Opening Statement by Governor Patrick Honohan to the Joint Committee on Finance, Public Expenditure and Reform Post author By Philip Lane Post date September 2, 2011 The opening statement is here. Categories In Uncategorized 30 Comments on Opening Statement by Governor Patrick Honohan to the Joint Committee on Finance, Public Expenditure and Reform ← Irish Energy Economics → Planes, Trains and Automobiles II 30 replies on “Opening Statement by Governor Patrick Honohan to the Joint Committee on Finance, Public Expenditure and Reform” Society ? No Comment. It is a little disappointing that so strong and quality a voice as Governor Honohan had to devote so much effort to ‘mortgage forgiveness’. That whole debate was cooked up by one or two wooly commentators. Far, far more pressing is the European financial crisis, sovereign and banking. Yet that attracts little debate here, even though it is massively in our interests that it be solved/ringfenced. Far, far more pressing is the European financial crisis, sovereign and banking. Yet that attracts little debate here, even though it is massively in our interests that it be solved/ringfenced. No-one is paying attention because that crisis is long over. Everyone knows that the euro as we know it is dying, and we’re all just waiting for the whole rotten structure to fall in on itself. This country is collectively moving itself into post-euro mode, preparing for reintroduction of a Punt, and the long overdue clean-up that will come with it. The government has lost patience with the banks and probably the ECB at this point, and as the austerity measures really begin to bite towards Christmas–getting worse in the new budget–they will do as all Irish Government’s have done and put what is politically possible over what is (supposedly) economically necessary. @desmond Eh..this is exactly what the mortgage forgiveness debate is all about. What part of the ECB insistence on Ireland Inc paying unguaranteed bond holders (mostly German) do you not get? And the fact that unguaranteed private debt now being dropped onto the Irish people, without any questioning, which is doing untold damage to confidence and of course the little matter of repaying it for which the ongoing fiscal adjustments are deemed as necessary nay ‘too slow’ we’re told today. They all form part of the same jigsaw. Our Eurozone partners have not allowed the losses to fall where they rightly belong and the effect of Govt decisions here and across the zone are the issues at play. The losses the banks should be incurring on crazy lending practices in the RoI and elswhere are just another straw to the whole disaster. So understand, mortgage debt forgiveness is effectively the sovereign debt debate at the ground level. Please remember that Prof. Honohan has voted twice this year to raise interest rates at the ECB table when all sensible folk were suggesting the ECB were out of step of the realities on the ground. Perhaps Prof. Hon would be better off focusing on what’s going on in the housing markets of Tullamore rather than the goings on in Turin. The wider eurozone debt issues will not be solved at the macro level because as has been said here before debt default begins at home. Breaking Newz The End of Freedom for another Sacred Cow … http://www.spiegel.de/fotostrecke/fotostrecke-72390.html @Yields or Bust The Irish banking crisis was indeed ring fenced by the post PCAR capital injections, the European banking crisis…well they haven’t even had proper stress tests. Also mortgage losses only make up a small proportion of our black hole. Ireland coughed up for its bank losses on a combination of moral and financial stability arguements…now we find Merkel and Sarko putting that very financial stability in peril. It is a scandal what they are (not) doing, and the ramifications go way beyond the Euro project. The hit on the sovereign toxic debt needs to be crystalised and ringfenced….I don’t care who pays so much, rather the uncertainty must be resolved. That is where the action should be, and having been the good boys, taken our medicine – we now have a powerful voice to call out Merkel and Sarko over their demented and incessant fudges. It would be helpful if obsessive maths freak would explain how the breakup on the euro , which he seems to favour, would affect existing debts denominated in euros and owed to entities outside Ireland. Would these debts not continue in euros even if we set up a new devalued currency? Would his proposal not have a disproortionately bad effect on a country, like Ireland, which is so dependent on international confidence? How does he envisage the transition to a new currency affecting ongoing business,especially in regard to ensuring cash availability in ATMs? Does he envisage the new currency being free floating or linked to anoyher currency? @Desmond I wouldn’t go that far but I agree the the Guv should be focusing on plan B with the imminent blow up in Greece and the dramatic slowdown around the world. Greek 1 yr hit 72.06% this evening. What chance do you reckon they have and what are the unintended consequences of a Greek default. It’s batten down the hatches time..again. Regretably I see Prof Honohan’s and Mr Elderfield’s call for a case by case resolution of the mortgage arrears problem to be a capitulation to the practices of the old clientelist Ireland. Lets consider two examples: One out of work legal professional , house purchased for €800,000, mortgage €500,000, now down to a single income of €40,000. House Value approx now 400,000. One ex building worker house purchased 250,000, mortgage 220,000, now down to social welfare. House vale now approx 160,000. In both cases only some interest is being paid. The existing code provides no objective criteria for resolving with these cases. It provides only a code of conduct in approaching the issue. Who will decide the resolution? Will the criteria be a value amount for each case? Will the resolution be based on the social class/profession of the mortgagee? Are we back to bank executives , bank chief executives, and boards of banks playing God in these issues? Surely we have had enough ‘Ungodly’ displays from banking executives, to know that such decisions should not be left to them, without a definitive set of criteria being applied and objectively implemented. Are we now back to ‘Light Touch Regulation’ of the banks on these critical issues? @ Joseph Ryan ‘Are we back to bank executives , bank chief executives, and boards of banks playing God in these issues?’ That’s the meaning of ‘case by case’. Bank officials are instructed to be tough with everyone except those people who might be too tough to deal with in that way. The hard luck story may get a brief hearing, but there are just going to be too many of them. Much better to be the sort of person who senior bank officials can empathise with personally. Best of all is to be someone who can make (unspecified but embarassing) dificulties if they do not receive consideration. I suspect that bankers have more skeletons than most. This is a very small country, so politicisation, with a small p, is absolutely inevitable. To the extent that no exlicit legislation is put in place, which is exactly what we refuse to do, there will be ‘Irish solutions to Irish problems’. Muddling through. Or maybe just muddling. @ Joseph Ryan seeing as you provided two examples, can you suggest what sort (if any) of debt relief/forgiveness should be given to each of them, or how you would deal with them etc? @Bond. Eoin Bond. I don’t have an immediate answer for each. But neither would I be prepared to leave the answer to the unfettered prejucies of bank executives. I have suggested elsewhere that the old historical ‘Surrender and Regrant’ policy should be applied to owner- occupier residences. “”The term ‘debt forgiveness’ is not helping. Better the old historical term ‘surrender and regrant’. Householder must concede ownership and gets to live in the house. The State ‘buys’ the house from the banks at a very large discount, say 75%, with an upper limit to exclude high-value houses. All assets must be in the pot before above is implemented except reasonable business assets needed to sustain a living.” There should be a clawback peiod of ten years to attempt avoid manipulation. I would also say that ‘debt relief’ should be confined to those whose incomes or lack of them clearly indicate that they are not and never will be able to pay the debt. There should be no question of blanket debt relief. We are all aware of high profile individuals, some with strident representative bodies, who have had business debts written off. If left to the sole control of the banks we will have a very inequitable outcomes. @Paul Quigley I share your concerns re ‘Irish solution to an Irish problem’. While I understand the concern of @Bond re the real difficulty of coming up with criteria, I feel that the worst case would be no criteria at all. To change the focus somewhat, this quote stood out for me it would be beneficial to reduce uncertainty by both deciding on and announcing, in as much detail as possible, the complete set of changes required to Government spending and taxation in order to bring the Government’s finances convincingly back onto a sound footing. There is no benefit to be gained by delay in this regard and the sooner the Government can make more detail available of the composition of the full adjustment package, the better. The planned pace of the adjustment is the minimum that is required to ensure stability and it is vitally important the targeted reduction of the deficit as a proportion of GDP is achieved on or even before schedule. That echoes the comments from Philip Lane and others about the need to bring finances convincingly onto a sound footing. If that advice is followed, the recent gains in Irish bond prices can be secured. Today’s exchequer report indicates no time should be lost. While (revised) targets are being met, we have yet to see a convincing break with 2009-2010. Much of the deficit is structural and would still need to be tackled, even if bank-related problems could be wished away. Like in several other eurozone countries, the UK and the US, there is no escaping inevitable painful adjustments, to take living standards back into line with ability to pay. Some courageous leadership would however make the medicine easier to swallow, and avoid brutal, forced and disruptive shocks, the likes of which we are beginning to see now around the West . A paper just today by Ivanova and Weber “Do Fiscal Spillovers Matter?” http://www.imf.org/external/pubs/cat/longres.aspx?sk=25213.0 indicates the quite considerable difficulties ahead, and for Ireland in particular. Nor can Germany be the white knight that many would like to imagine. As the authors show, “a reduced consolidation effort by Germany alone would have a limited impact on the European periphery”. This by the way also illustrates the value of actually putting some work into economic analysis, rather than merely blogging. . . @ Yields or Bust We do not know if the ECB voted to hike interest rates this year, let alone if Mr Honohan voted to do so (decisions might be taken by consensus instead of a formal vote). However we should know in many years down the road when the detailed minutes are published. In any case, it is not interest rate moves of plus or minus 0.25% which made much of a difference of late, either in Tullamore or Turin. @ Yields or Bust “So understand, mortgage debt forgiveness is effectively the sovereign debt debate at the ground level.” That is the bottom line you are so right there. @ Ciarán O’Hagan Regarding those .25% interest rate increases. From the Indo, http://www.independent.ie/business/personal-finance/property-mortgages/another-rate-hike-on-horizon-2671029.html “Central Bank of Ireland governor Patrick Honohan, who sits on the ECB’s governing board, recently admitted that he would vote for an increase in eurozone interest rates — even if the move had adverse implications for Ireland. “I have to wear a European hat,” he said. “It is the only area of policy where Ireland is not my priority. . . I’ll not be paying much attention to Irish economic conditions (when making decisions on interest rates).” These increases have proven to be bad not just for Ireland but for Europe and the whole Euro project. They voted to curb inflation in Germany when in fact the Euro was/is facing an existential crisis. Would it have been expecting too much of him to stand up and say this is bad for the Euro, for the ECB (shooting itself in the foot) and for the EU? I am supported in my analysis by Joseph Stiglitz, Paul Krugman and even Dr. Doom himself Nouriel Roubini. It was a daft move and now they try to save face by not reversing engines as they had to back in, May of ’08 when they made the same mistake. @Robert Browne “Would it have been expecting too much of him to stand up and say this is bad for the Euro…..” The question is did Prof Honohan get his own analysis just as wrong as the Executive Board of the ECB or is it a case of Mr Honohan saying ‘I will side with the Executive Board of the ECB, right or wrong’. As this was definitely another critical policy error, is it not incumbent on Prof Honohan to explain why both he and the ECB got it so wrong in June. @ Ciaran O’Hagan Thanks for the link. You are right in saying that difficulties lie ahead for Ireland. They are, in the main, of our own making. We are about to reap the harvest of a historical failure to rebalance the economic distortions arising from our colonial, agrarian role within the British economy. The substantial EC subsidies were not properly utilised, and the ‘strategy’ of putting our growth/export eggs into the US TNC basket was short sighted. To put the tin lid on it, we went on to swallow the Anglophone banking/property fantasy, hook line and sinker. As is illustrated in the Ivanova and Weber model, Ireland sticks out, and for the wrong reason. Fiscal consolidation in the US and UK will exert significant spillover drag on our GDP. ‘… the coordinated exit from fiscal stimulus will have limited direct effect on European peripheral countries since they are relatively closed, with the notable exception of Ireland. While the latter could benefit from external support, such support would require contributions from the major economies, including the United States and the United Kingdom—both countries where fiscal relaxation at the moment is not on the cards’ This will compound the contractionary effects of MoU mandated domestic consolidation. It is difficult to imagine a scenario in which we will get the growth which is necessary to avoid crippling debt/GDP ratios. I recall Gov Honohan said in a recent speech, ‘without growth all best are off’ or something to that effect. Ergo the upward pressure on our yields, and on the ECB, is likely to resume, with sovereign default as the terminus. Very hard to stomach mortgage decisions being made by people whose own financial existence has been propped up by an obedient populace who would also find themselves seeking mortgage forgiveness if their jobs were not being subsidized by the universal social charge , etc etc the same applies to the overpaid civil servants including commentators on this site who espouse theories but have never worked or lived in a competitive environment ,espousing a lot of rubbish either leave the euro and get paid your inflated salaries in irish pesos or cut the inflated salaries in half dole in half professional services legal accounting dentist medicine etc etc in half. Visit to doctor in sydney 15 uros ireland 50-70 etc etc ESB Northern ireland 43000 Ireland South 85000 TRY FINDING INFO ON DART RAIL DRIVERS AND TUBE DRIVERS IN LONDON I BELIEVE 80K V 35K STERLING AND IT GOES ON AND ON Seriously delusional IRELAND RIP 50years emigration and staus quo for those sitting safely in the jobs for life Keep them on life support the pensions alone are higher than the national wage. @ All Ciarán O’Hagan correctly draws attention to the only element in the opening remarks by Governor Honohan worthy of attention. Indeed, it is a curious fact that the Irish policy community is now listening to the emperor of the Irish central bank when he has no clothes when not a blind bit of notice was paid when he had some left. The attached link to the Economist’s Forum of the FT is of interest in this context. http://blogs.ft.com/economistsforum/2011/08/euro-bonds-are-not-enough-eurozone-countries-need-a-government-banker/#axzz1WscRsGD1 Of course, the proposal made cannot work for the reason pointed out by Micahel Sheehan in his comment. He gets to the nub of the matter. “You cannot avoid Germany having to face the critical question of whether it is willing to pay more interest in order to subsidize political and monetary union. Removing it one step away will not avoid the question and may simply muddle the issue and the pricing of the paper”. However, from the point of view of analysis, it seems to me that there is little one could quibble with in the piece (see embedded link), even without any detailed understanding of the underlying economics, especially in relation to the neutering of national central banks. The facts are there to support it. The analysis also coincides with analysis and views express by serious players such as De Grauwe, Gros and Winkler. The other curious fact is that the Euro Area governments are actually following many of the prescriptions set out while correcting the flaw i.e. there is acceptance – after a fashion – of collective financial responsibility. The problem is with the process and especially the mistaken idea that exercising a veto at an operational level – whether at the level of the German government or parliament – strengthens the country’s national position when, in fact, it weakens it as markets cannot wait. The focus of German political debate has now been turned to the supposed exclusive budgetary powers of national parliaments. But such an approach denies the very existence of the EU which has its own budgetary authority – the Council and the European Parliament acting jointly – which decides, by majority votes, on the annual budget of the EU on the basis of a Commission proposal. The level of Own Resources within which that budget has to operate is, of course, decided by unanimity and subject to ratification by national parliaments, but there seems to be no reason why the same logic should not apply to the EFSF and its successor, the ESM. The positive element is that it seems unlikley that the German constitutional court will finally burn its bridges next week on which judicial instance is actually responsible for interpreting EU law i.e. it will show more responsibility and respect for the institutional structure of the EU than is evident in other areas of the German establishment. It is also worth noting that France has finally moved on the Deauville deal in relation to the issue of sanctions in the context of the reformed SGP. It remains to be seen whether the European Parliament will accept the idea of a decision in the Council by simple majority. It should not. Either the French are serious about “economic government” or, more likely, they are not. @ All On the Governor’s comments on how things “might have been done better”, the idea of the EFSF becoming a part owner through direct recapitalisation of zombie banks in Ireland seems to lack any political nous. However, maybe there is another more realistic and, to quote Kohl, non-ideological, route! cf. http://www.breakingviews.com/2011/08/31/EU%20banks.aspx?sg=nytimes @DOCM Part of that article reminded me of the late Brian… “As of December 2010, the UK Treasury had collected 2.5 billion pounds by providing guarantees to its banks which have not yet been called on. If a well-structured guarantee scheme turns sentiment positive in the euro zone, it may never needed either – and could even be a money-spinner. ” something like the “cheapest bailout ever”. Cannot imagine Angela agreeing to that when even Silvio is reported today as saying he wants out of his “sh1t country” @ Ceterisparibus The UK Treasury bailout seems, for the moment at least, to be working. The Treasury is evidently both able to do its sums and to be aware of what is going on in the UK banking sector. The Irish bailout was a shot in the dark.The UK also has a true central bank, not one that imagines that it still is one. The interesting thing about the EBA approach is that as an “authority” i.e. agency, it derives its powers from the Commission, the only body to which executive functions can be delegated (apart from the special case of the ECB). But the Commissioner responsible is on record as not being entirely enamoured of the idea of guaranteeing bank bonds which the UK experience has shown can work. That is more than be said of the EA i.e. German approach hitherto. The City of London knows a thing or two about finance (unless I am misinformed). @DOCM Agree generally. Of course, the ability to print the stuff lends credibility to the guarantee and it doesn’t seem to have damaged them vis a vis other major reserve currencies. However, I still cannot see Dr. Merkel being able to extend the amount of guarantees her Cabinet agreed to this week which was, I think, in the amount of 200b. With 1.7 trillion needing to be refinanced over the next two years this won’t go far if adverse conditions persist. It appears the clouds are darkening with the chickens coming home to roost. @ Ceterisparibus The amount of the EFSF is not what is at issue but – as far as I can see – the manner in which it can finance. The 21 July agreement states that it can “finance recapitalisation of financial institutions through loans to governments including in non-programme countries”. Insistence on “loans to governments” by Germany is simply a reflection of that country’s refusal to accept that managing a single currency, shared by a collection of nation states, when it runs into difficulty means more than simply the creditor countries being willing to lend money to debtor countries. That is the core political issue that remains undecided or, rather, it is being decided by default through the actions of the ECB (which explains why the head of the Bundesbank – a Merkel appointee – is jumping up and down). By the way, what the German government has approved is the draft legislation implementing the changes to the EFSF and it is this that is going through parliament. I have yet, however, to see a final text of the amended EFSF. Illuminating to note that the ‘burn the bondholders’ sentiment has now swung around to addressing the issue of mortgage distress. I have made the point here many times over the past couple of years that default begins at home and without some focused determination to work that out practically a return to growth and competitiveness that entails significant increases in employment is a longer wise off than needs be. And while I am at it. Irish taxpayers are already signed up the debt distress programs whether through the mortgage supplement, mortgage relief or subsidized social housing. Irish taxpayers are already bailing out their less fortunate unemployed peers through the welfare system. and that’s not a bad thing provided the welfare rates don’t cut across job creation. It is a little galling to listen to a torrents of sanctimonious guff about everyone paying their way when a small legion of developers, whose debts effectively bankrupted the state, are still operating off shore. Or have shell companies registered in the British Virgin Islands (BVI) administered by lawyers in Switzerland, primed to reinvest in the Irish property market once the tax investment angle has been worked through some eurozone corporate entities. NAMA for the little people please. It is long overdue. @DOCM The following seems to lay bare the truth behind the withdrawal of the Troika team from Greece…. “Christian Lindner, general secretary of the Free Democrats, (FDP) junior coalition partners in Chancellor Angela Merkel’s center-right government, said Athens was endangering European solidarity. “The breakdown of talks between the Troika and Greece is a blow to the stability of the euro,” he said at a news conference in Berlin. Referring to Greece’s failure to meet deficit targets set in exchange for a second bailout package, Lindner said Athens was shirking responsibilities to which it had agreed. “This is not about non-binding statements of intent, but contractually secured reciprocity for the emergency loans,” he said. “We insist these agreements are observed.” @DOCM Thanks for your as usual very well informed and gently expressed input, but, wth respect, this bit flies in the face of history. ‘The City of London knows a thing or two about finance (unless I am misinformed)’. The rest of the world knows a thing or two about the City of London. It served Britain’s imperial interests well over the centuries, with scant regard for the welfare of the those who produced the wealth they carved up. Recent conduct is not edifying either. The London based Eurodollar market was set up to enable financial institutions to evade US regulatory control, and the British government was sold the financial liberalisation agenda. That opened to door asset inflation, dodgy accounting and bankers bonuses, leaving a pile of debt for the taxpayer to sort out. @Ciaran O’Hagan ‘…In any case, it is not interest rate moves of plus or minus 0.25% which made much of a difference of late, either in Tullamore or Turin.’ All terribly easy to assume that to be the case but I’d point you to the recent Credit Unions of Ireland survey which suggested that the ‘left over cash’ in a significant number of Irish households at the end of March 2011 was c€70 per month and the number of households in this situation had increased by an additional 2% by July when the next survey was conducted. So I’d rather that a statement such as yours above be made with these sort of metrics in mind and ask yourself again if one 0.25% rate increases let alone two, matter or not. Maybe not if your sitting in Paris but sitting with no job in Portumna in serious negative equity rate increases as voted for by Prof. Honohan hurt real bad. Can somebody explain why AIB would redeem NOW – Asset Backed Floating Rate Notes of €2,345,700 ………… which were not due until August 2050 ….. http://www.reuters.com/article/2011/02/21/idUS145897+21-Feb-2011+RNS20110221 Redeeming something now that need not be redeemed until 2050 appears to make no sense. What’s going on here? Also, I believe these are mostly residential mortgages and AIB has used €2.3 billion of taxpayers money to redeem this debt. So, AIB issued €2.3 billion in residential mortgages. Then it sold those mortgages to international investors for about €2+ billions, booked a healthy profit and lots of exorbitant fees. Then it used €2+ billions of taxpayers money to redeem that debt, presumably making another set of exorbitant fees. In the meantime, the residential householders who are servicing this debt have not, as far as I know, benefited to any degree from all these transactions. In spite of the fact that none of these transactions could have taken place without the residential mortgage holder having agreed to service the debt in the first place. Should the residential mortgage holder have been informed that his debt was being used in this way? Is he entitled to some portion of the profits which were made on the back of his debt? Better still, seeing as the mortgage debt has been redeemed with Irish taxpayers money should all the residential mortgages in the €2.3 billion package be cancelled? There you go Morgan Kelly, maybe debt forgiveness has already happened it’s just that nobody has informed the mortgage holders yet. If you want to see how the juicy fees were ‘extracted’ go to page 10 – Transaction Structure Diagram ……… http://www.ise.ie/debt_documents/Final%20Prospectus_Clogher_amended_10945.PDF Any information on what all this means will be greatly appreciated. In response to Eoin Bond and JR, I think both homeowners should have the option to convert part of their mortgage to a property appreciation right (PAR). In the first example, assuming the homeowner can service say a 300,000 mortgage, he would be allowed to reduce his mortgage to that level. The 200,000 that is ‘forgiven’ is converted into a PAR of the same value – effectively a call on the future equity in the house. The above solution would be greatly enhanced if the bank could sell the PAR now but the only realistic buyer is the State. Since it is the source of the recapitalisation of the banks, it has a vested interest in being part of a scheme that is fair, transparent and workable. It did something similar for the cost of nursing home care so there is a precedent of sorts. Comments are closed.