Dan O’Brien on Burning Bondholders

This post was written by Karl Whelan

Dan argues the ECB case for not burning Anglo bondholders in today’s Irish Times. I’ll quote the main argument at length

Apart from Ireland, nobody else in the euro zone has sought to make seniors take their losses so there are no cases to which one can point as evidence. But an immediate neighbour’s experience has been watched very closely. Denmark last year introduced the toughest bank resolution laws in Europe. These laws, which govern the winding-down of bust banks, are more similar to those in the United States than those across the rest of Europe. In the US, senior bank bondholders have traditionally got their just desserts if the institutions they invest in fail.

When two Danish banks failed earlier this year, their seniors were burned. This raised funding costs for the entire Danish banking system.

From the euro zone perspective, the ECB is obliged to consider that if a default precedent were to be set in the senior bond market, then at the very least funding costs for all banks in the zone would rise. The savings for Ireland of a few billion euro would be offset many times over by the generalised increase in funding costs for the already-teetering euro zone banking system.

That there is good reason – in the collective European interest – not to burn seniors does not lessen the injustice of having Irish citizens pay for European bankers’ losses (although the hugely subsidised bailout loan is a partial de facto spreading of the burden).

The point that burning senior bondholders may raise the cost of funding for banks is a fair one. But the relatively lower cost of bank funding obtained from a policy of supporting all senior bondholders is hardly a free lunch. The additional risk that the market would perceive as being attached to bank bondholders would have been transferred away from sovereigns.

Now one could argue that some sovereigns in the Euro area are in a position to take on this kind of risk in order to protect their banking systems. But others clearly are not.

My position on this is that there is no need for the question of burning senior bondholders to be a simple black or white proposition. As I discussed in this paper, the EU could adopt a policy that sees senior bondholders only incur haircuts if equity and subordinated bonds have been wiped out, the bank has been nationalised, and the state has incurred costs of x% of GDP to bring the bank back to solvency.

What x is could be a matter for policy discussions, and could evolve over time. But a policy that set x=5% would mean that the EU is only ruling out bailouts that would place enormous burdens on the state. Indeed, given the state of Euro area public finances, there simply isn’t room for another round of expensive bank bailouts so an approach of this sort may help to reduce the perceived riskiness of much of Europe’s sovereign debt.

This policy could see the remaining Anglo senior bondholders receive severe haircuts without implying a contagion effect for other institutions apart from those the market suspect to be severely insolvent and to which states should probably be reluctant to offer blanket liability guarantees.

But, of course, such a policy would tradeoff state and private sector interests in a balanced way and, as I argue in this paper, M. Trichet’s approach to the question of debt defaults has consistently been characterised by dogma rather than balance.


141 Responses to “Dan O’Brien on Burning Bondholders”

  1. grumpy Says:

    Karl, in case you missed it:

  2. Jo Says:

    I look forward to a world where no one would have the bald-faced cheek to publish an article such as that.

    Leave the country Dan.


  3. seafóid Says:

    “Apart from Ireland, nobody else in the euro zone has sought to make seniors take their losses so there are no cases to which one can point as evidence”

    Not yet. Let’s see how France and Italy deal with the bondwallas .

  4. Ceterisparibus Says:


    He is wrong there.

    What about PSI in Greece. Officially approved policy of 21% haircuts on seniors or so we are led to believe.

  5. Patrick Says:

    @ Karl

    Thought I’d ask a few questions if you have the time. It would be good to understand the outlook of a man as experienced as yourself.

    Funding costs have increased for Danish banks, but so have they for Irish banks. In fact Irish banks are being literally starved from wholesale markets. Is it really realistic that funding costs would have risen by even more in a counterfactual world of burning the bondholders?

    When there is a trade of between investing in a bust bank that honours its debts and a solvent bank in a country that has defaulted on senior unsubordinated debt, how high is the extra risk premia likely to be in the event of default?
    (Just thinking that with soveriegns the extra bps thrown on top of a country that has defaulted is not all that significant.)

    Can we know the answers to these questions, and is uncertainty surrounding the possible outcomes one of the major risks to giving a haircut on the banking debt?

  6. Joseph Ryan Says:

    @Karl Whelan

    I read your paper on Trichet. A good article, well balanced but a liitle too polite on his failures. Your quote below serves to illustrate the depth of the failure.

    Three years after the Lehmans incident, Europe still does not have a common agreed framework for winding down insolvent banks and avoiding all costs falling on the taxpayer.

    In addition three years on the EZ does not have an EZ wide deposit protection scheme for depositors. And I thought deposits were the foundation stone of banking.

    Regarding an EZ policy of bank wind-down including burning bondholders. Of course you are correct but that is no longer the main issue.

    The EZ interbank system is now completely broken. No bank treasurer in his or right mind would loan another EZ bank €1billion for three months, eeven at 8% interest.
    Only a new interbank system routing all interbank loans through the ECB at a premium will restore the interbank system.
    It should be accompanied by an ECB offer / policy of buying bank all bank bonds at heavy discounts.

    Trichet continued to define the war in a conventional manner and sought to fight it using conventional tools and conventional methods.
    He needed new strategies that would enable the EZ to do the following.
    Get control of a functioning EZ banking system.
    Put protected depositors at the heart of that system.
    Put a fully ECB run and ECB insured interbank system in place.
    Put a bust bank wind-down facility in place.
    Get rid of speculators. Naked CDS etc.
    Start a similar type of State debt rsulution mechanism.

    Yet he did none of these essential things. He fought the war to return the EZ to the status quo ante. But wars rarely if ever return situations to the status quo ante.

    Trichet may have been a fine soldier but he was a very poor general.

  7. DOCM Says:

    A topical comment and two interesting papers especially seen against the background of this Bloomberg report and hearing what Geithner actually said at the public seminar (which implied a certainty on his part that the EZ would move on giving the EFSF more “fire power”).


    His references to the difficulties not just being financial are particularly apt. It is difficult to see, for example, how France could seek aid through the EFSF for its banks without endangering its AAA status and bringing down the entire edifice. As to how it might work for other countries not in a programme, the detailed amendments to the EFSF (available on the Dáil site under “Bills”) make for interesting reading. On the “firepower” issue, the existing EFSF would seem to already have the necessary flexibility in terms of its operations. Whether it will be allowed to use by Germany is another matter.

    The coincidence of interest in Merkel’s populist desire to be seen to be punishing the wicked bankers, at home but especially those abroad, and that of Sarkozy to be able to continue to live in denial with regard to the health of French banks seems to be coming unstuck. Reality, in the form of the markets, has intruded. The waters of political scandal at home are also beginning to lap ever closer to the Elysée.

  8. Ceterisparibus Says:

    Looks like PASOK may have trouble getting the property tax through parliament. Apparently they put off the vote yesterday until next Tuesday.
    Also what was to be a two year tax is being made permanent. Pension levy???

  9. zhou_enlai Says:

    Colm McCarthy said we are taking one for the team.

    Dan O’Brien says we are taking a very big one for a very big and important team.

    If Jean Clause Trichet, Angela Merkel, Jose Manuel Barossa and Nicolas Sarkozy issued a statement to say that Europe owes a debt ofgratitude to Ireland then I think we would grit our teeth and bear it.

    But they are not thanking us, and the reason is that they intend to mete out the same treatment to us whether we default or not. They have created a zero sum game. At this stage I think we should advise them that unless we get a little “thank you” then we will default and they can all pay their share of the increased rates.

  10. Philip II Says:

    But default is bad….burning bondholders is bad. Or, so we are told…

  11. Philip II Says:

    But default is bad….burning bondholders is bad. Or, so we are told…

  12. Desmond Brennan Says:

    I’m not convinced that risk should attach to depositors/senior bondholders. However if it must, I’d suggest adding a variable to your parameters above. A default in the EZ should only be possible if the bank concerned gave rates in the upper Zth percentile of banks (by volume).

    I’d suggest perhaps Z be order 25.

  13. Tom Gallagher Says:

    Whereas many Irish people (including some readers here) will be virtually digging ditches in 5 years time, thanks to the catastrophic policy errors committed in 2008 and 2010-11, I suspect Dan O’Brien will find himself working in the European Commission (and not as a lowly pen-pusher). Catherine Day, Barroso’s governess, who wrote in the spring that since it was a number of Irish citizens who took on the mega loans from Germany and elsewehre, the rest of us were duty bound to pay for them, is bound to note this article with approval. Dan O’Brien is as sharp as they come intellectually and, unless he sees his loyalty as primarily belonging to the Unholy Roman empire of van Rompuy, Sarkozy and the rest, he will know that what he argues in today’s Irish Times is the equivalent of a smart barrister putting on a show to get a serious villain off the hook.

  14. The Dork of Cork Says:

    Ah the old chestnut - if you believe this is a leverage crisis then any reduction of credit deposits relative to the the taxpayers ability to pay without the social chaos of core deposit destruction is a good one.
    We (Europe) cannot grow out of this crisis this time at least without the destruction of debt through inflation or default.
    Deposits or bonds do not fund anything - the wealth is already there - the problem is now not enough wealth remains to service everybody.
    Hence the destruction of living standards / deposits of workers & dependents to service the needs of these shadowy men.
    I repeat deposits do not fund anything.
    Banks give out loans and thus create deposits.
    We live in a sick world but there you have it.
    Suck it up or do something about it.

  15. DOCM Says:

    @ All

    On what may seem to be off topic, a link to a little noticed comment off script by the French Prime Minister, Fillon, by far the most impressive politician in France today.


    His fundamental point that the French and German economies - nearly half the EZ - have to be run in tandem for the euro to work is incontrovertible but no other French - or German - politician has the guts to say it. Having common retirement dates is the least of the problems but a handy red rag to the Socialist bull (already having the desired impact). Having a common company level of taxation will not solve the problem either. The social structures of both countries have to be folded into one another. It is impossible for French agricultural producers, for example, to compete against an influx of migratory workers each summer to a united Germany -which has rediscovered its agricultural hinterland (and inherited the benefit of large farm holdings, courtesy of the departed Communists) - in respect of which no obligatory social security payments apply, still less a minimum wage.

  16. Ceterisparibus Says:

    @Bond Eoin Bond
    What’s happening out there Eoin. The Markets are in freefall after a positive opening hour. Can’t find anything on Reurters and the FT lead is way behind the curve.

  17. Bond. Eoin Bond Says:

    @ CP

    sorry, i’ve been off buying tinned goods and a shotgun. Well, almost.

    No news, at all, its just horrible risk off, no risk, sentiment at the moment. For once there is very little expectation that the G20 meeting is gonna come up with something big and bold like you usually have. I think you’re just seeing a fundamental repricing of people’s economic expectations for the next couple of years. We’re looking for the Fed to eventually come back in with something big in terms of QE and some other changes to how they are communicating with the markets, but probably not for a few months yet. ECB’s hand may be forced in a couple of weeks’ time though. If the G20 do do something over the weekend, it’ll have to focus on a big bad banking recap scheme to overcap the EZ banks like the Irish government has done here.

  18. Kevin Donoghue Says:

    “In the US, senior bank bondholders have traditionally got their just desserts if the institutions they invest in fail.”

    It’s nice that Dan O’Brien manages to call a spade a spade, even if he can only do it once in a while. He goes downhill rapidly from there, implying that higher funding costs for banks are harmful to society. Actually they merely indicate that the risk of failure is being borne by those who should bear it, those who choose to lend to the banks. They are fully entitled to higher expected returns, to compensate them for the cases when the returns don’t actually materialise.

    To say, as Karl Whelan does, that “the relatively lower cost of bank funding obtained from a policy of supporting all senior bondholders is hardly a free lunch” is such a gross understatement that it is downright misleading. Subsidising banks in this way encourages their growth, which enhances their political power, which they abuse mightily. They will continue to do so until the subsidy is withdrawn. As he mentions, there is also the drawback that the risk is transferred to those who lend to the state; and the state’s higher funding costs are borne by taxpayers.

    It’s a dreadful system and we should do all we can to bring it to an end.

  19. Kevin Donoghue Says:

    Desmond Brennan: “A default in the EZ should only be possible if the bank concerned gave rates in the upper Zth percentile of banks (by volume).”

    I presume there’s a typo or two there. I can’t make sense of it.

  20. David O'Donnell Says:

    Completely off thread - but there might, just might, be a way out of the little black hole that we have stumbled into …. just need to put a few bob on The Neutrino in the 4 o’clock at FairyHouse

    Faster than light particles found, claim scientists
    Particle physicists detect neutrinos travelling faster than light, a feat forbidden by Einstein’s theory of special relativity [h/t nakedcapitalism]


    Physics_envy reaches epidemic proportions amongst the naive branch of the dismal science. Richard Tol goes back to school ….

  21. DOCM Says:

    @ All

    Some facts and figures on the decline of French agriculture vis-a-vis other countries and notably Germany.


  22. Mike Hall Says:


    Fair enough & a thoughtful piece that recognises the reality of who’s doing who a favour, with the possible omission that it’s the most vulnerable & least able to afford it who are bearing by far the largest part of the burden. 10 to 15 % unemployment for the next decade (if we’re lucky) won’t be fun. Nor will slave level wages, working conditions, decimated health care etc. for those just above be much fun either.

    But, the point most +all+ of you are missing is that their need not be +any+ ‘borrowing’ costs at all - principle or interest - for (public) spending on behalf of a currency +issuer+. That currency +issuer+ being either a properly constructed ECB/central euro authority, or, failing that, the Irish gov following exit from the euro.

    Of course, such currency +issuer+ authority (debt free) spending is not unconstrained. There must be otherwise idle labour (the unemployed) available to be able to be hired. (Oh look, hey, there is right now! And oh, happy coincidence! We need to stimulate aggregate demand +right now+!)

    So, as growth returns & the private sector demand for those government-hired-near-minimum-wage-workers (so as not to ‘crowd’ existing employment) also grows, we need a few economists to do a few basic calcs and start cutting back the spending and/or taxing, according to our didtributional needs, to remove money from circulation and avoid inflation. Think you can manage that boys? (I reckon you could with a little re-education & training - currency +issuer+ funded of course, lets not be mean.)

    I know this is ‘macro’ economics & somewhat alien to the way you’ve been programmed, but do try eh? For the sake of those not as fortunate as yourselves?

    Allow me to point you in the right direction, if you like to get ahead of things? This is MMT - less a theory, more an accurate assessment of actual monetary operations - combined with Abba Lerner’s ‘functional finance’. The key academics have been checking all the details for the last 20yrs, Prof Bill Mitchell’s blog is particularly good. Back to basics, data, empirical evidence etc. all that good stuff, well explained.

    Yes, I know the banksters aren’t going to like this much. (Who’d a thought such honest folks would be scamming us for interest & principle for ‘lending’ to our currency +issuer+ authorities?) But perhaps we could summon the courage to propose, oh, say, a (long, very long) walking holiday for them, as a ‘thankyou’ for our 3yr+ ongoing global crisis?

  23. Ceterisparibus Says:

    @Bond Eoin Bond
    Thanks. The FT just changed the lead. Now reads…Markets shrug off G20 pledge.
    I think I’ll go and buy those Heinz beans now…or do Aldi sell them. I’m already loaded up on buckshot.

  24. JohnTheOptimist Says:

    Some people need to get a grip on themselves.

    After yesterday’s growth figures, there is zero chance of Ireland being allowed to default (even assuming the government wanted to, which I doubt).

    The fact is that Ireland would only ever have been allowed to default if it could show the world that conditions were so bad that it had no alternative.

    Quite a few, not least on here, predicted that such would indeed be the case.

    But, recent months have disproved all their dire predictions.

    First, the census results showed that all their hysterical claims about Famine-level emigration and depopulation were rubbish.

    Second, yesterday’s growth figures showed that all their hysterical claims about the economy having been destroyed were also rubbish.

    They must be bonkers if they think that Messrs Rehn, Bin Smaghi et all aren’t aware of both the census results and the growth figures.

    Yesterday’s growth figures showed that Ireland now has the second highest GDP growth rate in the EU27. Is it seriously believed that such a country would be allowed to default? Given the recent sharp improvement in competitiveness, the meeting of all IMF deficit targets, the movement into balance-of-payments surplus, and now the return to moderately high levels of growth, not to mention the census population figures, all of which are leading to rave reviews in the international financial press, is it seriously believed that Ireland should throw all this away and pursue a course of action which would destroy its reputation for a generation and lead to a collapse in investment? I think not.

    Add in other factors such as the complete absence of social unrest and strikes, and the fact that there is a government with a very large majority, which is riding high in the polls (although, for reasons unrelated to the economy, I myself wouldn’t vote for them).

    I am afraid that, while the default bus could have been boarded during the last autumn/winter period, when the panic was at its height and an election was in the offing, it has now long departed. Time the nuts in the media and on here got used to that fact.

  25. DOCM Says:

    @ Bond. Eoin Bond

    If you will forgive me for butting in, I agree completely with your last sentence. I wonder if there is any chance of getting some help with our bill for bank recapitalisation, or at least being given more time to pay it? After all, if Ireland is to be the new poster boy for the avoidance of contagion (i.e. the containment of Greece) the risks of him blotting his copybook have to be reduced in the broader European and international interest.

  26. Ceterisparibus Says:

    Remind me…what was the drop in GDP following the last recession and was it the IT that reported exports off by 10% in July. As Michael Hennigan posted earlier, beware of forecasters.

  27. Ceterisparibus Says:

    And a bit more reality from the Examiner…

    BANK lending to small and medium-size enterprises plummeted in the second quarter with loans to the wholesale/retail sector down 10.8% and hotels/restaurants down 17.4%.

  28. grumpy Says:


    There are margin calls so if it is liquid it is sold. Also the flattening of the yield curve is going to undermine all sorts of carry trades that have been inflating asset prices. For the real economy this might not be a problem - lower comods is hardly unhelpful the IBs have a different perspective. Lots of crowded trade merchants unwinding. Assumptions about bric economies being questioned.

  29. Sarah Carey Says:

    @Bond. Eoin Bond

    “sorry, i’ve been off buying tinned goods and a shotgun”

    We’re growing potatoes. I’ll share :)

    On Neutrinos we read this on Talking Point a while back.


  30. Shay Begorrah Says:

    @Kevin Donoghue

    Subsidising banks in this way encourages their growth, which enhances their political power, which they abuse mightily. They will continue to do so until the subsidy is withdrawn. As he mentions, there is also the drawback that the risk is transferred to those who lend to the state; and the state’s higher funding costs are borne by taxpayers.

    It’s a dreadful system and we should do all we can to bring it to an end.


    It seems fairly safe to say that the policy fight is now between those trying to pretend that the global financial crisis was actually a really unfortunate set of simultaneous local fiscal crises (solution: austerity, deregulation and financial innovation) and those who recognize that the financial markets, as they currently operate, are the largest impediment to a just and fair society and a balanced economy and need to be reconfigured.

    The ECB and schills would be firmly in camp one, Europe’s left in the sane part and Germany occupies a strange nether world where the problem is the insufficient deference to the financial markets everywhere in the Eurozone excepting countries adjacent to Germany where people just made some honest mistakes.

  31. Karl Whelan Says:

    I for one am looking forward to hearing Lorenzo’s opinions on our Census results.


  32. David O'Donnell Says:


    Also worth a read - only time to scan at the mo … he is speaking in Dub today and on VB last nite

    Thursday, September 22, 2011
    Marshall Auerback: The ECB v. Germany

    By Marshall Auerback, a portfolio strategist and hedge fund manager


  33. Ceterisparibus Says:

    It looks increasingly likely that greece will default soon. Bloomberg report that they first defaulted 2400 years ago when 10 munis defaulted on their debts.
    So they have a track record. Wonder did Moody’s factor that in. They must not have places like debtors prisons where you don’t get out until you pay up.
    I suppose that a Brit legacy.

  34. Ceterisparibus Says:

    3.4 Trillion up the creek….
    More than $3.4 trillion has been erased from equity values this week, driving global stocks into a bear market, as the Federal Reserve’s new stimulus and a pledge by Group of 20 nations fails to ease concern the global economy is on the brink of another recession. O’Neill said the Fed’s plan to shift $400 billion of short-term debt into longer term Treasuries hasn’t convinced investors it will strengthen growth.
    “The fear that it’s all dependent on the Fed, together with this mess in Europe, is really getting people more and more worried as this week comes to an end,” O’Neill said. “The markets have taken the latest FOMC move rather badly, which adds a whole new angle to it. It’s the first time since the global rally started in early 2009 that the markets have rejected a Fed easing.”

  35. Bond. Eoin Bond Says:

    @ CP

    i still reckon Greece get the next tranche and get thru to the Nov/Dec review, but anything can happen then. Govt could collapse in the meantime, or the measures pledged in the last week may end up not being pushed through.

  36. Ahura Mazda Says:

    @ Karl,

    “My position on this is that there is no need for the question of burning senior bondholders to be a simple black or white proposition. As I discussed in this paper, the EU could adopt a policy that sees senior bondholders only incur haircuts if equity and subordinated bonds have been wiped out, the bank has been nationalised, and the state has incurred costs of x% of GDP to bring the bank back to solvency.”

    Discussing these things when the system is blowing up isn’t ideal timing. I like simple. My position is banks should either be state owned or operate privately without any state protection (and this includes deposit guarantees). Depositors seeking safety above rewards should go to state owned banks. Private banks would either have to offer higher deposit rates and/or hold more capital to attract funds. This wouldn’t stop private banks borrowing from state banks. However the interest rate agreed between the state owned bank and the private bank would reward the state for the risks the private bank is taking.

    Ignoring the current, eh, issues; I don’t like:
    1. Private owners issuing shadow sovereign debt. If there is an implied state guarantee, see Ireland 2008-20xx for diwnsides.
    2. In confers an advantage on banks operating in countries with higher credit ratings.

  37. anonym Says:

    Higher borrowing rates? Saints preserve us. It’s one thing to scare the children into line with “Iceland!”, but “Denmark!”? Colour me unterrified.

  38. David O'Donnell Says:

    Oh - just give them the 8 billion - as we are all badly in need of a Greek/Greece/ free day …..

    … and the following day Frankfurt prints 3 trillion and we can all enjoy the world cup.

  39. Bond. Eoin Bond Says:

    @ Karl et al

    it should be noted that the Danish govt is also now rowing back/considering rowing back on the scheme as is due to the negative blowback for their banking system.

  40. Ceterisparibus Says:

    @Bond Eoin Bond
    Agree with you, I had posited that scenario earlier. But with the Greek Finance minister openly talking about default as a possibility, I think that may change the prognosis.
    To be shure to be sure I’m off to Lidl now…I hear they have a great bargain in tinned sauerkraut.

  41. seafóid Says:


    “More than $3.4 trillion has been erased from equity values this week”

    - http://cachef.ft.com/cms/s/0/7f55fe18-6a8c-11df-b282-00144feab49a.html#ixzz1Jt0wFhDy

    By Martin Wolf
    Published: May 28 2010

    “Bobby decided not to respond to this teasing. “So,” he asked thoughtfully, “what’s going to happen next?”
    “If I knew that, I wouldn’t be a mere economic journalist,” his father said.
    Bobby smiled: a familiar remark.
    His father did not notice. “Maybe, the momentum gained by the US and the big emerging markets, especially China, will let the world ride through the shocks. The OECD calls the outlook ‘moderately encouraging’.
    “Alternatively, you could argue that the massive fiscal deficits are unsustainable and that attempts to rein them in, in the eurozone and UK, are going to cause renewed recession and political strife. We have also barely begun reducing private debts, which will take years. The banks are far too big and have too many doubtful assets on their books. Meanwhile, emerging countries are too small and weak to be locomotives for the world. Some people worry that China is overheating or suffering from huge asset price bubbles, too, though I disagree. And then there is geopolitical uncertainty over North Korea and Iran. In short, markets are volatile because of all the uncertainty out there.”
    Bobby was beginning to find this familiar: his father tended to see the gloomy side. But he could be wrong, as his mother enjoyed pointing out.
    “Anyway,” concluded his father, “these aftershocks are likely to go on for years, with fiscal worries undermining confidence in the financial sector and back again. It will affect you, too: western governments are going to be short of money for decades. It’s going to be miserable. But you can learn Chinese and go east.””

  42. Bond. Eoin Bond Says:

    @ CP

    in fairness, the Greek FM is saying thats a scenario more as a scare tactic to get the remaining bondholders to sign up as much as suggesting it could really happen. He’s kinda saying, we’re offering you 79 cents via the swap, your alternative is 50 cents in a full on default. Take it or leave it.

  43. Frank Galton Says:

    This blog post from Robert Peston last week is worth a read.

    We are bailing out the ENArques.

    Just think of the value for money the next time you walk through the first class cabin on an Air France flight.

  44. Michael Hennigan - Finfacts Says:

    @ Jo

    I look forward to a world where no one would have the bald-faced cheek to publish an article such as that.

    Leave the country Dan.

    Where ignorance is bliss…maybe he deserves the Rick Perry treatment for traitors or worse?

    @ All

    Ireland and Denmark were the only members of the EU who guaranteed bank debt during the crisis.

    Ireland made a unilateral decision (nonsense about a prior phone call is irrelevant) to guarantee existing bank debt and 2 years or more later, it was difficult to muster up credibility thumping a table while in reality being the Whited Sepulchre.

    Ecofin had an Oct 2007 policy in place which recognised the importance of burden sharing; Q4 2008 would have been the time to have played some cards, during a time of turmoil.

    Words of advice from Kenny Rodgers:

    Now every gambler knows the secret to survivin’
    Is knowin’ what to throw away
    And knowin’ what to keep
    ‘Cause every hand’s a winner
    And every hand’s a loser
    And the best that you can hope for
    Is to die in your sleep”

  45. Chris Says:

    From JCT reply to parliament.
    “In our institutional set-up, fiscal discipline is induced via existing domestic
    provisions; the fundamental institutional framework of governance (the Treaty
    and the Stability and Growth Pact) and the assessment by savers and
    Jointly guaranteed bonds would not permit savers and investors to assess
    fiscal policies of individual countries.”

    Doesn’t JCT understand that the ’savers and investors’ represented mainly by fund managers, are not responsible enough or do not make use of information well enought to asses fiscal policies of countries. What about herding, contagion, bubbles etc. This ‘free market’ regulation has not worked. Is this seriously his main reason for rejecting Eurobonds?

    When Brian Lenihan informed a group of fund managers over the phone of his intention to reduce the terms of the bank garantee in Sep 2010, some of them made monkey noises and others were heard shouting ‘Short Ireland’. By November they had Ireland out of the bond markets. These guys are only interested in profit and if anthing has emerged from the crisis it is that they should not be made responsible for anything.

  46. seafóid Says:

    @ Michael Hennigan

    Kenny Rogers on traders trying to reverse carry trades

    I pushed my soul in a deep dark hole and then I followed it in
    I watched myself crawlin’ out as I was a-crawlin’ in
    I got up so tight I couldn’t unwind
    I saw so much I broke my mind
    I just dropped in to see what condition my condition was in

  47. Chris Says:

    Also in the U.S savers and investors don’t asses fiscal policy. In 2009 80% of US bond purchases were made by the Fed driving down interest rates. So even the recent issues with the debt ceiling their debt didn’t get more expensive.


  48. Mark Dowling Says:

    God forbid CDS holders in the US take a bath - Timmay Geithner might get mad

  49. Bond. Eoin Bond Says:

    @ CP

    equities in positive territory now. No news. Odd day.

  50. Michael Hennigan - Finfacts Says:

    @ seafóid

    Wasn’t Willie Shakespeare and his team wise?: the Devil can cite Scripture for his purpose!

  51. Chris Says:

    @ Karl,
    All of the submissions were interesting and made intelligent valid points from top qualified people. Charles Wyploz wrote the book on EU integration.
    Unfortunatly all policy makers seem to be constantly ignoring the advice from sources such as University lecturers and independent think tanks, and following the advice of financial industry workers.
    Joesph Stiglitz in 2004 figured out that the structure of the ECB was a major flaw with it being biased towards the financial industry and dismissive of workers.
    Of course the EU parliament can’t do anything except submit suggestions as the ECB is independent.
    How can the ECB be changed?

  52. Ordinary man Says:

    Karl Whelan Says:
    September 23rd, 2011 at 1:48 pm
    I for one am looking forward to hearing Lorenzo’s opinions on our Census results.


    Heard he spent the August bank holiday weekend studying the figures :-)

  53. David O'Donnell Says:

    @Karl Whelan

    May I presume that this will be St. Lorenzo’s treatise on the inflationary perils of the missionary position when the fire and the lights go out in the sinfully profligate periphery as his initial encyclical on taking up his new position as Abbot of the Trappist Monastery of Bobbio; to be published, with sincere gratitude, by The Saintly Columbanus Bank AG for services rendered.

  54. David O'Donnell Says:

    @FinFacts & Ministers Quinn & Bruton


    Australian tech entrepreneur Bill Liao has come to Ireland to, among other things, invest millions in Irish start-ups. But if we want to be the Silicon Valley of Europe, he warns, there are issues around bureaucracy, education and infrastructure that need to be resolved. [...]

    Liao has joined Ireland-based venture capital firm SOS Ventures and has invested in Startupbootcamp, which is run by former XING CFO, Irishman Eoghan Jennings.

    He has also joined forces with 18 year-old Cork technology entrepreneur James Whelton to run a nationwide initiative called the Coder Dojo, aimed at fostering software coding talent among Irish school children. Without basic coding abilities, the schoolchildren of today will struggle to find employment in the decades ahead in any number of areas.

    “It horrified me when James told me that there was no computer programming courses for kids in Ireland. The course I saw that James did in secondary school was all about how to use Excel. That’s just insane.

    “The Department of Education announced recently that they had just trained 50 secondary school teachers in how to programme, but they taught them how to programme in a language called SCRATCH which is for kids. My kids learned SCRATCH when they were just eight.”

    Liao is anxious that there needs to be a greater understanding at a senior political level that education reform and our approach to supporting businesses needs to change. At a family level access to and understanding of the importance of maths, science and computing are vital.

    etc etc

  55. Eureka Says:

    Must be easy enough to make the market do what you want if you’re rich enough. Everybody’s lost sight on fundamentals.
    Somebody (or people) could be making an absolute fortune on playing this market right now

  56. Rob S Says:


    “I look forward to a world where no one would have the bald-faced cheek to publish an article such as that.

    Leave the country Dan.


    If you can’t handle the other side of an argument then that isn’t really the author’s failing. I saw no advocation one way or another - simply making the point.

  57. Desmond Brennan Says:

    @Kevin Donoghue
    My language was a little tortured !

    My point is that Karl should add a condition to the ‘default on seniors’ rules, namely that a bank can only be let default if the seniors were getting an abnormally high yield on the bonds

    I suggest to define such as being in the Zth percentile of EZ yields, where Z is say 30.

  58. seafóid Says:

    @ Eureka

    but aren’t markets always efficient and prices always right ?

  59. Kevin Donoghue Says:

    @Desmond Brennan
    Thanks for clarifying. I don’t think your suggestion is practical. It would mean that if, for whatever reason, a bank was forced to pay above the threshold level, the lenders would be facing increased risk for that very reason. So it creates a destructive feedback where paying up increases the risk and the increased risk means the cost goes higher still.

    At the end of the day I see no good reason why people who are lending large sums of money (say 100k or more), whether they are depositors or bondholders, should be protected by the state.

  60. grumpy Says:


    @David od

    “At a family level access to and understanding of the importance of maths, science and computing are vital.”

    That is just nonsense. What matters far more is that sheltered sectors of employment remain protected from cheap / superior foreign competition - and the best way to ensure this is to spend time that might be spent on IT skills on compulsory Irish lessons and matriculation requirements.

  61. grumpy Says:


  62. seafóid Says:

    A Ghrumpy

    Na bi ag caint raimeis. Teigh amach go dti an leithreas anois.

    If Swiss kids can learn 3 languages at age 9 Irish kids can learn 2.
    Nach ea.

    Irish isn’t the problem. The standard of teaching is . Look at illiteracy levels or historic FF voting patterns.

  63. Chris Says:

    Its great to see Dr. Wypolsz pick up on something Jean Pissany Ferry had been on about and I have posted here a few times already. The poor and unfair structure and decision making at the ECB.

    The ESCB has a particularly complicated decision making structure. Formally decisions are made by the Governing Council. Currently composed of 23 members, the Council is clearly too large to conduct in-depth analyses. Although details are not made public, it seems that the decisions are prepared within the Executive Committee (consisting of six members).”

    “The current ’spoil system’, which reserves a seat for each of the
    four largest countries, should not be tolerated any further. We need the best possible candidates that Europe can offer.”

    I wonder if Dr. Honahan would agree. I presume he would.

  64. grumpy Says:


    Greek deposits running at a steady -10% yoy apparently.


    “Irish isn’t the problem. The standard of teaching is ”

    Would that be the teaching profession insulated from non-irish competition for decades by the Irish language qualification requirement? :-)

  65. Ceterisparibus Says:

    @Bond Eoin Bond
    Remarkable all right. I go out for an afternoon to stock up on necessities in Lidl and Aldi and the bloody market turns turtle. You can’t depend on anything. I picked up a bargain sub-aqua suit in case I have to go underwater,which reminds me, I shouldn’t have followed Warren Buffet. I thought I might get a bit of culture in town today, but the only thing of note was observing a barman being abused in a homophobic rant by a couple of patrons I think he ejected. So I bought the FT and was delighted to read that the Chilean Finance Minister agreed with my stance when he said…” we can only hope for the best and prepare for the worst”

  66. Brian Woods Snr Says:

    @Grumpy: “Would that be the teaching profession insulated from non-irish competition for decades by the Irish language qualification requirement?”

    No, it would be one of PH’s hidden interest groups and their ideological agenda. The primary syllabi and curriculum are a tad - “forward into the past”, sort of stuff. Primary teachers are ‘taught’ to teach in ideological Boot Camps. 8)

    Brian Snr.

  67. Desmond Brennan Says:

    @Kevin O’D
    Depositors/Senior bondholders are neither lenders nor investors, they just want a safe place to put money with a modest interest rate to offset inflation.

    Banks, with their c 8% risk capital are indeed lenders.

    And yes…my idea would mean punishing interest rates in the Zth percentile. Though it might make more sense to set it at say Z standard deviations or such like.

    But that is only if people think lqiuiidity providers _must_ be at risk….and I don’t think they should be. Regulators should use genuine risk ratings, and counter cyclical tarrifs. And Regulators need to be made lose money for bad calls. Neary was _rewarded_ with a golden handshake, and the others kept their jobs.

    Liquidity is only at risk when the lavishly paid, state appointed, regulators fail, and moral hazard needs to attach to them, not the liquidity providers

  68. Ceterisparibus Says:

    That FT article is interesting. The PIIGS only account for one third of 15% of German exports. So I suppose putting up trade barriers wouldn’t have much impact.

  69. Frank Galton Says:


    WASHINGTON—Greece’s creditors may need to revise the terms of the July 21 agreement on an additional aid package for the country, German Finance Minister Wolfgang Schäuble said Friday.

    “It would surprise me if the conditions for a disbursement of the next tranche of aid in September had changed, but not if the conditions for an additional program had changed,” Mr. Schäuble said at a press briefing on the sidelines of a series of international meetings.

    “However,” he added, “I want to wait and see first.”

    These haircuts might be coming crew cuts.

  70. Ceterisparibus Says:

    @ Frank Galton
    Yes…all bets off…”
    “According to Finance Ministry data released on Thursday, net revenues were 3.5 billion euros off target and expenses 1 billion higher. As a result, the deficit shot up 22 percent to 18 billion euros year-on-year in the first eight months. And the yearly targets seem unattainable, as the remaining sum for collection is 5.8 billion per month, when monthly inflows vary between 3.7 and 4 billion euros.

    Sources say the troika is still expressing doubts about the government’s intentions to fully implement the measures heralded. Its officials say they will wait for more details on the measures next week, as the announcements referred to measures already agreed to in the midterm program last July.

    “We are taking note of the government’s announcements… they will be examined in detail by the troika when it returns to Athens,” said European Commission spokesman Olivier Bally. “The aim is for talks to resume in Athens next week but we shall see if this is realistic.”

    It appears to be coming to a climax.

  71. Kevin O'Rourke Says:

    I have been waiting for Colm to point out that a decision appears to have been taken that it is OK, or at least preferable, to burn another set of bondholders…

  72. remnant Says:

    “There has not been a senior bank bond default during the euro era.”

    Wow - that’s a whole 12 years!!!

    “As a result, both asset classes have been considered by market participants to be effectively risk-free.”

    Not true. Anglo-Irish and other Bank senior bonds traded above sovereign yields prior to the guarantee. Even if true - not relevant - just because the market gets an expectation wrong doesn’t mean it has a moral, legal or political claim on Johnny Taxpayer.

    “The savings for Ireland of a few billion euro would be offset many times over by the generalised increase in funding costs for the already-teetering euro zone banking system.”

    Lets be clear here. The costs to the Irish taxpayer of providing this EZ “public good” - €80 Billion or so -were roughly equivalent to wiping out all of our private pension funds or, if you want another comparison, the total value of all consumer retail deposits in Irish banks in 2008.

    And for this we’re expected to doff the cap in return for an interest rate cut on debt we only need to take on because we’re paying someone else’s debts?

    The reason we are where we are is that fundamentally our elites/establishment/media (inc the Irish Times, etc) failed to recognise (or refused to face or were too cowardly to acknowledge) the fact that there is (and was) a fundamental conflict between the national interest of Ireland and those of our “European Partners”, ECB, etc.

    Their goal = Irish Taxpayer foots the bill to save EZ taxpayers from bailing out their own banks or the ECB from printing a bit of money.

    Ireland’s national self-interest = Wind-down of bankrupt Irish banks. (As we now know, there were more than enough assets to honour the states’ s€100,000 guarantee to depositors).

    And if/when they did recognise the conflict, they preferred to lie repeatedly to the Irish people about the reasons why. (”we can’t change the law”, burning anglo subbies would contaminate sovereign credit, all the bonds were owned by Irish people, etc, etc, etc).

    I can’t fathom why? Slavish Europhilia? Lack of the concept of “national interest” that motivates at least some of the “grown-ups” that run real states? Browbeating and broken promises behind the scenes?

    How much was this worth to the others? Back in November/December, total EZ Bank bond debt was €6,462 billion. Every 1bp that the Irish “guarantee” for Anglo or AIB bonds reduced the cost of this debt was worth >€6 Billion per year (or say, €160 Billion if capitalised at 5%).

    In other words, there was plenty of room for a Pan-European win/win deal on this - and instead the Irish taxpayer

    And we still fly the flag of the institutions that did this to us above our parliament and speak of “our European partners” - Shame on us!

  73. Desmond Brennan Says:

    @Kevin O’Rourke
    That would be a charitable analysis, as it at least assume co-ordinated and cohesive thinking - whereas what we’ve had has been a demented cacophony of EZ voices and institutions, with near arbitrary stopgap ’solutions’

    What is needed is for there to be a single competent authority, which would then be accountable . Some people confuse a lot of things and term the new authority as a new EZ Finance Minister, it need be no such thing, as a Min Fin has political discretion over fiscal matters.

    What is needed…and asap is an EU Directorate for Financial Stability, in charge of:
    1) Top level fiscal rules, their monitoring and associated economics work
    2) Monetary policy (yup time to pwn the ECB)
    3) Macroprudential regulation and standards supervision of local micro regulation

    Some of the powers would only apply to Ez members, but in general we do need one of these directorates per trade region of the world

    This new body should be set up with level of independence similar to a Central Bank, but true accountability. And instead of divvying up the top jobs by nationality…bring in folks from outside the EU(e.g. Stanley Fischer etc)

  74. Joseph Ryan Says:


    I can’t fathom why? Slavish Europhilia? Lack of the concept of “national interest” that motivates at least some of the “grown-ups” that run real states? Browbeating and broken promises behind the scenes?

    Straight forward self-interst on the part of ruling elite and upper echelons.

    Most of people influencing and making these decisions have done very well in the past three years. AT least twice if not three or four times as well as if they had stood up to the ECB/EU and shut the banks down paying only depositors.

    CUI bono. It is not just the bondholders who benefit!

  75. Kevin Donoghue Says:

    @Desmond Brennan: “Depositors/Senior bondholders are neither lenders nor investors….”

    I’m afraid you’re simply torturing language. You’re free to adopt your own definitions of course, but don’t be surprised if your readers just can’t make sense of your comments.

    @Kevin O’Rourke

    I’m not sure why, but it’s a comfort to know that you’re as pissed off by this nonsense as I am. Yet funnily enough, one of the things that Power and Plenty brought home to me was how readily the rules of the game are changed when the rules no longer suit the powerful. So in a way it’s a puzzle: why are we annoyed when we know very well that this is the way of the world? Is it just because it’s our ox being gored?

  76. Kevin O’Rourke Says:

    @Kevin: well, if you have learned this lesson, then you are bound to be irritated when people falsely insist that there is no alternative…

  77. DOCM Says:

    @ All



  78. DOCM Says:

    @ All



  79. seafoid Says:

    The thing about Dan and everyone else telling the country to follow the programme regardless of the lunacy that may be involved is the underlying assumption that if you do what you are told teacher will be nice to you.
    No scope for malfeasance or incompetence or just the bog standard type of shafting that can happen when people and countries make choices about those without any power.

    This sort of thing


  80. grumpy Says:


    Are you suggesting this all comes down to the sort of people who always want to sit at the front of the class vs everyone else?

  81. Eureka Says:

    Dan is, in my opinion, a guy who likes putting the boot in (German hobnail boots that is).
    It’s stupid even having this discussion. We have to pay these idiots cos their chief JCT is bankrolling us at the moment. There’s no point in discussing false options.
    Time the finance editor of the IT took the marbles out of his mouth and started discussing how, despite running a huge trade surplus we’re destined to languish for decades with lost lives through unemployment.
    Dan should ask - if the EFsf or ESM (or whatever) is used to recapitalize banks what will be left for Ireland in 2013. If Greece defaults we are an absolute 100% certainty to follow (cos there’ll be no money left for us). Simple as dat Dan.
    So stop kickin the Irish when they’re down - analyze properly. As a layman I’m sick and tired of seeing this more clearly than some idiots. It’s not cos I’m clever - it’s just cos I live in the real world

  82. Eureka Says:

    Sorry - said idiots meant some economists. Not all. DMcW was on the money. A few others missed it but have been great in stirring up debate etc so kudos to them. And never blame anybody for making a mistake. Dan didn’t see the problem and doesn’t see the solution - so…go figure

  83. myles Says:

    Burning bondholders is the not the total solution to the financial crisis. There may be scope for some haircuts of unguaranteed debt, but it should be possible to implement a structured default of most bonds in the main banks with a view to easing the burden on the Irish taxpayer and Irish economy in the short to medium term. There are other measures which would facilitate this new initiative, which I have outlined below.
    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.

  84. Michael Hennigan - Finfacts Says:

    While it is galling to have to pay back in full debt owed by a defunct bank, a country that is overwhelmingly dependent on foreign lenders for most of its funding - - sovereign and banking- - has not much room for maneuvre.

    “The Danish authorities have perhaps been a bit too quick to set up a resolution package,” Henrik Ramlau-Hansen, chief financial officer of Danske Bank A/S, Denmark’s largest bank and owner of National Irish Bank, said in an interview this month. “We fully support the idea that the banks should be solid and that you should have strict capital requirements, but it’s extremely dangerous to have different rules in different countries.”

    The venom reserved for the ECB, including presumably from some of you once happy mice who danced to the tunes of the Pied Piper of Drumcondra, should be set against the impressive crisis leadership of Jean-Claude Trichet - - a sharp contrast with the fiddling of political Neros.

    Some may point to Iceland: it did not guarantee bank debt; its export surge predated devaluation but compared with Ireland, where a small number of American firms are responsible for the majority of Ireland’s goods exports, Iceland can rely mainly on its own resources.

    The inconvenient truth also is that the Irish are not very good at exporting.

    So amidst the changes underway in the world economy, conservative Ireland is at a standstill; the insiders hold onto their bubble gains and but for Europe, the beggars could have remained on their horses . Meanwhile, policymakers await jobs manna from the US with its broad measure of unemployment above 16%.

    There is hope though: the troika is pushing for a derailing of the legal gravy train; I did remark previously that the learned judges found another mode of free riding, taxi regulation - - a cartel for lower income folk - - unconstitutional, more than a decade ago but not what was under their noses.

    @ David O’Donnell

    Bruton and his sidekick Sherlock reserve their arsenal of vacuous superlatives for what are viewed as the sexy startups.

    In the US, tech startups account for about 4% of the annual number of new companies. They and young firms are responsible for all net job creation.

    Many are needed because about a half fail in five years.

    I’m in favour of diverting some of the corporate welfare from the sexy area where a small number become rich and few private sector sustainable jobs are created, to other sectors.

  85. Ronnie O'Toole Says:


    The reasons for your very strong preference for indigeneous firms over foreign MNCs may seem obvious to you, but aren’t to me. Can you please spell it out?

    In terms of employment generated, tax revenue generated, knock on employment and technology transfer, the contibution of foreign MNCs to the Irish economy is massive. These firms are of course mobile, though no more so than large US firms are in their home country. The track record of foreign MNCs in Ireland is now a long one, and there is every reason to expect it will continue for a very long time. Finally, and as I mentioned recently, Asia has tranformed its growth path by attracting foreign capital and technology in the same way as we have - our industrial development path is not in any way unusual, though it is unusual to ‘old Europe’ which followed a very different path.

    All of the above seems obvious to me, but clearly you do not agree, as your comments continually talk about MNCs as if they barely matter. Could you please explain?

  86. paul quigley Says:

    @ Ronnie

    Excuse me for butting in, but:

    * Employment in the MNC sector is a relatively small proportion of total employment
    * While there is churn, no net new jobs have been created since 1998, as Michael consistently highliights
    * Investment is increasingly capital intensive, and directed towards services rather than manufacturing
    * The sector is an enclave with few linkages ofany kind to the domestic economy. If you can show otherwise, please do so.
    * Investment is financed from retained global profits and, unlike SMEs, is not dependent on swings in local credit conditions
    * More and more of the activity involves intangibles, such as licences and patents, with llittle or no domestic real economy impact
    * Many of the financial transactions, such as transfer pricing, reflect internal accounting features of the MNCs tax avoidant modus operandi
    * A significant quantity of the export/GDP metric is a synthetic artefact, that is to say, it is bogus
    * Most of our FDI comes for a country whose political, military and economic power is on the decline.

    While the MNC sector is critical to some sections of the society, the notion that it will be an engine of overall economic development lacks all credibility. Notwithstanding the hard work which is done in many MNC enterprises, the primary reality is that this is about Ireland receiving a consideration, in the form of Corpo Tax, for the rent of our sovereign economic space. That arrangement is revocable at will, and is liable to be undermined by tax changes in the US or the Euro area.

    You say that our industrial development path is not unusual. What is unusual about our development path is that we have tried to bypass the industrial stage.
    That was a fantasy. Michael adverts to the poor returns from state investment in the ’smart economy’. Truth is we are following a light across the bog.

    Do you know any other country, outside Latin America, which has aligned itself so firmly to US corporations, or which has taken such a supine approach to their activities ? The Koreans would regard the stance of successive Irish governments as a betrayal of the national interest. Blind faith in ‘technology’ and the ‘free market’ has been profitable for individuals, expecially well placed ones, but it has led Ireland up a cul de sac. The death of critical research in this area over the last 20 years shows the taboos which operate within our academic sector.

    The markets for high tech MNC products are very far from free. Behind the smiles and the handshakes, these folk play hardball. Administered (cartel) pricing plus tax, labour and regulatory arbitrage are some of the ways in which market share is maintained. They came here to make money and they have accumulated the cash pile. What we are left with is an enclave which distorts our economic footprint, and serves to obscure the parlous state of our domestic sector.

    Michael Hudson’s 1972 analysis in Trade Development and Foreign Debt have stood the test of time, as have Joe Lee’s observations in Ireland 1912-85.

  87. Michael Hennigan - Finfacts Says:

    I have no problem with MNCs and recognise their contribution.

    I agree with Chris van Egeraat of Maynooth as stated here this week that it will take years before we will have developed a competitive indigenous export-sector that will create the number of jobs required to address the current unemployment crisis:


    The MNCs do matter but we should realise that as we have been successful in getting the main US high tech and pharma firms to establish
    in Ireland and beyond the headline investment figures, new entrants in recent years have tended to be small with limited potential for creation of jobs.

    In fact new firms in the US in the past decade tend to be smaller in terms of employment than previously - - outsourcing of course is a factor.

    It’s not clear if we can get emerging economy MNCs to set up significant facilities in Ireland. In past years, the experience with Japanese and Korean firms has been mixed.

    I do regard the narrow focus of indigenous high-tech/biotech innovation from research is misguided.

    One problem is the size of the market and it’s difficult to export without having the testing experience of selling domestically.

    Supporting MNC R&D is important but that is a fuzzy area - - what type of R&D is done in Ireland and what are the manpower requirements?

    There is a lot of spin on collaborations but again, the taxpayer can be funding a large portion of the value (IDA funding of the MNC and 100% funding of the State centre).

    An HEA commissioned report this week had guesses on potential commercial impacts but in my opinion it was a waste of time and money.
    We do need to get people involved in startups in many sectors.

    What is the alternative to an early cashout by a university spinout with potential via a sale to a bigger US firm - - how many of such firms have scaled up in Ireland?

    We are very dependent on the pharma sector - - apart from the loss of blockbusters, the return from R&D has fallen over the past decade.

    The number of FDA approved new drugs each year is the lowest since 1950 and in the biopharma sector, the cost of new treatments tend to be very high at a time when public finances are under strain.

  88. hoganmahew Says:

    @Ronnie O’Toole
    Technology transfer is not worth a hill of beans if there are no indigenous firms to transfer it to.

  89. David O'Donnell Says:


    Der Spiegel Editorial …. Book_Em Dano .. er .. Burn_Em Dano!

    In the case of a fundamentally competitive Ireland, they essentially want to build a bridge to better times. But with Portugal, this is already doubtful. And in the case of Greece, according to all financial calculations, it is impossible for the economically moribund country to escape bankruptcy, even with a mixture of new debt and crushing reforms. Meanwhile no one in charge wants to discuss what would happen if investors decide to shun Italy, which is at even greater risk.
    Debt Haircut is the solution.


    All Blacks 19 French_B 03 Phew … we can relax

    @Michael Hennigan

    Yes - time for a real Minister of Small Indigenous Firm Sustainability & Development - perfectly viable ones are goin out of business at the mo …

  90. David O'Donnell Says:

    …& the newly formed Garda/PSNI All Ireland Rugby team has just been formalised - along the lines of the IRFU - gettin ready for The English and the French in the new year. Seeking an Honorary President - must have direct experience of both institutions - FG appear to be stumped on this one - have to think about it … JohnTheOptimist might help me out here …

  91. Dreaded_Estate Says:

    @Desmond Brennan
    “Depositors/Senior bondholders are neither lenders nor investors, they just want a safe place to put money with a modest interest rate to offset inflation.”

    Not sure what version of capitalism is where senior bondholders or depositors are providing risk free funding to banks. Lending money, which is what this is, is not risk-free. It never has been and never should be.

    The raison d’être of financial markets and capitalism is the efficient allocation of capital and resources. IMO the historic miss pricing of risk is the main reason why the financial markets have been in turmoil for the last 4 years.

    Lenders to banks, meaning senior bondholder and depositors, miss priced the risk that banks could go bust, providing them with too much funds at too low a price. The banks didn’t know what to do with their excess funding so they lent to the wider economy at rates that didn’t reflect the true risks they were taking on. Either through lending to developers or sub prime lending to very risky individuals.

    If lenders to banks had correctly assessed the risk the banks would fail they would have charged more to banks who were taking on greater risks, forcing these banks to charge more to their customers who were greater risks to them.

    To suggest we try and return to a situation where funding is seen as risk free and again miss priced is setting ourselves up for history to repeat itself.

  92. David O'Donnell Says:

    Final: All Blacks 37 French B 17

    Richie McCaw first All Black to hit 100 caps.

    Had a chat with a young lady recently - recent grad First Class Hons in Civil Engineering … all she can see is the dole + €50 Euro to do slave labor for a multinational - Insanity: So Blind Biddy (still wondering why de sthole her half bag of coal to pay for dead zombie banks) gave her a prescription for a few months in Bondi Beach and a bit of a party and then ‘da sthart’ with a firm in Christchurch New Zealand; with John Hayes as referee she will be chartered in no time. What does this tell us?

  93. DOCM Says:

    @ All

    To return to the subject matter of this thread, I happened upon the following comment by the editor of the Lex column which is such a masterpiece of encapsulation of the present international financial situation that it would be a pity not to share it.

    “When in a bind, twisting and squirming often only makes matters worse. That is exactly the effect the US Federal Reserve’s Operation Twist – a $400bn shift from short- to long-dated bonds designed to kick-start the economy – might have as the world lurches back towards financial crisis. Worse still, 33 months of near-zero interest rates and $2,300bn of debt purchases in two rounds of quantitative easing may have only succeeded in creating more irresponsible lending as investors abandon discipline in search of yield. This should be enough to give the Bank of England pause for thought as it contemplates a second round of QE. The global economic forecast is unlikely to brighten until eurozone politicians get serious about solving the region’s debt crisis. Further austerity measures in Greece this week will only postpone an inevitable default while Italy’s dysfunctional political establishment appears unable to deliver the necessary reforms. Add to this combustible mix China’s cooling property and manufacturing sectors and the situation looks grim indeed.

    The underlying problem is still the banks. Moody’s downgrade of three US banks speaks volumes about the dire state of the economy. In the eurozone, Italian banks are in a liquidity trap thanks to profligate government borrowing, Greek banks are in for more pain when a sovereign debt restructuring finally materialises and French banks find themselves at the centre of an ongoing recapitalisation debate. Worryingly some corporate clients such as Siemens now consider using their own banking licence to deposit money with the European Central Bank to be the safest option”.

    Others actually interested in the thread topic have commented on the curious case of the price of gold dropping at the same time as equities and have put forward the plausible explanation of investors involved in the currency carry trade facing margin calls and needing cash fast. The law of unintended consequences applying to the “Twist”!

    The leader writer in today’s IT is mystified as to the reason why there is an unwillingness to recapitalise banks, why he or she should be being also a bit of a mystery. The explanation is to be found elsewhere in the paper, notably the information that bailing out banks has already cost over 400 billion euros, with each country being left to carry, as opposed to kicking, the can for its own banks.

    The markets do not care who carries it as long as it is done. That other countries would now be inclined to assist Ireland in the matter when they face an imminent increase in the cost of helping their own banks seems rather remote. The German press is reporting major differences of opinion between Berlin and Paris with the former insisting that the agreed PSI in Greece be increased which, presumably, would lighten the burden for the German taxpayer and increase it for the French. Of course, other issues are dominating French headlines this weekend, the possible collapse of the international financial system being but a small matter by comparison.

  94. Ciarán O’Hagan Says:

    Dan O’Brien mentions the Danish banks “en passsant” in the article. There is however a lot more to be said about current legislative developments in relation to bank resolution, in the UK, Germany, and even at the level of the EU. Rating agencies also have begun to address the implications of recent developments, with already an impact on the outlook for bank paper.
    To get an inkling of what’s going on, you ‘d need to read more than what is above however.

  95. Joseph Ryan Says:


    I have a lot of doubts about QE and who are the real benificiaries are of QE.
    Like Groucho Marx when questioned on what he was going to leave to posterity relied -’What did posterity ever do me me’. The unemployed must surely be asking the same question about QE.

    As far as I know, and I am subject to contradiction on this, QE lands cash in the hands of institutions (mostly banks) who borrow it from Central Banks.

    So the cash is then in hands of banks etc and the world is supposed to applaud, happy clappy, at this brave move by the authorities.
    But what happens then? The already over-leveraged banks feign a few moves but sit pretty on the additional cash. A few token loans are given out but thats it.

    Meanwhile Bob the builder is still at home twidling his thumbs.

    Bailing out banks (recapitalization) as you rightly point out has cost huge money but there is not a discernible job in sight as a result. Again the money sits with the banks or is used to pay down their super leveraged loans. But as you point out regarding the cost:

    The markets do not care who carries it as long as it is done.

    In other words the market does not want losses on their investments, or wants a stop put to loss making investments. And the markets would like Joe Public to backstop losses on their investments. In this regard the markets have the full support of the ECB etc.

    But what is really needed is a complete shift in thinking away from banks and financial institutions to job creation via infrastructural projects.
    It needs sensible calling time on bust banks and bust countries.

    As for the unfortunate Greeks (GDP per person approx 18,000, Germany 31,000, Ireland ? 30,000), it is a pity that they have not got General Lucius Clay to make his common sense argument for them.
    In a war devastated Germany (1946) and with Stalin and communism just over the fence, he made the succinct remark that:

    “There is no choice between becoming a communist on 1500 calories a day and a believer in democracy on 1000 per day”.

    To the Greeks that probably now reads:
    There is no choice between leaving the EZ or Europe on 1500 calories a day and being a starving EU poster boy at 1000 calories per day’.

    The US in 1947 decided that another European descent into chaos must not happen and brought in the Marshall plan.

    Is it not extraordinary that Europe has so quickly forgotten the chaos from it dragged itself with US instgation and help.

  96. christy Says:

    I would suggest that one of the reasons that the ECB is so “condescending” when it answers questions on these issues is because it doesn’t want to spell out its position.

    I saw a press conference with Trichet and he seemed almost angered by repeated questioning on seniors at anglo - all he kept doing was saying they had already stated their position and mentioned credit worthiness - but the truth is teh ECB has NOT explained its position and has no intention of doing so - Trichet needs to be asked and asked asked agin until he gives a meaningful answer. The journos need a jeremy paxman approach to it -

    @ciaran O hagan

    If these new legislative developments aim at making it easier to impose losses on creditors of banks does it follow that there is less reason to be worried about imposing losses on seniors?

  97. DOCM Says:

    @ Joseph Ryan

    I would not know where to start given all the subjects that you touch upon. The Lex piece does give a cautious answer to your general thesis when it states that two rounds of QE “may have only succeeded in creating more irresponsible lending [read speculation] as investors abandon discipline in search of yield”. There is also the view that academics should not be allowed anywhere near positions of authority in central banks as they tend not to actually know how markets work. I am beginning to think that, as a generalisation, this is probably true. However, a period working for Goldman Sachs is seen as a major black mark for a central banker by many on this blog.

    I saw a comment from someone to the effect that there is no way of “engineerling” a solution to the present crisis and it will have to work itself out, without anyone repeat anyone, having any idea who did the right or the wrong thing until well after the event (a point made in a link, posted I think by Grumpy, on another thread).

    Indeed, the common theme between Greece and Germany at the moment, at least over this weekend, will be the length of time that Greece requires, Schaeuble having mentioned “at least six years”. A Greek minister - taking up his cue - referred to the assurance of EU support for a lengthy period.

    @ Ciarán O’Hagan

    The only sensible basis for bank resolution in a single currency area is on a common basis. The structure to achieve this is in place through the new financial supervision arrangements. But the idea of doing it is another matter entirely as, God forbid, it would imply that a country might be liable for the bank debts of another! There is provision for mutual guarantees between closely related economies, or some such, but the proposal by the ineffable Viviane Reding, the commissioner from Luxembourg, that the lucky AAA punters (Germany, Austria, the Netherlands, Luxembourg, Finland and France, in the order of their likelihood of retaining their status) has deservedly been shot down in flames by Berlin. It would split the EA and the EU irretrievably. But the attraction to France is rather obvious (which, one assumes, is one of the reasons why the kite was flown in the first place).

  98. DOCM Says:

    @ Joseph Ryan

    Correction. The period mentioned by Schaeuble is ten years.

  99. The Dork of Cork Says:

    The reason why they won’t spend into the economy is that any real spending would create massive inflation as credit hyperinflation has already happened.
    So the banks try to control the velocity of money by turning private credit contracts into goverment debt.
    The sensible and right thing to do would be to destroy the shadow bank sector and thus reduce leverage and its ability to leverage - therefore you will have the space to create new money into existance and engage in advanced capital projects that would increase long term wealth.
    However if the shadow bank system is in charge of governance that is not a real option.

  100. Tony Owens Says:


    Re the economic effects of US MNC’s to Ireland - if I might comment from the perspective of the tech consulting sector…

    It is important that there be a strategy behind the state business policies and stated expectations. Ireland suffers in that state strategy-making and course-following is weak for political reasons. The basic ‘industrial’ strategy for more than two decades has been to provide US-style business conditions plus negligible corporation taxes. This has been successful until relatively recently, as one FDI business sector after another has taken root in Ireland, made its money, then been forced by maturation and commodification to depart for lower cost conditions elsewhere. In most cases little is left behind apart from a cohort of skilled manufacturing, engineering and craft people who either bear the costs of reconnecting with the next wave of FDI, emigrate, or join FAS or the IT’s as trainers.

    MNC’s do minimal Research Development and Innovation (RDI) in Ireland for many reasons, for one because the development and innovation resources are poorly developed, and for another because much of this activity is outsourced around the world to experienced specialist providers. The situation with research (i.e. pure and applied science) is a bit different.

    Ignoring the cloud computing, mobile marketing, call centre and pharma formulation FDI production operations in Ireland, which have mostly superficial engagement with Irish research, the medical device and engineering sectors are where the greatest volume of potential RDI activity arises. It is important to understand that most of the front end high-value activity is outsourced these days by US MNC medical device developers to experienced product development consultancies in the UK and US, who do little research but large amounts of product and process development work as a contracted service.
    Creganna is the only Irish firm of any size operating in this area. The total size of the market for medical device RDI services globally is a small fraction of total investment spend in the sector. The product development budget for a drug delivery device, for example, is typically in the range 2 - 50M euros over a ten year period, which is dwarfed by investments in manufacturing processes, regulatory compliance, clinical trials, IP management and marketing.

    State funded university research businesses lack the experienced personnel, disciplined regulatory working methods, customer focus, industry contacts and flair to do any of this work. Nor do they wish to. They are almost entirely funded directly by the state, not by actual businesses. The products they produce - people, patents, papers, formulations, projects - are largely unsolicited by, and not valued by actual businesses. This is borne out in part by PA Consulting’s recent study for the HEA here: http://www.hea.ie/files/files/Ten%20Years%20On%20-%20Confirming%20Impacts%20from%20Research%20Investment%20PRTLI%202000-2006%20%282%29.pdf
    which looked at financial return on investment, and by Forfas here: http://www.forfas.ie/media/asc091215_role_of_phds.pdf
    which provides limited information about the proportion of Irish level 10 graduates involved in ‘industry’.

    Until research (i.e. science) and development/innovation (i.e. engineering) funding is re-balanced in Ireland and awarded to qualifying client businesses to spend within the state as they see fit, MNC’s will continue to commission US and UK firms to design and develop their products, do their IP strategy work and help them develop their innovation strategies. And the science funding agencies will continue to lavish tax revenues on economically-sterile science research and patenting at Irish universities to the exclusion of indigenous businesses.

    Irish graduates and postgraduates who are interested in careers in technology and innovation are badly served by current Irish curriculum which is almost exclusively discipline-focused and pays little attention to research, design and innovation skills. This is finally beginning to change, thanks to less than flattering high level feedback from a certain cloud computing firm and other MNC employers. But the policy of ‘open loop’ investment in academic science projects continues.

  101. Eureka Says:

    THis seems like somebody who knows what he’s talking about (unlike some…)

    And pay attention hiberno-haters - it’s about bailing out the dumb ass German and French banks…..
    And @ MH, he doesn’t even mention the Irish public sector as causing the world economic meltdown - imagine that!

  102. hoganmahew Says:

    “I saw a comment from someone to the effect that there is no way of “engineerling” a solution to the present crisis and it will have to work itself out, without anyone repeat anyone, having any idea who did the right or the wrong thing until well after the event (a point made in a link, posted I think by Grumpy, on another thread).”
    I missed that, but it is a sensible position to some degree. What is being attempted is to put a systematic solution in place for ad-hoc events. Sometimes the ad-hoc events are large and widespread, but that doesn’t make them any less ad-hoc. What is significant about the events is that they ‘move’ faster than the speed of systematic solutions - the gap between thinking that a bank or set of banks is in trouble and them actually being in trouble is very small.

    A system that is over-whelmed every time something new happens, forseeable or not, is one that just isn’t going to work. So a fixed amount in a bailout fund or an open-ended promise by a limited sovereign are neither of them good enough. The fixed amount is always too small (otherwise it is desperately inefficient and expensive), the open-ended promise in not credible (regardless of who makes it).

    Even an FDIC is not enough to avoid these problems. The FDIC ran out of money some time last year and is basically living off future income. Still, it is probably better than nothing on a europe-wide basis.

    A mechanism that is both open-ended and credible is what is required. It also has to have sufficiently onerous terms for BOTH shareholders and management that it is not an attractive proposition.

  103. hoganmahew Says:

    Er, yeah, Mr. Faber also has large bets against the continuation of the euro.

  104. Jagdip Singh Says:

    Dan O’Brien writes

    “When two Danish banks failed earlier this year, their seniors were burned. This raised funding costs for the entire Danish banking system.”

    Is there any evidence of funding costs to the “entire Danish banking system” actually rising? How does any rise compare with bank funding costs elsewhere. Banco Santander in the “no senior bondholder left behind” euro area is paying 3.75% for 25 month money.


    Surely there is some analysis to evidence the rise in Danish interest rates and some comparison with the rise in euro area rates in recent months. It would be ignorant, would it not, to publish such assertions without having done such analysis.

  105. Bond. Eoin Bond... Says:

    @ jagdip

    Danish bank funding costs did indeed rise across the board, but particularly for the smaller and already struggling lenders, who are now pretty much completely frozen out of international funding and debt markets. Moodys also downgraded pretty much all the Danish banks on the basis of what they perceived to be lower systemic support now in place.

  106. The Dork of Cork Says:

    Me thinks the excrement is about to hit the fan - BB operation twist will kill all consumer lending in the States stone dead.
    US dollars short term and Gold longer term me thinks.
    But what is their game plan ? - consolidation of power me thinks.


    DEFLATION ON A MASSIVE SCALE - think Ireland and * it by 100 times

    These guys are nasty - me thinks my silver position is toast.

  107. Jagdip Singh Says:



    Has anyone produced any publication on the rise. All banks (even those in the euro area) have seen their costs rise have they not? Also hasn’t the Danish central bank raised its main rate from 1.05 to 1.55% in the past year


    To conclude cause and effect between Denmark burning senior bondholders and investors demanding higher rates for that reason, and that reason alone, there would need to be some analysis and comparison with banks elsewhere whose costs were rising because of generally perceived uncertainty and risk.

    Also is there any quantification of the increase in costs?

    Appreciate the above is asking a lot but would appreciate if anyone had any research.

  108. Chris Says:

    Colbert on the Euro criss
    - giving the Germans a hard time.

    Here is Reuters Global Editor explaining the EU crisis in simple terms,Predicts Political Union. Seems to be accusing the Germans of having the

    @Tony Owens
    Former govneror of Michigan talks about attrating MNCs.

  109. Bond. Eoin Bond... Says:

    @ Jagdip

    The Danske Bank 5YR CDS went up 45bps in the week following the second bank collapse (Fjordbank Mors) in June, and the Swedish government has said that it’d like to enact similar legislation to that in Denmark to deal with failing banks, but is worried that it’s banking sector will be adversely affected like Denmark’s has.

  110. Michael Hennigan - Finfacts Says:

    @ Eureka

    Unlike Archimedes who had news of a discovery to impart to the populace, your’re more likely to drown in a bath of self pity.

    A former IRA leader this week dismissed critics as ‘West Brits’, to deflect inconvenient questions; your feeble jibe is ‘hiberno haters.’

  111. Eureka Says:

    @ Michael Hennigan
    Haha - I’ll let you away with that on humour - not bad.

    But - there’s truth to what I say. It has turned out that this was a global financial problem after all and not all down to overpaid Irish public sector workers as you often asserted.

  112. Jagdip Singh Says:


    Thanks for that, but if AIB were to fail this week, what would happen to BoI’s CDS? Can you really attribute a rise in risk premium specifically to the “burning” of senior bondholders.

  113. Bond. Eoin Bond... Says:

    @ jagdip


  114. Jagdip Singh Says:


    Would it make any difference if seniors were burned in Anglo type run-offs in receipt of massive state aid or in “pillars” ?

  115. Bklyn_rntr Says:

    Burn senior bondholder in a bust bank if the bank is indeed bust and let the market (remember that thingy) decide which is a bad one and which good….lo and behold, over time, the market will assign low spreads on good banks and high spreads on bad ‘uns.

    Isn’t that the core principal of a capitalist system? And if it is, can somebody please explain why it doesn’t apply any more?

  116. David O'Donnell Says:

    @all FYI

    Transcript of Press Conference on Europe, Antonio Borges, head of the IMF European Department

    Now a couple of quick words on the program countries. We are relatively reassured about Ireland. The Irish Government has been remarkable in its performance, and of course, the battle is far from won, but things are moving exactly in the right direction. The economy is doing better than what was planned in the program, slightly better, and confidence is restored, interest rates are beginning to come down, foreign investors are interested in investing in Ireland. Economic growth is surprisingly strong, according to the latest figures, and we expect that the Irish economy, very much export driven and very much focused on efficiency and competitiveness, will be on the right track very soon.


    ‘relatively reassured’ ….. IMF goes post-einsteinian …

  117. Mickey Hickey Says:

    Many of you comment that apart from Ireland nobody has proposed singeing the senior bondholders. Ireland was a pioneer in the field of bond holder protection. Remember that the world of finance was surprised, aghast, delighted, disgusted, bewildered and puzzled when the two Brians one being the Taoiseach and the other the Minister of Finance along with the Governor of Banc Ceannais na H’Eireann and the head of IFSRA ( who was acting under direction of the Governor Banc Ceannais na H’Eireann) announced to a startled world that they were back stopping the Banks, Bondholders, Developers and sundry members of the Irish oligarchy. The Governments of other nations under pressure on the periphery quickly recognised that the Irish precedent would lead to doom for some of them as well as for Ireland itself.

    So here we are today in a worldwide economic climate that is curbing growth in the best governed and financially sound countries. We are losing two of our old standby safety nets, namely emigration and exports.

    And what now is the exit strategy says he.

  118. Gavin Kostick Says:

    Meanwhile in Iceland

    ‘Iceland: from ruin to role model?’

    A couple of quotes:

    “The left-wing government’s insistence on preserving the country’s social-welfare system was not a problem for the IMF. Far from cavilling at this demand, Rozwadowski insists it was important that Iceland’s generous welfare state was preserved.

    “The Icelandic government opted to make half the required adjustments by raising taxes and half by cutting spending, in contrast to our own Government’s preference for spending cuts over tax increases.”


    “Homeowners were given the option of restructuring loans, as happens in Ireland, but the Icelandic government went much further. A debt-forgiveness scheme was introduced: loans were written off where they exceeded 110 per cent of a house’s value. So a person who borrowed the equivalent of €500,000 to buy a house that then halved in value could potentially have €225,000 of the mortgage written off.”

    And a final cracker:

    “Sigfússon [Minister for Finance] says Iceland isn’t out of the woods yet, but he exudes quiet satisfaction. “There was a time when Irish politicians made a point of saying: ‘We’re not Iceland.’ Well, they’re not saying that any more.””

    Oh, and they’ve built a fabuluous new arts centre.


  119. Gavin Kostick Says:

    Meanwhile in Iceland

    ‘Iceland: from ruin to role model?’

    Some quotes:

    “The left-wing government’s insistence on preserving the country’s social-welfare system was not a problem for the IMF. Far from cavilling at this demand, Rozwadowski insists it was important that Iceland’s generous welfare state was preserved.

    “The Icelandic government opted to make half the required adjustments by raising taxes and half by cutting spending, in contrast to our own Government’s preference for spending cuts over tax increases.”


    “Homeowners were given the option of restructuring loans, as happens in Ireland, but the Icelandic government went much further. A debt-forgiveness scheme was introduced: loans were written off where they exceeded 110 per cent of a house’s value. So a person who borrowed the equivalent of €500,000 to buy a house that then halved in value could potentially have €225,000 of the mortgage written off.”

    And a final cracker:

    “Sigfússon [Minister for Finance] says Iceland isn’t out of the woods yet, but he exudes quiet satisfaction. “There was a time when Irish politicians made a point of saying: ‘We’re not Iceland.’ Well, they’re not saying that any more.””

    Oh, and they’ve built a fabuluous new arts centre.


  120. Bond. Eoin Bond... Says:

    @ jagdip

    Yes, it would have an impact purely because of the precedent it set. However, how much of an impact is both uncertain and unknowable in advance, it could be tiny, it could be material. Let pput it this way - the day after Anglo seniors got burnt, are you more or less inclined to buy bank debt of other institutions?

  121. grumpy Says:

    @Joseph r, docm

    “Bailing out banks (recapitalization) as you rightly point out has cost huge money but there is not a discernible job in sight as a result. Again the money sits with the banks or is used to pay down their super leveraged loans. But as you point out regarding the cost:

    The markets do not care who carries it as long as it is done.

    In other words the market does not want losses on their investments, or wants a stop put to loss making investments. And the markets would like Joe Public to backstop losses on their investments. In this regard the markets have the full support of the ECB etc.”

    You shouldn’t generalise like that about “the markets”. Market prices are a kind of money / liquidity / conviction weighted average of lots of views which sometimes diverge a lot.

    eg “the markets would like Joe Public to backstop losses on their investments”

    If you are invested by choice, mandate or statutory requirement in government bonds, you do not really want Joe public backstopping other investors’ losses on their investments.

    or “In other words the market does not want losses on their investments, or wants a stop put to loss making investments”

    In a way, it is the duty of investors who have got the fundamentals wrong to do what they can to get someone else to give them a free guarantee or free put. It is no more surprising than a union asking for “disturbance money” for its members moving to a new office with expensive new furniture. It is almost their job to ask - and present the demand as reasonable. It is the job of government to say “no”, or as Bertie might have it “who are you trying to cod?!”

  122. grumpy Says:

    @Jagdip, Eoin

    You have to bear in mind that both bond investors and rating agencies are going to factor in the likelihood of someone (usually the state) recapitalising the bank or acting to ensure seniors face no losses. Wouldn’t you?

    If you have a current backdrop where consensus politics is to do just that then if a country departs from that consensus its bank’s bonds will carry a higher risk premium - if the state involved (via efsf or anything else) can realistically be thought to be in a position to provide a guarantee.

    With the official line being there are no real banking solvency problems in the EZ, you can do this. As the market gets real about this, the credibility of states to bail out seniors (and other creditors) wanes and cds ot banks bonds generally widen. This contrasts to a step widening in the past for Danish bank bonds on that policy change. Effectively other banks cds catch up if the apparent reality induces skepticism about bailouts.

    I don’t think senior unsecureds have been got away for about 3 months so that market should not be pandered to - if you hold seniors you must be fairly naive to think that thes were STILL supposed to be almost completely risk-free. This is old funding.

    Covered issuance has been resorted to for the last year or so and unsecured senior in vestor have known the banks were pledging more and more of their quality assets to the cover pools.

    The calculus regarding creditor backstopping (or not) should be focussed on more short term stuff that is actually relevant these days

  123. AMcGrath Says:

    “Apart from Ireland, nobody else in the euro zone has sought to make seniors take their losses..”

    There is something grotesque, unbelievable, bizarre and illogical, in that “we” were criticised by ECB for guaranteeing bondholders - while simultaneously prevented from burning “unguaranteed” seniors. Is this something you can have both ways?

    BTW @Joseph Ryan maybe Groucho Marx made that remark about posterity and what it did for us but our own inimitable Boyle Roche originated it over 100 years previously.

  124. Ronnie O'Toole Says:


    I’m sorry, but your rationale remains unclear to me.

    You talk about issues you have with industry selection (i.e. pharma), R&D content (both foreign and indigenous) and the average size of investment per firm. These are interesting debates, but certaintly aren’t a rationale for favouring indigeneous over foreign firms, which is what I am trying to pin you down on as it is a regular theme of your contributions.

    It also doesn’t come close to explaining why a country like Ireland which exports 50% more than Porgutal and Greence combined (with pop 4.6m vs 21m) deserves the followng:

    “The inconvenient truth also is that the Irish are not very good at exporting”

    Can you not see that (taking pharma) that this is an industry which has been growing steadily in Ireland for half a century now, and which has now built up a high quality pool of labour skills and knowledge in this field? Have you ever toured any of the plants here (you should)?


    I happily bow to your greater knowledge in this area.

    @Paul QUigley

    * Employment in exporting is small in all countries. The question is whether we should have such an emphasis on indigeneous employment as michale has.
    * True, the period of the last 10/15 years has seen a stabilising of job numbers, though a greate jump in the quality of these jobs. Analytically, I disagree with Michael in comariong 2001 (i.e. peak) with everything that came after. The common economic technique is to compare peak-to-peak or trough-to-trough to ensure that we don’t end up confusing ctructural shifts with business cycles.
    * If you look at the Forfas survey of business impact, it shows that a greater percentage of sales in services (18.1%) goes on local expenditure than in manufacturing (14.3%). I would be interested to hear your alternative sources.
    * Not sure what your point is on credit in terms of favouring indigeneous??
    * Direct expenditure - you have some point here (again using FOrfas survey). However, the figures for indigeneous firms are not much better
    * I stopped reading at your “political, military and economic” point. Sorry, but life is too short.

  125. Gavin Kostick Says:

    @ Ronnie O’Toole

    “I stopped reading at your “political, military and economic” point. Sorry, but life is too short.”

    Life is never too short to read a paul quigley post. He’s one of the greats.

  126. Eureka Says:

    Going to be a tricky few months. Good luck to us all!

  127. Tony Owens Says:


    I think what is not being said is that:
    1. indigenous Irish firms are weak, export little, do not have strongly differentiated businesses and will not drive employment growth (only SME business can) because of this.
    2. gov is not doing enough to help because it panders excessively to the wishes of a footloose MNC sector and is obsessing on a narcissistic smart economy policy that has not worked in a decade of trying and never will
    3. MNC’s operating in Ireland have no strategic dependency on anything controlled by the Irish state or its population or its knowledge economy.
    4. MNC’s control the only assets that count, which are brand, IP in its various forms, and networks. Control is everything in business and Irish MNC operations are not allowed to dilute that control.
    5. Innovation capability and its fruits - IP in particular - is the basis for influencing and controlling business. The Irish are not ‘at the races’ in this domain and it makes us very vulnerable. If the MNC’s decided to scale down Irish operations this place would resemble Albania within a decade.
    6. We need to build innovation capability in our indigenous SME businesses because they are rooted in the state whereas MNC’s are not and MNC employment will not grow.
    7. Sustainable indigeneous microbusinesses which possess sufficient innovation capability and ambition to operate at EU standards of competence are the only basis for creating the new employment needed to replace the blizzard of brokerage and construction foolishness of the bubble years. Assuming a recovery is possible at all.

    The MNC semi-automated pharma formulation and packing plants you refer to have produced industrial chemists, process engineers, facilities managers and logistics people. Plus a menagerie of technical specialists and operations management castes. World class though they are, they are ‘factory people’. Few of them are wealth creators or entrepreneurs. They don’t control the businesses whose needs they tend.

    Apart from the risk that a future protectionist US tax policy changes disrupt Ireland’s tax-based one trick pony economy, there is also the risk that ’substance’ in some of these MNC subsidiaries e.g. manufacturing operations may be relocated to lower cost EU states as Dell has done, leaving far slimmer residual operations behind to operate IP royalty and RDI tax credit-based tax optimisation.

    The only basis for a secure economic future in Ireland as anything other than a client state of the US, is to build a forest of sustainable profitable businesses that routinely trades in export goods and services. As two decades of hosting MNC operations has not taught us how to do that, and one decade of the SSTI has not addressed that, this urgently needs to be targeted.

  128. Jake Watts Says:

    You may wish to take a look at Puerto Rico, which is also a tax-based, pharmaceutical centric economy and part of the United States. Does third world ring a bell?

  129. Ronnie O'Toole Says:


    Your post reads like a re-run of Telesis. That report (in summary) said that MNCs would never do high valued manufacturing in Ireland given that they were controlled overseas. The report was massively wrong. Once we created the conditions for high valed manufacturing and services, they flocked.

    Your term “footloose MNC sector” sums up your post. What evidence do you have for this? This is one of the media staples over the last 20-30 years. While the rate of “creative destruction” of foreign firms in Ireland is high, it is no higher than the rates seen in the US, where most of these companies are headquartered. This high job churn is a function of the US business model, not of a fickleness of foreign investors itching to leave Ireland. Read the Murphy/Lawless study published by the CEntral Bank in 2008.

    In fact, a notable trend since 2000 is that indigenous Irish firms are also showing little hesitation in offshoring production which is no longer viable domestically. A 2007 Forfás report highlighted a rapid rise in outward investment from Irish companies. Their research also showed that this was good for all of us, with a positive impact on the productivity, skills profile and employment levels within investing firms.

    As for R&D etc, yes, because of our late industrial development we have been late to the game, and only time will tell. However the idea that this has to be done by Irish indiegenous firms just falls out of your post, without any defence of it. We need to create the conditions for successful research and thats not easy. However I suspect that whether the ultimate firm ownership if Irish or foreign doesn’t matter nearly as much as you think.

  130. Ronnie O'Toole Says:


    Can I put my argument a little more succinctly: You (and Michael) have elevated the role of the entrepreneur to incredible levels, and greatly underestimate the importance of all the other skills that go into producing goods and services, and in developing new ones.

  131. Tony Owens Says:


    Manufacturing skills in a properly leaned-out manufacturing process cost 2-3 dollars an hour and are entirely comparable with those in Ireland which cost x5 - x15 times that. Product development skills are the critical ones in Ireland as in Germany, Japan the US and everywhere else. Those the skills the state has lacked down through the years and which would have allowed sustainable SME’s to be built and dissemination from MNC’s to occur. Not research skills which are a different thing (as the word is used in Ireland)

    Call it what you will - in a world of winner-takes-all those individuals, businesses, cities and states that can innovate well will do well because they can control how their work product (IP) is used and can charge an economic rent for it. Non-innovators live on borrowed time.

  132. Joseph Ryan Says:


    re Meanwhile in Iceland

    Well done on that information. It makes one feel ashamed of being Irish.

    Firstly for having elected and promoted people who made utter fools of Ireland as a nation but cleverly managed to line their pockets while doing so.

    Secondly by our servile obedience to the ECB/EU who, when they saw we had donned the dunces cap, insisted on threats of immediate penury that we continue to wear it to our graves, so that their bankers coffers be kept replendished.

    Finally for pointing out that at least one hardy breed of people did not buy the line that capitulation was ‘the only game in town’.

  133. Gavin Kostick Says:

    @ Karl Whelan

    Late in the day. I very much enjoyed reading your paper on the Presidency of JC Trichet.

    Some stand out quotes and comments:

    “Three years after the Lehmans incident, Europe still does not have a common agreed framework for winding down insolvent banks and avoiding all costs falling on the taxpayer. With the EU’s bank stress tests largely discredited and significant risks related to sovereign debt exposures, the state of the European banks represents a major risk factor for the global economy.”

    The rubbish bank stress tests commissioned - and widely trailed to have certain results in mind - by the ECB, are IMO, a really big failing. They seemed to be obsessed with the notion of confidence, rather than fundamentals, and have lead to a situation where confidence is being destroyed. The ECB was crying sheep, when it should have been wolf.

    “The Securities Markets Programme strictly aims at correcting malfunctioning of markets.” (quote by JCT).

    That invisible hand eh? Slacking again. Odd how the markets/ratings agencies are right when they’re right and wrong when they’re wrong, depending on your POV,

    “The time may come again when the ECB, this time lead by Mario Draghi, will be called upon to prevent Spain and Italy from financial crisis. It is possible that such a programme would require much larger ECB bond purchases than has been seen up to now. This will place Draghi, as an Italian, under extraordinary pressure.”

    Can’t quite express this clearly. If the ECB is politically independent, what’s it doing dictating policy in leaked letters to sovereigns. Once it’s in the habit of doing that, then it is a political institution, in the sense that if I was a politician I’d do my best to nobble it. Also, this shows that the whole, only men from particular nations need apply, shows that there is an implicit political power play in there, and this undermines the independent character.

  134. Gavin Kostick Says:

    @ Joseph Ryan

    Sorry, just saw your comment. Cheers.

    The 50/50 tax and cuts interests me, as the budget is headed now.

    The mortgage write-offs also rather knock on the head the notion that a society where debt forgiveness takes place must inevitably fall into mutual recrimination.

  135. Bryan G Says:

    @Gavin K

    “The mortgage write-offs also rather knock on the head the notion that a society where debt forgiveness takes place must inevitably fall into mutual recrimination.”

    In Iceland the original bond-holders took most of the hit, since the government did not bailout the banks (beyond the deposit insurance scheme). In Ireland it is the taxpayer taking most of the hit for any loan write-offs, and hence in Ireland the debate intrinsically pits one group of taxpayers against another. If the Icelandic government had guaranteed all private bank debt, and did not have the ability to issue its own currency, I suspect the policy adopted there would have been quite different.

  136. Gavin Kostick Says:

    @ Bryan G

    Good point. I was more niggling after the more legalistic agument that has been floated that once you sign, no matter the personal and social cost, you’re stuck - unless you go bankrupt. That’s against the view that contracts are two way deals and are really, really important until such time as they’re a nuisance and a social disaster, in which case they can be collectively altered.

    Or put it another way, if we get to the position that the Irish tax-payer is not on the hook for the banks, then can collective mortgage write-off be considered?

    Meanwhile, if, as you kindly pointed out on the other thread, the ESM is for sovereigns, the that still leaves - as far as I can see - the thorny issue of what happens when an EZ bank goes bust and a nation (which is responsible for its own banking system) tries to impose a resolution including burden sharing, to which the ECB says ‘Non’.

    Lots to think about, but the threads as ever have moved on.

  137. Michael Hennigan - Finfacts Says:

    @ Ronnie O’Toole

    The big enduring companies such as GE and Siemens, or faltering Sony are very important to an economy but given job losses and gains, according to American research, all net job gains come from startups and young firms.

    That does not suggest that the older surviving firms are not important but in terms of jobs growth, the younger ones are the key.

  138. hoganmahew Says:

    @Gavin Kostick
    It’s worth bearing in mind that there has been no debt forgiveness scheme for Icelandic debtors. Their debts were transferred to the new banks.

  139. Mickey Hickey Says:

    Ireland has relied heavily on the diaspora returning to fill skilled vacancies. The output of applied science, science and accountants is relatively high and most of them are emigrating, or at least those whose skills are in demand are emigrating. That pool can be fished when Ireland gets back on the growth track which should take much less time than the half century wasted by De Valera.

    The Irish gov’t is not helpless unless it chooses that tack. To state the glaringly obvious the cost of labour, property and rent, professional services, energy are higher than most of our competitors, even those in the developed world. Government maintains a minimum wage that ensures high unemployment, props up property values at great cost to the tax payers thus ensuring higher costs for productive businesses either ongoing or start ups. The half a million semi in D4 is doing little to help the people on the dole or even the owners themselves unless they are leaving the country.

  140. Wonderful World Says:

    If you burn the bondholders, they will die.

  141. How to recapitalize really ****-up banks + Germany update – Kantoos Economics Says:

    [...] An insolvent bank could be recapitalized by injecting public equity, a procedure that is relatively straight-forward. But what if multiple sovereign defaults (say, GR, POR & IRE) cause banks to be really, well, doomed? In other words, if it costs, say, an equity injection in the order of 10% of national GDP to bring a bank back to solvency? You probably think that cannot happen, but it did! Not in Iceland, the costs there would have been even higher. In Ireland, it is projected to cost the taxpayer more than 20% of GDP to bring just two banks back to solvency, as Karl Whelan reports. [...]

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