Daniel Gros from CEPS has provided the following guest post based on his recent IIEA talk.
How to Make Ireland Solvent
The Republic of Ireland can no longer raise funds on the capital market and has had to accept a bail-out financed jointly by the IMF and the European Financial Stability Facility or EFSF (the EU’s rescue fund). Many investors fear that by the time European support ends as planned in 2012, the country will not have market access, and might then be forced into default if anti-bail-out forces are determining policy in Germany at that point.
But this dependency of Ireland on foreign support is difficult to understand given that the country has not lived continuously above its means in the past. Ireland has run a current account deficit (which means the country uses more resources than it produces) only for a few years; and if one totals the current account balances over the last 25 years, one arrives at a foreign debt of about €30 billion. This should not be too difficult to finance given that it represents only about 20% of the country’s GDP of €150 billion. Moreover, Ireland is on track to run a current surplus this year and should thus not have any need for additional foreign funds.
So why does the government need a continuing bail-out? The reason is that the government has a huge foreign debt whereas the Irish private sector has huge foreign assets. To make matters worse, the government pays exorbitant interest rates on its large foreign debt whereas the private sector earns very little on its foreign assets (and keeps these meager returns for itself). If this is allowed to go on, the government could indeed still have to default.
This was the case in Argentina where the private sector had large foreign assets while the government had an even larger amount of foreign liabilities. The Republic of Argentina went bankrupt with only a moderate net foreign debt because wealthy Argentines had spirited their assets out of the country, and thus out of the reach of the government, while the poor Argentines refused to pay the taxes needed to satisfy the claims of the foreign creditors.
Ireland is not Argentina and should be able to avoid its fate; but only if the government can mobilize private foreign assets. This should be possible given that these foreign assets are mostly held by institutions, such as pension funds and life insurance companies.
The little data published by the associations of Irish pension funds and that of (life) insurance companies suggest that these two groups of financial companies own over €100 billion in foreign assets, of which about €25 billion are in non-Irish government debt and about €72 billion in foreign equities.
From the point of view of the country, it makes no sense that Irish pension funds invest in Bunds which yield about 2-3%, whereas the government pays close to 6% on fresh money to foreign official institutions (and Irish government bonds promise yields of close to 10%). A very strong case can thus be made that Irish pension funds and life insurance companies should somehow be ‘induced’ to invest their entire portfolio of gilts in Irish government bonds. The €25 billion in financing that this would yield for the government is equivalent to the entire contribution of the IMF to the rescue package.
A similar case can be made for the €72 billion in foreign equity investments. If two-thirds of that sum (or €48 billion) were also be invested in Irish government bonds, the total financing available for the government would rise to over €73 billion, more than all the foreign funds made available to Ireland under the rescue package.
Would this mean robbing retirees of their future? The opposite seems to be the case: the rate of return achieved by the average Irish pension fund has been only around 1.7% over the last decade (as claimed in a recent report of the public pension fund). A massive investment in the bonds of their own government, which offer a return of close to 10% (on the secondary market), should actually be in the interest of present and future Irish retirees as well. Moreover, by doing so, the probability of a state default would actually be much reduced, which in turn will preserve growth prospects for the economy – the most important determinant of future pensions.
The EU might of course protest that any restrictions on the investments of Irish pension funds and life insurance companies smack of capital controls. But this could be finessed by either a waiver under Article 65 of the EU Treaty, or a clever wording of the ‘directed’ investment. Moreover, the public pension fund has already been obliged to accept a ‘directed’ investment, without any opposition from the EU.
Given the scale of foreign assets owned by Irish residents there should be no need for the government to depend on the funds of the EFSF and the IMF, which are very expensive in both political and economic terms. There will be practical and political obstacles to mobilizing pension fund assets, but they should be overcome if the future of the entire country hangs in the balance.
Brussels, May 2011
 Sources available from the author.
 A technical note: Pension liabilities are bond-like in nature, so the present heavy weighting in equities represents a substantial mismatch and investment risk in itself. There may thus be scope within appropriately framed solvency requirements to facilitate/encourage pension funds to more closely match their bond-like liabilities with instruments issued by their own sovereign.
132 replies on “Guest Post from Daniel Gros: How to Make Ireland Solvent”
I like my plan better…
Colm McCarthy pointed out the enormous hole in this argument at the IIEA event in question. The freedom of movement of capital is one of the four freedoms underpinning the EU and, not alone can a government not restrict it, it could be taken – very expensively – before the European Court of Justice were it to attempt to so.
The problem is not the lower rates that investors are willing to take for investments outside Ireland but the reason that causes them to do so: the lack of creditworthiness of the Irish state.
If this is recovered, and this a matter for government and people, there will be no funding problems. The argument may appear circular, but it is not. Freedom of movement of capital cannot be restricted but there is no limit on joined up thinking and intelligent action. As the controversy about the funding of the “jobs initiative” has revealed, this is still sadly lacking.
Daniel Gros writes,
I have a genuine question for the Irish Economic community, which I hope that people may not find too silly. I wish to know, exactly when in the last decade or more, did Ireland as a sovereign nation fund itself on the capital markets? I have listened to this discussion in Ireland for a year and more, about how Ireland can regain entry back into the sovereign debt markets. I would ask the question to the Irish Economic community, apart from an experiment conducted by the National Treasury Management Agency, during the 1990s, which subsequently continued under the Ahern years of the 2000s as a cash hoarding exercise primarily, when exactly was Ireland engaged with sovereign debt markets to fund itself? Everyone assumes that Ireland has this pool of very loyal sovereign debt holders, which have stood by Ireland for so long. But I would argue that Maarten van Eden’s article in the Irish Times today, can provide clues, that it may be a myth.
The problem I have, is the presentation of the narrative, that is ONLY RECENTLY that the Irish government used the leveraging of Irish banks to fund itself. When we clearly know it to be the case, that the Irish government has always used the Irish banks to fund itself, in express preference to obtaining credit on it’s own account. In fact, that has been the distortion in Ireland for the last decade or so. That Ireland as a sovereign nation has not been 100% in the market to fund its own debts for quite some time. But rather, the Irish government has tried to mask itself, behind the Irish banking system, and behind the property asset price explosion. Quite frankly, I am tired of this narrative, that it is only recently that Irish citizens have begun to pay for the cost of the same disfunctionality. When it has clearly been the case, that mortgage owners in Ireland have been leveraging themselves up on behalf of the government and its spending programs for over a decade now. The international markets are honestly tired of this lack of differentiation also. They have no idea what they are funding. They had no idea before the 2008 crash, and they have much less idea today. We talk about the vanilla Irish sovereign debt holders, as if that was the only source of sovereign debt funding in Ireland before 2008. But that was clearly not the case, as the Irish government was employing the Irish banks as its off-balance sheet creation. The Irish banks in turn were employing the property developers as its off-balance sheet creation(s). The Irish citizens in turn, through their own personal borrowings were expected to keep the whole ridiculous hierarchy in motion, for much longer than the last couple of years, and that is the real fallacy about all of the discussion in my view. Now we are surprised that all of the above items are sandwiched together into one entity, and we take the view, that this is incorrect. But perhaps, it could also be argued, that sandwich-ing the whole lot together, merely expresses in plain terms, what was the reality all along, and puts an end to the constant posturing and use of Chinese walls, between stuff, that existed in Ireland for a decade or longer. BOH.
Could Ireland issue a bond linked to Irish wage levels or inflation and introduce some pension regulations requiring holdings of things linked to Irish inflation, which the bond happened to suit extremely well. As government revenues would rise with increased inflation/earnings it would reduce risk and as the value of a pension would rise with the economy it would inflation proof pensions.
The danger here is that the German may have a ulterior motive – perhaps the plan is to drop kick Ireland into the BOE – if so Irish pensions would take another serious hit again in a few years.
Trust is lost in the system given the frantic efforts to save the shadow banking system at the expense of taxpayers and the currency over the last few years.
My argument is that given the deposits have been socialised already why not stick at least AIB term deposits in the Post office.
AIB ain’t giving credit so whats its function now ?
……..ah to prop up assets………… what assets………………. useless concrete……….. what return does concrete give ?………….. zero baby.
He does have a very serious point however – the local money supply is being extracted at massive cost to the average Mick and at huge gain to traders and their banks in London and elsewhere.
Walking the streets of Cork today and I got the feeling the place is on the ragged edge – somethings got to give.
I personally cannot understand why people keep their longer term deposits in the banks given what they have done and the lack of DIRT in these P. O products and also their flexible withdrawal policey
“The EU might of course protest that any restrictions on the investments of Irish pension funds and life insurance companies smack of capital controls.”
I’m not so sure that inducement to invest in Irish government bonds requires compulsion, or anything resembling a restriction of the investment universe available to Irish pension funds.
AFAIK, the Irish Association of Investment Managers chose, as its fixed income benchmark on accession to the Euro, the Merrill Lynch 5 Yr+ eurosovereign index. Ireland represented c.1% of that index, so the accession period triggered substantial sales by Irish institutional investors (at lousy prices) of Irish bonds, as they attempted in a short timescale to rebalance their portfolios. (Something similar happened in Irish equities, through 1999/2000, where they were dumped at giveaway prices to facilitate rebalancing of portfolios to new eurozone-wide indices – chosen by a combination of fund managers and actuarial consultants).
The tyranny of, and slavery to, indices (or, more relevantly, tracking error) isn’t just an Irish problem or issue, as they dominate and dictate mainstream institutional investment policy in the English-speaking economies and beyond.
Were Irish institutional funds to find Irish government bonds attractive at current yield levels, they would be precluded by index-tracking considerations, rather than any value criteria, from backing their judgment.
I’m staying neutral on whether or not investment in IGBs would be a good or bad idea at present yields/price discounts – but as the investment industry currently measures itself and its performance, they can’t and won’t buy them regardless of perceived value. Were, however, their benchmarks to be changed to, say, 10% fixed interest weightings in IGBs they would happily and blindly buy them regardless of current yield or future performance prospects.
GGD (General Government Debt) was 43.5 bn at the end of 1997
It was 47.3 bn at the end of 2007
During that time it had a low point of 39.9 bn in 2000. So the NTMA was active rolling over existing debt and taking on some new stuff.
Aside from that, it sold a lot of commercial paper for cash-flow smoothing.
Probably not enough activity in an incredibly benign market to justify the salaries they were paying themselves, but there you go.
It fits. It is kind of like what happened during the Cold War, between eastern European and United States superpowers. There was a mutually assured destruction, situation that existed between the NTMA and Dept of Finance, which ensured that neither entity pressed the nuclear button, because too many salary positions would be at stake. It must have been really funny though in late 2008 and early 2009, when the department of finance suddenly tossed a huge hot potato over the wall for the NTMA to deal with. Here, you have to deal with these now, we have created these borrowers, but we haven’t a notion of what to do with them. It is like the NTMA were frozen out for a decade or more, and stayed well back from all of that dodgy Anglo kind of business, only to be drafted back into the thick of things, when the wheels came off the wagon. Ever since we have been posturing around, talking about GETTING BACK into the sovereign bond markets, which we effectively shunned at during the boom years. BOH.
And the money supply keeps on falling – soon we will be reduced to bartering cows or specie as a medium of exchange
I wonder how many pints of Beamish can I get for a silver maple leaf ?
How many pints can I get for Daisy…….. the wife.
‘pension liabilities are bond-like in nature’
Not like nominal bonds though, more like index-linked bonds, which the Irish government never issued (when they could) despite numerous urgings. Equities are seen by trustees as an inflation hedge (very imperfect).
@bo’h – “the sovereign bond markets, which we effectively shunned at during the boom years”
Are you seriously suggesting that the State should have increased its borrowing during the surplus years, AND that its failure to do so was a self-interested conspiracy between the DoF and NTMA?
If more people and banks held Goverment bonds during the Good years the opportunities for malinvestment would be less.
Imagine for example if they offered a post office product back then with the return of Charlie McCreevy free money scheme !!!
This SSIA increased Banks deposit base and increased their ability to lend for crazy concrete dreams.
This was a very dubious direct fiscal subsidy of the commercial banks in my opinion.
It even beat Golds performance until the final year of its term !!!!!!!!!!
On reflection I think this might be a terrible idea hiding as a reasonable one
1 If we default – we should default on as many foreign private creditors as possible and not Irish creditors
2 When we force Irish pension funds to buy Irish debt in the secondary market the most we can change is the volume of buying and we cant change the mind of the marginal investor about the solvency of the state. That marginal investor is still going to be unwilling to buy Irish debt
3 By reducing our need for foreign funding – we don’t reduce our need for funding – we simply shift the risk of default onto Irish investors – we also encourage irish investors to capital flight – if they will take your pension – what’s next? and why risk it?
4 Replacing either foreign public or foreign private creditors with Irish creditors only makes sense if we intend to write down that debt and thereby avoid defaulting on foreign creditors – but why would we want to do that
Take a step back from all of this for a minute. See the link below, which features some comments I made in response to John McHale’s blog entry, Is the grievance against the ECB overdone? It appears as though the credit source-ing and delivery system in Ireland has been broken for a lot longer, than just in the post-crash 2008 years. We had enormous ‘flows’ of credit flowing through our system during the 2000’s. It was consumed in large measure, by a tiny fraction of the business community, in the property and related sectors. Is there any guarantee that will not happen again, if credit in some shape or fashion were to be re-directed into the economy? Have we any guarantees more to the point, that the government, in seeing that river of available taxation income, may not stick it’s bucket into the same and extract its entitlement also? I take no satisfaction in taking shots at Mr. Richard Bruton or colleagues, such as Kieran O’Donnell in relation to credit systems in Ireland. But their representation of the problems in Ireland’s credit systems, as being post-crash of 2008 only, in nature, is insufficient at best. At worst, down right mis-leading. This notion of getting credit flowing again, which you hear so much from business interests and from politicians. It is a great bumper sticker. But I have no idea what it means, when you examine it, in the Irish context. Furthermore, Richard Bruton’s characterisation of the bank guarantee as the point at which sovereign debt and private banking debt became confused is not strictly true either. This is not so. More accurately would be to say, the Irish department of finance, relied heavily on the property industry as it’s river of credit, and that in bailing out the Irish banks bad assets, it was in turn bailing itself out. So, I do believe that Maarten van Eden piece in the Irish Times overturned some interesting rocks. The department of finance rushed to the assistance of the Irish banks, because they wanted to preserve their own access and control over revenues from transactional property taxes, into the future. To the extent where the DOF, was willing to lump the responsibility of dealing with toxic borrowers onto the NTMA, an organisation which should have been focussed on design of systems of sustainable public debt funding all along. But like I said, once credit arrives into the country it becomes absorbed into property all over again, so the whole process is horribly circular. Which is why, I presume, the debt markets do not want a thing to do with it. And the NTMA are not going to force the issue too far as a result. The advantage of having the National Pensions Reserve Fund was that it tried to keep as clear as distinction as possible, from any other credit product, sovereign, private or otherwise in the Irish system. But you can appreciate the problem for the NTMA in having to deal with a DOF, which was in bed with Anglo etc. BOH.
Here is one other comment, and I don’t wish to monopolize the discussion space here. But when you consider the ways in which the central government in Ireland re-distributes the borrowing, which it receives by all kinds of indirect avenues, down through the lower tiers of regional and local government, it becomes yet more shocking again. I wrote some comments in response to Kevin O’Rourke’s blog entry, A Tale of Two Trilemmas, at link below. Kevin was mainly talking about a supra-national state level arrangement in his blog entry. But Europe is composed so much of city states, and ‘regions’, in the modern era, I felt it was worth looking at Ireland in terms of how it might work from a regional breakdown point of view, to better advantage. I argued for instance, that the Dublin and eastern region could almost enter the market for credit earlier than other parts of the state, if organised in the right way. This is not silly btw, as in the Bay Area in California, they are already beginning to think in that way. I reading something by Paul Saffo of the San Francisco chronicle not so long ago, along those kinds of lines. Over and out. BOH.
The freedom of movement of capital is one of the four freedoms underpinning the EU and, not alone can a government not restrict it, it could be taken – very expensively – before the European Court of Justice were it to attempt to so.
The Irish financial system (and one could argue the wider European financial system) retains its stability only due to huge infusions of public money and an unspoken international agreement that exposing the structural weakness of the banking system is such an appalling vista that Ireland has to spend the time in reparations jail and pretend to look guilty to prevent it. There is naturally a quid pro quo, the modern nation state does not exist solely to prop up the financial system (whatever LBS might think) and methods could undoubtedly be found to make this clear to the pension funds.
As for the terrifying possibility of our lack of capitalist devoutness being taken to the ECJ it simply will not happen – it is in no ones interests that the issue be aired and patience with the EU bank loss hiding shell game is running thin, indeed patience with the EU as a whole. With the imminent collapse of Schengen those four freedoms look set to be reduced to two soon, the ECJ may be too busy to deal with Ireland’s notional sins.
All this having been said, if sovereign default is inevitable we would be better off redirecting the various funds afterwards rather than before.
Dublin appears more profitable as it milks the Hinterland of its income and redistributes it amongest its euro-centric poltical and economic class.
I am not so sure it would be has wealthy if it resisted attempts by both state and non state actors to extract wealth and recycle debt through the Irish economic jungle.
The Pale of old would not have been very profitable if it did not engage with trading and slaving the savages of the bogs.
To be honest I would welcome a further partition of the Island – it would be a interesting experiment at least.
Both Dublin and Cork can compete for subsidy on the open market………………..
You can have Ronan O Gara however – you can utilise him in your much slimmed down diplomatic service.
“From the point of view of the country, it makes no sense that Irish pension funds invest in Bunds which yield about 2-3%, whereas the government pays close to 6% on fresh money to foreign official institutions (and Irish government bonds promise yields of close to 10%).”
Many people think that Ireland won’t be able to pay its debt if it kepps agreeing to pay at 6% on new debt. Therefore this return is very uncertain.
Mr Gros’s proposal could be interpreted as just another mechanism to replace foreign money with Irish citizens’ money in the line of fire. It sounds like the jesuitical logic of a pathological personality but perhaps I am missing something.
Well, there are already restrictions on the movement of people (primarily from the new accession states), restrictions on goods via several excise duty and customs laws, and restrictions on services such as gambling, air transport, and others via local protectionism and traditions.
So Ireland would really just be bringing EU capital movements into line with everything else.
On the issue of freedom of capital movements, there is an obvious tension between it and the management of a single currency. It seems that of the three desirable aspects of the conduct of a country’s economic relations with other countries, only two of three options can be chosen at any one time (i) an independent monetary/fiscal policy (ii) a fixed exchange rate and (iii) freedom of movement of capital. The trilemma, if I have it correctly, familiar to the economists on this blog. Ireland, as member of the EZ, is compelled to adopt (ii) and (iii) and lose (i).
The EZ has an entrance but no exit. That is now Ireland’s dilemma.
On the ECJ, the point is not that the country would be taken before the ECJ by an institution of the EU but that an individual pension fund manager, for example, would make the case that the Irish government was in breach of its legal obligations under one directive or another if they were forced to follow directions on investment choices (there are several dealing with the issue of freedom of movement of capital).
There is a de facto limitation on capital movements because of market conditions which brings us full circle back to the choice which is unavoidable: if we want to get out of the meat grinder without the drastic step of leaving the EZ – where our last situation would be ten times worse than our first – we must restore the creditworthiness of the state. Full stop.
The point at which this done is not directly related to the level of indebtedness but to the existence of the necessary primary surplus (a concept which I think I have got my mind around thanks to John McHale).
A recent article in the French financial weekly, Agefi, http://www.agefi.fr, was on how institutional investors in Europe (no mention of little Ireland) were re-centring their investments on their home markets, whether voluntarily or otherwise. The move has been going on for some time. I don’t have a link and didn’t keep the article.
The “solution” here is a good example of financial repression. Forcing Irish pension funds to invest in Irish bonds at below market rates is a bad deal for the beneficial owners of those funds, combining low reward with high risk. The author seems to think that investing in a debt security that pays 10% is a great deal, and totally ignores the default risk.
Whether and when Ireland defaults will not be decided by the Irish government – it will be decided by the great and the good sitting in Frankfurt, Brussels, Paris and Berlin, and will
depend on the outcome of the ongoing ECB vs German government battle (no restructuring vs mandatory restructuring before any new EFSF/ESM funding).
A few days ago I asked what would Ireland’s “regulation Q” look like, given the likelihood of further financial repression following the private pension levy. This is one possibility.
I’m all in favour of allowing those who wish to don the green jersey or ‘make a killing’ by investing in high-yield Irish bonds to easily do so, however this should be a decision made by the person contributing to the fund, not by someone else acting on their behalf. Those who don’t wish to invest in this way should not be “repressed” into doing so.
Guven the recent levy on pension funds there is an easy way to incentivise Irish pension funds to invest more in Irish bonds. Halve the levy to 0.3% on fnds invested in Irish sovereigns.
Looks like a thinly tarted up version of the idea that the Government should expropriate the only major pool of privately held liquid assets to pay off the ECB. It seems depressingly likely that it will actually happen – Stockholm Syndrome did not suddenly disappear after the last election.
Great minds think alike!
His comments are almost identical to what I posted in the John McHale thread here on Thursday (and many times before that), where I wrote:
“Ireland Inc is allready a net saver. There is a huge private sector surplus cancelling out a huge government deficit. Projecting forward a few years: (a) the huge private sector surplus will be even huger (b) the huge government deficit will be much less huge. So, the upshot is that, by 2013/14, Ireland’s domestic savings will be much greater, possibly several times greater, than the government deficit, and the gap between the two will be growing each year. In that situation, it would only require a very modest and falling proportion of domestic savings to be used to fund the still-falling government deficit. This will be a much more favourable situation than countries like the US and UK, which are likely to have similar government deficits to Ireland then, but much less domestic savings and still in balance-of-payments deficits.”
I have never suggested that these savings should compulsorily tapped, merely that it should not be beyond the capability of the government to convince these savers that buying Irish bonds is a good investment, as they offer much better interest rates when compared to similar bonds in other countries. The problem is more to do with psychology than economics. Ireland is currently offering much higher interest rates than other countries. But, Ireland’s savers are turning their noses up at these high interest rates because they are gripped by fear, panic and hysteria. They are the sort of people who hid under the bed coming up to midnight on 31 Dec 1999, thinking that the roof was about to fall in (literally). Call it the price a country has to pay for allowing a number of well-known quack economists to dominate media economic commentary (btw not a reference to anyone on this site). There is also the fact that stoking up this fear and panic is now a lucrative industry in Ireland.
As I have posted many times, I myself moved virtually all of my modest savings from Belfast to Dublin in 2007. They are currently worth a lot more now and increasing at a phenomenal rate. Those far more numerous people who moved their savings in the opposite direction are currently sitting on a huge loss (both from paltry UK interest rates and the devaluation of sterling). They should come forward and identify themselves. I may not be able to change their minds, but I can at least gloat at their misfortune. The fact that so many are sitting on such huge losses is, I’ll bet, one of the factors behind the media clamour for Ireland to default, exit the euro and devalue.
On a technicality though, is it possible that fund managers aren’t investing in government bonds because their regulations require them not to invest in things with poor credit ratings, and at the moment I think the goverment is not far off junk?
It probably won’t escape people’s notice that, while there seems to be no question of corralling capital and directing its use in the public interest, labour (which may not be as mobile for all sorts of reasons, both good and bad) must sit and take the punishment for the sins of unfettered capitalism – or have mobility forced upon it (emigration).
But again, given that, two wrongs won’t make a right – though many people seem keen on Richard Nixon’s policy: try a third wrong if the first two fail.
The ball remains in the court of the core EZ members. They will simply have to find some way of getting Ireland off the hook on which it is impaled because of (so expensively) seeking to save its and their banks. There is no other way.
Paul Hunt’s mention of Richard Nixon reminds me of this exchange recorded on the White House tapes:
John Dean: Yes, Mr President we could do that. But it would not be legal.
President: Legal schmegal.
Really, only lawyers can give an informed opinion on how the Gros plan might be implemented. Any form of financial repression is open to legal challenge, but presumably there is some way to do it so that the challenge fails. Peter Sutherland could probably figure out a way, but given his obvious conflicts of interest I wouldn’t ask him. Suggestions?
The transactional property taxation, which the department of finance in Ireland seemed to be so addicted to, for funding the central government exchequer, was a means of extracting taxes at an extremely local level, by geography across the island of Ireland. In other words, the priority of the department of finance (no doubt, upon the encouragement of the political class), was to use it’s quite long arm to extend into the regions and localities throughout the island and grab anything that might otherwise be collected by local authorities, or regional authorities. And then subsequently, allow local politicians housed in the Irish house of parliment to become like knights on their white horse, and ride back into the locality with a suitcase full of cash for that local economy. Then, having built the road or the factory shed or whatever it was, the mandatory IDA incentive-ized FDI company arrives into the locality, to provide 200 low paying jobs to the locals for about 2 years. You can see from the above, that the funding arrangements within Ireland are already extremely local in their nature, and made so, for the sake of buying a few reputations of local parlimentary representatives, otherwise know as Oireachtas members. This whole toxic arrangement of the Oireachtas and the transactional property tax as facilitated by the DOF, has completely imbalanced the entire credit facility creation and distribution stream for the entire island. There is no doubt, that the nature of our (democratic) national politics is to blame for the financial state of the country. What worries me, is that all right wing parties seem to know how to play this game. BOH.
Perhaps this has been addressed elsewhere on this blog but why is there such a disparity between the cost of borrowing for the government and for banks compared with the interest both are offering on savings (another form of borrowing), and why are interest rates for mortgages so low?
There was a recent IMF paper by Reinhart and Sbrancia on the liquidation of government debt and also a companion presentation written by the authors.
The conclusions are:
That link should be http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs2.pdf.
@ Gavin Kostick
The Finance Act 2011 provides for sovereign annuities which would be priced by reference to Irish bond yields. The NTMA has power to issue bonds to facilitate the creation of sovereign annuities based on Irish Government bonds with interest rates to be announced in light of market conditions.
The Irish Association of Pension Funds and the Society of Actuaries put forward a proposal under which Irish pension funds would have the opportunity to invest in longer-term Irish bonds at higher yields than are available elsewhere, and to price their liabilities to pensioners on the basis of those higher yields.
Irish pensions funds had allocated more than 70% of investments to equities until the crash and the ratio fell to 50% in in 2010 compared with 25% in the Netherlands and 5% in Germany.
So if there was some mechanism where Irish funds could earn say double the Bund yield for a period, it would be a lot more attractive than the 1.2% annual return on Irish manged funds in the 10 years to April 2011 when the the Irish inflation rate over the same period was about 2.6% per annum.
The National Pensions Reserve Fund statement on 2010, says since the Fund’s inception in April 2001, the Discretionary Portfolio (investments left after sell-offs to fund bank recaps) has delivered an annualised return of 3.4%.
This is a factual statement but presents a very misleading picture.
The 2008 report says the annualised return since inception in 2001 was 0.5% compared with 6.1% at end 2007.
Abolute lunacy: why not just sieze the assets Daniel and pay off the debt?
‘if we want to get out of the meat grinder without the drastic step of leaving the EZ – where our last situation would be ten times worse than our first – we must restore the creditworthiness of the state. Full stop’
The credibility, and the integrity, of our state is as important as its creditworthiness. Like other bankrupt ideologies, Ireland Inc is with O’Leary in the grave, and the street politics of this situation is going to catch up with the economics is due course.
We are much further back along the road of economic development than we like to imagine. As BOH and the Dork imply, its not just ghost estates we need to start demolishing. There is mountain of BS on this little island, and absent very deep and democratic reforms, it will not be a nice place to live.
‘In Germany and Norway, for example, the unemployment rate barely inched up during the crisis. In contrast, it rose markedly in some other countries, such as Spain and Ireland, where activity in the construction sector contracted sharply following the burst of housing bubbles, leaving many low-skilled workers without jobs. Youth unemployment, in particular, increased substantially. In extreme cases like Spain, close to one young worker out of two is now out of work, raising the specter of a “lost generation.” Likewise, temporary contract workers bore the greatest burden of the adjustment, and where it was not already high before the crisis, the long-term unemployment rate is creeping up.
Because adjustments have been concentrated in these special populations, they are likely to be associated with losses in human capital and rising inequality, potentially threatening Europe’s social cohesion and stability’
Some fascinating points. The key message is that Ireland inc. is not falling more into debt, it is, on the contrary, accumulating net assets.
What is and has been happening for many years is that Irish citizens are accumulating foreign wealth and this accumulation is being financed by foreign lending by government/banks. And then we expect the EU to allow the government/banks off the hook. How brazen we we possibly be as a nation?
A slight correction to the Gros argument. It is wrong to argue that Irish pension funds can lend to the Irish sovereign at more than 10%. For the case to make sense Irish institutions should be prepared to lend to the sovereign at less than the 5.8% which is available from the EU/IMF, and we expect this to fall to below 5%. This is not an enormous return albeit I admit it is higher than bund yields.
[…] Gros writes in the Irish Economy again, developing his proposal that the Irish Government direct Irish pension funds to sell their foreign assets and buy Irish […]
excellent piece today in the IT giving a reality-based retort to MK’s suggestions last Saturday, especially in regard to that line “Ah sure Argentina is grand” thats frequently rolled out.
Check out Stephen Collins editorial piece too in the opinion section on the “we’re all gonna have to sacrifice” idea. Thoughtful stuff in regard to the pension levy.
BW2: “It is wrong to argue that Irish pension funds can lend to the Irish sovereign at more than 10%.”
Certainly it would be wrong to argue that, but Gros doesn’t. He says: “A massive investment in the bonds of their own government, which offer a return of close to 10% (on the secondary market), should actually be in the interest of present and future Irish retirees as well.” I read that as a suggestion that Irish pension funds should be pressured into buying up bonds on the secondary market, which would presumably drive yields down.
But if the fund managers won’t respond to gentle nudges, can the government take more forceful measures? Dunno. IANAL.
Yeah, it is a peculiar mistake that Mr. Gros makes – the cost of old debt (the coupon payments) are baked in. It is the refinancing cost or the cost of new debt that matters.
While it can be argued that refinancing at the same coupon would continue the investment unchanged, effectively this would increase the duration and so depress the initial yield the debt was bought at. New debt would require new money at closer to 5% as you say.
Sounds perfectly logical to me.
1. The liabilities of private Irish banks have been ‘settled’ on the State.
2. The corollary of that and to balance the equation, private Irish assets should be ‘settled’ on the State- by extraordinary rendition.
So a wrong plus a wrong equals ..well, not exactly a right but a solution.
A solution that probably won’t harm a hair on the head of a bondholder.
Neat but nasty.
Now that is surely a solution that will interest the ECB.
Yes, an excellent article. Kelly’s analysis may be right, his recipe is total rubbish.
I presume you were misquoted in claiming that Anglo will cost us 20% of GDP for the next 12 years. Believe it or not I do agree with you that the real issue, as I suppose it was all along, is do we really have to carry the can for Anglo? In that context, the game is not yet up, we have lost some hard cash but at the moment it is mostly promises.
At the risk of being somewhat off topic in this thread, I’m referring back to my contribution to the “Regaining Creditworthiness” thread and somewhat summarising and hopefully smartening it up.
“How to Make Ireland Solvent … Many investors fear that by the time European support ends as planned in 2012, …”
“European support”: …
Perhaps the main concern of Europe is, or should be, to have countries with fiscal deficits, such as the RoI, get serious about those accounts and get them acceptably in order.
Perhaps in the case of countries where that goal has been achieved, the EZ would be more disposed to roll over its support, into the long term. By late 2012 The RoI _might_ be one such. If it was, the EZ might even be somewhat receptive to the theory that they, or banks elsewhere within the Zone have some responsibility for the crisis, that it has much to gain from resolving the crisis and that, given confidence that the RoI is now much more prudent, it would cost the Zone nothing to have a facility to roll over the support at zero yields of _all_ those already incurred loans – effectively to act as LOLR, perhaps more correctly “Holder Of Last Resort” of bonds –
those bonds on which we would continue to pay the yields applicable when initially made, or perhaps even slightly less – something possibly of a yield haircut for those creditors or whoever now holds these bonds.
(The money has already gone into circulation and has inflated prices and circulated itself throughout the Union and further afield. The Union may declare that it will not provide support for any new RoI bonds).
Much the same goes for our bonds relationship with the UK and its central bank.
For the RoI, then with its fiscal account looking respectable and a healthy current account, would remain its unemployment or equitable opportunity of quality of life issue.
… that should probably be: Guarantor of Last Resort of the bonds.
@ Bryan G
As an investor I would be following Reinhart and taking the necessary precautions. We are already well down the road of financial repression with pension and insurance levies and ever increasing DIRT. 2 yr Irish Gov bonds are currently yielding 12.42% …so little hope of funding on the markets any time soon. The signs are ominous.. Gros is simply off the walls.
@ Michael Hennigan
Thanks for that.
” A massive investment in the bonds of their own government, which offer a return of close to 10% (on the secondary market), should actually be in the interest of present and future Irish retirees as well.”
“which offer a return of close to 10% (on the secondary market)”
Zoom in a bit:
“a return of”
Put into context:
“a return of ?”
Suggest Daniel Gross takes a sabbatical as a sell side bond salesman for a while. He should learn something – if only some tips about the use of expletives in sarcastic replies.
It is a revealing interpretation of Irelands need for the bailout:
“So why does the government need a continuing bail-out? The reason is that the government has a huge foreign debt whereas the Irish private sector has huge foreign assets. ”
Thats it. No primary deficit or anything – that’s inconvenient.
If the state wants to force people to lend to it it should be forcing its overpaid employees and professional contractors to take part of their salary as gilts.
Fair dues grumpy, at least you responded to what the man actually wrote. As for your suggestion that PS employees take part of their salary as gilts, I see no indication that Daniel Gros would oppose that.
Carmen Reihhardt has recently drawn our attention to the ways previous debt crises have been resolved around the world. In most cases a form of ‘financial represion’ has been involved. The pension levy and Professor Gros’ suggestion can be so described. But, coming to a small green country not far away, financial repression. Inevitable as death and taxes; probably just a linear combination of the two. Get your money out while you still can. Or just get out while you still can.
Or to put it in plain English: EU-funded think tank urges Gov’t to seize Irish pension assets. http://www.openrepublic.ie/?p=343
I luv it, levy public sector pensions at 7.5% and it is not enough, touch Penelope Pringle’s private pension pot and it is “off the wall”, “rubbish”, “slavery” etc etc …
“The problem I have, is the presentation of the narrative, that is ONLY RECENTLY that the Irish government used the leveraging of Irish banks to fund itself. When we clearly know it to be the case, that the Irish government has always used the Irish banks to fund itself, in express preference to obtaining credit on it’s own account. In fact, that has been the distortion in Ireland for the last decade or so.”:
I expressed a similar view in the Indo in Nov. last year, titled “This nation is the cuckoo in the EU nest:
“It seems to me that we have, let’s say, borrowed €100,000,000,000 which it would be desirable to repay. It has been invested in, or converted into, new buildings, which generated overflowing government coffers, which kept the policymakers in power for three elections in a row.”
@ Peter Kinane,
Martin Wolf’s Ralph Miliband lecture at the London School of Economics is available as a podcast. I listened to it, and his insights are all put together quite nicely in a lecture format. It is sometimes easier to absorb his point of view in that format, rather than in the numerous FT columns that are linked from the Irish Economy blog from time to time. Wolf has written a couple of books, which I think would dovetail nicely into much of discussion and debate above. BOH.
Martin Wolf’s theories in relation to non-financial corporate savings (see slides in PowerPoint of the lecture available at link below), are quite frankly, as scary if not more scary as MK’s article of last Saturday in the Irish Times. In fact, there were many things about Wolf’s lecture which sounded horrific, especially when he began to talk about Keynes, China and surpluses. The point I did like, was the part that Keynes did not predict. The it was not credit flows at global level which stopped as Keynes predicted, but it was the credit intermediaries at national level, namely in the United States which imploded in such spectacular fashion. BOH.
‘Get your money out while you still can.’
That’s more or less happening anyway, despite the deposit guarantee – another evidently disbelieved pledge from the Cowen-Lenihan duo.
The pensions levy is just another tax on saving, and eventually the government will get around to increasing DIRT or increasing bank transactions taxes.
The country cannot get from under the burden of the Cowen-Lenihan bank guarantee and meet all its normal sovereign obligations unless a growth miracle happens or unless the government seizes private assets. Given the lackluster public objections to austerity, the latter may yet come to pass.
@gavin kostick – “On a technicality though, is it possible that fund managers aren’t investing in government bonds because their regulations require them not to invest in things with poor credit ratings, and at the moment I think the goverment is not far off junk?”
Fund managers can and do hold IGBs – they are still on average two notches away from loss of investment grade status. However, they hold very few of them – not as a matter of investment preference, with which over the last few years nobody could have any complaint – but rather because the index against which they measure themselves dictates investment policy, rather than merely measuring it. Ireland is about 1% of this index.
Ciaran O’Hagan mentions that there has been a tendency reported of fund managers in other EZ countries pulling funds back to their home markets over the last while. Without some change from the IAIM, that will not happen here.
As things stand, IGBs are priced (from beyond 5 years maturity) at levels which discount a haircut of 30%, which is to say they are priced at sub-70 in the secondary market. Whereas bond prices are normally derived from interest rate expectations/yield curve, when haircuts/defaults are feared or expected, the yield curve is derived from the expected scale of the haircut, giving rise to the steeply inverted curves prevailing in Greece, Portugal and Ireland. One could reasonably purchase 10 year Irish bonds today, not necessarily in anticipation of the 10%+ yields apparently on offer, but in the knowledge that, even after a 30% haircut, the return on the bond will be over 5%, compared with 3.2% in Bunds. Any lesser haircut, or none at all, would naturally give a higher return; any greater haircut would of course give a lower one.
As bad as things are, have been, and will be, there is a lot of bad news – possibly too much – built in to current IGB prices/yields. But I don’t think the Irish fund management industry cares one way or another. They will continue to allow indices to dictate performance and investment allocation, with value considerations barely on their radar.
Well – all ideas are welcome.
One cannot forget the toxic detritus of banking system debt – we have had the ‘stress’ tests – and next step is to restructure (fence-sitting does not resolve it, nor will Lehman induced and well spun nightmares) ….. think KW mentioned all those promissory notes …. methinks a good few are shred_ible … so a return to Daniel Gros on AngloIr/INBS etc 40billion or so ……….the …. er … banks. (I agree with M Kelly – ECB effectively now owns the Irish banks, and the Greek banks… and ….)
Debt restructuring is still a dirty word in Europe
ANALYSIS: Daniel Gros
Irish Examiner Friday, April 08, 2011
‘Europe is making a fundamental mistake by allowing the two key elements of any resolution of the crisis — debt restructuring and real stress tests for banks —– to remain taboo. As long as successive EU summits persist in this mistake, the crisis will fester and spread, eventually threatening the stability of the eurozone’s entire financial system. ‘
Key question: What, where, who and how is the best debt restructuring we can do? Why and when are rhetorical.
My gut tells me a massive inflation is coming when the Euro creatures try to direct the Micks pensions from equities to Bonds.
Its best to keep a simple barbel approach to investing for simple folk me thinks – however how equities can do anything positive when wages will have to increase to replace credit and its subsequent demand is beyond me.
This Dork is sticking with Gold long term and the Post office short term as I don’t have the luxury of a pension.
As when you are simple its best to keep it simple stupid.
There are ongoing references above the need for legislation to make Daniel Gros’ suggestion succeed. I think the Agefi article I referred to above suggests that there are other ways, other means of influence, that could be taken into account. Again I find that there isn’t that much awareness in Ireland of what is going on in the rest of the Eurozone, in part given the linguistic challenges.
Bond. Eoin Bond makes mention of a horrible incident in Argentina in 2002. In contrast to that, I spent some time in Argentina in 2003 and couldn’t help being struck by how quickly the economy had overcome the financial shock of the previous year.
That’s not to support the line “Ah sure Argentina is grand”. The bigger lesson to be drawn instead is that sensible political and economic management does matter very much.
Everywhere in Argentina, there are reminders of the faded glory of the early 1900s, a time when the country was among the richest in the world. Its relative decline underscores the importance of sound political and economic management.
Just last week, I was in Switzerland’s Landesmuseum, which makes a decent attempt at explaining how the country managed to become so rich with limited resources. A penny pinching culture would have had no regard for blanket guarantees, and I think would not be allowing public indebtedness explode on an ever grander scale, like Ireland in 2011 (funding of some E43bn from the EU-IMF is foreseen for this year alone).
“A very strong case can thus be made that Irish pension funds and life insurance companies should somehow be ‘induced’ to invest their entire portfolio of gilts in Irish government bonds. ”
One purpose of the pension funds is to allow workers to diversify their retirement savings into businesses they do not work for, industries they do not work in, and countries they do not live in.
In searching for a pile of money to be inducted may I suggest one obvious source is government workers themselves. Why not pay 1/3 to 1/2 of government salaries in long term government of Ireland bonds for the duration of the crisis? Now some will quibble that if the Irish government cannot pay them 100% of their salary now why would the Irish government be able to pay 2 or 3 times that sum over 30 years? Explaining it to the unenlightened is what the economics faculty at your favorite university is for.
Give me anything remotely approaching a guards pension and you can have all my pension pot plus Penelope (who might even agree for all I know). I would even write you a large cheque to throw in, if I could borrow the money from a bank.
And I have 11 years to wait for a State pension, whereas some of my contemporaries are on full State pensions for the past 7 years.
That is of course if both myself and the State as we know it last 11 years.
I am hopeful but not overly confident. The State appears to be confident but is a somewhat hopeless case.
The papers report today that Nationalised banks are to give staff partially tax free payments of between 50,000 and 300,000 euros as a compensation for being made redundant from now state institutions.
What would they get in a wind up? Wind them up.
Quite apart from the absurd level of these suggested payments, if the bank staff’s negotiators really believe that the state is in a position where it is appropriate to pay out these kind of sums, they should have no difficulty reaching a compromise position where they accept an offer of payment in government bonds. If the won’t do that it rather undermines their position that someone else should think it a good idea to lend the state the money for this.
I don’t suppose many of you took the time to listen to Wolfs treatise – a more simple corkonian breakdown of his lecture is that the west blew the slave surplus(credit) on useless consumption.
America ain’t going to pay China back – thats for sure but will the creatures of the euro zoo be persuaded to pay back the euro chips to Germany who created a surplus through work and London who created a surplus via thin air ?
Looks like the slave / worker dynamic may be reversed in Euro land.
With the locust middleman still surviving using various it was not me guv excuses.
If the Euro is to beat Gold this decade it MUST REWILD HIBERNIA , IBERIA and HELLAS.
If things become politically impossible the euro will either breakup or monetize.
Hmmm….so let me get this right.
1. German future pensioners via their pension funds punt on bonds in Anglo/AIB/BOI and lose big
2. I invest in sensible things like big well-run companies, swiss frances, international diversification etc. I don’t touch “Irish tiger” crap with a 20 foot pole.
3. Irish sovereign makes German pensioners whole but bankrupts itself on the process.
4. Irish sovereign is then “assisted” by the German sovereign and other assorted “partners”
5. German sovereign and assorted partners then force Irish sovereign to “induce me” to return my assets to my native land so that they can be seized to pay Irish sovereign debts.
Wealth Transfer Complete!!!
Don’t ye just love this European Project thingie!!! In any real country, someone showing up to propose this would be laughed out of town.
“1. German future pensioners via their pension funds punt on bonds in Anglo/AIB/BOI … “:
which were supervised by you via your input to the democratically elected government- -supervisor- -policy-maker.
@ Peter Kinane
‘which were supervised by you via your input to the democratically elected government- -supervisor- -policy-maker.’
Oh…. right. When Ireland signed up to the euro we were signing an unlimited guarantee for all wholesale lending to Irish banks.
I don’t think that was even in the small print. Was it?
That is one of best responses I have read on this issue for a long time. And I think it packs a good legal punch should Ireland say, that’s its, cut the banks loose.
Ciarán O’Hagan: I don’t have a link and didn’t keep the article. […] I think the Agefi article I referred to above suggests that there are other ways, other means of influence, that could be taken into account. Again I find that there isn’t that much awareness in Ireland of what is going on in the rest of the Eurozone, in part given the linguistic challenges.
French is certainly a challenge for me but I’m willing to tackle the article if you can post a link. But having watched many episodes of Engrenages, I don’t doubt that there are influences at work.
@ P McD,
“Oh…. right. When Ireland signed up to the euro we were signing an unlimited guarantee for all wholesale lending to Irish banks. …”:
I did not say it had anything to do with what we signed up to in signing up to the euro.
If A borrows from B, then A, presumably you agree, has a duty to B. This duty would not be defined as: the money is lost, tough luck on you. I should think that A would want to avoid any such attitude.
I am not saying it’s a law written on old stones and is evident to all – contrary to Bronze Age premises which inform our culture. Quite differently, I think different people are different people and when impacted by a force – such as having difficulty repaying their debts – the effect is different – so to speak, they react differently. This effect is then the person – the evolved person – going forward. We have some discretion in sizing up options and in influencing our fate henceforth. So, one person will crystallise one way and another another way, thereby influencing their potential going forward – to wherever their respective target forms are – if they have any. Likewise their past choices would have influenced their current form – the money is lost and I have to tell B … whatever.
Now regarding the particular A and B at issue in this thread or in my post (and your reply): two wholesale banks:
The issue or both banks respective standards on whether the citizen of a democracy in our culture has a responsibility for the policy of wholesale banks (especially as borrower banks): I think we are rather like shareholders in a company: the buck stops with us. We have a role in how our banks are run, via our elected representatives. For example, (we) the gov. can even move in and take them over, if it chooses, likewise with our pensions and income … depending on our target form – we are a society, perhaps more precisely: we are individuals and also individuals comprising a society or societies – a tension of the two. So, the lender, bank B, would have taken this into account in making the loan. It would also have taken into account that governments generally provide supervision to preclude their banks going bust – because of negative consequences (socially) locally and further afield.
Perhaps alternatively, bank B thought that bank A was entirely autonomous. If so, it would not expect responsibility for the loss to extend to the citizens.
Perhaps the level of autonomy versus citizens’ role was not fixed in stone for either bank at the time of issue of the bond. Let’s also say that either there was no precedent, or alternatively a whole range of precedents regarding such. This makes a different to the forces at play in determining an effect – decision.
Further, one might also keep an eye on the standards by which one will operate and be seen to operate in the world going forward and how one wants the world to operate and how one wants to influence the world to operate. One may want to keep an eye on one’s target form.
Further, I am not saying that the loss should be borne solely by one party- -bank, nor necessarily otherwise.
Further, one might want to look at the likely consequences of one’s various options on the wider EZ community (especially as one’s fiscal situation is out of control).
But then this is all coloured- -informed by one’s first principles. (I did not have any takers here in an economics forum to show, in advance of mine, first principles on theory of money or whatever, so would not expect a show on theory of value or whatever).
“I invest in sensible things like big well-run companies, swiss frances, international diversification etc. I don’t touch “Irish tiger” crap with a 20 foot pole.”
Oh for the eye of the gods. Please pass on that magic formula for identifying well-run companies.
@ Peter Kinane
Here’s a thought experiment that puts your opinion in perspective: Say you met a German banker in 2006 who owned Irish bonds and asked him why. If his response was that although he was concerned by an overheating property market, he thought that if the banks went bust the the Irish government would bail them out and he’d get his money bank. Would you still feel a moral obligation to repay him even though he’s clearly been reckless?
The fact is that banks who bought Irish bank bonds were professional investors who should have been perfectly aware of the risks involved and were most certainly aware that the extra return these bonds were offering was reflecting extra risk. The idea that any half-capable investor relied on the Irish Central Bank to do their due diligence for them is laughable and to the extent that any sleepy banks cut corners in their diligence, their negligence demands that they lose money on their investment.
Contrary to some popular opinions, the Irish Central Bank’s job is not to completely prevent bank failures – as it states on its website, it attempts to “minimise the risk of failure by ensuring compliance with prudential and other requirements”. This is an important difference because no regulator controls the actions of those it regulate and therefore cannot be held wholly responsible for the actions of those it regulates – if your teenage son steals a car and causes a 5-car pileup on the M50, people might say that you did a terrible job of raising him, but you don’t get sent to prison instead of him.
I agree 100% with your comment that if A borrows from B, it has a duty to repay B. Private banks, owned by private citizens borrowed money from European creditors. Now C is being asked to repay them, which is equivalent to the government forcing you to repay my underwater mortgage. Irish taxpayers were not “rather like shareholders in a company” but if they were, the whole point of being a shareholder is to have ‘limited liability’ – the great leap forward in modern commerce was to separate the liabilities of the company from that of its owners.
@ P McD,
“Oh…. right. When Ireland signed up to the euro we were signing an unlimited guarantee for all wholesale lending to Irish banks. …”:
Just a further thought: Actually, you are correct in so far as you imply so that I am implying that because we signed up to a common currency and borrowed from other members of the group- -family, this is relevant. I would see an extra duty: that of care to the group and the currency.
@ Edward 2.0,
The problem I really have, is with the various bumper stickers, popularized by Irish politicians which characterized the Irish financial meltdown. One of the those, being fixing the banking system. I am all for the concept of the banking system becoming a form of utility piece of infrastructure on top of which companies can trade and offer services as fit, to the meet demand. But I think it aught to be emphasized, that it is not fixing the banks, what we are attempting to do in Ireland. Furthermore, it should be communicated in no uncertain terms to those outside of Ireland, that same truth. The banking system in Ireland is a service which in turn runs on top of another large utility piece of infrastructure, the credit creation and delivery system. Precisely the mistake, that has characterized so much of thinking about the post 2008 meltdown in Ireland, is the mistaken believe that it is banking institutions which create credit. The banking system is a subset of the credit creation and delivery system. NOT THE OTHER WAY AROUND. The difficulty which existed in Ireland, long before 2008, was the lack of an infrastructure upon which to create a banking system, or run the kind of economic activity and growth which we witnessed during the 1990s and 2000s. Furthermore, it appears that the basic underlying infrastructure of credit creation and delivery, is something which governments are incredibly bad at maintaining. Our supplies of basic essentials such as fossil fuels runs on a one or two reserve also, and did for most of the 20th century. Our supplies of electricity are by no means as secure as they once were. There are a lot of these kinds of this basic infrastructure, the creation and supply of credit included which was initiated decades ago, and is in need of the most basic reform. The only country I am aware of currently, which has taken measures to look at this problem and address it agressively is Denmark. I wouldn’t think that we had a banking system collapse in Ireland, so much as a disintegration at levels much lower than that. It is like that train bridge that fell into the sea at Malahide not so long ago. The appreciation of risk and necessary emergency response doesn’t seem to exist within the various branches of government in Ireland. We tried to operate the Celtic Tiger kind of economy on top of the financial equivalent of a rusty bridge, and it ultimately failed. The passengers and the trains were salvaged barely, and made it to the next station. But what has happened, is that mainline of credit creation and distribution has not been repaired since then. Instead, we are focussed on the problems of the train companies, who ran their business on top of the infrastructure. We cannot solve the problem that way. BOH.
@ Peter Kinane
‘The fact is that banks who bought Irish bank bonds were professional investors who should have been perfectly aware of the risks involved and were most certainly aware that the extra return these bonds were offering was reflecting extra risk’
Absolutely. They were aware of the risk that the Irish banks would go belly up, because the regulation was obviously a joke. But they also knew that such a development would be hazardous to the EZ banking system as a whole, and that the ECB would act to prevent contagion, by facilitating the local soveriegn in socialising the losses. In other words they correctly reckoned they would get their money back.
That’s why they are called professionals. Extra returns for a notional, rather than a real risk. That’s alpha.
Your intuitions are very sound. Our economic development model which is fundamentally broken. We need some native genius.
@ Edward v 2.0,
“Say you met a German banker in 2006 who owned Irish bonds and asked him why. If his response was that although he was concerned by an overheating property market, he thought that if the banks went bust the the Irish government would bail them out and he’d get his money bank. …”:
Your first two paragraphs deal with the other guy.
My primary concern is my own performance (as a party to the bond); not that of others – this better equips me for going forward. If I take out a loan and it goes wrong, I look primarily to myself. That said, some people invest less in these matters- -fields than others; they depend on others for direction, and rightly so – we can’t all live the same lives; diversity makes the world go round. In the case of the state, it pays people to attend to the economy.
Also, nanny culture has taken a huge role in life, to the extent almost that if someone breaks into my property to kill me and slips on a banana skin, I might almost have to compensate them. I think it has gone far to far, and risks curtailment to much of the adventure and risk of life. Perhaps nanny culture is carrying over into our business dealings. (Likewise, with very long shot risks in certain matters: they have to be covered to an extent that is very expensive, thereby perhaps negatively impinging on general matters).
However, though I did not take a position above regarding co-responsibility, I have been saying for six months that it may be best to regard it as a co-responsibility matter, after we get a better grip on our finances.
Your third paragraph:
“the Irish Central Bank’s … attempts to “minimise the risk of failure by ensuring compliance with prudential and other requirements””:
So, it has a role- -responsibility. The NTMA seems to have been very concerned about the risk factors, and one might say it did not get as burned in its reputation as did the CB. Also, much of the government’s funds came as spin off of these bonds. It should therefore have been concerned that the loans were well on the way to being repaid, before spending the revenue. It should presumably also have noticed that the ratio of borrowing to deposits was surging – new levels of risk in the source of much of their revenue. We have a DOF that is long established. It should, and may, have been on the ball on these matters …
“… Irish taxpayers were not “rather like shareholders in a company” …”:
I meant that they were like shareholders in that the ultimate responsibility of the company’s/state’s management/governance rested with them.
In conclusion, there are many different potential forces that may act in how this crystallises, as in all issues. I think that is why we have such a diverse world. In part, I am acting to tilt the balance somewhat against those who want to land the loss exclusively with ‘the other guy’ and to influence us to be more responsible within the EU generally.
I think it is important to try to improve standards rather than to erode them – but of course how one does that is individual sensitive.
“Absolutely. They were aware of the risk that the Irish banks would go belly up, because the regulation was obviously a joke. But they also knew that such a development would be hazardous to the EZ banking system as a whole, and that the ECB would act to prevent contagion, by facilitating the local soveriegn in socialising the losses. In other words they correctly reckoned they would get their money back.”:
Perhaps our lot had a similar attitude – and not just our bankers.
Paul Quigley says,
Interesting. I am no expert in the field of economic development modelling. But I do understand, that people who work in the engineering and construction tend to be more familiar with human behavioural responses where some kind of collapses occurs, or may occur. I remember once I watched a documentary by Ray Mears about an American tourist on a skying holiday in Turkey. They got caught in a snow storm and decided to do the macho thing of walking out of it. Instead of staying put and waiting for a team of rescuers. Apparently they walked miles in the wrong direction, and this expanded the possible search area by a very large factor in a densely wooded area. The human behavioural response often seems to be, an impulse to do something, anything in order to try and solve the situation. To try and walk their way out of trouble. It is rare in the modern era for people to become directly involved in situations where a collapse occurs, and you are forced to deal with it. In the modern era, we have gotten into the habit of passing on so much of the risk that life entails. University education is a classic example of that. It is attractive to folk who fear a world, which is run by corporations etc. The university institution in the modern era is buying risk from you. The education is secondary at best in the transaction. That reality doesn’t offer the ideal environment, in which the ‘native genius’ that you refer to, may emerge. That much, I can understand. BOH.
Joseph Ryan Says:
May 14th, 2011 at 5:24 pm
I luv it, levy public sector pensions at 7.5% and it is not enough, touch Penelope Pringle’s private pension pot and it is “off the wall”, “rubbish”, “slavery” etc etc …
Give me anything remotely approaching a guards pension and you can have all my pension pot plus Penelope (who might even agree for all I know). I would even write you a large cheque to throw in, if I could borrow the money from a bank.
And I have 11 years to wait for a State pension, whereas some of my contemporaries are on full State pensions for the past 7 years.
That is of course if both myself and the State as we know it last 11 years.
I am hopeful but not overly confident. The State appears to be confident but is a somewhat hopeless case.
Oh Joseph, if all were as enlightened as you..
and were prepared to nationalise the private pension pot. €200 billion (40% or €80 was already gifted by the state through tax allowance, a further €40 billion was gifted last September by repaying the bondholders) is a pretty penny.
€24 billion of non-commercial public sector pensions have already been nationalised and that was considered fair.
Let us all now pay the 7.5% levy and rejoice at the comfort of being protected by the state.
opps forgot to mention that the 7.5% levy is on top of a 13% contribution.
The state pension is not payable to most non commercial public sector employees.
As others have already said, more or less, about Mr. Gros; If Irish bonds are a safe bet then 10% yield is the opportunity of a lifetime, for Irish pension funds or for anyone else.
Don’t let the facts confuse you.
A public officer of the State said in 2010 that the annual cost of a new entrant to the public service in 2009 after employee deductions was 19%.
The total accrued liability of €129bn at the end of 2009, including €16bn in respect of the State pension, may also be a fiction as may the rise in the staff pensions bill by 35% since 2008 to almost 3bn.
The earnings link may also cost nothing.
In societies where the number of years as dependents (childhood + fulltime education+ retiremanet) far exceeds athe number of years working, something has to give.
In other, totally bizarre news, it looks like we’re likely to get a new head of the IMF as Strauss-Kahn has been arrested in NYC.
Does anybody have any thoughts as to whether this a new head will be more or less inclined to force a restructuring?
I don’t claim any special knowledge, but I’d say less inclined, unfortunately. S-K had the reputation of being more sympathetic to debtor nations than was usual at the IMF.
Just to add, I don’t think it makes that big a difference. Morgan Kelly’s account (corroborated by Kevin O’Rourke) suggests that the US Treasury is with the ECB, which means the IMF is outgunned in any case.
Back to Daniel Gros: is there a lawyer in the house? Is the Gros proposal a runner?
It is said the Gordon Brown wanted the job, but was not supported by Cameron. We’ll see.
I’m optimistic, although very cautiously so, about a relacement at the head of the IMF. The US treasury seems to have exercised its influence through big EU Member States at the G20, rather than through the IMF. The IMF staffers seem to have been forced kicking and screaming to accept the “bailout” by EU and ECB officials with the active collaboration of their Irish hosts.
A new IMF head who is not in a shadow election campaign for the French presidency might be prepared to adopt a more forceful posture, particularly if there was even a hint of independent thought from the current Irish government.
@ Peter Kinane Says:
“which were supervised by you via your input to the democratically elected government- -supervisor- -policy-maker.”
Sounds fair. Tell me who I should write to in order to get my money back from the folks who regulated General Motors or Enron. Can I sue the US government because they didn’t regulate BP’s offshore actvities and I took a nasty haircut on these shares? What sovereign taxpayer should I sue for the loss of my bonds in ABB?
Also – what if I voted Labour or Sinn Fein? Do I get a discount on the reparations that I owe?
Daniel Gros rightly highlights the best and only certain way out of our mess. As Morgan Kelly pointed out the other week, a sovereign default could be a calamity. Unfortunately, it increasingly appears that a default is what many German politicians want, if for no other reason than they want to appear tough on private investors to their own public. The details as to who defaults, when, and to what degree seem unimportant to them, even though they would be shooting themselves in the foot by having to stump up billions to recapitalise the shattered ECB.
Understandably, many are nervous over what might smell of political interference. However, were the institutions to unload their bunds and buy Irish gilts, they would only be reverting toward the normal situation insofar that most OECD countries’ institutional funds have a home bias, in many cases to a substantial degree. This is naturally true of the larger countries, whose representations in the indices are higher, but even pension and insurance funds in smaller countries such as Canada and South Africa have for years held the majority of their fixed income assets at home.
As aiman pointed out in his perceptive comment above, institutions are benchmark driven. The historical choice by the IAIM of the Euro-BIG for its fixed income benchmark was, while not without rationale, nevertheless arbitrary (and, as it turned out, has served us well). There is no reason why that benchmark could not be 50% Irish gilts/50% Euro-BIG, or indeed 100% Irish gilts. Alternatively, set a benchmark at the fund level with, say, a 25% weighting.
It’s worth speculating over what were to happen if our institutions started switching meaningful sums back into IGBs. Daniel’s analysis implies that there will simply be no need for a default, a game-changer which the market would in all probability soon pick up on. So the institutions, or at least the early-movers, would likely experience significant gains as bond yields fall. The craven credit rating agencies would follow the market as usual with an upgrade or two. The institutions would do very well and we would all benefit from the fiscal financial crisis being resolved to a still large but clearly very manageable problem.
There are some handy strategies available. The NTMA could issue new long-term gilts, both nominal and index-linked, to the institutions. With the cash, we could rule out the need to tap the monstrous ESM (European Slavery Mechanism). This would be vitally important in the battle to regain market confidence as it will limit the senior creditor funds to no more than the existing EUR45bn with the IMF and EFSM.
The institutions might make the case that they are concerned over Irish default risk. However, their past low participation has put them in a serendipitous position. If they were to invest now, then their very own involvement would effectively remove the risk of default. Even for those who don’t buy this argument, current ten-year yields imply a 40%-plus haircut. Now then 40% of the outstanding bond plus promissory notes is around EUR120bn, of which 40% is nearly EUR50bn. That’s 20bn more than Wally proposed to Baldini, for goodness’ sake. Surely the worst case is more than priced in by now.
Once the solvency issue is clarified in our favour, we can perhaps ease up on the fiscal adjustment a bit. Just as importantly, we would be able to stick two fingers up to the EU on the CCCTB. And lower our corporation tax to 10%, so that we can get closer to the effective rate in France.
@ Edward v2
Apparently the deputy md is in charge of the Greek problem and he has announced his departure from the IMF.
Interestingly he did not go to Berlin to meet Angela today for a scheduled meeting that DSK had been due to attend to discuss Greece and Portugal.
On a practical note.. How do you get pension funds to buy new Government paper at a reasonable rate, say 5%, when existing paper is yielding 12.42% (2 year)?
“Tell me who I should write to in order to get my money back from the folks who regulated General Motors or Enron. Can I sue the US government because they didn’t regulate BP’s offshore actvities and I took a nasty haircut on these shares? …”:
I am not aware that democratic governments appoint supervisors of such corporations.
As regards losses on shares: You are now conflating- -confusing purchases with loans – if you are implying an analogy to the banks issue. If I buy a cow from someone and I don’t take good care of it and it dies, I do not go to the seller or the government to carry the loss. http://dictionary.reference.com/ 🙂
“What sovereign taxpayer should I sue for the loss of my bonds in ABB?”:
I don’t what ABB is …
“Also – what if I voted Labour or Sinn Fein? Do I get a discount on the reparations that I owe?”:
We act democratically to determine the direction of our society. We, as individuals, win or loose according to our collective choice – no discount for you, sorry.
I would also suggest you run the word “reparations” through the dictionary – somewhat different to repaying a loan.
The 3 Eurozone countries which are most dependent on foreigners to fund their sovereign debt, are the ones which have been bailed-out.
Doesn’t this just add to Morgan Kelly’s argument? We need to terminate the ECB/EU/IMF deal. This gives us resources to do it without killing the economy. We can decide to run down the deficit over 5 years.
The ECB/EU/IMF deal has turned the Dail into Ireland city council run by the ECB. Any fiscal policies need to rubber stamped by the ECB. Of course the Dail can decide the location of local roads and speed limits but not much else.
The rich in the public and private sectors used the boom and FF gombeen polices to suck the credit supplied by the German, French and British banks to pile on assets abroad. They now expect the rest of us to pay.
They did this by using the huge stamp duty revenue to reward themselves huge salaries in the public sector and semi-state sectors. We all know that senior civil servants, judges, Semi-state executives all get paid 2-3 times more than anywhere else in world. This is an outrage and the fact that the current administration does not intend to anything serious about it will be their downfall. They are now handing the dribbles of cash they are getting from the IMF/ECB to that same group. BANKRUPTING the country in the process.
In the private sector they also persuaded the government that the boom was caused by the huge entrepreneurial skills of the rich who should be not be taxed. They were showered with tax incentives, from the best fiscal pension treatment, BES, Rental incentives, Tax exemption for piss artists etc.. I know. I saw my % tax gradually decrease as my income rose. David Drumm was paying 2% of his outrageous income in income tax. Over the last 10 years this group sucked everywhere they could like a big vacuum cleaner. The threshold to get into the Sunday Times Rich list went up twenty times in the last five years when Ireland plc went through the sharpest contraction ever of a modern advanced economy. They grew as the country died economically and Goss pointed out moved all their cash to foreign “safe” assets. This same group expected, expect to get away with paying no fees for their darlings in college, a heavily subsidized health system and good infrastructure to cruise around in their SUVs. Any talk, including the current threat to a small percentage of their pension plots is resisted.
@Ceteris paribus: How do you get pension funds to buy new Government paper at a reasonable rate, say 5%, when existing paper is yielding 12.42% (2 year)?
Surely the point of Daniel Gros’s proposal is that, if funds are induced (somehow) to buy, bond prices will rise? It’s hardly a stretch to suppose that yields can be reduced to, say, Spanish levels by Irish funds’ demand.
@ceteris paribus – the yield at which new issuance can happen is, as you point out in other words, determined by the levels available in the secondary market. A significant portfolio shift by Irish institutions back into IGBs would likely see secondary market yields fall appreciably. Whether or not this appreciable fall would take time-adjusted funding costs for the country below those available from the Troika is open to debate. (It certainly wouldn’t happen at a stroke, but is possible over time, provided all things do not remain equal.)
@ Peter Kinane You seem to be under the impression that ‘democratic governments’ that appoint supervisors to financial institutions are, regardless of the explicit law on deposit guarantees and the law on receivership about who is in the queue for getting paid, signing a 100% guarantee for every thing those supervised institutions do because they supervise them. For get about practice. This doesn’t even make sense in theory. There is no legal basis for such a view and no one – not even Pimco believes that there is. ‘Shareholders’ as you call us are not responsible for the losses of companies they own. They take their losses in loss of share value.
I get the point that the Irish gov’t and regulator screwed up. They did. But that does not create an unlimited liability on the part of citizens and taxpayers.
You don’t understand the different between different kinds of responsibility. The German and UK supervisors are also supposed to be regulating the solvency of their financial institutions. They should have been looking at the possibility of an Irish default. Are they, and therefore, their ‘elected’ masters, and thereby their citizens also responsible..??
You’re throwing the facts into an argument that is little more than a Hegalian stew of conflation and elision. The supervision of banks does not create unlimited taxpayer liability. The reason why Anglo bonds paid more than than German bonds was because they carried hither risk. Geddit?
First off, pension funds and insurance companies don’t normally buy short-term stuff (see aiman’s comments re their 5yr+ benchmark).
Moreover, if they just buy the longer maturities in the current secondary market there’s a chance the ECB will, ahem, be fortunate with their sell orders. This arguably leaves us worse off – currently it’s us, the EU commission and the ECB versus the market and the Germans. We don’t want our star defender changing his shirt at half-time.
The key point is that we need more money after 2013 to meet redemptions. If we can get it, then we’re almost home and dry since there’s a two years+ gap before the next wave, and that can be dealt with by growth, the passage of time and (don’t laugh) the sale of the NPRF’s stake in the banks. So we need to maximise our advantage of any domestic institution purchases by raising cash in exchange for truly long-term securities (which is what they want anyway).
As regards yield comparisons, long-term index-linked issuance can’t be directly compared to the existing market. There’s nothing past 14 years maturity, and it’s all nominal. OK, you clearly can’t borrow cheaply under the current circumstances, but remember yield curves are typically steeply inverted in a default-fearing market. Why shouldn’t buyers and sellers meet at around 4% real for thirty year money?
So what if it’s a bit expensive? Ultimately, as a borrower, it’s a better strategy to have a higher cost of interest than you would like on bonds that don’t have to be refinanced for twenty or thirty years, than an inability to refinance at all without official, senior creditors.
I don’t buy your argument. So pension funds avoid short term but our 10 year are at 10.5% and our 15 year something similar. So you are saying that the managers will buy 30 year at 4%. If you can sell that Bill Gross has a job for you at Pimco. As for recouping money from the two pillars.. I would not hold my breath. All credibility in those institutions is shot internationally. At least they should change the names of these banks, on the basis that memories will fade over time. Not much point in reminding the markets everyday of the debacle.
Another point the wealthy in ireland have gained massively from the “support” or government has given to Anglo. The whealthy depositors and bondholders of Anglo were all rewarded with capital gains of 5-10% as Lenny and Dukes bent over backwards to tax payers money into their gullets and increased the interest on Anglo deposits to 6, yes 6%. Money that all parties knew would never be returned. Of course the depositors in Anglos wealth club, which was quitely sold in London about a year ago wouldn’t have much change if Anglo was not bailed out on that faithful night would they. Their 100,000 k deposit insurance from the then financially sound government would have only covered a small portion of their “wealth”.
Bob Merton spoke a bit about the pensions industry and the three legged stool at MIT. BOH
@ P Mc D,
First of all, sorry, I did not distinguish between wholesale and retail banks in my earlier reply – though it does not much change my position.
“You seem to be under the impression that ‘democratic governments’ that appoint supervisors to financial institutions are, regardless of the explicit law on deposit guarantees and the law on receivership about who is in the queue for getting paid, signing a 100% guarantee for every thing those supervised institutions do because they supervise them. For get about practice. This doesn’t even make sense in theory. There is no legal basis for such a view and no one – not even Pimco believes that there is.”:
It may have got lost with familiarity, but I think it is fair to say that I was intending a pre-guarantee scenario and certain, shall we say, unsecured creditors. These stipulations may have got lost over time or been taken as given. Then post blanket guarantee other creditors got packaged-in with them.
I suppose my current position is that the ROI has a share in the responsibility and a burden of some of the loss and perhaps that share is complicated by the guarantee. Also, that we need to get our fiscal expenditure under control before we can expect the EZ to try to get things sorted with us and also that perhaps they need time to get into a better position to cope with the problem and that we should try to facilitate them in this and also that they need to get a wake-up call out to all the members.
I posted at the time of the guarantee (picking up on something somewhat related to D Mc W and he quite possibly read my comment), in a forum long since removed, that the losses were then ultimately unquantifiable and I made a distinction between soldiers of business and pawns – the former being regarded as the wholesale banks and the latter the depositors.
” ‘Shareholders’ as you call us are not responsible for the losses of companies they own. They take their losses in loss of share value.”:
My point about this is that shareholders elect and fire the boards of management and that therefore they ultimately call the shots.
“… Are they, and therefore, their ‘elected’ masters, and thereby their citizens also responsible..??”:
As above, the creditors have some responsibility and consequently whoever call the shots for them.
Why not government –
1. Reject the ECB/EMF deal as morgan suggested
2. Ram through the dail new personal bankruptcy law so the sea of bankrupts can hand over the keys and be back again contributing after a year as in the U.K.
3. Hand the banks over the ECB
4. Reduce salaries, doles etc. of all under 50k in the public sector
5. Reduce salaries doles etc. of everyone else in the public by 20% including judges. Lets have a referendum next week to change the constitution if that was “legal” advice tells them.
6. Shut down nama and hand it back to banks as Morgan suggested
7. Give the banks to their biggest creditor the ECB lock stop and barrel. They can work it out
THEN ala GROS we can solve the basic agruments that many politicians have used against Morgan
1. Changing the bankruptcy law so people aren’t fecked for rest of their lives.
2. Set up a two time hit of 10% y1 and 10% year 2 on the Irish pension pot so that the deficit decrease can be managed without international help
3. Set up a small business bank with the funds from the from the pension pot raid to give credit to small buisness.
That would work wouldn’t it.
However it makes to much sense for our gombeen class so it wont be done and the country will go bankrupt and loads of peoples lives will be ruined
Sorry i ment in my last rant to say
1. Reduce doles, under 50ks etc. by 10%
Igsy is talking about the issuance of index linked 30 yr at say 4% real.
Say market expects cpi long term 2%, the 4% real gives you 6% nominal – the state takes on the inflation risk, not the investor. “% is from ECB target, everything else made up. You would be taking the view there is little likelyhood of significantly higher inflation over the term of the bonds – which is the official line.
cf TIPS and UK Index Linked markets.
On managing to benchmark, the managers do what they have been asked to do.
The benchmarks are chosen according to liabilities. If you do a megafudge and discount using Irish gilt yields as your “risk free” reference you effectively force managers to be benchmarked more against Irish sov bonds or take a big “risk” of getting sacked by not going along with it in order to protect the real-world “risk” profile of the portfolio.
If you do this you are rigging the market so as to induce by regulation, buying of Irish bonds.
False market to “fund” high cost economy. What could go wrong?
By the way the hit on the pension pot could be in the form of 10 year zero interest “solidarity bonds” so that they will get back most of their money
Missed the index linked bit…even with that the secondary market prices determine the price on new 30 yr. A promise to pay more for longer by an insolvent entity is unlikely to convince anyone to buy.
@grumpy – “On managing to benchmark, the managers do what they have been asked to do.
The benchmarks are chosen according to liabilities. If you do a megafudge and discount using Irish gilt yields as your “risk free” reference you effectively force managers to be benchmarked more against Irish sov bonds or take a big “risk” of getting sacked by not going along with it in order to protect the real-world “risk” profile of the portfolio.”
The managed pension fund benchmarks aren’t chosen by liabilities, except in terms of currency. Pre-1999, the fixed income element would have been benchmarked vs IEP government bonds. Come the euro, IAIM decided that the benchmark should now be an index of 5yr+ eurosov bonds, an index in which Ireland had a mere 1% weighting.
The Irish fund management industry proceeded to divest themselves of IGBs regardless of price/yield, through 99/00 – index tracking was more important to them than performance. Funny thing is, they sold what was to be one of the best performing bond markets in Europe up to 2007, in order to buy the three of the worst-performing in that period – France, Italy and Germany. (A strange feature of bond market indices is that they are weighted by market capitalisation/issuance size, with no adjustment for GDP, so a country with a debt/GDP ratio of 90% would have a weighting 3 times greater than a similar sized country with a more prudent debt/GDP ratio of 30%. Italy has the highest weighting in eurozone bond indices, as a consequence of this, while Belgium has had a weighting way in excess of its relative economic size).
Demonstrably, Ireland wasn’t eschewed by fund managers to improve returns. If it was eschewed for risk purposes, why did the average Irish managed pension fund tend to have an 8-times overweighting in Irish equities come end-2007?
I am not suggesting either fund management of choice of benchmarks is a liability matching exercise. With reference to liabilities – might have been more accurate, but once the fund manager has been told by the fund trustees or the client what their performance benchmark is, they are going to manage to that. Some of the criticism of traditional fund managers is unreasonable in that regard – even hedge funds are supposed to provide an idea of what it is they are aiming to achieve, and be accountable for measurement against that.
In this context what I am trying to highlight is that aspect of liabilities that relates towhat insurers regard as the applicable discount rate – what is considered “risk free”, and that once Euro membership was assured, that it is reasonable to drop the currency risk and go to bund rates then argue the toss from their about corporate bonds.
Here there is the posibility of a really big change in discount rate.
Is it possible that fund managers aren’t investing in government bonds because their regulations require them not to invest in things with poor credit ratings.
Regardless of the reasons, the reality is that these same fund managers have made investment decisions that, as things stand at the moment, are showing an abysmal, indeed negative, return, as compared with what would be the case if they had been invested in Irish bonds. Mega-billions from Ireland have been invested by these same fund managers in UK bonds since 2007, when £1 was worth 1.50 euros. It is now worth 1.12 euros, and, in the interim, the average annual interest rates paid out on UK bonds have amounted to around 2%-3%, compared with several times that on Irish bonds. Would any of the fund managers, that post on here, who have moved money out of Ireland and into UK bonds since 2007, like to tell us how much they have lost for their clients, and compare it with how much they would have earned for their clients, had they been investing in Irish bonds since 2007. I hope their clients sue them for malpractice. Fortunately, I would never dream of listening to the advice of these quacks with regard to my own savings, and prefer instead to make my own decisions. It is precisely because they are sitting on such heavy losses that they require Ireland to default and/or devalue in order to recoup their losses and to retrospectively justify their investment decisions. Hence the passion with which they argue for it on here and their ferocious hostility to anyone like Gros, who put forward a plan that will avoid it.
Excellent piece today in the IT.
In that piece, Seamus Coffey describes Kelly’s figures as ‘nonsense’. That is what I called them here last week. But, the condemnation from someone like Seamus Coffey carries infinitely more weight.
Regardless of whether one agrees with Seamus Coffey or with Kelly, it is indisputable that there is one major difference between them. Seamus Coffey is willing to debate his figures, whether in the media or on here. Kelly isn’t. He is a coward, who lobs his hand grenade, and then runs away. If Kelly thinks his figures are correct, one wonders why, in response to another prominent economist public deriding them as ‘nonsense’, he doesn’t go on tv or radio and debate them with that economist? The only explanation is that he is a coward and knows that he would be exposed for the fraud that he is.
“Get your money out (of Ireland) while you still can.”
As you are not Irish, I can’t accuse you of being a traitor for that incitement. Scumbag, yes. Traitor, no. But, it is no more than I’d expect from someone who bases his analysis of how the Irish economy is performing on what taxi drivers tell him. I suggest that you are one of the quack fund managers I referred to in my opening paragraph, and you are terrified that you will never recoup the losses you have made in recent years, whether for yourself or your clients, from following your advice to “get your money out (of Ireland) while you still can.”
“Regardless of the reasons, the reality is that these same fund managers have made investment decisions that, as things stand at the moment, are showing an abysmal, indeed negative, return, as compared with what would be the case if they had been invested in Irish bonds.”
If you look at a graph of the yield on Irish bonds (most bonds) you are fairly close to looking at an upside down graph of the price. The price of Irish bonds has declined steeply over the last year.
” in the interim, the average annual interest rates paid out on UK bonds have amounted to around 2%-3%, compared with several times that on Irish bonds.”
Not sure about this but are you confusing the fact that the yield has gone up a lot with the idea that it has gone up because coupon payments have been increased?
Most bond fund managers with clients in Ireland would have diversified into EZ bonds as there was no apparent currency risk. They will be very pleased with themselves that the bunds etc that they bought are yielding so little.
@ Peter Kinane
ABB is a large swiss/German engineering company that went bankrupt in 2004 and defaulted on its bonds due to dodgy activities with carcenegenic. It was regulated by the Swiss Financial Markets Regulatory Supervisory Authority. Can I sue the Swiss government to get my loan back?
BP + Enron were all regulated (the former’s offshore operations by the US Department of the Interior, the latter’s financial statements by the SEC). Do I have a claim on the US taxpayer? Enron defaulted on its (loans) bonds.
To be clear, when Johnny the German pension fund manager lent money to Seanie, AIB + BOI – he was NOT lending to the Irish state.
Other than the 100K deposit guarantee, can you show me any legal clause in any Statute or Treaty requiring that private loans to Irish Banks were chargeable to the Irish taxpayer should the recipient not be able to pay them back?
Or are you talking about some sort of vague phony balony “moral responsibility” that the EZ powers-that-be made up after the fact? A “collective guilt” that stops only at the doors of 2M Irish taxpayers. The very definition of arbitrary rule.
This is what the IMF (including a senior German banking regulator) said about our financial regulation in 2006.
But hey, Joe Voter in Ireland should have been more able to assess the merits of the Irish financial regulatory framework than a highly experiences team of international economists, lawyers and financial experts!
@Grumpy – check the following link http://www.irishlife.ie/uploadedFiles/Partnership_Institutions/Consensus.pdf to get an idea of the funds I’m talking about, and their investment behaviour. Dollars to doughnuts the bond element of their portfolio, from 2000 to the present day, has held about 1% in IGBs. This level of exposure would never have been an investment call; it would have been driven by the benchmark weighting.
Not picking on Irish Life per se (the numbers they give are from Q1 2008, btw) but there is a wodge of non-liability driven managed fund pension investment out there, via AVCs and small company schemes, handled by Irish fund managers. Investment policy, insofar as it is determined by scheme trustees, consists of choosing whichever managed product they’re sold by their provider. The fund manager generally determines the benchmarks – in the case of the fund I’ve linked to the benchmark is, of all things, the average investment weighting of all competitor funds in the Irish market. At a sub-level, the individual fund components (bonds, equities or whatever) are measured versus indices chosen by IAIM.
“The Consensus Fund aims to provide performance that is consistently in line with the average managed fund in the market. ”
This should in all honesty be marketed as “The Mediocre Fund” – shamelessly following the herd – and getting paid for copying.
This innovative fund [what is innovative about it, everyone has copied their homwork at some point] is Ireland’s most popular fund [groan] , currently managing over €6.4 billion in assets (April 2008). It is so successful [if you are unsuccessful at copying you really have a professionalism problem] because its approach is based on the combined wisdom [or stupidity] of the main investment managers in Ireland.
Why do we bother.
How the Fund Operates
The fund matches the average asset mix the investment managers make in shares, property, bonds and cash. By taking the average asset allocation of all of the active managers’ positions, the Consensus Fund is able to avoid the risks associated with reliance on the decisions of just one fund manager.
@ Aiman and Grumpy
I love that document.
To strain a metaphor: a load of frogs are sitting in a large pan of water, each thinking to itself, ‘Hmm, the water seems to be getting hotter in here, but I’m damned if I’m jumping ’til I see some other b@*t%*d make a move.’
@grumpy – is it worse than you’d thought?
That is woeful, and the popularity probably says something about the Irish psyche. Are the Irish more prone to following each other into investments – like housing?
These guys are not industry “leaders” – they are following. What would they do if they got so much business they had to copy themselves?
Underneath this sort of thing there are both pension and insurance funds with trustees and actuaries setting benchmarks for active managers to try to outperform.
These add-on funds are influenced in investment policy by the former as providing a sort of industry standard approach. They re marketed a bit like unit trusts etc as themed investment products. That area has always been cringe-worthy
Those funds that some thought goes into will be heavily influenced by any big move on discounting with reference to Irish bonds – should that be imposed by regulation. The add-on funds would probably follow.
In many press articles, the bailouts are judged a failure because bond yields have not come down. Personally, I consider that bond markets are currently overreacting especially in the case of Ireland and Portugal. But if someone wants to stick to bond yields as the reference, then he should admit that the bailout interest rate of about 6% represents an enormous subsidy of 3-4% compared to the oh so rational markets.
I would first like to discuss how I regard Ireland’s execution of the bailout terms so far:
– The Irish government had to carry out serious stress test of the recapitalization needs of the 4 banks. That has been done. And the last stress test has also been well received by the markets. If another stress test in say one year would demonstrate that the losses have been properly identified, market confidence in the solvency of the 4 banks might start to recover.
– My recollection was that the recapitalization of the 4 banks had to be carried out by the end of the first quarter. This has not been done. As long as that is not done, there is no reason for the markets to regard the 4 banks as solvent.
– Apart from sorting out the banking mess, Ireland is basically required to reduce its budget deficit over a number of years. Given the starting point (the highest deficit of the EU in 2010 together with Greece and the UK), the rhythm of deficit reduction is not too demanding. Seen from afar, it really does not look like there is a strong drive to reduce the budget deficit in line with what has been agreed with the troika.
To summarize, Ireland has delivered on one key commitment, has clearly failed to deliver on another one, and is not showing much enthusiasm for the third key commitment. Instead, the Irish prefer to discuss how best to renege on their commitments, running the risk of losing any support from their European partners (or even incurring retaliatory actions) and of precipitating a massive combined sovereign and banking default. Under such circumstances, I really wonder why anyone with a sane mind would expect bond yields to have fallen. In fact, some might wonder why bond yields are still so low.
But markets are not completely dumb either. They are probably discounting the hope that the Irish will recover their mind at some stage and start to look at their predicament with more realism.
Ireland should run a current account surplus of about 1% of GDP in 2011 (EU Commission forecast). Given that the public sector is expected to have a deficit of 10% of GDP in 2011, this means that households and corporates are deleveraging to the tune of 11% of GDP per year. This looks pretty strong to me, and will also support the solvency and deleveraging of the banking system going forward.
The combination of negative growth and deflation that occurred in 2009 and 2010 was deadly for a country with too much public and private debt. As of 2011 however, GDP is not expected to contract in real terms anymore. And Irish inflation has recently turned positive again. Nominal GDP should thus grow again, which will support the deleveraging process.
Finally, the public debt level is still expected to remain below 120% at peak, and to decline thereafter. If a country like Italy can access bond markets at acceptable rates with a similar debt level, I do not see why Ireland could not do that once its banking mess has been sorted out and its budget deficit has been bought under control.
Having demonstrated why I consider that Irish public debt is sustainable, I come back to the initial question: How could bailout terms be improved? The Irish can whine as much as they want about the bailout interest rate or burning the senior bonds. But I regard these issues as a sideshow. In my opinion, it would be much more sensible for Ireland to ask to their European partners for ways to reduce downside risks. I would suggest the two following measures.
– Transfer NAMA (assets and liabilities) to some EU (or EZ) vehicle, which would be then in charge of unwinding them.
– After recapitalization, the 4 banks would be solvent and their equity should have value. They could also be sold to some EU vehicle. Ireland could then also rescind the bank guarantee. The EU vehicle would then carry out the deleveraging process, find a solution for weaning the banks off ECB funding, and would eventually privatize them.
At first glance, both transactions would be financially neutral to Ireland and the EU. But there would be 2 benefits. First, Ireland would lose any downside risk to NAMA and the banks, while the downside risk are completely immaterial for the EU as a whole. Second, the EU vehicles would not have to operate under the same pressure as Ireland to monetize the NAMA assets or deleverage the banks. This could provide options to enhance value, to the benefit of all parties involved.
Sorry, discard my comment above: it is not in the right thread.
It’s definitely getting tougher around here. 🙂
“ABB is a large swiss/German engineering company that went bankrupt … due to dodgy activities with carcenegenic. It was regulated by the Swiss Financial Markets Regulatory Supervisory Authority. Can I sue the Swiss government to get my loan back?”:
It seems somewhat strange to me that one would loan rather than take shares in such a corporation? Perhaps you are a wholesale banker … (Given your (mis)use of terms in a previous post, I have to wonder if you are doing so again, sorry).
Perhaps I came to this issue in this blog with the view that whether or not to default is not just a matter of the terms on a signed paper; that the gov. would step in, and, thereby, the citizens.
I know that at the time I wrote about the creditors being soldiers of business. This was in assessment of the what to do, though I did not have to arrive at a decision, the gov. did. Or so it seems; they were very much involved when the crunch eventually came. Perhaps that is a clue to whether they had a responsibility?
I think banks are somewhat different to other corporations – they are more immediate to governments than corporations such as ABB, BP, Enron. Gov., for example, has a recognised responsibility or right to regulate their loan to deposit ratios, perhaps even to drop them hints of the direction in which the want credit sent. So, to me, they are more closely the responsibility of gov., and hence the citizen, than corporations such as you mention.
So, how to assess whether to stick to the terms of the agreement or to expect that the gov. would provide back-up:
Well, we’ve got our finances really up a creek without a paddle. The initial moment of decision, Sept. 2007 and presumably for quite some time before that, has passed. Perhaps its simply best to try to come to some arrangement with the EZ.
“… But hey, Joe Voter in Ireland should have been more able to assess …”:
Not Joe Voter, but his representatives and paid specialists.
There were different assessments also expressed, though I can’t cite and source them, other than some mention of “Wild West capitalism”.
How to evaluate whether specialists in the field going spectacularly into crisis is excusable/negligent or otherwise: I think we disagree somewhat on this (too).
Another economist has taken Kelly’s figures to shreds:
Regardless of which side of the argument one takes, cowardly Kelly’s total refusal to engage in debate with these other economists is a disgrace. Even his deluded followers on this site must be dismayed at his unwillingness to defend his own figures, when other economists challenge them. Clearly, Emperor Kelly has no clothes. His modus operandi is to launch a hand grenade, designed to cause maximum casualties, then disappear without trace for six months, until such time as he judges it opportune to launch another one. The continuing use of hard-working taxpayers’ money to fund this quack’s salary is a national disgrace. He should be sent packing asap.
Above, should read “Sept. 2008”.
Well done on the link. It impresses me as an excellent analysis.
“The ECB has lent €140 billion to the Irish banking system in the form of emergency liquidity. This money is absolutely vital to the Irish banks for the continuation of their everyday operations.”:
Yes, this seems self financing, so need not be counted.
“Adjusting for the above, it may be more appropriate to focus on a government debt projection for 2014 of between €190 and €200 billion,”:
Would you or anyone care to have a go at giving breakdown of that figure, just as a reminder to someone who can’t, for example, keep track of the year of the guarantee?
It might be harsh, but I’ll assume Daniel Gros’ analysis is waffle. It reads like he’s started with a desired goal and has worked a justification around that.
If we look at his desired goal (expropriating private Irish pension funds), does it make any sense? No. Although there might be some advantage to looking at this post default.
If Irish pensions replace international investors, does the level of debt decrease? No. So the only potential advantage to the Irish state is forcing Irish funds to accept lower yields. Gros underplays this.
What if Ireland defaults anyway? Private Irish pension funds would suffer significant losses and international investors would get away scot free. This sounds familiar. Gros’ solution is very favourable to foreign bondholders. I don’t think it’s great idea to destroy private wealth that could support Ireland after a default.
Leaving aside the self-elevation of you mind (14/5/11 @8.28am).
Your investment shift from £ to Irish € in 2007 (on the back of some advice from RBS/Ulster Bank?) looks more like a late ‘entry’ at the tail end of the Celtic Tiger and, short of the bailout ‘viagra’, your investment will have long since shrivelled illiquid and unproductive – unable to produce the ‘goods’ so to speak.
Without broad details of your investments, which you are very keen to ask of others, really there is no way of putting any credibility to your remarks regarding your returns in the Irish economy v UK or anywhere else.
06/07 I exited and cashed in all investments, with the exception of one FMCG Lisence in RoI & UK (which had no upfront or distribution costs). Was laughed at, had my sanity questioned etc. I moved into metals, minerals and commodities; all internationally tradable in $.
I have at the start of this year began ‘soft selling’ on metals down to original investment (plus costs and inflation) and taking ‘surplus’ into start-up funding in Ireland and cashflow +ve investments from any source.
My family live on a modest budget ( 5 figures and significantly less than 1/2 some of the salaries bandied (sic) about for civil servants and bankers etc.).
I have no idealogical or direct interest either way on this but for you to label ‘dissidents’ to your opinion ‘quacks’, ‘scumbags’, ‘cowards or traitors’ I am begining to believe, hides a desperation, on your part, that this strategy of the ‘socialisation of private debt’ follows through and you get covered for you late ‘entry’ into the Tiger.
As to the link above from the SBP. It is as much a case of ‘if and coulds’ as anyone elses analysis and to my reading in no way shreds anything – rather a feeble piece without any evidence or backing for the statements if you ask an ordinary man like me.
I would urge you John to ‘ believe nothing, not even if I have said it, unless it agrees with your own reason and your own common sense.’
In doing so, accept that it is your decision, your risk, your winnings and your losses.
As to the post.
If this will work as part of an overall stragtegy then do it. Do anything that will work.
My problem with the current strategy is than I remain unconvinced that it is a deliverable, sustainable solution.
This is the most rational thing I have read on how to generate funds to pay debt (alongside the obvious need to federalise it across the Euro-region). A breath of fresh air when compared to local arguments on cutting public sector pay more or imposing a lethal fiscal adjustment. There is capital available domestically. We need to utilise it. Defending its ‘freedom’ to move freely is an ideological defence that has no legitimacy given the chaos caused by 25 years of financial de-regulation. From 1930-1980 all western governments operated capital controls to limit investor choice. This facilitated the productive use of capital but also had a significant fiscal impact on government debt. It is high time that we began to speak about ‘capital controls’ in the interest of the wider economy/society. This financial ‘repression’ will, of course, horrify those schooled in free market orthodoxy.
See this excellent article by Gillian Tett last week:
@ Adrian R
Excellent link, thanks for that.
The BoE’s continued interest rate stragegy in the face of UK inflation appears to be following this line – as you say may be worth giving it a go.
[…] as an explicit means. The director of the Centre for European Policy Studies has recently suggested that the Irish government should direct the pension and life investment community to invest all of […]
[…] Daniel Gros has put forward an interesting analysis and prescription. In effect, he argues that Ireland doesn’t need the IMF, the EU or even in the short-term, the international markets to finance its debt. How could this be? ‘The little data published by the . . .Irish pension funds and . . . insurance companies suggest [they] own over €100 billion in foreign assets, of which about €25 billion are in non-Irish government debt and about €72 billion in foreign equities.’ […]
[…] Daniel Gross of the Centre of European Policy Studies has found that Irish pension and insurance funds own approximately €100 billion in foreign assets – 25 percent in non-Irish Government debt (e.g. German Bunds, US Treasuries, etc.) with the remainder in foreign equities. A small proportion of this could be redirected into Irish infrastructural and enterprise investment. […]
[…] meeting the Irish sovereign’s funding needs, which he has since elaborated on in a numberofrelated articles. His analysis centred on the fact that although the Irish government has a huge foreign debt, the […]