Not a new bailout?

Weird, it appears that Bank of Ireland is about to become yet another state owned (but not state controlled) bank in the coming days… and yet there’s not a single article discussing that here this weekend.

This is the Irish economy blog, yes?

BTW, why don’t we actually nationalise the banks? Make *all* the bank employees public sector workers, set their compensation accordingly and operate them in the public interest instead of for-profit. Not forever, but for a period. I can see the following objections:

1) Private businesses operate much more efficiently and are better for the economy.
2) While there are areas the public sector runs better, banks are not one of them.
3) The banks are likely much worse off than we can fully understand at the moment and by fully nationalising them we would be exposing the State to far too much risk.

My responses would be…

1) Hahahahhahahahaha.
2) OK, I can kind of agree, but in order to operate in the private sector banks *must* be allowed to fail. How do we end too big to fail?
3) That seems likely. Why are we propping them up then – why can’t we dig enough to find where the bottom is?

@Stephen Kinsella
I suspect this is one of Noonan’s regular kites which will be swiftly shot down by the grim gunners on the continent.

@ALL
I note that Karl Whelan is the subject of what seems to have become an increasingly personalised hostility from some normally reputable commenters (and another commenter). It’s unfair, appears very petty and is having a seriously detrimental effect on the blog discussion. The blog and the country would lose much if he was driven away and if you think differently….you’re wrong and just take my word for it.

@Stephen Kinsella

From my reading of the summt press release Noonan is correct where you have quoted him above. The EFSF will be used on a proactive basis to loan funds to States that tip the forelock. The corollary is that States that don’t tip the forelock will be impoverished as per ECB threats to Greece, Irelan etc.

Point 8 in particular establishes this new role for the EFSF/ESM.

My understaning of point 8 is that it effectively says that no bank will be allowed to fail and that States must borrow the money from the EFSF to make bank investors whole.
Personally I think the comminique is very close to a European version of the Irish bank guarantee, minus a small discount for the Greeks. But I would go a step further.
When the reality of these decisions hit home to the citizens of Europe, there will be a massive adverse reaction to the proposals.
A reaction akin to the Unionist? who commented on the passing Home Rule of 1913/1914?.
‘This bill might pass the House of Commons, but it’ll not pass the bridge at Portadown.’

@Oliver Vandt

+1

@ Oliver

More rubbish from sNooznan, like many in Irish society and apparent on this blogg site a dose of criticism is branded a personal attack. I dont know know or wish to know details personal to him, but I do know that I dont agree with his emphasis nor his stance regarding the budget deficit. I also am cynical about the way many commentators that apparently were unassociated with the act of treason in running the state into ‘the Fourth Reich’ are quick to dissociate themselves with previous responsibilities, and not just Karl. There is a conflict of interest that should be addressed by all commentators, budget funding for professorial and teaching posts is clearly a target in the event of a deficit correction and I have not heard a convincing argument against this necessary reconciliation

Academics are quick to retreat to their ivory towers, I know I completed a PhD

If Karl cant handle that then so be it,

Noonan’s statements at this stage, may be as much to do with the health of Europe, than Ireland. As such this statement seeks to take the focus off Ireland, and especially _our_ causing any new solutions/precedents.

@Rich
This place was a old sovergin money backwater.
We were all bounced by the new denationalised Euro structure.
The place is being taken apart bit by bit and I can understand your anger – but the forces laying waste to this bog are so huge no acedemic could hope to stop it – even if he was correct in his judgement.

We are in the eye of the storm here – between the dollar reserve and the Denationalised Euro.
A modern day financial Culloden.

You can expect an entire summer of hazy, ill-defined statements such as these from the Taoiseach and his Ministers as they no longer have to go into the Dail the next day and get hounded by the Sinn Fein and Independent deputies.

They can spend eight whole weeks saying what they like about the Bailout or anything else without having to put up with being accused of deceiving the nation by Gerry Adams, being denounced as putting profit before people by Richard Boyd Barrett, or being lampooned by Joe Higgins.

Rich
IMO Karl sometimes overlooks the tone of his posts, focusing instead on his point of view but he is sincere and that deserves some credit.

The post on zero deficits was, frankly, sneering and prematurely triumphalist and he deserves the push back he received. Also, it is easy for all of us that carry sincerely held views, to be sensitive to accusations of “talking your book”.

It seems to me the heart of economics is the principle of “no free lunch” and it would be a good exercise for all posters to discuss the costs of their preferred options, before they discuss the benefits. For instance, to point out the cost of a sudden return to fiscal surplus is easy if you believe that govt should accept bail out money. A post showing the downside of accepting the bailout cash, and especially an explanation of why those disadvantages are outweighed by the advantages. Fir instance, the required future fiscal surplus increases as a result of bailout cash received today. Also, we implicitly assume bank liabilities by accepting bailout money, even though the bank debt NEVER benefited the public interest and was never priced as sovereign dent (before the guarantee). Not accepting bailout cash could mean a sudden cut off from European money and the downside of that is a forced reduction in government spending, but it also means that the overall principal owed (bailout money plus bank debt now not assumed bay government) is less.

Maybe karl should lay out the pros and cons of his approach and allow comments. Hopefully that would bring out a more constructive discussion.

BTW agreed his absence would be missed

@ Michael Hennigan,

“Karl

Give up the moral high ground, you are apparently already intellectually superior and of course the festering budget deficit does suit your own needs if not those of the many.”

http://www.irisheconomy.ie/index.php/2011/07/20/fun-with-instant-zero-deficits/#comment-157883

I think he was perfectly entitled to feel insulted by that post. I wouldn’t agree with Karl Whelan on everything, but having read the bulk of the threads on this site, I think he’s proved a considerate, consciencious, and highly informative commentator whose opinions are thought over and above all honest. I have learnt a lot. Inconvenient views or not, respect goes a long way. He’s most definitely earned it.

@ Michael Hennigan

Ah ok! Just a question. Did you ever read Hard Times?

@Stephen Kinsella

Did the census results come up for discussion at the MacGill summer school? I can’t see any reference to them in the Irish Times reports today, although that could be due to lousy reporting or bad eyesight on my part. Certainly, Enda Kenny doesn’t appear (if IT report is anything to go by) to have mentioned them in his speech. Frankly, I find that amazing and sinister, but I can understand his embarassment. One would think that, in a county that was laid waste by depopulation and emigration when it was part of the U. Kingdom, and then frequently afterwards by various FG/Labour governments, he might have mentioned that, in the 15 years from 1996 to 2011, which roughly coincides with the period when he was out of office, the population of Donegal rose by 23.8 per cent. Just for the record, the figures are:

population of Donegal:

1841 296,448
1851 256,158 -13.6%
1861 237,395 -7.3%
1871 218,334 -8.0%
1881 206,035 -5.6%
1891 185,635 -9.9%
1901 173,722 -6.4%
1911 168,537 -3.0%
1926 152,508 -9.5%
1936 142,310 -6.7%
1946 136,317 -4.2%
1951 131,530 -3.5%
1956 122,059 -7.2%
1961 113,842 -6.7%
1966 108,549 -4.6%
1971 108,344 -0.2%
1979 121,941 +12.5%
1981 125,112 +2.6%
1986 129,664 +3.6%
1991 128,117 -1.2%
1996 129,994 +1.5%
2002 137,575 +5.8%
2006 147,264 +7.0%
2011 160,927 +9.3%

increase 1996 to 2011: 23.8 per cent

The turnaround from well over a century of depopulation to one of booming population growth in Donegal is one of Fianna Fail’s great achievements. And, still, the Dublin 4 establishment scatches its head in amazement that Donegal remains loyal to Fianna Fail. These figures show why. I think that the chances of such population growth in Donegal continuing under an FG/Stickie government are about the same as those of Enda Kenny being given a Papal Knighthood.

JTO,

you are informative on the population stats and your judgement as an FX trader is “san pareil.” However, your skill does not extend to the analysis of election counts. I would give you an E for this. Look at elcetionsireland.org and you will see the electorate of Donegal deserted Dev’s party in droves. The FPV fell from 40k to 16k at the recent election. SF is now the largest party in Donegal and given the quality and youth of the two TDs up there, that domination is set to remain for a long time.

Good luck with the defence of the previous govt.

Sorry avoided not advocated.

@ OV
Tip of the hat, Sir.

@ Rich
Tidy it up a little

Sorry for the double post, can the incomplete first version be removed, please? (and this one too, obviously?)

@ Highway61

KW as been a big backer of large budget cuts to spending, he just thinks there’s limits to how fast you do it and thinks that zero deficits in the short term are fantasy. More level headed people would agree with him.

Saying zero deficit by 2015 is agressive and overly optimistic, but reasonable and rational. Saying zero deficit this year, without acknowledging the effect this would have on the economy (ie put a metric on it and explain how that would help an economy still unable to grow at all/significantly) makes you out to be a kook.

@Tull McAdoo

You shouldn’t extrapolate too far ahead on the basis of one abysmal election performance. Moreover, as we now know, that performance was against the background of a supposed mass exodus and resumption of mass emigration in counties like Donegal, that has turned out to be a hoax. That is why I asked if Enda Kenny or any of the economists at the MacGill summer school had mentioned the census results. It appears that they haven’t, which is both inexplicable and unprecedented. Has there ever been a census in Ireland whose results were so little discussed in the media and by politicians and economists afterwards? I think not. The only explanation is that, were the census results to be discussed in any depth at events such as the MacGill summer school, the nature of the hoax would become obvious.

Even if posters had self-interested motivations, arguments should still be made and debated on their own merits.

zhu
+1

@ sarah
Tell us exactly why they cannot say it. The markets are saying it, pretty much every independent economist is saying it and the dogs in the street are saying it.
What would be so wrong for the government to come out and say we are planning to stay the course with the troika deal and pay all debts but we must prepare for the worst.

Every independent economist is not saying it. And remember, there are plenty of respected economists who choose not to debate their views with anonymous commenters on the internet so this site is not a catch-all. I speak to others privately who have trenchant views but save them for international institutions and the government.

And the reason you can’t say it is obvious – it would spark a panic. Sure you saw what happened when Merkel suggested that a deal might be done on bonds from 2013 – we ended up in a bailout. (And yes I know that day was always coming, I said so in various columns, but it was Merkel’s big mouth and not the numbers which did it in the end).
I know there is an argument that the default is priced in but you must recognise that thinking something will happen and being told officially by a sovereign it will happen are very different things.
It’s the difference between the comfort of commenting on the sidelines and having the responsibility of governance.

The analogy I’ve used before is the peace process. In that case we all understood the subtleties of public statements for certain constituencies vs the political reality that would emerge in time. This really is quite similar. Expecting the Taoiseach to announce at a summer school that the sovereign won’t honour its debts is a simplistic approach.
We’ve got step one of an improvement in conditions. There will be more steps, (part of that is CUTTING the deficit. (Still waiting on anyone to tell me if we’ve actually cut anything yet).
The voluntary-private-sector-burden-sharing will come. And no doubt will be greeted with just more criticism on this site anyway……

@ All

It seems to me that the statement by Noonan was rather clumsy but it is not inaccurate. My own reading of it would be was that he was attempting to give a message to market speculators.

He will certainly be heartened by the confidence being demonstrated by outside investors in BOI. Hibernia is not going to sink beneath the waves (despite the best efforts of those that govern). And the fact remains that if confidence is to be maintained, there is no alternative to closing the budgetary gap and the only way to do is to either (i) increase taxes or (ii) make cuts in the major areas of expenditure or (iii) a combination of both.

As Colm McCarthy pointed out in the Sindo yesterday 2 + 2 = 4, not 6. If Merkel (and the other triple AAA bean counters) have mastered arithmetic, it is not too much to ask commentators on this blog to do the same.

P.S. Is there not a simple solution to the problem of who is insulting whom? Leave such comments out! Do not respond to them! And stay on topic! (I have no expectation that this homily will be listened to).

@Tomaltach

One off houses continued in Donegal unabated.

JTO again:

Wonderful. I part inherited one of the one-off houses in Donegal that you refer to. Lovely it is, but it is a little on the small side. So, when I retire in a few years, I will certainly have a brand new, very large, and extremely garish one-off house built in Inishowen, of the type that will have An Taisce and Frank McDonald branding me a criminal. I will be delighted to invite you to the house-warming.

@david Burke

Germany is pumping to compete with China as a world super power. America is finished.

JTO again:

This is left-wing fantasy stuff.

Look at the demographics. Germany’s population is in freefall. They’ve stopped having children. Their average age is increasing at a faster rate than in virtually any other developed country. Because it hasn’t been secularised as much, US women continue to have children and, along with immigration, the US population continues to soar.

When Germany declared war on the US in 1941, Hitler actually fancied his chances, because Germany had almost the same population as the US then, just over 100 million.

In 2011, it is US 320m and rising fast v Germany 80m and falling.

In 50 years, it will be US 500m v Germany 50m.

@DOCM

P.S. Is there not a simple solution to the problem of who is insulting whom? Leave such comments out! Do not respond to them!

+1

there is no alternative to closing the budgetary gap and the only way to do is to either (i) increase taxes or (ii) make cuts in the major areas of expenditure or (iii) a combination of both.

+1

I do however that the focus is never on tax increases. It should be.

As somebody who favours closing the budget deficit quickly (who doesn’t), it is incumbent on those who propose that route to spell out where the ‘great axe falls’. The most interesting piece was Karl Whelan’s expenditure analysis at the end of that uncivil and unjustifiable thread in its ad hominem attacks on Karl Whelan.

Even though I would disagree with the direction, it is clear that the Social Payments’ group at 37.5% of the total will be hit severly not only in Ireland but throughout Europe.

Thank you for the link you posted. It is a rather large tome and I have not got to it. The abstract is certainly interesting. Not quite Frederick Forsyth but there are shades of views in there.
http://www2.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper36.pdf

@JTO
Where are you getting such figures ?
You do realise the Anschluss is over , the protectorate of Bohemia & Moravia is no more and Danzig & Konigsberg is part of Poland & Russia now.

@ Sarah Carey

“(Still waiting on anyone to tell me if we’ve actually cut anything yet).”

Department of Public Expenditure and Reform Databank here:

http://databank.per.gov.ie/

‘voted public expenditure.’

Click on summary on the menu and the little + signs for more breakdowns.

Say, 2007 – 2011 (est.): from the point when the government starting trying to get the finances in control.

Finance Group
Justice Group
Environment Group
Community, Equality and Gaeltacht Affairs Group
Foreign Affairs Group
Communications, Energy and Natural Resources Group
Transport Group
Enterprise Group
Tourism, Culture and Sport Group
Defence Group
Health Group

All cut: as in spending is lower now in these areas than it was, by anything from a few % to over 50% (Enterprise).

Total spend over that period is fractionally up, but approx 5 billion down from the 2008 peak.

Social Welfare is up for obvious reasons, which is why employment and a jobs initiative is so key to people and to the figures.

Roll on the structural funds.

@ All

Why can’t we all comment under our real names. Personal attacks are one thing but when they’re performed under cover it just seems unfair.

After a brief look at articles here since the beginning of the blog I think one could say that Dr. Whelan has been the best contributor on Irish economy.ie for calling things correctly. I stand to be corrected.
He has ‘outpredicted’ Dr. McHale, Dr. Ahearne, and Dr. Honahan and should be part of for example the new fiscal council.
Dr. Whelans correct views and predicitons, like those of say Dr.Gurgenduv, Dr. Kelly or say George Lee do not sit well with the more conservative and could I venture less educated in international finance and economics among us.
George Lee being ignored and leaving Fine Gael kind of sums up that point.
On vox.eu there are only 2 Irish people in their top category, Dr. Honahan and Dr.Kelly. Only one of them seems to be involved in forming public policy at home.

It is hard to know what Noonan is up to. One would have thought that we would want to have a solution where we would not need a second bail-out and would prefer to be involved in a priocess that will get us back on our own two feet. I have not heard the IMF’s take on the latest plan. Thier view will of course be critical.

On the other hand, a lot of Irish people are probably holding Irish bonds and therefore there is a benefit to saying that they will likely be protected through the provision of funding beyond 2013.

@Zhu

Is that General Zhu?

@John

Some people do need the protection if they have sensitive jobs. In fact they can be the most valuable commenters. Others are just cowards.

@Gavin

Thanks buut I think this is where endless debates about which numbers to use open up.

The Stability Programme Updates document linked from that page, appear to summarise the income/expenditure more accurately and the numbers there seem much more marginal. (see page 17 onwards) It makes mention of an expenditure reduction of…1.7%? The main thing keeping us going are the taxation increases, which are “behind profile”.
Perhaps though small % are all we can do without a shock to the system? But it seems modest to me…

@Michael

Oh dear – I don’t want to fall out with you because you are so sensible. But that idea of “this is not a public square it’s a moderated debate” I really think is sound.

Look at it this way. Maybe he just a bad day. It is hard keeping an eye on comments all day and it is insulting if you are being accused of arguing a point in order to preserve you’re own salary. Overall, Karl does a great job and perhaps we should indulge him on those days when he’s feeling a bit sore. The Zero Deficits thread was too much.

Can’t we all be friends or do we need a time-out? 🙂

xxx Mammy.

Presumably [Noonan’s] statement was intended to reduce uncertainty about Ireland’s post-2013 funding position. But these statements inject more uncertainty.

This claim doesn’t make sense to me. Is there some reason why a holder of Irish government bonds should be more nervous in the light of Noonan’s statement?

@Michael Henningan: you think it’s legitimate to ask why KW didn’t resign from a job he actually left years ago? Really? What next, a query as to why Kevin O’Rourke neglects the study of economic history?

PS we either go Greek – (maintain defecits) if we are not given a proper break on our external debt or pull out of the currency union.
Self emasculation via fiscal reduction on a even grander scale would be a form of modern state art worthy of mention but only interesting for the audience and not the actors.

I’ve lived in Ireland for 10 years. People in countries not in an IMF program ask me why Ireland has such a large budget-deficit. I tell them what an average Irish family pay in taxes -> I get interrupted and asked: So the reason the Irish government doesn’t have money to spend on public services is because the Irish people don’t pay low to no taxes? I’ve yet to find another answer to that question than a simple ‘Yes’.

The high wages of the people at the top in Ireland are relevant. The people on this kind of wages are (supposedly) leaders. People emulate their leaders and if the leaders believe that there are enough money to waste on their own high wages then the people below believe they are also entitled to high wages. The argument that cutting those wages won’t make a significant saving is a very, very bad argument. That kind of argument will be applied to everything and no saving will be made.

Economy is also about prioritising. By prioritising above eu average wages over renovating schools, building roads, more Gardai, more nurses or more teachers the delivery of public services will suffer.

It will be interesting to see which direction the Irish government will take. Will taxes rise to pay for current level of public services or will be the current level of public services be lowered?

@Chris

Spot on. I agree completely with your view and in many ways it backs up what JtO has been suggesting in realtion to the ESRI et al on the census numbers.

In most of the big calls on economic issues over the past 3/4 years the safe consensus view has been proven to be wide of the mark and invariably wrong. And sadly this matters.

Govts take their lead from the ESRI and ‘middle of the road’ view points and it goes a long way in explaining why the so called extreme views are rarely viewed as ‘sensible’ only then to be revisited after the event and considered in fact quite ‘reasonable’. I find this very very frustrating and more to the point it normally costs significantly more money to implement the correct policy after an avoidbale time frame has elapsed.

In the meantime all manner of Politicans, spin doctors and the like have come out defending an undefendable original policy and this happens time in time out but yet the reliance on so called experts pervades.

One particular issue comes to mind – the Vat increase to 21.5% from 21% a couple of years ago to prevent the loss of VAT revenue as a result of increased ‘cross border trade’.

The comfy view would have been that this was a sensible move with merit to ensure VAT yields held up and yet all manner of so called ‘whackos’ were scratching their heads and suggesting the complete opposite. In time of course the ‘whackos’ were proven competely correct and the decision was reversed about a year later when it became clear what was going on at the ground level.

The current reliance by NAMA on industry experts who virtually all mis read the property market for the best part of a decade is along the same lines today.

@Jesper
Taxes do not pay for goverment services – goverments depend on paper only to service their citizens.
We have a large defecit chiefly because collective interest rates are above optimal.
Imagine a simplified world where high wage earners saved the majority of their income in Goverment bonds – a cut in wages or a rise in tax would reduce the ability of a currency using goverment to raise money. (currency issuers are different beasts).
Irish people simply saved in the wrong assets for this present environment – it has really nothing to do with wages – we have a huge export surplus.

@ The Dork

“If you consider the Eurozone as a single entity this is not hyperinflationary Germany where most of the debt was external.”

Hang on, so my image of a mother going to buy a loaf of bread with a pram stuffed full of DM is wrong?

Cripes its like reading a blog about Big Brother or something. Quick, to the Diary room…..!!

’nuff navel gazing surely?

If anyone”s interested in the financial markets:

http://ftalphaville.ft.com/blog/2011/07/25/633461/oh-its-just-another-eurocrash/#comments

You never know about this sort of thing, and I am probably wrong, but have to say I had similar sense that the trading wasn’t “right” on the day Kervial’s positions were secretly being dumped by SocGen. Has looked odd for a while – dug these out for reference. Anyone any ideas?

24th June:

“Off topic:

Italian banks suspended, Unicredit off 9%. Very wierd.”

11th July:

“Something might have leaked about Italian banks a couple of Fridays ago. The equity trading didn’t smell right then and the bond guys have been piling in on Italy recently. Meanwhile the ECB and France are discovering that banks have boards accountable to shareholders not sovereigns – again hardly surprising.”

I dont think this is off topic but apologies to anyone who may think so.

I was just reading the “NTMA NOTE” which was kindly posted by Karl on July 18 and the accompanying comments expressing concern about 11.8BN matring in January 2014.

Since then there has been a reduction in the “bail out” (stitch up ?) interest rate and Bank recapitalisation will now be lower because of BOI`overnight good news.

Consequently I would like to draw attention to a number of points.

1)The amount of 11.8 Bn in 2014 can obviously now be addressed.
2) I have seen very little mention of the fact that the Irish electorate may not be in a hurry to “rush” back into the international bond market in 2014.
3)The domestic private pension sector is “beating down the door” to get a share of the sovereign bond market.
4)At some stage over the next three years the Government are going to start shedding some of their shares in the banks where they hold majority ownership and it is quite possible the Government/NRPF share of BOI will dtop from 32% to 25 % by January 2014.
5)While the NRPF is actually achieving(I believe) 8% return on itś investments every fund needs secure investments and a “few billion” Irish sovereign bonds at 3.75% will probably suit this requirement by 2013/2014

Perhaps it is time for the NTMA to issue another note and in fact I think it would be a good idea if they issued one on a regular basis so that forecast can be revised and debated sensibly.

Of course there will always be a few people trying to find evidence of the “sky falling down”in Ireland (it may be falling down in many parts of Europe but our problems are more like a seriously leaking roof) or mocking forecast but that should not distract those of us who take these Political Economic matters seriously.

By way of illustration 2 examples:
1) Some weeks ago Karl expressed some doubt about BOI raising capital while I expressed the view that we would only know how BOI would fail or suceed when we reached the end of July. Nevertheless Karl is still a much more superior economist than I will ever hope to be and was basing his presumptions on very sound and well thought through information whereas I was just being cautious.
I am delighted to benefit from Karlś opinions and anlyses. I did not read the comments on the “Zero deficit thread” but if they were as unacceptable as they apper to be then I am glad Sarah Carey has made the comment she made.

2)Twenty years ago (if I remember correctly) Connor Cruise O`Brien believed the Kremlin coup would suceed when it was announced wheareas I was immediately certain it could not. Again I could never hope to be a better Political Scientist/Diplomat/etc than Conor Cruise O`Brien ever was. I did not always agree with Mr O`Brien but I always learned something whenever I read opinions and analyses by him as did ,I am sure, the rest of Ireland.

@Stephen and Karl

Keep up the good work:)

@Michelle

Very well said. I am a Political Scientist but I rely on this site instead of some of the other sites for invaluable insight behind the headlines.

However I have also become concerned about the level of behaviour on this site recently. Some of us have other reasons to preserve their anonymity but to hide behind anonymity in order to attack contributors and commentators or spread “disconscerting spin” is completely unacceptable.

You express my feelings and concerns accurately and thank you for offering to provide a solution.

@Grumpy
You might be right…the euphoria has worn off very quick.
Spanish 10 year now at 6.03% and Italian yield up by 4.73% today.
Our own 2 year going the wrong direction again so it looks like Mr Market does not buy the continuing bailout line of MN.

@CP Spanish 10 year now at 6.03% and Italian yield up by 4.73% today.

I know Bloomberg does it, but quoting a % change in a % confuses things. So the Italian 10-year is up to 5.66%. Scary enough, though there seems to be a convention that officials only panic at 6%.

@Gavin

Ah yes, deficit cuts vs spending cuts.

I guess this is the nub. Spending cuts are announced and look impressive – yet the deficit cuts seem small in comparison. Therefore I often wonder if the spending cuts announced are just book-keeping re-arrangements – and the deficit exposes how small those cuts really are. Perhaps Colm McCarthy could give us a column on exactly what the deficit cut is. My understanding is we aren’t going to make progress till we cut the deficit. (Keynesian/Krugman objections taken as read..)

@Jesper

I think your argument may have timed out. It’s certainly true that we HAD comparatively low income taxes. (My beef with the trade union movement always was that despite talking left they acted right by cutting wage deals that lowered income taxes which of course is regressive since revenues are then funded by indirect taxes but it makes people feel good to have more money in their pocket with which they can subsidise the resulting lack of public services)..but I digress….

I think Brian Flanagan, if he’s still nosing around the site, might be able to tell us how progressive income taxes are now, post recent increases…

@Kevin D

Yes 6% is the headline. Thing is though, Italy is different because of its low potential gdp gains and the inconvenient fact that it has the world’s third biggest government bond market.

6% for other countries may be significantly lower for Italy.

Then there is the question of how long Italy can credibly finance itself on the market at rates significantly higher than the bailout three.

The politicians have succeeded in undermining the CDS market in a way that means big holders of Italian and other bonds cannot use them any more to hedge cash positions – but It seems like there might be something more to what is going on with the Italian banks.

Karl referenced Italy on his white flag post, and I think it was probably the prospect of the unbailoutable country sinking that led to last week’s agreement. They just don’t seem to be capable of getting ahead of events, possibly because they believe what they tell each other.

@JTO and Bond

Fair point. I,ll be watching with interest.

@Joseph
Aaah -the increments! I keep forgetting about those. And of course, all those 55year olds retiring on great pensions means we are paying for no work, as opposed to paying slightly more but getting work in return.

Also I’ve heard of quangos being abolished but staff being “reabsorbed” so the headline looks good but the bill hasn’t reduced much.

So, am I right to be skeptical about these “croke park is a success” press releases? What HAS actually been cut?

On that BOI deal from IT…

“The investment will take place later this week in a share sale of 4.2bn ordinary shares with a potential that they would buy up more. ”

The numbers don’t appear to add up…4.2b@10c does not equate to the reported 241b that the investors is allegedly investing.

It seems they are getting them for 5.7c if the reported numbers are correct.
Any ideas EOIN BOND.

I see 145 million shares traded in BOI today. is this a record?

@Tull
I think the answer to your question is here….

http://www.rte.ie/news/2011/0725/ecb-business.html

@Tull

I don’t know – its a bit like that joke about being asked for directions and coming up with “Oooh, I wouldn’t have started from here.” What are we supposed to expect of bund yields – you have to factor in the possibility the Germans are persuaded to go for broke (no pun intended) next time there is a summit if Italy is on the brink.

There was a lot of attention paid to Spain last year, but Italy really does have the potential to split the Euro up properly. You wonder what might turn up if Berlusconi is ousted and some rocks are turned over.

The Efsf is too small, the politics of increasing it – I thought 1.5trnl might be the figure, but 2trln is being discussed – are far from trivial, plus what happens to Italy and Spain’s contributions.

You wonder whether Germany is going to be told “you have broken it, so you have to buy it” wrt to the EZ! Then there is the stuff going on over the debt ceiling in the US with what could turn out to be some binary policy decisions there as the economy rolls over into an election.

Surely the problem with manipulating the Italian bond market is how big it is – even though a lot is domestically held. What will Lozza BS do?

My guess is they print as soon as it looks like any chance of generalised recession.

yet another version from the Telegraph…

“Depending on the results of the rights issue, Ireland will end up with between 15pc and 32pc of the bank. Existing shareholders will hold between 31 and 71pc and the new investors will hold between 14pc and 37pc.

The sale will reduce the size of a state capital injection into the lender required under a IMF/EU bailout deal by €1.1bn to a total of €2.4bn.”

I’m confused.

Ireland…15 to 32% cost..additional 2.4b
Wilbur …14 to 37% cost…initial 241million
Existing..31 to 71% cost…????????

So is the State getting a good deal?

@Ceteris:

“So is the State getting a good deal?”.

I doubt it very much. At book value my estimation is that the State book valuation in the bank is being given away at a 60% haircut. The numbers from the press release are virtually useless in determining the loss on the existing shareholding.

http://www.finance.gov.ie/viewdoc.asp?DocID=6943.
I also think that a loss of this magnitude in book value terms has huge implications for the proposed €19 billion recapitalization on the potential book loss of all the banks.
For instance, will the State ‘buy’ as much with its recap of BOI as the new investors are going to get.

I would pursue your line of investigation above.

I did post elsewhere on this. My theory was vigourly contested but not with actual numbers.

“”Basing my humble calculations on the Bank of Ireland 2010 report, this is definitely not a good deal for the State.
The total book equity at the end of 2010 was 7.4 billion thereby valuing the 37% stake being sold at 2.7 billion. That €2.7 billion is being bought for €1.123 or 41% of the book value.
This means that the State loses 59% of its piece of its existing 36% equity in BOI (7.4 * 36% * 59%= 1.57 billion loss).
Now for the real crunch.

The State is just about to put in 19 billion into the State banks. Is the State in line to lose 59% of this €19 billion = €11.1 billion even before the money goes in?

Of course the numbers may have changed slighlty since BOI produced its 2010 annual report in April this year. But Annual report are still supposed to mean something. Even bank annual reports.

So on face value this looks like a terrible deal.

A 59% haircut on the State’s BOI existing holding, with possibly the same implications for the pending €19 billion recapitalization.
Disaster is too kind a word.””

HI Stephen

If you are knew to moderation then you might want to check out Godwin’s Law. Soon as the Nazis get mentioned you’re supposed to shut the thread down. 🙂 One of us should’ve called it the minute the Fourth Reich was mentioned…

On “everything is fine” I think there is a line.

“There will be no bailout” while the IMF team waits an airport is stupid/damaging.
“We will pay our debts” (until the situation changes and we can cut a deal) recognises practical realities…..

@Stephen Kinsella

Would it be an idea to start a dedicated thread on the BOI deal as it looks like a very poor deal for the taxpayer?

@Gavin
Classic MMT interview with Yves Smith – I especially like the treasuary issued 1 trillion $ platinum coin as discussed on the Pragmatic capitalism blog recently.( I vant to be alone with that coin)
This would make it very plain that the US does not go into real debt when Congress sanctions spending and so is unlikely to happen.
The Euro system is a very different monetory system in many ways but given that most debt is internal they could also come with very simple solutions to the debt crsis.
http://www.youtube.com/watch?v=n_yAh27O4jA

@Stephen

The obligation was ours to call it 🙂

Anyway, I made “for you Herr Cowen, ze var is over” jokes in columns, so I really shouldn’t judge….

@Bunbury

Your noble austerity will be for nothing because the private sector is incapable of creating wealth at the moment.
Once more vultures get control of BOI they will use credit to blow more bubbles.
The entire financial / physical economy interface is dysfunctional.

@ Bunbury

The old order fights on and the last government removed the provision on pensions reform in the Croke Park slow boat to China process, to sweeten the arrangement.

Most people work in boring jobs, if not from the start eventually, and where there is little accountability or motivation at management level, those with the interest in change understandably give up eventually.

For senior people, the collateral damage of poor policy is generally unseen and the world of the shafted small supplier to Superquinn would be very distant.

Since the days of Whitaker, the prospect of a public official, other than the current Central Bank governor, floating even an original idea, would be a shock.

As in Japan, the system extends to retirement, where there are little earners such as membership of boards, taskforces etc to keep people quiet.

One former civil servant in 2007 got a 36% hike in his pension after 18 months of retirement and now sits on about 20 quango boards and review bodies.

This all comes at more than a direct cost when for example, enterprise agency heads appear to be mainly PR men and no insider breaks ranks on the so-called ‘smart economy’ spending.

@MH & Bunbury
This is why it’s so unhelpful to talk about “civil service pensions” or “public service pay” as if they were a homogeneous group.

If all pensions & pay were posted transparently then we’d know where to focus. (Same thing would be healthy for private sector.)

If the gov’t runs out of money, and can’t pay existing workers, wouldn’t they also not pay pensions?

Are there NO circumstance in which golden parachutes can be modified due to changes in the state’s resources?

“today’s (7/26/2011) European auction results indicate that the time to expand the EFSF to the €1.5 trillion threshold may be approaching faster than anyone expected. In Spain, the Treasury sold 750 million euros of 3-month bills at an average yield of 1.899 percent compared to 1.568 percent at the previous auction and at a bid-to-cover ratio of 6.3 after 9.5 in June. Spain also sold 2.14 billion euros of 6-month bills, with the average yield rising to 2.519 percent, the highest since Dec. 2010, from 1.776 percent in June, while the offer was 2.2 times subscribed after 3.8 times at the last auction. In other words: far higher interest and far lower demand than the last such sale in June. As Reuters cites, “The most important point again is the fact that relative to the last auction yields are much, much higher … It’s not a good situation to be in,” strategist at Monument Securities Marc Ostwald said. “It shows we may have had some relief last week but that relief has proven to be rather short-lived.” We wonder just how much of these auctions were allocated to the EFSF monetization mechanism and/or Asian proxies that know they can promptly use it for precisely such purposes. Elsewhere Italy sold €10 billion in 6 month Bills and 2 year notes, and just like in Spain, both saw their respective yields rising and investor demand falling: 6-mo auc avg yld 2.269% vs 1.988%, bid/cover 1.56 vs 1.72, 2-yr auc avg yld 4.038% vs 3.219%, bid/cover 1.66 vs 1.87. End result of today’s auctions: both Spanish and Italian Bund spreads jump to day wides as the IBEX is now underperforming on concerns Europe’s second bailout bought less than a week of calm.”

Zerohedge

@Rich
Just because Whelan doesn’t want to reduce the deficit from 10% of national income to zero in one year – something which I have never heard of any country doing – does not mean that he is motivated by personal gain. Almost everyone in Ireland is completely against it – and I am writing as one of the very small number who is prepared if there is no other option to consider it. Incidentally I am also not connected to the public sector or the academic world.

As a long time blog reader I have seen no evidence that Whelan would ever take any policy position on anything because of the effect on his salary. It is quite offensive to suggest otherwise. As it happens he has taken many policy positions that have had a very negative effect on his salary and that of his academic colleagues. You are entirely free to raise any issues you want but please avoid attacking his integrity or him personally.

Continual references to ivory towers distract from your arguments but that’s for you to consider.

@Oliver
I have scant regard for the furore driven by the delicate disposition so pervasive on this site
My point is simple, I do not believe tough decisions are optional as you imply, I work 48 out of 52 Monday’s given a choice I would decline.
The idea if budget correction as quickly as possible (not reasonable) is my position, in a year is preferable, the benefit will be immediate, uncertainty sidelined and a new Dawn of economic resurgence will begin.
The direct nature of my posts should not be used by the polite chattering classes to ignore the fact that tough action is the best medicine
Your condescending remarks as those of others smack of the elitist incompetence that prescribes a never never land of easy solutions and populism that won’t work

@Oliver

I am not certain how much more proof you need that immediate and drastic action is required or should I tickle your belly as I direct your attention to the facts?
Whether you like or not we will be balancing our budgets earlier than planned, our credit rating and thus our autonomy depends on it. Further debt will not cure a problem caused by excessive debt – this is obvious.
You may feel a sense of entitlement for yourself or this bankrupt country but then you wouldn’t be the only victim of hubris on this site

Why cant Kahzakstan have Irish wages? they have a better credit rating?

Its irrelevant the effect on unemployment this will come to pass anyway, the cuurent malaise is causing huge PR problems for my work with international colleagues, everyone knows the decisions are tough but no body believes we are focused enough to take them. Few blue chip investors private or public will consider us without closure on these issues.

Reduced wages/public expenditure will cause prices to fall, the mediocre nature of our state services (including education and health) will be more competitive in a low cost environment and will essentially see Ireland vie with Poland and eatern Europe on price – this is our final destination, the retrun of the call centre!, maybe 30yrs from now we will rise again but not because you have a sense of entitlement