by some. Greg, “They need to print €1.5Tn now and deal with inflation later.”: It seems to me that if the EFSF or the ECB took the liabilities of all the distressed banks onto its account, thereby cleaning their slates, this would not be inflationary. The (lost- -mal-invested) money which it would be taking ownership of has already been borrowed and invested- -lost and so has done its inflation. It would however prevent- -preclude firesales and bargains for the prudent, which in a sense (or sphere of the market place) would have been somewhat deflationary. There would only be inflation if the institution went a step further and recapitalised the banks. My theory of economics would not necessarily move me to do so. This then would mean that those banks that were redeemed would be effectively in poorer circumstances but those who had been prudent and pensioners and those on fixed income would escape being robbed. @ Ceteris, Maybe this post will be good for bonds. 🙂 @ Bryan G “(ii) The idea that any significant amount retail depositors would wake up Thursday, read their FT over their cornflakes, and then decide to go to straight to their bank to withdraw their money is just bizarre and not credible.” 🙄 But but but ……………. What about all the unemployed Polish plumbers who have nothing better to do than read the FT of a morning. Jesus wept and felt abandoned. From above. “But let’s be absolutely clear here. As I have said before the Governor of the Central Bank of Ireland does not work for the Irish people. He works for the ECB. What is Patrick Honohan’s current relationship with Michael Noonan? Is he being economic with the truth about 2013?” Must go need some nicotine. Will read the rest later. @Bryan G The Governor seems to be losing the pr battle. The interview was a bad idea. @Greg The dollar has been hyper inflated since 1980 and we are still here. The worlds reserve currency is the dollar. Dollar reserves (worlds savings) move to Gold New world reserve currency Gold. Gold is on the asset side of CB balance sheets – they can print more money The ration of money to credit increases – improved econimic efficiency – improved local production ( reference NAMAwine lake for the pigs who cannot be fed because they have no money) Ridiculous Remember Gold is useless for pretty much everything – thats why its a monetory metal. What will stop is the destructive dollar yield chasing in London which drives up the price of basic commodities. World trade will renormalise after epic wastage of resourses since at least 1970. Peter Kinane writes, It is a theory that is almost too unpleasant to express. Yet, a collision between Anglo-Saxon monetary theory and German or Austrian monetary culture would seem to be increasingly inescapable – and I’ve already kinda said that Europe needs to stand on its own feet more on monetary theory, as the current model is rather crazy- -self-destructive. I understand where you are coming from, and I appreciate the fact, that it is different undercurrent to that of the Euro zone’s own internal frictions. It is another sub-plot in all of the current saga. The more I think about it though from the north American perspective, I think that Ireland is like the Korean peninsula for the 21st century. And just like that unfortunate campaign of the 1950s, it is being fought with the same junk weaponry supplies and high command from an out of date era. BOH. You chaps seem to have selective memories of the febrile atmosphere that week. Minister after minister obviously telling lies when saying that the IMF were not in the country and there were no negotiations going on. The government shut out of the bond markets with either money for the banks or the deficit. No money for deposit insurance payouts. If talk-to-Joe had put the dots together on the back of some finance guy being on toady-PK, there would have been queues outside the banks and not just of aged farmers looking for some extra body insulation. @ Peter Kinane If you have a subscription to the FT, the full transcript of an interview with the head of the Finnish central bank, Erkki Liikanen, also in tomorrow’s issue, is worth reading as he deals, in a typically Finnish laconic fashion (they do’nt do blather) with the issue of when the ECB may start reversing out of the situation that inept and dithering politicians, notably Merkel, have put it. There is no problem with the role of the euro as a reserve currency if for no other reason that third countries do not want to be dependent on just one. The problems are all internal due to the failure of politicians to recognise that it is the governments of the Eurozone that are responsible for fiscal issues, including excessively indebted member countries, not the ECB, a distinction that has been almost totally lost in the debate in Ireland. I see that our government has now published its response to Morgan Kelly, in the now-standard way for Irish governments to announce important economic news: an unattributable briefing to a chosen newspaper. In this case the newspaper is the Irish Mail on Sunday, so perhaps not everyone has seen it. There’s not much new in it, except for one thing. The government has unofficially officially confirmed that not all the sovereign and senior bank debt is going to be paid back, and that in fact our unofficial official strategy is to continue borrowing from the IMF and EU in the expectation of defaulting on them at some point in the future. … As well as taking over the liabilities, the institution would also take over the securities (on which the loans were made). @ CP Re the Pat Rabitte stuff, if you listen to the interview on This Week, he seems, clearly in my view but ill agree you could read differently into on fisr listen, to be referring to a rescheduling of the bailout package, not the original debt. This would fit with recent discussions of this being a debt we can only hope to repay over twenty years, at a low rate, not 7 years at a high rate. Re The Irish Minister you speak of expecting a default on general government debt is in the Daily Mail as far as i’m aware, so count me somewhat underwhelmed by its likely accuracy given the source… @ AMcGrath “I think you may find they are employed of the financial sector and Mandy-Rice Davies comment “he would say that wouldn’t he!” can be applied.” Not sure about BWII, but didn’t think he worked for a bank (actuary maybe?), and i don’t work for an Irish bank, so not sure how its demise would directly affect me? Perhaps you could counter the argument with something a bit more substantial about why you think that the destruction of the Irish banking system would NOT lead to economic chaos?n You could make a good start by looking at trade finance, overdrafts, credit cards, ATM’s, cash management, cheque clearance, electronic payments etc etc etc…Term loans can be replaced relatively easily, the rest of the infrastructure cannot… @Michael Hennigan “So what are your cut proposals to eliminate the defict of €18bn in say 12 months? This is a fair question given your criticism of Rabbitte. Remember, you have to allow for a contraction in tax revenues in response to a further tightening of the domestic sector.” I have a problem with your question. First of all it misses the point which is that it is arguable that cutting the deificit to zero and opting not to drawdown any further funds from the Troika Loan Facility (it’s not a “bailout”) may be a lot less damaging than persisting in drawing down money from the Troika Loan Facility. The question of where the cuts come from become secondary if you think the pain and suffering caused to the vulnerable and the needy and to businesses will ultimately be less if we bite the bullet. Secondly, I never agreed with FF demanding that FG and Labour provide fully detailed proposals without the benefit of the apparatus of Government. It is a stupid schoolyard game played around election time where all the parties create fictional plans based on estimates created by the ESRI which are unlikely to be fully correct. I do not want to play this game with you as it is beside the point as to whether such action will ultimately preserve the economic future of our children and the social stability of our state. Suffice to say that if it is necessary to take this action to safe-guard our economic and social future (apart from our national independence and future ability to determine how our country progresses) then the cuts and tax increases would hurt everybody – the sick, the elderly, the unemployed, the employed, the self employed, people in receipt of public pensions, people in receipt of private pensions, low earners, and high earners. It would be extremely grim. However, that does not mean it is not the best outcome. Before you say only people with secure state jobs could take such a line or something like that, I will put to you my own view that it is the gravy-trainers, the rent seekers, the comfortable upper middle classes and the comfortable bureaucrats who are least willing to take real pain for the sake of the coming generation. I think the people who agree with you (i.e., that such cuts are so unthinkable that we actually can stop right there and not think about it any more) are those people in the secure jobs that you think are the ones preaching revolution. I consider life-time professional politicians who have been county councillors and TDs for a long time and who consequently have spent all their time interacting with civil servants and state agencies for most of their adult lives to be the absolute epitome of this class of person. I have plenty of respect for politicians but they are influenced by their own fish bowl. @Sarah, I’ve no problem with a 30% pay cut. Bring it on. Plenty of my colleagues do though. But they’re mostly in denial. As to the educational buereaucracy, yeah I’ve a major problem with waste, especially when overseen by idiot county counsellors. @MH BTW, I previously did say that we must at least appear to be readying ourselves to balance the budget if we are going to negotiate for real with the rest of europe. The fact of the matter is that they, reasonably enough, do not care how dire our future will be as a result of this bailout if it saves the core. It is only where we say that we must act responsibly and in our best interests and that it is for them to bear the cost of their concerns that they will actually do a deal that will work for us. @Issac How are we collectively going to pay for debt if we take a 30% wage cut? The Irish are amazing – they move from over consumption to under consumption without a moments thought. You do realise basic commerce in this bog is breaking down due to lack of money !!! Witness those poor little piggies in East Cork. Money is merely a tool which facilitates trading – it is not intrinsically valuable. Do you want to destroy all commercial activity ? @ Bryan G “(iii) It is clear from his interview that he regarded himself as playing for Team Ireland, not Team ECB,” Although having heard the interview once and live I think I agree that Honohan thought he was doing his best “for Ireland”. Difficulty is he is a Central Banker. He was before he took the job as Governor. It’s a mindset. Central Bankers and Neo-Keynesians believe that they can control the “ebbs and flows” of human behaviour by manipulating the availability of credit (money). They are, although my own opinion is that they have perverted the notion of cyclical smoothing, incapable of accepting that they can “get it wrong”. Greenspan and Bernanke get ten out of ten for arrogance on that score. Honohan is now not far behind. I think, and I think you agree, that what he did was outside the Pale. Now, I wouldn’t trust Lenihan with my own spit. But I would dearly love to know if Lenihan is the one briefing Kelly. He has after all been doing a lot of public revisionism lately. Having said that. Honohan did stab him in the back even if he thought he was doing it for Ireland. @ The Dork of Cork “The dollar has been hyper inflated since 1980 and we are still here…..” There’s a hell of a lot in that and the rest of your comment. No offence. Don’t have the time to deconstruct it. We will have to agree to disagree. I’m sticking with Gold only goes to €10,000 an ounce in a hyperinflationary depression. And if we are already in one. Well then, it’s not so bad after all. Of course I don’t believe we are in one. Yet. What strikes me is that its now clear we will default, on whom we will default, and all thats in debate is when we will default. Or am I wrong? @ hoganmahew “You chaps seem to have selective memories of the febrile atmosphere that week. Minister after minister obviously telling lies when saying that the IMF were not in the country and there were no negotiations going on.” I don’t. They were lying. And at the time I thought Honohan did the wet work for the ECB. Trichet gave him the stiletto and he used it. http://cashtank.com/store/images/Q0002H3016.jpg Honohan (and no one working in the Irish Central Bank) works for Ireland. They work for the ECB. We just have the pleasure of paying their bloated salaries and pensions. @ Dork of Cork Pay cuts for public servants will mean having to go to the local friendly bank manager and saying that they can’t afford those repayments anymore. Are they really going to repossess all those houses? This is the only way out. If this does not happen, then commercial activity will never increase. @Greg First the dollar was overvalued , then equities , then housing – we have been living through a series of almost hyperinflationary bubbles already which transfered wealth to the financial centers. They cannot sustain it anymore. They will try to re wild Ireland to protect the currency but once they get to Iberia they will have to capitulate although I do concede they have a small chance if they can learn to refine the quality of their bullshit and fool people once again. My bets are on Gold as that is the only mechanism to clear the debts when all capital has been expended to service unsustainable consumption. @Issac Not a very effecient way to work through this misallocation of resourses if you ask me .Public servants may or may not be overpaid – I really have no idea, but looking at total aggregate money somebody better create & spend the stuff. Horizontal credit money is dead – vertical fiscal money can pay the debts now. Only money can clear the stock of Goods and assets unless you want to start using the more forceful way of obtaining goods – the gun, which is not very elegant. @ The Dork of Cork “First the dollar was overvalued , then equities , then housing – we have been living through a series of almost hyperinflationary bubbles already which transfered wealth to the financial centers.” I don’t disagree that there was some serious bubble blowing. From dot.com, 9/11, housing and now QE1 2 3? More?. I agree there has been through this bubble blowing a massive transfer of wealth. I think you agree that it was deliberate and planned. But you do say “almost hyperinflationary”. Perhaps it is a mute point. I think that they have run out of road. Next stage is serious inflation in commodities, despite the efforts of the members of the Federal Reserve and their sub-offices that control and manipulate the futures markets. I think that the holders of the Mount Washington “reserve currency” are losing patience. I don’t think we have yet seen super inflation in the reserve currency. I think it is coming. The USA has had the ability to export inflation since Bretton Woods. I think that day is coming to a close. We are not too far apart. It’s just a timing issue. From the passing of the Gramm–Leach–Bliley Act (the abolition of the Banking Act of 1933) the power to create “money” was transferred to a banking elite who had purchased the political establishment of the USA wholesale. It is now failing by the second. Let’s hope everyone can remain civil while they fight for the scraps that are left. @ Eoin Bond “Perhaps you could counter the argument with something a bit more substantial about why you think that the destruction of the Irish banking system would NOT lead to economic chaos?n You could make a good start by looking at trade finance, overdrafts, credit cards, ATM’s, cash management, cheque clearance, electronic payments etc etc etc…Term loans can be replaced relatively easily, the rest of the infrastructure cannot…” The banks are like any other private companies, if they become insolvent an administrator will be appointed to asses the situation and run the business while they figure out what’s what. The administrator’s first and only driver is to extract the highest amount of value for creditors – maintaining the value in the branch network and core business franchise would be a top priority in this respect so the trade finance, overdrafts, credit cards, ATMs etc would continue to work as normal. These franchises could easily be sold at a knock-down price to both foreign banks and some of the many private equity firms looking to get involved in Ireland (Chris Flowers for one). All the tricky stuff will be left for the creditors to get what they can out of. Even during the Lehman bankruptcy the healthy franchises were quickly sold off to willing bidders. To the extent that there are existing legal impediments to this process, the government can change whatever laws it likes. I don’t know whether the core franchises could fund themselves between an insolvency event and their sale to better capitalised buyers – but shouldn’t somebody ask potential parties? Is it impossible at any short-term price? Even if the ECB wanted to be vindictive, they just another creditor of the banks and as such would be subject to the will of the administrators. I’m not saying that this wouldn’t cause huge disruptions to the system, but every path we can choose today leads to an unpalatable ending. The Irish banking system was shut down due to strikes in the 1960s and 1970s and I don’t remember us all living in caves during the 1980s. The Irish people are remarkably adaptable and you’re doing them a disservice by operating under the blanket assumption that there’s simply no way we could cope with stress of bank insolvencies. @Mr. Bond Re The Irish Minister you speak of expecting a default on general government debt is in the Daily Mail as far as i’m aware, so count me somewhat underwhelmed by its likely accuracy given the source… It’s the headline story on the front page of the Irish Daily Mail, under the byline of its political editor. So 1) it’s the Daily Mail, not the Weekly World News. It’s not highly likely that the Mail would invent from whole cloth an interview with “senior government figure” then plaster it all over the front page, inviting denial. It might slant its reporting of an interview that actually took place (though then it would be burning its source and losing the chance of future exclusives) but in this article the quotes seem to be extensive and clear enough to rule out the idea that the Mail has fundamentally misrepresented what was said. Besides, the Government position reported by the Mail has the ring of truth in that it’s pretty consistent with what’s been said and hinted before, especially in the way it leans on the “Everything’s better with Consensus™” argument. 2) It’s on the front page of the Irish Daily Mail, and now on Reuters too. So we know that the government knows about it, and we know that the government knows that lots of other people know about it too. Therefore if the story is seriously false, we can expect a loud and unambiguous denial from the government very soon. 3) Everything about this story is in line with how this government and the last government have made plausibly-deniable announcements about the banking crisis/bailout over the past year-plus. The only novelty is the decision to brief the Mail rather than prestigious organs like the IT or the Sindo. So until and unless we see a clear official denial, then, I believe the only reasonable assumption is that the report is genuine. No Greg , the dollar / Fed needs higher commodity prices so that the speculators / banks can earn their way out of this. The Dollar & America are different – America needs cheaper gas but they have the petrodollar as their currency – not a match made in heaven. This has happened before – New York and London are sucking in Arabian and other oil money so that they can live the life they have grown accustomed to – but in the process they are destroying lives all over the planet. Gold is not a commodity – if it was the CBs would not express it on their balance sheet @Bond. Eoin Bond What about Pat Rabbitte’s comments on bringing forward the 2013 mechanisms? Philip says, What strikes me is that its now clear we will default, on whom we will default, and all thats in debate is when we will default. Or am I wrong? I guess, that is why I find the, Ireland as the Korean peninsula, analogy works. Everyone who matters in terms of global mechanics, knows what is potentially coming down the tracks. They know how to improvise delaying tactics in the meantime, until they decide when it happens, how it happens and who becomes directly involved or not. Ireland is like a chess piece in a larger board game. Perhaps the commanders in the smoke filled rooms, are wondering what kind of rules will apply to this new kind of game of economic armageddon. My hunch though, is that we it happens, it will happen so fast and be over, before any of us have a chance to make our heads stop spinning. BOH. @ anonym OK. I give up. How are you doing the blue and changing font? It is the cite tag Greg: <cite> Irish Daily Mail </cite> == Irish Daily Mail New to me. Whoops, forgot to mention it is in blue as the whole thing is in a hyperlink tag, hence the link to the daily mail article itself. <a href=”http://www.dailymail.co.uk/news/article-1384767/Fine-Gael-Minister-admits-Ireland-plans-restructure-250bn-borrowings.html” rel=”nofollow”> headline story on the front page of the <cite>Irish Daily Mail</cite> == headline story on the front page of the Irish Daily Mail @Greg It’s just HTML tags. The blue is a hyperlink created with the <a> tag. (Beware of inserting more than one hyperlink and seeing your comment trapped for hours in moderation.) The newspaper names appear in bold because they’ve been marked with the <cite> tag: they should of course appear as italic, but the stylesheet produced by this blog software inexplicably styles them as bold. Some other HTML tags work too. Seems to me that this is a pitch by the UCD Economists to get the better of the TCD ones. Just plain old dirty University politics again!!!!! The strange thing is that none of the TCD Economists have posted here in support of the Professor. Maybe thats more University politics !!!! @Greg No worries Greg – people get very confused when you mix MMT thinking with Gold, but that is how the hybrid Euro is structured – its a crazy system. The funniest reactions are when you mention that your taxes do not fund the state – people are almost guaranteed to go ballistic. @Philip II No, the question of what debts and what debtors should or will be defaulted on is still very much up in the air. How big the default will have to be is also to be decided. Rumours will proliferate in the coming months. I would need something concrete to lend credence to the rumours. If our gov’t is seriously contemplating bailing out of the Euro Zone, EU or sovereign debt obligations it has to do some house keeping. First balance the budget, second place the order for the new currency. The lead time for currency will be 60 to 90 days, there will be leaks. The Gardai and the armed forces will have to be beefed up, particularly in the area of crowd control. Some gov’t buildings will be hostile crowd proofed, sand bags, barbed wire and so on. When it happens it will be sudden but not unexpected. As I see it the gov’t is quite comfortable with the current ECB/IMF arrangement. There is a lot of carping about interest rates and the unfairness of it all but that is the usual gov’t displace the blame tactics. Comparisons to Argentina and Germany are not valid, the Argentinians are nationalistic, hard bitten people who are accustomed to governments failing and currencies collapsing. Germany’s travails are caught up in wars and the aftermath of wars. In both countries there would have been a fajr share of schadenfreude at the thought of stiffing the foreigners. In Ireland we did the dirty deeds in leather upholstered board rooms and in the dark areas of well furnished pubs. There is no obvious enemy to blame for our problems. Unless we blame the ECB for showering us with cash from 2007 up to the present day. All of it at well below market rates. It has not been necessary for this gov’t or the previous gov’t to balance the budget largely thanks to the largesse of the ECB. Expect dithering, fumbling and bumbling for the next few months. The day of reckoning will occur, at the moment I am not willing to face up to it. “Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.” If there is a possibility that wecan get out of this deal on a legality then how do we go for it? @ Bryan G “(iv) Honohan claims today on the bailout “I don’t see it as in itself something that damaged or caused pain to taxpayers”. Huh? A commitment to not to hit unguaranteed senior debt and to recap the banks to the tune of €35bn, doesn’t cause any pain?” Well Duh? Just another scumbag taking €500,000 a year. @ Noel No. We have to find Independence again. There are no laws that cover this. The only weapon we have is the Euro. We should use it now. We should print Euros like there’s no tomorrow. Don’t expect Honohan to do it. Don’t expect Noonan to do it. Don’t expect Kenny to do it. Why? Why are they Traitors? Because they favour Europe over you Noel. They don’t give a phuck for you. You, Noel, are just a piece of scum Irish peasant. They are Irish at the Court of the EU. Fed and watered. And pensioned off while they phuck you and your family to Hades. You cannot expect the scum that sold you out to have any idea of how to get you out of the thing they created for you. And Noel. They did create it. They knew exactly what they were doing. Wake up mutthafukaa. Enda Kenny doesn’t give a sh*t for you. @hoganmahew You chaps seem to have selective memories of the febrile atmosphere that week…..If talk-to-Joe had put the dots together on the back of some finance guy being on toady-PK, there would have been queues outside the banks It wasn’t the first newspaper article to question the strategy of saving the banks at all costs, and I see no particular reason why that one, on that day, was so special or spelt imminent doom. The option for “Patrick” to speak to the nation at short notice was always there if need be, if revealing that a bailout was in the works was all that was needed for public reassurance, which seemed to be his thinking. Honohan can’t have it both ways: I had always assumed that his position and actions were to ensure that the views of the Governing Council prevailed, which is his legal duty under the Treaties for matters within the competence of the ECB. However today he explicitly rejected that scenario, saying that the bailout was outside this scope. This would imply that he was negotiating on behalf of the “Irish side”. However it just shows the absolute disarray of the negotiating team that a unilateral midnight decision that undercut Lenihan’s position in that way could happen as it did. MK’s article said “the IMF were scathing of the Irish performance”. It isn’t hard to see why. BTW my guess is that the source is a US-based IMF staffer. The WSJ did a profile on MK a few weeks back and he’s likely to be in contact with reporters there. Why the revelations now? It could be that the IMF know there is a huge battle brewing on restructuring Greek debt with the ECB on one side and the German chancellery on the other and the IMF are with the chancellery. Or it could be that some reporter just asked him or her what went on during the Irish bailout negotiations and they got some direct answers. @ Greg You should post your ignorant rants elsewhere. Terming a person a ‘scumbag’ shows what you are rather than your targets. @ zhou_enlai I have a problem with your question. First of all it misses the point which is that it is arguable that cutting the deificit to zero and opting not to drawdown any further funds from the Troika Loan Facility (it’s not a “bailout”) may be a lot less damaging than persisting in drawing down money from the Troika Loan Facility. The question of where the cuts come from become secondary if you think the pain and suffering caused to the vulnerable and the needy and to businesses will ultimately be less if we bite the bullet. It is ‘arguable’ indeed. Strange isn’t it, how little attention the downsides get? Maybe, there are some lessons to be learned from Kim il Jong’s currency reform playbook. 2011 2012 2013 take your pick when the defualt is trigered at which time Europe may be ready at their terms then the chance that Ireland may be evicted from the Euro at that time ? also the FDI companies here in Ireland seem to have many ways in calculating the Coperation Tax many right offs to reduce the CT bill how about closing a lot these loop holes Wow! Prof. Kelly certainly set off a comment storm. Not sure how much light has been generated amid all the heat. There seems to be widespread denial about the extent to which Ireland’s sovereignty has been lost in the key economic, fiscal and monertary areas – and the extent to which Ireland’s international reputation has been shredded. We simply have to face it; Ireland, as a small open economy, more vulnerable than most to global trade and financial flows, has demonstrated an inability to govern itself to protect itself from the risks to which it was exposed. The problem is that the bodies charged with addressing the fall-out from this failure of governance – the IMF and the EU – are seriously compromised in their ability to address it. The layer of poorly regulated global financialisation – fuelled by global trade imbalances generating a liquidity glut – constructed by the banking and shadow banking systems that generated the crisis is nowhere near being brought under policy governance or regulatory oversight. Indeed, politicians, policy-makers and regulators everywhere are being forced to tread very carefully as they seek to extend the necessary governance and oversight. We now have a situation where the volume of paper-trading far exceeds the volume of trading in the underlying assets and commodities. And the trading the in the markets in the underlying assets and commodities is often so thin – contrasting with the liquidity in the markets for their drivatives – that these markets are being totally distorted and physical and commercial players are deterred from participating. It’s going to be a long haul to ensure these markets are subject to appropriate governance and oversight. The parties who profit exercise enormous political and economic power. But it simply has to be done and some progress is being made. (As I’ve mentioned previously, finance has to be the hand-maiden of productive activity; not is imperious mistress.) Meanwhile, as grindingly slow progress is being made at both the global and EU level, the EU has been forced – for reasons of political self-preservation – to erect a fire-break between the smaller peripherals and the broader core. It is brutal and tragic that Ireland is on the wrong side of this fire-break, and any hare-brained attempt to escape would incinerate what’s left of the economy. The only option is to make the case, calmly and rationally, for more palatable and acceptable external support and to strain every sinew to get the domestic economy into shape. How are you doing the blue and changing font? ˙sʎɐp ǝsǝɥʇ op uɐɔ noʎ ʇɐɥʍ buızɐɯɐ s,ʇı @ Edward “The banks are like any other private companies, if they become insolvent an administrator will be appointed to asses the situation and run the business while they figure out what’s what.” The banks are like any other company in theory, in any sort of reality they are completely and totally different. No administrator can come in and keep a bank running without huge, total and immediate support from the central bank (liquidity) and government (solvency guarantee for depositors). In a normal company, creditors cannot “withdraw” their assets in a matter of minutes, in a bank they can. Absent those liquidity and solvency supports (ie the banking guarantee we are wishing we could now undo), a bank is toast before the end of business on Day 1, ie liquidation rather than administration. This is more or less the main reason we are where we are right now. We do not have a version of the FDIC here in Ireland, or even Europe for the most part. “Even if the ECB wanted to be vindictive, they are just another creditor of the banks and as such would be subject to the will of the administrators.” – do you honestly believe that? Seriously? So no, ATM, trade finance and overdraft “franchises” will not continue to work, and re your Lehman’s comments, there’s still, 2 and a half years later, ongoing court cases with people who used Lehmans as a prime broker/custodian (ie their assets should never have even been at risk) trying to get their assets back. “The government can change whatever laws it likes” – Eh, no it can’t. Why do people keep spouting this factual error? The constitution exist for this very reason. @Bryan G I agree with you that it was probably from the IMF. Sour grapes are an element of their response – imagine being out-bureaucracied. I heard John McHale this morning on Moaning Ireland. He made a good case for the risks of an immediate cut in the deficit and an immediate end of support to the banks. Unfortunately, the alternative is to expect a change in the bailout regime. I think this is a riskier strategy. We are betting on a unanimous political consensus being extant at the time that will be indulgent (or at least not be anti) Ireland’s prospects and willing to pony up the shortfall that a failure to return to funding markets will result in. This is not only by no means certain, it is looking quite unlikely. We should watch Greece very closely to see what extra conditions are placed on it. Yes indeed, two posts of mine got blocked yesterday…. @hogan, I can see the risks you highlight, but for some time I’ve being trying to make th case that the EU built the fire-break between the smaller peripherals and the broader core for utilitarian and pragmatic reasons. It is trying to shore up political support in the broader core (‘the least pain for the greatest number’) to engineer the concessions that will be required to bring the peripherals back in. And it is a long way from bring the malign forces of financial capitalism under any sort of check or restraint, so it has to make haste slowly. I know all this, like Waterloo, could be a damn close run thing, but that’s my sense of how the game is evolving. And I know it doesn’t butter any parsnips in Ireland. Methinks Dreaded-Estate was on Morning Ireland. Tony Foley argued that since we have to close the deficit anyway, better doing it now. That is a line pretty unique to D_E in this blog. If we break free from the bank reparations deal or if greece defaults or some other scenario leads to the break up of the Euro then do the following apply? 1.The Maastricht treaty ceases to exist and as each subsequent EU treaty is layered upon and dependent on the previous treaties then they too fold. 2. This would mean the end of the Nice and Lisbon treaties . Freedom to travel and work which applied to the Eastern Bloc countries citizens would cease and all liabilities to their citizens such as social welfare payments, childrens allowance etc would also end. A MODEST-means-citizens’ PROPOSAL (with apologies to Jonathan Swift) The current status is unsustainable and unfair to the people of Ireland, regardless of the makeup of the government, as we are now witnessing. Who are we to trust? According to Prof Kelly, even the Central Bank appears to be not acting in good faith. How about this humble alternative….. 1. Let the taxpayers pay an equivalent of the current Universal Social Charge to service each one’s own individual, personal debts (= home mortgages or private small business-related loans). Since we all agree that times are tough, rather than reducing the Charge, just make it compulsory that we service our own debts. Essentially, our mortgages and debts will be paid back over a shorter period. The banks will effectively receive the same amount of moneys – since for them, it’s the cash that is vital for subsequent lending and continued business. 2. The people need to be empowered to choose which debts they are willing to pay back…..Under no circumstances should the banks – who created this mess – and the government (plus the Central Bank and Gov Honohan) be in the position to dictate which debts are subsidised. Toxic debt should remain as correctly labeled – toxic and hence not fit for repayment by innocent citizens. 3. So while there will be approximate equivalence in Gov’t receipts as current, this will be a mechanism to improve our own, individual futures as well, and a brighter (and sooner) future for Ireland as a whole. 4. For citizens who have little or no personal debts, their Universal Social Charge should fund a pension-like, ‘contingency fund’ that will grant them a head start come retirement age. This should be an exclusive fund for debt-free people, allowing them to earn fruits from this investment when they become 65. 5. The government should work towards the ‘improvement’ of the Irish banks’ healths and cut waste, but renegotiate for lower interest rate (mentioned previously by Ollie Rehn, and always by our ministers – but they never do anything about it). Some of the contingency fund should be used for nurturing new business and job creation. 6. Will this be enough to satisfy the IMF and ECB? Probably not, but a thriving economy will make these two institutions think otherwise. According to Prof Kelly and others, the IMF will probably come on board if we show them that we are not incompetent. Two things are sure – household spending will increase because of greater consumer confidence and corporate investment will rise provided that they know that the moneys we are putting in are not to fill a bottomless pit. 7. Will further renegotiation of terms be helpful? Yes, and would it not be great if this happens because (not despite) the Irish economy rebounds ahead of schedule? By compelling the public to finance bad debt, the Irish government has acted in an “inherently immoral” manner (to quote Fintan O’Toole). This has to stop, but hopefully in a way that fuels the economy and generates growth. Anyone out there, tell me – in concrete and specific terms – why this won’t work. (Note: Please don’t give me the usual, “the administrative costs to implement this would be unbearable” excuse. Ireland already has layers of means-tested entitlements – doing the legwork and homework to make this happen will be worth any costs incurred.) ….Would be delighted to hear your thoughts. Thanks. @ Eoin Bond “Absent those liquidity and solvency supports (ie the banking guarantee we are wishing we could now undo), a bank is toast before the end of business on Day 1, ie liquidation rather than administration. This is more or less the main reason we are where we are right now. We do not have a version of the FDIC here in Ireland, or even Europe for the most part.” As I stated in the comment: “I don’t know whether the core franchises could fund themselves between an insolvency event and their sale to better capitalised buyers – but shouldn’t somebody ask potential parties? Is it impossible at any short-term price?”. As I said, this is clearly a problem – here’s a solution off the cuff – freeze deposits for a week, or two weeks – that might give the administrator time to separate the branch network/deposits from the more toxic stuff. A week or two of closed banks would be a blow to the Irish economy but hardly a mortal wound. I’m neither an insolvency practitioner nor a banking regulator so maybe this doesn’t work, but I thinks it’s likely that if we actually start looking for a solution to this problems, one might present itself (to be clear, I’m advocating doing the looking now, not after the fact). On the ECB as subject to the will of the administrators – “do you honestly believe that? Seriously?”. Yes. The worst the ECB can do to us is withdraw their liquidity, if we push the banks into insolvency this is a moot point. The banks other creditors are protected by law. What is it precisely you expect the ECB to do? Are they going to hire mercenaries and take the Irish branch network by force? Does the ECB have a standing army I’m not aware of? I am well-aware of the ongoing court cases relating to Lehmans and the unfortunate funds that use them as prime broker (I know several of the unfortunates myself) but your point is tangential. As I alluded to in the post (“All the tricky stuff will be left for the creditors to get what they can out of. Even during the Lehman bankruptcy the healthy franchises were quickly sold off to willing bidders.”), I’d fully expect court cases to go on for years, but that has little or nothing to do with the operational side of the business, which would have been sold/carved off immediately. “The government can change whatever laws it likes” – Eh, no it can’t. Why do people keep spouting this factual error? The constitution exist for this very reason.” Sorry, I should have said: The government can change whatever laws it likes within the bounds of the constitution. I’ve just had a quick look at the constitution and there doesn’t seem to be much in there about banking regulation, so my point remains the same. We could go backwards and forwards on this all day with you trying to present problems and me trying to come up with solutions, but my position remains I do not buy the assumption that we are held entirely hostage by the banking system. To my mind, this belief system is a continuation of the Irish political disease which has gotten us into this mess… if something sounds really difficult, those responsible for decision-making just say it can’t be done and any questioning is immediately dismissed. We always have a choice. If there is a growing consensus that Ireland’s debt burden is unsustainable, then I for one would like to hear analysis that centers around: (i) stopping the hole digging; and (ii) finding actual solutions to the problems that don’t involve some external deus ex machina. @ Michael Hennigan Good luck with your thin skin. Intemperate language? A lot worse is coming than. But then that’s just an opinion. @BWII I think you’re an eejit. In fact, I know it now, if you think that is a line that only D_E has been considering. @Paul Hunt The problem is not necessarily with the current players. The problem is with a different German chancellor and a different French one. It is with a Belgian government (if they ever decide on one). We are betting on an outcome that is unclear. The very fact that it is unclear increases the risk of it – we are resting on a series of ‘ifs’. @ hogan Withering repartee @Eoin Bond “not sure how its demise would directly affect me? One of MKs central assertions is that the guarantee of bank debt is just plain wrong – something all non-economists and non-bankers like myself know instinctively. As per the US DOI “we hold these truths to be self evident” and no amount of sophistry and obfuscation will convince us that black is indeed white after all. It must be a nice feeling to work in an industry which is supposedly governed by the laws of the market place but whose employess know that no matter what insane, irresponsible, speculation is indulged in by their institutions, the taxpayers of the country where they operate will be obliged to pay, while the exorbitant salaries and bonuses are still being paid. “Perhaps you could counter the argument with something a bit more substantial about why you think that the destruction of the Irish banking system would NOT lead to economic chaos?” This is just scaremongering – something MK has been accused of. Why would the ECB close down institutions which they are insisting we keep on life support after we have handed them the keys. If they did that it would expose the bailout for the sham which it is. Before that we should already have a brand new – bond debt free – bank up and running – in any case. Anyway UB and NIB are not among the 6 and they are well networked. I am also old enough to remember the bank strikes of the 1970s which didn’r result in the sky falling. As for ATMs etc – Anglo Irish bank was deemed to be one of those systemic institutions. I have never seen or heard of a branch building or ATM for that institution, which kind of undermines your arguments. MKs suggestion that we balance the budget immediately I heartily endorse – as well as the implication that the overpayment is mostly concentrated at the higher (his own) level and there is where the heaviest cuts must be made. A relatively short sharp shock to the system is what is need not a debilitating death by a thousand cuts so that bankers bonuses in Wall st can be maintained. @Edward V2.0 ““The government can change whatever laws it likes” – Eh, no it can’t. Why do people keep spouting this factual error? The constitution exist for this very reason.” Sorry, I should have said: The government can change whatever laws it likes within the bounds of the constitution. You were right the first time. The law implementing the guarantee was never tested for it’s constitutionality through the courts. The constitution has an article on private property which – prima facie – seems to be contravened by the guarantee. @Michael H Good task re proposals for reducing deficit Reduce social welfare Abolish children’s allowance Reduce number in the PS with compulsory redundancy Make all agricultural land ratable (referendum needed) Introduce/increase charges on bank transactions Transfer % of education budget to SMEs for in-house training and R&D Legal fee reforms as recommended by OECD Implement Bord Snip Scrap Croke Park @AMcGrath “the overpayment is mostly concentrated at the higher (his own) level and there is where the heaviest cuts must be made”. Agree absolutely. The budget problem could be solved tomorrow by setting a max salary of about €100k for the public sector and taxing any incomes above this amount in the private sector at a marginal rate of say 80%. This might be acceptable to some/enough/most if it was justified as a temporary measure till the deficit was reduced. It would need to be accompanied by measures to stop the unpatriotic pursuing loopholes, shifting residencies etc. @Brian Tax does not fund the budget . @hogan, I agree we are resting on a series of ‘ifs’, but the consensus here seems to be that the current ‘support package’ will lead to inevitable disaster and default. It seems to be encouraging paralysis in the sense that, regardless of anything we might do to comply with the conditions attaching to this package, we’re buggered anyway. This obviously suits many people because anger can be directed at external forces and they can avoid any obligation on their part to participate in very necessary reforms that would benefit the economy. It’s all just convenient displacement activity. We can’t just say this isn’t going to work and, because we believe that, we’re not going to try to make it work. It’s very early days and the key EU players will need a lot more evidence before they will be minded to make significant changes. And they will need evidence that we are making a serious effort. The irony is that many of the structural reforms that are conditional in the support package are things that should have been kicked off 2 years ago. They have the potential to generate significant benefits and, in actual fact, they don’t go half far enough. I know things seem to move at a snail’s pace, but I’m sure you realise that that’s how the EU operates. The Greeks are now getting some serious attention on the anniversary of their entry to the treatment room. I doubt that high yields on thin trading of Irish sovs is going to force a major change in the current support – other than some easing of the interest cost. Indeed, as an example of something useful and as I mentioned on another thread, in any engagement with Europe to ease the extent and burden of the EU/IMF support package, the Government could seek a derogation from some of the more absurd and costly elements of the EU’s energy market liberalisation process and climate change policy to allow it to tackle more effectively the cumulative absurdities that national policy and regulation have bolted on to these over the last decade. There is potential to generate up to €1 billion of annual cost savings in this area alone – not to mention privatisation proceeds. I know it is a huge risk, but demonstrating a willingness to get stuck in is much more likely to persuade other EU politicians (irrespective of their political compexion) to cut us some slack, than saying we’re going to do nothing becasue we’re convinced this won’t work. But it’s far better than venting our spleen, digging in our heels becasue the probability of default will increase to unity – and any sympathy will have evaporated. @ Edward you’re right that this debate could in all likelihood go back and forth forever. However, a few quick notes: re govt changing laws – one of the laws they cannot change, it is assumed, would be a revocation of the existing banking guarantees. So if you cant revoke that, how does any administration or insolvency of the banks limit the liability to the state? re ECB – they could actually, in affect, put a full freeze on any Irish banking systems payments in or out of the country by not accepting any Irish collateral, or by denying Irish banks any usage of any of its various payment systems. That would be i imagine their response to being told to simply “get in line”. The ECB is, in theory, only supposed to offer its collateral windows (including intra day ones which are hugely important for payments) to solvent banks, so it could easily close this offering to any bank in administration (which, like i said, would become a liquidation absent any capital controls). ….which brings us on to – “A week or two of closed banks would be a blow to the Irish economy but hardly a mortal wound” – i’m sorry, but remember what happened when Northern Rock got into trouble, both here and in the UK? And it was always gonna be backed up by a solid sovereign support mechanism. You’re suggesting a far-from-solid sovereign simply letting the at-deaths-door banking system look after itself. There is nothing more frightening for an advanced economy than the thought or sight of a bank run. Its an unfortunate truth. If you closed the banks you’d be looking at the risk of social anarchy. Given that so much of our economy now operates in an electronic form, i don’t see how any commerce could take place after 48 hours. That includes the purchase of basic things like food. I’m not saying this as some form of scaremongering, its simply accepting what is highly like to occur in your scenario – ATM’s would stop working, credit cards would stop working, hoarding would start to occur, because there would be no one – not a bank, not a government, and in this situation no supra-national organisation – to keep things working. This is the key difference between a banking system collapse here vs an individual bank collapse (whether govt supported or not) in other countries – we do not have any solid elements left of our financial and banking systems, there is no one to help steady the ship (other than the ECB, which is kinda the point here), and there is no one to keep the system going if one or two banks fall over. There is simply no one to buy up whatever “good” operations or franchises that might be split off, in the way that BNP was able to do in Benelux, or Lloyds in the UK, or Santander/BBVA have been able to do in Spain. For all the suggestions out there that a “big foreign player” would love to buy up Irish banking assets on the cheap, why on earth would the likes of HSBC or Santander touch Irish banking operations at the point where the economy is heading into bankruptcy, against the express wishes of the EU, ECB and IMF? It wouldn’t be worth their while, for the relatively small upside (in relative terms to their market caps/profits) even in the long term. They’ll only come into this country after things have stabilised and the ECB has given them the green light to, not at the point where literally the opposite has occurred. As previously discussed on this blog, banking-resolution theory is a very different affair to banking-resolution practise, and even more so in an economy that is in such a bruised and broken condition as ours. Strong economies with strong banking systems can potentially, and only potentially, look at letting individual banks fold (though no one has been particularly keen to attempt this at any sizeable level post-Lehmans), weak economies with weak banking systems do not have any possibility of letting this happen. @ Anonym “Irish Finance Ministry Says Debt Restructuring Report Outlandish By Dara Doyle May 8 (Bloomberg) — An Irish Finance Ministry spokesman said a report that Ireland may restructure its debts is “completely outlandish.”” @ The Dork “Tax does not fund the budget.” ??? @Mr. Bond, Thank you. I suspect the uncharacteristic length of your post is proportional to your increasing exasperation with the magic bullet merchants. What I find disturbing is that some reputable players, by highlighting the apparent inevitability of default under the current support package, are playing in to the hands of the magic bullet merchants and those who wish to prevent any and all structural economic reforms. However much the former may seek to qualify their comments by confirming the need for these reforms, only the message “Doomed, doomed, we’re all doomed” seems to penetrate. “Irish Finance Ministry Says Debt Restructuring Report Outlandish May 8 (Bloomberg) — An Irish Finance Ministry spokesman said a report that Ireland may restructure its debts is “completely outlandish.”” JTO again: So the Irish Mail on Sunday story was a hoax. The Der Spiegel story on Friday about Greece was a hoax. Lots of people, no doubt the majority on a site such as this, will claim that, in any clash of opinion between politicians and journalists, it is likely to be the politicians that are lying. However, I reckon that it is far more likely to be the journalists that are lying. The politicians are subject to extreme scrutiny. The journalists are not. Financial journalism is probably the activity most prone to corruption in the world today. By publishing a story at an opportune moment in time and working in collaboration with his buddies in the investment markets, a financial journalist can enrich himself beyond his wildest dreams. The bank accounts of all financial journalists should me made available to the public, along with information on whether they made a profit on the stories they publish. I’ll wager quite a few financial journalists made a killing on that story about Greece on Friday night. @ All by the by… *ECB FINANCING TO PORTUGUESE BANKS WAS EU48.009 BLN IN APRIL thats from 39bn in March, and comes after a good stabilisation seen in the last few months. Unlikely to be getting any better in recent weeks – could we be about to see a Portuguese bank run? Also, anyone know where he’s going at on #2 there… *IRELAND’S KENNY SAYS `FULLY CONFIDENT’ OF BAILOUT RATE CUT *KENNY SAYS MAY BE POSSIBLE TO IMPROVE ACCOUNTABILITY OF ECB The fallout from Morgan’s nuke is unbelievable as are some of the popular notions it has radiated. One such popular notion is that if we stuffed the banks up the ECB’s fundament and removed our deficit the ECB/EU would be powerless to retaliate and our economic life would continue in splendid isolation. How utterly naive. Such a move would be a declaration of economic war and we would defo be seen as the aggressors. The retaliation? Economic and monetary sanctions by the EZ/EU, with unanimous backing. According to Morgan’s ludicrous proposal if we do not need to borrow from foreigners, then we can pursue a truly Sinn Fein economic policy. But how are we going to buy those Mercs, the oil, German sausages, French wine, etc. etc. if the EU/ECB has imposed economic/monetary sanctions on Ireland. There are very, very few economies who can fantasise about a Sinn Fein economic policy. Ireland is probably the worst so placed in the whole planet. B. EB: There is nothing more frightening for an advanced economy than the thought or sight of a bank run. Maybe you find it so. Some people are scared out of their wits by spiders. Personally, I thought the Japanese earthquake was pretty scary. If the thought of a bank run really scares you more than that, I’d say that’s a phobia, not a rational response. Like Edward, I’m old enough to remember the bank strike. It wasn’t scary at all. @Brian Of course – its merely a accounting entry. A goverment just asks a bank for a piece of paper – neither the exchequer nor the bank goes into the tax office to collect the money. The money is already there – at any given time there is a money stock. In a situation of static money supply the bond holders will at first slowly and then more rapidly aggregate all the money as the exponential interest function goes parabolic until the non bond holders have nothing. That is why the goverment is having difficulty taxing – although its a accounting entry the Irish have less and less money that can be taxed. The problem is that the Irish or at least a broad enough section of them have not much assets in Goverment money. Goverment money is the only thing that can expand now – in this monetory system the money stock must increase – if it does not the economic gears get meshed up into useless junk – that is what is happening to Ireland now -the ECB is trying to limit the amount of goverment money when credit money is dying. The ECB is trying to take us out. @ JtO the suggestion on Der Spiegel story is that its really the work of one faction of the German DoF who want to bring things to a head and not delay things until 2013. Basically they know Greece is in absolutely no way seriously considering leaving the Euro (despite McW’s latest musings), but they want to show what a truely doomsday scenario would look like and so maybe calm people down to the bad-but-not-end-of-the-world (in their view) debt restructuring possibility. @Mr. Bond Irish Times, May 9: “Minister criticises economist’s ‘prescription'” Mr Rabbitte also expressed the opinion that the debt should be rescheduled. […] He said “the foolish thing about that is there is now an immediate and present danger affecting three member states . . . If a system is deemed necessary from 2013 onwards, why can it not be accessed immediately?” Bloomberg, May 9: “Irish to Avoid ‘Doomsday,’ Honohan Says as Rescheduling Mooted” The country’s loans will be repaid in line with their terms and conditions, Eoin Dorgan, an Irish Finance Ministry spokesman, said yesterday in a phone interview after Rabbitte’s remarks. I put it to you that Rabbitte’s and Dorgan’s statement are at variance. Do you accept this? @ Kevin try telling that to the 70 year old guy selloptaping wads of cash to himself as reported recently. And that was as the result of a relatively invisible corporate/institutional bank run in the Autumn. Imagine every newspaper and TV show in the land showing the quese forming 24/7 at banks and ATM’s. Also, people get scared of earthquakes, but economies don’t really, just look at Japanese financial markets of late – remarkably stable. Bank runs are a pschological response to a loss of confidence. @ Eoin Bond We’ll have to agree to disagree on this one (I have a rebuttal for each of your points if anyone would like to hear them but this could go on forever). Your scenario has just as many assumptions as mine and I while I accept that it is a potential outcome, it is not a predestined one, and in my opinion it is not the likely one. Since the beginning of this crisis the people of Ireland were told at every step that Sate had no choice, when in actuality it did. It still has a choice, as summed up by Brendan Keenan in the Independent today: “It would be an interesting question to put to the vote. Would you prefer a 20pc cut in living standards now, with the possibility, but not the certainty, of recovery; or would you prefer something more gradual, with the possibility of “utter ruin” at the end of it?”. Maybe his 20% cut is too low or its two high, but I’ve yet to come across a modern economy that reverted to the stone age through bank failure, while the number of “lost decades” appears to be growing. http://www.independent.ie/opinion/columnists/brendan-keenan/brendan-keenan-government-will-put-off-dealing-with-apocalypse-2641038.html JTO again: “So the Irish Mail on Sunday story was a hoax. The Der Spiegel story on Friday about Greece was a hoax.” The meeting in Luxembourg was a hoax also? If it did take place, what did they talk about? The weather? 400+ comments! I knew we could do it. Eoin, I don’t see people stocking up on cash as a symptom of real fear. When they start buying firearms and forming militias, that’s fear. You story is full of holes. The BIS, the Bank of England and the Fed will continue to function even if the ECB throws a hissy-fit. @Brian Wodds II The fallout from Morgan’s nuke is unbelievable as are some of the popular notions it has radiated. One such popular notion is that if we stuffed the banks up the ECB’s fundament and removed our deficit the ECB/EU would be powerless to retaliate and our economic life would continue in splendid isolation. JTO again; You are a bit too northern-logical for this site. Meantime, up north, the outgoing government has just been triumphantly re-elected, with the nutters being routed, an outcome which must be causing another Dublin 4 academic, Dr Conor Cruise O’Brien, the Morgan Kelly of his day in relation to the peace process, to be rotating in his grave. I never thought back in 1972 that one day northerners would be able to be boast about the relative sanity of the political debates they were having, in comparison with the madhouse that political debate south of the artificial border has become, with this site being a prime example. I suggest the immediate abolition of partition, with the capital being moved to Belfast as the best way forward. @Paul Hunt “I know things seem to move at a snail’s pace, but I’m sure you realise that that’s how the EU operates.” This is a serious problem, though. Not only for us, but for the EU as a whole. Indeed, just because the EU operates as a snail’s pace, it doesn’t mean that we have to. @ Kevin “The BIS, the Bank of England and the Fed will continue to function even if the ECB throws a hissy-fit.” Eh, are any of the first three offering to help us?? If they are, then we have options, but until then we are stuck with the what the ECB is willing to offer us and let us do. Eoin, You’re shifting your ground. Your scare-story involved a freezing-up of all settlement mechanisms: “a full freeze on any Irish banking systems payments in or out of the country.” That’s not simply a refusal of aid — you were talking about severe economic sanctions. That’s just scare-mongering. The ECB simply doesn’t have that kind of power. I don’t understand the basis of the Geithner intervention. From where does he derive his authority to veto a European proposal? Are we to understand that our own MOA with the Troika is subject to U.S. veto? @Bond Eoin Bond Its more then psychological – people may not understand the mechanics but its a gut feeling. The Goverment should be preparing to seperate the utility / checking accounts from term deposits and hopefully using those deposits as I have suggested. My conspiratorial little mind tells me the authorties have used NAMA to help create the fiction of deposits backing real assets when in fact they are but a illusion. The authorties has used peoples fears of negative equity in their homes against them – sustaining the illusion of wealth so that the core banks can get a few more years of recapitalisation on their books. It really is quite a spectacle http://www.youtube.com/watch?v=WxW6t8-1UA8 @The Dork Not clear to me how your clarification relates to my suggestion for a temporary super tax and salary limits. Looking back to look forward, here is Karl Whelan talking about the budgetry adjustment for 2011 in relation to the deficit. http://www.irisheconomy.ie/index.php/2010/10/22/sticking-to-2011-deficit-goal-of-10-requires-e7-billion-adjustment/ The target suggested at the time was a 7bn adjustment to get the defecit down to 10 % of GDP. “Hitting the 10% target will probably require about €7 billion in adjustment.” The Department of Finance talked about a 6bn adjustment, and contained this paragraph on the impact of the adjustment. “Imports are projected to increase in line with final demand so that in overall terms, real GDP is projected to increase by 1¾% next year (GNP by 1%). This takes account of budgetary adjustments amounting to €6 billion, which are estimated to reduce the rate of growth by somewhere in the region of 1½ – 2 percentage points. Nominal GDP is set to grow by 2.5% in 2011, implying a GDP price deflator of ¾%.” http://www.irishtimes.com/focus/2010/budgetary-outlook/index.pdf From memory the actual adjustment was more like 5.6bn. So to people more knowledgable than me, is there any way of telling yet what impact this is actually having, on GDP and/or the deficit? I note that already the new MoU suggests that as things are not working out as expected we’re already looking at 5bn this year, rather than the 3 and a bit originally projected. It might throw some light on whether cutting is actually working to close the defecit, and what the impact attempting to close the gap in one year might even look like. Timo Soini has written an opinion piece: http://online.wsj.com/article/SB10001424052748703864204576310851503980120.html @Gavin Didn’t an IMF staffer publish a review late last year of about 300 national busts and found that deflation worked in only a handful of cases (including Ireland in the eighties)? @Brian It will not make any difference – the money supply will still fall in Ireland – Its better to vector term deposits into Goverment debt so that the vultures will have less of our money to play with. Remember the deposits have been socialised already – so whats the big Deal ? @BWII I can confirm that I absolutely am not Tony Foley :-). It is basically common sense, we do have to close the deficit to zero, the choice is the pace of implementing the measures. @JtO If you think that Greece will not be restructuring sovereign debt sometime in the next few years then I think that is one forecast you are going to get very wrong. And the same will probably apply to a lesser extent for Portugal and Ireland. @Gavin Kostic The effect on GDP and GNP in 2011 is not known yet, as GDP/GNP figures have not been published yet for even 2011 Q1. In 2010 Q4, GDP growth came out below the budget prediction, but GNP growth came out well above the budget prediction. For 2011, all we know regarding the budget deficit is that (from figures published last week), in the first four months of 2011 (January to April), tax revenues were 1% above the December 2010 budget forecast, while government spending was around 2% below the December 2010 budget forecast. @ JTO “Lots of people, no doubt the majority on a site such as this, will claim that, in any clash of opinion between politicians and journalists, it is likely to be the politicians that are lying. However, I reckon that it is far more likely to be the journalists that are lying. The politicians are subject to extreme scrutiny. The journalists are not.” Exhibit A (from link below): For Jean-Claude Juncker, the prime minister of Luxembourg, the threat of immediate market turbulence means the usual norms of transparency don’t apply. “When it becomes serious, you have to lie,” Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union’s key spokesmen, said in recent remarks. Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country’s economy by driving up borrowing costs. “If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this,” Juncker said. http://ca.finance.yahoo.com/news/Market-jitters-bring-capress-2621033042.html?x=0 Of course, Gabriele Steinhauser from the Associated press might be a liar too… @ Kevin O Rourke “I had heard the Geithner story a few months ago, from a trustworthy source.” Why was this not reported in the Irish media before now? This is the kind of stuff that leads people to have conspiracy theories about the media and the way it operates. So Tim Guitner laboured the Irish state with 20 billion in a G7 meeting. Talk about the lap of the Gods! @Anonym “I put it to you that Rabbitte’s and Dorgan’s statement are at variance. Do you accept this?” O course they are at variance. The Governor hinted that the debt level may be unsustainable if we don’t meet growth targets. With all the downward revisions he may as well have agreed with Pat Rabbit that we will need restructuring. But I agree with Eoin Bond that chaos in our banking system is not the way- at least the zombie pillars are functioning. As regards the constitutionality of the bank guarantee – can anyone see a full Supreme Court panel holding that the guarantee was unconstitutional? The exigencies of the common good will always trump constitutionally mandated private property rights. Turkeys don’t vote for christmas. Judges don’t vote for chaos. @Paul Hunt “What I find disturbing is that some reputable players, by highlighting the apparent inevitability of default under the current support package, are playing in to the hands of the magic bullet merchants and those who wish to prevent any and all structural economic reforms. However much the former may seek to qualify their comments by confirming the need for these reforms, only the message “Doomed, doomed, we’re all doomed” seems to penetrate.” I think you might be missing a trick here. Morgan K’s article does something in clear, simple – understandable to the average voter – terms that that was avoided and danced around in the mainstream media previously. He explicitly links the idea of imposing capitalism on senior bank creditors instead of having the taxpayer provide welfare assistance for all of them for 100%, with the fact that there is and was no possibility of doing so without the state being in a position to demonstrate – through public backing for plans for a balanced budget, or the reality of it – that is not prepared to be simply told what to do. A couple of months ago Morgan Kelly would have been denounced as “economically illiterate” even on a reasonably free-thinking forum such as this, for making that point, because at that point some Irish academics were still providing cover for politicians selling the line that – as you rightly point out – nothing much need be disturbed too much, we could pretend the Croke Park Agreement non-application clause had not been activated by an “unforeseen budgetary deterioration” and that all that was required was to moan about the Germans being bad sports and threaten the EZ cor electorates with an out of context Krugman editorial. The public have been “mis-sold” political economy up until now. Morgan Kelly’s article and the public interest in it now means there is a much greater chance of the Irish debate getting real about the state’s economic and political options – rather than simply waiting for economic reality to bite the entire nation in the bum. People need to understand how the shadow bank sector obtains a surplus . They can produce money at will but require indeed need that we pay interest on private debt as they cannot produce this. The primary mechanism to do this is to inflate unproductive assets and extract a rent or interest off this. This deindustrilisation / debt strategy keeps us in our little box. They essentially use peoples greed as a weapon against us all The way to fight these bastards is not to cut our money supply which will merely transfer more wealth to the banks , but to destroy the value of assets that they require to get a yield. Houses are essentially worthless as they do not produce anything – lets learn to accept this and stuff the losses in their faces. If we do not do this they will have repositioned to a new strategy of obtaining all of the money and thus getting all of the interest on our money @jesper, Thank you for the link to Timo Soini’s op-ed piece. It would be great if it were the subject of a post kicking off a new thread. To borrow (and misuse) phrase from MK, we are at risk of disappearing up our own fundament here. @grumpy, I hear and heed your admonition. Jesper’s link to Timo Soini’s piece dovetails with the essence you’ve extracted from MK’s piece. This is the new voice of Europe saying citizens have had enough of this socialisation of the losses of private entities. It may be a tad naive in its failure to recognise the effort that will be required to tame the beast of global financial capitalism, but it is striking a chord with an increasing number of voters throughout the EU. Greetings, @ Brian Woods II Methinks Dreaded-Estate was on Morning Ireland. Tony Foley argued that since we have to close the deficit anyway, better doing it now. That is a line pretty unique to D_E in this blog. Or maybe Tony Foley’s reading this thread!! (Hopefully not for ideas…) @ All At risk of sounding Pythonesque… Apart from restructuring the debt repayments/rates, tax reform to increase revenue, withdrawing cover for levels of bondholders, addressing public sector pay, etc… Is there a case for Ireland – and, perhaps, the other PIGS – switching to a “soft” Euro: returning to (a new version of) their old currencies (the Punt, in Ireland’s case) to allow more elbow room (devaluing, etc) to deal with the economic issues? This woud not mean totally withdrawing from the EZ, like those countries which haven’t joined, just the currency aspect of membership. I realize that there’d be administrative costs, etc, but would it be worth it? Kindest regards, James I like Prof. Honohan. I trust his judgment and value the way he insists on a genuinely independent role for the CB. However, Kelly is not wrong to draw attention to how disastrous those original stress tests were in colouring subsequent decisionmaking. Nevertheless, I do not believe that we could have walked away from the guarantee just because it was a mistake. It is the law of the land and involved the State in private law contracts between borrowers and their creditors. How we could extricate ourselves from this without declaring the State bankrupt is not remotely clear to me. Ger, You are falling for the spin that there was a guarantee in 2008 that is still in place. It was a Guarantee until Sept 2010 more or less and it stopped of its own accord. Term deposits taken out at the right time remained covered until the end of their term though – so it isn’t straightforward. MK tries to point out that the decision to issue another shiny new guarantee to kick the banking can, expensively, down the road, was made on the assumption (via the joke stress tests, transparently so for some of us who are not at the Central bank) that the banks were not completely insolvent. Bank resolution should have been prepared instead of pretending there would not be a bank run when the original guarantee ran out. @ irishmuffin/ Eamonn Moran On Geithner, the US is the biggest contributor to the IMF and the money approving unit of the US Congress is controlled by the Republicans. Geithner was aware of criticism six months before of the US contribution for the Greek bailout. Caution is required in taking a recycled leak as gospel; it’s interesting that the ‘facts’ of Trichet’s Sept 2008 telecon with Lenihan have yet to move beyond spin. If we accept that a central tenet of Kelly’s piece – the size of the eventual Government debt – was factually wrong (as he double-counted €35 bn for bank recapitalisations and then threw in the whole of NAMA’s debt for good measure), surely this completely undermines his case that the projected future debt level is unmanageable? The fiscal deficit can be closed easily enough within the 4 years projected in the troika plan (and of course could be done more quickly, although not ‘immediately’ as Kelly claims). So what are we left with that is unmanageable? Further bank losses? My recollection is that the markets largely believed in the last stress test. Let’s not assume that because Greece is in deep deep trouble, we have to follow them. @ grumpy I’m sure you noticed that none of MK’s colleagues came forward to support a realistic fiscal plan even though 1 year to close the budget gap appears too draconian. Seeing that he says he is 50% overpaid, he should draft a fiscal plan and pass it around to his academic colleagues to sign on in support. Only very slightly flippantly, I think possibly Hugh Hendry is principally to blame for left leaning politicians lining up so determinedly to raid their tax base to prevent capitalism from imposing losses on private investors. They hate Hugh and people like him. They know people like Hugh are likely to be long peripheral bank CDS contracts. Hugh wound them up too much and they will do almost anything to make sure he doesn’t make a profit. The capitalists at the banks are much more clubbable and many went to school with said politicians. End of. The unacceptable face of capitalism is the impolite one that you wouldn’t inmvite to a dinner party. Hugh, for anyone that isn’t familiar is what Greek Ministers think of as a profiteer. “Labour Minister Louka Katseli, an economist and former OECD official, joined the fray on Sunday in statements to Eleftherotypia daily, favouring a repayment extension over a debt haircut. A ‘haircut’ is a form of restructuring that entails losses for debt holders. “Any logical person would agree…with a possible payment extension or a reduction in the cost of borrowing,” Katseli said. “But a haircut or debt default would only help profiteers,” she said, noting that Greece’s ailing state security funds have invested 75 percent of their property in Greek bonds. The government has denied any possibility of seeking easier repayment terms on its debt, except the 110-billion-euro loan from the EU and IMF on which it has already secured an repayment extension” @Gavin Found a reference to the IMF paper: “SLASHING GOVERNMENT spending to reduce debt burdens will have unusually damaging effects on growth because of the weak global economy, according to International Monetary Fund research.” http://www.irishtimes.com/newspaper/finance/2010/1001/1224280079771.html “The report suggests a reduction of 1 per cent of gross domestic product in the fiscal deficit will reduce GDP growth by 0.5 per cent and increase unemployment by 0.33 per cent within two years.” @ Brian Flanagan “Tax does not fund the budget.” ??? It doesn’t. Or so say the proponents of Modern Monetary Theory. It all begins with what money is. The explanation has to do witth power and social obligation. It is convincing, but highly technical and complex.. I don’t know if I’d recommend the Dork as a tutor though. He is from the Rebel County and likes to speak in riddles. If our are curious about MMT, there’s a nice intro recently posted on Steve Randy Waldman’s terrific ‘Interfluidity’ blog. @Paul “highly technical and complex….. speak in riddles”. No wonder I didn’t understand a word – IANAE. Wow : 440 posts or so and no mention of Nazi… have we disproved Godwin’s Law? @ Ninap, Good post. (Where were you 500 posts ago?) @Grumpy “Any logical person would agree…with a possible payment extension or a reduction in the cost of borrowing,” Katseli said.” Both would seem to be default events. Doubt if the bondholders would see the logic. According to reports they cannot meet next years maturities of 22b. and want to borrow it from the current fund so it seems they are merely postponing the evil day. Why all the fuss on Friday? As someone of Irish-spaniard background, with some financial and engineering experience in Spain and in Netherlands, a few issues strike me. First, I think we must lance the boil of incipient rebellion. Realistically there is only one way forward, and that is unity. Second, the oldfashioned meaning of “catholic” was universal and inclusive and we must cleave to this in Europe. there is no point in torturing ourselves on the rack of austerity when we know that we cannot confess! test As Indicated earlier, I believe that 1. Ireland needs a referendum on private banking debts 2. A debt audit to reject odious debts that are forcefully imposed on the people of this nation by the neo liberal dictate (Ecuador) This is a encouraging start: http://www.debtireland.org/ http://www.cadtm.org/Can-Europe-escape-the-debt-trap @Paul Hunt Right on cue, as if to illustrate the point about political leadership, Leo Varadkar speaks. In his view being a contrarian like Morgan K who got things basically right means that you get the courtesy of being listened to before your suggestions are labelled “absolutely ridiculous, in my view”. The man who promised “not another red cent” would go into the banks until there was a meaningful renegotiation of the EU / IMF bailout makes straight for the populist low-ground. Getting them to genuinely stop and think, instead of carrying on in autospin, requires more argumentative, thought-provoking contributions in my view, not less. Greetings, I’ll take the silence as a collective withering look. *sits down, red-faced* Kindest regards, James @Grumpy “more argumentative, thought-provoking contributions in my view, not less.” I don’t think this would work as they are too set in their thinking – we need a referendum (which we won’t get) and/or pots & pans protest (which could happen, eventually) as an expansion of the Ballyhea bondholder bailout protest http://www.facebook.com/pages/Ballyhea-bondholder-bailout-protest/162154057174719 @ Paul, “Or so say the proponents of Modern Monetary Theory. It all begins with what money is. The explanation has to do with power and social obligation. It is convincing, …”: Oh dear, I’d call it stupefying nonsense. Anyway, given the stress the G7 of old is in, I would definitely say, as I already did in another thread, a return to first principles is in order and that academia now does not know its head from its posterior. But perhaps like governments, reform must be preceded by outright collapse. Geithner is throwing more of his weight around. http://www.reuters.com/article/2011/04/18/greece-debt-restructuring-idUSLDE73H0DR20110418 Oh, it appears to be fixed, two posts of mine blocked yesterday. I’ve blogged here on the points I was trying to get across re Honahans piece on RTE. Re bailout and walking away from the guarantee: http://colmbrazel.wordpress.com/2011/05/09/irish-swan-song/ “The matter should have been referred to our Supreme Court by Honahan, by Lenihan/Cowen, by President McAleese. We got no information, no White Paper to educate the Irish people prior to a referendum? Citizens were not given the chance in this undemocratic, plutocratic kleptocracy of ours.” On the question of double counting raised by ninap above, I side with MK and don’t believe he’s double counting, I believe Honan is under counting, with the usual silly arithmetic, and I don’t believe the results of the recent stress tests are as reliable as they are claimed to be. Look em up, there is little analysis on CDS positions for example. They are predicated, for example, on a property market presently balloned in place by NAMA ‘no firesales’ Re NAMA, its professional of MK to regard taxpayers on the hook for the whole of the NAMA bonds given their damage to the Irish banks and economy, but that’s another matter. My main point is to ask under FOI, or otherwise, let the evidence be produced for his case against reneging on the guarantee, allegedly under legal advice to the Government. Let’s see that advice. My contention is given the shenanigans emanating from Anglo, the case of a monumental fraud perpetrated against the Irish people, is more likely to have success, than a denial by the courts of our right to walk away from false guarantees made illegally under false pretences, on our behalf. To suggest otherwise, by Honahan, is at best irresponsibly mistaken, at worst, a downright lie. The guarantee and bailout are both clearly in breach of Article 17.2 of the constitution: “Article 17.2 it states: “Dail Eireann shall not pass any vote or resolution, and no law shall be enacted, for the appropriation of revenue or other public moneys unless the purpose of the appropriation shall have been recommended to Dail Eireann by a message from the Government signed by the Taoiseach.”” Clearly, the facts in support of the guarantee were neither laid before the government at the time of the guarantee, nor laid before the Dail at this time. We still havn’t got those facts given missing documents and disappearing logs. Judging from Lenihan’s intervention recently re the ECB shafting him, Honahan needs to be challenged on the legality of his actions under 17.2, as well as their correctness. what is about irelands main stream polictical party’s that they can’t countance the fact that if conventional wisdom gets it wrong ,we need to be looking at all our options , i am not suggesting that we have a silver bullet but for far too long we have been fed the same bull s**t that we can’t unilaterly burn bond holders why have we not been making alliance with other countries such Greece and Portugal ,Spain work together in the same way that Germany and France have been working together useing all thier influance with ECB and EU instutions against our country in protecting thier banks @Morgan Kelly “Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion.” “On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds.” “In the circumstances, the ECB walked away with everything it wanted.” Kelly’s story is basically that the ECB, according to him duty bound to provide last-resort liquidity to Irish banks, reneged on this duty, conspired with bond holders and blackmailed Ireland to bail out European banks. A nice narrative, but grossly misleading. The ECB had and has no duty to provide emergency liquidity to Irish banks. Provision of emergency liquidity is not an ECB task. Emergency liquidity is a task for the national central bank, in this case the CBI. ECB provision of liquidity to Irish banks was not emergency liquidity but took place under the umbrella of monetary policy operations, the rules of which are described in ECB’s General Documentation (http://www.ecb.europa.eu/pub/pdf/other/gendoc2011en.pdf?29c2d8627c557654d3cabc5d5a30c6a6). The only (admittedly fairly valuable) card the ECB had in the negotiations on Ireland was the access of Irish banks to its monetary operations. The General Documentation (GD) describes the general eligibility criteria for access to ECB monetary operations (p. 15). Second condition reads “Counterparties must be financially sound.” Now, one could debate when was the last time any Irish bank was financially sound. But suppose the banks would have gone on and defaulted on their senior bonds. Would there be any way to argue that a “financially sound” institution would default on its bonds? Of course not, and obviously the ECB would have had to stop its lending to a defaulting bank. So, to maintain Irish banks’ access to ECB monetary policy operations, the Irish government had to recapitalize and keep them solvent. The other, less attractive, alternative was to burn the bondholders and do without ECB liquidity. The fact that these two consequences were connected was not due to the ECB conspiring with bankers, but due to the ECB simply trying to apply the rulebook that was written years before the Irish crisis to protect the institution from financial risk and political pressure. A second reason for the ECB grow concerned about its lending to Ireland relates to the collateral provided by Irish banks. Irish banks’ pledgeable assets consist mainly of securitized loans, Irish government bonds, NAMA bonds and other Irish state-guaranteed securities. For risk-management purposes, the ECB GD excludes collateral which has “close link” to the counterparty bank: “Irrespective of the fact that a marketable or non-marketable asset fulfils all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links” (p. 53). The “close link” concept was originally put there to exclude banks using securities issued by their subsidiaries, parent company, or otherwise closely connected entities, but at this point, it fully applies to the relation between the Irish state and the Irish banks. If one defaults, the other one will follow. Hence the protection provided by Irish state guarantee on an Irish bank liability is highly questionable. All in all, by providing liquidity to troubled Irish banks against questionable collateral, the ECB has stretched its rules to an extraordinary extent. It clearly does not consider keeping entire banking sectors (entire countries) afloat as part of its mandate, but it has done it, since there has been little alternative. The hostility it gets in return does not strike me as deserved. @James Burke I’ve floated the idea of domestic currencies a few times, but nobody has bitten either – the state makes all its payments in scrip to electronic accounts that can be used to purchase goods and services domestically. The scrip floats against the euro. @James B Didn’t read it fully, have now. No withering look should be forthcoming from the thoughtful. John McH raised the question of liquidity for compensation of bank deposits with limited ECB cooperation on another thread last week. The Irish CB exists and if very confrontational circumstances it can do things should it be minded to. Your point is no too dissimilar and is worthy of a thread of its own. You should bear in mind that the difference between a bond or IOU and money is that money can be used to pay for goods and services. California has a history of this. Should there be a conclusion that Morgan K is 50% or so overpaid bearing in mind he works for a more or less bankrupt state and should such employees be unwilling or unable to take a pay cut to assist with the state’s international negotiating position, then He might be willing to or encouraged to take part of his salary in the form of Irish sovereign IOUs which are, through legislation, legal tender within the country for certain goods and services. This is a de facto parallel currency. Ireos alongside Euros. @ JtO and Brian Flanagan Thanks for the replies. @Anonymous, I presume you are a new voice here and, if so, one that is very welcome to counteract the mountains of claptrap. The ECB was always going to be caught in the ‘damned if it did, damned it it didn’t’ trap. The implications of allowing the entire domestic banking system of a Euro member- even a small one – to go down the pan were, and are, impossible to assess with any precision. Being the only EU institution with sufficient capability and legal empowerment it has stretched both to the limits. Having gotten the donkey to the top of the minaret it should not be getting support, rather than brickbats, to compel the negligent politcians and policy-makers to put in the heavy-lifting that will get the donkey back down. @ Philip II I had typed a post which pointed out that Governor Honohan in his RTE radio inerview had said that the bailout might not yet be the final solution, but that a final solution was coming. I thought it an unfortunate phrase, and I didn’t mention it, but Godwin’s law is calling. Greetings, @ hoganmahew I seem to remember your doing so. My main reason for doing so was to enable a “better” deal from the IMF – at, I trust, a lower overall rate of interest than at present. [Granted, a debt restructuring within the current agreement would be preferred – ie, by reducing the rate by 1% to be in keeping with the Greek’s bailout rate, as is being proposed.] However, as I intimated earlier, I didn’t agree with the unseemly rush to implement the EZ in the first place, where European economies of varying shapes and sizes (in terms of economic fitness) made a mad dash to reach the “finishing line” of 2000. It seems to me that admitting this error would be the wiser thing to do and go back to what they should have done – implement a “soft” Euro first, and only when economies were best placed to do so, a given country would then switch to a “hard” Euro, if desired. As it is, some – like Germany – may be able to retain the Euro, others – like Ireland – may not. Needless to say, this is just my dilettante opinion. PS – I see that Professor Kelly has taken a pounding in today’s media: the Independent, in particular. Although George Garvey (page 17) does point out that Prof. Kelly’s articles assume Ireland’s “membership of the Euro as fixed and non-negotiable”. Hence, another reason for my question: how would switching to a “soft” Euro affect our ability to get ourselves out of this mess? Kindest regards, James Greetings, @ grumpy Thank you for the kind words. You’ve added some background details which also make sense. Kindest regards, James @Anonymous, ECB provision of liquidity to Irish banks was not emergency liquidity but took place under the umbrella of monetary policy operations…..oh really, so nobody else would lend to us, but this doesn’t mean they provided ’emergency funding’ No time to go through the various points you make accept to say they come down to 3 points of interpretation; 1) they were saving their own ass; 2) they were saving our ass; 3) they were saving both our asses. As I’ve given my reasons for supporting 1) elsewhere, I won’t boringly repeat them here. I do believe the points you make evidence a case of Stock:-)Holm syndrome. I’ve said this before: “The German Ein Danaergeschenk is a “fatal gift” that brings misfortune or causes problems. For some reason, English doesn’t normally speak of a “Greek gift” and German doesn’t warn against “Greeks bearing gifts.” The main evidence against 2) and 3) is our pleasant present peasant cruise along to default… @Fernando Alba You are the only one writing sense here as the Bull from Kelly is like one in a China Shop – destructive of ourselves from navel gazing. The best Way Forward is for all here to take a month out and walk the Camino de Santiago for as the boys in Cork say “way ahead ya boy………” You will then see the crap and spin here. @James Burke I’m looking at it a little differently – how would a domestic currency encourage domestic demand growth without leading to unsustainable imports (unsustainable from the point of view that the economy needs to keep more of its export income here to offset debt and interest repayments). It greatly simplifies expenditure adjustments in some ways. If government payments are in scrip, and that scrip is floating and adjusts downwards to the euro, there is an effective reduction in payments. No doubt there are problems with this, but aside from the incredible fuss it would cause, I can’t see them. @ Michael Hennigan “Caution is required in taking a recycled leak as gospel” I know but you would think that MK would have to be fairly positive he could back it up. Surely the IT would have needed proof before allowing him do it? Also it does fit in with my own conspiracy theory that much of the Bank Bondholders are in fact US MNC’s. There is a lot more to reveal here if the story is true. The US having veto on European matters seems Bizarre unless significant us interests were involved. But the story itself is so preposterous that you feel like it must be at least be partially accurate. You couldn’t make it up! @Anonymous This isn’t the first time the ECB or EU has bent or broken rules and so it shouldn’t be called upon now for retribution. Take a look at the Maastricht criteria when countries were first considered for the EMU – based on… Price stability Fiscal Prudence Successful EMF membership and Interest rate convergence The EU bent a lot of these rules to allow countries in on an expectation that they were ‘developed’ enough and could keep up with the pace. Well guess what…some weren’t up to it. because they bent the rules for us doesn’t make them Samaritans – it might just highlight a slightly thin policy proposal on their part for dealing with a crisis! @ Colm Brazil Perhaps a white elephant. Ireland has been presented with a fabulous gift it cannot afford to keep. @Anonymous There is always a alternative. Why does money have to be linked to fictitious bank balance sheets ? You seem to forget the role of a CBs has always been to bail out banks and not the physical economy. I must say both yourself and Paul Hunts faith in the ECB is touching. Banks have no role if they do not provide credit. Brinks could preform the private deposit function role of Irish banks now with less cost and risk and some private banklink operator could service checking accounts for a small fee. My post office can hold my long term deposits I will say it again – the situation is a bloody farce and if the executive was a real executive here they would be striving to make it offical. @ hoganmahew, etc If I understand the discussion, the idea would be to put time and location limits on it. I grew up in the North of England, and some large factories in small villages used to pay wages in what you`re calling scrip to be used locally. The Geithner story is plausible. He saw, at first hand, the damage that could be done to and by the huge layer of, largely useless, financialisation that the global banking and shadow banking system has spawned when a bank, Lehman Bros, that didn’t at first sight sight seem hugely significant in the overall scheme of things, was allowed to go under. And remember that the US had exported some of its more dodgy financialisation activities (outlawed by the post-Enron Sarbanes-Oxley Axt) to London – with significant infection of the EZ banking system. Nobody wanted a European version of Lehman Bros as the whole global financial system could have seized up again. If lil ole Ireland’s entire domestic banking system was effectively insolvent, then tough. The Irish taxpayer would be on the hook and the EB sticking plaster would be applied – as it wouldn’t be allowed to go under. Greetings, @ hoganmahew I see we have a slightly different perspective of the same issue. One of my reasons for suggesting a “Punt Nua” is that it would be implemented with the devaluation incorporated into it – much as the original Punt dropped off the value of Sterling on its implementation. The weaker Irish currency would help boost exports – which is the only current good news in our economic situation, and is what most seem to be hoping will continue to improve: to export our way out of the mess. I note that a report today indicates that Germany’s export figure has hit a new record. http://www.bbc.co.uk/news/business-13330882 It would be nice to emulate that – and a weaker home currency would help. Kindest regards, James @ Gavin Kostick Another analogy from my youth is Disney Dollars – freely exchangeable for goods and services within the realms of Disneyworld, but only good for a souvenir outside of those walls. 🙂 Want to critique Morgan Kelly’s article without having to go to the bother of reading it? Have no fear Joe.ie is here. http://www.joe.ie/news-politics/current-affairs/morgan-kellys-article-the-digested-read-0012058-1 You just haven’t made it till Joe does a tabloid version of your opinions! @Colm Brazel “..oh really, so nobody else would lend to us, but this doesn’t mean they provided ‘emergency funding’” Thanks for the sarcasm. “Emergency liquidity assistance” (ELA) is actually a quite well-established concept. It is liquidity for illiquid but solvent financial institutions. Just google around. The classic reference is Bagehot’s “Lombard Street” from a century and a half ago. But, in a way, and without meaning it, you point to an important fact. By its rules, the ECB is not supposed to do ELA. But, as it happened, little by little it was drawn to do things that looked more and more like ELA to Irish banks. Obviously, it did not like it. When it finally got enough, pointed out to the Irish government that all this was really not within its mandate and that it would very much like to get out of Ireland, the crowd started to shout “blackmailing!” and “hostage taker!” You also make a factual error. It wasn’t true that nobody else (but ECB) would lend to the Irish banks. The Central bank of Ireland did and does, on its own account, provide ELA to Irish banks. In short, the division of labor is this: 1. The ECB lends to liquid and solvent banks (monetary liquidity). 2. The national central banks lend to illiquid but solvent banks (ELA). 3. National governments deal with illiquid and insolvent banks (bank resolution). The limits to the ECB’s authority are there for a good reason. Common monetary policy is potentially a fantastically powerful vehicle of fiscal transfers between countries. But the drafters of the Treaty specifically did not want fiscal transfers (hence the no bail-out clause etc). Thus the ECB was structured so that it is only mandated to do (virtually) riskless operations, not bailouts or other fiscally costly operations- “they were saving their own ass” But of course they were! At least trying to. What would you expect? The ECB is an institution with a clear and narrow mandate and no political authority to improvise. For the governing body of such an institution, going outside of its mandate may carry legal consequences. Obviously, they would very much like to go back to their normal business and make Ireland someone else’s problem. So far, they have not done that, because everyone else tells them they must stay in Ireland. I don’t understand the “leaving the Euro” argument. How does it work? Our debts would still be in the Euro – wouldn’t they? So we’d have to pay them back. How do you remove the Euro from circulation? These aren’t objections to the idea – just questions regarding its practicality. There is an increasing school of thought in Germany that seems to think that this is a good option (though I note they make no mention of how to repay the debts). http://www.spiegel.de/international/europe/0,1518,761435,00.html (Also sceptical about this article and think it’s really just there as a scare tactic but…) How can there be so many conflicting views on this? Would it be very much different to the time we left Sterling after gaining independence? To digress a little from our problems…it looks like poor old Greece is really losing the plot- “Meanwhile, Greece attacked the rating agency for hitting its sovereign debt with a two-notch downgrade today, saying the agency’s ‘reliability’ was in doubt. ‘Their reliability is placed in doubt,’ the Greek finance ministry said, arguing that there had been no deterioration in the country’s economic figures since the agency’s last evaluation in March. ‘Decisions by ratings agencies must be based on evidence,’ the ministry said of the move which came a day before Athens intends to issue a batch of six-month treasury bills worth €1.25 billion. @Eureka “(Also sceptical about this article and think it’s really just there as a scare tactic but…)”. If according to the article “a Greek departure from the euro zone would be catastrophic for the common currency and for Greece itself” why are the EU and ECB not doing more to ensure that this doesn’t happen? Surely, kicking the can (further) down the road or punishing is not a valid strategy. DMcW had some thoughts in the SBP as to how “leaving the euro” might work at http://www.sbpost.ie/commentandanalysis/greeks-turn-tragedy-into-a-drachma-56157.html @James Burke “One of my reasons for suggesting a “Punt Nua” is that it would be implemented with the devaluation incorporated into it – much as the original Punt dropped off the value of Sterling on its implementation.” I don’t think you can credibly do that – you can’t turn around immediately to, for example, a university lecturer and say “you know your salary that was worth 40k euro, well, now it is worth 30k euro, but in 40k punt nua. I think you have to start from the position that they are equal in value and let demand do the lifting (or dropping…) for you. Greetings, @ Eureka I think the question of how to remove the Euro from circulation – in my view – would be no different than the same question asked about the Punt at the time it was replaced by the Euro. With a “Punt Nua” in circulation, with a de facto devaluation incorporated, this would enable two things: 1) a boost to exports; 2) a IMF loan (which generally requires devaluation as part of its arrangement) at better rates. With a more favourable loan, we could, effectively, hand back (part of) the ECB’s portion. [I realize that this may be more easily said than done – but if possible, it would also free us up to haircut the (junior) bondholders, if not more.] We’d still have to address public sector spending as part of an IMF loan agreement – but that’s on the cards sometime anyway. Progressive tax reform would also help, as the “rich and shameless” aren’t exactly carrying their fair share, either. And a more visionary energy policy – as I suggested earlier – would help domestic consumer spending as well as technological innovation. Kindest regards, James This thread reads like a thriller and has me as scared as hell! However, it is good to read the diverse opinions re MK’s bombshell article. Am hooked but need a break and a shower but am compelled to return again later. Thank you all. James Greetings, @ hoganmahew Perhaps not “incorporated”, as such – but it’s a given that value of the “Punt Nua” would drop-off the pace of the GBP, Euro and Dollar – thus improving exports to all those markets. Kindest regards, James @Brian Flanagan DMcW had some thoughts in the SBP as to how “leaving the euro” might work at http://www.sbpost.ie/commentandanalysis/greeks-turn-tragedy-into-a-drachma-56157.html JTO again: McWilliams writes in this article: “The other way is when you do a deal and default. Obviously, this is what the Greeks will do this weekend.” So, did they do as McWilliams wrote was obvious they would do? I must have missed it, having been at Old Trafford most of yesterday. But, if they did, I’m surprised it isn’t making more headlines today. @James Burke I note that a report today indicates that Germany’s export figure has hit a new record. It would be nice to emulate that. JTO again: It is very likely that Ireland has allready emulated that. Exports in 2010 A4 were just 1% short of a new record. Based on the PMIs, it is very likely that they will grow by more than that in 2011 Q1 over 2010 Q4. @Eureka How can there be so many conflicting views on this? JTO again: A clue is to be found in another link within the link you gave. http://www.presseurop.eu/en/content/article/643581-easy-target-hoax-reports Excellent article, under the heading “Rumours that are borderline criminal” – it contains the following: “For several weeks, erroneous information about the Greek economy has been circulated to destabilise Athens. The latest hoax to date was Spiegel Online’s 6 May publication of a report about a secret Eurogroup meeting to discuss Greece’s exit from the euro. The question is: who stood to gain from the crime?” “A session held by The Institute of International Finance — which brings together banks, investors, monetary and financial institutions — was marked by major rumours. Their source, American economist Nouriel Roubini — the man that rose to fame when he successfully predicted the subprimes crisis who is also the President of RGE, an analysis firm that provides (expensive) advice to investors — was at pains to convince everyone that an imminent restructuring of Greek debt was on the way.” “Announcing that his information was based on a series of meetings with the Greek Finance Minister, he hinted that such a deal had already been the subject of secret discussions, even though the Minister in question Georges Papaconstantinou had only a few minutes earlier made a speech in which he insisted there was no question of restructuring.” “Roubini wants to orient the market: as he puts it, a bet on Greek default cannot fail to come in. And the fact is, if every one presumes this is the case, his forecast will become a reality… On the same day, Dow Jones Newswires cited anonymous sources that reproduced Roubini’s point of view in an piece entitled “Greece Proposes Repayment Extension Of Its Debt,” which added to the credibility of the American economist’s remarks. Then “the news” was picked up by the financial press.” “It took several days to calm the ensuing storm on the capital markets. On Friday 6 May, the same process began all over again when the website of the German weekly Der Spiegel “revealed” that a ”secret meeting” of Eurozone finance ministers was to take place on the same day in Luxembourg. On the agenda, discussions of “Greece’s request” to exit the euro. No sources were cited, but that did not prevent press agencies from taking up the story, or a subsequent slide in the euro.” “The finance ministers of Europe’s G20 members (Germany, France, Italy and Spain), along with Eurogroup President Jean-Claude Juncker and the President of the European Central Bank Jean-Claude Trichet, were meeting to discuss the Greek adjustment plan with Finance Minister Papaconstantinou — in other words, a routine crisis meeting. ”We did not discuss a Greek exit from the Eurozone, because we believe this option would be stupid,” explained Juncker. Greek Prime Minister, Georges Papandreou, later insisted that the rumours were “borderline criminal.” “But who stands to gain from the crime? Investors who are currently holding anti-Athens positions. Especially those who have bought Greek credit default swaps (CDS), who will lose their investment if default does not happen. Or those who are indebted in Greece or who have withdrawn money from the country, who have every interest in a return to the drachma. The rumour mill is set to keep on turning.” My Dear Eureka, the facts are that large numbers of people stand to lose a great deal of money if Greece, Ireland, Portugal etc do not exit the Euro, devalue and default. It is naive in the extreme to believe that they do not pay financial journalists and economists to write articles to advance their cause. If you came from north of the border, you would not be so shocked to learn this. @James Burke I don’t see any need to remove the euro from circulation. We should do what other soft currency countries do – the local currency for local goods and services with the euro for external goods and services. @Eureka, James, James You don’t have to remove the Euros. You use the parallel currency – “Ireos”, say – to simultaneously reduce costs in the economy and government payroll bills. It is a way of breaking the stalemate over the reduction of costs and salaries in the economy that would have happened automatically had the Punt been kept. Currently much of the private sector has “adjusted” sufficiently or been made redundant. Most of the public sector and the protected and connected private sector are using every trick in the book (delay principally) to try to make sure they are last in the queue. It is rational behaviour. If private sector employers can pay 100% of salaries in Euros because they have sufficient hard currency earnings then those employees – who may have had a pay cut already in Euro terms – catch up again. It is an alternative to the state borrowing Euros it cannot repay to pay high salaries to employees who require high salaries, pensions, UB etc, to pay the high costs in the economy which result from so many goods and services being provided expensively by state, semi-state and some private companies who have to pay high salaries because….etc. Talk about leaving the euro and teeing off with a new punt doesn’t appear to factor in what would happen to existing euro savings, let alone euro credit agreements between exporters/importers and their customers. Energy costs would rise along with the cost of imports. Any company doing business in the eurozone would be more than perturbed. At a guess, Irish few savers would like to wake up in the morning to find their euro accounts converted into a basket case Celtic currency. There is no solution to Ireland’s problems that doesn’t include cutting public expenditure dramatically. The Celtic Tiger failed, the Smart Economy has failed and without some reality being brought to bear on public expenditure and welfare rates, a lot of small businesses, mundane types, the ones that crowd rural Chamber of Commerce meetings, will struggle to grow. @James Burke “thus improving exports to all those markets”. A collapse of the exchange rate would certainly decrease the imports, as the Irish standard of living would be dramatically lowered ,but why would the exports significantly improve ? Do you really think that the international firms that make most of the Irish exports would lower their prices since the price elasticity of most of what they sell (pharmaceuticals, IT services ,etc..) is very low and the competition from other European countries nearly inexistent? Furthermore the transaction costs would increase tremendously( who would like to detain a currency whose reason to exist is to loose value?). . S&P Cuts Greek Rating; Moody’s Warns of Downgrade. Greece Default Coming? Can Ireland be far behind? The debt in both countries is simply unsustainable. http://video.cnbc.com/gallery/?video=3000020901 . @ JTO Well it didn’t take long for the ‘blame the short sellers’ nonsense to start up again. Please. I suppose it is the same short-sellers that were responsible for ruining the Irish banks. If they are on the loose then perhaps I need to dust off my tin foil hat… The article you point to states: “The finance ministers of Europe’s G20 members (Germany, France, Italy and Spain), along with Eurogroup President Jean-Claude Juncker and the President of the European Central Bank Jean-Claude Trichet, were meeting to discuss the Greek adjustment plan with Finance Minister Papaconstantinou — in other words, a routine crisis meeting. ”We did not discuss a Greek exit from the Eurozone, because we believe this option would be stupid,” explained Juncker. Greek Prime Minister, Georges Papandreou, later insisted that the rumours were “borderline criminal.”” So Jean-Claude Juncker is your voice of honesty and reason? Perhaps you missed my earlier post in the sea of comments, but Jean-Claude Juncker is a liar – this is not my opinion, he has stated so himself, as follows: “When it becomes serious, you have to lie,” Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union’s key spokesmen, said in recent remarks. Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country’s economy by driving up borrowing costs. “If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this,” Juncker said.” http://ca.finance.yahoo.com/news/Market-jitters-bring-capress-2621033042.html?x=0 McWilliams arguments on devaluation are usually spoof. The two big devaluations of the drachma in the 1980s worked wonders?? The way this spoof works is that you ascribe all growth to a devaluation; Bertie Ahern oversaw a 10% devaluation in 1993 and the triggered an export boom! This is an absolute joke! Look at the falt exports of indigenous firms in the following decade as the huge FDI investments from Intel, Dell, HP etc were having a big impact on trade. Sweden and Finland provide examples against the backdrop of strong global growth. Then why is a 20%+ trade-weighted dip in sterling not working? In the Irish Independent in Sept 2010, McWilliams, used false export data to argue against the euro. He wrote: “The most damning statistic of our entire euro venture is that from 1990-2000 when we had our own currency and we devalued in 1993 to get competitive, Irish exports grew by 360%. Between 2000 and 2009 with our overvalued new euro currency, Irish exports grew by 0.3%. That says it all really and yes, that figure is 0.3%, not 30%!” In 2000, tradeable goods and services exports were €102bn; in 2009 they were valued at €144bn – yes, an increase of 41%! McWilliams said 0.3%! The claim was never corrected. @Anonymous. Re your three points on the division of labour for ECB liquidity. I think you are one step ahead of the curve on each. “1. The ECB lends to liquid and solvent banks (monetary liquidity). 2. The national central banks lend to illiquid but solvent banks (ELA). 3. National governments deal with illiquid and insolvent banks (bank resolution).” I would argue that in your point 1. above, a liquid and solvent bank does not need access to liquidity. A solvent bank suffering from liquidity problems should be a point 1. Point 2. should read ‘ ELA is given to insolvent banks that are considered to have to have a chance of trading out of their insolvent position (I have heard this referred to as ‘soft form’ insolvency) ‘ The only reason ELA exists is because the rules of the ECB mean it cannot lend to insolvent institutions. Point 3. is for banks that are completely catastrophically bust. Stop whinging the lot of you- youse are like a pack of old women. Danish tax rates Up 10% Danish welfare rates Down 10% Danish public service salaries Down 15% Danish procurement prices Down 15% Deficit = 0 within 2 years Problem solved – thanks be to god I am not an economist P.s By the way 7000 computer programmers/IT vacant in Ireland @Anonymous re “You also make a factual error. It wasn’t true that nobody else (but ECB) would lend to the Irish banks. The Central bank of Ireland did and does, on its own account, provide ELA to Irish banks.” Err, not a factual error, ICB not counted by me as LOLR as its a domestic, ‘nobody else’ means ‘non domestic’ lender by me above. Plus the 1% lending of the ECB to Irish banks should be underwritten by collateral in the Irish banks, the fact the ECB is pulling back and trying to extricate itself from this type of funding should be a warning that collateral is no longer acceptable by the ECB, or it doesn’t like the 1% base support to continue. But consider the former possibility, that ECB doesn’t like the look of the Irish collateral. Enter the Irish Central Bank ICB to the rescue. We’ll accept the collateral of the Irish banks. See thread below that examines the topic. So the Irish banks now borrow from the ICB based on their collateral. And what collateral has Anglo got. Well, its got billions in promissory notes issued by the Government with interest hidden and payable beginning some years from now, but hidden for the moment. For example, ICB prints money for the Irish banks based on collateral no longer acceptable by the ECB, which is based on promissory notes issued by the Irish government: Enjoy the party well described by Burgess here: “Let’s take Anglo. The Irish Government has lodged €25 billion in Promissory Notes. This is an asset and a liability of Anglo. It is money owed to the government and it is money owed by the government. If the Central Bank puts €20 billion into Anglo, they would have got the Promissory Notes as security. So the Central Bank can demand that the government pays it the €20 billion. ” http://www.askaboutmoney.com/showthread.php?t=151340 http://bit.ly/dI258F But the Irish government is bankrupt, but not if its backed by the ECB, but the ECB has pulled liquidity and forced the ICB to issue liquidity, which means the Irish government is bankrupt, but it can’t be if its backed by the ECB. Now don’t go down to the IFSC to check the assets in the IFSC used as collateral by the ICB to issue liquidity to Anglo, you are not allowed to go there! Welcome to truthiness and scambling debt engineering Irish style. So when do we have the Irish Default party begin? Meanwhile frontline services to kids with disabilities get cut with staffing up to 33% cuts and subsequent stress on staff, services, children…… Lets clean out the banks and rid ourselves of toxic Anglo, AIB etc and create some good banks based on the Bank of North Dakota and end the above scambling gambling scams. @cet. par. O course they are at variance. The Governor hinted that the debt level may be unsustainable if we don’t meet growth targets. With all the downward revisions he may as well have agreed with Pat Rabbit Or with the Mail‘s Unidentified Government Minister #1 who sounds strikingly like Pat Rabbitte on RTÉ. Then there’s Brendan Keenan: Prof Kelly was one of the first to say this, and no one says it quite like him. What was new at the weekend were hints in the RTE interview by Central Bank Governor Patrick Honohan that the debt outlook might indeed be unsustainable, and off-the-record suggestions to the same effect from government sources. So either Keenan publicly accepts the Mail‘s story (and is saying ‘off-the-record’ when he means ‘unattributable’ – surely not!) or he has confirmation of the shift in position from other sources. Hopefully Mr. Bond will agree. But I agree with Eoin Bond that chaos in our banking system is not the way- at least the zombie pillars are functioning. But Morgan Kelly didn’t implicitly call for chaos in our banking system, as Eoin Bond claimed. Kelly explicitly said that his plan would not result in chaos in our banking system, and gave an argument as to why. It’s certainly not a new argument, it’s not one that has convinced everybody, and I certainly don’t think it’s one that’s beyond reasonable dispute. But AFAICS Mr. Bond hasn’t yet actually addressed Kelly’s argument in this thread. Judges don’t vote for chaos. Sure, but that cuts both ways. If the government did repudiate the current bank guarantee and creditors went to court citing Article 43, the Irish Supreme Court would feel considerable pressure to get a result for the team by rejecting their suit – not that it would be difficult to justify rejecting it, thanks to Article 43.2. (As it happens, I can’t see any reason to doubt that the bank guarantee legislation was constitutional, though the promissory notes may be another matter. And of course, in the event of a default on the guaranteed bank senior debt the real action will be in foreign courts.) @Edward v2.0 I don’t doubt that lots of politicians lie. My point is that lots of financial journalists, economists, ratings agencies also lie, especially when it is to their financial advantage to lie. Lots of short sellers, as you call them, stand to lose a great deal of money if Greece, Ireland, Portugal etc do not exit the Euro, devalue and default. That is a fact. In the past couple of years, there has been a large outflow of capital from Ireland. Again, the people behind it stand to lose a great deal of money if Ireland stays in the Euro, does not devalue and does not default. That is a fact. You may have such a deep faith in the goodness of human nature that you genuinely people these people would never pay financial journalists, economists etc, to write articles designed to advance the scenario in which they avoid losing a great deal of money and, instead, make a profit on their gamble. I am afraid that I don’t. All financial journalists, celebrity economists etc, who have the power to influence public opinion in these matters should have their bank accounts open for public inspection. If a financial journalist or celebrity economist stands to make a profit from Ireland exiting the Euro, devaluing and defaulting, and he writes newspaper articles advocating that course of action, then the public are entitled to know. If he’s innocent and stands to make no financial gain from the course of action he is advocating, then he has nothing to fear, and would actually benefit from the public inspection of his bank accounts revealing that he had no financial stake in the course of action he was advocating. I would love to inspect the bank accounts of that Der Spiegel journalist. @cet. par. (I forgot the Keenan link.) @all Greece, Ireland, Portugal, Greece, …? Does the sequence continue? http://www.spiegel.de/international/europe/0,1518,761435,00.html#ref=nlint Morgan Kelly certainly livens up the public sphere … but doesn’t look like we will front page headlines on Der Spiegel anytime real soon, judging from the response from those peddling the dominant discourse. Serfs remain hung out to dry … @John TheOptimist ‘All financial journalists, celebrity economists etc, who have the power to influence public opinion in these matters should have their bank accounts open for public inspection.’ Hey John! You own the local banks, why not open them up for public insepection? Serfs would love to ‘see’ who they are really bailing out … without a say in the world on their odious burdens!… yet. @the alchemist, michael h, overseas commentator You do not need to leave the euro. The alternative to some payment of local salary bills and accrual of costs in a local parallel currency is as no less than Paul Krugman said – years of grinding deflation. Only it is deflation that least affects the parts of the economy that are in the most need of reform. If you want pharmacists (the shops that have the highest charges probably in Europe overseas commentator, not the manufacturers), lawyers & accountants on government contracts, politicians retired bank executives and their golf club memberships, the worlds highest paid electricity workers, senior civil servants etc, etc, etc to be less expensive in international terms – then I would like to hear of an alternative way of achieving this that will not take until after the state has gone bust. If you think these sort of domestic costs can just remain high and it doesn’t matter to the economy then there are countless formal and informal lobby groups in Ireland who will cheer you to the rafters while simultaneously keeping their heads buried in the sand. @ Peter Kinane “Or so say the proponents of Modern Monetary Theory. It all begins with what money is. The explanation has to do with power and social obligation. It is convincing, …”: ‘Oh dear, I’d call it stupefying nonsense’ Whoah there Peter. Don’t be getting me mixed up with the Dork. He isn’t all nonsense either, but he is a poor salesman for MMT. This guy, on the other hand, is crystal clear. ‘I think MMT offers a coherent and important perspective on fiscal and monetary issues that ought to be understood, on its own terms rather than in dismissive caricature, by anyone serious about macroeconomics. We ultimately judge theories by how useful they are, both in making sense of “the data” we already know and in offering guidance for policy going forward. In my opinion MMT is one of the most useful perspectives in thinking about fiscal and monetary questions’ http://www.interfluidity.com/ On that Friday Night meeting …. (to which we were not invited … ‘The center-left Süddeutsche Zeitung writes: “Seldom have we seen politicians acting as irresponsibly as they did on Friday evening. In Berlin, Brussels, Paris, Rome and Luxembourg, officials were silent, deceptive or just plain lied. And all of that just to keep secret a meeting of a few finance ministers at which — as would later be said — only a few opinions were exchanged over Greece … and where no decisions were made.” “Within a matter of hours, the governments of the euro countries managed to fritter away the last remaining trust the people of Europe still have in the bailout action. Who in the future is supposed to believe that Greece isn’t interested in leaving the euro zone if Luxembourg Prime Minister Jean-Claude Juncker, who heads the Euro Group, is taking the lead on the deception? First he denies in writing that the finance ministers have even met in Luxembourg. Then he publicly swears his loyalty to Greece. Then it emerges that he personally invited his colleagues to the meeting.” “Any reasonably interested European will now be asking, in astonishment or anger, just how dramatic the situation really is in Greece. Is the country on the verge of bankruptcy despite all the aid and statements to the contrary? That would also mean that another promise would come undone, namely that the Greeks will pay back all the loans to their partners with interest and compound interest. If they don’t pay, then taxpayers will definitively get stuck with the bill.” “One thing is certain: Trust can only be regained if there are consequences as a result of Friday’s deliberate deception.” http://www.spiegel.de/international/europe/0,1518,761475,00.html#ref=nlint @alchemist Your post (second paragraph) does not make sense – the euro is a hard debt currency where there has been massive credit / debt creation!!!!!!! The only money with velocity in Ireland is fiscal debt. How are people able to pay their private debts if there is no money in the economy ? Believe it or not that is a vital requirement. Honestly what is the difference now between monetory and fiscal debt in this strange world of non default of private debt ? Why the hang up about fiscal debt. Most of yee guys are living in cloud 1980s land. This is not a artificial debt crisis – this is for real. Its massive fiscal debts or Dickensian darkness – take your pick. David McWilliams “What we should do is announce that all contracts are now in Irish Punts at a one for one exchange, so no default there, then we would say the Irish Punt is now floating” Pat Kenny: “And the punt would fall to 10% of its value” DMcW “Well maybe not that much but yes and our debts are immediately reduced without default” Pat: ” And our exports would go through the roof” David: “Exactly Pat. Happens all the time” Jayz, more and more of this mutual cuddling session. What utter nonsense. Ireland does not have an exchange rate problem. Declaring that what we used to owe in euros we now owe in punts and letting the punt fall like a brick IS default” Not only in substance but in international law which prohibits the redenomination of external loans. This is really starting to get in one me, how Morgan Kelly and David McWilliams can hold prominent media spokespersons spellbound with their madness. @ BF “DMcW had some thoughts in the SBP as to how “leaving the euro” might work at”: “Thoughts” which I would regard as appallingly standardless. “Thoughts” to the effect: Open the new currency at par with the euro, but floating. So our debts convert to the new currency immediately and within minutes that currency crashes in value – at which stage our debts are in the rubbish new currency. Is the state of our finances not disgrace enough without such “thoughts” on the PK show … @JtO “I would love to inspect the bank accounts of that Der Spiegel journalist.” I agree that everyone can have their own agenda but sometimes they are also just reporting the facts and stories they have been told. Simple question, do you believe that Greece, Ireland and Portugal will get through this without some debt restructuring? @Paul I am not a salesman for MMT – I hate the friggin thing. But it is the architecture of the monetory system and nobody can really deny the reality of it – the Euro makes it more complex given the Central bank has control of base money rather then executives but along with freegold on the asset side of the euro balance sheet there is not much difference between the Euro and Dollar /sterling in the release of money into the economy. I would much prefer a system where the treasury would by law release just 2% extra money a year and let full deposit banks use it or lose it in the physical world. Central banks would become obsolete. @JohntheOptimist. “If a financial journalist or celebrity economist stands to make a profit from Ireland exiting the Euro, devaluing and defaulting, and he writes newspaper articles advocating that course of action, then the public are entitled to know.” This is a new low in snide innuendo against those who dare to contradict the deaft consensus of Irish economists. Since the term ‘celebrity economist’ has been used to describe only one , or possibly two Irish economists this statement is shameless and cowardly , since it comes from an anonymous contributor. “You may have such a deep faith in the goodness of human nature that you genuinely people these people would never pay financial journalists, economists etc, to write articles designed to advance the scenario in which they avoid losing a great deal of money and, instead, make a profit on their gamble. I am afraid that I don’t. ” such utter balderdash. Do you also want people who will profit allegedly from the other side of the argument to be open. What a load of cobblers you do talk Johannes…. @Colm Brazel “Err, not a factual error, ICB not counted by me as LOLR as its a domestic,… ” Then you have a funny way of counting, because the Irish Central Bank is the only LOLR Irish banks have. You might wish it be otherwise, but wishing doesn’t make it so. I recommend this piece by Willem Buiter (you know who he is, don’t you?) on who does and who doesn’t do last-resort lending (ELA) in Europe: http://www.nber.org/~wbuiter/ela.pdf @grumpy Defaulting the same day you leave the Euro ,create a non-convertible punt ,leave the World Trade Organization and create new tariffs would be an internally consistent position ,but I do not see how your scheme with two currencies will work . I first came to Ireland in the sixties. I fell in love with the country but I remember how terribly poor the country was. The tremendous progress that was made since then was possible only because Ireland opened to the outside world and became part of the EEC. Any attempt to turn the clock back and leave the club will come at a tremendous cost to Ireland. There must be a simpler way to solve your skewed distribution of income than to make you whole economy collapse. The article provides an interesting chronology of events leading up to the Irish bail-out. However, I feel it underestimates the effects of the collapse of Lehman Bros on financial markets, in that after such a catastrophic and unexpected event it was practically inconceivable to allow any European bank to default due to similar and even worse consequences for the markets. ( Prof Kelly fails to mention the untimely remarks of Angela Merkel and their effect on Irish funding costs ). As a point of fact: Timothy Geithner was not responsible for the bail-out of AIG, but his predecessor, Hank Paulson. Nor will US taxpayers assume this burden, as the coming IPO of the company will probably result in the US Treasury reconvering all its funds used for the bail-out. The suggestion that NAMA should by abolished and loans given back to the banks is also inappropriate in my opinion. The good bank/bad bank figure has worked well in every situation it has been employed and there is no reason it should not work in Ireland. ( preliminary results are showing this ). I wonder why Prof Kelly does not employ net versus gross figures for his calculation of Irish indebtnedness, and why he does not consider the alternative of restructuring which is what most are pointing to. It is also strange he should consider Ireland`s export prowess as being a phenomenon of the 1990s, when only last year the country had the second highest trade surplus in Europe ! In spite of this, extreme views are always welcome because of their thought-provoking nature. Next time, however, I believe Prof. Kelly should offer more plausible and realistic solutions to Ireland`s debt problem. @ Paul, Sorry if the attribution is incorrect but what I quoted is in your post without parentheses. “… the Dork. He isn’t all nonsense either,”: In support of this you are offering a second hand argument, which is fine, but let’s see its quality: In the first sentence, he gives his opinion without really any support of it: “‘I think MMT offers a coherent and important perspective on fiscal and monetary issues that ought to be understood, on its own terms rather than in dismissive caricature, by anyone serious about macroeconomics. ” His second sentence: “We ultimately judge theories by how useful they are, both in making sense of “the data” we already know and in offering guidance for policy going forward.”: The first part of it is circular, and so is of little use other than to perhaps make him dizzy and the concluding clause about judging something as a guide to policy going forward: Oh dear! The third sentence is another unsupported opinion: “In my opinion MMT is one of the most useful perspectives in thinking about fiscal and monetary questions’”. Oh dear, … John the appalling : in this thread you have Called Morgan K a lunatic Compared him to Osama, a mass murdering terrorost Suggested that he is raving and psychologically disturbed accused two newspapers of fabrication / hoax suggested that financial journalists are corrupt and/or engaging in market manipulation eulogised over the reelection of a polity which is designed to FORCE compromise between warring factions over one where whatever its faults hasnt had a civil war in 90 years implied that those that commentate on the issues (and DARE to take an opinion different from that of an anonymous poster) should be required to exhibit a level of fiscal openess not foud elsewhere because they are probably tools of corruption. Googling your posts you have remarked a few times that you have loads of irish govt debt. Forgive me if I sense a shrill panic emerging from your posts that perhaps just perhaps the high yields on same may be a premium for risk, and that the horrid risky thing is now closer. But, as you hide behind a (ridiculous) name, we will never know. Some moderation on this site, in all senses, would be useful. If one wants conspiratorial ravings one can go elsewhere. We are going from the ridiculous to the whatever…. Der Spiegel journalists on the take etc. utter nonsense. It is obvious the Germans briefed Der Spiegel – just as our guys are talking about the debt being unsustainable (as pointed out by Anonym above). We are now living through a farce which has only one possible outcome. The inept EU lot demonstrated this on Friday and have lost the last remaining bit of credibility they had. @ DORK, “I am not a salesman for MMT – I hate the friggin thing.”: If I may say so, am glad to hear. “But it is the architecture of the monetory system and nobody can really deny the reality of it …”: If the theory is ‘popular’, there may be a chicken and egg quality to this theory and the practise. And if it is popular, all the more reason for a revision of first principles. (And how is it working for the EU and … ?) @Peter One of the central maxims of effecient use of MMT is to run High fiscal debt loads during the good times and if that is unsuccessful to monetize in the bad times – this prevents private actors from getting into massive debt and malinvestment. This has been essentially proven in the euro zone – I don’t see how you can deny the reality of it. Japan who has been living on a energy tightrope has had no choice but to engage in this monetory policey as any malinvestment on their part would be doubly catostrophic given their unique vulnerability to energy shocks. @ ceteris, I have not picked up on the points you raise, but as I read him, I think JTO makes much sense. Peter Kinane http://www.irisheconomy.ie/index.php/2011/05/07/morgan-kelly-irelands-future-depends-on-breaking-free-from-bailout/#comment-145687 See back along… @ JTO I have no doubt that all kind of skulduggery goes on in the murky world of financial journalism, but my comment refer to the specific case you’ve pointed towards – the Der Spiegel article alleging that Greece was having secret discussions with the EU on a potential restructuring. It’s clear from the article you posted that either: (a) Nouriel Roubini and the Der Spiegel reporter were lying before the fact; or (b) Jean-Claude Junker and G-Papacon were lying after the fact. The article assumes that the former were lying and the latter telling the truth, as apparently do you. I come to a different conclusion, based upon the following: Nouriel Roubini is a well-respected Professor at NYU who makes a good living being as economic consultant on the side. What is the upside to him of lying? Maybe he accelerates the default of Greece and his clients make some money sooner than they expected. From the articles and newsletters of his that I’ve read, he is absolutely convinced that Greece will default, so from his perspective it’s just an acceleration of the trend not a change in direction. What are the downsides to being caught lying? He’ll lose the credibility he’s spent years building up, will stop getting calls to go on CNBC or write opinions for the WSJ and his consulting business would suffer badly. Jean-Claude Juncker has publicly stated that he feels it is his duty to lie to the people of Europe for their own protection. What is the upside to him of lying about discussions with Greece? In his mind he will save Europe from Armageddon. What are the downsides to being caught lying? Nothing. He can say he lied for the sake of Europe and actually feel patriotic about it. Again, the Der Spiegel journalist has little to gain by lying but lots to lose. G-Papacon has everything to gain by lying and little to lose. I love a good conspiracy story as much as the next fella, and maybe Roubini was lying and somebody paid the Der Spiegel journalist to plant a story, but the more likely scenario is that they were both telling the truth. @ DORK, Just taking this: “One of the central maxims of effecient use of MMT is to run High fiscal debt loads during the good times and if that is unsuccessful to monetize in the bad times – this prevents private actors from getting into massive debt and malinvestment. This has been essentially proven in the euro zone – I don’t see how you can deny the reality of it.”: Sorry, but I did not deny the “reality of” anything: ““But it is the architecture of the monetory system and nobody can really deny the reality of it …”: If the theory is ‘popular’, there may be a chicken and egg quality to this theory and the practise. “: By this I meant that it may well be the operating system (or architecture) – theory and practise influence each other; can become different faces of each other. @ ceteris and Philip, Sorry folks, I mis-attributed. I have to admit I was expecting more of a reaction when a politician who got approx 20% of the votes in a recent election in an euro-zone country said this: ‘By TIMO SOINI When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body.’ http://online.wsj.com/article/SB10001424052748703864204576310851503980120.html#articleTabs%3Darticle @overseas commentator That is not the same thing as paying the 50% of Morgan’s salary that he says is too much for the state to afford in IOUs which can be used only to purchase local goods and services. The alternative is to borrow that 50% in Euros from abroad – which the country probably cannot repay, in order to keep him very very highly paid in comparison to counterparts in the countries lending those Euros. Yes it would be simpler to just get pay cuts and cost reductions in Euros all-round but the reality is that the mechanisms within the Irish economy for resisting that are proving so effective that it is probably just not realistic to expect it to happen other than at a glacial pace. California temporarily issues IOUs to pay its local debts, salaries etc sometimes when it cannot borrow more money. You could do a similar thing in Ireland but given the additional difficulties, it might be very useful to actually mandate that those IOUs could be used for some local purchases. You might put a redemption date on them – say a promise to pay the bearer 1 Euro in twenty years time. @ All Apropos of absolutely nothing. http://www.davidpbrown.co.uk/poetry/rudyard-kipling.html @Dreaded_Estate Simple question, do you believe that Greece, Ireland and Portugal will get through this without some debt restructuring? JTO again: Fair question. I have no idea. I can not predict the future. Neither can anyone. Your own forecasts for residential rents in 2010 were somewhat wide of the mark. You predicted that they would fall by 10 per cent. They stayed flat. The future is inherently unpredictable. I do not pretend to be able to predict it. But, neither can you. In relation to Ireland defaulting, it is ultimately a political choice and a moral choice, not an economic one. Ireland has absolutely no economic need to restructure debt or default. Ireland has a record of high economic growth going back over half a century, which is unparallelled in the EU. Even achieving growth one half its long-term average would result in the debt problem melting away within a few years. But, it ultimately depends on how successful loons like McWilliams and Kelly are in panicking the public into going down the political and moral route that they advocate. Debt interest repayments are much smaller as a percentage of GDP/GNP than in the 1980s. There was no default then. Real GDP/GNP per capita is 3 times what it was in the 1980s. People are far better off now than then. If the previous generation, which had a standard of living one third that of the current generation, and which had far lower personal wealth, far worse housing conditions, far poorer employment prospects, far lower education levels, far poorer infrastructure, far lower social welfare benefits, far higher taxes, and so on, not to mention a war in the six counties, if they did not contemplate defaulting on the country’s debts, which were greater then than now, then there is absolutely no reason why the relatively well-off current generation should do so. In addition, looking at the current performance of the economy, there is an emerging balance-of-payments surplus (meaning that Ireland Inc’s net debt is now falling), manufacturing output and exports are soaring, inflation has been the lowest in the EU27 every month for almost 4 years, competitiveness is rapidly improving, FDI investment is growing rapidly, tax revenues are ahead of the December 2010 budget target (remember, all the pro-defaulters claimed back then that the austerity package meant that the December 2010 budget target for tax revenues could not possibly be met – I’m not even sure that you weren’t among them), monthly redundancies have been falling continuously for 2 years and are now half 2009 levels, monthly job vacancies (as reported in Irish Employment Monitor) have been rising continuously for 2 years and are now twice 2009 levels, the live register has been falling almost every month since September, agricultural incomes are soaring, tourist numbers are recovering, and so on. Hardly supporting evidence of Messrs McWilliams and Kelly’s view that the economy is collapsing. Regarding overall economic growth, both McWilliams and Kelly have said repeatedly that GNP is the aggregate that matters. Thus: David McWilliams wrote: “Forget GDP – As Constantin Gurdgiev points out – it is GNP that actually matters because that is a more realsitic figure of the income that is kept accumulated.” Morgan Kelly wrote: “Gross National Product (GNP) is a better measure than GDP (gross domestic product) of the value added accruing to residents of the country.” So, they both say that it is GNP that measures how well the economy is performing. But, the latest CSO figures show GNP up 4 per cent between 2010 Q1 and 2010 Q4. Their response is to simply ignore the GNP figures and claim that the economy is in meltdown. Perhaps you can explain the logic (a concept to which northerners attach much greater importance than southerners) of Messrs McWilliams and Kelly both saying that GNP is the aggregate that matters, then, when GNP grows by 4 per cent in nine months, both turn around and say that the economy is in such a state of meltdown and ruin that the only course of action which can save it is the drastic one which they are now advocating. So, I dismiss completely the economic arguments for a default, euro-exit, or whatever. And I repeat that those financial journalists and celebrity economists, who advocate it, should have their bank accounts opened to public inspection, so that the public can judge whether or not they have any financial stake in advocating it. However, as I said above, it is ultimately a political and moral choice and, clearly in recent decades, as the amoral, anti-nationalist, anti-religious, corrupt, and utterly useless Dublin 4 mentality has strengthened its control over the Irish media, the chances of the public being panicked into following the course of action that loons like McWilliams and Kelly advocate, are increased. So, I don’t rule out the possibility that they could win, although, on balance, the probability is that they will not. However, the fact that these loons are given the time of day at all is an indication of a serious malaise in southern society. I am posting from what is theoretically a part of the U. Kingdom, where debt as a percentage of GDP and the budget deficit are very close to the levels south of the border, although, unlike south of the border, the balance-of-payments is still in deficit. Yet, the idea that northern equivalents of Messrs McWilliams and Kelly could spring up, scattering manic predictions of doom all over the place and and advocating courses of action so drastic and absurd that the economic reputation of the region would be destroyed for a generation, is laughable. It simply could not happen – probably something to do with the Northern Protestant ethic, which, whatever its faults, certainly equips one to spot chancers, spoofers, and snake-oil salesmen, when they turn up. @Jesper ++ good find. Its worth repeating some- “At the risk of being accused of populism, we’ll begin with the obvious: It is not the little guy that benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a kind of deadly symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever-more money back to our governments, keeping the scheme afloat. ” Even Lenny comes in for mention “Further contrary to the official wisdom, the recipient states did not want such “help,” not this way. The natural option for them was to admit insolvency and let failed private lenders, wherever they were based, eat their losses. That was not to be. As former Finance Minister Brian Lenihan recently revealed, Ireland was forced to take the money. The same happened to Portuguese Prime Minister José Sócrates, although he may be less forthcoming than Mr. Lenihan about admitting it. Why did the Brussels-Frankfurt extortion racket force these countries to accept the money along with “recovery” plans that would inevitably fail? Because they needed to please the tax-guzzling banks, which might otherwise refuse to turn up at the next Spanish, Belgian, Italian, or even French bond-auction. Unfortunately for this financial and political cartel, their plan isn’t working. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them.” Sorry – should have attributed above -Timo Soini in the WSJ online @ Jesper I read that article – thanks for the link. Trenchant stuff. Perhaps people don’t comment on everything or we’d be here forever – oh, my mistake: we are. Timo seems to be following DMcW and MK. “Fortunately, it is not too late to stop the rot. For the banks, we need honest, serious stress tests. Stop the current politically inspired farce. Instead, have parallel assessments done by regulators and independent groups including stakeholders and academics. Trust, but verify. Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail. If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders. For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country’s debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.” I wonder who will get the last word in on this thread? @Peter You make a forceful point – a mechanism of Europe taking our taxes directly to service the interest on their money would not make much difference really. I am not sure about this – but when the Goverment said back in the autumn that it had enough cash to continue for some time and was subsequently ambushed by the ECB. Was in counting tax receipts or did the NTMA not have the bank paper ? I am sure the NTMA must have the paper first – tax receipts merely measure the falling velocity of money It may be a event that may prove my point or perhaps not. I am sure Karl or John must know. Anyhow if the goverment can or cannot access tax receipts and the money it obtains is external – surely over a period of time the amount of money in the economy would decrease to service the interest. A solution to this is to use internal money to fund the state and recycle the interest income rather then see credit deposits disappear as they become money and then disappear to the continent. Try to imagine a Irish economy where all deposits are goverment money and the ECB is left with the assets – there would be no credit to pay for its “assets” and it would have to take a loss while we peserve the quanity of money in our economy. Chicken and egg maybe right however. I guess theres no point in getting our knickers in a twist about this as the ship is sinking anyway @Anonymous “1. The ECB lends to liquid and solvent banks (monetary liquidity). 2. The national central banks lend to illiquid but solvent banks (ELA). 3. National governments deal with illiquid and insolvent banks (bank resolution).” Erm, 2 is just not true. The ICB can only lend to solvent banks. That is why we have promissory notes… 3. is also patently false as the Irish government has not been permitted to deal with its insolvent banks – “you must save your banks”. As for 1, well, the ECB crossed the line with their exceptional liquidity support. By drastically lowering interest rates, they made all the tracker mortgages in Ireland unprofitable… 😉 @christy grins, this thread is open until 2013, when the germans and french got what they wanted. @ JtO Fair enough, and robustly expressed as ever. You say: ‘Ireland has absolutely no economic need to restructure debt or default.’ Isn’t the problem though that the bailout package is insufficient for Ireland’s medium term needs, designed as it is to restore confidence so the state can re-enter the market in 2012 – but the market is looking decidedly iffy about Ireland leapng back into the pool. You can, if you like, blame Kelly and McWilliams for the state of the market, but if you can manage without, do you have any thoughts on how even a growing Ireland will be able to fund itself when it has a debt mountain to climb and looks likely to run slap bang out of cash? On a smaller point, now Kelly has had a crack at the current lot, have you changed your previous opinion that he is fuled by anti-FF rage – I always thought it odd that you took that position as Kelly went out of his way last time to attack FG, when they were in opposition. @ Christy ‘I wonder who will get the last word in on this thread?’ Well traditionally Micky Hicky rolls in after 2 am, but Michael Hennigan is a very early riser. Hard to say. As the Dork of Cork can argue with an empty room, I’d say he’s worth a punt. @overseasguy above, for ” You might put a redemption date on them – say a promise to pay the bearer 1 Euro in twenty years time.” read: ” You might put a redemption by date on them – say a promise to pay the bearer 1 Euro in not more than twenty years time.” or even 1 ireo = 1.x Euros to be redeemed in y years. PS Jesse cafe American engaged in a brilliant rejection of MMT a few months ago entitled “The Emperor rampant and barking” I recommend its conclusions. jessescrossroadscafe.blogspot.com/…/modern-monetary-theory-emperor- rampant.html @ JTO Thanks for that. Everyone’s got a dog in the fight. Some financial, some personal. Not surprised with any journo stuff – one of the least trusted professions according to surveys. Morgan Kelly should really come out and debate this stuff. @hoganmahew “Erm, 2 is just not true. The ICB can only lend to solvent banks. That is why we have promissory notes…” Please go back to my post and read again what I wrote: illiquid but solvent. 3. is also patently false as the Irish government has not been permitted to deal with its insolvent banks – “you must save your banks”. Of course the Irish government was permitted to deal with its banks. It just was not willing to accept the consequences, such as the fact that the ECB cannot, by its rules, lend to banks that are in default. Edward 2.0 says, As I said, this is clearly a problem – here’s a solution off the cuff – freeze deposits for a week, or two weeks – that might give the administrator time to separate the branch network/deposits from the more toxic stuff. I have a serious question for most attendees here. Anyone here listen to Vincent Reinhart discussion on Econtalk, on his theories, that government intervention in the 1990s, came to be seen as a ‘free lunch’ for the government. That is, they could move in to guarantee debts, and the guarantees would never be called, so that the government got to be the hero without having to invest a dime. Reinhart makes the point, that it goes all the ways back to the $50 billion Mexican debt crisis, when the proclamation was, this cost us nothing! It sounds exactly like something the democratic assistant chief of staff, Josh Lyman would say in an episode of the West Wing. Reinhart in his explanation, offers the notion that this logic began to be taken as bullet proof during the 1990s and was used again and again, culminating in the ‘rescue’ of LTCM in 1998. But by the late 2000’s this was beginning to backfire badly, as speculators shorted public stocks of principal lenders, and bought up un-secured debt. I have a question, and it is specifically aimed at the more economically literal amongst the Irish Economy community. How much of the above sounds eerily familiar of our minister for Finance’s famous phrase, this will be the cheapest bailout of all time. Perhaps if he was a minister for finance in a US presidential sitcom based on a 1990s democratic administration, it might have come off peach-ingly. The only trouble was, the year was 2008, and that old move was not fooling the markets any longer. Reinhard proposes that it was the saving of Bear Stearns, which really blew the whistle for the free-for-all to truly begin. How sure can we be that Anglo wasn’t simply a target by the same wolves who took down Lehman etc, and that they had already preempted the specific kind of text book stunt the Irish government would attempt? There is a specific scene I remember from one of the Die Hard movies when the Feds decide to ‘take over’ from the local cops. The only problem is that the Feds strategy was so text book, the bad guys holding hostages in the tower building, were at least ten steps ahead. I get this feeling more and more these days, that everything that governments are doing in relation to banking these days, is so text book, that people who know can predict it from miles out. It is the only explanation for why the Irish and Europeans have been plunged into such a death spiral. BOH. @ceteris paribus “As former Finance Minister Brian Lenihan recently revealed, Ireland was forced to take the money.” Can someone explain to me how exactly was Lenihan forced to take the money? Did they put a gun at his head? Did they speak rudely to him? Nobody forced Lenihan to take money. With money quickly escaping the banking system, Ireland desperately needed money. What he means is that he would much rather had just kept financing the country and its banks from the ECB. 1% interest rate and no conditionality is politically a lot nicer than the EU/IMF program. The problem was that the rest of Europe was not willing to offer that. It was the lack of other financing options that forced Lenihan to take the program. @JtO Yeah hold my hands up on that one, got the rents prediction wrong for 2010. To say Ireland is a wealthy country isn’t enough to determine whether it has a sustainable debt burden. The key measure is debt compared to the size of the economy. As you have pointed out GNP has been improving over the last 3 quarters, and I agree with you that this is the best measure on which to measure the performance of the Irish economy. In particular anything that relates to the government capacity to raise additional taxes and hence the debt burden. This is good news and hopefully it will continue and improve. However as we both think that GNP is the best measure for the Irish economy then the debt burden is approaching levels very few countries come back from without default and/or devaluation. The governments projections is for GGD to hit 142% of GNP in 2014. That isn’t that far below the Greek level and they are all but certain to default IMO. I think comparisons to the 1980’s is a little like comparing apples and oranges. That was an era of higher worldwide inflation which effectively eroded the real value of the debt and also made real cuts in government spending far easier to achieve. This time we are in a fixed currency union where inflation is unlikely to be much above 2% and we really need Irish inflation to stay well below the European average to continue the progress we have made on restoring competitiveness. We were also in recent of significant structural funds from the EU and have a private sector much less indebted than now. There are some similarities to the 1980’s but there are more differences. Comparisons to the UK are also misguided because with their own currency they would be crazy to ever default when they can just devalue instead. Which is effectively what they have done over the last 4 years with the € value of £ down about 25%. I am going to make another prediction and say Ireland debts will be restructured within 24 months as part of a final European solution to the crisis. @Anonymous “Please go back to my post and read again what I wrote: illiquid but solvent. ” My apologies – I have dancing “in” syndrome. Great analogy Brian – but if you dig deep you will find the FED and the other agents are the bad guys. Fractional banks cannot operate for long without CB instructions and protection – they have created the derivatives not the commercials. They (commercials) just use them in the street. I wrote above, How sure can we be that Anglo wasn’t simply a target by the same wolves who took down Lehman etc, and that they had already preempted the specific kind of text book stunt the Irish government would attempt? One more question to the community, if I may. Why are we so sure it was the Europeans who were pulling the strings of the Irish government on the night of our banking guarantee? Would it not make a lot more sense, if it was Geithner and his buddies doing the string pulling instead? I have to say, it has the hallmark and the thumb print, of a Wall Street kind of move all over it. BOH. @ JTO I’ve just come across a WSJ blog entry (h/t Zero Hedge) which quotes Junkers spokesman as admitting to lying about the validity of the Spiegel article. Perhaps you’d like to take this opportunity to apologise to any Spiegel Online or other journalists you have been wrongly slandering? It appears that the journalists were in fact telling the truth and the politicians were indeed lying. The article includes the following: “Just before 6 p.m., German news magazine Spiegel Online distributed a report saying that euro-zone finance ministers were convening a secret, emergency meeting in Luxembourg that evening to discuss a Greek demand to quit the euro zone. Calls from reporters flooded in to Guy Schuller, the spokesman for Luxembourg Prime Minister Jean-Claude Juncker, the man who is the head of the Eurogroup council of euro-zone finance ministers. In a phone call and text messages with two reporters for Dow Jones and the Wall Street Journal, Mr. Schuller repeatedly said no meeting would be held. He apparently said the same to other news outlets; at least one more moved his denials on financial newswires. Of course, there was a meeting–although not, apparently, to talk about Greece quitting the currency, which would be an extreme step to say the least. Mr. Juncker even said a few words to reporters who had hustled to Luxembourg to stake out the gathering. So why the lie? “I was told to say there was no meeting,” said Mr. Schuller, reached by telephone Monday. “We had certain necessities to consider.” Such as? Evening in Europe is midday in the United States. “We had Wall Street open at that point in time,” Mr. Schuller said. The euro was falling on the Spiegel report, which had overhyped the meeting. “There was a very good reason to deny that the meeting was taking place.” It was, he said, “self-preservation.”” http://blogs.wsj.com/brussels/2011/05/09/luxembourg-lies-on-secret-meeting/ @Anonymous, Re, Look, I’m not talking about LOLR, I’m saying the markets have us at junk status, so we’re excluded from them full stop. Re http://www.nber.org/~wbuiter/DoN.pdf Yep, Buiter well worth reading, eg “A viable and dynamic EA requires i) a much larger liquidity support facility, ii) restructuring of the unsecured debt of EU zombie banks and recapitalisation of the systemically important ones among them, iii) restructuring of the debt of insolvent EA sovereigns.” But read with caution. His views are pye in the sky as far as Trichet/ECB policy is concerned. Also recent news re Geithner opposing burning bondholders in Irish banks, means the dynamics of debt go beyond the ECB to include the Fed. Perhaps Ireland should remove itself from the euro and become the 51st dollar state and get Geithners QE funds of last February to bail us out. Lol:) @all A major tome from Morgan Kelly, Der Spiegel on Greece exiting the Euro, and the clandestine meeting of the EZ Financial Politburo (deauville error writ large) on Friday evening – & EU in a state of chassis. In the European Public Sphere, Greeks are trumping Kelly. S’pose our time will come …. unless we get a handle on time in the meantime … Lying will kill the euro 9 May 2011 SÜDDEUTSCHE ZEITUNG MUNICH http://www.presseurop.eu/en/content/article/642541-lying-will-kill-euro Part of the problem is that the trash appearing across the EA just can’t be hidden anymore, its even coming up out of K Club gold courses:) @ David O’Donnell Big diff between saying there’s a meeting and saying that the Greeks want to leave the Euro. This is one of those ones where we’ll never know the truth probably. But this is a game. We aren’t even players in it – we are more like the dice being rolled. So let’s forget the game. Let’s step back and focus on the fundamentals. We have a strong economy. We have competitive exports. What we need is a low interest credit stream over 30 years. That’s it – in a nutshell. If we don’t get that credit stream we default and take it from there @ DORK, Sorry again but as well as not denying, I did not subscribe. Further, we have not communicated – achieved much connotational empathy – on what I was saying about theory and practise; it is a very difficult concept to convey to the classical world mindset, that they are interdependent – all is- -am effect through featuring ‘forces’, both theory and practise, though perhaps ‘the centre of intensity’ shifts back and forth between those featuring ‘forces’- -faculties. Sorry, but it’s not the easiest concept to just jump into – from a classical philosophy framework. Perhaps an example will help: In the flat earth model of the world, the practise or ‘physical’ or ’empirical’ data was that the sun crossed the sky day after day. So, a theory about such recurrent practise may have been that the sun returns in a sun-boat to the place from whence it riseth. And so the theory and the practise … how would I say … effect through similar ‘forces’, indeed express each other. But it is a circularity. Likewise, the classic philosophy system is a circularity, though, prior to me it did not recognise itself as such, perhaps as the flat-earthers did not recognise the inherent circularity of same. According to my philosophy system, all concepts are features of a system and do not translate or transfer across systems. And so I would say that not only has the world a circular posture but it is not aware of its condition- -circularity. 🙂 To the main thrust of your apparent subscription to MMT: Again, it is a model. I do not subscribe to any of its concepts – much as the concepts of the flat earth model do not feature in the helio-centric system. The thing is to conceptualise whatever models feature, formulate new ones if possible, and then collide them and see which thrives and which decline(s). I have a general idea of MMT. This not to comment on what is the architecture of the EU; what expresses in one facet of the nature of things as a flat earth, for another facet is- -am a helio-centric architecture. I put forth the first principles of my theory previously and which I recommend as a model by which to operate (and which, I think, would be naturally characterisitic to Germany – though currently they largely are part of the Anglo-Saxon (rather Keyenesian) system. Here, slightly edited: A society’s money- -currency represents its tradable wealth (and developed as an alternative to barter). (This former is something A. Greenspan did not seem to know in a 1966 paper, where he talked of it as a means of exchange and store of wealth). Changing the quantity of money without changing the amount of wealth only changes the value of the currency and the wealth of those who hold the currency. Vica versa: changing a society’s quantity of wealth changes the value of its units of currency. Some of this wealth- -currency is deposited in a bank for a rate of interest and the bank loans it to others for a fee, at perhaps, normally, X amount of loan per Y amount of deposit. (Are our banks now allowed only loan 80 of ever 100 euro?). If banks want more than this (capital) then they borrow the extra. If wealth grows, then the quantity of money may be increased accordingly. (Of course if things go askew, as currently, then that’s another issue). The quantity of money may be increased also by approx. 3% per annum to encourage keeping it working and also as a means of redistribution of wealth. Other than that I see little reason for changing the society’s quantity of money, except perhaps in times of extreme stress such as war – in which case it is directed to survival as distinct from affluent consumption. @ Dork ‘Jesse cafe American engaged in a brilliant rejection of MMT a few months ago entitled “The Emperor rampant and barking” Funny enough, I read it as an acknowledgement that the MMTers have lot of the truth. @ BOH, “I have a serious question for most attendees here. Anyone here listen to Vincent Reinhart discussion on Econtalk, on his theories, that government intervention in the 1990s, came to be seen as a ‘free lunch’ for the government. That is, they could move in to guarantee debts, and the guarantees would never be called, so that the government got to be the hero without having to invest a dime.”: Without having heard of that principle, I came up with it myself and have it posted above. Probably time and a good excuse to show it again, much as above: * It seems to me that, should radical measures become necessary, if the EFSF (European Financial Stability Facility) took the liabilities of all the distressed banks onto its account, thereby cleaning their slates, this would not be inflationary. The (lost- -mal-invested) money which it would be taking ownership of has already been borrowed and invested- -lost and so has done its inflation. It would however prevent- -preclude fire-sales and bargains for the prudent, which in a sense (or sphere of the market place) would have been somewhat deflationary. There would only be inflation if the institution went a step further and recapitalised the banks. My theory of economics would not necessarily move me to do so. This then would mean that those banks that were redeemed would be effectively in poorer circumstances but those who had been prudent and savers and those on fixed income would escape being robbed. The Facility would also take over the (inadequate) securities/assets underlying the liabilities. These should probably be moth-balled for a few years and then gradually marketed or else put to entirely novel uses. Of course, it is not friendly to concerns about moral hazard. * “The only trouble was, the year was 2008, and that old move was not fooling the markets any longer. Reinhard proposes that it was the saving of Bear Stearns, which really blew the whistle for the free-for-all to truly begin. “: One has to have one’s own currency to do it. The USA could do it, Mexico, but not a party to a common currency such as our CB. However, the ECB or EFSF could do it, hence my presenting the option. @ Peter Kinane, I’ll just pick up on one thing you said above there and expand on some of my thoughts. See below, the bold-ed, italic-ed bit. There are many things about Reinharts discussion on the Econtalk podcast, which resonated with me, in thinking about the Irish situation. When Reinhart talked about the 2,000 or so off-balance sheet creations Lehmans had to store many of their assets, it reminded me of the Irish situation. Except in Ireland we called the off-balance sheet creations ‘property developers’, and proceeded to insert them into the Irish Times rich list compilation. Funnily enough, dozens of them have have disappeared all of a sudden from the same. It was only an accounting trick to create them in the first place, and we the Irish were only too slow in not creating CDO squares out of the same, and using them as collateral in some way, as Lehman managed to do with the 1% window offered to Bear and company before the 2008 crash. I think Reinhart began the discussion in talking about increased capital reserves and made some insightful remarks there too. Gregory Connor take note. In relation to this, “The Facility would also take over the (inadequate) securities/assets underlying the liabilities. These should probably be moth-balled for a few years and then gradually marketed or else put to entirely novel uses.” Reading that sentence did remind of what Reinhart said about the Federal system in north America. How the government there, were really sucked into this mis-understanding. The fed etc, concocted this will cost us nothing, originally, because they imagined they were only stepping in to solve temporary liquidity problems. Where the assets were bound to mature if given the right time. It is so reminiscent of Ireland I think, in the sequence in how we attacked the problem. Firstly we had the ‘cheapest guarantee of all time. Followed by the intervention to hold the assets until they mature. What I liked a lot about Reinharts whole view (and I must say, I found it refreshing), was that he looked at things from the point of view of the market participants. David McWilliams tries to do this, but just hasn’t managed to translate it as well as Reinhart does in my view. One thing Reinhart said was about Washington Mutual, who didn’t know who to call first. They got on the phone to the FDIC, which turned out to be their mistake. Reinhart goes into the whole thing of the Fed having the 20 or so principal lenders as ‘clients’, and how that relationship defined so much. Eoin Bond, Edward 2.0 and some others above, should really investigate the podcast for their interest. It’s right on the home page at Econtalk dot org. BOH. Peter Kinane wrote, One has to have one’s own currency to do it. The USA could do it, Mexico, but not a party to a common currency such as our CB. However, the ECB or EFSF could do it, hence my presenting the option. I suppose, the real conclusion we are coming to after 500+ comments, is that Europe tried to copy the Americans by the letter of the text book. But ended up in a very different place, because we were operating with a distinctly different toolset to that of the Americans. Is that a plausible historical analysis from where we are standing in 2011? In any case, I believe many of these issues will become more exposed as we get further away from the time and the place. I find it vaguely interesting also, that little snapshot of history, where Gordon Brown doing laps of the Atlantic ocean in his airplane to compare his notes with Washington. The conclusion he came home with was, my notes are as good or better than their’s. BOH. The article highlights how debt is passed from the banks to the sovereign. Could we not also draw a link between 1. The ECB’s failure to restrain the lending of the core banking system to the periphery 2. The resulting funding of uncreditworthy projects by the peripheral banks 3. The consequent insolvency of the peripheral banks 4. The need for the ECB to step in as LOLR in order to ensure the peripheral banks’ obligations to the core banking system were rolled over. If this analysis holds, then rather than the ECB crowing about how magnanimous it has been to Ireland, it should instead acknowledge that it is only reaping what it initially sowed when it allowed its preferred post-ECB employers to run riot. @Karl Whelan Would it be a good idea to open a new thread on the True Finns leaders article in the WSJ? @ BOH, Have not read Reinhart, so don’t have enough detail to discuss him. As to my own option: it just seems as perhaps a fairly good option if the EZ tensions really get to breaking point, though, would have to be careful to avoid making a habit of it. As to your second post, I don’t think the EZ has been to the meltdown stage that the USA reached and acted on – EZ is still in holding strategy in the hope of avoiding that stage.. Time for me to leave it for now. @Paul I read it as a acceptance of its mechanics but a rejection of its real utility. I am simple Dork and consider money merely a symbolic representation of energy yet to be used – where things get a bit more complicated is debt dynamics. Clearly to many liabilties are chasing a too limited amount of goods and assets. So it follows something is needed to clear the debts – either devalued goverment money replacing overvalued credit or a upward revaluation of Gold on CB balance sheets – both will probably be accepted on Euro and possibly Dollar balance sheets. Although Buiter seems to have near epileptic financial fits when someone mentions Gold which I find quite funny Exchanging the debt chips will perhaps make local trade more effecient again. @Peter You are way above my pay grade – even though I was dealing with a complex or perhaps more accuretly a nonsensical topic it does have some interest as understanding the mechanics means that we can learn to game the system more effectively and thus obtain what surplus remains from our masters If you merely think of money as a energy flow rather then the vaguely autistic view of MMT mechanics you begin to realise that the accounting is wildly variable and dependent on a kind of monetary art rather then science. Sometimes is best not to do something rather then inflict activity on the unfortunate patient – for example the jobs in the construction sector did not achieve a net gain in output when you factor in the inputs and physical destruction of our shared landscape which I believe inflicted real psychological scars on those of us who need the elemental rather then human landscape. Will a forceful counterweight to the deflation now via MMT do more damage ? We should recognize the losses through the assets themselves rather then try to hyper inflate the currency itself – this will be achieved through Gold revaluation upwards (which in my opinion will not reduce the buying power of a note too dramatically but shift the nexus of money deeper into the physical realm of energy units) But it will kill world trade as it is presently structured – its a joke anyway with too little redundancy and not enough efficiency although it is wildly productive Things will just have to slow down until real capital is built again. Morgan Kelly is RIGHT. Its better late than never. Ireland needs to act NOW. @Eureka Default on bank-debt is inevitable. Only a matter of how we are handled, or how we handle it. Simple enough in general terms – specifics remain open. On the Pat Kenny program Monday after listening for 30 mins to David McWilliams with nobody else but the interviewer there to challenge some of the crazy claims, a listener’s message was read out in which he sought advice on transferring his bank deposits to the UK under his sister’s name. It should be weird that a claimed architect of the State bank guarantee, would get such a platform but of course it isn’t. All so easy: switch euros for punts; the cancellation of euro contracts would happen seamlessly — presumably with the Constitution suspended and the right to appeal to the EU Court of Justice not available as we would not be in the EU. The claims on the prospect of a ‘massive’ export boom are laughable. McWilliams actually argues that it was Bertie Ahern who had triggered an export boom from 1993. Recall step 10 of the putative election manifesto last Jan; the $800bn crock of gold at the IFSC was as real as a leprechaun’s. http://www.finfacts.ie/irishfinancenews/article_1022253.shtml http://www.irishtimes.com/newspaper/opinion/2011/0510/1224296602550.html Help! Could somebody please help us out of here? The heat is getting intense and the light is being extinguished. Open another thread, whatever? Please. @Paul Did anybody tell you we have passed the economic event horizon ? There is no escape now. Things heat up instead of cool down in this universe – the laws of thermofinancialdynamics are different here. @Brian O’Hanlon “How sure can we be that Anglo wasn’t simply a target by the same wolves who took down Lehman etc, ” Because a falling share price largely doesn’t affect the solvency of a firm. The pack of wolves is a myth. Vultures, maybe, picking over the weakened carcass, but both companies were brought down by internal corruption and looting. Our favourite ECB member speaks… *BINI SMAGHI: INVESTORS INSURED AGAINST DEFAULT WOULD BENEFIT *BINI SMAGHI SAYS RESTRUCTURING `WRONG’ IN THEORY AND PRACTICE *BINI SMAGHI SAYS RESTRUCTURING WOULD LEAD MANY INTO POVERTY *BINI SMAGHI SAYS RESTRUCTURING OR DEFAULT `DRAMATIC’ EVENT *BINI SMAGHI SAYS RESTRUCTURING WOULD BE `POLITICAL SUICIDE’ Where to even start with this guy… One solution might be if the EU gave aid to the exposed lending banks in Germany/France /UK in lieu of an equity interest in same, to prepare them for the bond hits from Greece/Ireland /Portugal. Then burn the bondholders. @ DOCM, “There is no problem with the role of the euro as a reserve currency if for no other reason that third countries do not want to be dependent on just one.”: This does not quite seem to address my point that the USA might not like its dollar to be unseated as the reserve currency and may be disposed to act to support the status quo (especially currently when, I should think, many would see it as much less sound than heretofore) while the EZ (and others) might be disposed to act to change it and indeed these latter may be in competition with each other for this role of what may be, as I think DeGaulle categorised it, “outrageous advantage”. So, the bold Lorenzo says: “At times markets have perverse incentives. In particular, large investors who have bought insurance against sovereign default, often without holding the underlying asset, stand to benefit greatly from the default and lobby in favour of it. ” JTO again: Anyone spot any difference between what Lorenzo is saying and what I posted above? He’s just saying it a little more diplomatically, that’s all. But, then, he’s not from the North. We are a bit more blunt up there. It doesn’t take much leap of the imagination to believe that the “large investors”, that Lorenzo is referring to, will actually pay financial journalists and celebrity economists to argue in the media in favour ot the course of action that they “stand to benefit greatly from”. I am certainly not accusing any particular individuals. But, if they opened their bank accounts to public inspection, then we’d know if they have any financial stake in the drastic courses of action they advocate. If they have none, then their arguments will carry greater weight, so it is their own interest to do so. @ Finfacts Let me challenge some of your crazy claims there: I’ve listened to the podcast: http://www.rte.ie/radio1/todaywithpatkenny/#Podcasts It was rather a good interview with Kenny asking good questions and DmcW giving answers unlike the reverse of that with Kenny giving the answers by himself. The listener you mention was probably provoked to ask the information by the discussion on the flight of deposits from institutional investors and the shallow discussion of this in the general media, so perhaps this was her first time hearing of this. So it should be good to listen to the winners and not the losers for a change who got the boom wrong, the ECB/IMF bailout wrong and continue to get it all wrong. We’re on the brink of a deflationary spiral. And the remedies spoken of by MK and DmcW are vilified? DmcW and MK have both attacked the guarantee as crazy. In DmcW, there was rationale there to create a window of opportunity, to prevent the flood out of deposits, to assess and deliver a structured and carefully constructed and wise approach to deal with the banks. But space was needed to assess the damage. Because our mandarins in DoF were useless, incompetent, unprofessional, inexperienced in such matters and under the spell of incompetent and probably corrupt Irish bankers, they did not get best practice from experienced players worldwide, but allowed themselves to be swayed by the likes of Merrill Lynch stakeholder consultants out to protect the ass of bondholders, not the Irish State. Re “All so easy: switch euros for punts; the cancellation of euro contracts would happen seamlessly — presumably with the Constitution suspended and the right to appeal to the EU Court of Justice not available as we would not be in the EU.” No, it won’t be easy. But it will be easier than slow suffocation and strangulation of our economy as we are swayed by StockHolm syndrome to hope the ECB which has torpedoed us with the crazy ECB/IMF bailout, will come to our rescue. RE “The claims on the prospect of a ‘massive’ export boom are laughable.” Now let’s see, we reduce our costs and our prices through devaluation and this won’t help exports. I would expect a boom in the agri sector and opportunity for the reopening of Donegal Woolen Mills, etc and a great lift to the tourism sector and related service industry, restaurants. Forget economic denominators, unemployment is the biggest indicator of economic health. The greatest economic stimulus we will get from leaving the EMU will be a stimulus to employment. As a huge supporter of the EU Project, a person who regards the ECB as the greatest threat to the EU, perhaps we can negotiate a way out of the European Monetary Union without leaving the EU. We need before more damage is done, restructure our debt, leave the EMU, do PuntNua. We should also seriously look at our relationship with sterling and perhaps examine some form of economic commonwealth union with Britain that could help reunite our island north and south; because, seriously folks, recent economic events and our response to them, has shown we are politically bankrupt as well. We’ve spent too long in Jotunheim, land of the giants and trolls of the ECB, let’s hear more from MK and DmcW:) @ BOH, A possible distinction between the option I outlined and USA current strategy may be that of recapitalisation; they seem to have done some adding of liquidity to the system (as well as taking over taking over toxic assets) whereas my option was just to take over the toxic assets. They are quite different policies- -principles. As regards the necessity that one would have one’s own currency: If one is sovereign then one can take on the debs and not owe anyone further along the line, if one is a party to a common currency the debts are still owed further along – to the common group. (But if the common group took them over, it would not owe them further along). At least that is how it seems to me and am open to other opinions. @alexander anderson “As a point of fact: Timothy Geithner was not responsible for the bail-out of AIG, but his predecessor, Hank Paulson. Nor will US taxpayers assume this burden, as the coming IPO of the company will probably result in the US Treasury reconvering all its funds used for the bail-out.” Actually the AIG bailout was devised and organised by the Treaury Sec – which was indeed Paulson, but in conjunction with the Fed chairman Ben Bernanke and Tim Geithner who was then NY Fed President. I am surprised you think the 85bn which the Fed supplied – remember it was not just GS who profited from this largesse at the US taxpayers expense – will be recovered in this re-IPO – where did you get that estimate. It seems to me only another mighty ponzi scheme could result in AIG recovering to that extent in 2 years – so that is another cause to worry! @Eoin Bond “Where to even start with this guy” I would start here “BINI SMAGHI SAYS RESTRUCTURING OR DEFAULT `DRAMATIC’ EVENT” A number of people (including JtO) have made the point on this thread that the real reason why the ECB are insisting on us bailing out the banks is because if we don’t we will trigger the “CDS death star” as Greg calls it. Is this what LBS means by “dramatic event”? @ A-Mac the outstanding CDS on Greece and Ireland isn’t of death star proportions, more like one of those star destroyers they captured Leia with (yeah, im a Star Wars geek…). Spain is of death star proportions however. I think the “dramatic event” he is worried about is more like the post-Lehmans risk aversion where bank liquidity disappeared almost completely, which in turn increased govt supports and so the eventual solvency concerns that we are now dealing with. @ Michael Hennigan I see you have been making some very valid critiques of David McWilliams. For what its worth in my opinion is that he realises he was the brainchild of the worst economic decision ever implemented in any economy and he is trying to get us to default ever since to try and undo at least some of the damage. His articles have been way more political than economic. You are correct to pull him up on factual errors but as other economists have said its way more political than economic at this stage. As linked by Gavin Kostick above, John Bruton says Morgan Kelly’s proposal will not work: http://www.irishtimes.com/newspaper/opinion/2011/0510/1224296602550.html Re LBS – is there an address where we can write to Mr. Lorenzo Bini Smaghi to let him know how flawed we think his logic is and how pernicious we think his media activity is. There is a chance that nobody is actualy telling this guy to his face what a …… …. he is. @ Colm i think the reason most people question McW’s suggestion of an “exports boom” is that we already have an export boom despite the strong currency we are currently faced with. It’s not the issue, and it would seem heroic for exports, tourism apart, to get any boomier than they currently are. What are exports here as a % of GDP, 100%? Can we reasonably expect them to get much higher in the short term even if we ‘gained’ a currency devaluation? The negative side of that event in terms of import inflation, capital flight, and solvency issues at anyone with non domestic-law covered debt would be enourmous. Add in a collapse in domestic demand from government spending/tax hikes being pushed through to close the deficit in double quick time, and you have all the ingredients of an economic collapse. @Bond apart from that, export is dependent on external factors outside of our own control. I often wonder, do people really think it is desirable to force more exports utilizing the german concept? Slashing wages and supporting a 2nd hand slave labour market? Are we going down that road? Sure, this way the german sheets are looking good, but one has to look at the reality behind it. This german boom comes at a great price. Exports alone are not going to drag us out. No way. @JTO “It doesn’t take much leap of the imagination to believe that the “large investors”, that Lorenzo is referring to, will actually pay financial journalists and celebrity economists to argue in the media in favour ot the course of action that they “stand to benefit greatly from”.” Of course this type of thing never happened during the boom when things were on the way up…….. There are two sides to every biscuit. @zhou_enlai Re Bruton, eg from his IT “But, like the advocates of default, I am afraid that the course he favours would destroy our international credibility instantly. It would involve immediate shock therapy for our economy, which could do much more harm than good. It would undermine trust.” Crapissimé PlurissimEé from Bruton there full of sinister threats that lecture us that they’ve kidnapped the family and are holding them all at ransom unless we capitulate to the mafiosa omerta code of honour. The feckin markets think we’re mad in not defaulting, and this gombeen I might give some credence to if we could borrow at commercial rates today that might back up his arguments and assurances re trust. The TRUST the markets have in us is JUNK STATUS, we shouldn’t worry about violatiung the high opinion they have of us. That guy is an economic hit man working for the IFSC bondholders and the stakeholders feeding from the trough of bailout. @Bond. Eoin Bond I entirely agree with DmcW on his boost to export. I know we have a ‘so-called’ export boom, but what is that made up of? Sure the agri sector is booming with hundreds of euro extra per beef cattle head today, than last year, on the foot of a jump in demand. Sure, the multinationals, pharmaceuticals and who knows what is added to GDP though financial schenanigans at IFSC, transfer pricing, Dutch Sandwiches, the Double Irish and whatever else they can leak from the paper trade. But GNP is dead at 0%. The export boost we need is that that will generate local employment, a service industry to back up tourism, even to prod the startup of local manufacturing again. We already have capital flight, we already have economic collapse, the patient is brain dead with the ECB/IMF bailout we have. But listen to the podcast, as well as restructuring the concept of Brady bonds is invoked, to cushion the collapse and make it a survive and thrive exercise. Anyone got links to more Smaghi?