Protecting Senior Bondholders

In his Sunday Independent column today, Colm McCarthy again makes the argument the Government is protecting – or being forced to protect – senior bondholders in order to protect European banks. 

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 British MEP who chairs the Economic and Monetary Affairs Committee. The team, in the form of the EU Commission, the European Central Bank and the Franco-German political leadership, persist in the pretence that the protection of creditors of the bust Irish banks, at the expense of the Irish Exchequer, represents some form of generosity to Irish citizens and taxpayers.

Fortunately, the existing deal with our European partners is impractical as well as unfair. It has not worked, it will not work and there will be further rounds of modifications as Europe gropes towards a resolution of the banking and sovereign debt crises. It will not be enough, in regaining solvency, for the Irish Government to avoid further pay-offs to bondholders in Anglo and Irish Nationwide. The Irish Exchequer’s contributions to bank rescue have already destroyed the sovereign’s capacity to borrow. There is still an opportunity to avoid default on the sovereign debt of the state, but the ability to avoid this outcome is being undermined by the obligations undertaken to investors in bonds issued by insolvent banks.

The restoration of that ability requires, in addition to vigorous reductions in the budget deficit, 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.

Putting aside the relative costs to Ireland’s creditworthiness of defaulting on sovereign bonds compared to sovereign guarantees, oversimplified claims that senior bondholders are being protected to protect foreign banks are undermining support for necessary fiscal adjustments.  

The concerns of the ECB about balance sheet/precedent-related contagion does explain the absence of loss sharing for the roughly €3.5 billion of unguarnateed seniors in the defunct and depositor-less Anglo and INBS.   The constraints on loss sharing in the pillar banks are quite different. 

There is an effective instrument to impose losses on pillar-bank bondholders – bankruptcy.    Although we know the credit system is already impaired, making the pillar banks bankrupt would impair the credit (and payments) system to a significantly greater degree.   Also, it is conveniently ignored that depositors rank equally with senior bondholders under current law.    It might have been possible for the State to make depositors whole when the State was creditworthy.   That ship has sailed. 

Now I do think more should have been done early on to put in place a resolution regime to increase loss-sharing options.  However,  the legal avenues appear to be quite proscribed.    While I am not saying this is the end of the argument, given the damage done to public support for tough fiscal measures, 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.    It is emotionally satisfying to heap blame on a requirement to protect foreign banks.  The reality is more complex.

179 thoughts on “Protecting Senior Bondholders”

  1. 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.

  2. 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

  3. I think Colm McCarthy may be the first person of any reputation I’ve read who praised Osborne and Cameron’s stewardship of the British economy. Everyone else thought that their efforts were misguided and counterproductive.

  4. @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.

  5. John McHale:

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

    At no point have I identified (bank) bondholder creditors with ‘foreign banks’. So I would’nt know whether it is emotionally satisfying or not. Why misrepresent what people are saying?

    ‘The reality is more complex’.

    Thanks for that John.

    Here’s another take on reality. The combination of accumulated sovereign debt, continuing deficits, other debt foolishly guaranteed, and contingent liabilities, has created a situation where bond market re-entry is unlikely for the foreseeable future. Consolidation fatigue is a probable consequence. Aside from complacently hoping that the current programme works, what precisely do you propose should be done about this?

  6. @ 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?

  7. @Colm

    The challenge we face is indeed daunting. My point in the post is that, besides some possibilities for loss sharing in Anglo/INBS, real constraints make further loss sharing with bank bondholders a dead margin for response. The live margins are the evolving European crisis-resolution mechanisms (especially the elements that affect expectations of default/PSI on State bonds) and the fiscal adjustment. I hope you can appreciate that I can’t comment on the latter for the moment. But the political capacity to do what is necessary is hampered by a heightened sense of grievance about the banks. Much of your analysis is very helpful. But what you are saying about the banks is, in my view, doing more harm than good.

  8. @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.

  9. 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. Anger about the favours done to bank creditors is justified. With luck it may even drive worthwhile changes. Simply trying to change the subject isn’t a sensible response.

  10. 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

  11. The EU might have more credibility on this if we didn’t see Josef Ackermann popping up at all the key meetings — only on the sidelines, we are assured.

  12. @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.

  13. Come now, Anglo managed to shift its depositors to another institution without also shifting its senior bondholders. It is not a bankruptcy yes/no operation – Anglo has not been bankrupted.

    Aside from orderly liquidation, examinership is also an option. Generally the largest creditors get to push through what they want. In the case of the Irish banks, even with their poor loan/deposit ratios, depositors vastly outnumber bondholders now.

  14. @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 ?

  15. One thing that is undermining support for fiscal austerity is the billions of euros that have been and are being paid to bank creditors. This is hardly Colm’s fault, since he has been arguing that the policy is crazy.

    Remember the marches in Dublin on the weekend that the IMF deal was done? (i.e. before Colm started writing his articles?)

  16. 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.

  17. It is ALWAYS up to the government, using the resource of state apparatuses to publish studies dealing with questions which require the peculiar knowledge of the state, as well as the heft of ots

  18. Great article Colm, as usual (and it is mostly on the budget, not banks). As is often the case, it goes into my reading list for investors on Monday mornings.
    As John McHale notes, ships continue to sail. One was to do like the UK, as the article suggests, and introduce a mini-budget. And the 2012 budget ships are set to sail across Europe. All governments are free to follow the spirit of the European Semester, and adopt the general European practice of submitting budgets to parliament in the early autumn, after trashing out the numbers over the summer. It would appear to be in the governments’ own interests, let alone those of the taxpayer, to be in line with general practice.
    I suspect the difficulties for the last government would have been less severe in late 2010 if they had followed the usual European custom of completing the budget dogwork several months ahead of year-end. The Irish “four-year plan” last year came 24 November. It had a forecast for the general government deficit in 2011 as % of GDP of 9.1% and a general government gross debt (also as a % of GDP) at 100% (for the end of 2011).
    Most Europeans though are generally not used to seeing Ministers walk into parliament on a freezing day with a briefcase of budget surprises http://www.france24.com/en/20101208-imf-welcomes-irelands-new-austerity-budget. There are ways of broadening out government, which hopefully facilitate consensus and make the bitter pills easier to swallow.

  19. 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.

  20. @John

    I find it hard to accept your views about supporting the bondholders at, seemingly, any price to the State and its citizens. Ireland’s debt to GNP ratio will exceed 140% next year. This is simply unsustainable and IMHO morally wrong for so-called experts to suggest that it is manageable. It is more than double to EU’s own limit.

    It is highly improbable that the State can trade out of this situation even with accelerated measures to reduce the primary deficit barring a world economic recovery or a major oil find (or better still a massive gold strike). Against this background, we are faced with a form of sovereign examinership or receivership.

    The only solution now is to cut borrowings and the deficit in parallel and the former means burning bondholders. You say “the reality is more complex”. I say that the reality is quite simple. If this reality had been faced earlier, we would now have a resolution scheme in place with one or more good banks controlled by the State and several bad banks controlled by the almighty bondholders.

  21. 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.

  22. John
    As the new watchdog in chief of Ireland’s fiscal situation it’s quite surprising to see you apparently accepting the need to spend tens of billions without any analysis….is this how the new fiscal council will work? Surely not…surely?

  23. @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.

  24. Could gov not use it’s powers under the 2010 act, shift the deposits to bank of Ireland from aib-Anglo-inbs, ‘recap’them with the self bonds nibs have used, then walk away….?

  25. @John

    Thank you replying, and more generally thank you for continuing to engage on here despite your public appointment.

    Indeed “contagion” and “higher funding costs” have been used to justify the compliance by Ireland with the ECB’s wishes. But has anyone explored what contagion means to say a strong French bank or a weak Spanish bank? And has anyone studied the experience of Denmark which is of course outside the EuroZone to see what effect its “burning the bondholders” has had? Without meaning to be disrespectful both reasons are cited as you would say “that’s so why” to an annoyingly inquisitive child. And for something so expensive -, again I don’t think I’m taking liberties with assumptions – we need better justification.

    I’m probably one of those that is agitating for more action on bondholders, and I recognise such agitation might be viewed as unhelpful or inconvenient, but there are people up and down this country, “ordinary people” if I may use the term that don’t understand this nation’s position with the repayment of bondholder debt. They deserve a better explanation. And just to emphasise, this is not directed at you, this is more a political matter than one of economics even if the basic justification of repaying bondholders is heavily dependent on the economics.

    One “ordinary person” is going on a bread-and-water fast for seven days starting tomorrow. http://thechatteringmagpie14.blogspot.com/2011/07/bread-n-water.html

    Logging off now for the evening.

  26. @Jagdip and others

    I do understand how painful it is for the State to have to cover such horrendous bank losses, and I very much share people’s anger at the consequences for our living standards. It also was not my intention to do anything to shut down debate on the issue, as some clearly interpret my post as doing.

    The point really was just to note that there are more constraints on loss imposition than is acknowledged in much of the debate (and I think in Colm’s article), and I do see it as doing damage to public support for necessary actions in other areas. A significant part of the bondholder protection to date has been the result of the need to protect the credit system and to protect depositors. I think this is poorly understood by the public, and politicans, economists, journalists, etc. need to take responsbility for that. I am more than open to suggestions for ways to impose losses on bondholders that overcome these constraints, and very much welcome this debate. Long-term readers of this blog will know I was actively involved in debates rearding resolution mechanisms to achive loss sharing while recognisig the constraints, particularly in early 2010. The solution is not to shut down debate, it is better debate.

    If I have come across as trying to silence any views (including those who believe these constraints I mention are not important), that was not my intention and I apologise.

  27. “I am more than open to suggestions for ways to impose losses on bondholders that overcome these constraints, and very much welcome this debate”
    See my suggestion above—-im sure it wouldnt work as if it was that simple…wouldnt that be the case?

  28. @ 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.

  29. @ All

    On the wider issues, rather than that of the residual one of the burning the bondholders debate where the horse has well and truly bolted (the Irish one, at least), and assuming that Colm McCarthy is right on the central issue (which I think he is i.e. the present “package of measures” will prove insufficient), the question posed is what additional measures the leaders of the Eurozone can take to halt the crisis (assuming that Washington settles its immediate crisis and the soldiers of the US in Afghanistan can receive their next pay cheque).

    If E-bonds are unsaleable politically for Germany, the first obvious answer is to agree to increase the envelope of resources for the EFSF. This poses the question of how this can be done. It is surely anomolous that the countries that are members of a monetary union can agree emergency lines of credit for an international body such as the IMF – which they are major players – and cannot do so for the body taking on the role of LOLR for their own currency creation?

  30. 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.

  31. John
    on the Ringfence post you seem to think that the clear problem with Greece is too little burning of bondholders….now here you say we cant, so get over it. Some contradiction/confusion no? At what debt/ GxP ratio does the torch get lit? 100%? 110%? Ireland? Greece? From your posts it seems to be between the two latter?

  32. @John
    I do not accept the equality of bond holders with depositors argument – but if you accept this meme and that the ECB is trying to protect the credit system then why has it not expanded its balance sheet this past year ?
    Me thinks it has grand strategic ambitions – using european nations as pawns in its strategic gaming & social engineering ambitions.

  33. @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

  34. @John McHale
    “The live margins are the evolving European crisis-resolution mechanisms (and especially the elements that affect expectations of default/PSI on State bonds) and the fiscal adjustment. ”

    Regardless of the market merits of PSI or a fully credible LOLR. The markets clearly do not believe that the Irish sovereign debt burden is sustainable.
    If they thought the debt was sustainable they would be willing to lend to us now. There would be no second offical bailout hence the issue of PSI would be irrelevant.

    So why do the markets think that think the Irish debt is unsustainable?

    We still have an almost unlimited (although much smaller) open liability to the banking sector. While we are closer to the bottom of the potential hole the Irish property market is not yet at the bottom therefore we are probably not at the bottom of the losses yet.
    Moving to a position where the Irish government stated that it was no longer willing to pile endless amounts of sovereign cash into the banks.

    Also digging under the surface Ireland’s debt sustainability is much closer to Greece that it would first appear.
    While the debt will probably peak at 115% of GDP, in GNP terms that is over 140%. Much better than Greece but still well into unsustainable territory.

  35. 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.

  36. At last – a gripping debate on Irisheconomy.ie! As one who can’t make up my mind about the whole issue of ‘burning bondholders’ versus ECB support, etc. I’m finding this very educational.

    The (carefully disguised) professional vitriol is terrible. I hope it lasts!

  37. 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.

  38. @John McHale
    “I do understand how painful it is for the State to have to cover such horrendous bank losses, and I very much share people’s anger at the consequences for our living standards.”
    I don’t think you are addressing the right issue. It is not about fairness. It is, as Dreaded_Estate points out, about credibility.

    It is not credible for the Irish state to say that the banks are fine now, when there is a moratium on repossessions and there are multiple past lines in the sand washed away from the tide.

    It is not credible for the Irish state to say we’ve had so much austerity, we’re halfway there when public spending has hardly decreased (in absolute terms) and public income has not increased (again in absolute terms). That more of the deficit is made up of interest this year than last is of little consolation when the plan is to take on another 40+bn of debt.

    Choices have to be made about who is not going to be paid. Mr. O’Hagan, being a sovereign bond salesman, would rather it was not him and his clients. I tend to agree with him – it was the calculation that Iceland made. A sovereign that can get funding can engage in capital projects that provide both employment and recycled tax revenues. Instead, we are slashing the capital program. We are repeating the 1980s.

    The payoff from the ECB is insufficient.

    The cuts so far are insufficient.

    The reduction of tax expenditures so far is insufficient.

  39. 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

  40. @Rich
    It is you who is projecting morality tales.
    The sovergin rates did not explode until the collapse.
    These rates were exceedingly calm until the storm front arrived.

    I would contend that the local CB were using old Sovereign money signals to evaluate risks – the massive increase in credit did not rise Sovereign interest rates as it would under more convential monetory systems.
    What kept these sovergin rates low ?
    It was the sale of CB Gold during the late 90s early 00s to facilitate the entry of the Euro,
    With the SNB selling a truely massive 1100 tons , UK 600 tons etc etc.
    These low sovergin interest & debt levels in general did not extract enough credit deposits which was subsequently malinvested.
    To blame a bunch of foolish paddies in FF and the country in general is insane – we were exposed to a lethal dose of credit opium outside our control.
    According to the crazy capital rules of that time the credit money had to be created.

    The situation can still be saved if credit deposits are converted to Goverment money which will finally destroy artifical asset prices.
    We can easily afford a 200%+ debt GDP ratio if we do not pay mortgages and save the new surplus in local goverment debt.
    If the ECB decides to destroy the currency to save the banking industry then Gold holders will cash in and buy sovergin debt after the base money creation phase…
    Banks & sovergin debt can be divorced from each other – despite the propoganda – my bets however is on the ECB destroying the currency to save the parastical banks.

  41. @ 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.

  42. @John McHale

    “Now I do think more should have been done early on to put in place a resolution regime to increase loss-sharing options. ”

    Why not do this now? Why not put in a an SRR scheme that says depositors come first? Who is going to object? The ECB? Because it prefers to take its advice from Ackerman?
    It suits Ackerman right now for all other countries not to have an SRR, because deposits are flowing into Deutsche. So the ECB says “No SRR”, because it does not suit Ackerman.
    A very difficult political play for the ECB.

    I say start at the beginning. Put in an SRR scheme. We are still a sovereign country. Well, sort of!!!

  43. @ 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

  44. 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.

    Yes, but this week he’s additionally made the point that the Government may have to default on the banking debt anyway. I’m sure he understands the consequences of the government doing so.

    John McHale has outlined the consequences of defaulting in his post, and is still of the opinion that defaulting on the bank guarantee would be more or less catastrophic for the country. However, it’s worth noting that the post above makes a careful distinction between Anglo et al, and the two pillar banks. If I may say, I would characterise this as a significant concession from the economist who 5 months ago called for the Minister for Finance to be a “Default Nut”.

    I would emphasise these points as they show that these two senior Irish economists are not actually disagreeing over whether the state should default on the banking debt; they are disagreeing over how much of it the government should default on.

    I would also point out that in recent weeks, Deputy Shane Ross has also raised the possibility of considering default in the Dail and in his column. Not to mention the EU acceptance of “structured” Greek default in their latest bailout. And it must be pointed out that Constantin Gurdgiev, Morgan Kelly, and David McWilliams have all effectively been pointing this out for some time.

    My point is that the numbers simply aren’t adding up, and the country, economists and all, is coming around to that fact. While it might be difficult for some to change their long held positions or beliefs, I applaud those who can reassess their positions when given the data; that is the mark of a true scientist.

    To quote Keynes: “When the facts change, I change my mind. What do you do, sir?”. And in Ireland the facts have changed.

  45. # 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?

  46. @ Obsessive

    Could you not make a similar point on taxes increases imposed by Irish governments to fund the petulent budget deficit?

    Lets see you negotiate stopping paying your taxes on the fact it wasn’t your fault – sounds ridiculous – no?

  47. @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.

  48. @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.

  49. @Rich
    I don’t understand your postion – we gave up our soverginity when we entered the currency union – how could we be responsible for the collapse if we had no control over our destiny ?
    WE BECAME A DUMPING GROUND FOR EXCESS CREDIT withen the eurozone.

    Sovereign bonds function by subtracting credit deposits to service its interest.
    Germany and the other core countries were denied a healthy fiscal debt using the 3% / 60% fiscal dogma.
    This means their credit deposits / bonds exploded and were exported to the periphery to get a yield.
    Banks did not break their capital rules in Ireland – they created more credit on the back of this credit which inflated domestic deposits further.
    Our credit deposits in banks are not funding goverment – they are shadowing fictitious asset values.
    A conversion of these deposits into goverment money and the redirection of money spent servicing mortgages into saving goverment debt would enable us to service our debt and expand it.
    We cannot service both our mortgages and Goverment debt – we must divorce ourselfs from the artifical economy.
    Of course the ECB must provide the cash before we can save it.
    If we don’t spend the cash it will not cause inflation.

  50. @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.

  51. @Dork

    I dont think the description of peripheral countries as dumping grounds reflects the tools the ICB had to prevent 30% credit growth year on year for most of the last decade. The Irish government, in its infinite paddywhackery, encouraged spending to yield taxes to facilitate tax cuts and lottery style pay and pensions for the indispensible public service.

    We encouraged the madness as a people and didn;t reflect on the gearing of incomes to debt or relative price inflation to our competitors – that was cribber and moaner talk if I remember correctly. We are the authors of our own demise no imperialists to blame although the die hards on this site have reincarnated the British jackboot into a German one _ I hope thats not too Nazi a reference for this precious site

  52. @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.

  53. @Rich
    Did not the banks conform with Basel rules at the time ?
    Everything was Hunky dory , the sovergin yields were low , consumer inflation was low (asset price inflation was not factored into monetory policey) and the credit assets were doing brilliantly……………..
    The ECBs & ICB doctrine was a competitive environment for credit production – the banks created the debt and did not break the rules.
    Their credit was divorced from the sovergin until we found out it was not (the ECBs denationalisation of money doctrine seems only relevent when credit is expanding)
    Leverage in my opinion is the ratio of the sustainable taxable base of the country to its credit / deposit production..
    We can reduce leverage by giving each other goverment debt and thus driving down interest rates which is money being bled from the country.

  54. 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.

  55. @Rob S
    When we reduce consumption through “austerity” we transfer consumption somewhere else in the currency union.
    Its daft – we give our money away hoping others will buy our exports or others arrive as tourists to witness true peasants in their envoirment.
    I just don’t understand this form of economics – its people with the paper that can buy goods & services , if we give our paper away we starve.
    What exactly is the purpose of trade ?
    Its not to increase exports , its to increase wealth.
    Adam Smith is spinning now.

  56. @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?

  57. @Rich
    It was not short sightedness it was doctrine.
    Various banks such as bank of scotland and others were providing credit in a “competive envoirment”.
    I don’t think you get the ECBs denationalisation of money beliefs – when goverments cannot get into significant defecit the banks private credit production does the heavy economic lifting – otherwise you get negative economic growth.

    Previously European goverments spent their money on industrial and social utilties , the banks grew GDP by building houses and such – this was a malinvestment of resourses that now has been socialised.
    This bank credit growth is characterised by net energy return as we never grew 20 – 30% even during the boom.
    Goverment defecit production is normally a far more effiencent use of debt.

  58. Gentlemen a Biblical earthquake , Nuclear accident happened in Japan which will probably kill thousands more – its currency is not under attack with 200%+ fiscal debt ratio.
    Its the central banks in Europe – they are mounting a all out war against the nation states including their hosts.
    Wake up.

  59. @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?

  60. @all

    ‘… the situation has changed from impossible to somewhere between hopeless and desperate.’ Colm McCarthy

    Good for those in the delusion of denial to be reminded …. Default, unfortunately, is no longer simply an ‘option’ – it is, according to the bond markets, an inevitability.

  61. 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

  62. @ Grumpy

    “How do you think this looks from overseas?”

    surely our experience to date has been that no one overseas gives a monkeys how we distribute our public money. ?

    I think your angle on this is noble – ie the hope that our benefactors will put a stop to our generous public pay levels. I am hoping with you, but it is my belief that this will never change. As long as the bailouts continue for the next 5 – 10 years, the bullet proof T&Cs that come with public jobs (and quasi-public jobs – eg large banks) will continue.

  63. 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.

  64. @ OMF

    “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.”

    This is completely missing the plot. The winners from our false boom are many indeed. The people like Gilmore’s wife who sold land at ludicrous prices. At one stage it was reported that we had an extremely high proportion of people with over €30M. They are still there. Then there are people like me who didn’t borrow or sell anything but benefitted from very attractive income taxation and also some boom fuelled rises and bonuses. There are our public servants, the highest paid in Europe.

    The developers are actually the big losers. They were a mere conduit for a massive transfer of wealth to many sections of Irish society and now we want to default on the loans which have created this wealth transfer. Unbelievable.

  65. 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.

  66. @Brian Woods 11

    The people like Gilmore’s wife who sold land at ludicrous prices.

    Interesting that you pick this very small sale to make a very poor point and arrive at a very unusual conclusion. I would have thought that the sale of the Jury’s group by the Doyle family, or indeed the sale of old veterinary college to the Grehans would have been top of the list.
    The State to my knowledge picking up the rather large tab for both ‘sales’.

    However, it is your quote below that takes your comments from the unbelievable to the grotesque.

    The developers are actually the big losers.

  67. @ Joseph Ryan

    You may find the attached opinion piece from the Frankfurt correspondent of the FT of interest.

    http://www.ft.com/intl/cms/s/0/6142ba0a-bba9-11e0-a7c8-00144feabdc0.html#axzz1TlnVyeiU

    With respect, you have the argument by the wrong end of the stick. However, it is a point of view seemingly shared by many, not least extremely powerful political leaders in Europe and notably in Berlin but, fortunately, not by the markets.

    The logic of the position of those insisting on PSI is something on the lines of going to one’s bank manager and saying “I want you to forgive half the amount of my current loan and, by the way, I will be back next week for the same amount again”.

    Ackerman’s job is to protect the shareholders, depositors and other holders of the banks debt and make a profit. It is not to sort out the domestic political problems of political leaders across Europe. Investors do not have to buy sovereign bonds and they are free to dispose of them if they do. If those issuing these bonds do no like the situation, let them cease the mantra of “getting back into the markets” and either balance their government or default.

    I have no difficulty of a discussion of the D word. But those using it need to spell out the consequences cf. the experience of Argentina.

    http://www.independent.ie/opinion/analysis/the-middle-classes-were-begging-for-food-in-the-street-2835484.html

    There are really, as far as I can see, only two versions of default; orderly or disorderly. One easily morphs into the other with a very high risk of contagion as the Latin American and Asian experiences have demonstrated. We may shortly find out how it may work in the case of Greece.

    The markets tell us what does not work. Unfortunately, they are incapable of telling us what will.

    Trichet has been consistently right and his detractors consistently wrong. (Merkel even corrected Schaeuble when the latter ventured criticism of him). I do not expect this track record to change. But he must certainly be looking forward to retirement.

  68. @ 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.

  69. @ Joseph Ryan

    I’ll admit that my comment on developers was a bit off mark but your own cited examples underpin my argument that the false bubble has left an awful lot of people in Ireland with far more wealth than was ever justified.

    This has in the main been fuelled by foreign borrowing and now we are saying we don’t want to pay back by arguing that our banks, which were merely a conduit, can’t pay back.

  70. 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.

  71. @DOCM

    Thank your for your always polite reply.
    But I cannot share your confidence in the ECB/European banks. Ackerman and Juncker reportedly worked out the Greek deal together. And Juncker reportedly relies on Trichet for his decisions.
    Was the purpose of the ‘deal’ not to stabilise the bond markets. But Ackerman was leaving the negotiating room, to give instructions to his people to dump Italian bonds at the time of negotiating.

    Der Spiegel on line
    http://www.spiegel.de/international/europe/0,1518,776411-2,00.html
    l

    As for the argument that the bonds markets will collapse post default etc., I would say this.

    Look for a long term solution.
    A long term solution both to the banking issue and to State funding. And then move towards that that long term solution step by step.
    1. An SRR regime that protects depositors first. When depositors have protection above bondholders, then deposits will return, not before then.
    2. A banking system funded from internal deposits.
    3. State borrowing funded as much as possible from internal resources.

    No normal banking system or normal State can survive on capital that can move in minutes to other locations on the flimsiest of reasons.

    Coincidentially, last week, I had the ‘pleasure’ of listening to a near relative being advised of where to put their upcoming PS retirement lump sum. The advice was coming from a subsidiary of soon to be 99% State owned institution.
    The unequivocal advice was not to keep all of the funds in Ireland. A German or European post office savings account was recommended, for a portion of these funds.

    How is it possible that any State can survive its own institutions advising and betting against it?

    No doubt Ackerman would be most pleased with the advice.

  72. @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.

  73. @DOCM in top form:

    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!

    As a suggestion, perhaps in future you might replace “We all” with “People like me” or “Bankers”?

    I never added to, participated in or profited from the property boom. In my particular industry all the property boom did was to add to costs by transferring money via the mortgages of property owners to banks and their bondholders (the final beneficiaries of the credit boom, the men behind the ECB curtain).

    The credit bubble in the Eurozone periphery was (not amazingly) the responsibility of the people who provided the credit. They have escaped any consequences for their greed and incompetence, and government policy all over the Eurozone is now to ensure that they continue to profit from destroying several economies and perhaps fatally wounding European Social Democracy (though this may have been intended).

    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.

  74. @ 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?

  75. @ Joseph Ryan

    Thanks for your reply. I undertsand very well the considerations which bring you to the conclusions that you arrive at. However, as far as I am concerned, this blog is about the Irish economy in its international context and I express no ideological position one way or the other. The other basic view that I take is that it serves no real purpose to argue on the basis of the way things should be rather than the way that they are as such discussion seems to me to belong either on a political blog or one dealing in philosophy. This does not, of course, preclude criticism of the political participants in the management of the economy, whether from the left or the right.

    The facts should speak for themselves and one that is undeniable is that Berlin and the ECB have been locked in a struggle in which, as I see it, the ECB as an institution takes its responsibility for protecting the single currency seriously and Germany is trying to abscond from the responsibilities intrinsic to the management of said currency. Touting the idea of a “European Monetary Fund”, or at least accepting the definition, as Merkel has, as not inappropriate, is an example of this. What the EZ needs is a European Debt Agency not a pretence that a single currency is the equivalent of Argentina tying the peso to the dollar.

    I also think that governments should not involve private banks in sovereign inter-state negotiations. Their job is to regulate banks, not to become partners with them, a point on which we would both, it would appear, be in full agreement.

    There is no secret about what Juncker personally thinks should be done. But he also conducts his chairmanship of the Eurogroup in the only manner in which he can retain the confidence of his peers: impartially.

    http://www.ft.com/intl/cms/s/0/540d41c2-009f-11e0-aa29-00144feab49a.html#axzz1TlnVyeiU

    P.S. I agree with the point made by Brian Woods II.

  76. @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.

  77. @ Gavin

    Notwithstanding Rich’s clarification, I actually got the metaphor wrong.

    The Irish populace is the drunkard, the Irish banks are the barmen, the CBI is the bar owner and the foreign banks are the brewery. To me, the least responsible in this parable is the brewery.

  78. @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

  79. @Brian Woods II on the side of the “The little people were asking for it.” analysis of the credit bubbleand ensuing global financial crisis.

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

    As it happens I offer a free metaphor improvement service:

    If a drug addict overdoses and dies, should the victims family be responsible for repaying his heroin dealer?

    It is beyond laughable to paint the consequences of the global financial crisis and Eurozone peripheral credit bubble as some sort of collective morality tale about the importance of personal financial responsibility and paying ones debts.

  80. @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.

  81. @ Shay

    The implication being that individuals borrowed outside the state regulators from German banks?

    My undersatnding is that the Irish borrowers did so from Irish based banks regulated by the ICB, answerable to the Dept of Finance (ultimately) – this is the problem of a national identity – I’m sure you were happy to enjoy the Rugby teams Grand slam and the infamous Italia 90? same concept you were no more responsible for the Grand Slam than the lack of responsibility shown by the regulator – still both are in your name – Irish that is

  82. @overseas commentator

    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.

    Absolutely, if I had used the words “sole” or “property bubble” that would be an entirely valid point. Free market dogma and laissez faire regulation took root here, helped by a compliant media reliant on property advertising, the emergence of the PDs and the gradual, sad, rightwards trend of European political thought.

    However, do you think it is fair to argue that the ECB’s core friendly low interest rates combined with the economic policies in the core in the early 2000s stoked a credit bubble that made Ireland’s poor government into dangerous government and that the ECB and core EZ policies now make it desperately hard for Ireland to recover, mainly in order to save their own political fortunes and the strength of the Euro?

    To quote me, earlier, in this thread (but you could be forgiven for skipping my contributions).

    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”.

    Is it really such a tough sell that the large Eurozone countries attempted to deal with the domestic political consequences of the global financial crisis by forcing the debtor countries to keep a badly malfunctioning European financial system whole?

  83. 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

  84. @ Shay

    It was you that introduced the morality line and thi shas led to the strained metaphor.

    The reality, not the metaphor, is that all that money lent by foreign banks is still in Irish hands, not the hands of the banks or the developers who they passed it on to, but in the hands of the farmers and wives of Labour Party leaders and in the hands of many of us who enjoyed the boom years without necessarily having made a Shiek’s fortune on rezoned land.

    And it is also evident in a very much improved infrastructure, which perhaps even you may benefit from. But now we, Ireland, do not want to pay back the loans which financed these massive wealth transfers and wealth creations.

  85. 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.

  86. @Pr Guy

    Yes, it was actually the European financial services sector who were facing ‘more towards Boston (or perhaps Chicago) than Berlin’…

    I despise the PDs, and I remember feeling as if I was suddenly involved in Invasion of the Not Very Bright Body Snatchers as various talking heads debated the sagacity and vision of that particular speech.

    Fools, one and all.

    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.

    So it seems, I really bought into the idea that EU was something hopeful and progressive but the EZ has facilitated a right wing takeover of the whole EU enterprise, as this depressing animation from the Guardian shows.

    http://www.guardian.co.uk/world/interactive/2011/jul/28/europe-politics-interactive-map-left-right

    Move the slider to when the Euro is launched and watch the political pallor of the EU be destroyed by enhanced competition and the single currency.

  87. 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.

  88. BTW – Still waiting, although its a bank holiday in Ireland so perhaps not so surprising, for John McHale to tell me the debt/GxP ratio at which bondholder flambee comes on the menu.

  89. @ 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

  90. @ Hoganmahew
    I said “a house” not “buying a house”.
    Human beings need shelter. You can rent that shelter or buy it.
    In the “credit boom” rent was even less affordable than a mortage for many.

  91. @ 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

  92. @Eureka
    “In the “credit boom” rent was even less affordable than a mortage for many.”
    Having both rented and bought in Dublin during the bubble, a mortgage was only more affordable during the times of ridiculously low interest rates.

    Not doing your sums on a purchase is also indulgent.

  93. 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

  94. @Hoganmahew
    “a mortgage was only more affordable during the times of ridiculously low interest rates”.
    Who set the rates?

    “Not doing your sums on a purchase is also indulgent.”
    Nope – not really. Foolish in hindsight maybe but not indulgent. Most people actually thought that when they submitted all their payslips etc to the bank that somebody in there knew something about affordability and risk. Remember people had to be “approved” for a mortgage. That meant that the lender thought that they were good for it. If the lender thought it – it was not unreasonable for the borrower to think it too.

  95. @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.

  96. @Eureka

    ‘If the lender thought it – it was not unreasonable for the borrower to think it too’

    Classic delegation of responsibility, understandable in the innumerate, whats the poit of education?

    That leads me to another beef I have with the rote learning the Irish education system delivers for some of the best salaries in the world, meanwhile we are going bust because no one can add, take responsibility or provide the inflated service commensurate with their inflated salaries

  97. @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.

  98. @Eureka
    I’ve a bridge I just know you’re going to love.

    “Who set the rates?”
    That’s the wrong question. “For whom are the rates set?” is the correct one. They are not set for house-buyers. Really, anyone who thought that the emergency rates after 9/11 were going to last for ever was being wilfully delusional, never mind self-indulgent. People put more effort into buying consumer electronics than they did into buying property.

  99. @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.

  100. The more serious (and emotionally charged) the issue, the more warranted the rhetoric exposing the complexities of it – such as this rebuttal.

    Unarguably, capitalism should take its natural course, for social justice if nothing else.
    However, as this post pointed out, the “reality is more complex”. The motives for protecting bondholders are multifaceted (and possibly sinister). This is what needs to be explored, exposed and debated.

    My point here is this. Irrespective of what side one is one or holding qualified and unqualified views, the debaters should not apologise for expressing their opinions nor apologise when they been misinterpreted by others especially when their intent is honourable in ringing those bells of caution!

    @ Dork – thanks for link 🙂

  101. @ 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).

  102. @Brian Woods II

    Dr Holger Schmieding is the second source.

    I am only referenced very briefly at the end. Most of Hamish’s comments relate to the said Dr Holger Schmieding. I have no idea who he is, but he sounds important.

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

  104. @ JtO

    He does sound important, certainly more important than Sinn, though I wonder has he a beard.

    @ Rich

    What I have in mind is a retro tax on net property related gains since 2000 on the following scale:

    First 100K – tax free
    Up to €1M – 50% (Gilmore’s wife would be caught for 200K)
    Over €1M – 90% (Dunne family caught for c.350M)

    I would make exceptions of course for people who had already spent the dosh, but the onus of proof would be on them.

    Also there should be a voluntary tax on all others who believe they benefitted unduly from the bubble. I myself would cough up about fifty quid.

  105. @JTO
    Re: Dr Dr Holger Schmieding at Berenberg Bank

    What should anybody listen to a European Bnak economist or spokepeson or director and believe that they have a dispassionate, independent view?
    As pointed out Ackerman of Deutsche was dumpinf Italian bonds in the billions at the same time as he was advising Juncker on a plan to stabilise bond yields and minimise his peice of PSI loss in the Greek plan.

    @Grumpy:
    re Italian bond spreads:
    No surprises from the moment that the Duetsche duplicity and Prodi’s letter became public.

    To me this is beginning to look like the endgame for the euro.

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

  107. @ 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.

  108. @DOCM

    Thanks for the link to the FT, already overtaken by the Italian 10 year going to 6.0%.
    http://www.ft.com/intl/cms/s/0/b620280c-b9ef-11e0-8171-00144feabdc0.html#axzz1TlnVyeiU

    “If the markets truly reject Italy or Spain, nothing except the ECB re-opening the securities market programme and buying Spanish and Italian sovereign debt in a potentially open-ended and uncapped way stands between these sovereigns and a disaster that could destroy the eurozone. ”

    It will be interesting to see the ECB intervene to keep Italian bonds down to 6%, while it allows other peripheral bonds float into the stratosphere.
    The EU may have to rewrite it solidarity clause (3, I think) to square the circle on that one.

  109. @JR
    The food was so plain that obesity was a rarity. When I got to Paris I noticed a horse race course called Molyneaux, I went to school with Molyneauxs so I naturally assumed that one of the Kerry Molyneauxs was involved. Furthermore they were pronouncing it wrong back in Kerry it was Munnix. God be with the days.

    Willem Buiter has had a good handle on the Euro Zone over the past five years. In my eyes he is highly credible which means we will eventually bite the bullet.

  110. @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.

  111. @ All

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

  112. @ KD

    Gravitas is of course welcome but it does not quite allay the disapointment at the absence of a beard.

  113. 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.

  114. Back to the original article – which proposes that some combination of creditors and EU governments pay for the remaining costs of the bank recapitalization. Here are the costs to date

    to May 2009: €11bn – cash from Exchequer/NPRF
    to IMF/EU bailout: €31bn – in promissory notes
    post IMF/EU bailout: €22bn – cash from NPRF (3.7 Dec 2010 + 17.1 PCAR/July 2011)

    The thing to note here is that the bailout resulted in the liquidation of the remaining assets of the NPRF to pay for the banks. The “promissory note” approach, which spread the cost over 10-15 years was abandoned, at the insistence of the EU, I imagine. The remaining costs would appear to be the servicing of the promissory notes, at €3bn a year for 10 years, plus deferred interest after that.

    From the EU/IMF point of view these promissory notes are just part of Ireland’s sovereign debt. I see no evidence at all that they would be prepared to regard this as any different from any other tranche of sovereign debt, and to treat it in a special way. At some point, should growth continue to disappoint, the EU may decide to restructure the entire debt. I am sure Ireland’s “operational arm” will be kept informed of developments, but the decision will be made elsewhere.

    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. From the EU/ECB point of view it was important to eliminate Ireland’s stockpile of cash, to remove the possibility of resistance to their programme.

    Imagine a parallel universe where they said “Let’s fund all the bank recap with long term notes/bonds, and use the NPRF as a local structural fund to build infrastructure, fund more Job Initiative-like programs, and focus on stimulating the economy for the low/unskilled workers that form the vast majority of the unemployed population”.

    Not alone has Ireland lost sovereignty – it has lost sovereignty to institutions where common sense and pragmatism are alien concepts.

  115. 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.

  116. @Dork of Cork

    The only two steady-state scenarios I see are a collapse of the Euro with a return to ERM-like exchange rate policies or further fiscal and economic integration with even greater losses of sovereignty. This article by Joschka Fischer covers some of this ground and says

    this jump into a monetary fund and economic government will lead to further massive losses of sovereignty for the member states, in favor of a European federal solution. For example, within the monetary union, national budget laws will be subject to a European supervisory body.

    I’ve no doubt that a majority of Irish people would much prefer to be a member of the (to use Fischer’s terms) rearguard ‘British/Scandinavian-led European Free Trade Association’ rather than the vanguard ‘German/French led European Economic Community’ blocs of the EU.

    I still believe that when Germany finally sits down to do its sums, and calculates the benefits to itself of the reputed 30-40% reduction in exchange rate compared to a free-standing DM, it will decide to pay up and a fiscal/transfer union will be on its way.

    Ireland’s only hope to get out and jump to the ‘EFTA’ track would be a Euro collapse, likely caused by a political failure to sell the transfer union. However faced with a choice between a transfer union and collapsing the Euro, I still cannot see any German chancellor choosing to collapse the Euro. For Ireland, the nightmare will continue.

  117. @ 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.

  118. Bryan G

    ‘From the EU/IMF point of view these promissory notes are just part of Ireland’s sovereign debt. I see no evidence at all that they would be prepared to regard this as any different from any other tranche of sovereign debt, and to treat it in a special way.’

    There was no evidence of debt relief for Greece either a few months ago. It is up to us to start making distinctions between categories of debt. You know who holds the stuff. Avenues for negotiation were opened (sotto voce) at the Brussels summit.

  119. @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.

  120. @ Brian G

    Thanks. Having consulted the EFSF Framework Agreement (on EFSF website), it would seem that there is more than sufficient flexibility in Section 5 – dealing with credit enhancements – of the existing agreement to allow for this.

  121. @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.

  122. @Brian Woods II

    The reality, not the metaphor, is that all that money lent by foreign banks is still in Irish hands, not the hands of the banks or the developers who they passed it on to, but in the hands of the farmers and wives of Labour Party leaders and in the hands of many of us who enjoyed the boom years without necessarily having made a Shiek’s fortune on rezoned land.

    There is an element of truth to this, but I think your entirely healthy hatred of profiteering might be obscuring an other part of the reality, that Ireland’s cheap credit fuelled bubble of property speculation was the result not just of widespread and shameless avarice but of a fundamentally flawed European financial system and that our escape from this disaster is now being prevented by the same forces that enabled it.

  123. @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

  124. We need to balance the books. People accept that. It’s been 3 years of ‘pain’-light. It’s probably going to be at least 4 more of ‘pain’ full fat.

    In my experience the easiest way to get people to accept ‘pain’ is when it’s administered fairly. Peoples pain threshold is a lot lower when they’re being treated unfairly.

    We can talk all day about what is more costly to the state, but IMHO unless Bank debt shares the ‘pain’ (at least ungauranteed seniors), those involved in the mess are brought to some kind of justice and senior public service wages are brought in line with the reality of a state that has to borrow 1/3 of its wage bill (or at least with European averages), you’ve lost people.

    I’m an engineer, not an economist but it’s obvious to me that this isn’t going to be easy. How long can people be treated unfairly before they snap?

  125. @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.

  126. @ Mickey Hickey

    ‘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’

    So there were no wholesale appropriations of land by force majeure? No penal laws ? No economically discriminatory Act of union ? No mass evictions or forced emigrations ? Of course there are remnants of clan organisation to be seen, but the clan system was hacked to bits.
    While Britain made many improvements in the Irish economy, most of them were, like the Bull Wall in Dublin harbour, designed to increase profits flowing to the homeland. Plus ca change. As Dork points out consistently, today’s improvements are of the financial engineering variety.

    I think it was Gore Vidal who said something to the effect that all civiliisations are built on the bones of trampled peoples. I doubt if Kipling wouild really disagree.

  127. @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.

  128. @ BW 11

    ‘The Irish populace is the drunkard, the Irish banks are the barmen, the CBI is the bar owner and the foreign banks are the brewery. To me, the least responsible in this parable is the brewery’

    With respect, your comments display exactly why deregulation is such a toxic phenomenon. The reason we have so much alcohol related harm is that the drinks industry has a strategy of maximiising profit while externalising the social costs. The national alcohol strategy was shelved in favour of the industry-friendly commission on liquor licencing. More offies for the street drinkers. More fruit fvoured tipples to get the teenage girls ion board.

    The notion of ‘consumer sovereignty’ cannot be taken seriously by anyone with a minimal knowledge of social psychology. The ‘consumer society’ is in large part, a product of the marketing industry. History, and psychological experiments, shows that people can be persuaded to do pretty much anything, when they see it as the ‘done thing’.

    If everyone else is getting drunk on ‘cheap’ credit, it’s very hard to resist. If there is a message from the PTB that this is the ‘last chance to get on the property ladder (aka the ladder to upward social mobility for your kids), who will have the courage and the foresight to say no ?

    The principle that ‘the polluter pays’ is of wide application, as it cuts to the heart of the governance issue. The financial sector continues to use its muscle to evade democratic control, but the ultimate effect will be to highlight the socially and ecconomically destructive ways in which the industry operates.

    I take the points made by Richard Fedigan about the EC’s dilemnma. China is the Britain of the 21st century, but its people will not tolerate financial repression sine die. As witnessed by the US, all empires over-reach themselves.

  129. @ 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.

  130. @Overseas commentator

    The cheap credit was available all over Europe, only England and Ireland knew a property bubble .

    Though its not terribly relevant to this thread you might like to search for the words Spain and property bubble on the Internet.

    What happened is more a problem of Irish governance than a problem with European monetary policy.

    Its odd though, don’t you think, that its the countries who do not share a border with Germany are the ones that suffer from bad governance? Does that not plant the seed of a doubt in your mind that the reason some economies are flourishing and some not in the EZ is that its being run for the benefit of the core (and their excess credit and poor domestic consumption) without regard for the consequences in the peripheral countries?

    The EZ has turned out to be a very good deal for Germany, and a very bad one for Ireland. I tend to blame the more powerful entity in power relationships but then again, I am a leftist.

    It also shows that leaving bank supervision to member states is not a workable setup in the EZ.

    No disagreement here., I was fully in favour of a much more thorough examination of bank balance sheets and capitalization. Interestingly, not al countries were – especially the “well governed” ones.

  131. @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

  132. @Shay Begorrah

    ‘The EZ has turned out to be a very good deal for Germany…. I tend to blame the more powerful entity in power relationships but then again, I am a leftist.’

    Not sure why only leftists ( nothing wrong with leftists!) would “blame” the more powerful entity in power relationships.

    Rightly or wrongly, as Monty Python’s John Cleese pointed out forcefully many years ago ( to the dead parrot salesman) plumage/blame “don’t enter into it”. The poweful one has to dealt with.

    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!

    The EZ has served Germany’s purpose since its introduction but its exports are now shifting towards Asia as the no-growth EZ becomes “used up” as a long term market.

  133. @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.

  134. @Richard
    If Germany trades with Asia more at the expense of western Europe – is that sustainable ?, is that not very very strange.
    As I have said many times the Eurosystems strategy is to destroy the physical economy of the periphery to save the currency such as what happened in America during the 80s.
    The paper is completly divorced from the physical economy – therefore you get very strange trade relationships which from a energy anylasis does not make any sence.
    From goods transported across the Pacific using wage arbitrage models during the 80s ,90s & 00s and now the possibility of German / Chinese trade this illustrates how paper games is so dysfunctional creating massive waste in the cracks between these parodies of countries.

  135. 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.

  136. Overseas Commentator

    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.

    I do not really disagree with you there. Circumstances and roles have changed now though.

  137. 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 ?

  138. In terms of postings, bond burning still tops the popularity ranks.

    We simply don’t know what is or is not sustainable at this point.

    So once again, I suggest that we should pay attention to getting our own house in order in the short-term not by a slash and burn approach but by for example targeting the large scrounging herd of sacred cows as detailed in the 2-year old Bord Snip report.

    The global economic trends are very uncertain at present and they will become more so if a Republican president and Congress are elected in 2012.

    Either way, growth is likely to be at a lowish level for the foreseeable future.

    Opening up the issue of bondholders now with the ECB expected to be the main funder of Irish banks for years to come, is likely to be less productive than the realty of the facts on the ground in two more years time.

  139. 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.

  140. @ Paul Quigley

    I agree with what you say in that most people share your views on the subject.

    However, coming from County Kerry my take on it is that the Irish are the original “Drama Queens’. We grossly exaggerated all the indignities imposed upon us with the exception of the Cromwellian episode. The landlords acting on their own initiated evictions, it was not British Gov’t policy aimed at the Irish. The famine was a natural phenomenon made worse by our reliance on mono crop agriculture. Thomas Robert Malthus had shaped British opinion before his death in 1834, he is commonly referred to as a demographer and political economist. In any case social Darwinism was all the rage when the spuds rotted in 1845 and afterwards. The British were not exactly coddling their own destitute underclasses in the nineteenth century. As always we have to keep in mind that conservatives are relentless in their pursuit of a moral philosophy that justifies greed and selfishness.

    As to economically discriminatory acts, we have done even better than the British. The economic landscape of Ireland is literally covered with economically discriminatory structures. A good example would be to look at what happens when Tesco applies for planning permission in any Irish town. The silos carefully constructed by the professions is another good example.

    We have used language, religion, culture, ethnicity as weapons of war since the famine. If we could now put our energies into resurrecting our economy and dealing with the corruption that is a remnant of Clan culture. Now it is known as nepotism, cronyism and having pull. The whole parish pump syndrome strengthened by the tax payer subsidised GAA.

  141. @ 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?

  142. “Also, it is conveniently ignored that depositors rank equally with senior bondholders under current law. It might have been possible for the State to make depositors whole when the State was creditworthy. That ship has sailed.

    Now I do think more should have been done early on to put in place a resolution regime to increase loss-sharing options. However, the legal avenues appear to be quite proscribed. While I am not saying this is the end of the argument, given the damage done to public support for tough fiscal measures, 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”

    The clear and obvious solution has been, and is, a resolution regime

    I mean, is the objection that the state can’t make depositors whole, so therefore, they should make bondholders whole as well?- if so it seems to me to be patent nonsense.

    Please, please, please spell out the legal problems created by the pari passu ranking of depositors and senior bondholders – three years later and nobody has done so. Don’t ask people who say there are no problems to explain why – that’s asking them to prove a negative – instead suggest or explain what those problems are and then let others try to evaluate whether they are justifiable concerns.

    Saying that they rank pari passu and then simply following that up with “therefore there is a legal problem” is a very frustrating way to argue – especially when there does not appear to be, prima facie, any problem thereby created.

    Saying there are legal problems makes these arguments sound serious and probably a little mysterious to economists or non lawyers – but without any content they are just not persusive

  143. @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.

  144. I just wish that Colm and others would start to focus on the other side of the equation – growing the economy to help reduce the Fiscal Deficit which is the biggest Elephant in the room. We all learned “sums” in Primary School and we know there is a big hole there which is growing by the minute so lets put our brains to work on how to solve it instead of the constant bickering as to who is right on the overall “sums” and what might happen in 2013/14. The only figures on debt that I believe in are Seamus Coffey’s of UCC. The rest are only trying to get the limelight.

  145. @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.

  146. @oversea commentator

    but this is long settled

    a regulatory regime change is not retroactive

    You simply say that henceforth a bank that can’t fund itself can be put into the resolution regime – then cut support for the bank in question – it cant fund itself and it therefore gets resolved

    The law is settled in this area – a legitimate expectation can’t be used to fetter the state’s discretion to change a regulatory regime

  147. 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

  148. @Mickey Hickey

    If I were looking for an outrageous example of taxpayer subsidy I would hardly identify funds given to the GAA as an example. The GAA has provided facilities in communities all over the country at a modest enough cost to the taxpayer, since most of the money was raised voluntarily, and with little personal enrichment of anyone as part of the process. Some other sporting bodies seem unable to raise funds or spend most the their funds on big salaries.

    As for depositors, whatever the legal status you can simply put the word out and depositors can just withdraw the money, the government supporting the bank while they do so and stop supporting it when there are only bond holders left.

  149. @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.

  150. @ John McHale

    “Now I do think more should have been done early on to put in place a resolution regime to increase loss-sharing options.”
    John this is not the way I remember your opinions at the time. Perhaps i am wrong and I will happily apologise if you could copy and paste a link to evidence that “more should have been done to put resolution regime to increase loss sharing options”.
    As I remember you were very much against any type of default.

  151. @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

  152. @ 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).

  153. Colm’s basic (and continually reiterated) point – Ireland cannot repay its sovereign and bank debt – seems to be the subject of a large consensus at this point.

    Either the state will default or come so close to default in the next 3 years that no one will be able to tell the difference in practice. The government must deny default can happen up to the last moment but maintain its threat as a negotiating tool with the Troika – especially the ECB.

    The argument should then be about how to best come out the other side: sharp cuts now and pretend the inevitable is inconceivable (to prove to future bailers out that Ireland has done its best and deserves some slack), or go for broke and ignore what happens afterwards, which is the position of many posters here.

    The government (current and previous) seems to be going for the first option. I hope it’s because they have considered both alternatives and not because they just hope something will turn up.

    Neither option is attractive. Both need default to be plausible. For that to be the case, the most important requirement is a primary budget surplus. I suspect that real negotiation on the bond holders will not begin until this is achieved.

  154. @ 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.

  155. @Paul Quigley

    ‘China is the Britain of the 21st century but its people will not tolerate financial repression sine die’

    Paul, this is only slightly off-thread as Ireland and Europe’s challenges are now part of a global context where a near US default ( in spite of the last-minute band-aid) is leading investors to consider some “blue chip” (sic) corporate bonds as safer havens than US Treasuries or sovereign debt in general.

    This will have at least medium term implications for Euro and dollar credibility and may even pave the way for eventual renminbi convertibility.

    I really didn’t understand your reference to “financial repression” ( of the Chinese people) so I called three former Chinese senior manager-employees yesterday in Beijing and Shanghai as well as a Thai-born Chinese in Singapore who is just about to move “home” to Shenzhen/Hong Kong.

    None of these three felt in the least financially repressed. Indeed, their major concerns were inflation, property prices and rapidly rising (worker) wages and skills shortages.

    The middle classes in China do not appear ( admittedly from a tiny sample of 3 Chinese managers) to be suffering from the two key European and US malaises, stagnant wages and unemployment.

    All three are primarily concerned with the education and skills of their kids so that they will be able to compete with the millions of Chinese “workers” who are joining the middle class every year.

    I wonder how many of our Irish ( and European) young people are fully aware of the vibrancy and competitivity of this global market for talent and skills. (And I haven’t even mentioned India!)

    And by the way, the “workers” joining the middle class are not all software engineers.

  156. @ 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.

  157. @Bond.Eoin Bond

    I agree with your sentiments. If the armchair commentators would get off the pot and concentrate on how we can grow the economy the certainty of default would recede considerably. If they are not prepared to put forward some positive thoughts then it must be time to ignore them. The easy option is to keep droning on about default. The fact is that most or all of these people never employed another person or devoloped a business which increased the wealth of this country and it’s people.

  158. @ 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/

  159. @ Paul Quigley

    Well thank you for that. “Financial Repression” in that sense would never have crossed my non-academic, non-economist mind.

    Another “learning” from this site ( and you, Paul). Cheers!

  160. @ 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.

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