Guest Post from Daniel Gros: How to Make Ireland Solvent

I like my plan better…

Daniel Gros writes,

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).

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.

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

@Brian O’Hanlon
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.

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.

@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?

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

@ Aiman,

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.

http://www.irisheconomy.ie/index.php/2011/04/15/a-tale-of-two-trilemmas/

@Brian
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.

The freedom of movement of capital is one of the four freedoms underpinning the EU …

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.

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.

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.

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.

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.

Dork says,

Both Dublin and Cork can compete for subsidy on the open market

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.

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:

The collective buildup of public debts in the advanced economies during WWI was
largely unwound through default in the 1930s.

The even larger buildup in public debts of WWII was unwound partially through steady growth-but, more importantly, through “financial repression”.

To deal with the current debt overhang, similar policies to those documented here may re-emerge in the guise of prudential regulation rather than under the politically incorrect label of financial repression.

Moreover, the process where debts are being “placed” at below market interest rates in
pension funds and other more captive domestic financial institutions is already under way in several countries in Europe.

@ 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.

@ All

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.

@ DOCM

‘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’

http://www.irisheconomy.ie/index.php/2011/05/12/imf-regional-economic-outlook-europe/

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.

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.

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.

@ 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.

” 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.”

Repeat:

“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.

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.

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 …

@ 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.

@simpleton

‘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.

@all

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

http://www.irishexaminer.com/ireland/debt-restructuring-is-still-a-dirty-word-in-europe-150753.html

‘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.

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).

@shay

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.

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.

@ remnant,

“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.

@Paul McDonnell.

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.

@ 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).

Etc., perhaps.

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).

@ 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.

@ 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.

@ BOH

Your intuitions are very sound. Our economic development model which is fundamentally broken. We need some native genius.

@ PQ,

“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.

Joseph Ryan Says:

May 14th, 2011 at 5:24 pm
@shay

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.

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.

IF

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.

http://www.guardian.co.uk/world/2011/may/15/france-dominique-strauss-kahn-lifestyle

Does anybody have any thoughts as to whether this a new head will be more or less inclined to force a restructuring?

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.

@ 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?

@ 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.

@ remnant,

“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.

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 – 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.)

@Ceteris

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.

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”.

@ 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.

Sorry i ment in my last rant to say

1. Reduce doles, under 50ks etc. by 10%

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

@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?

@Gavin Kostik

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.

JTO again:

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.

@Eoin

Excellent piece today in the IT.

JTO again:

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.

@Simpleton

“Get your money out (of Ireland) while you still can.”

JTO again:

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.”

@ 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.

http://www.imf.org/external/pubs/ft/scr/2006/cr06292.pdf

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!

@aiman

Thanks. Brilliant:

“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.
Asset

@grumpy – is it worse than you’d thought?

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.

@ remnant,

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).

Above, should read “Sept. 2008”.

@JTO,

Well done on the link. It impresses me as an excellent analysis.

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.

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:

http://www.ft.com/intl/cms/s/0/0af29588-7a5b-11e0-af64-00144feabdc0.html#axzz1Mb83tWi0