Patrick Honohan on Vincent Browne

@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?

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.

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

@ Colm McCarthy
+1

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?

@ 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.

gcost talks sense tho!

methinks John thinks they arent dead…http://youtu.be/4vuW6tQ0218

@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.

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.

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.

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

@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?

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.

@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?

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…

@ 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-

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.)

@ 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.

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.

@ All

FYI

http://www.guardian.co.uk/business/2011/jun/12/french-banks-quit-greece

“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

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.

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.

@ 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.

contd.

land, the economic boat may be righting itself of its own accord. We will see!

And here’s something tasty for the Sunday lunch.

http://www.interfluidity.com/

@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

@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.

“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.

@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.

@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.

@ JtO

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

Brian Snr.

@ 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.

@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!

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.

@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.

Not to interrupt the flow, but the transcript of the Governor’s interview is now available in full at

http://namawinelake.wordpress.com/2011/06/12/governor-of-central-bank-of-ireland-claims-lenihan-was-%E2%80%9Ccrestfallen%E2%80%9D-by-eu-stance-on-bondholders/

Michael Hennigan – Finfacts Says:

June 12th, 2011 at 10:33 am

+1

@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

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.

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.

@ 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

@ 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”.

@ 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.

@ 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.

@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.

@ 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

@ DOCM

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

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.

explan…had to split that 3 part post as together it got a 404 error:)

@ 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.

@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.”