Donal Donovan: Irish bailout actions display credibility the Greeks lack

Donal Donovan writes in today’s Irish Times on the importance of demonstrating the political capacity to see through the adjustment programme: article here

38 thoughts on “Donal Donovan: Irish bailout actions display credibility the Greeks lack”

  1. Sorry but I read this piece as pure IMF/EU/ECB spin even though I could not find the phrases “we are where we are” and “we mustn’t rock the boat”.

  2. Neat piece of Establishmentarianism with a dash of Leo-lite.

    The fiscal adjustment is unavoidable but would certainly be facilitated if unconscionable vichy-banking system debt NOT SOCIALIZED on the Irish serfs. Blind Biddy is not impressed!

    ‘It is true that, more than in the case of the underlying budgetary imbalance issue, the separate, vexing question of how (and possibly by whom) the one-time bill associated with the banking fiasco is to be settled continues to be the subject of considerable debate.’

    Possibly by whom!!! Possibly! More than a touch of Stockholm Syndrome here …. Has he not read AJ’s recent press conference?

  3. Yes , we must purge the badness……….

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

    In a rational world these efforts only make sense if you think world trade is working efficiently.
    It is working alright for the people who have the divine right to produce the money but thats about it.
    Even under a compromised gold standard system such as Bretton Woods such vast trade distortions would not be viable.
    Greece , Ireland ,US – effectivally everywhere will have to re localise trade on a continental , countrywide and provincial scale.
    Burning all this fuel to sustain the unsustainable is simply not sustainable – nothing complex about this manifest fact.

  4. By contrast, the Irish Government has taken significant steps to reduce the expenditure/revenue gap. Admittedly, there is a long way to go. To reduce the deficit from 10.5 per cent of GDP to about 3 per cent will require further major and difficult efforts over several years.

    1. Despite cutbacks which were largely targeted at the poor and despite tax hikes that disproportionately hit the less well off, Ireland will still record an €18 billion deficit this year.

    2. Ireland will pay bank bondholders €60 billion in 2012/2013/2014 despite the banks being bust and despite the State throwing €66 billion down the tube at the banks. (€46 billion so far plus a further €20 billion in recapitalization possibly this month)

    3. The “bail-out” or ECB/EU program had nothing to do saving Ireland or the Euro. It had all to do with bailing out the bank bondholders. As DEEPTHROAT would say, “follow the money”

    4. Mr Donovan should familiarise himself with the May income and expenditure returns. Total taxes up a net 1.6% (not 5.6%) if the €485 health levy transfer from expenditure is taken into account. This miniscule rise despite the new USC levy and the elimination of some tax breaks.
    Expenditure, despite the very definite cuts on services, again affecting mostly lower paid is still on a par with last year.

    5. The reality is that the underlying tax base has been much more severely eroded than anybody is admitting. It is just very difficult to pinpoint because of the Incme levy/PRSI/USC shuffle that has been done.
    Maybe they have no idea just how badly eroded the tax base is.

    6. Allow me to add here that the revenue do not collect and have never collected seperate figures for health levy, income levy or USC. Any comments made by the Dept of finance in relation to these figures is pure guesswork. [Some would say that is what they have been doing all along]

    7. In other words, because the higher eschelons are being protected no progress whatever has been made in bridging the deficit gap.

    By contrast, the Irish Government has taken significant steps to reduce the expenditure/revenue gap.

    No, Mr Donovan, Ireland omitted to take the most significant step of all. To burn the bondholders. And to reduce the biggest items of expenditure under its control

    A. Refuse to pay the bank bondholders for clearly insolvent banks.
    B. Reduce government payroll targeting the higher paid.
    C. Reduce the millionaire gravy train for State suppliers of services.
    D. Stop the payment of pensions to existing State employees.

    In addition Mr Donovan’d political analysis is also very suspect. The real backlast against the current course of action has not even started. People were fooled (once again) by election promises.
    There will be a very different electotrate in the months to come.
    And about time.

  5. Donal, I can’t tell you how impressed I am with Ireland’s slaughter of the sacred cows and defiance of vested interests. Time for a self-congratulatory pat on the back.

  6. Maybe the link below is better placed here.

    It seems some of these banker types (Goldman Sachs in this case) want everyone, except themselves, to pay for their mistakes never mind our own (in actually doing it).

    http://www.economist.com/node/18744559

    Guys like Mr O D keep telling us that a deal is a deal – it is written signed and sealed.

    Well according to GS it isn’t really like that.

    The last line I thought ironic.

  7. Mr. Donovan seems much more thoroughly convinced that everything will turn out all right if we stick to the programme than the current IMF staff who have crawled all over the issue.

    We should stick to, or accelerate, the programme,not because we are convinced that it will work out, but because it is the only strategically robust response to our current predicament. It is the right response whether the programme works, or the Eurofolks agree to take a hit on the debt, or we eventually choose or are forced into default.

    From a purely economic perspective, the right approach is probably to go through an structured default now, but the international political economy consequences of doing this unfortunately seem to rule it out.

  8. @Grumpy
    Many of us would accept this if all Europeans became good Austrians – unfortunetly that is not the case.
    Many of us might even accept wealth transfer if the capitals of the world actually produced something of value in return for their money monopoly – alas their defecits are not merely physical trade.
    Capitals serve no function if they cannot innovate – they have the privilege of living off the hinterland in return for the prospect of invention.
    If they produce intellectual fluff they become parasitical in nature.

    I keep thinking of the old Empire – at the point of collapse it had a vast network of civil servants working for both keeping the system functioning and also to insure the revenue kept flowing.
    But also it had a large boffin culture of eccentrics working for something in the physical world – this tertiary culture was destroyed in the 60s and soon after the civil service itself died as a result of the subsequent malinvestment in a industrial vacuum.
    But what replaced these statist creatures ?
    Yes financial enginners – there only goal was to insure the revenue would keep flowing to London , almost all bureaucratic endeavours in the physical world was considered too expensive and was junked.
    This released energy normally spent for future capital gain – releasing profits for the new privtised civil service
    In accounting terms capital appreciation was ejected from the economic discussion.
    Well now the colonial hinterland has no more physical capital to extract yet the modern civil service which is the vast banking sector still wants its pound of flesh.
    It may get it for another few years but the damage done to the economic ecosystem by flawed accounting structures makes them dead men walking

    It is no coincidence that the IMF destroyed a once Great great britain – this plan was put into action after Suez and power retreated to the city and Manhattan.
    But where will the IMF retreat to when all the nests are soiled and the Great phoenix in the east have no more use for Venetian bankers ?

    http://www.youtube.com/watch?v=JacGZ4LxK-0

    It seems the local executives of western countries are still creatures of the 2 churches – Jenkins and Healys all of them…….. “orders were given to destroy everything” – including the friggin jigs !!!!!!!!!!!!!!!!!!!!!

    Healy “the IMF had already decided”

    The British aerospace industry never recovered from this cancellation – the Olympus engines developed for this aircraft would later enter the Concorde – without Concorde there would be no Airbus industries.

    Bankers only know how to run down capital – as that is what banking is – to give executive power to such creatures is madness.
    The decline of Britain as both a society and a industrial country is a microcosm of what is going on in the entire western world.

    Yet still we obey………..

  9. Listen Folks

    the IMF are not our friends as JOHN MCHALE loves to protray. Look to History and the IMF sucks the life out of ecocomies. the IMF is broke and is licking its chops getting in here and raping the country. Look what they are doing to Greece and we are next. All state assets will be privitised with the assistance of our right wing minister Leo.

  10. Donal says that “Greece’s debt to GDP ratio is …. likely to significantly exceed 150 per cent this year, compared to just over 100 per cent for Ireland.”

    The likelihood that our debt to GNP ratio will hit about 144% next year puts us within a whisker of Greece – see http://www.planware.org/briansblog/2011/05/default-is-inevitable-unless.html

    Rather undermines the context of his article. Maybe, we should pay more attention to how Greece handles its crisis than to the IMF and its camp folowers

  11. Almost all his derogatory comments on Greece are equeally applicable to Ireland. A few weeks ago I was watching a 4th or 5th generation Bank Analyst, American Irishman named Donovan comment on the Euro Zone as he hit point after point with accuracy. Is there something in the water that leads to wishful thinking here. The unwillingness to recognise the seriousness of the nation’s predicament as the hole gets dug deeper month by month. I have been in Germany for the last three weeks and the consensus as I see it is that collapse of the Irish banks in 2007 would have brought down the whole house including the strongest German and French banks. The German taxpayers are vehemently opposed to bailing out Greece in particular and any country that has not taken concrete steps to balance its budget.

    There is a school of thought here that has doubts about the German Gov’ts ability to bail out the big German banks (DB and CB) if what is seen as their profligate lending practices to irresponsible banks bring them down. The Germans assume that competent adults are in charge of German banks and that lack of due diligence is inexcusable.

    As for Ireland, our Gov’t, Central Bank and Regulatory regime are looked at in a head shaking way as being naive, amateurish and out of its depth for over five years.

  12. I read this bit slightly differently:

    “It is true that, more than in the case of the underlying budgetary imbalance issue, the separate, vexing question of how (and possibly by whom) the one-time bill associated with the banking fiasco is to be settled continues to be the subject of considerable debate.”

    The fine art of the parentheses lives. There is a centrist sort of position shared at the moment by the government/ICB/ECB/IMF (with reservations) etc., that ‘it’s managable’. Hence the fury over Kelly saying it’s not managable. However, the vision as far as I’ve seen of the centrist position up to now has been that final tot up for the debt including the paying off of bank bonds outlined by Joseph Ryan above, falls on the state, and the tax-payer. This remains an unacceptable outcome.

    The ‘(possibly by whom)’ re-opens this centrist position, for Donovan at least, to include finding ways that the one-off bill does not fall entirely on the state. This might make the whole scenario a goer.

    Over in the UK:

    http://www.guardian.co.uk/politics/2011/jun/04/george-osborne-plan-not-working

    And they get to have their own currency, interest rates and the capacity to print money.

    From the centrist pov, the Irish adjustment package has to not do so much damage to the economy that the deficit fails to close, or it will just be flogging a dead Irish donkey. I could see the centrist approach working if Ireland had about 5-10bn a year free for about three years.

    @ Dork

    Sundayish sort of musing.

    What do you make of the Islamic no-interest banking system?

  13. @ Mickey Hickey

    The German banking industry is hardly the best example of prudent management. However, that is by the way.

    There was a very good summary of views on the ‘yes, no or maybe’ (which, at least, is better than ‘everybody knows’) of a second bailout in the Sindo today.

    http://www.independent.ie/business/irish/yes-no-and-maybe-to-a-second-bailout-2666727.html

    The key reference is to the issue of how the ESM will deal with the seniority of debt.

    “Also on the horizon is the June 24 EU summit in Brussels, the result of which will dictate whether private investors’ debt in the ESM fund is seen as junior to that of the EU-IMF.

    “If it is, then Ireland and any other countries availing of ESM funds will need highly convincing fundamentals, in terms of budgets, economic growth and stable governments, in order to borrow at sustainable rates. Doing that might take some time, perhaps a number of electoral cycles”

    : according to Harvinder Sian of Royal Bank of Scotland (which should have some insights in the matter).

    The issue is indirectly on the table at the moment in the context of the insistence by the FDP on the “voluntary” involvement of banks in the second Greek bailout and, indeed, the possibility that the German government would not have a majority in the Bundestag otherwise.

    The issue is a crucial one and the pendulum seems to be swinging in the direction of common sense i.e. against Germany and a reducing number of allies (the Netherlands and Finland, it seems) mainly because it is evident from the Greek, Portuguese and Irish experience that the approach is not very clever and is, indeed, counterproductive for the reason explained by Sian.

    The most promising new element is that Merkel has come up with another political ‘spectacular’ – taking the decision to reverse Germany out of nuclear energy without any consultation whatsoever with her EU partners (so much for the brand new references to shared energy concerns in the Lisbon Treaty) – to distract voters and lay the ground for a common platform with the Greens.

    German handling of the e-coli outbreak has also left a lot to be desired. Health is, of course, a land and not a federal government concern.

  14. 3% deficit is no use for us.

    If we have 3.5% growth on average from 2015 onwards (based on the NTMA forecasts) and we borrow on average 3% a year, we’ll hit the Maastrict debt criteria in 2142. We won’t get below 100% debt/GDP until 2038. It would be a zombie economy.

  15. @ Maurice Hickey

    In March 2010, Germany’s top bank, Deutsche Bank, had a combined €14.8bn of gross sovereign debt exposure to the “peripheral” EU states of Greece, Spain, Portugal, Ireland and Italy, of which €10.4bn was to Italy.

    @ All

    O’Donovan reflects the common sanguinity of the well-heeled superannuated.

    While we should stick with the programme as it has only been in place for 6 months, we should also have a realistic assessment of growth prospects rather than keep spinning a yarn that will eventually be shown as that.

    As I said elsewhere this week, only 5,000 net jobs were added in the tradeable goods and services sector in 2001-2007, a time of a global credit boom, should we wait for some manna from heaven now?

  16. “Greece’s debt to GDP ratio is …. likely to significantly exceed 150 per cent this year, compared to just over 100 per cent for Ireland.”

    Not if you include the Central Bank monopoly money. How does the CB plan to wean the banks off its support? Over how many years?

    The scale of the disaster is breathtaking. I had a look at the Irish life and permanent site the other day. The shares are now at 11 cent and the latest news from the company is a liability management exercise that will pay subbies 20% in the Euro.

    Who is going to lend money to Irish financials again ?

    The Irish attitude to crime has a lot to do with punishment. Imagine if destroying a company were as abhorrent as certain other perversions. Imagine Denis Casey or Eugene Sheehy in the place of Larry Murphy .

    http://www.independent.ie/national-news/murphy-leaving-ireland-when-he-gets-passport-2666756.html

  17. @Gavin
    Not so up to scratch with non-usury banking (where does the new money come from ? – in the ancient world it was primarily silver mining) , as regards Lebanese banking culture which seems much more stable given its higher reserve requirements – it seems much more attractive from my perspective

    But here is a logical criticism of full reserve banking – I am not saying he is right but his ideas regarding stock and the mechanism of how home loans are given is interesting.
    http://www.youtube.com/watch?v=tLuv5tLUdUA

    Anyhow I guess most of us can agree that resources are being expended on non productive investments which ultimately will not service interest.
    Given that banks are eating their tail and indeed internal organs now – something is very wrong with the mechanism.
    Only very basic changes to the structure of finance will change this entropy

  18. DoC
    Full reserve, fractional reserve, the key seems to be that, when fractional reserve banking is combined with limited liability corporate structures and Ayn Rand philosophy, the end result is a disaster of historic proportions.

    The comment above about the anger surrounding Morgan Kelly’s work is illuminating. It was indeed impressive to witness the furious criticisms his calculations, when those critics produced calculations that came reasonably close to Kelly’s. Had we said, the eventual debt is €225bn give or take 10% , it would capture both Morgan Kelly’s estimate and that of his critics. The main question, “can we afford to pay this and if so, how do we go about it?” was sidelined. Of course it was, because god forbid we would actually have to debate the harsh choices that face us.

    Also, the tone of the article” we are hurting but responsible, the Greeks are hurting, but they are irresponsible” is dangerous. Has anyone sought out real, on the ground, data showing the effects of austerity on ordinary Greeks? ……I thought not…because again, let’s not allow facts interfere with a good narrative. I understand that food prices are sky rocketing, pensioners get their pensions one week, but sometimes not the next and massive wage reductions are destroying purchasing power.

    In other words, Greece is close to an Argentine style meltdown and THE ONLY reason the EU is considering a second bail out is because it’s about to collapse. Greece today, is Ireland in three years, but please, don’t mention it, because that would interfere with our nicely constructed narrative that leads the foolish public to the slaughter while blindfolded and flattered.

  19. @bklyn_rtnr

    well said i wonder how this crisis will be looked back on in years to come particularly the misinformation that is being put out there at every turn of events

    it is as if the citizens must not be told the true picture lest that the markets get the jitters , so our goverment and media are doing their best to protect us from the truth only one problem the markets are and have been better informed and have had our goverments position figured out long before the bail out but it looks like we are to keep with the ostrich approach and maybe all the bad predictions will go away when decide to lift our head from the sand

  20. Clintideal,
    Well said yourself…manage the information to keep markets calm…the only problem is that market participants do this stuff for a living…. we don’t. When the fund manager studies his positions in Ireland’s debt, he need only swivel his chair to get input from the high yield analyst on one side and the emerging market analyst on the other. Both will tell stories of irresponsible borrowing, conflicts of interest, denial, and misinformation. In the final stages obfuscation, blame transference and finally, default are the norm. then, when it finally blows, we can make a matter of fact announcement saying ” well it was obviously unsustainable so any on the fund managers that held this sh*t deserve what the get”)……

  21. Irish bailout actions display credibility the Greeks lack

    THIS IS WHAT PEOPLE IN DUBLIN ACTUALLY BELIEVE.

  22. @ Mike Hall

    Hudson: “What really were rescued a year ago, in May 2010, were the French banks that held €31 billion of Greek bonds, German banks with €23 billion, and other foreign investors. The problem was how to get the Greeks to go along.”

    American academics tend to have a simple narrative for the Greek crisis. It’s apparently an easier subject to tackle than the austerity under their noses in California.

    This week a report on the shadow education system in the EU reported that private tuition in Greece was estimated at more than €950m per year, which is equivalent to 20% of government expenditure on primary and secondary education.

    The status quo benefits the well-off who pay little taxes and so they can fund their own system.

    “But to impose such neoliberal reform, foreign pressure is necessary to bypass domestic, democratically elected Parliaments. Not every country’s voters can be expected to be as passive in acting against their own interests as those of Latvia and Ireland.”

    In contrast with austerity in California, there is a chance that the rich in Greece will be forced to pay more to support their embattled country.

  23. @Seafoid
    You ask who is going to lend to Irish financials again. Simple..nobody.
    This pillar strategy is insane. Discredited banking institutions which are now burning subbies cannot expect to borrow anywhere in the world for the foreseeable future. These are the pillars that are going to get our economy going again. When your quoted banks are trading at 9c,14c and 18 cent you are in the manure business. Time for a rethink?

  24. @ Ceteris paribus

    I don’t see how it all fits together. The CB has a massive chunk of GDP in lost deposits and non rolled over bonds on its balance sheet

    http://www.ft.com/intl/cms/s/0/1a61825a-8bb7-11e0-a725-00144feab49a.html

    and this is supposed to be short term? Or will it be there forever? And when are the banks supposed to be back in a position where they can raise their own funding ? And then who will lend them anything ? Especially with the same crowd of amadans in charge as before.

  25. I damn well hope no one ever lends to the Irish banks again. That’s one of the key links in what got us into our current predicament. Getting back to the point where they are trusted to take deposits should be adequate for the country’s needs.

  26. why do we keep trying to drive a wedge between us and the rest of the “peripherals”. Do none of our so called leaders not know that the only way we are going to get out of this is if we all hang together and use our collective strenght to force the EU commission to over rule the ECB and bring some sanity back to this situation.
    The IMF is already starting to realise that it has become involved in an family fued and is desperately looking for a way out, it would have been out long ago if it wasn’t run by French politicians looking to get back into French politics.

    While I do not agree with Morgan Kelly’s idea (mostly because if we did it all now the poorest would suffer most), his solution is looking better and better all the time. In my economic illeratacy it seems we have a choice of defaulting now or later, it is like discussing whether to rip a sticking plaster off in one rushed pull or millimetre by millimetre. And I think that one thing we Irish are really good at is adapting to change so maybe we should really start thinking about the “one rushed pull” method.

    Maybe I am wrong and the reason it is not being considered is because it would hurt everybody and so the insiders will not allow it.

  27. This gov’t and previous gov’ts remind me of deer frozen in the headlights or rabbits in the dazzler as they say in Kerry. We have to face the fact that our gov’t the attendant bureaucracy and related institutions such as the Central Bank are drowning under the losses incurred and are paralysed with indecision because every decision they make will inflict pain on the public and business in Ireland. Little baby steps such as hair cutting risky tranche bond holders are as daring as they dare to be.
    I have a lot of sympathy for the politicians and bureaucrats the vast majority of whom have neither the training or experience to deal with the problems they are faced with. I expect that the final solution will come from ECB, IMF and European Commission in the meantime the politicians will tread water until the rescue is enacted. Then of course they will scream blue murder about the unfairness of it all. For generations we have voted for the candy shop, shady gov’ts we got. Now we are dealing with the results, hopefully we will do a little thinking beyond what’s in it for me when we mark future ballots. I would not worry about our banks, they are not lending now, simply rolling over existing loans. If they cease trading they will be replaced by numerous foreign banks within weeks. I was in a small square in Swinemunde (Swejouscie) Poland a town of about 40,000, there were 4 foreign banks and one Polish bank in the square. Ing and Paribas were among them. It is a marvellous world awash in every good and service that the heart might desire.

  28. @DOCM
    Interesting take on the Greek situation from the link you provided to the WSJ. In particular, the suggestion that the ECB would accept newly exchanged bonds for repo while refusing to accept the older sovereigns not tendered is a new twist to the saga. It seems the rating agencies would treat this as a default…with all the attendant consequences.
    What happened to the supposed agreement announced by the Greeks on Friday.

  29. @docm, ceteris

    “Among the biggest hurdles may be the European Central Bank, which has been staunchly opposed to hurting banks and other creditors, for fear that big losses on Greek debt could catalyze a banking crisis. A senior German official said last week that if the ECB vetoes a maturity extension, governments will have little choice but to lend Greece money with only a weaker form of private-creditor involvement.”

    Veto eh. What about the ESM’s “debt sustainability” exercise??

  30. @ ceteris, grumpy

    See discussion and my contribution with links on thread just opened by Karl Whelan.

  31. @MH

    “O’Donovan reflects the common sanguinity of the well-heeled superannuated.”

    Great line. Where was our the well-heeled superannuated Mr/Professor O’Donovan when bankers/developers/senior public servants/well-heeled professionals and the FF-PD government of the time were wreaking havoc from 2000 to 2008?

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