Protecting Senior Bondholders

This is a blind spot in the usual solid arguments of Colm McCarthy and it seems to me that the explanation is to be found in the following extract:

“that the remaining costs of rescuing the Irish banks be shared with their creditors and with the European institutions whose defence of bank bondholders has helped to create the current untenable situation”.

We know who the creditors are but what is meant by “European institutions”? These have no resources of their own other than those given them by the participating states which vary according to whether we deal with them at the level of the EZ 27 or the full EU 27.

Incidentally, the paper linked to by Chris on the other thread is worth linking to here as it really is excellent and may help situate the discussion in its broader and very complex context.

http://www.iie.com/publications/pb/pb11-13.pdf

@JMcH,
1) It’s not too late to put in place a resolution regime that can allocate losses appropriately without bankruptcy.
2) I don’t think Colm conveniently ignores the equal ranking of depositors with senior bondholders when he refrains from mentioning it any more than you conveniently ignore the belief among many Ireland’s creditors that our state is insolvent when you refrain from mentioning it in articles where it is arguably relevant. Addressing these (admittedly important) details just adds too much complexity to fit into the short form articles that both of you write.
3) In extremis, the government can issue paper to depositors backed by their share of the institutions’ assets and its own guarantees in settlement of that substantial part of the deposit guarantee that it cannot fund from cash reserves.
4) Practicably speaking, it’s unlikely to come to that. Anything resembling a default on depositors would have such a big impact on banks elsewhere in the EU that it is almost inevitable that the ECB would either come up with the cash itself or allow the ICB to issue it.

@ Colm McCarthy

That’s a petty reaction. When Pearse Doherty, Aengus Fanning et al make this argument they mean that it is a Franco-German ruse to protect Franco-German bondholders. It is disingenuous for you to claim that just because you didn’t explicitly say so, that you too were not similarly indulging in this populist theme.

We will not get bond market re-entry untill we put the fiscal house in order. Meanwhile we can borrow at 2% less than the Spanish and Italians from the Troika. Besides without the Troika calling the shots we would NEVER balance the budget. So what’s your problem with the current process?

@John

“anyone who pushes the line that losses should be imposed on broader bondholders has an obligation to explain how the legal obstacles could be overcome while protecting the credit system and protecting depositors.”

That’s fair enough, but would it be at all possible to see The Calculations which suggest it better for the interests of our country to repay the bondholders 100% than to default. For our democracy to shoulder the forthcoming austerity without such bail justification is reprehensible.

And the political bait-an-switch scam artists that suggest the austerity is 100% to balance a budget so that we can economically stand on our own two feet, are just as bad as those who suggest austerity is 100% to out the banks/developers. The truth is austerity is for both.

We know the reason for balancing the budget, but, and I don’t think I’m taking liberty with assumptions here, we generally don’t know the reason we’re repaying €60bn of bondholder debt. We know about the guartantee and the concept of secured bonds, but we don’t know the legalities of voiding these and the consequences to our economic prospects.

And those who might have previously said “trust me” have, to a greater or lesser extent demonstrably gotten their calculations and estimates wrong in the last 2-3 years.

So it’s a fair challenge to those who say “burn the bondholders” to justify their position, but to put the horse correctly before the cart, there should first be a justification for continuing down this set path.

Putting our “fiscal house in order” will result in a massive mortgage default & make present credit banks obsolete.
Since the ECB / previous Irish executive tied the sovergin to the banking sector there’s no way out without a inflation of Euros.
Commentators need to divorce themselves somewhat from currency as a storage of value concept , its most important role is as a medium of exchange.
Destroying the economy to prevent the creation of fiscal defecits is just plain stupid.
The fiscal defecits on this scale are a indicator of the weakness withen the economy – it is not the cause.
Where will the money come from to pay our private debts when / if we reduce our defecit ?
Theres no role for credit money creation in this economy – its a depleted sub- rural landscape now.
Goverment money is fundamentally a scorekeeper – if the football match ends 3 -1 and the scorekeeper decides to arbitrary change the result tournaments will become chaotic at best.
We either write off all private debt and tax or save this new potential inflation or we destroy all internal commerce in the country to save a monetory concept.

This crisis is signalling that private credit is not needed now – if the ECB wants to keep the credit banking system in place it must destroy the currency , if it wants to save the currency all debt must become Goverment money

@Jagdip

I can’t argue with you when you say there should be better justifications for policies pursued, not least when they come with almost unimaginable price tags. I am not sure, though, that the sort of “calculations” you are looking for to identify an optimal policy can be provided. We can identfy such optima in our models, but the real world in all its competing objectives, complex constraints, etc. is different, and often policy makers are thrown back on judgements — but hopefully judgement based on good analysis. But the point remains that better attempts should be made to explain those judgements.

I know one of the areas that has bothered you and where you wanted to see the calculations is the repayment of the ungauranteed seniors in Anglo and INBS. I should say I have absolutely zero inside information, but I would guess that it is a mistake to view the “calculation” in question as some sort of hard bargaining outcome where an assessment was made about the probability the ECB would cut off support to the Irish banks if losses were imposed. My hunch is that the ECB requested that seniors be protected because of their concerns about contagion, and this was met in light of ongoing extensive funding support for the Irish banks. While I don’t deny there is a bargaining element to such negotiations, and all sides are looking mainly to their own interests, there is a reciprocity element at work that is essential to successful repeated interactions. The calculation in question may have been of a sort very different than you suppose. I am under no illusions but that you find any of this as other than completly unsatisfying.

@Kevin

“If Colm McCarthy took a vow of silence would there be any increase at all in public support for austerity? I don’t think so.”

I don’t think so either — quite the opposite. My “critique” is quite focused on the banking issue. I should have made this more clear.

@John
The banking system is dependent on its customers ability to pay – you have got the entire payment system back to front.
Bonds don’t fund anything – the system first requires a adequate supply of tokens withen a economic ecosystem.
Where does the surplus from this austerity go ?

I am now convinced that John McHale is just a slightly more sophisticated version of the “don’t scare the horses”, “don the green jersey”, “something will turn up” brigade that was so prominent in the last government.

Particularly egregious are is repeated attempts to pain people who disagree with his point of view as driven by emotion and somehow irrational. His tone towards those who advocate alternatives is condescending through the implication that they have not considered the full ramifications of what they are proposing. The Alan Ahearne effect is in full force.

Apologies. Using iTouch. I give up

Senior bond holders are hardly the main cause of the present predicament. Defaulting on senior bond holders might or might not improve the present situation ,it might or might not be possible to do so, but as long there is no economic growth and the budget is not balanced ,the question of what to do about the senior bonds is a second order problem.

I think having a quality debate on the morality of _should_ we pick up the tab for bank deposits/funding is something which is needed. Avoiding the debate is not helpful, and currently the public are very underinformed as to how banks work.

@JMcH, the core of your argument seems to be that “real constraints make further loss sharing with bank bondholders a dead margin for response”, but the case you have made is so thin that you are effectively asking Colm and the rest of us to take it on faith and don the green jersey.

This feels very much like a rerun of having to take it on faith that guaranteeing bank debt was a good idea, that subordinated bondholders could never be burned, and that the long term economic value calculations that justified NAMA had a basis in reality, and again donning the green jersey to help keep the proles quiet.

If the issue as clearcut as you think, you should be able to be more convincing.

Even if Colm’s strategy is not set out in full detail, it has a crisis exit point that the strategy for which you are apologising lacks.

@ All

FYI

http://www.reuters.com/article/2011/07/30/us-bankofireland-wlross-idUSTRE76T11U20110730

@ Rob S

In fairness to Colm, he has an article in the Sindo nearly every week and nearly every week he has made the point (forcefully) that the deficit needs to be cut and possibly at greater speed.

I’m not sure of the point you’re making here. Colm McCarthy preaching “austerity” is a PD fellow-traveller record that’s been on long-play for nearly thirty years now.

Also it is mere chance that there are ‘bondholders’ to burn. Most banks are funded by direct depositors. Irish banks started running out of these, and foreign banks moved their depositors funds to Irish banks.

Patrick Neary et al swore blind that the risk capital of Irish banks was a more than adequate bulwark to ensure funding was safe. Indeed the Central Bank ran ‘Financial Stability’ motivated stress tests of the Irish banks in 2005 that said ‘all fine’.

In 2007 Bertie Ahern told people to comit suicide, rather than subject the property bubble to skeptical analysis.

‘Official Ireland’ did rubber stamp the banks. As such the Financial Regulator had ‘private information’ so people were due to give him higher credence.

I’m not sure how Ireland can say this isn’t our debt.

Desmond Brennan
“Most banks are funded by direct depositors. ” Sure about that are you? http://www.ecb.int/press/key/date/2009/html/sp090921.en.html (to 2009 )

@surrealists

While I can appreciate the academic debate on the morality of paying back bondholders over the past year since the IMF plan, I will focus on the actualities. Unlike previous economic crises we no longer own the ball (the currency/interest rate etc), monetary union clearly had benefits but also responsibilities. The regulation of borrowing by Irish banks and individuals was left to the state, reasonably so for a responsible mature sovereign. The vast amounts borrowed and dispersed was done by the Irish elite and overlooked by their academic superiors. Repeatedly the political need was the need of the masses, crass and ugly they demanded more and the baying led to property alchemy based on liquidity that the euro brought

Europeans respected the Irish government and expected adult behaviour instead they allowed a fox into the chicken hut and being in our nature we ate everything. Group think is unashamedly greedy and ignorant and we wrote the book on it

From their perspective we made our choices and the ball being 1% ours and 65% German/French/Dutch and Austrian they have decided that to limit damage and morally correctly in my opinion, that bills be repaid, dont forget the democratically elected Irish government oversaw this orgy of financial hedonism – thats us by the way not the poor unrepresented victims that we are made out to be!

The debate is not about what we would like to be done but what we can do to restore our credibility. We can afford a 140% Debt to GNP, the price is our standard of living. Reducing the deficit in three years will destroy the banks balance sheets once more however we do know that we will be allowed default and that we must flush as much debt as possible through this mechanism when made available, hence my opinion is to crystalise these losses asap. Ireland could not survive out of the Euro, who in their right mind would lend us money? we have all read the example of the disolution of monetary union in the former USSR

We can hypothesise all we like but we are the catcher not the pitcher because we couldn’t be adults

No scenario (except never never land) will see real credit back in the Irish system until we look viable once more and we must move as quickly as possible to our own demise to allow for the phoenix to arise. This is equivalent to the blood sacrifice of the founding of the state and it is our duty and responsibility to make the hard decisions and take the pain so Ireland can return as quickly as possible to a first world country fit for future generations

Its nice to worry about the law protecting the bondholders but what about the law that has completely failed to protect the Irish people by bringing to justice the criminal bankers and highly paid public servants who were complicit in their criminal acts.

The late Mr Linehan a Barrister of sterling reputation, in negotiations with ECB/IMF and publicly, stated that under Irish law, rules and regulations the bondholders and depositors were held to be equeal in a bankruptcy and or default scenario. Mr Linehan was Minister of Finance at the time and this led to the Barrister and the Accountant (Cowen) entering into an agreement with ECB/IMF and the Banks that will go down in Irish history as the biggest defeat suffered by the Irish since Hugh O’Neill and Hugh O’Donell were defeated by the British at Kinsale, County Cork in 1601.
We cannot now say that a school teacher, farmer or doctor entered into an agreement that they did not understand. There were advisors the cream of the Wall Street elite including Goldman Sachs. Perhaps we could get copies under “freedom of information legislation” that would shed light on the machinations that led us down a path that gets rockier by the month.

We are beyond the point where we could negotiate a three way split with the Irish Gov’t, Irish bank creditors (bonds/deposits) and Foreign bank creditors (bonds/loans) an equeal split between the three of all the losses incurred. The Irish Gov’t were clearly negligent in the run up to the fiasco. The Irish banks including the Central bank and regulators were equeally culpable. The foreign banks knew that Ireland was blowing property bubbles and that the Nebuchadnezzer would fizzle out in short order. There is plenty of blame to go around before the collapse. In the aftermath of the collapse 2007 and onward is when the stumbling, fumbling and bumbling of Ireland and the Irish Gov’t shocked even people like myself who thought we had seen it all and it could not get worse..

Tighten yere belts folks ye aint seen nuttin yet.

Ciaran O’Hagan sensibly realises that a healthy sheep gives lots of wool for longer while w dead one gives mutton….John mchale seems to think we need muttin

@ J McH

I appreciate your peace making efforts but you were right to criticise Colm’s populist “burn the bondholders” article, do not back away from that.

@ Dork

I dont know where to begin here….

‘The sovergin rates did not explode until the collapse.
These rates were exceedingly calm until the storm front arrived’

If you pull the pin the grenade will go off, might be delayed but the net result is a mess

In summary, we expect sovereignty as our right but not our responsibility, I’m sure the other nations that didn’t crash their economies had similiar opportunities to be imbeciles, thankfully for the prudent among us they declined.

The solution you say is not to pay any more mortgages well thats ongoing and doesnt seem to be working?

The rest I dont understand

# Desmond Brennan Says:

I’m not sure how Ireland can say this isn’t our debt.

Actually, most of it is down to less than two dozen people. While it’s true that they’re all Irish, not all Irish are them. So I’m not sure how you can say that this is our debt.

Speaking for myself, I went about €200 into overdraft on my credit card once, though I did pay it back the next week. So I suppose I should apologise for my part in bringing ruin on us all, and accept my fair €100,000 share of the ~€200 billion bill?

@DOCM
Thanks for the link. I had missed it.
Wilbur talking up Ireland cannot do any harm. It is purely incidental that he has now put his money at risk in BOI having bought at 38% of book value and,as he states, allowing him a considerable margin for error.
This is typical short term vulture bottom fishing which may or may not work and will not have any great impact on the investors overall should it go pear shaped. I wonder what assurances he got that the ECB will continue to fund BOI.
As for the debate on here regarding bondholder burning, I agree that it is largely pointless. The horse is gone with our 70 billion. The deficit reduction was imposed by the EU/IMF in the document released late Friday (bank holiday weekend) and although Leo states that they are only “options” I am more inclined to believe that the Government will again have to renege on it’s promises on social welfare and income taxes.

@DOCM
A Greek newspaper was carrying the story that the Italians may not agree to remain involved now that their borrowing costs exceed the amount Greece will pay. So more uncertainty.

@Obsessive maths Freak

Actually, most of it is down to less than two dozen people. While it’s true that they’re all Irish, not all Irish are them. So I’m not sure how you can say that this is our debt.

Just so.

If ten years ago, you had said that joining the Eurozone effectively meant that the state was responsible for all the debts of the banks operating there people would have simply have laughed and dismissed you a libertarian nut (I would have).

Yet it seems to be the truth. Qui bono?

It is emotionally satisfying to heap blame on a requirement to protect foreign banks.

It is dispiriting to read this sentence in the extreme. Foreign banking is certainly one beneficiary of the the current EU/ECB policy, but it is the policy itself that people are angry at, and their resistance to the “tough fiscal measures” that further the current EU/ECB policy is rational as well as “emotionally satisfying”.

Ireland, and the Eurozone, are in serious trouble because they are wedded to monetarism and unwilling to confront and control the vast power of the financial sector and those who have benefited from it. If these intellectual and moral failures do not make you angry then you have a very serious problem, or your concerns lie other than with the common good.

@EWI

“I’m not sure of the point you’re making here. Colm McCarthy preaching “austerity” is a PD fellow-traveller record that’s been on long-play for nearly thirty years now.”

I thought my point was very clear, sorry. It would be difficult to argue that anyone who regularly reads the column in question would come away thinking that adjustments are not necessary.

Colm says:

“It is entirely fair for our European partners to observe that we have brought this on ourselves but it is equally fair to note that in picking up the tab, the Irish are ‘taking one for the team’, in the phrase of Sharon Bowles”

The ear of Sharon is insufficient. Colm is right that Ireland might get more mileage out of its actions thus far by, frankly, selling them internationally. Better late than never.

In this regard the apparent failure of Irish negotiators to require any form of utterance of what they perceived to be the threat from the EBC – instead perceiving nods and winks as equating to that, and doing what they thought they were being telepathically ordered to do – is deeply unhelpful. It is a bit late in the day to start selling to European electorates the idea that Ireland has not acted entirely of its own free will and in pursuit of its own interests – just like everyone else.

It would have been more effective to start at least straight after a fact-finding initiative by the new government, but they have to decide – what are the facts? Either the country acted under its own steam in its own interests and now thinks it might have made an error and is moaning self-indulgently, or Patrick H’s “the people” and “no political room” and the (non) existence of a secret side-letter to the MOU and all that actually add up to the state being directed into the course of action it took by outside interests which might not coincide with those of the state itself.

If it is the latter then there is nothing wrong with Irish politicians being straight about it. They can say to the Irish people that they really do not want to repay the bondholders, that the want to resolve the insolvent banks etc, but were told that if they didn’t then X or Y would happen – so they judged there was no choice. This would not be some sort of irresponsible wild idea – it would be the truth – presumably.

That message would throw the spotlight onto the people that applied the pressure and are responsible for the bill to Irish taxpayers and a chunk of the threat of PSI for holders of gilts. What is wrong with that?

I think that some, perhaps those like John, imaging that this must not be done because anything other than a denial that duress was involved will halt any progress over reform and outrage the powerful foreign influence. I think this is probably wrong. If this tactic failed to result in any give on the payouts to bank bondholders, at least the government could be seen to have tried.

The public might them be more inclined to pull together to get on with putting the country back on track since there would not be the lingering widespread suspicion that they are being asked to “adjust” in order to avoid some embarrassment or some politicians or central bankers somewhere and that no one has really had a crack at doing something about it.

As for the irritation of Geitner, Trichet, comical Bini, or whoever, if they did actually threaten to bring down the Irish banking system or something similar, unless unwise investments in unsecured, unguaranteed bonds issued by insolvent banks were repaid in full to the imperilment of the sovereign’s credit-worthiness, then it would be outrageous if they were not made to feel a trifle embarrassed by that as it was brought to the attention of, not least, bond market participants around the world. If they haven’t done anything to feel ashamed of then they will have no problem with the disclosure of what they did do.

Colm also contrasts the repayment of these bank bonds with the PSI plans for Greek bonds. I do find it particularly ironic that an insolvent sovereign can have its creditors forced to take redemption of bonds by way of rollover financing – yet investors in supposedly more risky corporate bank bonds issued by insolvent banks cannot be forced to roll over debt – they can receive nothing less than proper actual cash Euros.

Part of the strategy for obtaining concessions on bank bonds has to be making a noise about it – the right kind of noise.

Horses have bolted though and last year there was potentially a lot at stake. If people who were then agitating for engagement with the public on the need for an economic hostilities style fall-back position (no one said it was optimal), which would have facilitated the possibility of a negotiation rather than a dictation of terms, had not been so fiercely dismissed then maybe Colm wouldn’t currently feel the need to be writing his anti-bondholder articles each week.

One other point John, wrt this:

“Also, it is conveniently ignored that depositors rank equally with senior bondholders under current law. ”

It is no where near misleading as “senior bond holders are the same as depositors under Irish law” that used to be trotted out, including by Bruton after the election, but can we agree on and stick to:

“Senior bondholders have claims of equal rank on the assets on a bank in a winding up”

That way we don’t’ confuse anyone into thinking that they actually have to be treated the same in terms of things like state compensation should the bank’s assets not be sufficient to repay them in full. Quite what they would be paid with is as they say beyond the scope of this thread.

@Dork

Whether rules where heeded or competition rife there is still common sense and 30% credit growth yoy describes the sparse governance and the governments short sighted revenue raising position

As for private and public being seperate there was a differentiation and would still be had the government moderated Banks testosterone laced race to the bottom. There was clearly an obvious risk of dramatic credit flow on joining the Euro

As regards government debt are we not already the beneficiary of ECB transfers at interest rates of 1.5% and the 3-4% from IMF/EFSF funding? This is an indication of the extent of our malaise?

sorry – net negataive energy return

@John McH

As regards that “adjustment”, once the government stop pretending paragraph 1.28 is written in lemon juice and no one has yet had a hot iron to hand, they won’t have to rely on this sort of thing:

Note in this specific case, BRICKLAYING!?

“THE CROKE Park agreement – in which the Government and trade unions agreed industrial peace in return for no redundancies in the public sector – does not create enforceable legal rights for an individual public sector employee, a High Court judge has ruled.

Mr Justice Gerard Hogan was giving his judgment on an injunction application by David Holland to restrain Athlone Institute of Technology, pending the outcome of full legal proceedings, making him redundant as a lecturer in bricklaying.

The institute had told the court it decided to discontinue bricklaying courses because demand had completely dried up. Mr Justice Hogan found yesterday that Mr Holland was entitled to an injunction on the “narrow” ground of having established a Department of Education circular of 2007 afforded him a legitimate expectation concerning his employment.

That circular stated lecturers who hold a contract of indefinite duration should enjoy permanency in their employment status akin to that of academics with full tenure, the judge said. The Labour Court had decided Mr Holland held such a contract, he noted.

However, he rejected arguments by Mr Holland’s lawyers the Croke Park agreement also created legitimate expectation nobody in the public service would be subject to redundancy. The language in paragraph 1.6 – guaranteeing no redundancies and providing for redeployment in the public service – was “too imprecise, conditional and aspirational” to permit such an interpretation.”

How do you think this looks from overseas?

From the article:

“When David Cameron and his Chancellor George Osborne took over in the UK last year, they too faced a daunting budgetary challenge. They chose to put through a pre-cooked emergency budget inside six weeks, blaming the previous administration and gaining valuable credibility in the markets.”

From yesterday’s Observer:

“CBI cuts its foreceast on UK economic growth”

“Britain’s leading employers’ organisation on Monday cuts its forecast for economic growth this year in response to the severe squeeze on consumer incomes and a sharp drop in business confidence.”

http://www.guardian.co.uk/business/2011/aug/01/cbi-cuts-forecast-economic-growth

From Bloomberg

“U.K. Business Confidence Weakened in July”

“U.K. business confidence weakened last month after reaching a 13-month high in June, adding to indications growth may be slow for the rest of the year. ”

http://www.bloomberg.com/news/2011-07-31/u-k-business-confidence-weakened-in-july-from-13-month-high.html

I have just spent a couple of hours typing up the July EU/IMF Programme documents, so that they can be released from the limitations of pdf. format, for the purposes of quotation and discussion. Social, economic and political melt down of the State is conveyed in them with the utmost calmness and discretion – http://www.politicalworld.org/showthread.php?t=9019

Does anyone who says that this debt should all be paid propose themselves to go hungry, homeless, and see their children deprived of education ?

John – you are saying that the “legal options are quite proscribed”. You are surely aware that it is up to us as a people to prescribe the legal options – when it came to NAMA and the Credit Insitutions (Stabilisation) Bill government was not too shy about passing controversial legislation that impinges on rights.

States that have dealt with crises on anything like this scale have without exception passed new legislation to meet the requirements of the time. Consequently I find it hard to believe that you advanced that argument with any degree of seriousness.

I’ve seen no figures that convince me that the debt is payable in full, with or without catastrophic social destruction.

Excellent article and analysis. A number of points, if I may.

1. This is a very emotional issue. Why should it be otherwise? It concerns the sovereignty of the country.

2. That sovereignty had effectively been gambled away by the Irish ‘leadership’.

3. But the nail in the coffin of Irish sovereignty is being driven in by the ECB in the unashamed and deliberate protection of the senior bondholders in all banks throughout the EZ. There is no ‘oversimplication’ of this issue.

4. This protection of the large bondholders is being offered while the largest of these banks, Deutsche for instance, continued to dump all peripheral bonds.

5. Even while the ink was drying on the euro anti-contagion/Greek deal, Ackerman of Deutsche, was dumping billions of Italian bonds.
http://www.telegraph.co.uk/finance/financialcrisis/8667986/Eurozone-crisis-fears-continue-as-Italy-forced-to-pay-higher-rates-to-borrow.html.

6. It is therefore the sheer injuctice and duplicity of the ECB and the big European banks and their governments that make this an emotional issue.

7. Hopefully Deutsche Bank’s action will have exposed the ECB for its deceitful and fraudulent stance on the issue of protecting the bondholders at the expense of citizens.

There is is need to clarify one item in the Colm McCarthy article , which I am sure he is aware of.
The artcile states that:

Nama has eight-and-a-half years left to unload its loan and property portfolio and pay down its debt of about €30bn.

My understanding is that the pace of deleveraging (aka firesales) is now being dictated by the Troika (ECB). So while the 10 year timeframe is correct, NAMA is now being pushed to meet intermediate targets by selling into a distressed market thereby exacerbating losses along the way.

Again, well done to Colm McCarthy.
We should not hide the truth on this issue. In particular we should not hide the truth, because it would expose just how inadequate and supine our response is.

@ Brian Woods II

“The developers are actually the big losers.”

Or maybe not such big losers: as posted by PR Guy a couple of threads back.

http://www.irishexaminer.ie/breakingnews/ireland/report-nama-enters-debt-forgiveness-talks-with-developers-514906.html

@ Joseph Ryan

Please insert the word “accounts” after government.

On the issue of who is responsible for the debt burden on the Irish people, this is an amazing debate in many respects. We all are! The bubble “wealth” has all disappeared, and it never really existed in the first place, but the proceeds of the bubble – borrowed from abroad – are still in the hands of many, from those enjoying high salaries and gold-plated public service pensions to those receiving unjustifiably high levels of social welfare. But the bulk of it is probably in the hands of the over 10,000 people who have downloaded the details of NAMA’s list of “distressed” properties.

In every pyramid scheme, there are always those that get in early and get out early. The rest are left looking for scapegoats both to blame and to make up their losses.

Always makes me nervous when folk argue about preferred courses of action without making explicit the time-frames in which the consequences of those actions will arise. In the short-term – 1-4 years – burning some bondholders makes more money available for social welfare recipients, economic consultants, road builders, academics and various other vested-interest groups. In the longer term however such an action makes the country a pariah on international markets, see http://www.nytimes.com/2011/06/24/business/global/24peso.html?_r=1&pagewanted=all for a discussion on the Argentine experience. Paying our bills incurs further short-term pain with an expectation that we will be promoted from the club-med to the northern European division of worthy bond issuers, (on that note the recent decoupling of Irish and Portuguese CDS rates is an interesting development). In the end one’s preferences might boil down to the ages of one’s kids – if one has any – but regardless, the time-frame of expected costs and benefits should surely be identified in recommendations being proposed.

@DOCM

On the issue of who is responsible for the debt burden on the Irish people, this is an amazing debate in many respects. We all are!

No. On my own behalf I cannot this. I may have to accept it but I will never accept in good faith the financial burden which seeks to recoup this debt from me.
But the private banking debt was not a debt originated by the Irish people. And the stupid guarantee given on behalf of the sovereign people was not a guarantee to eternity. It has six month expiry dates. It should not be renewed next December.
At least the non renewal would have the effect of forcing bond prices down to a point where the bonds could be bought on the second hand market.

At the outset of this this crisis, I was very pro-European and always have been.
Now I no longer believe that Europe is heading towards social democracy and I want no further part of it.

@ Shay Begorrah

This is all groundhog day stuff.

“The credit bubble in the Eurozone periphery was (not amazingly) the responsibility of the people who provided the credit.”

If a man gets helplessly drunk, who is responsible, the man or the barman?

@Shay Begorrah
The idea that the Irish property bubble was the sole responsibility of foreign creditors ot Irish banks ,without any involvement of the said banks ,the Irish regulators,the Irish Treasury,the Irish finance minister,the Irish prime minister,the Irish developers and the Irish citizenry involved in wild speculations not unlike the tulip bulb speculation of 17th century Holland,is going to be a tough sell elsewhere in Europe.

@ Gavin

They were acquitted Gavin – grow up

@Overseas commentator.
It is the ECBs / ICBs doctrine that banks must “compete” to provide credit , money used to fund goverment is a waste of resourses from there strange perspective.
Irish Pavlov dogs like continental Pavlov dogs are not sentient human beings – there actions are determined by credit production alone.
There is no such thing as free will withen this monetory system.
The BIS is a fan of shock therapy

@Shay Begorrah

“The malign influence of the financial sector and their henchmen in the ECB remains unchallenged, and I imagine that suits some sectors of Irish society just fine if it enforces more “market discipline” on the Irish psyche.”

Yes, it was actually the European financial services sector who were facing ‘more towards Boston (or perhaps Chicago) than Berlin’… and we were just kidding ourselves, seeming staring into mid-Atlantic ocean with our pants down, going, “WTF?”

Europe was never heading towards social democracy. That was just the necessary spin to keep the public quiet while the the real PTB got on with it.

Alcohol is an indulgence – a house is not.
The analogy is not apt

I am sitting here laughing at the comments , blaming the Irish – a broken simple people for the flaws in global financial architecture.
I guess this country was always a intersting experiment in social enginnering – Its wildly amusing really if you divorce yourself from the carnage.
The blind “markets” will destroy everything.
http://www.youtube.com/watch?v=fhz6i6JGzIU

Colm McCarthy’s repeated expression of opinion that Ireland has zero chance of borrowing from the markets even by 2013 is by no means unanimous. Dr Holger Schmieding (from Berenberg Bank) has produced a paper saying that it is quite possible that it will. The strange (or not so strange) thing is that our wonderful media seem to have missed it. I only read about it in the always-excellent Hamish McRae column in the London Independent. If Dr Holger Schmieding turns out to be right, Colm McCarthy’s reputation will have to be downgraded from its current Triple A status.

http://www.independent.co.uk/news/business/comment/hamish-mcrae/hamish-mcrae-countries-are-teetering-on-the-edge-of-default-which-may-be-a-good-thing-2327884.html

I quote:

“Something more encouraging. Could Ireland be the first eurozone turnaround? A paper by Dr Holger Schmieding at Berenberg Bank argues that it might. He notes that while the banking problems remain serious, the country has four advantages over the other weak eurozone members.”

“It has a strong export sector, inherent flexibility, the possibility of recovering some of the funds pumped into the banking system, and creditors who understand its problems in a way that they do not understand those of southern European countries. He thinks that given reasonable growth it might be able to finance itself from the markets at a reasonable interest rate by the second half of next year.”

“I would add two other things. One is that the Bank of Ireland refinancing has gone better than expected, leaving the government with only a small stake on its hands. The other is that the new census results show that the population in April was 100,000 more than the highest pre-census estimates.”

“A reader pointed this out to me and noted that both employment and growth may well be revised upward as more data becomes available. Things are of course still serious; but not quite as dire as people thought.”

PS I wonder who the ‘reader’ referred to in paras 3 and 4 could be? A clue: he is a regular poster on this site and is in exceptionally good mood this morning after the weekend results at Croke Park.

@JTO

everyone has an opinion so no need to get personal with Colm McCarthy. Less of the ego and just give your opinion.

Hey John the Optimist…if things are so fan-taddly-tastic, how come the ten year bond yield has widened today and still stands at claser to 11 than 10%? Going to go back to the markets are we? oh, forgot…you dont comment on markets or banks. As for hte BoI deal being so magnificent, John McManus doesnt think so…http://www.irishtimes.com/newspaper/finance/2011/0801/1224301686223.html any thoughts on that? oh, forgot, you dont comment on markets or banks, and sure why would you when they give the lie to your moniker.

@ Rich

“They were acquitted Gavin – grow up”

The conversation has moved on a bit, but…

They were acquitted, but not before it was established that barmen do indeed have a duty of care to the public.

“He [the judge] said that there were four ingredients to the charge which had to be met by the State – firstly that the two accused had a duty of care to the deceased, secondly that they had breached that duty of care and thirdly that their negligence in that breach amounted to a gross negligence.

“He said that he was satisfied that the State had met all these three requirements but that there was also fourth ingredient or standard required of the State, namely that the gross negligence of the two accused was the cause of Mr Parish’s death.”

Apparently new legislation was to have been brought in about this, but the collapse of the last government prevented it.

The point being in any transactional relationship there are two or more parties who jointly share responibility for that transaction.

http://www.irishtimes.com/newspaper/breaking/2011/0512/breaking26.html

@ Gavin

Indeed the judge seems to be inclined, as most do, to address the need for empathy in such a unfortunate case

However in financial matter and indeed in this ill made analogy the question must be put Qui bono?

If I buy an asset and make a 100% profit I do not share this with a bank, similarly for profits from business ventures

The precedent you would like to set would insinuate that the bank you borrowed the money from has a recourse to your profits – as it is also liable for your losses – personal choice carries responsibilityl, our government made choices on our behalf and many people chose poorly in their investments

However, many retain these lucrative bubble cash mountains which would be ideal for a wealth tax which I entirely agree with

The transactions engaged in are not morally based -they are simple commercial undertakings.
A gives B x amount of money. A knows that there’s a risk that B won’t pay so charges him interest. If B doesn’t pay he loses the collateral etc…
In this situation both A and B are responsilbe for the outcome of this transaction.

At a sytemic level there were too many of these dud transactions undertaken. Biggest problem is that C, who had nothing to do with A or B has been railroaded by A to make good on B’s shortfall. But – c’est la vie.

Back to the main point of this thread. I think that certain economists should know the differece between what would be nice to do and what can actually be done. At the risk of introducing another metaphor Ireland is in Jail. We have to play by the rules. Any silly messing without express approval by the troika will land us with a few nasty thumps from the security guards.

The only option we have is to keep the head down and hope for parole

@Eureka
Its the ratio of the base or maybe goverment debt relative to private credit that creates bubbles – the interest rates are only a function of wealth extraction , looking at the dollar post 1980 the interest rates fell as wealth capital was extracted over 30 years.
The CBs changed their inflation targeting from base / credit ratios to interest rates during the late 60s early 70s which destroyed the real wealth advantage of technological innovation towards the apparent wealth creation of the rentier sector.
This is the most important monetory lesson of the post 1971 years.
The rise of the base in America & Britain recently is the CBs trying to reverse the wealth extraction to prevent implosion. , the ECB still thinks there is much wealth to extract as there was a lag between the monetory polcies of the European continent and the Anglo saxon world during the 80s.
Its doing a modern version of the Volcker policey – deindustrialising the periphery to extract the malinvested credit so that the core can continue to consume.

@Shay Beggorah
I agree that the Irish property bubble would have been impossible without the low interest rate policy of the ECB, that ,in itself did not make that policy wrong .In the States the optimum monetary policy for Michigan or Ohio is not the same that the optimum policy for the sun belt, still there only one Fed policy. I understand that Ireland would benefit now from a good dose of inflation right now, but it is unlikely to get it .
Personally, I would not be scandalized if the bond holders lost part or all of their loans ,they were too lazy to do their homework ,relying instead in the mistaken belief that no European bank could go belly up .Any research would have shown that the real estate price level in Ireland was not sustainable (I was shocked to discover that property in Clifden was worth more than the same surface in some parts of London or Paris) .
What disturbs me is the attitude of many Irishmen who believe that foreigners should have known that the Irish banks ,the Irish regulator or the Irish government were dysfunctional .In a sense you reproach the rest of the world to have taken you seriously. This is strange.
As to the default of the bonds, I suspect that some time in the recent past, the Irish government has signed a secret letter to the ECB guaranteeing that this would not happen.

@Overseas commentator.
I do not disagree that the Irish are generally mildly retarded but what relevance has this got to do with the financial ecosystem – in fact because we were a bit slow we deregulated more then any other European country with much praise from a probably amused financial oligarchy.

We were & are the most praised in the classroom because we are the slowest – the classroom teacher feels it must encourage us.

Anyway interest rates are tertiary to credit formation – first you provide the loan / create debt.

@ JtO

My spirits rose when I read your quotes from Hamish but then they sank again when I realised that this was not the much sought after second source (for optimism).

Welcome back John…the bond yields and John McManus as referred to above? thoughts? rebuttals? dismissals?

I note K-man’s already there:

http://krugman.blogs.nytimes.com/2011/08/01/meanwhile-in-the-global-economy/

Doyle family

Having checked Berenberg Bank’s website I can report that Dr Holger Schmieding does not wear a beard. But he has a certain gravitas.

@ The Dork of Cork 2.56 pm

I know you modified this later with your comment referring to simple mindedness.
I subscribe to the theory that we never reached the social engineering stage. We are still stuck with tribalism and the clan, there was no large scale invasions such as took place in Europe with the Romans, French, Germans, Austrians, Spaniards performing civilizing missions. I had a few discussions in Germany where they are still grateful for what Napoleon did to European royalty.

There was a small invasion in the North but they did not affect the culture since they adopted apartheid policies. The British in the South were stand offish until they intermarried and then they adopted the mores of the indigenous Irish.

Education in Ireland in addition to being heavily religious was also inward looking and nationalistic. A good example was my fifth class teacher who spent a month in France and came back and told us the French had to use sauces because their food was bad compared to the Irish food which did not need sauces. This was at a time when Bacon, Potatoes and Cabbage was relieved by Fish on Fridays and a goose at Christmas.

@Mickey Hickey
What a well fed youth you had!
Fois gras and all at Christmas.

@Mickey
We are just mildly more retarded then the continentals – Germany for instance believes you can save debt by reducing investment !

The Swabian stingy culture seems to have caught on in Teutonic circles for some reason.
Some Germans have a strangely linear thought framework for some reason.
Although in the final anylasis its just that the paper in the financial world no longer builds capital but destroys it to get a yield.
This has been a 40 year old car crash and normal people are just the passengers – we are not in control of this car.

@ All

I forgot to mention that a click on the Google ‘translate’ button will give a very good translation.

Many commentators appear to be totally missing the fact that Ireland no longer has any say in all the major decisions impacting its finances. All “executive level” decisions are made outside Ireland, setting baselines, floors, ceilings, targets etc.

Ireland has “operational responsibility” to carry out these decisions, and second-order (but still important) decision making in regards to the composition of its fiscal adjustments. Ireland can exceed thresholds set by the EU (e.g. for extent of austerity) but cannot fail to meet them while still accepting funding from the EU.

Take Greece for example – how involved was Greece in its own Bailout 2.0? Not much it would seem. Greece would be significantly better off with plain vanilla EFSF financing than with the mix of EFSF and PSI financing that was produced. I imagine there was a conversation along the lines of

Greece: “Look – the PSI you are proposing makes things worse for us, not better”.

EFSF: “Sorry, but this makes things better for us (less EFSF exposure), you’re just going to have to deal with it”.

Greece: “Well if you don’t take decisive steps to reduce our debt levels to something manageable given the growth we can expect, it won’t actually solve the problem, and the markets won’t react very well.

EFSF: “We’ll worry about that after our Summer holidays”

Greece: “OK – should we pencil in the end of September for another emergency summit?”

I guess it is easier to live in a state of denial about the loss of sovereignty than to accept it.

Bryan G
All the nation states of Europe have no control of their borders or monetory policey since the 90s

Fair enough , that was the contract so that private capital could move freely withen the Eurozone.
But it now turns out private capital is not private but public – yet we have no power , we just pay up – no questions
Now that treasuries are bailing out the monetory authorties this European contract has become a farce.
How is it politically sustainable ?
Is it even politics ?
This “arrangement” is not a tradional european construct – and no I don’t want a European treasuary – it would become a Caligula’s Rome.
We just have no rule of law – me thinks the EU will collapse even before it builds a Empire.
Its beyond pathetic really.

@ Bryan G

“Ironically there are now reports that the EFSF won’t have to raise funds to support recapitalization of banks. Instead they will issue their own securities – which seems to be a variant of the “promissory note” concept”.

Would be grateful to have links as this a key issue for the weeks ahead of the “technical default” by Greece.

P.S. I wonder why we need all those recently appointed Ministers of State and their expensive staffs. The raids on the public purse continue unabated.

@DOCM

This Reuters article has some information on this towards the end, including

Euro zone sources said that the EFSF would not need to raise all the money agreed on Thursday for the second Greek programme on the market.

[…]

“Not all of these amounts quoted as part of the Greek deal involve physical transfers of money because some can be given not in cash but in EFSF bonds. So the EFSF can issue bonds, but they will not be sold on the market,” the second source said.

@colm mccarthy

I’d agree it’s worth a try, but I see the chances of success as quite slim. The only hope would be to get a powerful player such as the IMF on board, but it seems they have already been arguing for bondholder participation without success, and if anything they seem to want to disengage (European solution for a European problem) rather than become further enmeshed in the details. Perhaps there’s some scope to ‘Europeanize’ the €50bn contingent liability from the ELA, but again this would require a mindset change in the ECB, and there’s certainly no evidence of that. Maybe with Trichet and LBS gone from the ECB by the end of the year there’ll be a more moderate approach, but I think that’s unlikely.

I think the Greek PSI case is different. It has been clear for a long time, at least as far back as the Oct 2010 Deauville meeting, that some form of creditor participation was a non-negotiable pre-condition for German support of any bailout. The fact that the chosen form of creditor participation makes things worse, not better, for Greece, does not appear to matter. It was all about the optics at German national level. This was a powerful player getting something it wanted.

@Brian G
Fischer : “The markets issued an ultimatum to Europe: either embrace more economic and financial integration ON A FEDERAL BASIS, or face the collapse of the euro and thus the EU, including the Common Market. At the last moment, Merkel chose the sensible option”

Were they really that specific ? did Fischer ask them ?
But of course they want Euros back at their present value – which is why they want German tax payers money rather then ECBs printed Euros.

But we are told nearly All Euro debt is internal – why can’t the euro central banks just give euros to treasuries to pay sovergin debt at a per capita basis ?

This is just another European integrationist that is pushing even more union when it has already reached it limits.
They are attempting to destroy all vestiges of the nation state despite the fact it took 400 years of torture to build.
These Euro freaks are madmen – they will destroy everything to achieve their vision

@Dork of Cork

‘They are attempting to destroy all vestiges of the nation state despite the fact that it took 400 years of torture to build.

That’s a helluva broad ( and reductionist at the same time) statement complete with an assumption that the nation state is somehow the zenith of political and economic constructs, all the while ignoring the “torture” these constructs, past, present and future have perpetrated on themselves, each other and on other constructs that do not conform to this paradigm.

Constructs where the “people”, culture, history, language, state and society are all the same thing or must conform to some timeless templete ( defined by whom, when, how?) have probably accounted for as much “torture” and mayhem as all the marauding empires down the millenia.

European leaders are acting under global market pressure with limits to their lattitude while trying to simultaneously resonate with national electorates and position Europe to survive in a world of essentially two ( for the moment) über “nation states”/empires.

We, Ireland and the minnow European nation states ( including Germany) that make up a Europe that adds up to much less than the sum of its parts have been losing these battles for decades precisely because our core “building” construct, the Johnny-come-lately, essentially, 19th century nation state construct has outlived its relevance ( for countries that are not China or the US).

Europe will become more federal not out of love for the concept but out of necessity and to survive.

Building such a “Europe”, with adequate checks and balances is the only hope for the survival of Euro/US “democracy” in the face of a Chinese capitalist, cash-rich authoritarian/meritocratic nationS-state model for export.

@Shay Begorrah
The cheap credit was available all over Europe, only England and Ireland knew a property bubble .It could happen only because the Bank of Ireland was totally blind to what was going on, or,more probably submitted to pressures from the government who was in cahoots with the bankers and developers.
What happened is more a problem of Irish governance than a problem with European monetary policy.
It also shows that leaving bank supervision to member states is not a workable setup in the EZ.

@ DOCM

Many thanks for the Boone and Johnson ref. They correctly identify the central governance problem at the heart of the Euro crisis, It was a regime of moral hazard which was designed to deliver guaranteed multiannual mega-profits to the financial sector. Now that Spain and italy are going under, the game is revealed for the scam that it was.

@Richard
Global market pressure me hole – this is a structured process.
Where did China get its capital ?
Thats right western corporations and banks.
This is western central banks shitting in their own nest since the 60s.
I hope for their sake the Chinese forgot about the little opium war thingy.

Tea & biscuits anyone.
http://www.youtube.com/watch?v=hVoLOaDXyfE

@Shay Begorrah
You are right about Spain, my mistake.
I think you give to physical proximity an importance it does not have ,at least within Europe .It takes two days for a truck to go from any point to any point within the 27 countries. I spend a good part of my working days in a different country and my nights at home.
I think the present strong position of Germany has little to do with its size and a lot with the sacrifices they accepted in terms of standard of living since the Shroeder’s years which amounted to a large internal devaluation (personally ,I doubt it was worth it).
I still think Ireland was mainly victim to it’s really bad economic governance ,at a time when the “Irish Tiger” was giving lessons to everyone.

Richard Fedigan

Also, and again rightly or wrongly, the German taxpayer/voter is not at all convinced that German leaders are protecting them, much less empowering them, as they perceive Germany practicing wage restraint only to bankroll “Europe” in Euros that for them are de-valued Dmarks!

I would tend to agree with them. As the redoubtable DOCM keeps mentioning, the Harz IV social welfare and work rights reductions and internal devaluation helped German industry a great deal at the expense of German society.

As for the powerful having to be dealt with, I am rather less sanguine about that. Sometimes it is best to make your own plans and a little distance is now required. The drawbacks of Eurozone membership seem to have comprehensively beaten the advantages.

People do not seem to perceive that Financial city states hinterlands are not their host countries and now it seems Frankfurt’s hinterland encompasses Asia & not Europe
So its very likely you get a great re wilding surrounding these city states as they trade paper with other city states and also use their Industrial Asian colonies & oil resourse jurisdictions to provide basic goods & services while their host countries such as Germany can sometimes provide luxury goods for their needs.
This construction is not organic – its a abomination with a massive waste of human & physical capital.
And for what exactly ?

German wages have been stagnant for the last decade. A few weeks ago I was told of a cutting edge dental device laboratory in Germany that lost four of their most valuable technicians to a laboratory in Toronto, Canada. The reason for leaving was no wage increases in a decade. This is going on all over Germany. The post WW2 exodus of highly skilled people from Germany tapered off in the mid sixties. Werner Von Braun was one of the more famous emigrants. Germany is not without its problems within and outside the country. They differ from the Irish in that their Gov’t addresses existing and forecast problems in a timely fashion.

@ John McHale,

The point about balance-sheet/contagion effects does indeed explain the ECB’s insistence that all bondholders be made whole, but does not explain why the Irish state should be the one to bear the cost, rather than socialising the cost of the bail-out at European level. I believe – and like Jagdip, I don’t think I’m making too generous an assumption here – that such an arrangement might be more palatable to the Irish taxpayer from a moral standpoint at least. Given the current lack of creditworthiness of the sovereign, such a position also strikes me as economically preferable to the current arrangement (leaving aside whether one believes bondholders should be let off the hook at all).

I understand the obvious political opposition to this position, but surely the ECB’s complete independence from political considerations would allow it to take this stance should it believe it to be the best course of action. Can you thus think of a plausible explanation for the ECB’s insistence, in public at least, that the Irish taxpayer and the Irish taxpayer alone should bear the cost of bank recapitalisation?

@christy
In practically all democratic countries there is a legal postulate affirming the non-retroactivity of the laws.
“Ireland
The imposition of retroactive criminal sanctions is prohibited by Article 15.5.1° of the constitution of Ireland. Retroactive changes of the civil law have also been found to violate the constitution when they would have resulted in the loss in a right to damages before the courts, the Irish Supreme Court having found that such a right is a constitutionally protected property right.(wikipedia)”.
There should have been a resolution system three years ago (and a non-recourse mortgage law) there was none. Any decision now to treat depositors better than bond holders will probably be censured by the Irish Supreme Court, if not ,by the Luxembourg court.

@Overseas commentator

There should have been a resolution system three years ago (and a non-recourse mortgage law) there was none. Any decision now to treat depositors better than bond holders will probably be censured by the Irish Supreme Court, if not ,by the Luxembourg court.

If it came to it, and it should, the outcome in the Irish courts is not a foregone conclusion.

Article 43, section one of the Irish constitution, which guarantees the right to private property, comes with a big fat rider in section two.

2. 1° The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice.
2.2° The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good.

I think the phrase “regulated by the principles of social justice” should chill the heart of any investor.

As for the Luxemborg court, that might be a useful way of checking just who European laws really serve.

Furthermore, and perhaps most fundamentally, there is no loss capable of attracting compensation

If the bank is put into bankruptcy a senior gets, lets say, 40 cent on teh euro

If he is put through the new regulatory regime, he gets the same.

Therefore, his loss is not increased by the new regime – all that changes is the amount of collateral damage done in teh process

@christy & Shay Begorrah

I am not a lawyer ,there must be many readers of this blog more qualified than I am to give an opinion on this subject.
I am sure,however, that any retroactive decision in financial matters would be anathemous to foreign investors .Ireland reputation would jeopardized for a long,long time.

This discussion is rather theoretical because I think ,outside of Sinn Fein,nobody in Irish politics would dream of trying something like that.

@overseas

The present government is trying to do precisely that – impose losses on seniors.

Second, the UK gov has introduced a new regulatory regime.

Third, on what basis do you say that investors would view it as anathemous? You say you are “sure” about this. I’m not. Can you explain why you are sure?

Given that you’re still referring to these changes as retrospective and haven’t addressed the fact that losses are no bigger under the resolution regime – it seems to me that you’re not addressing in substance the reasons why investors may not view this as a deterrent to future investment.

If what you really mean is that investors thought they enjoyed an implicit guarantee on senior debt and that they will be upset that it doesn’t materialize then I’d see that as, if anything a good thing.

Fourth, we have already done it for subbies.

these are all like Krugman’s zombie arguments – they keep being killed only to return later and haunt the debate

@E Moran

I’m pretty sure John did advocate such a regime

@ Eamonn

i think pretty much everyone has been in favour of an SRR. I think perhaps where you’re getting your wires crossed is that some people advocated loss sharing even without an SRR (or without addressing that issue first), and some others (myself, and i believe John McH amongst others) repeatedly felt the need to point out that loss-sharing outside of an SRR was legally dubious, like to be very disorderly, and simply impractical and inefficient. I think that was where a lot of the arguments ended up – wanting to impose losses vs how this can actually be done (ie it possibly couldn’t have been).

@ Overseas Commentator
When the Irish Gov’t guaranteed to backstop bank losses and protect creditors, depositors and bond holders the response was mixed. Many people rejoiced, some were aghast as this imposed onerous conditions on the other countries headed for default and there were the disinterested who shook their heads and wondered what had gone wrong with the Irish Gov’t.

It has become obvious that the ECB/EMF bailout falls short of enabling the Irish economy to grow at a rate that will result in budget surpluses. The Gov’t needs to cut the Public service numbers and wages back to 2005 levels as well as eliminate the minimum wage and reduce social supports.

As things stand now default is guaranteed it is a matter of picking a year 2013, 2014 or 2015.

Knowledgeable people expect default and see it as being unavoidable, similarly for Greece and Portugal. Spain and Italy the third and fourth largest economies in the Euro Zone are now in danger and is not a hope in hell that Germany and France can or will bail them out.

If the Euro Zone is to survive the ECB will have to crank up the printing press, flood the market with liquidity and inflate our way back to prosperity. I would not rule this out.

@ All

all this talk of default being guaranteed and doom n gloom etc is interesting when compared with the reaction on the bond markets over the last week and a half. Despite Europe seemingly coming close to implosion yet again, Irish bonds have massively outperformed. Clearly there’s a large body of thought out there that doesn’t think default is quite the done deal. The market is still skeptical for sure, but its not as cut and dried as some armchair commentators would have you believe.

@ Richard Fedigan

I wonder there your guys (and gals) put their savings, ‘cos they won’t get much return back in the old country ? I hae me doots also that ‘middle class’ has the same meaning in China as it does, for example, in the US.

‘China: where’s the inflation?
Jun 15th, 2010 by Michael Pettis

‘.. policymakers can still contain inflation by what economists call financial repression, made possible by their control over the banking system in countries where banks completely dominate the financial system. In the Chinese context, financial repression exists because the vast bulk of Chinese savings is in the form of bank deposits, and the deposit rate is set at extremely low levels.

This has the effect of transferring large amounts of income away from net savers, which for the most part consists of Chinese households, and in favor of net users of capital. Net users, of course, consist primarily of large, capital intensive businesses, real estate developers, infrastructure investors and local and central governments, including the People’s Bank of China, the largest net borrower of renminbi in China.

Net savers are forced into subsidizing net users, in other words.

The consequence is that monetary growth is channeled not into household demand but rather into the production of more goods, and the inflationary impact of monetary expansion is muted. Financial repression is an alternative to currency appreciation or inflation.

The cost of low interest rates

But according to Aliber’s model, financial repression has a cost. It leads to overinvestment, asset bubbles, and rising excess capacity. By keeping the cost of capital in China very low – perhaps as much as 5-8% below a rate that would impose a fair distribution of the benefits of economic growth between savers and users of capital – it results in a surge in investment which, allied with large-scale socialization of credit risk, can lead at first to a rapid increase in economically viable investment but ultimately, if left unchecked, results in capital continuing to pour into investment long after its returns are uneconomical’

http://mpettis.com/2010/06/china-where%E2%80%99s-the-inflation/

@ John Mc Hale

“Oversimplified claims that senior bondholders are being protected to protect foreign banks are undermining support for necessary fiscal adjustments”

The central argument of the article (as I read it) is that those creditors who invested in bank bonds that are no longer worth anything should take a loss not the Irish taxpayer. This is an assumption premised on common sense. It is quite another story to make a jump and start blaming ‘foreign European banks’ as this implies Ireland is being hoodwinked by our European partners. But, I don’t think Colms article (or any other) does this.

No fiscal adjustment can occur unless there is a sense of procedural and distributional fairness. The absence of distributional fairness in Ireland (i.e. making taxpayers pay for the reckless behavior of private financiers) is what will undermine support for fiscal adjustment not stating the truth. Fiscal adjustments are not just technical, they are deeply political.

It is a positive reflection on democracy if citizens refuse to pay for the follies of creditors and it is a positive reflection on the political elite if they choose to defend the interests of citizens over banks. No fiscal adjustment on the scale being proposed in Ireland can work if it is premised on a distributional bargain that is perceived to protect the interests of private creditors. So, I say thumbs up to anyone who calls a spade a spade.