Antoin Murphy: This time Morgan Kelly is wrong

My colleague adds to the Morgan Kelly literature in this SBP article.

129 replies on “Antoin Murphy: This time Morgan Kelly is wrong”

I got in slightly ahead on the other thread.

This is what I posted there:

“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.”

The key point is that all the other economists are willing to debate and engage. Kelly isn’t. Why not?

I’m a bit puzzled as to why so many people seem to think that Morgan Kelly’s projections are off the wall. Am I wrong in thinking that the IMF team projected debt of 238bn in 2015? Even if I am, Colm McCarthy interpreted their report as being very gloomy about Ireland’s prospects of avoiding default. Their view of the future is a little more positive than Kelly’s but it ain’t cheerful.

So where does this idea come from that Morgan Kelly is some wild outlier? Of course he misuses the word ‘material’, but aside from that quibble I see him as a pessimist, but a perfectly sane one.

The Antoin number on “Recapitalisation” .

“The second problem relates to the €35 billion recapitalisation of the banks. The actual figure is €24 billion and with the recent recapitalisation of the banks, it will not be necessary to avail of the full €35 billion that was designated for bank recapitalisation.”

Looks good. However doess Morgan add the cost of Recapitalisation to the cost of CLOSING Anglo and INBS and thereby reach €35bn…in which case Antoin himself seems to be missing a key figure altogether. We are recapitalising the dregs of 4 banks and running down 2 ..or 1.5 once INBS deposits xfer to the EBS.

I won’t even start on the €140bn number …being the sum of ECB Repo Ops and the Ever Mysterious ELA which appeared last year (ELA backed by whom or what who knows and nobody talks about ) 🙂

It is sovereign in effect Antoin, we own all the banks nowadays. Repudiating part or all that €140bn will be a sovereign operation if and when it happens because that was the mechanism by which we ‘got’ the money in order to bail the German banks out at 100% in the € face value.

I lost patience with Antoin Murphy when I got to this bit:

The government debt and the banks’ debt to the ECB are two separate issues. Irish banks are not on the state’s balance sheet, so that reneging on the €140 billion of emergency lending by the ECB to the Irish banks would not affect the government debt.

Irish banks bloody well are on the state’s balance sheet if you think of the situation at all logically. That’s the whole problem in a nutshell. The state is a horribly mismanaged banking conglomerate with some not-very-profitable investments in other sectors, notably transport and the health.

Just on the cost of the banks and the €24bn identified in the stress tests. I would have characterised the market reaction as : the stress tests went too far with their mortgage default losses but not far enough with deleveraging or post 2013 loss dynamics.

But we are expecting the stress tests for Anglo and INBS shortly and despite recent noises which suggested existing estimates might be more than adequate, if I am reading the Independent story yesterday correctly then we might have another €5bn or so there (and that is apparently on top of €32bn for Anglo, again if I am reading the article correctly).

Truth be told, if the markets did believe we had gotten to the true bottom of the bank losses, wouldn’t our 10-year bond be back down at 6%, wouldn’t the bank share prices be higher than their lows in March and wouldn’t deposits be flying into this country at such a rate that we might have to put capital barriers in place to keep them out.

Think about it, probably the most tested and poked banking system in the world, that reports daily and weekly to the ECB, IMF and God knows, who else, capital buffers which are world class and high deposit rates (certainly higher than Germany or Switzerland) plus extensive State guarantees. So why are we not fighting prospective depositors off with sticks?

As the saying goes, money talks, BS walks.

@ All

MK uses a NAMA figure of €45bn, which to almost all close NAMA-philes was quite clearly above the spend so far of €31bn. Fine, he got his numbers wrong on that, no biggy.

And then i see that David McWilliams, in his new venture “The Economics Clinic”, is using an unreferenced figure for NAMA of €43bn. McWilliams, in the SPB yesterday, also describes the reaction to MK’s piece as a “bitchfest”, and that the people critiquing MK “didn’t see the bust coming”.

Now i don’t want to start a tabloid rumour of MK and McW being in league or anything, but…

@Jagdip Singh

As indicated here before Capital Ratios are generally a very poor metric to determine the real underlying value of a banking franchise. Sadly the folks on Dame Street have yet to read that particular message as has their cheerleaders of which I note Dep. Shane Ross has developed into the clear leader in that regard.

We must always remember that Amagerbanken which went bust in the first week of February this year reported as recently as the end of Oct 2010 to the market that their Core Tier 1 ratio was 13.9%!

So expecting the markets to be somehow dazzled by the vitues of significantly larger than required Capital Ratios (as Messrs Honohan and Elderfield have been) is dellusional.

Investors do not work this way. What bank investors would much rather hear at this stage of the cycle is for lower capital ratios to take the pressure off the banks to allow them to grow their book again and start to make some money. The warm comfy feeling of higher captial ratios is fine and nice as a theory but most investors would view this as code for lower than optimal returns on equity and exactly the wrong strategy to pursue at this stage of the cycle.

What would I know sure I’m only a bank investor at the end of day – but God forbid those in power ever ask us what we really require as opposed to what the rule book says we require.

As per the IMF’s latest (April) World Economic Outlook, Ireland’s gross debt rises to 232bn in 2016, though as a share of GDP it peaks at 125.8% in 2013, falling to 121.5% in 2016……this I think still assumes full 35bn used for banks….


I don’t know where the €45bn came from, but here’s a stab:

The present figure is €31bn and if the objector/Paddy McKillen loans are absorbed that should rise to €33bn.

Minister Noonan has warned BoI and AIB that unless they come up with credible delevering plans by the end of May 2011, he may force them (after all) to transfer the sub-€20bn loans to NAMA. They total €12bn or €16.6bn with associated lending. Applying the NAMA average haircut so far of 58% and you get €7bn.

That gets you to €40bn. NAMA may advance up to €5bn in development funding and indeed launched programmes to obtain that.

That would get you to €45bn.

@ Jagdip

but of a stretch for him to just to assume we’re at the 45bn figure though, no? And as you noted on your site, they do have a real underlying value and cashflows, its not zero. McWilliams actually says (below) “NAMA has paid 43bn”. Like i said, people who enjoy conspiracy theories would say they are talking from the same reference…For other conspiracy theory nuts out there, DSK has just claimed he was at lunch with his daughter when the alleged offence took place…

I had thought that Antoin had got lost in that ‘black hole’ in the Irish economy that he had famously discovered in pre-lunar crater times.

It’s good that economists are at last willing to challenge each other rather than keeping to the default faux respect mode.

I see elsewhere in the SBP, that David McWilliams is seeking to rise above the ‘bitchfights’ among economists.

Of course he doesn’t also like to be challenged on facts and in the Irish broadcast media the insiders are always assured of an easy ride.


As I say, I don’t know what composition of figures he had in mind but that stab is hardly clutching at numbers.

NAMA indeed is backed up by assets. NAMA says values have fallen by €1bn so far. Based on what I know about NAMA’s portfolio, I’d say the fall based on property values is about €3bn. Who knows about the future, but I would have said in the short term the promised abolition of UORR commercial leases and the outlook for the Irish residential market, would mean further losses were in prospect – a 20% drop in commercial and 30% drop in residential would see NAMA with a €7bn drop in value perhaps. There still remains an unease about NAMA’s exposure to derivatives in addition.

But in the context of a 10-year project, could NAMA turn that around? Certainly, and indeed it could be a stunning success, take the extreme scenario of massive EU-wide quantitative easing and property prices could be worth multiples of their euro price today. On the other hand, what would happen with a messy sovereign default, an exit from the euro with property prices plummeting. Who knows? It’s Magic 8-ball or Gypsy Rose Lee time. But with meaty administration and interest costs, NAMA’s profitability is by no means assured.

The ratings agencies regard the debt as soverign debt now. John Corrigan railed against them to no great effect. They said as NAMA pays down the NAMA bond debt, they will change their views. They take a prudent approach. Can you blame them? Or by extension Morgan Kelly?

@ Bond. Eoin Bond

It’s extraordinary that even though EU policy when Ireland issued the blanket gurarantee, was contrary to socialisation of private bank losses and for burden sharing, prevailing anti-EU hysteria puts all the blame overseas.

Here is what DMW wrote on his selling job on a blanket guarantee – this is important because the guarantee made the subsequent default slow-motion response to the bankng crisis inevitable: “I told him he simply had to guarantee everything for a limited period to make sure that an illiquid
dilemma didn’t lead to an insolvency catastrophe…I walked him out to his car and he reiterated the fact that his officials would explode if they knew he was
there. I said I wouldn’t tell a soul if he didn’t.

The minister called me the next day and again on Friday, the 19th, when he rang to say they were contemplating a partial guarantee. My view was that such a move would accelerate capital flight, not avert it. From then on, we spoke on a daily basis, but he still wasn’t convinced and, from what I could gather, his officials in the department were dead set against a full guarantee, although they didn’t seem to be coming up with an alternative.”

Mr Murphy argues that MK got his figures wrong … But his own numbers appear suspect. the last numbers out show the ECB at 109b and the ICB at about 50b. this was after the 20b of extraordinary deposits from the NTMA.
So the figure is 160b not 140b.

@ CP

the 109bn ECB figure includes the foreign banks. Strip them out and you get c.85bn for the domestic “covered” Irish banks. 55bn on top of that from the ICB and you’re at 140bn.

It matters not so much, in the totally of things, that MK got some figures wrong (or right) – these can always be corrected. Its some of the useless spin that attends these events that I find distracting.

Now I fancy that MK ‘tossed a political grenade’ into the sheep-fold. Like, its “wake-up time Sheeple”. Its more, possibly all about – “How in hells name do we get out of this mess?”

Do you think we have a very defective econ and financial model here? Sure looks like it. And guess who will endeavour to extract us? Our wonderful politicians is who! The most anti-reform bunch of critters on the planet.

Feel better Now? Yeah.

Brian Snr

@ All

But surely the big argument here is that stiffing the ECB for the 140bn odd liquidity it has in the banks won’t actually halve the government debt, indeed it will do nothing to it whatsoever. That’s a pretty clear divergence of opinion isn’t it?

From the article:

“Kelly believes that, by transferring the Irish banks out of the hands of the Irish government to the ECB, the ‘‘Irish government can halve its debt to a survivable €110 billion’’.

But how has he incorporated his estimate of €160 billion (the correct figure is €140 billion) debt of the Irish banks to the ECB into his original estimate of government debt of €250 billion?

The answer is that he has not and therefore cannot, by this sleight-of-hand, reduce the government debt by half.”

I think Antoin Murphy could do with taking his own advise.

“may be more appropriate to focus on a government debt projection for 2014 of between €190 and €200 billion, rather than Kelly’s estimate of €250 billion.”

The Dept of finance released a document last week estimating that the debt would be 204 billion in 2015. It included some reductions in our increasing levels of debt that were ridiculous as I pointed out.
“this year 24.9 next year only 14.4 (a drop of 10.5 billion admittedly it assumes no further bank injections required) then 2013 10.7 2014 4.1 and finally in 2015 1.4 billion.

Seamus Coffee had to admit that
“I do agree that there is a rapid decceleration of the debt accumulation and this is dependent on the delivery of about €10 billion of mostly unspecified “adjustments” over the next three years and the cessation of capital injections into the banks. Other than the three listed above there may be other minor factors that help explain the arithmetic of the slowdown but the potential for real slippage remains.”

IMHO thats putting it mildly.

Since then the EU has come out with even more depressing figures that forecast higher Debt to GDP ratios than the Dept of finance.

Go back to the 2008 budget. Look at the forecasts for 2011 for increased levels of debt for 2011 and compare with the current estimate 24.9 billion. The government has continually overestimated the ability to close the gap at the speed they need to. To some economists like Michael Burke and Paul Krugman this is no surprise.

For Morgan kellys 250 billion to be correct it would not require any further capital injections due to mortgage defaults which is a virtual certainty.
All it takes is for the dept of finance figures on reducing our levels of increased debt to be off by 9 billion a year for 5 years.

Anyone who thinks that 9 billion is way too pessimistic needs to look at the projections from just a couple of years ago and compare with the 2011 current forecast. We would have to be spending about 8 less billion than we are taking in in 2015 to hit the target figure of increasing gov debt by 1.4 billion. That is because our interest payments would be about 8-10 billion at that stage.

Since then the EU has come out with even more depressing figures that forecast higher Debt to GDP ratios than the Dept of finance.

However If morgan kelly is right then we will never get as far 2015 without some dramatic event.
Either default or debt forgiveness in the form of QE from the ECB

@ Eoin Bond
thanks. Now that we only owe 140 b to both institutions we seem to be on the pigs back ( smiley). pity we gave our last bit of cash (20b) to the pillars.

@ Gavin
If you accept that the 140b due by the banks (and we own them)plus about 100 of sovereign paper plus whatever we owe the IMF, EU and UK then the number would appear to be accurate.


“I lost patience with Antoin Murphy when I got to this bit……

Irish banks bloody well are on the state’s balance sheet if you think of the situation at all logically. That’s the whole problem in a nutshell”

Chill out, man. What Antoin was pointing out was that Morgan made a huge boo-boo in his calculations. He starts with a €250Bn debt and then says dumping the banks on the ECB would reduce that debt to €110bn i.e. manageable proportions. But the ECB support was not even included in the €250Bn, it is separate, that’s the point Antoin was making, a straight arithmetic correction. Morgan’s blunder is of “deposit selling ” proportions. Nobody picked up on this yet until Antoin but surely even RTE could be made to see through this Junior Cert howler.

So back to Morgan. Remember his main theme is that we must avoid sovereign default at all costs because of the damage it would do to our immense reputation. The whole thrust of his prescription is that by walking away from the ECB we bring our debt down to manageable proportions. But he got the sums incredibly wrong, so even on his own analysis, once the blunder is pointed out to him, we do not reduce the debt to manageable proportions and we are doomed to sovereign default after all.

Of course Kelly’s numbers are being rubbished. The problem is Kelly’s numbers are more accurate that most of the other stuff.

Specifically Antoin Murphy says:

“Kelly believes that, by transferring the Irish banks out of the hands of the Irish government to the ECB, the ‘‘Irish government can halve its debt to a survivable €110 billion’’….The answer is that he has not and therefore cannot, by this sleight-of-hand, reduce the government debt by half.

Kelly is right. Others are wrong.

GGD from the NAMA note at end Dec 2010= 148.1 billion
Financial Assets from the same NAMA note= 40.6 billion
Net Govt Debt -from the same NAmA note= 116.9billion.

Kelly’s figure is €110 billion. Not much difference there from €116.9

kelly’s solution-no more borrowing leaves Net Govt debt at 116.9.
The promissory notes, committments to banks are consigned to a bonfire.

The error being made by several commentators including Prof Murphy is that they are not taking Kelly’s solutiuon into account. They are all starting from 2014 or 2015.
Kelly is starting from now.
No more borrowing. Ergo the Net Govt debt does not rise.
His analysis is not dependent on the LaLa land of growth that will not happen, the lala land of expenditure that will not reduce, the lala land of upper echelon freeloaders that think they can freeload into eternity, the lala land of no tax increases for high earners.
His solutions are not for the faint hearted.
His analysis of the net debt figure is pretty much spot on.
His figures are based on starting from now.
No more borrowing.
They are correct.

@ Ceteris, Brian, etc.

Still trying to get my head around it a bit:

Here is Morgan Kelly from the original article:

“Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.”

So the e250bn, does not include the e140bn in the liquidity support. Correct? Unless the 160 is assumed to be a huge chunk of the 190, which I assume it isn’t.

He later says:

“The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

At a stroke, the Irish Government can halve its debt to a survivable €110 billion.”

As Brian Woods II notes above, it seems strange that the e160bn, which was never in the 250bn, can have any impact in bringing the total debt down to e110bn.

@ Joseph Ryan,

Am I right in thinking that you’re saying that dumping banks, NAMA, etc right now, combined with immediately balancing the budget, would freeze the outstanding debt at around e110bn? So it’s not the case of A being taken away from B (mistakenly), but if we do A, then B follows. Sorry if I’m not expressing this very well.

@Joseph Ryan
Precisely. It is not just the banks, it is also the fiscal deficit. Mr. Murphy starts off by saying:
“I wish to query Kelly’s projections and question his recommendations with respect to the ECB and to Ireland’s fiscal policy.”
and then doesn’t mention the fiscal situation except to say:
“This accommodating policy, strengthened by an inflow of deposits into the Irish banks, obviates the need to have the type of excessively deflationary fiscal policy that Kelly recommends”
Boo hoo. It’s going to be deflationary. What the next three budgets are going to be, I don’t know. What the 3bn a year for the next ten (?) years on the promissory note is going to be, don’t ask me. I’m not an economist… I’ll take a stab, though. Cash-flow is much more important for a state than growth. The cash-flow situation for Ireland is extremely poor as it stands. Perhaps we can put the country into NAMA?

No other solution is on offer, apart from the “inflow of deposits into the Irish banks” magic-money fairy.

Never mind no other solution, we are magically going to refill the banks and get to 2015. This despite no clear entrance strategy for returning to the markets.


The key point is that all the other economists are willing to debate and engage. Kelly isn’t. Why not?

Morgan Kelly’s uses his own name. I admire him for that to begin with.


Yes, that is what I am saying and I think Morgan Kelly also.
Start with the existing Net Govt debt at the end of 2010 [116.9] (GGD-cash balances at NPRF). Then say, thats it, no more borrowing.

There would be some slippage already in 2011, but the country will have to stop taking arsenic sooner or later.
PS. I come from the left of the political spectrum.

Yes cash flow is very important. So why did we put our last few bob into the twin pillars???
Did JCT or DSK insist that we disgorge our safety valve???

Getting down our fiscal spending merely transfers consumption to other jurisdictions in the Euro areas – MKs fiscal emasculation scheme simply does not make sense unless we go back to the Punt and re dominate all our debts from Euros to Punts.
If we are to remain in the Euro we will have to buy our own debt as the interest income from foregin debt holders will merely transfer the money supply abroad.
Of course the danger in buying our own debt is that the ECB will game us to a new level of poverty again by monetizing our wealth.
It seems to be extremely difficult to play the CBs games when they are given effective executive power.

@ Joseph Ryan

You give the impression that Morgan Kelly outlined ‘solutions’ on cutting the deficit to zero when what he proposed was an aspiration; apart from a reference to his own excess earnigs, no ‘solutions’ to use your term, have been provided.

@Joseph Ryan,
Thanks for that. Question for you, or anyone else who might know: just what does the state have in the way of liquid assets at this point? That’s a crucial question when it comes to Morgan Kelly’s cold-turkey proposal. If our EU ‘partners’ have managed to clean out the cash-box, then they really have us by the shorts. As a simple matter of administration, government can’t shut off spending like a tap. In the latest NTMA note I see cash balances 16.2bn and Non-bank NPRF 15bn. Is the latter at all liquid?

Isn’t it time someone banged out a spreadsheet and posted it? This is silly.

Almost as silly as the idea of making banks solvent then using it to dissolve them. But not quite.

PS Antoin mentions the best capitalised banks in the world argument again ……..
But I continue to ask what is the point of well capitalized banks operating in the Irish economic bog when the non-credit money supply in the physical economy is continuing to decline ?

Even banks have to operate in the real economy me thinks – no matter how impressive their capital buffers – these capital buffers are merely artifacts of credit or CB intervention.
The only metric that matters is the tax raising powers withen the juristiction as this is a true refection of the real physical economy and not just money present on banks balance sheets which is a chimera.

The Irish need to own their own local money supply unless the ECB monetizes and devalues the currency or maybe we should just Punt it alone.


I think the €20 from the NPRF has just gone into the banks as a deposit. It is waiting for ECB security to come and place in a secured (not the collateral kind of secured) vault labelled capital, below depositor, below seniors, below juniors, right at the bottom of the endless pit.

It caused a liitle flicker in the Central banks accounts just published, as the ECB/ICB promptly withdrew an equivalent $20 billion from the banks.
So its gone really, just about the same time as Morgan Kelly was writing QED to his article.
The turkey just got colder at the end of April.

If someone says self fulfilling prophecy I will scream.

Can we say model-consistent expectations? 😉

@ Michael Hennigan

Stephan Kinsella did the work for him in the blogs in the guardian last week.
That it can be done is not in doubt.
How politically feasible it would be? That is the question. Big question.

I think Kelly made the recommendation in full knowledge it would not be implemented.


The word solution may have been badly chosen. I should have said proposal and indeed there is a difference. Point taken.

We may not agree on the Kelly’s proposals but we could agree on the absolute inertia in reducing government expenditure. An inertia that has greatly benefitted vested interests, mostly higher earners.

The proposal / plan contained in the MOU to run up debt to a figure of €223 billion (I think that is the latest revision) is not simply akin to a lethal injection, it has all the hall marks of population marching in step in a funeral march out to sea.
It defies the natural survival instinct of all but lemmings.

@ Joseph Ryan

Yes, I see now where the €110Bn is coming from. I read Morgan’s article again. It says “At a stroke, the Irish Government can halve its debt to a survivable €110 billion”.

The stroke that is being referred to is returning Nama assets and scrapping the promissory notes. Antoin has (understandably) misread it as referring to stuffing the ECB’s €160Bn emergency support. I say “understandably” because, of course, there is no halving at all, we are saving the €30bn promissories thus bringing current debt down to €110Bn, that is not a halving.

So, apologies Morgan, you have not had a “deposit selling” moment after all but your remedy is still seriously off the wall.

We cannot at a stroke reduce our debt to €110 billion by “disengaging from the banks”. Excluding any further bank recapialisation the GGD will be €159 billion which as we all know excludes NAMA. By dropping the Promissory Notes we can reduce the GGD by €28 billion as €3 billion have already been paid out. That brings the GGD down to €131 billion. NAMA is not in this figure so abandoning that process cannot bring the figure below €131 billion.

There are few further savings possible by giving the ECB “the keys to the banks”. We cannot ask them to give us back the money we have already poured in. We have €131 billion of debt that cannot be removed by breaking our ties with the banks. €131 billion is still a huge debt level, and with the ongoing deficits, does not fully resolve the sustainability issue.

Of that €131 billion we brough about €47 billion of debt with us into this crisis in 2007. Around €63 billion has gone to fund the 2008-2011 deficits. We have borrowed €12 billion to build up our cash reserves and have borrowed about €9 billion to fund the bank recapitalisations that did not come from the monies built up in the NPRF.

At the most we can bring our debt down to €131 billion for this year. The €173 billion that will be the end-2011 outcome will come about once the €28 billion of outstanding Promissory Notes and ensuing €20 billion of bank recapitalisation are undertaken. Dropping the banks because of the mistaken belief that they will take half out debt with them is the first step to economic ruin. The immediate balancing of the budget because of that step is the second.

Crikey, wouldn’t it be easier to make a simple stacked column chart of “Financial Assets and Liabilities” and at least argue with some clarity?

Trying to read and make sense of this thread is almost impossible…so many numbers flying around.

@ Joseph and Brian,

Thanks for your respective posts. I think Antoin Murphy has misconstrued Morgan Kelly’s argument, but the language of the article makes that easy to happen.

Still lots more to think about.

@Seamus Coffey,

Many thanks for this. You have consistently provided lucid presentations of the data. It would be wonderful if these could be expressed in, how ever rudimentary, pro forma government income statements, funds flow statements and balance sheets for the next 5 years. It would help to frame the debate and might reduce the wild claims that are often made.

I had hoped that something like this might have emerged from the Review of State Assets and Liabilities, but I suspect the ToR, not to mind data deficiencies, prevented this.

@Ceteris Paribus
“Yes cash flow is very important. So why did we put our last few bob into the twin pillars???”
Um, yeah. Makes you wonder, doesn’t it?

Personally, I think the last government tore up the parachute by opening the NPRF vault. Note that the Hungarians haven’t been ‘forced’ to dip into their public pension fund, so I doubt, had the NPRF remained as a pension fund and not suddenly morphed into an SWF, that it would have been emptied. Reserve parachute still intact is a very different proposition…

One question worth debating is whether any accounting should include unfunded public sector pension liabilities. Surely if that’s a real liability then the state is not going to be able to pay all the liabilities. No?

Then doesn’t the question become who will be defaulted upon, not whether there will be default?

@ Hogan

well the suggestion is that a 25bn SWF would be an awfully nice fallback for a country considering default at some stage down the line…

@ Hugh

“One question worth debating is whether any accounting should include unfunded public sector pension liabilities.”

Well, if you start doing that then even a lot of “safe” sovereigns start to look pretty ropey. Including unfunded health/medical and public sector pension liabilities typically put a lot of debt/GDP ratio’s above 200% i think?

@Hugh S

Yes it is a liability – to make cash payments. Where is it in reality in seniority?

Thing is though the debate has focussed og “debt sustainability” aka “can you make the payments?”

The state pensions liability payments are an annual expenditure since their is no fund and the state is not going to buy one with borrowed money.

I absolutely agree with Hugh Sheehy – there is nothing more turgid and more likely to generate confusion than prose descriptions of accounting data –
whatever happened to the stylized bank balance sheet that used to be the staple of the ‘money and banking’ chapters of economics texts?

@Peter, Hugh

Someone needs to invent a way of sharing a matrix incorporating mathematical and logical functions, with other people, in different locations, who might think of something they haven’t.

I suppose everyone would have to be constructive rather than trying to spot an error to harp on about – should the technology ever become available. Imagine the effects on productivity!

Indeed, AFAIK if you add committed liabilities most democracies are essentially insolvent, if not technically so. However, given the fact that much of Europe is already talking about debt crises, it might be a good time to talk about perhaps the biggest one.

The different liabilities just need to be communicated clearly and – these days at least – people might pay attention to a discussion of financial liabilities, assets, and the gap between the two. General public understanding of the state Balance Sheet would be a worthwhile outcome.

All those jumping up about the central bank liquidity should also factor the collateral that has been used by the banks to obtain this funding. Between Promissory Notes, NAMA bonds and sovereign bonds the banks are using around €70 billion of State collateral on this funding.

If all these debts are repaid (as is currently the plan) then the banks will use the money from these instruments to repay the money borrowed from central banks. Half of the funding can be repaid by debts we are promising to repay anyway. It does not make any sense to add this bank funding to the State debt.

In a large part it is just double counting as outlined here. It will require losses above those already accounted for in the banks in order for the liability to become a debt of the State. There is no indication that such losses are in the system. If you think the banks’ central bank liability will become a debt of the State you have to look at the asset side of the banks’ balance sheets. You cannot make a loss on a liability. The loss has to come from the asset side.

Have to agree that Kelly’s 45bn for nama does not look so strange when the remaining (+possible) transfers are factored in along with the 5bn originally allocated for development.

Also have to agree that we can simply add another 20bn in theory to the ECB/CBI reliances in July when the 19bn in deposits is taken out.

Very interesting observing the different ways people can come up with the 250bn figure though.

@Joseph Ryan

Yes, that is what I am saying and I think Morgan Kelly also.

JTO again:

It is pathetic when other people have to interpret what Kelly means. Why can’t he explain himself what he means, either on here or in the media.

The fact is that (at least) three reputable economists have rubbished Kelly’s figures: Seamus Coffey, Joe Durkan, Antoin Murphy. They’ve all put the debt figure at under 200bn, rather than the 270bn that Kelly claims. Each of them has gone into considerable statistical detail in doing so, and laid their calculations out clearly. Each of them is available for media questioning on their figures, and one of them regularly posts here and is happy to respond when other posters question his figures. But from Kelly, nothing but silence.

If Kelly is of the opinion that all three of these economists have got their calculations wrong, why can’t he post on here showing exactly how they are wrong and how he is right? I assume that he knows how to use a computer. It would only take a couple of minutes. I would be amazed if the organisers of this site hadn’t allready offered him the opportunity to do a guest post, like they did with Daniel Gros. Presumably, with such a big ego, he thinks it is beneath his dignity to post on here. In that case, why won’t he be interviewed in the media about the differences between his figures and those of the others? Coward is too mild a word to describe his behaviour. But, his silence speaks volumes.

Money will just have to deleverage – the system simply cannot take anymore absurdity.
Fiscal debt needs to increase and “asset values” need to be destroyed.

Whats so complex about this dynamic ?
People are trying to reverse fiscal gears to accomplish what ? – the destruction of the physical economy to save imaginary bank balance sheets !!!!
Debt based monetory systems simply do not work in reverse

Real Money is not credit.

@Seamus Coffey

Dropping the banks because of the mistaken belief that they will take half out debt with them is the first step to economic ruin. The immediate balancing of the budget because of that step is the second.

I cannot agree that the second step will bring any more ruin than the existing plan as produced on page 24 of the latest SPU update, April 2011.

On that page Gross Voted Exp will reduce by €5 bilion from 2011 to 2015.
Non-Voted, interest mainly, will increase by €5 billion in the same period.
So all the very miserable saving made in expenditure are going to be lost in interest payments.

Tax revenues, on the other hand will increase from €35 billion in 2011 to €44 billion. Where these are going to come from nobody knows but it is highly unlikely that growth is going to do it.
Effectively we are looking at a €9billion deflationary program of taxes over five years.

The net result is that the exchequer balance current forecast at €18 billion in 2011, will improve only as a result of tax increases as any expenditure reductions, which are very modest to begin with, are going to be lost through increased interest payments.

The net result of that is that we are to have a slow tax increase program designed by and large to reduce the deficit while having only modest expenditure reductions. All the while the modest expenditure reductions are being offset by increased interest payments.

The question that has to be asked is to who is to benefit from the slow ‘train-wreck’ approach.

A tax and expenditure program aimed fairly exclusively at the higher earners of a total of approx €15 billion or 10% of GNP, would have some negative effect (maybe 5%) of GNP in the first year only. After that and presuming that that the figures on page 24 of the SPU document mean something, the interest savings on the debt start to kick in.

In summary the country has already had to absorb GNP reduction of 3.5% in 2008, 10.7% in 2009 and 2.1% in 2010, a total of 16.3% but is unwilling to suffer a further approx 5% GNP reduction in order to survive as a homogenous civilised nation.
In addition the reduction in GNP so far has been borne to a huge extent by those least able to bear it. Particularly in the private sector but also in lower eschelons of the public sector and amongst temporary public sector workers that lost their jobs.

The reasson for all of the above, with respect, is that the freeloaders are hoping to stay freeloading, while the weakest and the young in particular are forced out or down.

Our current approach, (and I not suggesting that it has your support) which protects the vested interests of financiers and freeloaders while destructing the lives of others is morally and nationally an obscenity.

Kelly’s proposal of closing the deficit would force this country to confront what it appears unable and definitely appears unwilling to do.
That is to share the pain of survival.

@ All

Pondering these debt figures makes me see Morgan’s proposal in a different light. Morgan presents to us that the main plank of his solution is stuffing the ECB. He then concedes that the inexorable consequence of such audacity is that we can’t fund our fiscal deficit, therefore it has to be removed.

In fact, the removal of the fiscal deficit is the primary driver of us getting to that manageable €110Bn debt, not merely the consequence of declaring monetary Sinn Fein. And to get to that €110Bn the deficit has to be closed immediately, no 12 month lead in or anythingg like that.

I doubt whether Morgan’s fan club would have been as cheered as they appear to be if he had presented the MAIN thrust of his proposal as the immediate removal of the deficit.

““Cash- flow is much important for a state than growth.”

You couldn’t expand on that a bit, could you?”
The country is not going to go bust because it is not growing quickly. It is going to go bust because it runs out of cash. Whether this is due to a maturing debt payment missed, a payment from the troika delayed, whatever, cash is committed to go out, it must come in first.

The current bailout is not large enough to reach 2015. I don’t see that any of the maturing bonds in the interval are going to roll themselves over – they’ll be glad to get their money out. So new investors will need to be sought to replace them. This appears unlikely at the moment.

So the current likelihood is for a cash crisis to face the state at some stage in the next few years. Of course, this can all change – the last time the state faced a forseeable cash crisis, the troika were ‘called’ in. At the moment, though, that is how it looks.


This makes sense today but you are forgetting that the very thing that will ensure (or not) that roll overs are not missed is the attitude of the markets to our growth predictions and economic performance in the interim, the time we next go to market. Todays market attitude is largely irrelevant.

The markets view of Ireland could and will, be very different than it is today and the markets will be pricing that debt at rates which may or may not look attractive relative to say Bailout Mark II rates aka ESM.

So when push comes to shove in actual fact its growth or the lack of it that will ultimately determine our ability to raise cash at the time of the roll over (or more likely some time beforehand) – bacause in fact Govt Debt is never really paid off.

Govt debt tends to be rolled over with either more or less debt raised at the time depending on upcoming liabilities and projected Govt revenues.

We shouldn’t be so clever to believe we know exactly how the world will be viewing Ireland in 18 months time. Nobody really has a clue what the markets will be focusing on at that time but history would suggest that stong growth rates are more likely to entice would be bond purchasers more than a stock of cash which will dissolve over time.

“Kelly’s main source for his €250 billion government debt figure appears to be a website called Namawinelake.”

Am I the only one who reads a patronising tone there? The one thing that impresses me most about NWL is the frequency with which past posts are updated to reflect new information where inaccuracies come to Mr Singh’s attention.

The remark about 220 vs 250 billion being an “immaterial” difference strikes me as someone trying to become a celebrity economist by having a crack at another one. The context of Kelly’s point was that coming down from 250 to 220 wasn’t going to make the total manageable, not some kind of “30bn here, 30bn there and soon you’re talking real money” stuff.

@Yields or Bust
Well, there are two interlinked aspects to this:
1. The government’s debt rating.
2. The view of the markets as to the sustainability of the debt load.

I don’t see these improving significantly by next year (when self-financing will be required). Do you?

I see taking a negative view of the debt outlook as only as realistic as taking a rosy view of growth prospects. We have been gambling on growth for the past few years. I am still at a loss where it will come from to the level required.

The namawinelake estimate was based also on the assumption that the full €35 billion contingency fund would be used. This will now be between €18 to €20 billion. The comment linked is also the sourve for Prof. Kelly’s €45 billion figure for NAMA for those interested.

NWL could not take account of the true bank recapitalisation figure at the time the estimate was made but everyone else can do and should do so now that we know the outcome of the stress tests. Once this is accounted for the namawinelake estimate of the 2014 debt is around €205 billion and not too dissimilar from most other reasoned analyses.

The €45 billion difference between €205 billion and €250 billion is material but no sound reason has been offered to explain how this increase is likely to come about. Morgan Kelly knew the bank recapitalisation would be €24 billion and knew that namawinelake had accounted for NAMA and any implications for the public debt from the central bank funding provided to the banks yet he offered no justification for increasing the figure to €250 billion.

Professor Kelly is right. We should cut in one go & need to separate sovereign & banking debts. As things stand we will not have any meaningful growth as far as is forecast-able. Our current course of action has no light at the end of the tunnel, merely more gloom.

Mortgage & loan arrears will build up between now fiscal consolidation. In Japan it took 7 years for the arrears to build up to bring down the banking system. We face a similar, second, banking crisis in the coming years. This time we will have fewer options.

Whether we cut in one go or not we must default in a large portion of our banking debt.

@ Hogan
“I don’t see any of the maturing bonds in the interval are going to roll themselves over..”

How about reprofiling? I see a Commission member saying that reprofiling is not a default event. If we could push all the existing stuff out 5 years it would help our sustainability argument.

I doubt Kelly really believes the 18bn adjustment as policy – merely a way to put forward the argument that deficit reduction should take place sooner rather than later (which many economists including Colm McCarthy have emphasised since it is one of the few policy options under our control).

I personally saw it as a type of bargaining to ensure that the less prevalent view of closing the deficit quicker was reaffirmed in the public conciousness.


Labour: Lets extend the deficit target to 2015

Morgan Kelly: Lets close the deficit in one year

Consensus: Maybe somehwere in the middle? Closer to the ESRI position?

You can’t help but some of the people proposing extending the deficit reduction are just hoping some of the big decisions can be put off until some magical economic revival takes place.

@ hoganmahew: “We have been gambling on growth for the past few years. I am still at a loss where it will come from to the level required.”

Regrettably, I am with you on this one.

Again, I take the position that the hoohaw about MK’s ‘probabilistic prediction’ is misplaced. We do not have the income to pay down debt and principle, so some sort of writedown is inevitable. Its the when and the how much are the unknowns.

Hence, this matter is completely in the realms of the politicians and we should ensure that’s where it stays – by reminding them every day. They will not like that, but its what they deserve at this stage.

It would also be a useful exercise if someone with all the relevant figures to hand would post an article outlining the likely income and welfare cuts that would occur. I believe this would be a greater shock to the system than MKs figures, which are largely inaccessible to Sean and Maire citizen. But put the cuts in terms of their weekly earnings or pensions. Then you will get a response. Folk are a tad loss-averse.

Brian Snr.


I don’t know is the answer. And quite frankly nobody does.

It seems to me however that if a few of the obvious low hanging fruit options were explored I believe the situation would change very quickly – quick enough to turn the ship around I’m not sure – but I believe worth trying.

In simple terms we need to break rules. No disaster was ever solved by following the rule book which are devised for normal times. We don’t live in normal economic times.

Remember we voted to allow murders etc walk early from jail in 1998 following a Good Friday Agreement. Hardly following the rules – but it worked because fixing problems is about fixing not about fairness or equity its about getting out of a hole. Normal rules need not apply.

Here’s one for starters:

Despite me and others being very much in the dark when the Dork of Cork makes suggestions on these threads – he makes one above which I and others have been suggesting for some time.

For the love of Holy God can we please stop pretending we have have banks which are required to conform with Basel III rules. They’re not. Why?

Because they’re not banks. The rules the Regulator is requiring they comply to are rules that are relevent to normal functioning banks at the top of the economic cycle. We don’t have normal banks and we’re at the bottom of the cycle.

Make the Irish Guaranateed banks Basel III free zones until they normalise themselves. Bad regulation at the bottom of the market is every bit as damaging as bad (or non existant regulation) at the top.

I suggested in previous threads that the empirical evidence for banks holding anything more than 7% core Tier I capital is at best inconclusive yet we seem hell bent on getting that figure to 10%. Why? As far as I can see nobody really has a clue why?

There has not been one piece of economic evidence presented to show that this move will in any way improve our economic well being and yet Groupthink believes it to be sound policy. It’s not and its killing us. Stop it now.

Allow the Irish ‘banks; to hold 1% Core Equity ratios for the forseeable future and take a chance. The bubble has burst the horse is gone the excess capital over and above 1% is for what exactly?

And here’s another:

Implement a Mortgage Debt write down scheme ASAP.

Mr. Honohan (the other one) spoke last week on an issue which I believe simply needs to happen. Stop pissing about. We all know that significant portion of the mis pricng error in relation to Residential property resides with the banks – this is not new information.

The IMF capital earmaked for the banks should go directly against the loan accounts of those who were mis sold mortgages over the past 10 years.

Forget the idea that this can’t be done – its simple – and most likely unfair but refer to opening above.

In addition trying to go down the route of relieving those who can’t ‘afford’ is daft. My defintion of ‘affordability’ may be a world away from yours so don’t even go there. Use a rental yield model and move on.

Calculate what yield the house was sold at – versus what is should have been sold at using long run average market yields at 7% and calculate the difference in price deduct what has been paid in the interim and write off the difference. End of. Ireland recovers in 3 months as a result.

These are banking price errors remember – solve the error and stop talking about it.

Otherwise the ship won’t turn and we all go down.

@Ceteris Paribus
“How about reprofiling? I see a Commission member saying that reprofiling is not a default event. If we could push all the existing stuff out 5 years it would help our sustainability argument.”
Yeah, Commission members say lots of things “optimal currency areas don’t matter”, “it doesn’t matter if Germany and France break the S&G pact”, “capital controls are not required”, “the banks will regulate themselves, it is in their own best interest to” and my favourite “shure what do dem feckers at the ISDA know anyroadup?”

It is a guarantee of junk bond status; it is an event of default, even if it is only a small bang and not a big one (knock as the DSK defence, I believe).

But yes, that would certainly help, provided we could push the rest of it out and stick with the coupons on it. If we could do that and cut the deficit quickly, rather than slowly, we wouldn’t need the rest of the bailout, banks or no banks…

Mind you, if all the raindrops were lemon drops and gumdrops…

@Yields or Bust
“It seems to me however that if a few of the obvious low hanging fruit options were explored I believe the situation would change very quickly”
Well, they appear to be protected by a variety of political fences; if is difficult and dangerous fruit that are being reached for at the moment.

I refer you back to the answer I gave to Ceteris Paribus and add: If all the sunbeams were bubblegum and ice cream…

Your getting very cynical.
Bini Smaghi is saying that extending the maturities only would not be a great help in respect of Greek debt. Could be he is hinting at a rate cut as well.
If we extend and maintain the coupons then the markets would have little to complain of other than distorting the yield curve.

@ Yields and dork,

“The rules the Regulator is requiring they comply to are rules that are relevent to normal functioning banks at the top of the economic cycle. We don’t have normal banks and we’re at the bottom of the cycle.
Make the Irish Guaranateed banks Basel III free zones until they normalise themselves. Bad regulation at the bottom of the market is every bit as damaging as bad (or non existant regulation) at the top.

I suggested in previous threads that the empirical evidence for banks holding anything more than 7% core Tier I capital is at best inconclusive yet we seem hell bent on getting that figure to 10%. Why? As far as I can see nobody really has a clue why?”:

This is a very interesting point. Without trying to go in much detail into why this is policy, perhaps it was part of shock therapy to get us to cop-on and get a grip. Perhaps the country at large is approaching that target. It has not served a purpose of making us attractive to the bond markets. At this stage it makes our overall debt look larger than it otherwise would be and is counter productive to attractiveness, presumably.

Should we get a grip and smarten up to the requirement to aim to live within our means, 90% of that reserve capital could be returned to funder, thereby reducing our indebtedness. This combined with an EZ guarantee mechanism for our still outstanding debts, in their EZ interests as well as ours, should make us much more attractive to the bond market, though I would see little reason for further borrowing, especially as there is some logical weight to expecting pension funds and such to provide resources to promising enterprises. It would also reduce our interest load. And it would make us a more secure location for depositors.

@ B, 🙂

@Yields or bust

Whats complex about what I am saying ?
The only money with any velocity is teachers wages , the dole etc – Goverment debt.
The banks cannot create credit and multiply this – thats a good thing not a bad thing , who the hell wants those bozos to misallocate capital again.

The bank credit investment good and bad is for better or worse in the system – some of the stuff they built is not all bad but to function in the physical economy they need to be cleared and filled at cash price.
Example – A apartment complex in a central area close to areas of work and leisure needs to be filled with workers, not remain vacant.
Housing estates out in the sticks need to become agricultural land again – their remaining occupants can relocate to a logical and more effecient habitation.
BANK BALANCE SHEETS DO NOT REFLECT THE PHYSICAL ECONOMY – its a artifact – but you don’t cut the basic money supply to zero to heal this absurdity !! because you guessed it, its a absurdity.

That would mean demand for logical things like milk and eggs will fall while people kept their home equity fantasy – why do this to peserve a credit illusion ?
Demand will have to be expressed in short term goods for now , not these long term bank malinvestments.

Neat piece of establismentarianism by Professor Murphy on institutionalising the conflationist fallacy in the minds of the sefs and the spalpeens. Whether 250 or 200 billion – this is not ‘Government’ debt: this is genuine Sovereign debt and Odious and Ill_eegit_imate banking system private debt which PD/FF/gp and ECB have decided that the serfs and the spalpeens should shoulder; and FG/Labour policy at the mo as well!

I agree with Professor Kelly – the effective owners of the Irish Banking System is the ECB.
The so called bail-out has failed .. abysmally: markets at +10% on Irish bonds; banks cannot access market for funds; Failure, yet establishment continues to press on with a failed policy – but protecting itself.
In terms of class war, who remains protected, who sets the agendas, in whose interests, ………. this is a massive transfer of wealth from the have nots and have littles to the have most and those upper-echelon elites who are successfully protecting their own interests, ably assisted by the System of Law.

The serfs and the spalpeens could survive a 12 month deficit reduction – if simultaneously the gougers and the entrenched ‘takers’ and naked expropriators were fec*ed out of the temple; and an emergency levy on real wealth would reduce the burden – this wealth exists. This is possible; it is also morally right; and it is economically right as markets would reach positively once reality restored to Irish finance, economics, and politics.

I go with Kelly.

Of our projected €205 billion debt in 2014 we will have:
– brought €44 billion into the crisis with us in 2007
– used about €96 billion to finance the 2008-2014 deficits
– borrowed €12 billion to build up our cash reserve
– seen €53 billion of debt created by the banking disaster
Three-quarters of the debt mountain we are creating has little to do with the bailout of our failed banks.

@ Yeilds or Bust
‘fixing problems is about fixing not about fairness or equity its about getting out of a hole. Normal rules need not apply.


@Seamus Coffey

On three-quarters – agree; McCarthy has been making this point for yrs now: yet the decison to socialise this debt is the main cause of bond markets not touching Ireland (the quarter that matters); deficit can be done – if sufficient political will as sufficient wealth exists to do so. This re-structuring of Irish economy/society is being successfully finessed/resisted by entrenched upper echelons – as they have done since the early 19th century.

@David O Donnell
You should not use tax to redistribute wealth – a goverment tax policey should be centered on making a economy more effecient and productive.
I.e. a tax on petrol to prevent waste

What needs to happen is malinvestment should be expressed as a loss somewhere – I would suggest the ECB and remaining bond holders.

A restoration to a sensible cash property market would do the redistribution far more efficiently then punitive tax sanctions cast by our poltical pygmies as some sort of redistributive class war.
In fact it would be nothing of the sort – it would just pile on more inefficiency to sustain credit empires for just a little bit longer.
Unfortunately some very powerful clans remain in Ireland – the BOI and AIB tribes come to mind – they feel it is their right to live off unproductive credit fueled assets and use the mortgages on these “assets” as a clandestine rent/tax.
If banks actually created credit to fuel productivity they might earn their right to do this under state sanction but it seems to me they are only interested in rent seeking.

@ S C,

Thanks for those figures. It’s good to get them out here. They make a lot of sense.

Some recent posts relate to the reserve capitalisation or Core Equity of the banks, a theory that it could be reduced drastically. Would you have a figure on much it is – presumably a percentage of
– seen €53 billion of debt created by the banking disaster ?
or perhaps it’s here:
– borrowed €12 billion to build up our cash reserve

Press Release: IMF Completes First and Second Reviews Under Extended Arrangement with Ireland and Approves €1.58 Billion Disbursement

‘Supporting these efforts with a more comprehensive European plan would help overcome market doubts, regain market access, reduce the threat of spillovers, and bring about a recovery of the Irish economy.”

They must’a read Kelly – give the bleed1n banks to the ECB!

Prof Murphy: “[Prof Kelly] initially expects the debt to be €220 billion (the Namawinelake estimate), but then adds an extra unexplained €30 billion, dismissively remarking that the differences between €220 billion and €250 billion ‘‘are immaterial’’.

Can Kelly really maintain that an extra €30 billion on the gross government debt is immaterial?”

Now this is pretty rich from Prof. Murphy. Suddenly Prof. Kelly, who’s arguing that our debts will bury us, is portrayed as the insouciant one. Of course, what Prof. Kelly means is that €220 billion is so freaking enormous an amount of money that whether the true figure is €250 billion is immaterial to the argument.

@ Rothbard,

“Now this is pretty rich from Prof. Murphy. Suddenly Prof. Kelly, who’s arguing that our debts will bury us, is portrayed as the insouciant one. Of course, what Prof. Kelly means is that €220 billion is so freaking enormous an amount of money that whether the true figure is €250 billion is immaterial to the argument.”:

Of course if MK admits he could be out 30 bn in one direction, presumably he could be out the same in the other.

Would that not worry you about his competence to contribute to the debate?

@ Peter K

Well, it’s more a case of trying to get some understanding myself. AM quotes €190 billion, still an enormous number. And all this takes no account of the inflation-or-depression monster stalking the whole world.

@Yields or Bust
“I suggested in previous threads that the empirical evidence for banks holding anything more than 7% core Tier I capital is at best inconclusive yet we seem hell bent on getting that figure to 10%. Why? As far as I can see nobody really has a clue why? ”
I’ll tell you why – because nobody believes their loan loss projections, but at least with 10% core they can take a lot more loss than with 7%. This is still all about losses. It is all about property prices and how far they will fall. The market doesn’t believe the sugar-plum fairies at S&P who reckon that the decline is over. Why? Because they’re talking nonsense, that’s why.

Until the banks have positive net worth at the end of a proper worst case loss scenario (which the last stress test comes close to), they are going to be in trouble. As it is, they are probably dead ducks and no amount of capital will make them attractive. Renaming the Drusilla and Griselda might make more sense than leaving them be as AIBoI.

@ R,

I think … our … SC gives a good break down of, probably, very sound figures.

Presumably the country and perhaps the world will be over flowing with economists from the uni of life after this – and they might do better than the other variety have done.

Though I’m afraid that still only one of two holes in the bucket are being addressed – the unattended one being the potential for rapid trade liberalisation to undermine our economies thoroughly.

@Peter Kinane
“unattended one being the potential for rapid trade liberalisation to undermine our economies thoroughly.”
I don’t think there’s much to fear from that.

Much more, for us, to fear from the opposite – a rapid return to protectionism…

re: Yes, that is what I am saying and I think Morgan Kelly also.

I can’t answer for Kelly. All three economists that you mention are probably excellent economists, I claim neither economic expertise nor excellence. Maybe their final debt figures are of €200 -€ 220 billion are accurate. I note from a comment above that the IMF is now forecasting €232 billion by 2016.

The hard numbers say (or at least did say at the end of 2010) that no more borrowing would leave net govt debt at approx 116 billion.
Seamus Coffey’s later post puts this figure currently at €131 billion. I accept his figure on that. But he also says that a continuation of the current strategy will see us in the hole for €173 billion by the end of this year.
In other words by the end of this year the debate is over. We will have blown it. The damage will have been done.

That is the choice.
The govt, the country and indeed many economists appear to back the strategy of loading on the bank debt, loading on the deficit debt, loading on the interest debt, loading on the cost of all excess State expenditure, loading on the cost of AIB staff (2,000) executives leaving what are now State companies with barrowfuls of money.

Meanwhile statutory redundancy is your lot in the private sector. And if you are unemployed be you 25 or 55, your choice is to hunker down in poverty or emigrate.

I simply don’t back that strategy. Not only will it not work, it doesn’t deserve to work.

I note from some of your more sane comments, you put a lot of store in Ireland running a current surplus this year, if that is what it is called.

Not being an economist, let me tell you purely from intuition, what I think this means. It means that more wealth is accruing to the citizens and companies etc of this country this year. Ergo, the “country” as defined by some model is getting richer. And maybe this is true.
But if it is true then Kelly’s argument for cutting the deficit is all the stronger. And if it is true, by virtue of the fact that huge numbers are getting poorer, the income/wealth distribution gap is not just widening, it is shearing apart.
As I said above, I simply don’t back that strategy. Not only will it not work, it doesn’t deserve to work.

@ hoganmahew,

Interesting point about the core reserves.

Re rapid trade liberalisation:
I mean the G7 of old and associates – I’m not implying that after 65 years they should start building walls against each other.

Rather, that the rate at which they/we are opening up to very large, very poor societies, some with little if any history of democracy is fraught (repeat for u benefit: “fraught”) with many dangers.

This seems like a way to undermine much of G7 wealth production and make it redundant and import its replacement. I expect it is good for some G7 companies (perhaps one’s that have major, discreet influence on policy), but I would expect that this benefit to loss ratio would, indeed is, becoming increasingly negative, with potential for all kinds of consequences.

Of course, I believe in co-operating with these non G7 nations and would approve of presenting them with our best science, perhaps with a five or ten year lag. They have the labour and, by co-operating between themselves, lots of resources, and there would also be trade with the G7.

The thing is that I would not want the rate of opening of trade to risk being at the cost of G7 suicide.

MK’s solution has a huge flaw as it would immediately render the banks insolvent. They are only surviving because of cash provided by the ECB backed by the NAMA bonds. Demanding those bonds back would effectively suck that very amount of cash out the banks and in combination with ripping up the promissory notes would render them unable to meet their demand deposit and current account obligations. A collapsed payments system and the indirect confiscation of peoples savings should be included in the costs of this proposed solution.

After this epic misallocation of capital ? – capital inflow – labour inflow –
boom/waste – capital strike – labour retreat – bust/waste – chaos.

Who pays for the externalities baby ?

The real question is will corporatism be cemented into the governmental structures if when private institutions continue to have free call on worlds resourses while individuals become more and more restricted in their use of their private capital and sale of labour value.
When the second half of the equation is complete its game over.

I have to laugh at the middle and upper middle class in this country – you have embracced the liberal bullshit as long as it kept the price of a restaurant meal low but when the logic of the situation creeps up into collage campuses and civil servent nests things suddenly become different.

Obviously it has not reached out and touched you yet – but give it time , give it time.


Not so fast – the losses are in the numbers are we’re still intending getting the ratios to levels that supposedly give serious comfort to all manner of bank counterparties. Don’t think so – well thus far it seems we (as the State) are the only serious depositor back into the banks – so the excess capital over and obove the stress test losses has convienced nobody other than Michael Noonan. How cosy is that.

I’m not a believer in the stress tests but I’m equally not a believer that excess capital is the answer either.

The simple fact is that bank investors will only be convienced by one thing and one only thing and that’s growth in the lending books and the economy generally – no amount of excess capital wil reverse that basic issue. Are you listening Dame Street?

@Yields or Bust.
Excess capital ? is credit money capital ?……… answer no.

One of two things must go if we are to remain in the Euro – mortgages or solvency.
Where is the money for economic activity when so much money pays for the mortgage rent ?
The absurdity of the situation is well ………. absurd.
We are effectively in a Easter Island end game but despite our knowledge we continue to listen to the priests who implore us to cut down the last of the trees to make more Giant Faces.
The friggin island is full of Giant faces – the priests tell us we must value these objects above all else so therefore we give them a artificial monetory value.
One face = ten trees but we know that one tree can become a boat that can feed us for a year , something is not quite right yet inertia compels us to listen to the priests.

@ Seamus Coffey

“Three-quarters of the debt mountain we are creating has little to do with the bailout of our failed banks.”

In a narrow sense, maybe yes. But the State’s loss of control of its finances 2002 – present has everything to do with the actions of the banks.

Or another way, the €53bn (and counting) is only the direct cost to the state of restructuring the banks, as a part of the larger consequences of a financial sector disaster.

Without rehashing too much: this does not take responsibility away from political/governance decisions either.

If the state ever gets round to sending a bill to the banking sector for the mess, it should be considerably larger than €53bn.

@ Hogan & Yields

Thanks for discussion above.

@ Gavin,

I agree that the banks have a greater responsibility than just the debt created. I was just focusing on the debt.

Also remember there would be €16 billion plus earnings in the NPRF so if were sending them a bill it would be larger than the €53 billion given above. That’s just the debt.

@ Joseph Ryan
I have to say i think your comments on this topic have been spot on. As someone also left of centre like you I find this whole episode horrible but i completely agree that Kellys solution is probably the least worst for for the people on the margins and would force those with most to share in the burden.

Do you think much of the argument against it is simply a mixture of fear and self preservation as I do?

Do you think that if we just keep going on the path we are on that the ECB will be forced to use QE to allow us off the hook?
Do you think that labour’s current strategy can be defended on the basis that they believe that europe will not allow us go under?

The main reason that I think the IMF (236bill) and Morgan Kellys (250bill) numbers for our total debt for 2015 are more accurate than the 190bill proposed by S coffee or the 204 bill produced by the dept of finance is they see a speed in the reduction our incresing levels of debt that is completely without any basis in reality.
Would people who do not see the debt going over 204 please indicate if they see the projections of our increasing debt of 24.9 bill this year getting to 1.4 bill by 2015 as realistic or optimistic? given the level of interest payments we will be making by then?

The other important question for people who think that the debt will not go over 204 billion is, at what point are we in a debt spiral? Is it below 220bill as Kelly would maintain or is it 230 bill? 250 bill? where?

Where there is no temptation, there is no sin.
Now there apparently is temptation.
Recall the W. Churhillian: “…this was their finest hour” – on this day.

This really is a wonderful set of comments. Slowly, slowly, some of you are dragging the reluctant toward reality. Marvellous. Next you have to ‘stick it’ to Enda, Michael, Eamonn, Jerry and the remainders in Leinster House. And I mean STICK IT!

@ YoB: ” … about getting out of a hole. Normal rules need not apply.” Best in a long time. Must be a new ‘law’ in there. Reminds me of the first time I encountered a reverse thread bolt. You can extract it with some physical effort, but it requires a significant, and inverted intellectual effort, to drive it home!

And if you think things cannot get worse – just watch what is happening to those energy costs. They have not gone away you know!

Brian Snr.

@ Eamonn

The IMF did not forecast a figure €236 billion. Their original forecast was €225 billion but as I said above.

“The IMF ‘forecast’ that the 2015 GGD would be €225 billion last December. However, this was based on the full €35 billion set aside for the banks as part of the EU/IMF deal being used. This will actually be €18 to €20 billion. Once you subtract the difference that will not be borrowed for the banks, and the accumulated interest that would have been incurred on this between now and 2015, it is clear the IMF projection for 2015 is probably in the €205 to €210 billion range and comparable to most other reasoned estimates.”

Any figure close to €250 billion has little relation to reality.

As to whether the decceleration of the debt accumulation is possible it is very likely that it will be possible. The €24 billion increase in the debt this year includes a €10 billion non-recurring payment for the bank recapitalisation process. If all else was equal in 2012 the increase would drop to €14 billion so it is best to start from there. Even by 2015 the general government balance is expected to be €5 billion so it is not expected that the deficit will fall as fast as the rate of increase in the debt.

How can we have a GGB of around €5 billion yet see the GGD rise by only €1.5 billion? This is only possible if we maintain the €16 billion of cash we had on deposit at end-2010. The NTMA has stated that it expects the end-2011 cash balance to be something similar and they believe that “[t]hese balances provide a significant potential offset to Gross Government debt in the future and give the State some financial flexibility.

To achieve the targets laid out we have to reduce the GGB from €15 billion this year to €5 billion by 2015 and see no more money used for bank recapitalisation than that already committed. There is doubt about either of these but they are far from improbable.

To echo Eamonn Moran a bit, what is the track record with respect to debt forecasts? Is it a number that ever undershoots or even meets the target? I don’t just mean in Ireland, I mean anywhere else?

So is it not just that there is a target, but given all we know, the risks are to the upside of that target, no? (This is the point where economics needs to move from accountancy to politics/history/philosophy/psychology…).

@ Seamus Coffee
Lets say that there are not any more calls on the NPRF Money in the meantime and lets say the GGB is 5 billion (are you including promissory notes payment of 3 billion in that?) and another 1.5 billion of debt as forecasted. Its gone in 2 years. Long term we will have (200bn (using conservative figures) x 5% in interest) 10 billion interest payments per year. By what year do you think we will be taking in 10 billion more than we are spending? It is only then we can stop increasing the over all debt figure. This is not sustainable.
But it doesn’t matter your guys have won this argument within both FG and Labour. The comments from Enda Kenny, Eamonn Gilmore and Pat Rabbitte have been explicit. No Default will happen in Ireland! They are obviously using the best available advise. They are it seems relying on the kindness of strangers. Perhaps they will help us for their own sakes?

@ hogan
I would imagine some countries have gotten out of dangerous national debt situations quicker than they expected before but any that didnt have a currency to devalue?
I too would be interested in previous cases.


I don’t follow you. What’s gone in two years?

In 2015 the GGB is forecast to be €5 billion. This excludes the capital on the Promissory Notes as that is already included in the GGD so counting the payments on the Promissory Notes would be double counting. The €5 billion does include the accrued interest on the Promissory Notes.

With a GGB of €5 billion it would take €3.5 billion of cash to keep the increase in the GGD to €1.5 billion. I think you have added €5 billion to €1.5 billion to get the cash requirement when in fact you have to subtract them.

We do not have to “bring in” the exact amount of the interest more than we spend in order for the debt to be sustainable. That requires the interest rate to be lower than the sum of the inflation rate plus the growth rate. It is likely that the absolute amount of debt we have is going to be increasing for the forseeable future but it takes more than that for it to be viewed as unsustainable. If the debt/GDP ratio keeps rising then it is unsustainable.

@Eamonn Moran

Do you think that if we just keep going on the path we are on that the ECB will be forced to use QE to allow us off the hook?
Do you think that labour’s current strategy can be defended on the basis that they believe that europe will not allow us go under?

I have no knowledge of the ECB, except to say that I remain deeply suspicious of any organization that has campaigned for and succeeded in pushing private banking losses down the throats of citizens that had not hand act or part in incurring those losses.
We can expect nothing but more moralising from the ECB.

The current and previous government stance is to load the debt on until it becomes fully apparant that the donkey’s back is completely broken. There appears to be a nod-nod, wink-wink approach that Europe will ride to rescue, everybody will breathe a sigh of relief and continue to avoid making the decisions necessary to live within our means as a sovereign nation.

To think that in its current mindset, Europe (the EZ piece) dominated largely by a combination hard currency and neocon philosophy will not allow Ireland to go under, lacks an appreciation of how Europe has changed over the past 15 years. From a positive social democratic idea to a liberals paradise.

As for labour, they seem to believe that the salary of a Secretary General or Chief Justice is as sacrosanct as that of a poorly paid janitor.
Labour they may be. left thay are not.

PS. I see on todays irish Independent that Ireland has applied for permission to continue the unlimited guarantee (€150Billion) on the banks for a further six months.
I had to read it three times to make sure that it was not some kind of joke.

A bankrupt State applying for permission to extend a guarantee it cannot afford, to benefit private financiers who took risks, at the expense of the destruction of the country, in particular its youth.

Well done to Laura Noonan of that paper, for being able to write that and refrain from inserting a paragraph asking which banana republic she was living in.

I am not saying that Morgan Kelly is 100% right, but it must be pretty obvious to many many people, including many of the contributors to this site, that the debt laden donkey plan will not work.

“If the debt/GDP ratio keeps rising then it is unsustainable.”

I have come across this Debt/G*P relationship before. I also have had to correct a couple of folk about the concept of sustainability (wrt. ‘green energy’ Crapola).

Searching thru some micro texts I see no mention of ‘debt’ – which is negative future income – in respect of estimates of Aggregate Income (Y). Debt is not a static metric, it increases or decreases. The former exponentially – which is a bitch if you go back to that relationship above: G*P has got to increase exponentially also – which is a physical impossibility, except you are “kooking de books”. Which we appear to have been doing for some considerable time.

Sustainability: this is also a dynamic metric. It mandates an intertemporal, decrementing trend line – like less and less each successive time period. It does not indicate a ‘flatline’. You can only get away with +ve sustainability in a virtual system – in which case your sustainable elements are virtual also. And since our economy is a real, physical, and finite construct – sustainability of economic output indicates a decline thereof.

@ JR: Joe, it appears that what we knew as Left, Red, Socialist has become Right, Green, Capitalist. They are now all perched on the same end of the see-saw. I think we were fooled by their kit. Now that they are all bollock-naked they are indistinguishable from one another. ‘Cept for the beards maybe. 🙂

Brian Snr.

@Brian Woods Snr

I’m confused. You say that a 3% interest rate means that debt grows exponentially but seem to indicate that a 3% growth rate does not imply the same for the economy.

@Brian Woods Snr

it appears that what we knew as Left, Red, Socialist has become Right, Green, Capitalist. They are now all perched on the same end of the see-saw.

Spot on.
And the question is why are they all now perched on same end of the see-saw?
I think we know that answer to that one.

Look lets the various against Morgan Kelly one by one and see how valid they are. You come to the general conclusion that Mr. Kelly is right and we are facing defacto default in 2014 if we don’t turn the boat. At that stage Spain will probably have needed a bailout cleaning out the cupboard and we will just be let sink. This is the inevitable result of going on the way the are. Most of the critics of Morgan can be summarised in to a number of groups and valid arguments can be made against all these groups. The arguments can be summarised as follows 1.

1. Morgan got his sums wrong
After careful analysis of Morgans numbers they find that he is out by 10 or 20 bn in his key numbers on debt 2014 therefore QED his whole thesis is wrong. These are the same people who thought houses would keep going up and flying PIGs. My moneys on Morgan as these people always add another 5 bn on the bank losses every month.

2. We are all going bankrupt help
The Leo Vadracker argument that there will be so many bankruptcies that the country will sink under a blanket of high court repossessions. The answer to this is to change the bankruptcy law to UK. one year without credit cards. Do you think the ECB owned banks are going to throw everybody out on the street . They will they take what they can get. Houses will be virtually unsellable in Ireland for a decade whatever happens. Think about it

3. We cant cut the deficit to zero without cutting judges pay and closing Hospitals
This the general government argument that they cant cut the deficit to zero in one year. However Daniel Gros has shown that, because of the high savings rate in Ireland during the balloon they don’t need to. They could for example start a decent property tax, decide to to introduce a minimum tax of 30% on salaries over 75,000 (most people on Ireland on salaries of 100,000k plus in ireland pay 1 or 2% income tax due to the huge range of property based, artist, BES, patent exemptions etc. on income tax). The is also uniquely in Ireland the virtually no tax on pension pots, however big.

They could also very simply OVERNIGHT get 10 bn of the 14 bn deficit. How by giving the pension industry 1% ten bonds for the 10% of the pension pot. Why pay 6% to the IMF when you get 1% interest to your own citizens.

The answer is the current administration with their apologists Antion Murphy and JTO etc. would rather an Argentian Default in 2014 as the wealthy and the pensioners moved all their remaining assets aboard leaving an unsustainable tax on the ordinary PAYE sector to pay the ECB and the bondholders.

Why not the Icelandic solution, no sovereign default and a government determined to look after its citizens. Why not tell the banks to get lost and save our reputation and our economy

4. Are the banks sovereign are they not dance.
The argument made by Antion Murphy that the banks are not sovereign. Isnt that what Lenny did, make the banks sovereign and what Morgan Kelly want to reverse by handing the banking sector over to its biggest creditors. Are they sovereign or are they not. If they are not sovereign as Mr. Murphy suggests then we don’t have to formally hand them over. The ECB as the biggest creditor can run them as they see fit with no more taxpayers cash. This is just a ridiculous circular argument which could only be answered by a judical enquiry lasting for 5 year and costing 1 bn. Better just giving the ECB the share certificates as Morgan suggested.

5. OH no no credit (isn’t it credit that caused the problem in the first place)
The no credit argument. If the government is generally worried about credit to business set a small business bank with some of the proceeds the pension raid. Credit caused the problem. As for consumer credit do you think the ECB owned banks are going to cut all domestic credit-card and loans when if they make a mess in Ireland and dont get some of their 130 bn back they risk bankrupting themselves. I don’t think so. In any event if the ECB banks don’t loan vulture banks from the UK and elsewhere will quickly descend to offer high margin safe credit as they were before and during the bubble.

“most people on Ireland on salaries of 100,000k plus in ireland pay 1 or 2% income tax due to the huge range of property based, artist, BES, patent exemptions etc. on income tax)”
It’s just not true. Aside from the minimum tax rate, most people in Ireland on over 100k are not much over 100k and are salaried. They enjoy none of the tax breaks you mention.

You are simply making stuff up which damages the rest of your argument fatally…

@ Jules

were you drunk when you wrote that? That “most people earning over 100k pay 1-2% tax” was only the start of your idiocy, there was plenty of other inane rambling involved there.

@ jules

“the ecb as the biggest creditor”

The ecb is a SECURED creditor. By far the biggest creditor now of the banks is the 150bn of UNSECURED deposits….

@ Hog

Jules was referring to people earning 100,000K plus i.e. 100M plus. He is probably correct that this person does not pay much tax. Why are you picking on poor Jules?

Can’t find the link now but have the data in excel format.
The revenue released a document with 2006 data, and taxes have increased and allowances reduced since then, which shows that the effective tax rate paid by those earning over 100k was 30.46%.

As an aside they represent 3.75% of the cases, 21.1% of the income and 41.07% of the tax paid.

This is great – healthy debate!! Bring it on. We are growing up!
Morgan Kelly is half right and half wrong.
We are fubbard but the rest of the world is fubbard too. Our biggest problem is energy. If we could secure some form of decent energy supply we’d be the best country in the world


As we know the taxation data you refer to refers to PAYE returns and the vast majority of the 100k plus bracket is outside this.

In fact if you ask the Revenue a simple quaestion like how much taxation are they not taking in an the artists exemption for example they cannot answer you because they don’t know the answer. The 30.46% figure is meaninless because it does not include royalty income from some of biggest bands for example. It does not include patent income. It does not include income diverted into large pension pots etc. For example Anglos Drumm only paid 2% legitimatially on an income of 1 million plus and that is one of the only returns that has surfaced for legal reasons.

Why is everybody so against raising the taxes on the wealthy. Increasing the effective tax from 30% to 40% on this group will raise another 1.5 bn in income tax. A property tax of 1k per house as in the u.k will raise another 1 bn. Introduce third level fees and taxing childrens allowance another 0.5 bn.

10 % of the total private pension is about 10 bn. Give them 10 yeat 1 % bonds in return for their cash.

All in all you have the makings of the deficit and we could tell the EMF to piss-off. Otherwise we have a major is risk of an Argentinian style default in 2014 as all deposits are pulled out the banks before we off load them on the ECB. We have to do what Morgans says, my only point of the ramble above is that it can be done. WHY NOT

@ Jules

1. you claimed people earning over 100k were paying 1-2% effective tax rates. We called bullsh1t and cited the real figures.
2. You claimed people earning over 100k weren’t included in the PAYE figures, and you seemed to imply that they were all receiving mainly royalty and patent income. We all scratched our heads, because thats one of the most bizarre suggestions that any of us have heard.
3. You claimed David Drumm only paid 1-2% in tax, and i commented that you were basing that suggestion solely on an Irish Times article which was retracted 12 hours after it was published.
4. You blathered on about “not cutting judges salaries” was the reason we couldn’t cut the deficit to zero – please show where anyone has every suggested that as a reason why we can’t cut the deficit to zero??
5. You basically want to seize 10% of all private pensions in order to cut the deficit to zero. Are you going to do that every year??
6. To increase the effective rate on “the wealthy” by 10%, wouldn’t you have to raise marginal rate by more like 15-20% on all people earning over 75k? Seriously, to 70% or so??

At no stage have you admitted that all of your comments have basically been made up in your own mind and are completely insane. Why on earth should anyone listen to a word you have to say?

@ Bond. Eoin Bond… Says:

May 17th, 2011 at 9:48 pm
@ Jules

were you drunk when you wrote that?


It is only upsetting you 🙂 🙂

In today’s Irish Times, UL’s Anthony Leddin and Brendan Walsh from UCD, have their go at trying to work out how Morgan Kelly’s €250 billion debt figure could come about.

Clarity needed when figuring out Government debt

Like Antoin Murphy’s piece that set this thread rolling, they cannot find the evidence to support the claim which can only be reached by double counting the bank recapitalisation funds.

What difference does it make 225bn or 250bn.. Ireland cannot afford the lower number. 225 bn . Ireland needs a write off of 50 bn if it is to recover any hope of stability in the next 5 years. If it does not get back to consumption and employment of the young graduates the game is up.
Why should anybody remain behind to fund reckless bond holders from across the EU and fund smart ass builders who will make more in buying back assets at knock down prices than they ever dreamed.
The economists are arguing about whether its 225 or 250. Reality it makes no difference
Can we start the discussion on how can we get the EU to agree a write off of the bonds of 50 bn or provide a grant of 50 bn to pay off the bondholders in Germany and France.

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