Burning Bondholders and taking one for the team

This post was written by Stephen Kinsella

Before he became über-famous for his history of finance, The Ascent of Money, Niall Ferguson made his name in academia writing ‘counterfactual histories‘. Counterfactual histories are essentially ‘what ifs’, changing the outcome of one or two pivotal events, and taking history for a ride to see where subsequent events take you. A great example is what would have happened if Arch Duke Ferdinand hadn’t taken a bullet to the neck in June 1914 from Gavrilo Princip. Would World War 2 have started? Another cool example is the effect on bridge engineering if ‘Galloping Gertie’ hadn’t collapsed in 1940. Counterfactuals are useful because they allow us to explore the ramifications of what might have happened in the light of what actually happened.

Every citizen in the State has probably sat down at some point asked themselves what might have happened if the late Brian Lenihan hadn’t handed out the blanket guarantee in September 2008 that put the taxpayer on the line for the banks’ many failures. Everyone wonders what would have happened if the Regulator had done his job properly during the years of the construction bubble. And everyone on this blog, I’m sure, has wondered what the outcome would have been if we had burned some of the senior bondholders in bust banks like Anglo long before now.

Official wisdom, as handed down from the ECB as recently as yesterday, holds that confidence in the banking system is more important than individual banks’ liabilities. So the taxpayer must be put on the hook for those liabilities in extremis. Serious people the length and breadth of the country queued up to endorse this policy. If you didn’t–especially if you were an economist–you were being irresponsible and extremist.

The official position has changed slightly. Now it’s just not worth it. We’d lose the ‘confidence’ of the markets for a mere 100 million euros if we burned the remained 3 billion of unguaranteed seniors. I’m not the only one perplexed at how this number is reached.

Today’s Sindo column by Colm McCarthy puts nails in the coffins of the serious people and their preferred policy. The counterfactual element comes through in this piece quite strongly. Colm argues, clearly and simply, that paying off bondholders of bad debt warehouses when the country is bust and within an EU/IMF loan facility is bonkers, and that there is a different way. Read the whole thing, but here’s a key part:

It is unprecedented for bondholders in defunct banks to be paid by a country already in an IMF programme and unable to re-finance its own sovereign debt in the market.

It is an extra irritation to have to endure lectures from EU and ECB officials about their generosity to Ireland, as if the lucky beneficiaries were the Irish public.

The Irish Times interviewed departing ECB executive council member Juergen Stark and reported on Monday last: “He is dismissive of a renewed Government push to avoid repaying about €3.8bn of the senior debt in Anglo Irish Bank and Irish Nationwide Building Society. The ECB remains opposed to such an initiative and Stark says Ireland is ‘not autonomous to take this decision’. The question is a ‘non-issue’ for the bank.”

The phrasing is interesting. Ireland is “. . . not autonomous to take this decision”. The government of an EU member state, accountable to its electorate, is not free, according to Stark, to decide whether or not creditors in utterly insolvent and defunct banks, no longer trading and in wind-down, should be paid by a Government which has not guaranteed these debts. The funds to pay these bondholders are being provided by the IMF and EU, since the country cannot borrow elsewhere. Each payment adds to a debt mountain already so large as to threaten the ability to service the State’s own sovereign debt.

This column would have been heresy, even one year ago. Now let’s hope it contributes to a change in official policy with respect to the bondholders in Anglo, and perhaps in other banks. Colm closes his piece well, it’s worth quoting:

It is bad enough to have to “take one for the team” without acknowledgement. It is much worse to see the team lose the game so ingloriously.

150 Responses to “Burning Bondholders and taking one for the team”

  1. Sarah Carey Says:

    It’s a great article and from an important voice - as Stephen says “serious people”.

    If Colm is reading:

    1. Is it feasible for Noonan to call the ECB’s bluff? What if we just said no? Surely the ECB couldn’t pull the liquidity?

    2. Also - will Draghi’s arrival change the policy?

  2. Brian Woods II Says:

    I’ll try a “what if?”. Imagine on that fateful night Seanie had said to Lenny, “look this bank is a black hole to the tune of 30bn”. Imagine further that Lenny announced the next day to the world that Anglo was a 30bn hole and we were walking away from it. Do you really think we would have lived happily ever after? Not at all, there would have been the immediate collapse of Ireland’s banking and economic system and very serious ramifications beyond.

    So, I argue, once we arrived at September ‘08 we really had little choice but to do what we did, there were no silver bullets, we did not miss any tricks.

  3. Enraged Says:

    It was heresy. Now it’s accepted wisdom. McCarthy is welcome to the rest of the wider commentatoriate, who for YEARS have been arguing this. Why has he changed his mind now.

  4. Stephen Kinsella Says:

    @BW11,

    What about in 2009 when the guarantee was renewed Brian? I can accept that in 2008 things were unclear and that it made sense to guarantee everything given the information they had. But 11 months later we had the bill of the dinner, and we could have changed tack then, no?

  5. Brian Woods II Says:

    @ Stephen

    I am not suggesting that everything we have done since Sept 08 has been optimal.

    But we now know that there is a much bigger picture. We were not autonomous. I don’t think we have missed any silver bullets. Maybe a more deft footwork might have saved us a couple of billion. Maybe we should have let INBS go and then compensated the depositors. I don’t believe that we could have avoided in any material way the horror that is Anglo.

    The scope for “what iffery” is very great indeed in this whole debacle.

  6. Stephen Kinsella Says:

    @BW11,

    I declare the phrase of the day to be “whatiffery”. :)

  7. Georg Baumann Says:

    Draghi will not change this policy of Hell freezes over, but regardless, what the Heck do you find so astonishing ? There is nothing really new in it at all, nothing really, it is just the reality of a handful of elite politicians enforcing policies that are unjust, immoral, and reflective of vested interest groups that steer behind the scenes.

    The politically ‘thorny’ solutions are to be found in Ireland, not in Brussels or Luxembourg. Again, the way to really change it, is to put these questions to the people and hold a emergency referendum on the matters, then take this referendum to the unelected forces in ECB and confront them with the facts, this could have happened long ago. The investigation into banking matters in Ireland is another example, it has been turned into a farce beyond belief.

    The green jersey is being pulled instead and a presidential election campaign put to the people, hardly a significant issue these days.

    Divergences in economic performance and fiscal management within Europe are unresolved issues and the virtual knife in the back of captured EU Institutions, yes, captured Institutions!

  8. Philip ii Says:

    Let’s recall the words of governor honohan on flinging sway money like crazy
    http://www.irisheconomy.ie/index.php/2009/05/29/anglo-irish-bank-dealing-with-risk-investors/

  9. Jagdip Singh Says:

    Perhaps it’s just cynicism but yesterday was the first time I heard that burden-sharing might result in a benefit worth a relatively measly €100m.

    And accompanied by the introduction of what is arguably a distraction in the Anglo promissory notes.

    This from the same minister who told the Dail on 7th June 2011 that a change to interest rates on the bailout might be worth a maximum of €148m pa (compared to the €1.2bn pa currently being talked about)

    This from a Government that magicked up a “mortgage expert group” overnight in August as a knee-jerk reaction to Morgan Kelly’s debt forgiveness comments.

    Min Noonan attracts much sympathy from informed observers of our economic policy, and the view is that he has a weak hand with few options and practically no option that can be pursued without consent from the ECB.

    If France can by itself demand changes to our Corporate Tax rate in exchange for changes to our bailout, and not incur widespread diplomatic disapproval then by comparison, we appear to be amateurs. Light-weight amateurs.

  10. Jagdip Singh Says:

    @Stephen

    “A great example is what would have happened if Arch Duke Ferdinand hadn’t taken a bullet to the neck in June 1914 from Gavrilo Princip. Would World War 2 have started?”

    Maybe you can draw a line between WW1, defeat of Germany, Versailles treaty, reparations and humiliation, rise of German fascism and cult of Hitler, WW2 - but did you mean WW2 or WW1.

  11. Stephen Kinsella Says:

    @Jag, there’s a great piece in this book by Ferguson on WW 2, not 1, and the role the assassination played. Worth a read. http://www.amazon.com/Virtual-History-Counterfactuals-Niall-Ferguson/dp/0465023231

  12. Stephen Kinsella Says:

    Sorry, I did mean 2, not 1, in the piece.

  13. Ceterisparibus Says:

    As Jagdip says light weight amateurs and I would add, who cannot count.
    With 3 billion of senior unsecured bonds for repayment how in gods name do you arrive at (only) a 100 million saving.
    The paper in question is trading at 80-85% of face value.
    Noonan should be asked to explain. Fair play to CMcK for highlighting this nonsense.

  14. Philip ii Says:

    Look. The green jersey wearers will be out in force here. I’m going to find a pub or restaurant that’s showing the GAA. But csn the ecb really cut us off? No. Will they? No. Should they? No. Doing so would force us out of tre euro, and they would have to stand over the breakup being caused not by Greece and it’s sovereign default but by Ireland acting prudently. Maybe in reality the ecb is a monetary suicide cult but I doubt it.

  15. Georg Baumann Says:

    I don’t think the ECB is s suicide cult, although a tempting thought, however, it is the mirror that displays the death of parliamentary democracy in Europe, and in essence, in most EU member states.

  16. remnant Says:

    Great article.

    Sadly Colm argued for waving the white flag when we actually had some leverage back in November/December - at a critical moment, when the nation was in shock from our “rescue”, there was a minority government - and when Irish economists could have been a powerful voice in derailing this.

    http://www.irisheconomy.ie/index.php/2010/12/05/no-cards/

    In terms of counter-factuals, the best might be Munich 1938. What if the Czechs had fought?

  17. Ceterisparibus Says:

    @George
    You raise an interesting question. Is the action of the government legal?
    “The phrasing is interesting. Ireland is “. . . not autonomous to take this decision”. The government of an EU member state, accountable to its electorate, is not free, according to Stark, to decide whether or not creditors in utterly insolvent and defunct banks, no longer trading and in wind-down, should be paid by a Government which has not guaranteed these debts”
    On the face of it, it would appear that the government in taking instructions from the ECB (as confirmed by Stark) is not acting constitutionally.
    Do we have a bright (and brave) legal eagle to challenge this?

  18. Bklyn_rntr Says:

    My oh my!

    Talk about useless pontificating ….. Change your mind now, when any real chance of directing events has been squandered. The 2008 guarantee was tragic and, while it may be understandable given the hectic pace of events, the 2009 renewal of said guarantee, without as much as a real debate, was inexcusable. Now we own it and anything we say/ do that acts to protect the taxpayer is tantamount to default, or threat of default.

    When the guarantee was provided, the line was unavoidable, and just imagine what will happen if we don’t guarantee. Then it was, well it’s not possible to default because bondholders hold equal seniority with respect to depositors, so default and the depositors have to get hammered too, then it morphed into, oh well it wouldn’t save much anyway.

    It’s called being played. The banks in Ireland and in the EU needed to pass their crap onto someone else and we were elected as clueless victim. We played out part well.

    On the positive side, it appears that Angela is refusing to go gently into that good night. We may see some fireworks yet and when we do, we may get an opportunity to actually act responsibly

  19. Brian Woods II Says:

    @ Ceteris

    Marion Finucane, quoting Colm, also reiterates her total amazement and anger at this bailing out of “insolvent, defunct etc.” banks.

    Let me give a reminder of what actually happened. Using emergency legislation the depositors were evacuated from the sinking Anglo ship. Bondholders were constitutionally equal to depositors and this was a very major factor in their lending to Anglo at very modest interest rates.

    To now burn these bondholders is a breach of faith by the Irish system. We were never going to con the ECB with this ruse even though it seems to have conned Colm, Marion, yourself and others.

  20. Paul Hunt Says:

    If Ireland has ‘taken one for the team’, it’s because the ECB has been forced to select ‘volunteers’ in the absence of the courage of senior EU politicians to explain to their voters the real implications of the mess they (and their predecessors) have made of the design of the Euro, of bank supervision and financial regulation and the parlous state of many of their banks - and how much it will cost to put them on a sound footing.

    Ireland is paying a double price: it is paying a disproportionate price for this political cowardice and it is paying a price for the glorious political, policy and regulatory stupidity that made it the first and logical ‘volunteer’ selected by the ECB ‘to take one for the team’.

    It is an excessive price, but the causes are political cowardice and stupidity. It is quite remarkable that a majority of Irish people seem to think that changing the personnel at the cabinet table (and their special advisers) is a sufficient response to the political, policy and regulatory stupidity. It is also convenient, but probably perfectly understandable, that blaming an allegedly out-of-control external institition and unresponsive foreign politicians provides a good excuse for failing to tackle the profound internal political and structural reforms required.

  21. Philip II Says:

    Brian woods 11
    “Bondholders were constitutionally equal to depositors”
    They are in their hoop…
    Where oh where does it say that?

  22. Rob S Says:

    Essentially, the argument for bondholder burden-sharing is being extended in focus, from the 3.6bn of unsecured unguaranteed in Anglo/INBS to the remaining 27bn of promissory notes we still owe?

  23. Rob S Says:

    Essentially, the argument for bondholder burden-sharing is being extended in focus, from the 3.6bn of unsecured unguaranteed in Anglo/INBS to the remaining 27bn of promissory notes we still owe?

    I have to say I never thought that the current market value of the Anglo Bonds would be paramount in deciding any discount we decided to impose - a 15% haircut seems silly.

  24. Eureka Says:

    This article is at least a year too late.
    Stark’s truth is exactly that … we are a protectorate. Let’s just accept that!

  25. Ceterisparibus Says:

    @Brian Woods 11
    it may be that bondholders are/were legally protected but the situation is different now. It could be argued that the effect of the emergency legislation was to remove that protection..which in effect is what it did by transferring the deposits. This applies to the Anglo/INBS situation only. The really aggravating factor is the claim by Noonan that it would only save 100m…out of 3,000,000,000. Maybe he got the decimal point wrong.

  26. The Dork of Cork Says:

    Stark is right , the goverment is not a autonomous state - it is not a currency issuer and also appears not to want to break from the vice , the former Taoiseach’s capitulation to the local CB overlord was the official ending of any executive control which was very limited even then.
    No Guts no Glory as they say.
    This whining from official Ireland is getting tiresome now - we have accepted our place in the new European feudal structure , and unfortunetly due to our stupidity , cowardice and short term avarice over the decades it seems to be at or near the bottom.
    Such is life until we get men of action rather then words…….it will be a cold day in hell I imagine.
    Stark is merely recognizing the obvious - we are to be scorned.

  27. Brian Woods II Says:

    @ Ceteris

    Noonan is really squirming. What he said was that a voluntary exercise would only yield €100M. Surprises me that people would even volunteer that.

  28. Kevin Donoghue Says:

    Sarah Carey asks Colm McCarthy: “Is it feasible for Noonan to call the ECB’s bluff?”

    If Colm is reading perhaps he’ll answer that, but in the past he has always insisted that unilateral action would be lunacy. Unfortunately, it seems that either we act unilaterally or no action will be taken. Somebody has to be the first to get up and dance. It won’t be Angela and Silvio, that’s for sure.

    To my mind there’s no point in denying that the ECB has us by the shorts. But that shouldn’t stop us from kicking up a fuss. It is a serious injustice and it ought not to be accepted quietly.

    The root of all this trouble, not just in Ireland but in the world at large, is a parasitical financial sector which has grown so powerful that it can bend governments to its will. Removing that tapeworm from the economy will take decades, but now is the time to start.

  29. Mickey Hickey Says:

    Bond holders were ranked equeal to depositors, therein lies the problem. In normal countries depositors are backed by deposit insurance arrangements. These are usually mandated by gov’t and take the form of an arms length entity funded by a levy on deposits (1/8%, 1/4% dictated by actual loan losses and subsequent payouts). Banks usually advertise the types of deposits covered and have turned it into an advantage that distinguishes them from the non regulated institutions ( mutual funds, unit trusts, ETFs and so on). As stated here and elsewhere, regulation out to lunch for decades, incompetence plain for all to see amongst politicians and Civil Service mandarins.

    What have we got now? A gov’t that has demonstrated beyond a shadow of doubt that it is incapable of taking steps to rein in the deficit. The mountain of debt continues to grow as Ministers make pilgrimages to Frankfurt, Brussels, and New York pleading for lower interest rates. Its a replay of Knock, Lourdes, Fatima where at least there was the hope of divine intervention. The new saviours are now NAMA, and the torrent of acronyms emanating from Frankfurt, Brussels and Berlin with our Gov’t mesmerised into inaction.

    As the public become even more disgusted and lose respect for gov’t they will let the politicians know in plain unvarnished terms that the game is up and the same old, same old, is not good enough.

  30. Philip II Says:

    Brian woods 11
    Any luck finding that constitutional provison in the actual constitution ?
    Iv had a read of http://www.taoiseach.gov.ie/upload/static/256.htm but it doesn’t seem to be in there. You wouldn’t be mistaken would you?

  31. Kevin Donoghue Says:

    Don’t you know that bond prospectuses have the force of consitutional law, Philip?

  32. Philip II Says:

    Kevin
    Yes, silly me. I for one etc etc

  33. anonym Says:

    It is an extra irritation to have to endure lectures from EU and ECB officials about their generosity to Ireland, as if the lucky beneficiaries were the Irish public.

    [...]

    It is bad enough to have to “take one for the team” without acknowledgement.

    Oh, quite.

  34. Brian Woods II Says:

    @ Philip II

    Dictionary definition of “constitutional”

    noun
    1. the way in which a thing is composed or made up; makeup; composition.

    I apologise for forcing you to read the Bunreacht but I was using the word in its more generic sense rather than its narrow DeValerian context.

  35. Sarah Carey Says:

    Oh God - spare me the pari passu debate again.

    It’s a red herring. It always was.

    WTF are the lawyers?

  36. Paul Hunt Says:

    I’m pretty sure the ferocity of Colm’s attack on the ECB and on the cowardly politicians behind it whose discomfort it is sparing is not intended to deflect attention from the domestic fiscal adjustments and structural reforms required. Indeed, Colm is often equally ferocious on these. But the effect, unintentionally, is to provide comfort to the FODAR and their acolytes by allowing them to point the finger at someone else and to evade the scrutiny they deserve and require.

    The traded and more exposed sectors have responded promptly by effecting almost one half of the internal devaluation required; the sheltered public, semi-state and private sectors have evaded their responsibility to complete the task. This is in the realm of public policy and executive action. Why not just get on with it? And what about about a bit of ferocity in making the case?

    The top two layers of the ‘official government’ - Ministers and their advisers - have been replaced, but this is not enough. The top two layers of the government machine behind it and of the quangocracy should be required to re-apply for their jobs. I’m sure there are plenty recently retired senior public servants from better governed countries who would be happy to assist in the interview processes. The benefits would far outweigh any costs incurred. A bit of ferocity here might be beneficial.

    And people need to wake up to the fact that the excessive executive dominance of the government (and of the government machine behind it) is both unhealthy and dangerous.

  37. Bklyn_rntr Says:

    No red herring at all, it was a key part of the plan to force all liabilities onto government….

  38. Ceterisparibus Says:

    @Phillip
    Have a look at the exigencies of the common good…A40.3.2 and A 43

  39. DOCM Says:

    @ All

    It seems to me that the problem with the debate in Ireland all along has been the failure to see the issue from the opponent’s point of view. The recent speech by LBS explains the issue as viewed by the ECB.

    http://www.ecb.int/press/key/date/2011/html/sp110915.en.html

    Ireland is just simply an unfortunate victim of a much wider battle which the ECB is in the process of winning with regard to the desirability of private sector involvement (PSI) in any circumstances at present, given the fragility of the banking system.

    If further evidence is needed, it can be found in the decision by the Commission not to table its “bail-in” proposals” at this present delicate juncture. Geithner has read the riot act to the ministers of the EZ17, it being notable that on the Austrian minister, who is clearly on the wrong side of the fence as far as the ECB is concerned, was alone in giving “colour” on what had transpired. The real story was, however, the action by the central banks with regard to dollar liquidity. Le Figaro is reporting today that the recalcitrant ministers have finally agreed that recapitalisation of the banks is necessary, as opposed to simply making provision in the amendments to the EFSF for such an eventuality. The final deal on the “six-pack” of proposals on the Growth and Stability Pact in a manner which Trichet has found acceptable. In short, both Merkel and Sarkozy have been pushed off the position that they agreed in Deauville.

    The delay with regard to paying the next tranche for Greece evidently is linked to the timing of the Berlin land election in addition to the need for the Greeks to finally get serious, start cutting expenditure and, most importantly, paying their taxes. Papandreou is on the case.

    The most relevant extract from the LBS speech is the following.

    “The second reason that may explain the assessment of excessive credit risk of the euro area countries is the own goal that European countries scored when they embraced the concept of private sector involvement in October 2010. I won’t go into detail, but in essence European countries have sought to deviate from the practice followed so far and, inspired by some academics and commentators, have tried to define an arrangement according to which a country must renegotiate with its creditors the conditions under which public debt securities were issued. This is another case in which the theory can deviate greatly from the practice and – especially in a context of general instability on the markets – intensify the crisis. The fact is that since last autumn euro area countries have been paying a specific risk premium which effectively penalises them.

    Charts 1 and 2 seem to suggest that the concept of private sector involvement has introduced a sovereign risk premium specific to the euro area. On 21 July this year, the heads of state and government recognised that the case of Greece is special and that the modalities to resolve the crisis will not be repeated. The fact the markets do not seem to believe it should induce the euro area authorities to be more convincing about such a statement”.

    Turkeys do not vote for Christmas. Charts 1 and 2 in the LBS presentation might suitably be called the “gobble-gobble” charts demonstrating what happens if an attempt is made to make them do so.

    “Whatiffery” has its disadvantages if it dominates the domestic debate. It serves no useful purpose in dealing with an ongoing situation - not a historic one - and, what is much worse, leaves politicians exposed and gives less time to them to consider “whatnextery”.

  40. Simpleton Says:

    Why do we show these idiots such deference? Their monetary policies have, again, been shown to be the work of lunatics - tightening in the teeth of financial crisis and imminent recession.
    More importantly they persist in pretending that Greece is solvent and more fiscal tightening will do the trick. default, they say, will be avoided when we all know it is 100% certain.
    These are the policies that we are expecting to be part of, to endorse and to fall in line with. Which bit of them do we think is working?
    If by what they do and what they say they reveal themselves to be idiot savants, why do we pretend that what they ask us to do could possibly make any sense?

  41. DOCM Says:

    The words “has been agreed” are missing in the sentence dealing with the SGP.

    In the context of “whatnextery”, the comment by LBS - ” On 21 July this year, the heads of state and government recognised that the case of Greece is special and that the modalities to resolve the crisis will not be repeated. The fact the markets do not seem to believe it should induce the euro area authorities to be more convincing about such a statement” - has clearly a particular implication in terms of the ESM text signed off on by finance ministers. However, “sufficient unto the day are the labours thereof”. One misstep at a time, as Merkel might say.

  42. Ceterisparibus Says:

    @DOCM
    I had read that LBS article which you had kindly posted and accept in principle his argument. But surely you would agree that the Anglo/INBS situation is different. These are defunct organizations that are no longer banks and therefore should pose no systemic risk to the European banking system. If the bondholders were unilaterally subjected to a cut of x% at the direction of the Minister then it would be up to them to challenge this in our courts. I would give them two chances of succeeding.

  43. Brian Woods II Says:

    @ Sarah Carey

    Oh God - spare me the pari passu debate again.

    It is not irrelevant in this context. We have Noonan, McCarthy, Finucane et al pointing out this pathetic, defunct, insolvent (actually it is not, see below), rump of a bank with no depositors exposed. Why are we paying the unguaranteed bondholders? Two things very seriously wrong with this argument:
    1) It only got to be depositor free by an emergency ruse overturning the legal basis upon which bondholders lent to this bank. The ECB and even the IMF clearly do not see that we have in substance broken the pari passu link with depositors.

    2) Anglo is not actually insolvent. I know we have the emergency legislation which in theory allows the minister to do whatever he wants, but surely the arbitrary decision not to pay creditors even though the bank is solvent would be a gross abuse of these powers. I always saw these powers as being applicable if Anglo were to get even worse and were to lurch back into insolvency. I really can’t understand why Colm, so sensible on things like fiscal rectitiude and debt forgiveness, is arguing that a solvent institution of the State should default on its creditors.

  44. anonym Says:

    Anglo has, for all practical purposes, been closed down by the Government. The bank does not lend, does not accept deposits and is now devoted to collecting whatever it can from those borrowers still on its books. It will be gone altogether as soon as this task is accomplished.

    Again, this is not really relevant. In terms of the systemic-risk argument for bailing out senior bank bondholders with public money, the only thing that matters is whether the institution was a bank at the time the senior debt was incurred. It would mostly defeat the purpose if potential bondholders had to guess whether a bank offering a bond would lose its banking license before the bond matures. There’s no reason that any adherent of the systemic-risk argument would find it more acceptable to burn Anglo seniors than those of other banks.

    Of course, in an Irish context this serves to set up the distinction between bad old Anglo and our new friends the Pillar Banks, whose unguaranteed unsecured senior bondholders will be bailed out in full by the Irish state (though Colm McCarthy doesn’t use the actual phrase himself, instead quoting the IMF). After years of half-omerta about the state’s (actual) banking policy, the push to get us to love the Pillar Banks has all the desperation of a divorced person trying to sell the kids on their new boy- or girlfriend. Except that the new flame happens to be exactly the same drunk and abusive spouse as before.

  45. Frank Galton Says:

    How late it was, how late.

    We should thank heaven for small mercies. If yesterday’s rugby had happened in the Celtic Tiger era, the camera shots of the VIP section would have shown ministers, senior civil servants, bankers, and trade union officials all clutching bottles of the Widow Cliquot as they cheer for the folks back home paying for it all.

    As for the matter at hand, as a commenter said on a thread a while ago, it was Croke Park for Bondholders. The trough did smaller but there are still sharp elbows at the front of it.

    I suspect that at this point the govt strategy is to stay in the good books and hope that we get some classic Greek catharsis sooner rather than later. Alternatively, there may be a few more rogue traders among our creditor banks whose losses we have to cover.

  46. Joseph Ryan Says:

    My answer to all this is to wait until the EZ collapses. Then deduct the full cost of the banking bailout (€63 billion plus interest) from the amount due to an already discredited and soon to be dead ECB.

    At present Ireland is a beaten docket as far the bondholders are concerned. Ireland’s feathers have been well and truly plucked and not even a hiss.

    As a small token of protest, we could insist that the funds must be collected personally by appointment at the Caherciveen Post Office, if for no other eason that to see who turns up to collect.

  47. Philip II Says:

    Anglo is not insolvent is it? Wow, when does bobby come out of the shower

  48. Ceterisparibus Says:

    @Brian Woods 11/Anonym
    Firstly, Anglo is a theoretically solvent former bank and now a debt collection agency and secondly,the fact that it was a functioning bank when the bonds were issued is irrelevant. Things change, sh1t happens and legislation gets passed to deal with consequences. There is simply no merit in the ECB argument that burning bondholders in a former bank poses a systemic risk to Europe and it’s banks.

  49. Georg Baumann Says:

    @CP,

    the bewigged class in Ireland has other priorities than to challenge the dyssocial policies of enforced by a European Peoples Party consensus.

    The question of legality of governments action does not concern me anymore, the law and constitution has proven to be dyfunctional to protect the people of this Nation from harm caused predominantly by foreign and private interests.

  50. Georg Baumann Says:

    ….than to challenge the dyssocial policies of an unelected and unaccountable ECB, enforced by a European Peoples Party consensus…. I mean to say.

  51. DOCM Says:

    @ Ceterisparibus

    In fact, I do not accept that Anglo/INBS are different (for the reasons outlined by Brian Woods II and Anonym).

    What I do regret is that the Merkel/Schaeuble drive to make the wicked bankers pay - in a mistaken attempt to curry favour with German voters - ran out of steam before it could be applied to Ireland. As a blogger pointed out recently on another thread, the German view of Ireland is coloured by the lite-touch regulation saga and they have no sympathy whatsoever for the Irish situation. Their attitude to Greece (outside the pages of Bild) is much more nuanced. They know it was a mistake to allow Greece to join in the first place and they also know that their banks financed irresponsible purchases by Greece of German exports of various kinds from submarines, that the Greeks neither needed nor could afford, to various other schemes (with a more thann a whiff of unacceptable practices involved).

    If there is to be talk of taking a hit for the team, it would be best to first recognise the nature of the game being played. The failure to do so is the biggest lacuna in the Irish domestic policy debate but it seems to me to being well on the way to being filled. Noonan, for example, rightly dismissed the comments of Stark.

  52. hoganmahew Says:

    @Jagdip
    “Maybe you can draw a line between WW1, defeat of Germany, Versailles treaty, reparations and humiliation, rise of German fascism and cult of Hitler, WW2 - but did you mean WW2 or WW1.”
    Well, the Fritz Fischer school of German history does exactly that - the end of WWI was unfinished business, Versailles and Nazism notwithstanding. The argument is that there was a pervasive intent to expand Germany by military means that began with Bismarch and persisted through WWII.
    http://en.wikipedia.org/wiki/Fritz_Fischer

    (Nice to get some use out of A-level history…).

  53. Desmond Brennan Says:

    There are certain covenants which are tenets of financial stability. A well known one is that sovereigns are expected not to default.

    Even more important is that banks should always pay their depositors/senior bondholders. That money is NEVER meant to be at risk, equity capital, and subordinated bonds are meant to be the risk bulwark.

    Breaking the principle of deposits/senior debt not being at risk, would be a serious threat to financial stability. Ireland had hundreds of highly paid civil servants in the then Financial Regulator tasked with ensuring the bank’s risk bulwark was adequate.

    Also, when the tide went out…who won and lost ? Well the property developers appear to have rolled everyting over, double or quits, and are bankrupt. The main beneficiary from the fake property bubble was the people of Ireland. Massive windfall taxes (fake money) fuelled huge increases in expenditure…social welfare, public pay and capital expenditure.

    It would be morally wrong, and practically very unwise to default on bank deposits/senior bondholders.

  54. hoganmahew Says:

    By the way, I take “Ireland is not autonomous” to mean that this is not just an internal Irish affair. That is not to say that it is not within our means to act, just that there will be external repercussions. I think, though, Herr Stark might want to reflect on the troubled history of countries which concentrate on either the Primaat der Innenpolitik or der Aussenpolitik to the diminution of the other. Ireland at the moment, is playing the game for the Aussenpolitik, while Greece is riven with Innenpolitik.

    The shift to the right that Morgan Kelly talks about is, I believe, a shift towards a navel-gazing Innenpolitik - a retreat from the international to the domestic. This is a risk for Europe - Ireland is not Greece… so far…

  55. Philip II Says:

    “Ireland had hundreds of highly paid civil servants in the then Financial Regulator”
    Errr..no, it didnt

  56. Jagdip Singh Says:

    @Yogan,

    Surprised some commenters here haven’t suggested WW1 has led to events in September 2011!

    If Germany has the “pervasive intent to expand” then we seem to have the pervasive intent to contract - why else would our population have stayed flat over 200 years and why don’t our leaders react to the suggestion we repay bonds at Anglo/INBS with the same faux surprise that Messrs Trichet/Staerke do at the ECB.

    Maybe Min Noonan should take a wander down Smithfield on horse market day and observe some lad from Rathkeale reacting to an asking price of €1,000 for an average cob. Instead it is Jean Claude Trichet who reacts with the wile of an experienced horse trader, expresses surprise that the bondholder issue is still an issue and responds with a John McEnroe “you can not be serious (man)”

    Anyway they’re back on the pitch..

  57. Brian Woods II Says:

    @ Desmond Brennan

    + 1, unfortunately that makes a total of 2.

    @ Philip II

    Anglo is not insolvent is it?

    Philip, are you sure this blog isn’t above your head? Anglo’s half year results show assets of €54.1Bn and liabilities of €50.7Bn giving net shareholder funds of €3.4Bn.

    I really can’t see how any responsible commentator should be advocating that a solvent institution in the custodianship of the State should in a cavalier fashion refuse to pay some of its creditors.

    At risk of offending Sarah, forget about depositors but senior bondholders most definitely are pari passu creditors of this institutioin irrespective of their access to a third party State guarantee.

    To use the emergency legislation to enable a solvent institution to discriminate between pari passu bondholders and still remain a going concern would totally shoot any credibility in the Irish legal framework. And that is exactly what the IMF were indicating when “staff” warned about acting legally.

  58. Eureka Says:

    Being a protectorate is a twighlight state between pure independence and pure subjugation. The correct strategy is to go along with the general plans and not cause too much trouble. There’s no point. We just have to wait it out.

  59. Frank Galton Says:

    @ BW an dara

    Was Anglo solvent immediately prior to the point at which it was nationalised?

  60. Philip ii Says:

    Bran woods 11
    Thanks for your condesention. I will treasure it . Tell me, if Anglo is solvent why on earth are taxpayers on the hook?
    What’s the asset mix? Can they, on liquidation at 0900 tomorrow, pay all?

  61. Philip ii Says:

    Grr…
    By your “logic” we can shut Anglo and recoup billions… Why then Don’t we/they/you? I kean, it’s solvent?
    Frankly, some one has been on the solvents

  62. Brian Woods II Says:

    @ Philip II

    You have answered my question, this stuff is a bit beyond your pay grade.

    What’s the asset mix? Can they, on liquidation at 0900 tomorrow, pay all?

    That is an irrelevant question for a viable going concern. Solvency is judged by whether the value of its assets exceed its liabilities as a going concern, which they comfortably did at the last count.

    By your “logic” we can shut Anglo and recoup billions…

    Again revealing a certain ignorance. Getting the value for its assets requires Anglo to work them out over their natural economic lifespan. That is exactlly why it has not been liquidated as this would have cost even more, presuming we made whole the depositors/bondholders.

  63. Kevin Donoghue Says:

    It would be morally wrong, and practically very unwise to default on bank deposits/senior bondholders.

    There is something very warped about a morality which requires taxpayers to rescue people who were daft enough to place deposits with, or buy bonds issued by the likes of Anglo. Vastly better-managed banks have been closed down and creditors left to forage for whatever scraps they could get from the wreckage.

  64. nick Says:

    worth a read as we near the moment of truth
    http://www.guardian.co.uk/commentisfree/2011/sep/18/euro-crisis-recession-europe

  65. Philip II Says:

    So, in the long run brian woods 2, we are ok re anglo? You really believe that?

  66. BeeCeeTee Says:

    “There are certain covenants which are tenets of financial stability. A well known one is that sovereigns are expected not to default.

    Even more important is that banks should always pay their depositors/senior bondholders. That money is NEVER meant to be at risk, equity capital, and subordinated bonds are meant to be the risk bulwark.”

    Nonsense. Equity and subordinated bonds get it in the neck first, but in normal market economies senior bondholders and depositors are next in line, subject to depositors benefiting from deposit insurance. Under normal circumstances, market participants expect this to happen so it does not affect market stability.

  67. hoganmahew Says:

    @Jagdip
    “Surprised some commenters here haven’t suggested WW1 has led to events in September 2011!”
    Yes, well, there’s a difference between a chain of causality (or one thing happening after another) and an intended sequence of events. Fritz Fisher’s thesis is that there was intent before WWI just as there was before WWII and that the intent was the same.

  68. hoganmahew Says:

    Hey lads, the handbags and name calling are a bit pathetic. This may be a site with mostly academics posting the lead articles, but it doesn’t mean that you are school-boys.

  69. Desmond Brennan Says:

    @Kevin D
    The State gave Anglo a banking license, and assured depositors there was sufficient risk capital there….time and time again the Financial Regulator and Central Bank said all fine. It was their job to watch out, worse still, with the ‘green jersey’ conspiracy - they’re potentially liable for fraud.

    Anglo was not a hedge fund…it was licensed as a bank….it should never have been !

  70. Stephen Kinsella Says:

    Seconded Hogan-@all can we keep it civil please?

  71. Rothbard Says:

    Whatiffery?

    Is that the new name for Iceland?

  72. Jagdip Singh Says:

    @Hogan,

    If you were to credit Frederick “Day of the Jackal” Forsyth’s view of Germany today with respect to Ireland, you may say that the pre-WW1, pre-WW2 intent was still there.

    http://www.independent.ie/opinion/analysis/new-deal-is-a-charter-for-the-fourth-reich-2829834.html

    By the way, I think the article is contemptible as well as inaccurate.

  73. Tonicforthetroops Says:

    Regardless of mr woods above, nobody, especially the markets, thinks that Anglo is but a rotten carcass.
    So, back to the Colm McCarthy issue…why on earth are we paying into it? No ordinary person can comprehend this. And they are the ones paying.
    If it were solvent we would not be supporting it. As we are, it’s not. And so, let it go.
    What am I missing, apart from tax revenue foregone to keep it alive?

  74. The Dork of Cork Says:

    @Stephan
    You need a civil society to justify a civility to others who project such servitude.
    Our lack of bite in this society is a indication of extreme retardation - its nothing to be proud of.
    The pathetic Irish characteristic of worrying what others think of us is a Joke to others in reality
    I imagine in the ECBs dark halls they admire the Icelandic Independence - the truth is merely coming out now - Stark and others rightly consider us with extreme contempt.

  75. DOCM Says:

    @ All

    Meanwhile, back in the real world.

    http://www.reuters.com/article/2011/09/18/germany-election-idUSL5E7KI0N420110918

  76. anonym Says:

    @cet. par.

    There is simply no merit in the ECB argument that burning bondholders in a former bank poses a systemic risk to Europe and it’s banks.

    Surely the systemic risk to Europe and its banks is basically the same whether bank senior bondholders are burned in an institution that later stops being a bank or one that continues being one after its restructuring. The object of the ECB’s no-bank-senior-left-behind policy is to a) protect other institutions from losses on their senior bank-debt holdings and b) reassure future EZ-senior-bank-debt buyers that they’ll get their money back plus all interest due, on time. As far as those two objectives go, it doesn’t matter a fig why, or by what mechanism, bank seniors take losses.

    Make no mistake, I think that no-bank-senior-left-behind is a very bad policy and that no-one should be pursuing it. Nonetheless, I think it’s clear that be it a good, bad or indifferent policy, burning Anglo seniors is and was not somehow compatible with it.

  77. Ceterisparibus Says:

    @Brian Woods 11

    “At risk of offending Sarah, forget about depositors but senior bondholders most definitely are pari passu creditors of this institutioin irrespective of their access to a third party State guarantee.”

    With the depositors having bolted, isn’t it fair to say that bondholders have nobody equal? Also didn’t the Danes burn Seniors and depositors recently without catastrophic consequences.

  78. Eureka Says:

    We shouldn’t be getting too upset here. This is a bad mess. We are not the only ones who will lose in this.
    It is reasonable to expect major austerity with severe cuts to be announced in Greece. This leads to a high probability of Civil Unrest which leads to a high probablility of the army being used to control the masses. It leads to the end of meaningful democracy there.
    Expect Berlusconi to go in Italy - not because of sexual indiscetions but because the market no longer likes him.
    The market wants Europe - it will get it. It’s that simple.
    And I think Niall Ferguson’s book isn’t very good. It is in itself a false history. It links the rise of the financial markets with the rise of prosperity. Unleashing the power of coal lead to prosperity - not the markets.
    It also starts curiously in the middle ages - neglecting the fact that societies and civilizations managed money successfully for millenia before this. In fact, whatever system the Romans had in place served them for 1000 years. Do you think our system will serve us for even another 1000 days?

  79. hoganmahew Says:

    @Jagdip
    “By the way, I think the article is contemptible as well as inaccurate.”
    And I agree with you, though laughable springs to my mind. While it makes a good Ludlum thriller plot, the dumb Hans that Michael Lewis talks about and the fiascos of the German SIVs in the IFSC say more about what is going on. While the Germans have found that trade is more profitable than war, much as the Japanese did, they are also finding, I reckon, that finance is a host-eating virus… much as the Japanese did…

    M Lagarde with her insider knowledge of French banks (IMF says european banks need 200 bn in fresh capital) mirrors the French position that the German banks are in - both countries superbanks have loaned far more than they will recover.

    The same question remains - who will bear the losses?

  80. Ceterisparibus Says:

    @Anonym
    I can understand that a bank that has been restructured could not burn senior bondholders but an institution that has been massively supported by the state and is now a debt collection agency called Bank Resolution Corp. ( or something like that) is a completely different ballgame. The State through emergency legislation removed the deposits and through the same legislation can impose loss sharing on unsecured seniors…that would be the equitable thing to do. How this would impact on European banking?

  81. christy Says:

    The same talk of senior debt not being “risk” capital, even though the legal framework in place did, does and will provide for losses to be imposed thereon and even though seniors have in fact borne losses in other countries.

    (As a matter of LAW and as a matter of FACT seniors are and were risk capital in the sense that the capital was and is at risk in an insolvency).

    The same talk that defaulting on seniors would be “immoral”, even though, well that doesn’t even really deserve a response in my view, but given that the holders of financial assets tend to be from the better off among us and the bailout funds come from the general taxpayer fund and given that the legal framework in place provided for losses on seniors in a situation where the bank made large losses I would view this argument as pretty weak

    The same old conflating of the position of depositors (guaranteed) and seniors (not guaranteed).

    In relation to the fact that the bank was re capitalized and as a result we can’t now impose losses because it is solvent - that’s a better argument in my view - but ultimately isn’t persuasive - as we have already done the same with other banks and bonds. More fundamentally, these bond holders don’t have or haven’t suffered a compensatable loss.

    The reason the state injected capital as opposed to winding the bank up was because it had no choice in the emergency that arose. These bondholders would suffer no EXTRA loss as a result of the State’s failure to adhere to the regulatory regime in place for dealing with insolvent banks.

  82. Ceterisparibus Says:

    @DOCM
    FDP at 2% and Angela losing 6 out of 7 elections. I would think this will be the final nail in the coffin for Greece.
    Is this the reason Papandreou turned back in London following a conversation with his Finance Minister?

  83. Brian Woods Snr Says:

    @ Eureka 7.24pm: More precient comment than the general floundering about: “its the macro, silly!”

    We will, or we will not have sufficient future disposable income to pay down the debt. Looks like we won’t, so that should be the substantive issue. What will be (or is the likelist) the political exit? “All together now! Default!!!” ???

    Depends on the electroral cycle, I suspect.

    By-the bye. D-land trade surplus depends to some significant degree on the econs of FR, ES and IT. If this trio get into some bother, then D may have some bother of its own.

    Brian Snr.

  84. Eureka Says:

    @ Ceterisparibus
    I’d wonder if they’re about to announce major major cuts in Greece. Saw reference to an article today where their finance minister will seek savings through cuts rather than through taxes (possibly because they don’t have the ability to collect them)
    A slow, grinding crash is underway. Going to be messy.

  85. disgruntled observer Says:

    A contrast in study:

    The Dork of Cork

    You need a civil society to justify a civility to others who project such servitude.
    Our lack of bite in this society is a indication of extreme retardation - its nothing to be proud of.
    The pathetic Irish characteristic of worrying what others think of us is a Joke to others in reality
    I imagine in the ECBs dark halls they admire the Icelandic Independence - the truth is merely coming out now - Stark and others rightly consider us with extreme contempt.

    V.

    Eureka

    We shouldn’t be getting too upset here. This is a bad mess. We are not the only ones who will lose in this.
    It is reasonable to expect major austerity with severe cuts to be announced in Greece. This leads to a high probability of Civil Unrest which leads to a high probablility of the army being used to control the masses. It leads to the end of meaningful democracy there.
    Expect Berlusconi to go in Italy - not because of sexual indiscetions but because the market no longer likes him.
    The market wants Europe - it will get it. It’s that simple.

    The Dork wins it. They really do have nothing but contempt for us. And we deserve it. Our servility in this whole affair has quite frankly been embarassing.

  86. Sarah Carey Says:

    @DO

    Who cares what they think?

    As a Dublin friend just texted me: “Life really is better under Enda”.

    The important thing is that a voice like Colm’s can help put steel in Noonan’s spine.

    Let’s get more “serious voices” on board…building a respectable consensus to drown out the worriers in DoF should be the goal here.

  87. Philip II Says:

    Sarah
    “building a consensus to drown the worriers in DoF should be the goal here.”
    Fixed that for ya…

  88. Ceterisparibus Says:

    @Eureka
    I don’t think it is further cuts as they have already announced massive ps cuts. I think it must be something to do with the Troika. They were due back in Greece tomorrow but I now see that the Finance Minister will have a conference call with them instead. It’s an ominous sign that George cancelled his meeting with Lagarde in New York.

  89. Tonicforthetroops Says:

    Zero hedge is calling to watch Tuesday
    http://www.zerohedge.com/news/september-20-greek-default-day

  90. Sarah Carey Says:

    @Philip II

    he he :)

  91. Bklyn_rntr Says:

    Anglo solvent? Excellent, so NAMA can sell back the loans to bought from Anglo for the price, cancel the equity and let the market decide it’s future.

    Crisis solved!

    And passive only barely describes the actions of our dear leaders in this crisis. I can’t escape the feeling that market et al have decided to let Greece default and they are preparing the ground to deal with the backlash. The reductions in Irish etc interest rates, the talk of private sector loss sharing, the talk of bank recaps and then, the surge an finance minister’s attack on Geitner!

    Nothing is “random” in finance or diplomacy IMHO especially at these very high levels. The Austrian finance minister first blew the lid on Geitner even being there (I at least didn’t see any newspaper headlines saying he would participate), then the revelation that he said save the banks but don’t use taxes on financial transactions to fund it. A dog and pony show to highlight how “we tried everything” but these bloodsuckers (US Fed and the financial sector) are impossible.

  92. Ceterisparibus Says:

    @Eureka
    New update on the Greek story.
    http://www.reuters.com/article/2011/09/18/us-greece-economy-idUSTRE78H19R20110918

  93. PR Guy Says:

    @Ceterisparibus

    “I think it must be something to do with the Troika. They were due back in Greece tomorrow but I now see that the Finance Minister will have a conference call with them instead. It’s an ominous sign that George cancelled his meeting with Lagarde in New York.”

    Oui, c’est ca. And he was actually in transit, in London when he got the call to come back. I wonder if he’s facing an internal revolt within his party. Losing support. The ‘wavering’ has started.

    People do funny things when they have guns pointed at their head. Sometimes they turn round and say: “sorry sport, no can do so shoot me.” Then it’s a matter of whether the gun holder really wants to/can pull that trigger. My ma always used to tell me that if I were to pull a gun out, better make sure I intend using it or things might not turn out as you think.

    Anyway, the ECB, with all the evangelism and zeal of the Spanish Inquisition are slowly getting the chosen bondholders over the hump. If they can just keep it going until late 2012 most of the birds they want to protect will have flown. But they know that time is against them. Could start getting dirty now. Powerful opposing forces at work and all that.

  94. DOCM Says:

    @ Ceterisparibus

    Is not the anwer to your question above in this report? Papandreou turned back because he has to knock some sense into his government. Where will Enda be turning back from if he has to do the same given the exchanges on the radio today about the availability, or not, of funds for mental health services?

    The most heartening outcome of the most recent German regional election is the following comment by the head of the SDP.

    “The best part of the result tonight is that the voters showed the FDP they won’t get anywhere with populist attacks against Europe,” said SPD leader Sigmar Gabriel, celebrating his center-left party’s sixth win in seven regional votes this year”.

    Incidentally, there is highly credibel speculative report in the English language version of Der Spiegel of another grand coalition between the CDU and the SDP in the event of the present government collapsing. The previous one was built on the communality of interest between organised labour and employers in Germany and this has not changed. The communailty of interest is based on the view that the consumer for German products is everywhere except in Germany. Good old-fashioned mercantilism!

  95. Ceterisparibus Says:

    @PRGuy
    It seems the Troika are not buying the property tax wheeze they came up with last week and that resulted in an unscheduled cabinet meeting today.
    But Angela and Nicky fully support them or maybe it’s just Nicky now after poor Angela loses Berlin!!!!!

  96. Joseph Ryan Says:

    @Brian Woods 11

    The question has been posed above as to whether Anglo Irish Bank is solvent or insolvent. You seem to believe that it is ’solvent’.

    Technically of course no business is insolvent in a legal sense until the court approves the appointment of a liquidator. If my recollection is correct the court accepts that ‘the company is unable to pay its debts as they fall due’.

    Following from that I had a look at the 2010 accounts for Anglo. The statement of the Chief executive is interesting:

    “FUNDING
    Lack of clarity regarding the future of the Bank, combined with
    growing concern regarding the banking sector and the
    economy, last year resulted in the Bank being unable to restore
    its market funding and, as a consequence, dependency on
    central banks increased, particularly in the last four months of
    the year. I would like to express my gratitude to the authorities
    for the significant funding and capital support provided to the
    Bank during the year. While it must be hoped that during 2011
    the funding of the Bank can be put on a more permanent
    footing, the continued reliance on Government and monetary
    authority support is a key dependency of the Bank going
    forward. This and other relevant matters are outlined in the
    going concern considerations in note 1.2 to the financial
    statements.”

    In summary I would say that your claim that Anglo is solvent has little substance to it. It is only solvent because of the continuance of support of the Irish government.
    Both the Chief Executive’s statement and the the auditors note 1.2 make that clear.

    So if the Irish government withdraws support or refuses to borrow from the IMF/EU/ to fund the promissory notes, then Anglo is insolvent.

  97. DOCM Says:

    @ Ceterisparibus

    FYI

    http://www.spiegel.de/international/germany/0,1518,786671,00.html

  98. seafoid Says:

    @DO

    “They really do have nothing but contempt for us. And we deserve it. Our servility in this whole affair has quite frankly been embarassing.”

    This tired, abstract anger –inarticulate passive opposition –always the same thing in Dublin

    Beckett

  99. seafoid Says:

    I get the feeling Colm McCarthy is only saying this now because Italy is also in the sewer and the whole Euro project is in the sights of the market. Nothing has changed since Kevin O’Rourke wrote his magnificent “letter from Dublin” and there is no point in thinking things are getting better. Ireland is still on the roasting spit even if bond yields have come in somewhat. The name of the game is power and Ireland doesn’t have any.

    General Wesley Clarke does a McCarthy

    http://www.youtube.com/watch?v=TY2DKzastu8&feature=player_embedded

    “This country was taken over by a group of people in a policy coup . Was there a debate on it? Absolutely not , and that is why we are failing.What is our aim ? what is our purpose ? Why are we there ? ”

    And why is Ireland in this handcart ?

    The ECB are as competent as Wolfowitz and co. The gravestone will read “fought inflation” .

  100. grumpy Says:

    @Stephen K

    “This column would have been heresy, even one year ago. Now let’s hope it contributes to a change in official policy with respect to the bondholders in Anglo, and perhaps in other banks.”

    When it mattered, there was plenty of said “heresy” in the discussions on this site and the archives here contain much better than this one which seems to be BW2 vs everyone.

    It doesn’t matter so much currently and without Eoin and John McH even feeling the need to bother, I’m not going to pile on against Brian.

    The time to argue forcefully for this was when it wasn’t so easy to do so, and there was a lot more to argue for.

    Fairly soon it will become literally academic, at which point it really will be safe to talk about it.

  101. anonym Says:

    @Bklyn_rntr, @Stephen Kinsella

    Change your mind now, when any real chance of directing events has been squandered.

    Has Colm McCarthy actually changed his position, though? Back in his early-December article he hewed to the pair-of-twos argument that this is a poor deal, but we have no alternative but to accept it. (In fact he really piled on the no-alternative stuff with a trowel.) IIRC, in his articles over the next few months he became more sharply critical of the deal, and specifically of the protection for senior unguaranteed bank debt, but he still dismissed calls for unilateral action as crazy-talk. In this latest article he’s even more critical of the deal and the ECB’s position on bank seniors, and he doesn’t specifically call on the government to refrain from unilateral action, but he doesn’t call on the government to consider unilateral action either. If anything he just seems to assume that the option is no longer relevant. (The subheading says “A crushed Irish Exchequer should no longer continue to pay off unguaranteed bondholders of bust banks”, but McCarthy probably didn’t write that.) Lacking clear evidence he now supports unilateral action, it seems more likely that he’s shifted his emphasis rhetorically but his actual position remains the same.

  102. Bklyn_rntr Says:

    No…Ireland has power, it just needs to choose to exercise it. It could

    1. Renege on the bank guarantee.
    2. Refuse agreement on any agreement that requires unanimous votes
    3. Insist on a referendum to approve further payments of interest on debt taken over from the banks.
    4. Burn bondholder

    Of course, in order to exercise the diminishing power it still retains, Ireland must first plan for the consequences. Clearly the troika deal would die and the government would have to either find alternative sources of funds to finance government while it works down deficits or b) force a sudden collapse in government spending. I would choose option A, however that would require some creativity on the part of Ireland’s powers that be, and that seems to be in short supply.

  103. Eureka Says:

    So the CMcC article is too little, too late…
    Hindsight is not insight - now catch up
    We are a protectorate. Our best hope is to await collapse of the EZ overlord allowing us to default, devolve (ie print our own currency) and devalue.

  104. bolshevik Says:

    “Greece nears a tipping point in it’s debt crisis”
    http://www.nytimes.com/2011/09/19/business/global/19iht-euro19.html?hp

  105. Bklyn_rntr Says:

    Anonym
    This article will be whatever Cmccarthy wants it to be in future. If no default and all works out fine, then the December article stands, if default and a disaster, then todays article was a think piece but there was no change of heart, if default and works out, then this most recent article was a declaration of epiphany….talk about keeping up!

  106. Bklyn_rntr Says:

    The point of all this is….everything points to fireworks….the time to poo or get off the pot has arrived…..Greece will likely default in the next month and the German government could collapse….either event is a massive body blow to the bankers and they won’t go down quietly…

    Politicians will fight ferociously to save the euro (and if they fail, then god help us as it opens up a power struggle within Europe larger even than hitler or Napoleon. France cant survise with a “fair” market defined interest rate without the tacit support of Germany’s interest rate, neither can Italy, Spain or holland. They will all go bankrupt and every government in the EU will have to double cut spending or allow their banks to fail…that’s the stakes

    Instead, they will allow Greece to default, force the banks to take a hit, recap them and then have the ECB print like crazy….that way the US pays a bit too.

    Everyone is trying to externalize the effects of the deleveraging. The US by printing reserve currency, the EU by forcing the little boys into austerity… The prob is the little boys can’t take it, so it’s time to externalize to a big boy

  107. PR Guy Says:

    @Ceterisparibus

    “But Angela and Nicky fully support them ”

    Ha ha - that sounds like the kiss of death to me :-)

    @Bolshevik

    I notice that the first comment in that link is from a guy in Valhalla (Hall of the Slain). How very appropriate!

  108. Brian O' Hanlon Says:

    From McCarthy’s article,

    It is unprecedented for bondholders in defunct banks to be paid by a country already in an IMF programme and unable to re-finance its own sovereign debt in the market.

    Yeah, it is a very good paragraph. But in the vein of ‘what if’s’, maybe someone here at the Irish Economy blog can explain the following. During the 2000’s in Ireland, many people here seemed to invest in Anglo Irish Bank. It is three years since the 46 Irish economists signed their article. A lot of water has gone under the bridge. But in the past couple of years, I have encountered too many people who have lost money in Anglo Irish bank. I often wonder if any research has actually gone into this. I have come across folk in Ireland who sold out viable businesses during the boom, they liquidised very valuable and strategic assets, they sold stocks in what are still healthy Irish companies, to buy shares of Anglo Irish bank.

    Maybe I had my head stuck in the ground for the last decade. Maybe I wasn’t in the loop. Maybe I didn’t have the right kinds of friends. In the last couple of years in Ireland, I have had conversations with all sorts of people who lost money in Anglo Irish bank. What exactly did Anglo Irish bank have, that enabled it to hoover up such a vast amount of secure, stable, smart private wealth in this country? What secret formula did it have? Maybe, I didn’t read enough newspaper business sections over the decade of the 2000s, and realize that I should put all my wealth into Anglo Irish bank. I know one person who still has the brass plate, that was at the entrance to a quite successful consultancy business in Ireland. He sold out his business, which he had built with his own bare hands over three decades, and you can guess where he put all of his money. Anglo Irish bank. I know of an Aristocrat who lived in a castle and grounds for the last twenty generations of his line, and he put all his money into Anglo.

    Does any know what all of this was about, whose advice were these people taking and what kind of research, or light can be shined into this issue. I haven’t seen the book, or the TV documentary yet, which uncovers this story. It is a story, which I have pieced together myself over the past three years. When you talk to the ordinary people of Ireland, this is the story that emerges time, after time, after. It seems obvious to me, that the thing that allowed Anglo Irish bank to emerge as a dominant force in the Irish landscape, had a lot to do with this distribution mechanism, that reached into every small town and village in Ireland.

    It seemed that this diminutive institution facing St. Stephens Green in Dublin, had a unique capability to reach into the pockets of a very widely dispersed community on the island of Ireland, which in totality can be termed the smartest, most conservative and astute money that there was here. I would love to know what brochures these folk were reading, and who exactly was dispensing with the advice that led so many of these folk, down the garden path. This story has yet to be written. In fact, for some reason, it has been kept rather quite. BOH.

  109. ObsessiveMathsFreak Says:

    This column would have been heresy, even one year ago.

    And why? Why would this logic have been dismissed by all and sundry one year ago? Why would no-one bother to acknowledge the reasoning, logic, and argument behind it? [b]Why does it take wave after wave of crisis and incompetence to so much as get a reasonable argument heard, much less listened to in this country?[/b]

    The likes of Morgan Kelly, Constantin Gurdgiev, and David McWilliams have been ignored, derided and attacked over the last three years(nigh 10 for McWs). They are still being attacked by some. Why weren’t they listened to?

    I’m not asking rhetorical questions; I want real answers. In particular from the many economists, journalists, and newspaper editors who looked the other way when warnings were given, or worse, attacked such warnings. Why did this country not face up to its problems when the evidence for them was clear?

  110. Bklyn_rntr Says:

    http://www.efinancialnews.com/story/2010-01-25/sovereign-trading-rescues-cds-market-from-obscurity

    I wonder who is writing all these CDS contracts? Who takes the risk if Greece does go? And if, as the article says, there is no risk because “norther Europe will fund southern Europe” then why do these contracts even exist?

    I am thinking aloud here, but it seems to me that there are two fronts to the war…the FX war is being won by the Anglo countries, but the debtor/creditor war is not resolved and that is where europe’s power lies

  111. Brian O' Hanlon Says:

    @ All,

    Something else that we all need to consider carefully, in the Irish context. Something which isn’t that funny at all, from the point of view of Irish enterprise and further development. I am engaged in the occupation from time to time, of talking to folk about investment opportunities, and safe ways to use their wealth to finance one venture or another. Most of the time, I spend my time trying to talk people down from over ambitious goals they have set for themselves, in dispensing with their wealth into one project or another. It seems that common sense and reason is in quite short supply out there. But at the same time, I would hope to have something to offer people, which I believe to be sensible but also innovative and in some sense, ambitious.

    I did quite a lot of looking into new computing platforms over the summer time, and at Ireland from the point of view of launching new data centre projects etc. Most of it, was just soundings I took from people I have grown to trust, from other parts of the world. There is already a lot of the ’smart’ money beginning to ask questions about these projects and about these ventures. Is it too early to get involved, or is it the right time. But the thing that I encounter so often, is the anecdotes about money lost in investing in Anglo Irish bank. In my opinion, we have the wrong departments investigating into Anglo Irish bank in Ireland. We should have an anti-terrorist investigative team looking into it. If we had to hire foreign expertise to come in and do the right sort of probing it would be worth it. Because what Anglo Irish bank had managed to do, it is quite clear to me, is to eliminate all possibility of private wealth investing into projects on the island of Ireland for some time.

    This is the view of things, that we have not managed to understand yet in Ireland. The effects of Anglo Irish bank, go far beyond what economists focus on most of the time - the numbers on the balance sheet. Quite frankly, that has gotten far too much of the attention. Not enough genuine, intelligent reasoning and investigation has gone into the issue of confidence damage inflicted by that bank on the Irish private wealth sector. A lot of that same wealth has evacuated from the country in quite illegal fashion, because it was running so scared. Anglo Irish bank was an act of terrorism on Irish society, and nothing short of it. We all have to ask ourselves the question, seriously, if we intend to protect ourselves from the same. Or not. BoH.

  112. Bklyn_rntr Says:

    OMF
    Because they are human and they are compromised. Many of the journalists, editors and economists are hangers on, desperately seeking approval or the “inside scoop”. They literally pant at the idea that “Sean fitzpatrick” recognized me at that do the other night! OMG…

    Most of the journalists don’t have the foggiest idea of what’s going on, they take talking points from a fax machine and hear them at cocktail parties and before you know it, they are convinced that they do understand. And the economists? How on earth can a “scientific discipline” call itself that, when the explicitly exclude financial intermediation costs from their econometric models. Oh yeah, and when they do address it, they produce reams of paper with data going back to 1981 (the last peak in global interest rates) to conclude that, while there is some correlation between growth and debt levels, the effect can be offset somehow…..

    And your friends who got ripped off? Well they looked at a chart, they read the indo headlines and they decided that we had entered a new normal…fed to them by Anglo et all through their great friends, the jorno’s and the CON a mists…. that was their mistake

  113. Brian O' Hanlon Says:

    Lastly and finally,

    Economists such as Mr. Kinsella, Mr. McCarthy, Mr. Gurdgiev or Mr. McWilliams aren’t capable of addressing any of the above. It is not even a matter of criminality, or criminal behaviour, or criminal brain work. The Irish financial collapse is simply a matter of national security. Economists aren’t trained to fix those kinds of issues. Much less, react, recognise or hypothesize. Our country should not place itself in the position, where these academics are required to sacrifice themselves reputationally, or any other way. Either Ireland, is prepared to address these issues for itself. Or it isn’t. That all there is.

    No offense intended by the way. BoH.

  114. Bklyn_rntr Says:

    Well BoH I wholeheartedly agree, it is unfair to ask them to opine on matters of national security. Remember, at the end of the day, they are PR for the political orthodoxy of the day.

    Their role is to create a seemingly rational framework for whatever is in the politicians interest. They do that job well, BTW.

  115. The Dork of Cork Says:

    @Brian O Hanlon
    Interest rates…………
    I remember in 2002 when interest rates were on the floor depositing a considerable sum for a Dork into Anglo for I think 3.75%……
    I remember the small branch in the South Mall they had at the time - it just smelled of corruption - but what could you do if you knew the property excrement was hitting the fan and needed safety but a return.
    If they offered better rates in the post office at the time using perhaps the inherent subsidy of the McCravey free money scheme things would not be so bad now I suspect.
    But this country used fiscal money to subsidise credit deposits at that time - enough said - pure bank takeover of all institutions , if you wanted to survive financially you had to play ball with the political machine - no matter how small you were.
    I am just sad I was not financially astute enough not to invest in Gold at that time - it would have prevented at least one tiny bit of malinvestment.

  116. Brian O' Hanlon Says:

    Bklyn_rntr wrote,

    Their role is to create a seemingly rational framework for whatever is in the politicians interest. They do that job well, BTW.

    The actual story of the Irish financial collapse has been kept quiet. It is a little like what professor Elizabeth Warren in the United States says about the problem there in the middle classes. Because the middle classes were assumed to be quite boring and ’safe’, it never gained the amount of attention from researchers that it would deserve. Researchers tended to focus upon the extremes. In Ireland, there have been whole forest chopped down in order to allow our economists explain their views of ‘what happened’. But none of them, seem to have any idea of what happened. Because none of them are actively enough involved at the front line, of actually consulting with real people on the ground in Ireland, in relation to the go-ahead, green-lighting or otherwise of actual projects. Think of the hypothetical situation of Hollywood and the movie making industry.

    Regardless of your opinion of Hollywood and that industry, suppose that suddenly the investment, the projects, the ideas all dried up and the money all moved somewhere else in suitcases? Do you think the govenor of the state of California, would simply sit there and say ‘oh well’. This is essentially what has happened in Ireland, I discovered. I have discovered such, from talking to real people, rather than reading Paul Krugman’s blog. Not to say, that Paul Krugman’s blog isn’t worth reading. But it just doesn’t enable one to understand what actually happened with Anglo and with Ireland.

    I think the fact that Anglo Irish bank was involved and happened to be a bank is quite coincidental in the story. What actually happened, and what fuelled Anglo Irish bank to rise so quickly, was that super-charged, private wealth channel that extended deep into the most far flung places on the island of Ireland. Anglo was able to suck up all of that wealth, like you would use a straw to get the last drop of Coca Cola, from between the ice cubes while eating a hamburger. The fact that Anglo Irish bank was a bank, was only for convenience. It was only a vehicle, a device like a straw, to do the sucking action. It is very unfortunate now, that so many bright, intelligent and some brilliant Irish economists collectively now feel the irrepressible urge to stick their hands up, and show themselves off, to be the brightest kids in the class. And worse, they can’t seem to get enough of the lime light. Go figure. When in reality, what Ireland needs to deal with this, is a crack anti-terrorist unit, capable of taking this investigation to the ends of the earth. BOH.

  117. bolshevik Says:

    @ PR Guy

    Who said Americans don’t get irony :-)

    @ Brian O’Hanlon

    Anglo Irish bank was an act of terrorism on Irish society, and nothing short of it. We all have to ask ourselves the question, seriously, if we intend to protect ourselves from the same

    The first question you should ask is “qui bono”?

    It seemed that this diminutive institution … had a unique capability to reach into the pockets of a very widely dispersed community … which in totality can be termed the smartest, most conservative and astute money that there was here

    Not so smart and astute as things have turned out. Maybe they were all just greedy!

    It wasn’t just Anglo. This rot reaches everywhere. Here’s a little story from the farming community.
    http://www.diarmaidcondon.com/wp-content/uploads/2011/05/Castle-Carbery-Irish-Farmers-Journal-May-28-2011.jpg

  118. bolshevik Says:

    That should be Cui bono

  119. Ceterisparibus Says:

    @Bolshevik

    Leave bono alone …he is a poor tax exile…or his co.

  120. Bklyn_rntr Says:

    BoH,
    Don’t get too bogged down in Anglo, if it wasn’t Anglo it would have been another, similar vehicle. Although, it was essential that Anglo was a bank. That is key. Without the leverage available to a bank, it could never have pushed the straw so far into the ice cubes.

    Every country has it’s Anglo Irish. In Germany it was DEfpa(?) in the uk, northern rock, and in the US countrywide and The investment banks. The fact is there was a riff, a narrative, that said, this time things are different, and over time we all believed it. Central banks printed money and for as long as that money didn’t find it’s way into wages or the much manipulated inflation indices, the game was on. So interestbrates fell and assets were leveraged, and when asset prices fell, then interestvrates would be manipulated down a little more, so the leverage game could get going again.

    Dork got it right when he mentioned interest rates and the DIRT tax. Ireland’s politicians acted proactively to create this bubble, I even remember hearing my own parents talking about stocks in the early 200’s because “well when you take off the DIRT tax, you only get a half percent on the large number of savings accounts that had seen them through decades. We were pushed into taking risk and when we got a taste, we were hooked.

    Now the game is up and, as is always the case, the problems are multi faceted. In some countries the FX rate is the problem (the US), in others it’s a debt problem (the UK and the US) and in some it’s a straight debt problem (Germany). Every democracy has to balance the demands of it’s electorate with those of it’s bankers, creditors (they are not the same BTW) and the US has chosen to deal with the currency problem first ( the root cause of the debt problem) because by doing that, they will solve the debt problem.

    Germany, and more generally, the EU has a debt problem more than a currency one. The Euro can devalue, but it’s not necessary that it does, given that europes CA deficit is tiny and it’s capital account is balanced. The US wants to devalue, but how can it against China? And what does it matter against Japan? No it needs to hold the debt problem in aspic, until the currency problem is fixed. And fixed means exported to europe. The problem is, that US banks are likely re leveraging the balance sheets with all sorts of toxic nonsense, like sovereign CDS’s. so if Greece defaults and US banks hit the skids again, the currency and the debt problems become enmeshed again, and that is bad, because the debt problems force a USD appreciation.

    Europe, by which I mean Germany and France, have to understand the causality and the deep motivations that are playing out and they are likely angry, but more importantly, they understand that this is all a game of chicken. If they allow themselves to be corralled into assuming Greek liabilities, then the community of CDS holders, that are actively betting on a euro collapse in the US, will grow and as it grows, the exposure of US banks to an EU sovereign default will grow too. At some point, Germany will have to either say yea or nay and if they are going to say nay, then they have to do that fast.

    The game is on again

  121. Pellshek Says:

    We’re not actually paying any bondholders though, are we? We’re simply adding debt on top of existing debt. That’s not the same thing as taking money that would otherwise be spent on gruel for orphans and just flushing it down the toilet.

    At some point our national debt will settle at (sovereign debt + bank debt), with a clearly identifiable banking portion. Surely it is only at the point when we start paying that off that it can be said we are paying off bondholders and ECB vampires and whoever else? My guess would be that a restructuring event will wash away this banking portion long before that real repayment starts happening.

    (The foregoing notwithstanding interest repayments, which obviously matter wrt the absolute size of the debt.)

  122. Paul Hunt Says:

    @grumpy,

    “Fairly soon it will become literally academic, at which point it really will be safe to talk about it.”

    Some of the academics here, once bitten by the establishment response to some very active campaigning against NAMA, are now even more than twice shy. It’s only a blog after all. It once had the potential to lead and inform the public discourse on economic matters while this state was, and is, experiencing the most severe economic crisis since its foundation.

    But that now is long gone. And it is informative that, at the end of the week when the Government decided, in principle, to part-privatise the ESB, the chair of the group which reported on semi-state privatisation decided to let off some mortars against the ECB in probably the most widely read Irish Sunday paper, rather than commenting on this.

    There was a period of flux from end Sep. 2008 until 25 Feb of this year when the ‘official’ government, while retaining a basic constitutional legitimacy, gradually lost any popular or democratic legitimacy to the point where it was completely gone. A shell-shocked government machine struggled to keep the show on the road. During that period of flux opinions swung violently one way and the other. New voices were heard, new ideas were advanced and there was some measure of a productive public debate.

    Now, with the election of a government enjoying an overwhelming Dail majority, normal service has been resumed. Policy decisions will be made and the basis for proposed executive actions will be decided behind closed doors and issued as faits accompli. Yes, there will be ‘debate’ - in the Dail, the media and blogosphere - but it won’t be worth a warm cup of spit. The government spin machine will be switched to the appropriate setting, various media ‘place persons’ will be squared and any legislation or approvals of executive action required will be rammed through the Oireachtas.

    Despite the best intentions of the Government - and I’m not assetting that this shower doesn’t have some good intentions - and recognising that this may be seen by many as an effective way to govern, we need to recognise that this is both unhealthy and dangerous. Thus is prescisely what got us into this mess in the first place.

  123. Brian Woods II Says:

    @ Joseph Ryan

    Well on that criterion all the covered banks are insolvent.

    The fact is that we negotiated with the ECB that we could evacuate the depositors from Anglo provided the rump bank had sufficient capital to be able to cover all its bondholder liabilities.

    Emergency legislation was subsequently passed to enable the minister to do anything he wished up until 2013. The implication was that enuff was enuff and that any further capital needs of Anglo would be met by burning whoever the minister saw fit, but that situation has not yet arisen.

    Noonan meanwhile, with the legacy of rash election promises, thought he saw a gap and that the ECB would allow him to burn unguaranteed unsecured seniors in the defunct, “insolvent” bank even though its condition had not deteriorated. He now realises that he misjudged the situation and is pathetically claiming some superior win on the promissories as a justification for a U-turn on this matter.

  124. Michael Hennigan - Finfacts Says:

    What if?

    Bond-burning still trumps every other topic even on an All-Ireland Sunday. What if fixing issues under our control were such a cause célèbre?

    Wouldn’t that be something to marvel at?: those responsible for this terrible economic dénouement, their fellow travellers and vested interests feeling the echo through their tin ears, of the modern equivalent of the rumble of the tumbrils on the cobblestones of Paris’ Place de Grève.

    Interesting that our venerable economist, appears to have become a one-club golfer at the Sindo - - although I don’t fear that he will become a jackal.

  125. Brian O' Hanlon Says:

    Bklyn_rntr wrote,

    Dork got it right when he mentioned interest rates and the DIRT tax. Ireland’s politicians acted proactively to create this bubble, I even remember hearing my own parents talking about stocks in the early 200’s because “well when you take off the DIRT tax, you only get a half percent on the large number of savings accounts that had seen them through decades. We were pushed into taking risk and when we got a taste, we were hooked.

    I’m beginning to get an understanding of it now. What you say makes sense for sure.

    Thanks for the response and the other information, which is rather thought provoking to hear, in relation to the European and north American situations. BOH.

  126. seafóid Says:

    à la recherche du temps perdu

    1. John McHale Says:

    December 1st, 2010 at 10:30 am
    @Brian,
    I know there is no appetite to hear this, but I think there is a reasonable chance that the plan can work. It is important to see what has been achieved: We have secure funding to cover our budget deficit for next next few years and we have an (implicit) commitment of the ECB to prevent the complete collapse of the banks. We thus have bought time and goodwill. If Patrick Honohan is right about the banks and we get even half decent growth — admittedly big ifs — we will get through this without default. If eventually a restructuring is required, and I certainly do not rule that out, we will have a much better chance of avoiding a “sudden stop” of funding if we have maintained the goodwill of our potential funders and we do it as part of broader EU resolution mechanism.
    Colm McCarthy could usefully remind us again that “anger is not a policy”.

    1. Kevin O’Rourke Says:
    December 1st, 2010 at 10:48 am

    It is not just Barry Eichengreen, Martin Wolf, Buiter, and many other respected overseas commentators who don’t believe you John; the markets are screaming as loudly as they can that they don’t believe you. The two ifs you mention are just too big an ask. We have been provided with liquidity, and yet our yields are up. The markets believe that this is a solvency crisis, not a liquidity crisis, and until something is done to address our debt overhang (and, indeed, our macroeconomic situation) they won’t change their mind.
    So: we can default on bank-related debt now, or on sovereign debt later. I know which I prefer.

  127. DOCM Says:

    @ seafóid

    If the markets are to be taken as the guide, it would seem that John McHale was right. Irish bond spreads have clearly decoupled from those of Portugal and Greece,the decoupling from Portugal being the more significant as that country did not have a banking crisis. This suggests to my non-economist’s eye that the capacity to grow out of one’s difficulties is the key consideration as far as markets are concerned. It stands to reason.

    A global downturn could, of course, derail everything.

  128. Brian Woods II Says:

    @ tonicforthetroops

    Regardless of mr woods above, nobody, especially the markets, thinks that Anglo is but a rotten carcass.
    So, back to the Colm McCarthy issue…why on earth are we paying into it? No ordinary person can comprehend this. And they are the ones paying.
    If it were solvent we would not be supporting it. As we are, it’s not. And so, let it go.
    What am I missing, apart from tax revenue foregone to keep it alive?

    A few clarifications here. I too believe that Anglo is a rotten carcass. But we have put c.30Bn into it so as to make up for its outrageous and in my view traitorous lending activity. It is now able to meet its liabilities thanks to us the taxpayers.

    We are not being asked to pay any more into Anglo. My guess is that if ever Anglo comes abegging again we will be allowed to say no.

    The immediate issue concerns Anglo itself not the taxpayers. Anglo is due to pay a wadge of its bondholders in the near future. What McCarthy et al are asking for is that we use the emergency legislation to prevent Anglo paying these bondholders despite the fact that we have already subscribed the funds to enable it to do so. This would be a clear betrayal of earlier commitments to the ECB. Noonan has made an embarrassing faux pas in not appreciating that and now he has to climb down with some ludicrous fudge that he will renegotiate the promissories instead.

    Your questions might have been relevant before we put that 30Bn in but they are now past their sell by date.

  129. seafóid Says:

    Roubini : Greece should default and leave the Euro

    http://blogs.ft.com/the-a-list/2011/09/19/greece-should-default-and-abandon-the-euro/#axzz1YO84f6JE

    “The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero.”

    He doesn’t say anything about Caitlin ni hUallachain

  130. Paul Hunt Says:

    @Michael H,

    Dream on. As I’ve mentioned previously, those who prevent a government acting in the public interest are the government. We still have more than half of this internal devaluation to be completed, but the FODAR are securely entrenched to ensure it doesn’t happen. They are confident they can secure their absolute and relative position - irrespective of what happens to the economy or to everyone else outside their fortress. They’ve done it before; they’re doing it now; and they will do it again.

    The only slight sources of unease are the presence of the IMF (over whose eyes it may not be as easy to pull the wool as they can over those of EU officials) and the apparent, but understandable, reluctance of the unemployed to bugger off to foreign climes as they have done on previous occasions when the FODAR engineered an economic calamity.

    This focus on the ECB and EZ politicians is a very convenient distraction; the conflict between the Troika’s desire for structural reforms to complete the internal devaluation and its desire to see some progress on privatisation will be exploited by the FODAR for all it’s worth; the possibility of serious industrial action in response to serious structural reforms scuppering the sunny, sanguine economic narrative being crafted will also be played up to frighten the Troika off; and we can expect a serious assault on unemployment benefits and allowances to encourage some more enthusiatic wanderlust among the unemployed.

  131. Brian Woods II Says:

    @ Joseph Ryan

    You have defined insolvency as it applies in a non banking environment. It is indeed possible for an ordinary enterprise to go bankrupt even though it has positive net assets.

    In banking the authorities operate a “lender of last resort” facility so that, broadly speaking, a bank which has positive net assets will always have liquidity made available to it. Thus insolvency in a bank’s case is equivalent to having negative net assets. This is what McCarthy et al mean when they call a bank insolvent. Clearly they are wrong in the case of the now recapitalised Anglo.

    Providing bank guarantees is merely a way of mitigating the requirement to provide lender of last resort facilities. In summary, solvent banks in the balance sheet sense are in effect entitled to official support if they have liquidity problems.

  132. hoganmahew Says:

    @BWII
    In banking circles, a serially illiquid bank is defacto insolvent. Whether it has positive net assets or not. The LOLR facility is supposed to be only available to banks that can trade their way out of difficulty. If they cannot, they should be closed down - Bagehot.

  133. zhou_enlai Says:

    The institutional and political thinking on these points in Europe is very confused.

    However, the law is clear and the bail-out deal is clear. The debts are not guaranteed and the Memorandum of Understanding does not contain any written provisions obliging us to repay this money.

    Not only is it not acceptable for our taxpayers to have to borrow money to repay this unguaranteed debt, it is not accpetable for Finnish, French, Italian or Spanish tax-payers to have to loan us money to do so.

    On the other hand, no EU institution can be seen to counsel default. It is actually unfair on the EU Institutions to ask them to take responsibility for a decision which is legally, democratically and politically our decision to make. The reality is that it will take unilateral action by a country like Ireland to sort this out.

    Richard Bruton might have faced them with his attachment to principle in the sense that he could convey a willingness to go alone. I don’t think Michael Noonan or Enda Kenny are willing to be that soldier though. In the circumstances, the best hope is that the Govt could mobilise Governments of other countries (including Germany, France and Finland) to counsel us not to put borrowed money towards paying unguaranteed seniors.

  134. Philip II Says:

    Where is Eoin Bond? He has left Brian “Hiroo Onoda” Woods II in the jungle and gone?

  135. grumpy Says:

    @PG Guy

    Off topic

    Your query about Coppock “killer waves”.

    There are abou 9 of these in the last century. There were significant market declines after 3 of them.

  136. Ceterisparibus Says:

    A little off topic but may inform the debate here….the Greek Finance Minister comes out fighting ahead of the crucial conference call this evening with the Troika…
    http://www.bbc.co.uk/news/business-14969034

  137. Eamonn Moran Says:

    @ BOH
    Whats so confusing?
    It was a Ponsi scheme.
    If you want to understand the Psychology you can examine the investors in Bernie Madoff’s investments.
    People were making good returns for a considerable length of time.
    They either had to believe it was an amazing company with a brilliant business model or a Ponsi scheme.
    People of all walks of life can get greedy.

    @ ColmMcCarthy

    “Most Anglo bondholders have already been paid. But the remaining bondholders, remarkably, live on, including holders of senior unsecured bonds which do not enjoy a guarantee from the Irish Government. At the insistence of the European Central Bank, these unsecured, unguaranteed bondholders are to be paid in full.”

    The only thing remarkable is that you find it remarkable.

    The ECB policy as outlined by Georg Baumann above has been consistent.

    “with additional pressure allegedly applied, for reasons which remain obscure, from US Treasury Secretary Tim Geithner.”
    Whats obscure? He defended the interests of the investment bank lobby as the US treasury always does (his excuse this time was he believed it would trigger a CDS domino effect) and vetoed it.
    Imagine for a second that you are one of the group of bondholders that the Irish Government want to burn. Isn’t it worth spending a lot of time and money to influence the people who make the decisions? Isn’t it in their interests to advocate that the contagious effects of hurting them could in fact Cause a European/World wide crises.

    I like Joseph Ryans idea of making them show up in person at an Irish post office. People have the right to know whose bacon they are saving. The fact this still remains largely a secret is an indictment of the complete lack of independent financial investigative journalism in this country.

  138. Michael Hennigan - Finfacts Says:

    @ Paul Hunt

    We love to talk and dream as part of the country did during a civil war.

    I remain an optimist at a personal level but at a country level, because many of us are descended from post-Ice Age Spaniards, I expect that we will likely continue muddling through.

    I referred some years ago in an article to a balkanised society and a Serb wondered if I was casting a racial slur on his region.

    It’s interesting in the context of Stephen’s reference to counterfactuals, to wonder how many here would be saying the opposite if their country had been prudently run by a tribe other than Neanderthal poltroons?

    In 2008, many whinged about the elites not responding to their electorates; be careful what you wish for, but as some Chinese tell me, their wise men never said.

    The recent debate on the plight of people with mortgage arrears gave some of the comfortable an opportunity to emote, but as to cost, it was a matter of smoke and mirrors courtesy of BlackRock Solutions. None of them offered to give up their second homes.

    There are few who are willing to give up the bubble gains voluntarily.

    The problem with the system is that the politicians and senior civil servants are amongst the biggest gainers and patriotism is traditionally for the poor.

  139. PR Guy Says:

    @grumpy - Your query about Coppock “killer waves”.

    Thanks - even more reason to retreat to my bunker.

  140. Jesper Says:

    People in Ireland looking out see the ‘Troika’, people outside of Ireland might see a bit of another trio that seem to be happy to be outside of Irish focus: Bankers, property developers, politicians in an opaque system.

    Bankers in Ireland borrowed money for abroad, took a cut and lent it out to property developers. The same bankers are STILL taking their cut, or have there been purges of upper management, board members, internal auditors and external auditors?

    Property developers borrowed money, took a cut and invested in property projects. The same property developers are STILL taking their cut, now as employees of NAMA.

    Political governance. Big item before the election. The system in place allowed this to happen:
    http://kathleenbarrington.blogspot.com/2011/02/anglo-pressed-cowen-for-bank-law-change.html
    The same system is in place. Different people are in control of the system. Would the new people in the system do the same? Since few (no?) changes have been made to the system I believe it is possible to do, the only hope is that the new people won’t change once in power or that people coming after them won’t abuse the system either. Anyway, politicians and senior people in the administration are STILL paid wages that other nations wouldn’t pay.

    Solidarity in Ireland?
    Cutting wages of the top paid would only save 42 cent on the euro but cutting the wages on the bottom would save 80-90 cent on the euro so the leaders of Ireland are of course recommending maintaining high wages for themselves while arguing for cutting other peoples wages as part of improving competitiveness. Leading by example they do not. Solidarity? Not according to the definition I’m used to.

    Solidarity of Ireland towards the rest of the EU? The double Irish for corporation tax is still allowed.

    That being said, the Anglo situation is strange. I suppose that defaulting on senior bondholders would necessitate the closing of the bank and the firing of all employees?

    Banks in Sweden are posting high profits and are at the same time firing people. Banks in Ireland are posting losses but somehow they can still afford their highly paid management teams. Is some sort of expensive employment scheme in place? Granted; firing them would increase the deflationary pressure….

  141. Brian O' Hanlon Says:

    Eamonn Moran writes,

    Whats so confusing?
    It was a Ponsi scheme.
    If you want to understand the Psychology you can examine the investors in Bernie Madoff’s investments.
    People were making good returns for a considerable length of time.
    They either had to believe it was an amazing company with a brilliant business model or a Ponsi scheme.
    People of all walks of life can get greedy.

    There is nothing wrong with that explanation. In fact, for most people, it captures as much of the truth as may be required. However, if I were to head the investigation team, and have the resources which Patrick Honohan or Regling & Watson (or that other fellow from Finland, whose name I can’t recall), had at their disposal during the ‘banking inquiry’, I would approach my investigation entirely different.

    The fact is that economists try to analyse the symptoms and appear to be very poorly equipped with the analytical and forensic instincts with which to understand the rubble, understand the train of events which lead directly to the collapse. In my investigation, I would carefully build up a database of the real life stories, behind each €100k, each €1.5 million and each €4.0 million lump of money that for some reason, all found their way into Anglo Irish bank shares during the 2000’s.

    I think there is a lot of institutional memory there, behind each of those stories, which contains a lot of valuable information, that an investigator may use to build up a complete understanding of the wreckage left behind by Anglo Irish bank. The same aught to be published in due course, using names like ‘Mr. X’, or ‘Ms. Y’. We would probably gain a picture of what wealth there existed in Ireland prior to the financial collapse, and what its constitution was. I mean, like one saws through a tree trunk, one can learn a lot about the history of the species and the specimen.

    The problem I have is that this data is nowhere to be found at the moment. That is one of the most catastrophic things that happened as a result of the collapse of the banking sector in Ireland. We had a fairly decent tree ring source of a data about the wealth that was created in Ireland, since the foundation of the state itself. It seems to me, that investments in shares of Anglo Irish bank, came from such a wide geographic and social dispersion, that we probably will never again have an opportunity to harvest such a valuable picture of what the real economy in Ireland is composed of.

    The reality of today in Ireland in the year 2011, is that we are beginning to form those tiny first tree rings, again all from scratch. It took many decades to assemble together those discreet bundles of private wealth as I described above. That is why it was smart money, and it was also conservative money. It was money that was earned, painstakingly, and probably passed from one generation to another. What I do know, is that this layer of slightly old wealth in Ireland, operated much like what Alan Greenspan used to term dry tinder. When Greenspan spoke about matters of consumer inflation (as opposed to asset price inflation), he could speak with some authority.

    It seems to my mind, that it is something we aught to watch in Ireland, several decades from now. What exactly happens with that basic layer of private wealth, where it goes and how it is funnelled or directed. That in particular is of most concern to me. I know I will be in my 70s or 80s, by the time it becomes a real concern again. But I would like to know that some institutional memory had been captured today, the tree ring data that I mention, in order for it to be of use to generations of Irish folk, further down the line. I’m less convinced that reports such as the one by professor Honohan, will be of lasting and real value.

    I don’t have the resources at my disposal which Honohan etc had. But I know instinctively, that him and others walked across the wreckage of the Irish economy and saw only what they wished to see. Not what was really there. BOH.

  142. Brian O' Hanlon Says:

    @ All,

    If the economy in Ireland, prior to the collapse of 2008 were a tree specimen, then Professor Honohan in his investigation, tried to work from his own pre-conceived notion of what the tree trunk of the Irish economy had been, and proceeded to work out along the branches and towards the leaves at the end.

    I would approach it from the opposite end, and thereby capture a far more realistic impression of what the specimen was like. The realism or otherwise of the impression, is what constitutes the value of the resource to future generations. BOH.

    http://designcomment.blogspot.com/2011/09/tree-rings.html

  143. TRP Says:

    Maybe someone should dust down the Special Report 68 from the Comptroller and Auditor General on Public Service Pensions issued in August 2009. The accrued pension liabilities at the 31st December 2008 of the Public Service was estimated at €101 Billion.This figure is calculated before the accelerated Pension scheme for the Public Service was put in place which will add conservatively €10 - 15 Billion to the above bill before the end of February 2012. BTW the figure for accrued pension liabilities of the Universities which we the Taxpayers are picking up is €3.685 Billion as at the 31st December 2008. What is they say “People in glass houses should not throw stones” .

    These figures make the bank bailout appear to be chickenfeed but it seems to be no problem for the economists !!!

  144. Bond. Eoin Bond Says:

    @ Phillip II

    sorry, was on the beach. Was reading up on the real Phillip II - did you know he defaulted on Spain’s debts five times during his reign, including just one year after he took power? Quite the name you’ve chosen there…

    Anyways, onto the substance here: seeing as we’re going with the whatiffery/counterfactual history chatter, was the option on Anglo et all facing us back in 2008/9 not the same as that facing the US back in 1945 when it decided to nuke Japan? ie one horrible and painful option (to nuke/to save the banks) up against another horrible and potentially even more painful option (to have a full on conventional war on Japanese mainland/to let the banks take the hit and hope the ECB keeps standing behind us).

    On the notion that “the ECB couldn’t just let us collapse if we defaulted on bank debt”, is there not a chance of something like that actually happening in Greece very shortly?

  145. Brian O' Hanlon Says:

    @ Eoin,

    What I find absolutely strange in my mind, is the advertising at the moment for all kinds of sovereign bonds and Paddy bonds, which mean to save the country, and renew the economy. It seems to me, that since so much private wealth in Ireland has been burned up by investing in banking institutions, we now seem to be all motivated very much, to try and collect whatever wealth is available now, and gather it together, to try and provide some underpinning for a recovery.

    Where was that spirit of national duty, when we had the generations old wealth available to put somewhere? Where were the Paddy bonds then? Why was it so acceptable to put all our wealth into institutions like banks for the last ten years, no questions asked - but now we have all of these sovereign bond schemes, Farmleigh conferences and your country, your future etc, etc. The sequence just seems all backwards to me. What changed? BOH.

  146. m_mccutcheon Says:

    RE: Ceterisparibus Says:
    September 18th, 2011 at 2:33 pm

    @Phillip
    Have a look at the exigencies of the common good…A40.3.2 and A 43

    Having looked at Article 40.3.2. the wording of which is shown below I would suggest that the key aspect of the article is in the words “as best it may”.

    I do not believe for one moment that the bonds should be paid off and believe Noonan could do well to find his spine.

    A40.3.2 “The State shall, in particular, by its laws protect as best it may from unjust attack and, in the case of injustice done, vindicate the life, person, good name, and property rights of every citizen.”

    In relation to Article 43 I would refer you to sub-article 2.2 in which it speaks of the social good and delimiting rights by law for the common good.

    Society is going to break down completely if people are going to continue hijacking the financial system for personal gain. The economy should serve all citizens not just a few.
    “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.”

    @brianwoods11

    If you are a lecturer teaching solvency to students then I would be surprised because solvency is just that, solvency. Company law to the best of my knowledge does not discriminate between standard companies and banking entities. Solvency is the ability to pay one’s bills as they fall due and in the absence of taxpayer support Anglo is insolvent. Would it have the ability to meet its costs as they fall due in that scenario? The problem is the business model they followed of borrowing short to lend long was always a disasterous model from the start and the irish citizen should not be expected to pick up the bill.

  147. Brian Woods II Says:

    @ McCutcheon

    I do not think Colm McCarthy was speaking as a lecturer in solvency law. In the context of this debate the distinction between liquidity and solvency of a bank has been taken to be that the latter means the bank is essentially sound i.e. its net assets are positive while the former refers to its ability to continue to rollover its mismatch between the short term of its liabilities and the long term of its assets.

    At the moment very few banks in Ireland, Portugal or Greece can independently pass the liquidity test. It is the responsibility of the ECB to act as LOLR in this situation unless of course the banks are insolvent in the balance sheet sense. Anglo is not insolvent in that sense having had c. 30Bn of taxpayers money injected into it.

  148. Kevin Donoghue Says:

    If “solvency is the ability to pay one’s bills as they fall due” then a bank is solvent if, and only if, it can borrow on the market or from a central bank. That means that it’s up to the state to decide when to pull the plug. IANAL but my guess is that the courts wouldn’t normally see any reason to second-guess the state’s decision. An exception might be a case where the state seemed eager to destroy a bank, but in Anglo’s case the opposite is true.

  149. zhou_enlai Says:

    Garrett Simons SC will be speaking on the legal aspects of the Bank Guarantee at the upcoming Rouhd Hall NAMA conference in the Westbury on 22 October 2011.

    The topics he will cover include:
    • The 3 Bank Guarantees
    • Restrictions on retrospective legislation
    • Bondholders and Deposit Holders
    • The Northern Rock Litigation
    • Subordinated Debt and The Credit Institutions (Stabilisation) Act 2010

    Garrett Simons SC previously railed against NAMA and the Guarantees and questioned the legality of giving Ministers so much power.

  150. myles Says:

    Burning bondholders is not in itself the only policy which will get Ireland out of its financial crisis. Much more is required. But burning bondholders sounds catchy, dosen’t it ?

    I like your web site, its very informative. The continuing turmoil on the markets, and inability of Irish and European government austerity measures to deal with the crisis shows the utter futility of the present course of action and mindset. There is a desperate need to move away from the current economic paradigm, so beloved of our government ministers and civil servants. I have created a series of alternative proposals to the government policies and bank bailout mechanisms. They are practical and innovative and would remove the private banking debt burden off the backs of Irish taxpayers and the unemployed and disabled and onto the backs of the private bankers and central bankers. You can view the alternative proposals at http://www.goodwillbank.com.
    Have a read and see what you think.

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