Patrick Honohan on Vincent Browne

Thanks to grumpy for drawing our attention to a fascinating segment with Patrick Honohan on last night’s Tonight with Vincent Browne show.   (The segment runs from minute 17:40 to minute 36:12; you can read grumpy’s comment here.)  Governor Honohan made an unfortunate reference to “the people” in relation to the blocking of attempts to impose losses on senior bondholders, giving fodder for conspiracy theories.   But I don’t think there is much of a mystery about the people in question.    The ECB clearly worried — and continues to worry — about balance-sheet contagion across the European banking system, and (I would suppose even more importantly) the implications of the precedent of withdrawing the implicit guarantee for senior debt for the funding of a system that continues to be fragile.  

On the Irish side, given the existence of the ELG guarantee on post-December 2009 bank funding, the equal ranking of depositors and senior bondholders, and the systemic importance of AIB and Bank of Ireland to Ireland’s credit and payment systems, a pragmatic decision was made that the fiscal savings from feasible loss imposition (most likely the remaining unguaranteed senior debt in Anglo and INBS) would not be worth risking the reliability of large-scale funding from the eurosystem. 

(It is worth noting that a special resolution regime was not in place, and even if it was the U.K. example shows U.S.-style depositor preference is considered incompatible with European law.   In principle it would have been possible for losses to be shared between depositors and senior bondholders, with the State making depositors whole.   But at that stage the State had lost its creditworthiness, making it hard to see how such depositor protection could have been implemented without significant outside support.   Lastly, both Anglo and INBS still had depositors back in November.   The Credit Institutions (Stabilisation) Act later facilitated the movement of depositors out of those banks, but that piece of legislation – which made it possible to impose proper losses on subordinated bond holders – is unlikely to be costless in terms of the longer-term reputation of the stability of Ireland’s investment environment.)

I think reasonable people can disagree about whether more should have been done to force the issue back in November with senior bondholders.    But I find it hard to understand the certitude with which the policy course is criticised given the very real constraints that were faced.   At this stage, I feel the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk.

Update: Namawinelake provides a transcript of the key segment with Governor Honohan: see here

106 thoughts on “Patrick Honohan on Vincent Browne”

  1. “At this stage, I feel the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk.”
    perhaps. But perhaps its that people think it massively unfair and therefore wish to keep staating that they dont and wont acquiesce in cuts while they feel this unfairness persists? There is such a thing as democracy, and the will of the people. Taking this argument to the limit “we are where we are”, then one could post-hoc justify anything as sure the past is the past and whats done is done and no use crying over spilt milk. But people do. And will.

  2. @John McH

    What is the tactical advantage for Ireland of not exposing “the people” who demanded the favour but didn’t dare have it written own in the MoU?

  3. John,

    if the ECB screwed the Irish government in November, which is what I understood Patrick Honohan to be saying, they were screwing the sovereign bondholders. It is part of the deal with the troika that Ireland is to return to this market, implicitly in size, at a sustainable interest rate and at a reasonably long maturity, inside eighteen months. Let’s say €5 bill for ten years at 5%. There now appears to be no realistic prospect of this happening.

    If they did what the governor says they did, they deliberately (and I must assume consciously) subverted their own declared policy objective (return to the market) in order to avoid facing a resolution of the banking mess up front. All of this presumably at the behest of the French and German governments. I agree with you that Ireland did not have attractive unilateral options in November. But a resolution of the European banking crisis has been deferred through increasing sharply the risk of sovereign default in (at least) three Eurozone countries.

    This is a shambles. So far as I know, the last European sovereign default was in 1952. All of this is being done to avoid explaining to continental European taxpayers that some of their banks are f****d, were poorly supervised and that the bill is due.

  4. @Grumpy

    Who was it in the IMF that said the Irish negotiating team appeared to have ‘Stockholm syndrome’.

  5. It’s a pity there’s not a ‘like’ button on irisheconomy. In it’s absence I’d like to say:

    @ Colm McCarthy
    +1

  6. Colm
    +1 also.
    Pity nobody in government is listening. Nobody in Dept of Finance seems to be capable of hearing.

  7. The oldest trick in the book in negotiations. Agree virtually everything and when everybody is happy clappy right at the end, throw the curve ball.

    @Grumpy.
    Agreed.
    We need to know, whom threw the curve ball.
    We also need to know, who decided not to catch it and thrown back with a vengence. It looks like it was not Brian Lenihan.

    @John McHale.
    I understand your frustraton with what appears to be an obsession with the debt rather than how we should move forward.
    The answer unfortunately is that the imposition of the ‘no hair cut’ dictat in relation to the bond holders of bust banks has poisoned the atmosphere almost beyond redemption.
    If the objectors, and I am one of them, sound ‘like wild men screaming though a keyhole’, the fault lies with those who locked the door on burdern sharing.

    @John McHale

    On the Irish side, given the existence of the ELG guarantee on post-December 2009 bank funding, the equal ranking of depositors and senior bondholders…

    On a not so small technical point, my understanding is that depositors do not rank equally with bondholders, particularly secured bondholders within the banks liability structure. They may well have a government guarantee outside of the bank corporate structure but inside that bank structure, depositors are now virtually last in the queue.

    Could somebody clarify the exact position please?

  8. @ All

    Merkel is clearly stating that another Lehman’s episode must be avoided at all costs. One must assume that she therefore thinks that such a threat now exists. Having gone through her podcast, I can find no reference to burden-sharing by private investors, although this is supposedly a key element in Germany’s/Merkel’s/Schaeuble’s (?) negotiating demands.

    If the ECB is taking such a stance against Germany with regard to the issue of possibly disputed bondholder claims, why should it be viewed as surprising that it did so in respect of Ireland?

    And there remains the small matter of the effectively unlimited liquidity that continues to be made available to Ireland by the ECB – at a nominal rate – without which the Irish banks – and the economy – would cease to function.

    P.S. One has to admire VB’s negotiating, sorry, interviewing technique which is more than can be said of some of the other participants.

  9. @ John

    ‘I think reasonable people can disagree about whether more should have been done to force the issue back in November with senior bondholders. But I find it hard to understand the certitude with which the policy course is criticised given the very real constraints that were faced.

    At this stage, I feel the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk’

    I think I am right in recalling that the most serious criticism here has been reserved for decisions which were taken much earlier. While the Sept 2008 guarantee was understood to be a product of haste and confusion, the 2009 ELG decision was seen as consciously giving a hostage to fortune. We seem to have missed opportunities to break out of the trap.

    It is further accepted that the property-oriented tax breaks offered by successive MsoF, and the electorally driven expansions of public pay and benefits, and more errors, provided the fuel for the conflagration which has occurred.

    While you are right to call for positive ideas, the only propositions which will gain traction are those which are firmly rooted in reality. That reality includes the fact that the ‘necessary’ fiscal correction cannot but blight our remaining growth prospects, as well as driving unemployment through the roof.

    As others have pointed out, we can’t get out of this hole by our own efforts. If you have a way to square the circle, please say so.

    @ Colm McCarthy

    Fair play to you for calling a spade a spade. There is hope for us yet.

  10. “And there remains the small matter of the effectively unlimited liquidity that continues to be made available to Ireland by the ECB – at a nominal rate – without which the Irish banks – and the economy – would cease to function.

    err…isnt however this something they have to do? I mean, they are not simply lodging the money, but taking in assets on repo under the common mandate/policy of the operation of monpolicy? How can they decide to stop repo on irish bank assets alone? This all seems a bottle of smoke to me

  11. Colm,

    I don’t really disagree with anything you argue, though I just can’t muster as much indignation as others at a eurosystem that is providing funding to the Irish banking system equivalent to Ireland’s entire GDP at 1.25 percent.

    However, there is an idea out there that there imposing senior losses was some magic bullet that was passed on. I try to list in the post some of the realities that seem to get so easy glossed over in the discussion. The amount that could be have been saved then by imposing losses on unguaranteed Anglo and INBS seniors — €4 billion? I really think it is becoming a distraction from the massive remaining challenge that we face, and indeed, by undermining public support, making that challenge even greater.

  12. “by undermining public support,”
    you dont get it John…there is no support for the cuts needed until ALL are seen to share. And all are not seen. Legitimacy of the actions is a prerequisite for their imposition surely?

  13. @ John

    The amount left in relation to unguaranteed seniors in Anglo-INBS is indeed small in the sense that it doesn’t change debt sustainability considerations by much — a mere €1,000 a head, perhaps €2,000 per taxpaying unit. (Of course, if you imposed a 2k per taxpayer charge to pay for a dead bank on taxpayers in any other European country, there’d be riots.)

    But the enormous and sustainability-relevant burden of banking debt is still there. It’s just shifted form into the magic promissory notes — €3.1 billion a year as far as the eye can see.

    Can you ever envisage supporting a scenario in which, given the alternatives, an Irish government could decide not to keep putting €3.1 billion a year into a dead bank?

  14. @Karl

    You have previously explained in clearer terms than anyone else that those promisory notes are effectively a debt to the ECB. Making the cash available so the ECB is paid back will be an annual and horrible reminder of how much this has cost us.

    On your question, if somehow we lose official support we will be defaulting on a lot of things. The best course through the crisis must have a dual focus — regaining market creditworthiness (which it is now evident will be very hard) and sustaining official support (which is now massive and, in my estimation, comes wiith a sizable subsidy given the risks being taken). I think we need to get real.

  15. @Colm McCarthy

    +1

    @John McHale

    Focus on ‘socialization of banking system losses’ is not an ‘obsession’; it is a central reality to the crisis that Irish Sovereign presently finds itself in; carrying this level of socialization ‘locally’ (to the benefit of the EZ core) is quite simply unsustainable.

  16. “it wasn’t an agreement, it was influence”

    Someone woke up next to a horse’s head.

    One other thing stands out: Where the hell was Brian Cowen when all this was going on?

  17. With all the “screwing” going on it’s getting difficult…
    “if the ECB screwed the Irish government in November, which is what I understood Patrick Honohan to be saying, they were screwing the sovereign bondholders.”
    Therefore the ECB were screwing themselves, being .the buyer of last resort.

  18. @ John

    “sustaining official support (which is now massive and, in my estimation, comes wiith a sizable subsidy given the risks being taken).”

    Remember that a major reason there is such risk is because the EU approved of the policy of loading so much bank debt onto the sovereign and encouraged it at every turn. Had this not occurred then the objective of regaining market funding would be far more attainable.

    I think it’s important to not forget this point. Your benevolent viewpoint on the EU’s approach suggests you have.

  19. The only modification I might suggest to Colm’s post is that the main message to european taxpayers is that their banks are probably F***ked and that if their govts don’t let creditors take the hit then the taxpayer will take the hit instead.

    Only if taxpayers are on the hook to make up the losses is it a taxpayer problem. If losses are apportioned to the banks’ creditors then the taxpayer is not necessarily involved.

    I realise that the taxpayer and the creditor will often be the same person at the end of the day, but they will not always the same and the difference is hugely important.

  20. @Karl

    I don’t think we are that far apart.

    But a few points:

    First, the main damage was done with the blanket guarantee, and I don’t think the responsibility can be put on the EU/ECB for that. It was a bad decision made under tremendous time pressure and on some shockingly bad advice. The die was largely cast at that stage.

    Second, both of us (and a handful of others) stressed early on the importance of having a special resolution regime in place for when the blanket guarantee expired to have any chance of significant loss sharing. This wasn’t done; but I have also become more sceptical that a U.K.-style SRR would have done much for us given the creditor ranking issue, and certainly the possibilities narrowed further as we lost creditworthiness.

    Third, I think we agree that the ECB takes its “no default” — on sovereign or senior bank debt — too far. But I understand what they are trying to do. In the grand scheme of their attempts to ensure European financial stability we are relatively insignificant though I do not see ill will. Unfortunately, we largely have to treat the evolution of their policy as exogenous. While aspects of their policy have been detrimental to us, I do think we also have to judge their policy towards us in its totality — and we are getting very substantial support. Moreover, as I have argued on another thread, the design of the ESM makes regaining creditworthiness extremely difficult in my view, and I think we gain from the strengthening of the LOLR function they are effectively pushing for. So, bottom line, I am not unaware of the faults, but on balance I think the ECB/European Commission are not the villains they are made out to be.

  21. One thing which is very clear from all of this, is that Ireland has indeed decided to take on the obligations of Irish failed banks…yet has received little moral and public credit for same.

    Do (for example) the German public policy community appreciate just what we are doing ? Ditto the general public.

    I think ‘The Wild West’ , needs to show clearly to all that we are paying for the party

  22. @ Colm & Hugh

    +1

    ‘the way the world works’ Patrick Honihan

    Seems our negotiators were really castrati – plenty of noise but lacking…

  23. @Joseph Ryan

    “my understanding is that depositors do not rank equally with bondholders, particularly secured bondholders within the banks liability structure. They may well have a government guarantee outside of the bank corporate structure but inside that bank structure, depositors are now virtually last in the queue.

    Could somebody clarify the exact position please?”

    What has happened is that banks have had to issue “covered” bonds instead of the unsecured seniors (equal rank to depositors) that they used to. These bonds have a “cover pool” of assets that are effectively stripped out of the bank as collateral for them They are overcollateralised as part of the deal.

    You may recall that the hijacking of the laws of capitalism by the bankers (central and otherwise) and the socialisation of risk was justified in significant part by the aim of keeping the avenue of bank funding by issuance of unsecured bonds, open. It has been an expensive tactic for taxpayers. It has succeeded to the point that so small is the appetite for unsecureds that the resort to covereds has reduced the prior effect of the seniority of both senior unsecured bondholders and depositors. Not exactly a bargain.

    On a more general note, there was a deal done, funding in place. “the people” then closed of “political room” for haircuts to seniors. Were these people politicians? Were they central bankers (if so what were they doing dealing in “Political room”. How was this option closed off.

    What was Ireland threatened with, and by whom?

    Why is the government and the central bank keeping this secret?

  24. How much could actually be saved by engaging in burden sharing with unguaranteed senior bondholders? In response to a question from Stephen Donnelly a few weeks back, Michael Noonan provided a reply which revealed that €7.3 billion of unguaranteed senior debt has been repaid (with €6.0 billion of this unsecured). Paying off unguaranteed debt has not gotten us into the mess we are in now.

    As we already know there is about €36 billion of unguaranteed senior debt remaining in the banks. Of this €20 billion is secured and probably over-collateralised, with €16 billion unsecured.

    All told it seems there was about €43 billion of unguaranteed senior debt in the banks with a relatively even split between secured and unsecured debt.

    Some questions:

    1. How likely is it that we could impose significant losses on €21 billion of unguaranteed secured senior debt?
    2. How much could we save by imposing losses on €22 billion of unguaranteed unsecured senior debt?
    3. How quickly would these potential savings be dominated by getting GDP-equivalent funding from the ECB at rates between 1% and 2%?

    Some possible (and only suggested) answers.

    1. Not very likely though low single digit billions may be possible.
    2. At a 50% haircut across all banks we would save €11 billion.
    3. If forced to borrow this money at 5% the benefit of burden sharing would be exhausted in two years.

    In a previous exchange on Vincent Browne, Prof Honahan revealed that he had undertaken this type of analysis.

    PH: There will be consequences. One has to calculate them. The calculation of expediency that one would make is “is the amount recovered, is that going to be offset by higher funding costs and the smaller the amount to be recovered relative to the total amount of debt, the more adverse that calculation becomes”.

    VB: As far as I’m know there’s nothing in the EU/IMF deal that requires us to pay this €35 billion.

    PH: Absolutely not. That’s right, that’s right.

    VB: So, we wouldn’t be breaking the deal if we said we’re not paying. But you’re saying in addition to that…

    PH: No, I’m saying that a calculation has to be made as to whether it would be advantageous.

    VB: But the deal would stand in any event. We would still be paying whatever we’re paying, 5.8% or whatever.

    PH: Certainly. But, but I think I’ve pointed out, it’s not legally unproblematic. That there would be consequences in terms of the cost of funds and there would be consequences in terms of the impact on our partners and therefore that would feed back to us. So it is an argument of expediency.

  25. John McHale wrote,

    Governor Honohan made an unfortunate reference to “the people” in relation to the blocking of attempts to impose losses on senior bondholders, giving fodder for conspiracy theories.

    It reminds me of that scene from the West Wing, where C.G. Craig, the WH press officer had root canal surgery, and the assistant chief of staff, Josh Lyman decided to take on the responsibility of doing announcements instead. After about 5 minutes flat, the WH press had had him for breakfast, and the president had announced (via Josh), his secret plan to fight inflation. BOH.

  26. @John Mc Hale

    “by undermining public support…”

    This is the reality, and with good reason – the lack of burden sharing has and continues to actively work against Irish public support for reform/cutbacks. Let’s look at the numbers again

    – Total taxpayer support for bank recap = €65bn (€46bn before Mar 31 + about €19bn of the €24bn Mar 31 injection)

    – Amount of unguaranteed unsecured bonds on Sep 2008 =€22bn (€6bn paid back by now, €16bn to go)

    (Also mount of unguaranteed secured bonds on Sep 2008 = €21bn (€1bn paid back by now, €20bn to go))

    The tax-payer got a bill for €65bn for someone else’s debts. Of that 1/3 was unguaranteed. and so for which the taxpayer was under no moral or legal obligation to pay. This amount is well on its way to a total of two years income tax – so effectively all income tax deductions from everybody’s pay for 2 years are being funnelled back to private sector bondholders, in accordance with the ECB’s wish to create a weird form of capitalism which is risk-free for creditors, and hugely risky for taxpayers.

    it is wholly understandable that people should be “obsessed” with this use of their money.

    No doubt there would have been significant legal issues to be addressed, and the amount recovered would have been significantly less that the topline amount of €16bn or so outstanding last November, but the point is simple – fairness does matter. This point cannot be downplayed on pragmatic grounds, or minimized due to the existence of other serious problems. It is clear from what Honohan said that the ECB enforced their views against the wishes of the democratically elected government, who wanted some elements of burden sharing/risk sharing in the plan. This was undemocratic, authoritarian and an example that all that really matters in practice is power, not fairness.

    So if the ECB want to enforce a “heads I win tails you lose” distortion of capitalism and free markets in order to protect their own interests and those that they represent – is it surprising that (after the surface veneer of platitudes etc. are stripped away) the underlying dynamic to much public debate in Ireland right now is – “Head for the hills – it’s every man for himself!”. After all, the lesson has been learned that what matters is power, not fairness.

  27. @Grumpy
    “It has succeeded to the point that so small is the appetite for unsecureds that the resort to covereds has reduced the prior effect of the seniority of both senior unsecured bondholders and depositors. Not exactly a bargain.”
    A question/observation….
    Prior to the blowup the senior unsecured bank bonds ranked equally with depositors. Then the fad of issuing secured seniors took hold. Were the legal terms of the unsecured bonds so badly drafted that they allowed banks to issue secured seniors to the detriment of the holders of unsecured bond or was this change in seniority reflected in the pricing/yield?

  28. @John McHale

    I would like to come back to the your link re UK SRR in relation to the issue of depositor preference, a preference that is not included in the UK law but is in the US (see extract) and also in Australia as far as I can see.

    I cannot see why Ireland cannot go ahead and introduce depositor preference without waiting for EU legislation that may take years. And is probably intended to take enough time so that bondholders can get out:

    I have posted below a link from Morgan Stanley (last October) which discusses this issue and looks at various EU country proposals in relation of depositor protection: The Morgan Stanley article offers little comfort to subordinated bondholders in any banks.

    linkback.morganstanley.com/web/…/BMServlet?file…0…

    From your link U.K. example:
    “The US SRR does also feature a version of the no creditor
    worse off safeguard, which was adopted in 1989. But its
    relevance was greatly reduced when the United States
    introduced depositor preference in 1993, under which
    depositors rank ahead of other unsecured creditors in an
    insolvency. This allows the FDIC, when subrogated to the
    claims of insured depositors transferred from the failed bank,
    to rank ahead of the unsecured creditors in the receivership…”

    I understand the point that both you and Seamus Coffey have made in relation to ECB funding at approx 1.5%. The problem with this funding is that it comes with a ever present threat of instant withdrawl and could at a moments notice come under the conflationist eye of Mr Sarkozy or his banking supporters.

    Our only policy at present seems to be to our heads down, the very well paid PS paid and the ATM’s open. Might I suuest the following:

    1. Introduce depositor preference legislation asap. [Imagine the ECB publicly arguing against it!!!!]. That should help deposit repatriation.
    2. Take a much harder line with haircutting subbies. I am not clear that the ECB can easily throw the toys out of the pram on subbies.
    3. If they threaten to bring down the Irish banking system to protect the subbies, lets force them to do so publicly.
    4. And lets force them to say publicly that the protection of subbies is more important than the protection of depositors, because that is the effect of their policy.

    And after tonights little piece of research, I can only conclude that the US Canada/ Aussies seem to know what they are doing in relation to banking failures. Maybe the ECB should be shut down and the running of the EZ should be contracted out to the FED!

    And thank you for the link.

  29. I must say I would love to have been around when BL told Hohohan “your figures were wrong” I presume “Kevin’s”(Cardiff) figures were wrong too! So, now serious cracks are beginning to appear in the European banks which all passed their stress tests with flying colours last year! Were these signatures put on to these documents by automatic writing?

    From and earlier thread…..
    April 7th, 2011 at 1:18 am
    @ Colm Brazel

    I totally agree with you about Honohan, he has been a grave disappointment and has proved to be an ineffectual negotiator when it mattered.

    In an earlier thread an article in the FT was cited. In that article it stated that €7,600bn of German banking “assets” are supported by less than €350bn of equity and reserves, that is an astonishing figure!

    Contagion of German banks can happen and will happen. Next, the markets will move on to Spain and its caja’s but believe me sooner or later the problems in die Detuche Landes banken and not just their regional banks are going to come under the spotlight. So far, the game is to keep the spotlight off these banks and raising the base rate is part of that subterfuge, as much as to say, we are on top of our inflation problem while underneath lurks an infinitely greater problems. The design of the monetary system was totally inadequate but before it is rectified countries like Ireland have to muddle along and keep their mouths shut! Meanwhile in 2013 bondholders will be burned and will also have to get in line behind those holding sovereign debt. Gemany’s bank resolution legislation includes burning senior bondholders but Ireland must not do that as part of their resolution of their banking crisis. This defies all logic and is only possible because our government and it FF predecessor are a joke.

    Meredith Whitney in 2010 said she would not touch European banks with a barge pole, and for good reason as they have not even begun to address their problems. Ireland, has not addressed our bank problems, all we have done is create a monster called NAMA as well as incinerating 73bn rising eventually to the inevitable 100bn plus mark. We have converted private debt to sovereign debt and it is a strategy that will/has bankrupted the country. Meanwhile, our various ministers for finance parrot “the hole in the wall will not work” the Garda, nurse, teacher will not be paid! So what! is what I say. Are we going to allow the country to be held up to ransom time and time again because of ATM’s. This government and the previous one get a lump in their throat whenever someone says the ATM’s won’t work and they cave in repeatedly to guarantees, bad deals and bailouts that have been intrinsically bad for us. The trokia are leading us by the nose to a default. Eventually the hole in the wall is not going to work in any event and they will be getting 50% of what they are paid now along with many other of the untouchables, trade unions and Croke Park mirages. We need a structured default now. We should have sent Mr. Gurdgiev to negotiate for us along with others of his ilk and we would not be in the mess we are in and if we were in a mess at least we would be living in the real world and not living in a state of suspended animation hoping against hope, that, if only growth would grow out of deflation if only our European partners (strangers) were kinder to us…

  30. @Colm McCarthy – “This is a shambles. So far as I know, the last European sovereign default was in 1952. All of this is being done to avoid explaining to continental European taxpayers that some of their banks are f****d, were poorly supervised and that the bill is due.”

    +1

    I don’t think I’ve ever seen the nail so accurately hit on the head in so few words. I wonder when it’s all going to unravel?

  31. @ Robert Browne

    I recall that our banks only fessed up to their NPAs when they had no choice. The big EZ banks are stuffed with toxic derivatives, and may be in far worse shape than generally acknowledged. From the bankers point of view, I suppose a few sovereigns going overboard is unfortunate, but not catastrophic. Losing big in the casino is the real fear.

    This link would suggest that the ride is about to get bumpier.

    http://www.zerohedge.com/article/exclusive-feds-600-billion-stealth-bailout-foreign-banks-continues-expense-domestic-economy-

  32. @John McHale: At this stage, I feel the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk.

    It’s easy to dismiss the concerns of those who disagree with you as a substitute for hard thinking. It’s just a rhetorical trick, a substitute for making a case. Karl Whelan, for example, does plenty of thinking. If bitching about the socialisation of bank losses (with or without scare-quotes) is an impediment to thought, it seems to be one that he, at least, can cope with. And if concern with the unalterable past is so stultifying, maybe we should try to persuade the Germans to get over the 1920s hyperinflation and live in the present.

  33. In the light of Colm McCarthy’s characteristically succinct and blunt description of the problem and the challenge and John McHale’s lament that “the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk”, I believe Bryan G has characterised the the domestic political and policy-making impasse:
    “So if the ECB want to enforce a “heads I win tails you lose” distortion of capitalism and free markets in order to protect their own interests and those that they represent – is it surprising that (after the surface veneer of platitudes etc. are stripped away) the underlying dynamic to much public debate in Ireland right now is – “Head for the hills – it’s every man for himself!”. After all, the lesson has been learned that what matters is power, not fairness.”

    While every second cent of a tax increase or public expenditure cutback is being expended to allow core EZ politicians and officials to postpone explaining to their taxpayers that they, too, are on the hook, domestic popular consent will evaporate and the peripherals will sink even further into the mire.

    I have previously made the case that the Government should take full page information ads in all EU national dailies that concede the previous policy and regulatory lunacies while setting out the current reality as Colm has described.

    This impasse must be broken – and broken soon. Speaking quietly and reasonably to EZ politicians and officials seems to have gotten the Government nowhere. It’s time to speak directly to their voters.

    (PS to Karl. Accepting penance to secure absolution for a sin one has not committed (in this case continuing to pay for Anglo/INBS) is a very religious thing in the context of the history of Christendom – and not unique to Ireland. Many people believe Jesus was crucified to stone for humanity’s ‘original sin’ and that they continue to abase themselves as a result. Probably one for behavioural or psychological economics.)

  34. @ All

    If the contagion risks of burning sovereign bond holders are such that at this juncture such action is being ruled out by almost all, it seems, other than the German minister for finance, even in respect of Greece, why should the situation in respect of Ireland either now or last November be any different?

    It has been argued ad nauseam that what is at issue in Ireland’s case is private bank debt but, given the blanket guarantee, the distinction is by now academic.

    The ECB under new management is not going to be any different cf. Draghi’s responses to European Parliament.

    http://www.europarl.europa.eu/meetdocs/2009_2014/documents/econ/pr/868/868435/868435en.pdf

    The government in Berlin is in deep political trouble, a situation not aided by the Merkel’s volteface on nuclear energy which is estimated to cost other countries on the Continent an additional 6% to 8% inl costs because of the common energy market. To this must be added the fortuitous incident of the e-coli infection which has wiped out Spanish fresh food exports to Germany, a quarter of the country’s total trade in the sector.

    And the irony is that the various manouevres by Merkel are not helping her politically.

    http://www.reuters.com/article/2011/06/08/us-germany-coalition-idUSTRE75725Q20110608

    The head of Commerzbank makes the point in one of today’s German papers that involving private investors in a precipitate fashion – such as was now contemplated – risked causing them to stop buying the bonds of the peripheral countries indefinitely.

    Depending on what is agreed in the ESM, this statement of fact simply brings forward the day of reckoning as far as the Irish public deficit is concerned. For a credible narrative to emerge, some quantification of the causes is possible and unavoidable, divided into the two broad and obvious categories (i) deficit in respect of normal government expenditures and (ii) cost of banking bailout.

    If the first is tackled courageously – and there are some signs of this happening – the chances of arriving at an Irish style “Vienna Initiative” to get back private funding to the Irish banking system and of avoiding the cul de sac of a second bailout would be greatly improved.

    Demonising particular players in a complex negotiating situation is both a waste of time and counter productive.

  35. Whatever the arguments about what Europe should be doing for us, there can be little doubt that this issue invaribaly trumps that of what we should be doing for ourselves.

    It’s almost four years since the music stopped in international credit markets and there is still little enthusiasm for reform and change in Ireland.

    There is a cultural aspect to this and governing has never been one of our strengths.

    We export half of our hazardous waste and 60% of merchandise exports are from the pharma/medical devices sector – – a well run country like Austria has about 9 incinerators and a highly regarded waste management policy but here we are with the same penny ha’penny rigamarole despite a brutal crash.

  36. John McHale’s last post seems to me to be the one who has hit the nail on the head. He seems to have the most un-biased view of anyone on this site, recognising that the default situation has changed, and his opinion has changed with it. Enter Keynes quote here!

    He also acknowledges the problems with default on senior debt. i.e. the losses that would have to be imposed on deposiors and the need for the state to make up the difference. The problems which others blatantly ignore.

    It’s important that we do not let the terrible injustice of the bank gaurentee cloud our present view of the banking crisis.

  37. “It’s important that we do not let the terrible injustice of the bank gaurentee cloud our present view of the banking crisis.”
    why? What other terrible injustices would you like to shrug your shoulders at and move on? Clerical Child abuse? Magdalenes? (no, not saying theyre in same league but…)

  38. @ Philip II
    A bit sensationalist? No?

    All I’m asking for is an objective discussion on what would be best for Ireland now, not a year or two ago.

    The way I see it. In order for Ireland to default on all unsecured senior bank debt, we would need an assurances from the Troika to fund the repaying of depositors ( probably lots of legal issues here that I know absolutely nothing about) and gaurentees that we would continue to be funded as long as is nessecary because default on gaurenteed bank debt could be viewed by the rating agencies as soveirgn default. On the other hand it could lead to a quicker return to the markets, given a reduced debt burden.

    This scenario would need a great deal more support from the Troika, and especially the ECB, given its 150bn loans to the Irish banks. Can we really expect a c.entral bank to persue a policy that could bring its solvency into question?

  39. “Can we really expect a c.entral bank to persue a policy that could bring its solvency into question?”
    CBI has been doing that with the ELA ITIR

  40. @Philip II

    True.
    I knew someone was going to take me up on that last sentence. What I meant was given a central bank has risked its solvency by providing funding to a banking system ( rightly or wrongly), can you expect it to persue a policy that will materialise that risk.

  41. A very brief list of reasons why John McHale is wrong:

    Ignoring the errors of the past leads to repeating them. It is pointless to construct economic models if we don’t also study events; pretending that everybody knows what happened inhibits learning.

    Acceptance of abuses of power encourages further abuses by the same people. Acceptance of abuses of power also encourages abuses by other people.

    Tilting the scales in favour of creditors against debtors harms economic growth.

    Focussing on what needs to be done “to get through a crisis” encourages the idea that we want to get back to where we were. If we’ve any sense we should be thinking about how to get Ireland, the EU and the world to somewhere quite different, where being reincarnated as the bond market is no longer a megalomaniac’s dream.

    That’s not all but it’ll do for now.

  42. @Joseph R, Ceteris

    Yes the issuance of covered bonds undermines the position of depositors and senior unsecured holders. Regulators around the world put slightly vague limits on the issuance as % of total assets 5 – 20% depending where.

    You don’t have to be overly cynical to imagine the complexities of measuring these – and the contents of the cover pool – particularly where banks are “stretched” and regulators are “accommodating”.

    See this for example:

    http://ftalphaville.ft.com/blog/2011/03/08/507151/heavy-covered-bond-encumbrance/

    They have been the only thing some banks have been able to get into the market because investors know many banks and the ECB are spoofing. eg this article:

    http://www.ft.com/intl/cms/s/0/64b7c0e6-137e-11e0-a367-00144feabdc0.html#axzz1P3dEMOCF

    Yes there has been a reflection in yields, but you have to be a bit careful looking at them. If you don’t filter out the very big outstanding covered issuance from Spain and how this skews spread comparisons with unsecureds (with less spanish content in aggregate), and think about how that interacts with movements in sovereign spreads, then you might not spot it.

    The credibility and confidence tricks have been expensive failures. Time to get real?

  43. Colm MCCarthy says we are looking at a shambles. Robert Browne certainly concurs. He seems to consider that talk about a return to the markets was cynical spin, and that we are being carefully set up for the mother of all hosings.

    ‘The troika are leading us by the nose to a default. Eventually the hole in the wall is not going to work in any event and they will be getting 50% of what they are paid now along with many other of the untouchables, trade unions and Croke Park mirages’

    DOCM and John McHale have a more benign view of our friends abroad, and DOCM hopes for a Vienna-style initiative, but I doubt that either of them will consider Robert’s endgame as entirely impausible.

    I wonder what the FDI execs are saying to each other these days.

  44. Sometimes we get carried away. We’re in a quandry. How we got here isn’t as important as getting out of it.
    The options are: stick to the plan/default/combo of these.
    The govt is going for the combo.
    Thebottom line is that the more we cut our deficit the less dependent on bond markets we become.
    The aim should not be to return to the money lenders. It should be to cut the deficit, become self-sufficient and tell the markets to get stuffed

  45. @ Eureka

    That’s all well and good but we have significant amounts of our existing debt maturing over the next few years. We need money to finance the rollover of this debt. From 2011 to 2014 about €36 billion of our debt is due to mature. Without a return to markets we will not be able to repay this.

  46. @ Paul Quigley

    In fact, I do consider Robert’s endgame implausible, barring accidents. Such an event is most likely to occur in Greece. However, when I hear the word “unfair” being bandied about, even at the highest level, I no longer rule out such an accident in the case of Ireland. The word does not come up in the context of national politics, why should it do so in an international context.

    I have a feeling, however, that behind all the bluster – which is far from being confined to Ire

  47. @KD: “… where being reincarnated as the bond market is no longer a megalomaniac’s dream.”

    @ eureka: “… become self-sufficient and tell the markets to get stuffed.”

    +1 +1 = reality (well the newish version thereof). Live within your means.

    @DOCM: “… the economic boat may be righting itself of its own accord.”

    Not a chance in hell. Our ‘economies’ feed on credit and energy: vital nutrients. Credit has fermented into a soup of toxic debt. Energy? The cost of crudes (the good stuffs) need to come back to less than $80/bl for growth to stabilize in +ve territory. Not going to happen – ever! Seriously.

    There will be ‘price crashes’ due to demand destruction in the developed economies, but the internal domestic demand in producer countries is increasing ( +3% -> +5% pa depending on source). New production startups? Lagging badly. When will the dippy production plot-line intersect with the uppy domestic demand line? Nett exports of crude = zero? Like nothing for sale on the open market? 2050 by most estimates. But before then?

    This puts western developed economies into the toilet, possibly around 2020 – that’s how far away? How long will it take to ramp up alternate energy sources?

    Time to re-orientate your thinking away from fiat currencies, credit, bonds and debt and focus on the Big Issue: energy shocks!

    Brian Snr.

  48. @Eureka

    The bottom line is that the more we cut our deficit the less dependent on bond markets we become. The aim should not be to return to the money lenders. It should be to cut the deficit, become self-sufficient and tell the markets to get stuffed

    JTO:

    There is a great deal of merit in what you say, especially with regard to the government putting itself in a position to be able to tell the money-lenders (i.e. bond markets) to get stuffed. That should definitely be their objective. And, also to tell the crooked ratings agencies to get stuffed also.

    However, there is another element. While the deficit lasts (and I ageee it should be cut rapidly but it won’t disappear overnight, just as it won’t disappear overnight in any country), the government should raise as much as possible directly from domestic savers in Ireland (like my humble self). As I have pointed out repeatedly, Ireland is heading for balance-of-payments surplus. That means there is enough private savings in Ireland to fund the government deficit. Ireland Inc is in surplus. It doesn’t have to be all the government deficit funded from private savings in Ireland, just part of it. Every little helps. And, whatever amount, it is perfectly compatible with the EU/IMF program, but, obviously, the greater the amount, the less dependence on the EU/IMF program. At the moment Ireland’s private savings are going to fund other countries budget deficits, particularily the UK government’s budget deficit, which is roughly the same size as a percentage of GDP as Ireland’s. The UK needs to tap savings from other countries, including Ireland, because, unlike Ireland, it is still in balance-of-payments deficit.

    There should be a government-backed campaign to highlight what a lousy investment for Ireland’s savers is lending to the UK government at current inflation and interest rates, especially in comparison with using part of their savings to lend to the Irish government. According to today’s Sunday Torygraph, UK government bonds currently give an interest rate return of 3.3%. Savings deposited in a UK bank currently give a rate of interest of around 1%. Inflation in the UK is currently 4.5% and forecast to rise to over 5% in coming months. In Ireland, inflation is 1.2%. Between June 2007 and May 2011, the UK devalued its currency by 23% versus the euro and, during that time, inflation in the UK amounted to 15% versus -1.5% in Ireland. The now more or less permanently much higher inflation rate in the UK virtually guarantees that the pound (£) sterling will continue to depreciate against the euro in coming years. Given this background of 5% inflation and depreciating currency in the UK, savers in Ireland who are willing to lend to the UK government at 3.3%, or deposit their savings in a UK bank at 1%, are complete and utter suckers. They require psychiatric examination. They’d be better off keeping their savings in the form of lots of bank notes under their mattress, and posting a few per cent of them as a direct gift to the UK government each Christmas, until such time as they run out.

    A Chinese ratings agency is now saying that countries who avoid repaying their debts by the expedient of devaluing their currency should be declared to be in default (link below). They were thinking mainly of the US, but it would apply even more to the UK, which has devalued its currency more and which has higher inflation. The Irish government should press for the EU to insist that this be standard practice for all ratings agencies operating within its territory.

    http://www.huliq.com/8738/us-already-default-says-chinese-rating-service

  49. @ Paul Quigley

    To return the favour, herewith a link to the recent article by Wolfgang Munchau in which he outlines the mini “political union” necessary for the effective functioning of the single currency. This could be up and running at a practical level without major institutional change. In fact, his prescription coincides to a considerable extent with what the German opposition, and notably Steinmeier, head of the SPD, are saying in response to Merkel and her erratic crew. Unfortunately, the same cannot be said of the opposition in France. But Sarkozy is getting the message. France’s commercial deficit reached a record level last month. Even Merkel, with her podcast yesterday, seems to be conceding ground, especially when she has to explain why skilled and educated labour is leaving Germany for greener pastures. Why would they stay in a country pushing wage levels relentlessly into the ground?

    As far as the debate in Ireland is concerned, and regrettably on this blog in many respects, these developments might as well be taking place on another planet. But they help explain why we are being treated so “unfairly”. Big decisions lie ahead and we can either decide to stay in the quarantine ward or get out of it. Portugal may well show us the way.

    http://www.ft.com/intl/cms/s/0/056ff402-8faa-11e0-954d-00144feab49a.html#axzz1OikPK7C0

  50. @Brian Woods Snr

    The cost of crudes need to come back to less than $80/bl for growth.

    JTO again:

    Crude is far cheaper in real terms than it was in the 70s, 80s and early 90s.

    In 1980, crude was $28, which is far less in real terms than today.

    Current crude prices aren’t stopping global growth. Global growth is bounding ahead. It is just that Europe and the US are not getting as large a share of it as in the past, while most of Asia and Latin America are getting a larger share than in the past.

  51. @Kevin Donoghue

    A very brief list of reasons why John McHale is wrong:

    Very good.

    Theories in the social sciences have a certain amount of inertia, the EMH cruised on despite it being at best useless; proponents of the benefits of unregulated capital movement have an ever expanding list of the disasters it has caused exactly matched with a list of really detailed explanations on why these disasters were somehow exceptional; neoclassical economics has been reduced to a plausible theoretical foundation for growing inequality while capitalism itself trundles on towards the cliff of a global resource crisis.

    In Ireland the political theory we would not let go of is that the EU and its institutions had not essentially become agents of its largest members (Germany and France) and its most profitable and politically influential businesses (the FIRE sector). Our sovereignty was not pooled, it was gifted to the controlling power bloc, a trend the EU Institionalists seem set on continuing.

    It should not have been a terrible surprise to us that this new more efficient and streamlined EU ended up acting against Ireland’s interests and indeed pressuring us into helping protect the self styled core economies and financial sector from the flaws inherent in the current system. We are assured of course that a really terrific solution is being worked on in private by very serious people, within the constraints of their own entirely valid domestic political concerns, and that we will be told about the solution just as soon as that big new security door is fitted.

    It should be clear to everyone now as it was to the left at the beginning, that Ireland has to act, hopefully in concert with others but alone if not, to bring the European financial crisis to a head. It has to become everybody’s banking problem, and quickly. Ireland will keep bleeding people, influence and resources until the crisis is “crystallized” and, as Kevin Donoghue noted, if we do not fight the current policy it encourages further abuses of power.

    This is not giving up on the EU, it is acknowledging that we have made mistakes, and that we are determined to try to correct them.

  52. “The bottom line is that the more we cut our deficit the less dependent on bond markets we become. The aim should not be to return to the money lenders. It should be to cut the deficit, become self-sufficient and tell the markets to get stuffed.”

    And be in a position to tell the official usurers that they can get stuffed too. If they want the euro saved, let them pay for it. They have much deeper pockets than we do, and they care about it far more than we do in our more rational moments.

  53. @JohnTheOptimist
    I could be wrong but I think anyone who reads this site is perfectly clear on your investment strategy at this stage, not sure repeating it on every second thread adds much to the debate.

    You have basically gone long euro and short and fx movements is where you have obtained the vast bulk of your returns.
    Quoting UK inflation rates is almost completely irrelevant from the perspective of an Irish investor in calculating real returns, all that matters is the Irish inflation rate. Yes they could be important for Irish fx traders but not in measuring real returns.

    You may also want to recheck the rates available from UK banks, as a quick search shows plenty of rates in excess of 3%
    http://www.moneysupermarket.com/savings

    And for the record I am neither an investor in Irish government or UK government bonds at the moment but do have a substantial short GBP position like yourself.

  54. @Grumpy
    Thanks for the explanation.
    So our current banking strategy is to revive the “two pillars” whilst paying back all the secured and unsecured bonds and haircutting the subordinated.
    We know they will not be able to part fund themselves in the bond markets because
    1. Subordinated are gone the way of the dodo.
    2. Unsecured bonds are not marketable (for Irish Banks)
    3. Secured not possible – no acceptable collateral.
    4. Deposit unlikely to grow.
    So the banks will continue to rely on the 153 billions of ECB/ICB money whilst deleveraging by 72 billion over the next two years and will only lose 13 billion in the process.
    Now that is some plan. I must have it wrong. Pay everyone who won’t lend to you again…there must be logic somewhere.

  55. @Jto

    “The now more or less permanently much higher inflation rate in the UK virtually guarantees that the pound (£) sterling will continue to depreciate against the euro in coming years.”

    I am aware you have great certainty over this, but there may be people reading this blog who might be sold on your certainty. It doesn’t tally with my experience which is that currencies cross rates cannot really be usefully predicted even if you know the next few years of GDP deflators. If you want to try this, you can superimpose exchange rates over graphs of the deflator ratios. Over decades, it tends to sort of work, but can have enormous, lengthy diversions that would make Warren Buffet run for the hills.

    There is also a basic fundamental problem and that is that PPP is only one factor. An extreme example would be a country heading into a deflationary spiral. A PPP prediction would suggest an ever higher currency for the deflationary basket case, however in the longer term other currencies would offer higher interest rates and higher gdp path which supports the currency.

    Lots of people have tried to come up with quantitative fx strategies that work repeatedly over months of years. I gave up, and I don’t know anyone that made any real inroads. If it was as simple as predicting inflation for the next few years we would all be doing so.

  56. @Ceteris.
    On no 2 above-: There is no need to bracket Irish banks-unsecured are finished for all banks throughout the EZ and possibly worldwide. The links given by Grumpy seem to confirm this.

    On no 4. Until deposit preference a la the US is put in place, bank deposits will gravitate towards the ‘too big to fail banks’, definitely not the Irish banks. Even the UK SRR regime referred to by John McHale would be perfectly useless in terms of protecting depositors.
    It just goes to show how the the large bond buyers and banks are influencing UK and EU legislation.

    It is a shambles as pointed out above. A solution?
    1. Put in a robust US style SRR regime that protects depositors and built a banking system from the ground up based on that.
    Interbank and bond finance is finished for years to come. They were ephemeral sources of finance anyway. Shifting sand dunes not worthy of buliding sandcastles on, let alone a banking system.
    2. Make sure depositors rank above all other creditors secured or not.
    3. Ignore or face down objections from the ECB. Even the ECB cannot be seen publicly to place bondies ahead of depositors even though that is what they are doing by stealth.
    4. Publish a paper tilted “ECB Stealth theft from Depositors” and send Prof Sinn a copy.

    PS. I have no personal agenda on deposits. Never had the money.
    @Grumpy: Thanks for links : very informative.

  57. In France (and other European contries,I believe) there is an insurance fund for deposits .Banks are legally obliged to be insured and have to pay insurance premiums to fhe fund .In case the fund were to be insufficient (which would happen if BNP or Société Générale went belly up),the States gives its explicit garantee to the depositors.

    I believe this debate is purely theoritical because no bank will be allowed to default,under any circumtances in a large European country.The nationalization of British deposit banks by Brown proves it.

  58. @ JtO

    Forget about 1980s John. Concern yourself with 2020 (or may be 2025). Fun times ahead.

    Brian Snr.

  59. Ireland became comfortable, almost complacent, about handouts from the EU over four decades. So sniffy in fact about ‘our European partners’ that Boston was trumpeted as preferable to Berlin and ratifications of important transnational treaties were treated with immature contempt. All the conflicting guff about the ECB – string ’em up today or worship ’em tomorrow – ignores the size of the domestic deficit. Borrowing when the deficit is still out of control, is that likely?

    MoF Noonan says he can’t rule out further tax increases yet, presumably, he must be mindful that mortgage defaults have developed an explosive head of steam. Unemployment has almost completely disappeared from national headlines. Banks are ‘converting’ overdrafts into term loans so they can post good credit figures to the CB. And Croke Park is doing very well. A nice bit of spinning all round. Nothing has changed.

  60. @ Joseph Ryan
    I agree that deposits should rank above all other liabilities of banks and that a system like the FDIC should be put in place.
    To my mind it was the flight of 100+ billion in deposits that enabled the ECB to force us into a bailout.
    That may not have happened if depositors were secure in the knowledge that they ranked in priority to all others and had an explicit State guarantee as backup.

  61. Talk is cheap

    Leverage is expensive

    please google :

    Central government debt; total (% of GDP) in Euro area

    in the trading economics website
    Back in 1996 as EMU was getting started it was 72/73% of GDP
    in 2008 it was 51 /52 %
    Bank credit filled this hole and created a massive malinvestment nightmare

  62. @DOCM

    If the contagion risks of burning sovereign bond holders are such that at this juncture such action is being ruled out by almost all, it seems, other than the German minister for finance…

    No so. For example:

    Mr Schäuble’s position was bolstered with support on Friday from the Dutch government and the German parliament. “We view the German proposals favourably,” Dutch prime minister, Mark Rutte, told a press conference.

    In Finland the Social Democrats and the True Finns, who will likely form part of the next government, are also demanding bondholder participation in any future bailouts.

    It is shaping up as a battle with the ECB and the French on one side, and Germany and like-minded allies such as Holland and Finland on the other.

    It has been argued ad nauseam that what is at issue in Ireland’s case is private bank debt but, given the blanket guarantee, the distinction is by now academic.

    I fail to see how diverting two-years worth of the income-tax revenue stream to pay back somebody else’s private debts (most of which is still to be paid back) can be regarded as academic. Were at least some of this misdirected revenue stream diverted back to reducing the deficit the state would be better off as a result.

    However, when I hear the word “unfair” being bandied about, even at the highest level, I no longer rule out such an accident in the case of Ireland. The word does not come up in the context of national politics, why should it do so in an international context.

    Wrong again. For example, with Thatcher’s rebate negotiations with the EU:

    We weren’t getting a fair deal on the budget and I wasn’t going to have it. There’s a great strand of equity and fairness in the British people – this is our characteristic. There’s not a strand of equity and fairness in Europe – they’re out to get as much as they can. That’s one of those enormous differences. So I tackled it on that basis.

    It’s even better in person!

  63. contd.

    informed her of the decision of the Irish government to guarantee the debt of all Irish banks “because they had to do it”.

    As to Margaret Thatcher, what a lady! The Continent still does not know what hit it. Can the same be said of the present or previous Irish governments?

    P.S. The capacity of this blog to chase hares is truly impressive. I have been dipping into the thread on Case-Shiller and nobody has yet mentioned subprime lending and the role of Wall Street.

  64. @Brian G

    “We weren’t getting a fair deal on the budget and I wasn’t going to have it.”

    That is the difference though. Ireland isn’t getting a fair deal but is content to have it.

    Whatever you may think about Thatcher, and by and large I didn’t think too much, she was a leader. Ireland is more or less milling around, not far from rudderless.

  65. @DOCM

    You keep missing the point, and ignoring any inconvenient facts

    – You point out that the chairman of a member bank of the ESCB supports the ECB position. Hardly breaking news. Schauble is not on his own, but is supported by Dutch and Finnish politicians.

    – You gloss over the fact that there is a difference between guaranteed and unguaranteed debt. The Irish government wanted to hit some of the €16bn in unguaranteed senior debt last November but the ECB prevented this. This is not academic.

    – In a democracy fairness does matter. This is part of any national interest calculations.

  66. @grumpy

    Yes I was certainly no fan of Thatcher in general, but she did achieve a very significant rebate, if not everything she demanded. A few years ago Tony Blair negotiated away part of this rebate on the basis of promises to reform the CAP. Amazingly these promised reforms never happened. Blair’s approach was a bit like that of the Croke Park negotiators – the rewards (no redundancies/pay cuts etc.) were given on the basis of promises, not results.

    Overall I think both the last government and the current one are really out of their depth dealing with Europe. They make the common mistake of assuming that those on the opposite side of the negotiating table will behave in the same way that they would, were they on the opposite side of the negotiating table themselves. They are then surprised when carefully reasoned and explained arguments fail to change anything. A different approach is needed – for example Ireland should refuse to approve the second bailout for Greece unless it gets an interest rate cut. No need to spend much time explaining anything – just state the position and be prepared to follow through.

  67. @ Bryan G

    With respect, the point that I am making is that nationally it is accepted that “all is fair in love and politics” usually expressed in terms such as “politics is a tough business”. The same is even truer of international politics. Thatcher was talking to her domestic audience but knew exactly what she was doing and the evidence lies in the fact that the deal that she struck (1984?) is still in place, the only major change, ironically, being the success of Germany, the Netherlands, Austria and Sweden in negotiating a reduction of 75% in their share of the cost of funding the UK rebate, the shortfall being made up by the other countries, including Ireland. It is unlikely that this situation will be allowed to continue.

    I did not enter into the distinction between various forms of debt. This may, indeed, not be an academic issue in its own right but it is in the context of the blanket guarantee.

    I agree with the general point that a sense of fairness is essential to any functioning democracy, whether national or international, such as the EU. But this is what is being overlooked. The unfairness lies not in respect of Ireland but in the action of two governments acting outside the context of treaty agreements and linking issues which should not be linked. Direct taxation is a national prerogative and will remain so until the countries of the EU agree that the situation should change. The error being made is not alone that the basis on which the Franco/German case is not being challenged on behalf of the EU but that it seems to be accepted. This is simply part of a Europe wide phenomenon where the politicians – and their advisers – no longer understand the basis on which the EU should function.

  68. @Bryan G

    Having seen your reply to grumpy, I thought that you might be interested in the Own Resources Decision of 2007 which provides the basis for spending in the EU, including funding the EFSM which is providing funds to Ireland. The UK rebate is very unusual as it is part of the law of the EU and the UK intends to keep it that way. Had Blair not made the concession to which you refer, the UK would be making no contribution to the cost of enlarging the EU. Indeed, the new member states would have ended up funding the cost of the UK rebate which, even for Blair, was too much. By the way, why should the UK have a rebate?

    http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:163:0017:0021:EN:PDF

  69. On the ‘them’s the rules’, theme, I seem to recall that the Lisbon Treaty said that if a million citizens signed a petition the EU commission was obliged to consider it. Any chance of getting the good people of Europe to work up something?

  70. PH: “November the 4th [2010] was the date that I decided that the market situation had got so bad that we’d have to do it. And I talked to these officials and other people and it was clear that this was the way we’d have to be thinking –
    VB: Did you go to BL at that time?
    PH: I had talked to him about the possibility beforehand –
    VB: Did the three of you go [presumably PH, John Corrigan and Kevin Cardiff to see BL]?
    PH: No, no there was no set piece meeting.”

    So, the 4th of December was the date that Patrick Honohan decided that Ireland needed a bailout and later on he is sure that someone probably Kevin would have told the unfortunate minister for finance Brian Lenihan. Nice of them.

  71. I am coming at this from Morgan kelly,s angle. . We cut the deficit to zero, which means we are now self financing and don,t need the Debt markets. Cut the banks loose. It sounds pretty straight forward to me. I know there would be a lot of pain but there is alot of fat out there still. 80,000 people going to KINGS OF LEON does,nt smack of poverty to me and a taste of Dublin packed out at the weekend. . Young lads on jobseekers allowance off to Slane with their cider. Spare me the crocodile tears. Economics is a strange art, it seems to be about an opinion some times. Remember we were told Ireland is not Iceland. Well Iceland is looking alot more attractive right now,simply because they dealt with their banks head on. Maybe its their Viking DNA. Whereas the poor old paddy reverts back to his colonial mindset and bends over and takes it up the A**. Jasus, if I could govern this country for a year I,d cut through all the horse shit and vested interests.

    The world needs to go back to the gold standard when all this mess is cleared up in the next 6-7years and get rid of these deficits and live within our means. We only print money to match the gold and silver in the vault.

  72. @DOCM

    I did not enter into the distinction between various forms of debt. This may, indeed, not be an academic issue in its own right but it is in the context of the blanket guarantee.

    Do you understand that the €16bn of debt I and others are talking about is not covered by any guarantee, “blanket” or otherwise? The original September 2008 guarantee expired in September 2010. The current ELG scheme does not cover senior debt and some term deposits that predated the ELG scheme.

    Thatcher wasn’t the type of politican to give carefully nuanced messaging depending on the audience. She said the same things domestically, to the French, the Germans, and anyone else within earshot. Your original point was that the concept of “fairness” doesn’t arise in the context of international negotiations. I’ve given an example of where it was the cornerstone of an argument that all seem to agree had a successful outcome for its proponent. After all, why should the UK support the massive subsidy scheme that is the CAP for the benefit of French and Italian farmers? In the same way why should Ireland support the massive subsidy scheme, enforced by the ECB, that extracts money from Irish taxpayers for the benefit of bank bondholders?

  73. @ Bryan G

    Of course I understand the first point. But the effect of the blanket guarantee was to make the sovereign responsible for all the debts of the banks and this is a burden that the markets do not think that it is capable of bearing. Burning bank bondholders, whether permissible or not, is unlikely to get them to change their minds, especially as the one backstop we have left – the much maligned ECB – thinks that the situation is too delicate to allow even for that.

    I have also argued for the creation of a credible national narrative by attempting a calculation of what is our national responsibility and what we can legitimately argue flows from our membership of the euro. Meanwhile, we have to get our financial house in order, dragging the ball and chain of the effects of the guarantee – which we are well capable of doing given the repayment arrangements – until more propitious negotiating circumstances arise.

    These may arise sooner than we think. Wolfgang Munchau spells out today one possible set in his second major article on the fundamental implications of the euro crisis.

    http://www.ft.com/intl/cms/s/0/b4705338-952d-11e0-a648-00144feab49a.html#axzz1OikPK7C0

  74. @DOCM

    Of course I understand the first point. But the effect of the blanket guarantee was to make the sovereign responsible for all the debts of the banks and this is a burden that the markets do not think that it is capable of bearing.

    I’m not sure you do understand the first point, since your second sentence above is incorrect. The blanket guarantee expired Sept 2010 and is no longer relevant – what is relevant is the ELG. Unlike the blanket guarantee, this does not make the sovereign responsible for all the debts of the banks, as you claim.

  75. @ Bryan G

    I know this too from reading this blog. But your argument is like having someone point out to a painter “you missed a bit”. It does not change the overall picture if you stand back from it.

    By the way, there are no less than three really pertinent articles in today’s IT which deal with issues that are being batted back and forth between us and others (i) Dan O’Brien on Greece (ii) Paris correspondent on “fairness” and (iii) John McManus on the ECB “bailout”.

  76. @ DOCM

    ‘I have also argued for the creation of a credible national narrative by attempting a calculation of what is our national responsibility and what we can legitimately argue flows from our membership of the euro’

    A credible national narrative has to be credible to the citizens, as well as the wider world. Our state is manifestly flawed, and if we never has a financial crisis, the need to get our domestic house in order would still be there. Too many cuckoos in the nest.

    As some posters above have pithily summarised above, we are not the only ones with a ball and chain. Core economies may be ‘grand’ ( if one desn’t look too closely) , but the question is, what is the EC project all about ? The common understanding is that is about economic and political co-operation.

    Unfortunately there is are cuckoos in the Euronest too, which are chucking the economic and political eggs out. The capturing of institutions by the FIRE sector is one of the major reasons why anti-EC movements are prospering. A bit more housecleaning all round would help to generate the necessary spirit.

    Like you, Munchau expects the EZ instituitions to provide debt forgiveness, but not before the s***t really hits the fan in the periphery. The next couple of years are going to be very interesting.

  77. @ Colm McCarthy
    “If they did what the governor says they did, they deliberately (and I must assume consciously) subverted their own declared policy objective (return to the market) in order to avoid facing a resolution of the banking mess up front. All of this presumably at the behest of the French and German governments.”

    John Mchale and Seamus Coffee then say that the most we could have saved is about 4 billion.

    I have been away for a couple of weeks but did somebody conclusively rubbish MK’s assertions about Timothy Guitner (not Nick Sarcozy and not Angela Merkel) and his veto of a 20 billion saving to the state in a bond holder burning.

  78. While the great and the good of this site, plus its resident confidence fairy, debate the issues of the day, the leaks about the next budget start to filter our into the media. Those of you that inhabit that parallel universe called ‘rational debate’ should take note that in policy circles, nothing has changed. As ever, as always, Ireland’s fiscal crisis is to be solved by:

    1. Minimal structural reform (of anything)
    2. Token spending cuts
    3. Headlines (but with no delivery) about pay cuts
    4. Tax rises. Lots of them.

  79. @ Eamonn

    i think there was 20bn in notional unguaranteed seniors outstanding at that stage (ignore the secured stuff, its only brought in by those who either don’t know or don’t care about the impossibilities of actually enforcing losses on them). And we couldn’t have “saved” 100% of that. We can’t even “save” 100% of the subordinated stuff.

  80. @ Eoin Bond
    The way i heard it, it was to to burn 2/3 of 30 billion.

    As for the impossibilities of enforcing losses on secured seniors it seems to me that you can do it, once every one in the G8 says you can.
    It also seems like there were 2 separate things happening last November. The first thing was an application to the troika for an extra borrowing facility. The second thing which was above the pay grade of everyone involved in the first was a request to allow some burden sharing due to the fundamental unfairness of dumping so much private bank debt on a small nation. I doubt anyone Irish even got to put their case in person. Guitner vetoed it, and they were on to the next item on the agenda.

  81. @grumpy @Seamus Coffey

    Thanks for the insight into the effect of the creation of covered bond.

    I find these arguments and John McHale’s arguments persuasive.

    However, the maths will ultimately trump the mechanics and this is why Colm McCarthy’s point is ultimately where the matter resides.

    Unless the EU can address this problem properly then we will be forced to either act unilaterally or to suffer such hardship that the EU will lose all political support here and elsewhere.

    The problem to be addressed is that the banks have made losses, the bill has to be paid, and the entire system has to be restructured so it is sustainable and in a way that recognises that there is a limit to tax-payer support.

    Sovereigns are said to have unlimited assets in theory because they can tax as long as the sovereign is in existence. However, this is “in theory” only because sovereigns need political support and need to be able to deliver a stable state in order to survive.

    The EU needs to remember its raison d’etre. If its institutions cannot deliver the big reforms and measures needed to steady the ship then it is in danger of being a failed institution.

    Ireland and Greece are being pushed to the point where the only effective measures which can be taken are unilateral measures.

    Neither country wants to act unilaterally because it is an anathema to European solidarity. There is a fear that it would be a statement that the European political and institutional machinery is badly broken.

    On the other hand, maybe it is Greece’s and Ireland’s duty to act unilaterally within their own competence. By looking for EU approval for everything we are demanding that the EU carry out functions which its institutions are not designed to carry out effectively.

    For clarity, acting unilaterally means legislating to revoke elements of the banks guarantees, restructuring all bank debt, and rescheduling our sovereign debt insofar as same is governed by domestic law. It would be better for everyone if this could be done with the EU’s, and indeed the US’s, blessing.

    Now, we must be clear that any such unilateral action could only be taken in a context where we can show for certain that the current deal will not work and that the EU has proven beyond doubt that it doesn’t have the capacity to handle these problems. The Greek situation will tell a tale in this regard.

  82. @ Eamonn

    re secured debt – most of it is heavily overcollateralised at this point, which means that it literally is impossible, political agreement or not, to enforce losses on them.

  83. @ Paul Quigley

    I am just trying to draw a logical conclusion from the dirge “it was not all our fault, others played a part too”. Who played which part and to what extent? If the analysis is accurate, it should be credible to all parties. I have neither the skill nor the motivation to undertake such an exercise but, with or without it, some rough and ready political assessment will be made as to where the line is to be drawn

  84. By the way, I think we should be willing to accept the support of a “coalition of the willing” for any unilateral move. This could include the EU Commission, banks, Governments, international organisations and think tanks. We do not need absolute unanimity within Europe.

  85. @ DOCM

    I haven’t too many tunes myself, but I know a good session when I hear one. Play up. : )

  86. Look, there is a great deal of propaganda obfuscation based on the simple position that the ECB is not in favour of burning senior bondholders. Let’s examine this for a sec, let’s say the senior exponent of such arguments is Professor Honahan.

    Professor Honahan as a governor of the bank of Ireland has a voting role on the board of the ECB that carries certain obligations. Certain aspects of the voting is secret based on the premise that the voter sets aside national bias and votes on best course for the ECB.

    Because of the above conflict of interest he should never have been selected in the role of senior negotiator for Ireland’s bailout.

  87. But lets examine the argument for Ireland’s bailout from another perspective. Suppose our senior negotiating team is not locked into an equivocal position with the ECB a la Honahan. suppose the determinant of Ireland’s position on bailout is dealt with strictly on the basis of Ireland’s best interest.

    One argument in favour of a better deal might be that a punitive bailout interest rate is self defeating, kills the goose that lays the Golden Egg. On the French side, the argument might be that in order to achieve a better rate, that taxpayers cannot bear further burden, instead the CT interest rate must be unplucked and raised to ease taxpayers burden. It may be difficult to argue against the French, but the problem is we wish to protect senior bondholders and have our CT goose at the same time. They may smile and perhaps wait until we recognise the impossibility.

  88. And so the Irish position is locked up in a big Ostrich EGG:) Long rounds of comforting Ostrich negotiators putting their heads in the sand for Ostrich hours pleading for endless support from our 27 EU partners:)

    But some of us have broken out of the ostriche egg:) Like Morgan Kelly we wish to burn senior bondholders. We should use Icelandic principles of the Althing, based on our ability to repay and the liquidity support provided for the Irish Frankenstein banking system, as MK suggests, left with the ECB as its loss, not ours(taxpayers) .

    We wish to leave the EMU’s path of perdition currently being prepared for the Irish taxpayers with €3.6 bn out of the economy in the next budget, €4.4 the following. This will lead to the destruction of the Irish economy, growth currently at 0% descending next year to the minus with deflation, current retail business closures running at 30% rate increasing.

    Leaving the EMU should return our economy in the short term to growth levels being experienced by Iceland. In the long term, if the inefficient management and dearth of political leadership that is sucking our economy dry, driving emigration and unemployment skywards under a handout, begging bowl policy to keep overpaid Irish vultures feeding on the rewards of bailout, locked into the begging bowl egg, is properly dealt with, the rewards for ireland could be huge.

    CT would need to be reduced to a competitive, say 6%. There would have to be a large volunteer movement to buffer the initial pressures that this changeover would involve. We should consider an alliance with Sterling, the UK and NI.

    The alternative is we go over the cliff. Default is imminent and surer than the arrival and return of the IMF. But even if we do default within the EMU, the likelihood of a good structural outcome, given our difficulty even over CT and bailout, is virtually zero.

    The only doubts about such a default policy is the gombeen element in Irish leadership positions that apparently, is too blind to be able to see the wood for the trees. The truth is we are Pigs on the way to the abattoir unless we default and become Lazarus. So it didn’t work out, is not working out, we’re bankrupt.

    We’re dead if we don’t and we don’t want to become some Frankenstein vassal state kept ‘alive’ by the ECB . Or do we? I suspect we do:) ZZZZ
    seems our most inspirational response to our difficulties.

    Simple. ECB monetary policy of unpoliced Central Banks allowed the ICB to turn a blind eye to Anglo. Its poor fiscal supervision much worse than that of the Fed, with its equivalent of their US Central banks, is ECB responsibility, along with disastrous supervision of Stability Pact monitoring. Lets return the bill to where it belongs, the ECB and senior bondholders who lacked prudence.

    Our share of the bill should be paid by our exit from the EMU, senior bondholders and ECB should share in the cost. If the ECB have gotten any smarts from this, they should recognise our exit is the best path for them as well.

    The alternative for them is to pour more good money after bad.

  89. @ Eoin Bond

    “re secured debt – most of it is heavily overcollateralised at this point, which means that it literally is impossible, political agreement or not, to enforce losses on them.”

    Literally impossible is putting it very strong and i think underestimating the severity of our situation
    Re overcapitilisation are you trying to say that the assets used to back up secured senior bonds are worth more than the value of the senior secured bonds? Really?
    Is that at current market value or book value?
    But isn’t their cross collateralization too that would dilute the claims?

    If you are of the belief that the debt is too big to pay back and default is inevitable, as i am, then the normal rules will not apply.

  90. @John McHale

    I apologise for coming late to this, but the determination to prove there were no other options has led to a misstatementof the facts,

    “It is worth noting that a special resolution regime was not in place, and even if it was the U.K. example shows U.S.-style depositor preference is considered incompatible with European law.”

    The British paper cited specifically states that the provisions of its Special Resolution Regime were chosen in order to provide greater comfort for non-depositor creditors than is available in the US and in other countries. Yet even this legslation provided complete restitution for Northern Rock depositors, and haircuts all round for everyone else.

    While the paper also refers to protection of (shareholders’) property rights under the European Convention on Human Rights, it does not argue that the ECHR would prevent preferential treatment of depositors.

    In fact it states in terms, “…clearly other European countries would have to respect the property rights guaranteed under the ECHR. But although this might in some cases require other European countries to provide compensation when exercising SRR-type powers, this is generally left to the discretion of the authorities and little guidance is provided in the primary or secondary legislation governing the regimes in those countries.

    “In Italy, Switzerland and Germany, for example, there are no statutory provisions which mandate compensation to be provided to shareholders and other stakeholdes of a failed bank if measures have been taken in respect of a still-solvent bank in orde to preserve financial stability”.

    It ight be argued that the ECHR prvides the basis for a legal chalenge to the preferntial treatment of depositors, but the absence of any successful challene on these grounds is telling.

    In no way can European legislation be held currently to prevent the preferential protection of depositors.

  91. @Michael

    The issue is not depositor preference re shareholders, but re other unsecured (non-subordinated) creditors.

    From the paper:

    “There is no depositor preference in the UK SRR, so the FSCS,
    when subrogated to the claims of eligible depositors, will rank
    equally with the non-depositor unsecured creditors in the BIP
    or BAP. Given that the FSCS or FDIC will generally be by far
    the largest creditor, this should improve likely recoveries for
    the unsecured creditors in the United Kingdom compared with
    the United States. The UK no creditor worse off safeguard
    should also be attractive to creditors, because not only does it
    place a floor on creditors’ losses in a PPT, it also allows them to
    share in the upside if the use of an SRR stabilisation tool
    generates a greater return from the sale of the failed bank’s
    business than a piecemeal sale in liquidation. In the
    United States, that upside accrues to the FDIC before the
    non deposit creditors.”

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