O’Leary and Walshe on Debt, Deleveraging and the Irish Economy

More Kenmare-related fare (sorry I couldn’t resist). This time it’s from Don Walshe and Dermot O’Leary of UCC and Goodbody Stockbrokers, respectively. I attended this talk and the paper they produced is just now online at Finfacts as a Goodbody note. The pdf is here. The data they provide is really useful to guide our discussions on debt and deleveraging in the Irish banks, especially (for me anyway) sections 3 and 4 on balance sheet dynamics. O’Leary and Walshe argue for a slower deleveraging process to help aid growth in the economy. From the piece:

The goal of an export-led growth strategy is the correct one, and appears to be yielding some benefits already, but the external strategies of fiscal consolidation in developed economies puts this under threat. Indeed, the external trilemma of policy autonomy, fixed exchange rates and capital mobility, close off some of the traditional routes to achieving an acceleration of export growth and/or real debt reduction.

Ireland wants to reach a destination whereby it will have a smaller private debt level, a smaller banking system and stable public finances. That is the story of stocks. How it gets there, outside of default, is determined by flows. This paper shows that the current policy course is inconsistent with the achievement of all three goals in a reasonable timeframe and sustainable way. With private sector deleveraging largely outside of domestic policy control and political imperatives pushing for fiscal consolidation, we view the slowing of banking sector deleveraging as a way to ease the damaging circular dynamic that is currently taking place in the Irish economy. Further European assistance will be needed to achieve this, but the policy recommendations laid out here are unlikely to be exclusively beneficial to Ireland if they were implemented.

A quick note on comments. I’ve gotten a few complaints discussions aren’t being kept (roughly) on topic, so I’ll be a bit more aggressive in deleting comments that don’t add to a discussion on debt and deleveraging in the Irish economy.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

100 replies on “O’Leary and Walshe on Debt, Deleveraging and the Irish Economy”

Most observers expect Europe’s banks to de-lever over the next two or three years very substantially, that this will impact the SME sector particularly.

Does it matter that everybody, recognises that this is a recessionary influence?

What would a plan to keep the banks levered up look like? Where wouold the capital come from?

Isn’t it true that with the states largely tapped out by their banks, the lending and borrowing binge will inevitably be followed by a lending correction – which is anti-boomy just as the binge was pro-boomy?

Shouldn’t some of the bankers just say “sorry” and go ‘ome?

Ireland wants to reach a destination whereby it will have a smaller private debt level, a smaller banking system and stable public finances. That is the story of stocks. How it gets there, outside of default, is determined by flows.

And ebbs. Specifically by the amount of ebb which must be directed out of this country in order to pay of the gambling debts of the likes of AIB and Bank of Ireland (The latter of which I note is selling assets it squirrelled away for private gain.). However, as a result of the government’s continued fiscal imprudence, the debt “stock” level of this country is reaching high enough levels to make the required “flows” of debt repayment impossible to sustain.

The sane policy option is debt defaults and writedowns. However, the paper does not even consider these:

On the assumption that there is no write-down of debt (private or public), we argue that slowing the pace of banking sector deleveraging is the most important policy change required for the economy to reach its desired destination.
Finally, debt write-off is not suggested as a policy at this point.

It is not acceptable to make these statements without justifying them. The onus is on the authors to explain why they have chosen to ignore the elephant in the room here. Debt write downs are a reasonable, and tested response to debt crises. They cannot simply be paid lip service in the crisis we now find ourselves in.

A quick note on comments. I’ve gotten a few complaints discussions aren’t being kept (roughly) on topic, so I’ll be a bit more aggressive in deleting comments that don’t add to a discussion on debt and deleveraging in the Irish economy.

Actually, as it happens this is one topic in which the Dork of Cork is in fact something of an expert.

@OMF, not pointing fingers at all–once people stay on topic then I’ve no issue with diverging views at all.

What is the method of deleveraging envisaged by the Troika ? it looks as if BOI’s sell off of non Irish loans counts…

To me the real issue would be to call in all loans in breach of covenant…liquidate and take the hit. Is that what the troika are thinking along the lines of ?

I am a expert in all things of no consequence……………

This ia not a bad report – but one thing is missing……………
Its the consequences of a lack of money which was not the case once the Japanese authorties finally responded.

This continued expected long deleveraging phase does have very significant costs of depreciation to both Human & physical capital.
People have probally died & will die , people will become unemployable , houses will decay into dust , transport & private utilities will not run at full capacity although existing public utilities in health will shrink and yet run at full or beyond capacity.
So we have a triage operation in action.
I noticed from a recent mortgage report that the most reliable areas for repayment is Dublin & Cork – with the midlands being the not so secret Cambodia conflict in this debacle.
Well I can tell you Cork is not running to capacity – neither is Dublin I suspect – this creates huge losses in things like Public transport.
Now its not sensible to allow everything to degrade – you must make decisions – therefore tax policey should be directed at making the rural hinterland a hostile place for commuters, they need to be driven into the cities where the economies of scale are much greater.

This is not nice – but when you accept the authority of the ECB & IMF this is the only logical conclusion.


What about the type of deleveraging going on? Prof. Honohan in the comments after the paper made the point that there are ‘core’ banking activities the CBI don’t want to see sold off too quickly, and ‘non core’ that should be gotten rid of quick smart. I’d be interested in people’s views on which activities should be classified as ‘non core’.

Useful, well informed, stuff, even if our famous ‘export-led growth strategy’ is fundamentally a ‘strategy for attracting FDI’, so that our GDP gets a steroid boost. Natural Ireland me eye.

Absent default, which the authors rule out, this is where we are headed:

‘An important caveat, however, is that higher savings will only result in higher net wealth if they are not offset by further declines in asset prices. Moreover, if the savings are used to facilitate de-leveraging and balance sheet repair in the banking sector, this flow is lost to investment which will act as a drag on economic activity. The danger here is that a destructive feedback loop emerges where weaker economic activity drives down asset prices and aggravates the problem of non-performing loans which requires further de-leveraging in the banking sector and so on’

My guess is that the bank deleveraging will run into the sand anyway, as the saleable, mostly overseas, parts of the loan books are shed, and global growth grinds to a halt. Credit will remain unavailable to Irish business.

Lots of people will be overpaid to sift through the wreckage of the bubble, in the hope that something will turn up and ‘normality’ can be restored. That will go on until the costs of keeping up the charade become unbearable. Eventually someone will pull the plug and we will move on.

That was my point ! Are the troika simpply saying
1) Too much liquidity in the Irish banking system or
2) Too much liquidity in Ireland

If (1)…then BOI sell off of what aren’t even Irish loans counts, and has no real effect on Ireland

If (2)…this suggests calling in all sorts of loans (commercial, mortgage etc) that are delinquent or in breach of covenant

Would like to know whether IMF satisified by Type1…and if they are, then we could even package up more Irish loans, and sell them fully off balance sheet (say to some SPV or intl bank)

If its (2) they want…to drain ireland of excess liquidity…well that needs to be postponed a while

@Desmond, I guess it depends on the relative sizes of 1. and 2. and whether they represent the core elements we’d like to see an Irish banking system have, with the attendant consequences of whatever else gets de-levered in the process.

@Paul q

” Eventually someone will pull the plug and we will move on.”

Difficult not to read that without thinking ‘down the plug hole’.


Core, I think is supposed to mean domestic retail and commercial. Anecdotally there is little discrimination. They are just trying to lend less. Banks were always regarded by stockbrokers as inherently stupid businesses whose function in the business cycle is to hand out umbrellas willy nilly when the weather is fine and then demand them all back at the first sign of rain. If you look at the sector relative against the FTA over fifty years you can see it is consistently dismal. Their only real achievement has been capturing the political class over the last 15 years.

@Stephen k

These threads stay open a long time. This is an extraordinary point in macroeconomic history with events, in terms of apparent policy or market realities shifts every few hours at times. Ireland is likely to be affected by them for decades – long after topical interest in sites like this has waned due to policy stasis. Would you like general topical observations to be posted elsewhere?

The ad hoc contributions to this site are streets ahead of the garbage that pollutes much of the interweb and twittersphere. I regularly look at Bloomie, Rtrs, Google, the FT and this site to keep up to date with what has been going on in the last few hours. That is quite something for an open forum. Are you sure you want to discourage everything that is not on-topic ?

@grumpy I was careful to put (roughly) into the text above because I think we can all judge when the posts are interesting and slightly off topic, or just people ranting about their pet cause or obsession a but too much. Personally I just want to do a good job for the readers of the site.

The hypothesis that deleveraging should happen over a long period of time only makes sense in an inflationary environment. And that buries a lot of other assumptions, not least of which, is that there will be some form of debt monetization. In a deflationary environment, fast brutal deleveraging is not only the least painful, it is almost unavoidable (except in Japan’s case, but that is not relevant here since it borrows in the currency it prints). If that’s true and inflation is a de-facto default, how can default, in some form, be excluded as a potential outcome?

Very good paper.

One bit I’ve never quite understood.

Take this for example:

“In Ireland’s case, the effects of simultaneous deleveraging in the Household and Financial sectors are particularly noteworthy as the financial system is unable to recycle savings back into the economy, which places an additional drag on aggregate demand growth.”

So the banks are taking in money, and looking to get loans paid off but then not making new loans, and we are lead to believe that a good amount of potentially viable SMEs are being starved of credit as a result.

I would have thought there was a gap in the market here. Any reason why a bank like a Handelsbanken, which specialises in local, Captain Mainwaring type banking, shouldn’t move in?

Also, the authors are making their contribution within the stated policy aims of the government – which is no default. I think its reasonable to do so in a form of ‘if’, ‘then’ logic. It doesn’t mean that defaults in their various guises aren’t still live options.

It seems that profitable/unprofitable and core/non core could be exact opposites in many cases. Non-core – profitable – e.g offshore operations in a country like Poland. Core- loss making – Irish residential mortages.
Which do you sell in deleverging?
The Irish mortage book and other ‘core’ activities are probably over-priced and marking them down to real value for sale would cause more taxpayers money to go into the banks.
So probably the profitable operations are the ones that will be sold, described nicely as ‘non-core’.

The 3 biggest Frencg banks assets account for over 230% of GDP. France is already using the EFSF with its implicit garantee of support for countries banks. Pehaps more obviosly France may be forced to tap this fund directly to help their banks after the Greek writedowns. Will the French banks also be put on a ‘program’ by the IMF of breaking them down to size to fit their country?

@Chris – that’s a good question. To some extent, the French banks have an intention to shrink themselves to avoid forced recap. However, their moves are inadequate. This is going to leave Sarko in that famous position of tide out and no trunks on. He has to avoid this so expect to see some ‘stealth recap’.

This is a useful paper (I’m a miser with superlatives) and it’s important to realise that even without an Occupy Ireland movement, the grip on the public purse is still with the same people who held sway during the bubble years.

With long or short deleveraging, this has consequences.

Last Friday, The Irish Times gave a platform to Jim Browne, NUI Galway president, for a classic piece of Newspeak devoid of facts but containing the word ‘excellence’ 13 times, that argued for continued high public spending on research.

What George Orwell described as “euphemism, question-begging and sheer cloudy vagueness” can be found in the common use of the term ‘world-class’ in Ireland, which was vividly illustrated by an Irish Times report in Oct, 2010 titled: “Fás board to agree plan for new ‘world-class’ skills body”. Plain bloody competence would do for the once aspirant space travellers!

‘World class’ is also a worry for Jim Browne who fears other universities may be given the chance to become ‘world class.’

He and his counterparts can concern themselves with prestige but even if the annual public science budget was doubled to €5bn, apart from more public sector jobs, even in the long-term, the benefit for the Irish economy would be minimal.

In the US biotech industry most firms never make a profit – – and that has applied over four decades. Can we do better and at what cost?

Browne referred to ‘medical devices’ in a reference to Boston Scientific, but what original research do MNCs do in Ireland?

Pfizer is firing hundreds of its scientists in Sandwich in the UK.

Against a feast to famine backdrop, there are consequences already from this moonbeam chasing.

We need lots of startups across all sectors, not just the measly 4 that Science Foundation Ireland supported in 2010.

After 60 years of public support, we don’t know much about startups in Ireland.

In the US, the 2010 Survey of Consumer Finances, a Fed report based on interviews with some 6,500 US consumers, found that more than 70% of the nation’s startups use personal savings or assets as a primary source of funding.

Just 6% relied on personal loans, while 3% took out business loans or used unutilised credit card credit, the survey found. An even smaller percentage turned to credit unions or investors.

The priority has to be on jobs across the economy not a sector that will never be a jobs engine.

As for the well-paid folks who want the prestige of ‘world class’, Germany has a stronger economy than France but half the percentage of young adults with a college degree. 

Finally, back to George Orwell’s Newspeak, are French and German universities less world-class because their scientific papers tend to get lower levels of citations in English language journals?

Joe Nocera in The New York Times has a story today on Howard Schultz, the founder of Starbucks.

Nocera says: With the help of Starbucks, we the people can do what government and the banks won’t: make loans to small businesses; Americans themselves would start lending to small businesses, with Starbucks serving as the middleman. Starbucks would find financial institutions willing to loan to small businesses.

Starbucks customers would be able to donate money to the effort when they bought their coffee. Those who gave $5 or more would get a red-white-and-blue wristband, which Schultz labeled “Indivisible.” “We are hoping it will bring back pride in the American dream,” he says. The tag line will read: “Americans Helping Americans.”

I suppose it was just a matter of time before the somewhat inconvenient truths of the rules and logical arguments of math muscled their way past the delusional scaffolding that so many folk have self-erected around themselves. In a short, simple sentence: If your outgoings exceed your income, your bust!

The delusion (or lets be generous, Miltonian Assumption), about the probabilistic level of future incomes is wrong; (substitute deterministic for probalilistic if you are a Permagrowth type). Current incomes (in aggregate) are at best, static, or worse, deleveraging (lovely term). Future incomes look, probalilistically, very iffy indeed. That’s the math. But debt? Sure that just keeps growing. That’s the trouble.

Trouble? Well, you ain’t see real trouble. But it has just poked its scruffy little head over the backgarden wall, like a thief casing your home. Its called energy. Energy extraction (hydrocarbon sort) has plateaued off. That’s trouble, with a small t.

The global rate of discoveries of new, accessible fossil fuel assets, is less than the global decline rate of existing, productive assets. That’s trouble with a big T.

The rate of domestic energy consumption by the major energy producers is increasing – exponentially. That’s trouble – as n, “Oh s**t!”

Do all the fancy math you like. Without a ready supply of ‘easy energy’ our economic ‘growth’ goes down the plughole. Easy energy has gone – permanently. You can fill in the dots.

Its not financial deleveraging we will be discussing soon, but whether we can all enjoy ‘three hot meals a day’ – as a proxy for our existing life-style, as it ‘deleverages’.

Nifty grahics in the paper. Just shows the power of a well conceived picture.

Brian Snr.

The problem for French banks is not the Greek default,which can be easily absorbed by the present capital (this would not be the case for an Italian default,which would be devastating and the end of the Euro),it is the rule changes that are discussed.If they are obliged to raise their capital to 9% of assets ,their shareholders will be diluted to a very large extent ,given their present share price,or the State will enter the capital in an election year.
There is a fixation on French banks,but the problem is the same for all Italian banks and most German banks.

Two Excellent articles by Shane Ross in Sundays Indo and Stephen Donnelly in the journal.ie.
The Keane report is a bankers charter. They still, somehow, have the government by the wots-its.
From Stephens Article
“Of the billions of euro which the Irish people had given these two banks to deal with the mortgage crisis, how much had been passed on to mortgage holders?
For AIB the number was €600,000. That’s about 0.0002 per cent of the money we’ve given them just to deal with distressed mortgages. Bank of Ireland had to be asked for their number five or six times, and finally conceded that for them the number was zero. Not one cent.”
Is there no one in government with the gumption to tell the Pillar banks to start forgiving those who cannot pay?


Aside from the energy issue raised above the issue here may or may not be core or non core business deleveraging but I believe that’s missing the more fundamental point.

The bigger issue here is that the banks are being forced to sell assets in line with the PCAR 31.03.2011 requirements at the wrong time in the cycle.

That’s the problem with Regulators – they are generally really bad investors – they’ve allowed the banks buy at the top and are now forcing them to sell at the bottom. Goodbody are right this is a crazy requirement. Its purpose being what exactly?

The bigger issue here is why are the CBI forcing this upon the banks and by the way its not even mentioned in the report, and its the equally crazy new capital rules.

I’ve suggested here time and time again what we need here is to say to the EU/ECB/IMF that the ROI is a Basel III free zone for the next 5 years. We don’t have banks so why the need to impose capital rules stiffer on our non banks ahead of the likes of Goldman and Barclays is beyond me and has been beyond me for some time. If this was a case of trying to put manners on the banks well again the timing of the Regulators is about 8 years off.

In markets timing is simply everything and Goodbody when all is said and done are simply highlighting that the deleveraging idea may in fact be a necessary one but not now, for the love of God not now. This requires the CBI to look outside its rule book and look to the effect its capitalisation rules are having on the wider economy – all bad in the short to medium term.

Recent talk from the EBA of stressing banks to 9% Core Tier 1 cap rules makes sense when the cycle allows but again not now – the valuation genie has flown and the losses need to be taken – when the losses are taken both private loans and sovereign bonds and the hole size is known with much more certainty then I suggest build from the bottom up i.e. start with 4% and get to 9% core tier 1 over time – not the other way around and the CBI and EBA are suggesting.

For investors potential losses and real losses on large amounts of capital are still a LOSS on capital – to an investor capital size is largely irrelevant. Prof Hon believes large capital sizes will attract foreign investors to our banking shores – he’s wrong.

@Brian Woods Snr
Speaking of natural resourses………… did you catch the mention of credit addicted Cyprus getting some money from the Russian Bear.
If you believe a recent Bruce Karsting post 2 Russian Hunter Killer subs are down there not minding their own business…………
That menage a trois of Cyprus , Turkey & Israel has got even more complicated with the Russians involved – I presume the Greek Cypriots cut a deal with the Russians regarding the new Giant Gas fields.
It speaks volumes for the breakdown of EU relations & monetory flows really – and may explain some of the hostility towards mainland Greece.

Also Japan deleveraged in a rational way – providing money that replaced credit for capital projects that reduced their energy imports although there was still alot of roads to nowhere
We will just do it the old fashioned way – starve.
But if we ever wake up from our credit / oil slumber there are some low cost projects that the Victorians & Edwardians have left us that still remain to a large extent intact & even more viable then back then given the huge increases in population.

@ YoB

the main reason for the deleveraging demanded of the Irish banking system is to remove the contingent liability which has dragged the Irish economy under. Its not about a fear of capital inadequacy within them as much as a fear that the size of their balance sheets was scaring off foreign investors in Irish govvies until this was rectified.

Look at how the likes of Finland have fared during this crisis, the lack of a major domestic banking sector has meant that there was never any fear of their economy blowing up. Its probably one of the only economies in Europe that does not have to worry about its banking system getting into some sort of trouble.

But i agree on the substantive issue – the cycle does not allow for a proper recapitalisation of the banking system in one big step, and this all seems to have been cobbled together in a very short time span and in a haphazard manner.

@ All

A very interesting paper and accessible, with a bit of effort, even to the non-economist. Unfortunately, it is holed seriously below the waterline and is unlikely to have any impact on the thinking of the Troika (or, at least, I hope it does not).

The difficult lies in the underlying assumption of a homogeneity in the various sectors, especially that described as the household one. Even casual everyday observation shows that this does not exist. Many households, I think it is a majority, have no mortgages on their property, to take one example. I wonder how many participants in the session in Kenmare were in that category!

There are glimpses of the real world here and there in the paper.

“The collapse in property values has thus triggered a substantial reduction in household net worth. Under the assumption that residential property prices decline by 60%, we calculate that this reduction amounts to €250bn or 288% of disposable income in aggregate from the the 2006 peak. This loss in wealth has mainly been borne by younger cohorts of the population who purchased property at the peak of the boom” (page 13).

“Unfortunately, we do not have data on the distribution of household assets and liabilities” (page 23).

Unfortunate, indeed! The authors go on to establish that statistics on mortgages show that €28 billion was advanced to first time buyers and that 80% (102,000) were aged below 36 years.

“There is a view that these savings are unnecessary high due to the uncertain environment and thus can be regarded as precautionary savings” (page 24).

It is a view that I hold and is shared, I would think, by many others as they watch a government seemingly incapable of reducing its borrowing levels because it is in thrall to a widespread popular view, anchored especially in the public sector, that there is a natural entitlement to a certain standard of living and of public services without actually having to address the issue of paying for them.

@ Bklyn_rntr

Although I am not sufficiently expert to come to a view, it seems to me that your comment corresponds with the reality I see all around me. The sooner the Irish beneficiaries of the bubble – and there are many – can see the route clear ahead, the quicker they will begin to spend (and to bring back funds as confidence returns). Clearing the route depends on taking the right, if unpopular, decisions with regard to (i) cutting public expenditure on an equitable basis (including pensions) (ii) increasing taxation and (iii) paying down debt rather than wasting money on make-work projects and digging the domestic economy in further.

P.S Dan O’Brien must have missed this paper. The presidential election is also throwing up signals about the mood of the public (or at least that proportion of it that likes to view itself as entrepreneurial even though their understanding of this quality is open question).

Slow bank deleveraging fans and turbo-efsf supporters might like top take note of todays move in France – Germany spreads.

Let me just get this again.

The banks have not got enough deposits and are weighted down with debt, but all the Irish corporate deposits are sitting in European banks.

Households have excess savings that will they not spend and are leaving their deposits in banks in Ireland and abroad.

The Irish government cannot borrow but is happy to see about 90 billion of pension funds being invested outside of Ireland with the proviso that it can be invested in any State bond in the world provided it is not Irish.

It seems to me that we should look at this deleveraging ‘requirement’ from another angle.

@DoC: “Oui, un ménage de deux: formidable! Mais, un ménage à trois: le boom! boom! C’est la vie!

Anyhow, back to deleveraging. I appreciate all the efforts to dissect the entrails of this predicament. I follow some of it, but much is beyond me. Some commentators have clearly made an effort to analyse the paper (and fair do’s to the authors for putting it into the domain of us wolves to savage.)

Back of it all, we have a physical economy. Money (in all its formulations – apart from cash and notes) is a virtual entity. However, debt, which is also a form of money is a very, very unfunny entity. The damn thing grows and grows and consumes a portion of your (possible) future income. This has unfortunate consequences if your economic Model-in-Use (not your political economic …ism) mandates a continually increasing exponential trend line. The blind-faith of in this belief will encounter a very disaggreable suprise. And it is my considered opinion, that is exactly what has happened.

To be fair, its not a singular event, but a long sequence of eventlettes (sic). Like the slow, build-up of oxidation on the surface of metal. So, whilst coming to a proper understanding of the essential requirement for a specific type of energy to drive our economy up that mandatory trend line, may not appear to be a meaningful intellectual matter – until it bites your Gluteus Maximus. But then its too late.

That’s the predicament with deleveraging – attempting to go in reverse without a reverse gear! It has to occur, with all its dreadful social consequences. So, while I appreciate the many useful comments above, please remember how our economy actually works – in the physical world:not the virtual world of finance: no matter how intellectually interesting it may be.

So, I we have to ‘delever’; what has to happen? How will it be done? And crucially, who will initiate the process and guide it? “There will be winners and there will be losers. But the economy will be worse off.”

Brian Snr.


You may indeed be right but I thought NAMA was the tool for the removal of the toxic/contingent liabilities.

The deleveraging request is a proper one but it raises some serious issues which again the report sidesteps in line with current policy and that of course is the debt write down question and specifically mortgage debt.

Given that the balance sheets were too big for comfort and require scaling back then surely given the advice from the Blackrock paper presented at last weeks conference where principal write downs were shown to be the most effective way of dealing with the mortgage issue. Then write offs at some point simply have to form part of the solution.

In many respects timing of the cycle as I’ve noted above should be a requirement in terms of selling reasonable buisnesses but in relation to write downs, if anything speed is of the essence, the current point of the cycle as we find ourselves demands it today.

So in summary we have a CBI requesting banks to sell assets and books of business, some of which are in reasonable shape, in a hurry and losing money for the taxpayers as a result and we have the CBI pleading with the banks to utilise the capital provided to them to write off mortgage debt which they refuse to do, and Govt think tanks aka Keane provide significantly more heat than light on the issue and all the while the majority of these institutions are supposedly under State control.

A casual observer would suggest the banks have the Govt and its various arms once again in a tizzy – and they would be right.

@ Bond. Eoin Bond

On Finalnd, I wouldn’t be so sure of that, I’d say they’re probably due a property price ‘correction’ which would adversly affect the banks. The politicans are starting to talk about the dangers and my rule of thumb is once they do, it’s too late.

Though broadly speaking I agree, at the moment they’re the best of a bad bunch.

@ grumpy

Who can blame the markets, the rating agencies or Germany!

Sarkozy has been spoofing about “la rigueur” but actually doing nothing about it (apart from taking the opposite step of capping income tax levels for the highly paid).

It is now too late. Berlin is anticipating the arrival of the socialists under the leadership of Francois Hollande and a repeat – as the party remains firmly stuck in the nineteenth not to mind the twentieth century – of the push for growth that Mitterand attempted and which ended disastrously within a short period.

Might as well – from a German point of view – have the reality bite the French in the derriere now rather than later!

The MMTers propose replacing much of credit with Gov Bonds – which is just money with a time factor that unlike credit does not net to zero when debt is repaid (goverment debt/money stays on the books and is not payed off in General except for in mentally retarded financial jurisdictions)
Here is Cullen Roche response to a sceptical Bruce Karsting in yesterdays Zero Hedge article on the subject.

“Bruce, the reason for the decline in interest rates is actually central banking 101. When the Tsy spends it creates reserves in the banking system. If the Fed does not control the amount of reserves then their target rate drops as banks compete to rid the reserves. This is why reserves create downward pressure on the FFR. This is the only reason for paying IOR currently. This is all well documented over the last few years as the Fed’s balance sheet has exploded.

The point is, the Fed always controls the price of its debt via monetary policy. They are the price setter as the monopoly supplier of reserves. You call artificially low rates manipulated, but that’s false as well. The natural rate of interest on govt debt is zero as is evidenced by the fact that the Fed has to manipulate the amount of reserves in the banking system to keep the rate from dropping to zero. This is 100% proven by now. Not even debatable.

If the Fed didn’t manipulate rates by paying IOR the rate would drop to zero and everyone would see that deficits create reserves in the banking system and result in a 0% FFR. The FFR is actually manipulated HIGHER 100% of the time. Again, there’s no theory here. All you have to do is look at the balance sheet expansion in the last few years and the Fed’s response…..”

I think the main weakness of the MMT universe is the final settlement of foregin transactions but I am a mere Dork and could be wrong – anyhow we have not got the Gold standard for 40 years and it is not coming back anytime soon in my opinion – we have however free gold on the ECBs balance sheet for 10 years and free floating currencies for decades , really since 71 but with restrictions gradually lifted over time.

Credit is not coming to the west again for a generation – we may as well get used to it and spend money into circulation hopefully to increase our non oil based capital.
PS I persume IOR is interest on reserves

Reading through some of the Irish commentary at the weekend, I was struck by the proposal that the forces in Europe would move to ‘protect’ Ireland in the event of a Greek default. It reduces to ensuring that Ireland doesn’t opt for a ‘managed default’ too. So the Greeks are now expected to pay back somewhere under half what they borrowed but the Irish will be ‘protected’ from such an onerous debt write-down. And the worry is that the government and various elites will agree that this is just the sort of ‘protection’ needed. If Greece defaults, and it seems inevitable, why would Portugal, Spain and Ireland not follow suit?

“Look at how the likes of Finland have fared during this crisis, the lack of a major domestic banking sector has meant that there was never any fear of their economy blowing up.”
Er, isn’t that because in their banking crisis in the ’90s they effectively liquidated their domestic banking system? Now who might have said we should follow such a path here and who objected to it? *whistles tunelessly*

@Joseph Ryan
“Let me just get this again.”
You may be happy to invest in junk bonds or deposit at junked banks, I, and I suspect many others, are not. To suggest to do otherwise is green jerseyism of the worst kind – papering over the cracks with a sheen of patriotism for our great awntrupinners and their bonuses in the banks.

A bank cannot have a rating above its hosting sovereign. The rating of the sovereign has been destroyed from within. Until the rating of the sovereign is fixed, the ratings of the banks cannot be fixed.

The data contained in the Goodbody report is useful. I don’t think some of the narrative or the conclusions are backed up.

A couple of points:
1. I’m not sure what value benchmarking the decline in household wealth to peak house prices has. It wasn’t earned wealth per se, but mark to market.
2. “For our purposes, we assume that the credit expansion phase ran for 24 quarters from the start of 2003, so slightly less than the average. One could argue that the credit expansion actually began well before that date.” – I’d suggest 1998ish :(.
3. In the “International debt reduction episodes” section, they don’t address Ireland’s lack of its own currency.
4. The deleveraging plans mostly relate to banks selling off overseas assets. The deadlines being imposed will be expensive for Irish banks (/taxpayers). But importantly, this doesn’t reduce the over-indebtedness of the Irish private export.
5. Their “slower bank deleveraging recommended” isn’t adequately explained. Nor do they mention any amounts.

That said, if ILP didn’t have to sell their assets at a big loss, their shares might be worth a punt 😉

@ hoganmahew,

“You may be happy to invest in junk bonds or deposit at junked banks, I, and I suspect many others, are not.”

I agree with you. The EU/ECB would like to see the Irish state do this. As would the unions.

The only time this may be acceptible is 2/3 years after an Irish default.


A bank cannot have a rating above its hosting sovereign. The rating of the sovereign has been destroyed from within. Until the rating of the sovereign is fixed, the ratings of the banks cannot be fixed.

This brave new world where states are expected to maintain large financial buffers so as to be able to offer unlimited funding to private financial institutions while those self same financial institutions are only obligated to their bottom line now seems to be the accepted wisdom.

What a very odd place the modern EU is, Denmark excepted.

“What a very odd place the modern EU is, Denmark excepted.”
You are mistaking my intent – the Danes are operating under the same rules. The key thing is to protect the sovereign rating. Without it, it doesn’t matter how good the banks are. The Danish Central Bank apparently realise this and are liquidating failed banks rather than propping them up or nationalising them.

Given that deposit insurance schemes everywhere are funded by states (which take the money and spend it in current spending rather than letting it accumulate for crises), it is hardly surprising that there is this reliance.


You are mistaking my intent …The key thing is to protect the sovereign rating.

Sorry, my mistake, I am in full agreement with you there.

I suppose my question is, with the banking bailouts already having seriously compromised the sovereign here is it completely outrageous to suggest that they now be compelled to take a roll in digging the sovereign out or have we accepted that the tens of billions we put into into the banks to guarantee their survival were a gift?

As one of the non property owning classes you can imagine that I am not happy merely to see the banks survive, I expect a quid pro quo.

On the FDIC style schemes Chopra’s FAT tax seemed to be a good way to go, and that might be administered in such a way as it was not spent on “current” expenses.

@hogan: ” … awntrupinners …” Luverlie!!!


@DoC Had to think a bit. Do I detect in your commentary that the ‘adults’ have been, and still are, engaged in a game of Monoploy, with real assets and real folk, but using monoply money and with a special card with – ‘YOU MAY DELEVER NOW! – proceed to GO and collect your reward’, printed on it? That’s very unfunny.

Do I also detect (and I apologise if I have this wrong) that some other commentaries on this subject of deleveraging appear to suggest that its an accounting exercise, with merely virtual consequences?

Deleveraging has a real, unpleasant economic outcome. Its known as Regression. That’s unfunny also.

Brian Snr.

The lack of join the dots thinking between managing sovereign debt and de-leveraging personal debt was underscored today in the Irish Banking Federation’s rejection of Matthew Elderfield’s entreaties for its members to stop raising rates on variable mortgages. And as Michael Finnegan trapped recently, the BoI is promising a bumper Xmas of charges for its business customers.

What’s the point of deleveraging the Irish banks in the absence of a proper EZ recap scheme ? Wouldn’t it also make more sense to agree an EZ wide deleveraging scheme ?

Why doesn’t Ireland kidnap a few Israeli soldiers and trade them for AIB ?

The deleveraging in Irish society is nasty because they are not replacing credit with money – creating a physical rather then just a monetory depreciation of people & assets because of lack of use.
This is a capital extraction gamble by the euro masters I guess – they probally understand us more then we do ourselfs – the bet on the borderline mental retardation of the populace has been a good one so far……… but negative externalties can build up over time that can ultimately affect the return of your capital.
There is a balance somewhere ………… it could be famine , it could end next week – it depends on what the collective population will put up with I guess.
But getting back to the foundations of leverage

I don’t know. I wouldn’t start from here, but that is not much help.

Unfortunately, I think we are stuck for the moment waiting to see what happens with the rest of the eurozone and particularly to see if the ECB is going to get off its lump.

The current plans are all based on money being paid back. This clearly isn’t going to happen in all cases. Forcing all sovereigns to recap their banks (even from a pooled fund) is only going to trash all the sovereigns and all the banks (bad and worser). This is hardly conducive to avoiding another recession. Another recession will force more non-standard measures on the ECB as the banking system implodes, so they might as well man up and look forward to what might happen and how to avoid it, remit or not.

@ Hogan, Shay.

“The current plans are all based on money being paid back. This clearly isn’t going to happen in all cases.”

The scores on the doors I have for this at the moment is as follows: I’m saying this to see if I’m even in the ballpark.

The banking system is on one way splintering – they won’t lend money to each other, but in another way playing a great game of class solidarity – the’ve managed to pursuade the ECB and to an extent the EZ that the number one priority is to maintain all systemic banks, and systemic means all of them, see Anglo for details.

Ireland is going down a route of regaining creditworthiness, which translates as taking on more austerity faster, and repaying all senior bondholders, guaranteed or not. The side bar of this plan (see Chopra), is actually then to move the debt that the Irish sovereign put into the banks over to the new pan-European grand bargain. Whilst a good thing from the Irish point of view, it is potentially problematic from a class point of view if the funding of bank recapitalisation is put on the shoulders of all European tax-payers, not just the Irish ones.

Eureka’s comment that the markets want the German tax-payer on the hook resonates here.

In some cases, eg Northern Rock, it is entirely possible that money put into a bank might come back to the state, as the bank is retructured and resold.

However, if the banks are looking to be supported collectively, then I would go down a ‘polluter pays’ route, and whether it is via a Tobin Tax or a FAT tax, the financial system should be putting money aside for its own rescues when necessary.

This does not cover the money the Irish banking system owes the state which is not likely to be covered just by selling them off. I’m happy to see the profits from recovered nationalised banks go to the state, and/or some kind of extra tax as suggested in the programme for government, to pay back the money – over 30 years if necessary.

But if the whole thing is sorted out at EU level, then again, not only does some kind of Financial Tax seem necessary, but also some accounting for money that states have to write off for banks, and some way of clawing that back.

Here’s an analysis I came across. It’s not rocket science

Recapitalise/consolidate banking sector

– Banks need to be strong enough to absorb losses on Greek, Portuguese and Irish public debt.
– banks to hold less capital for Italian/Spanish/French sovereign debt appears absurd. (when you need to hold more for blue chips like Nestlé)
– If necessary, the government/EFSF has to inject capital.

Reduce debt of (close to) insolvent sovereigns in an “orderly” way, via…

– Various forms of wealth taxes/forced loans in the countries where solvency is in doubt
– Transfer payments from external sources. (Moral hazard to be countered by harsh conditions)
– More significant contribution from private holders of government bonds (Greece, possibly PT, IE)

Everyone knows this has to happen. Why should Ireland do it on its own?


You may be happy to invest in junk bonds or deposit at junked banks, I, and I suspect many others, are not. To suggest to do otherwise is green jerseyism of the worst kind – papering over the cracks with a sheen of patriotism for our great awntrupinners and their bonuses in the banks.

JTO again:

This is one of the dumbest statements I have ever read.

It is the equivalent of saying that one should never bet on a football team when Dunphy predicts that they will lose. Blindly following what the ratings agencies say is for people who aren’t clever enough to do their own analysis. It has nothing to do with green jerseys, but to do with outsmarting the mob who blindly follow what ‘experts’ tell them.

The facts are: in June 2011, Irish government bonds were rated as junk – UK government bonds were rated as Triple A. But, it is the junk ones which have given the far better return since then. This is likely to continue. Inflation in Ireland rose to 1.3% in September and junk Irish government bonds are still giving 7.5% Today it was announced that UK inflation rose to 5.2% in September and Triple A UK government bonds are giving 2%. Unfortunately for the suckers who have their money invested in Irish pension funds, the managers of these funds think that the 5.2% inflation/2% interest rate combination is the better one. Thank God I have not entrusted my savings to these clowns.

It is all very simple really. In round figures Irelands GDPis 150 bn. Current Sovereign debt is about 120 bn (80%of GDP). Defict is 15bn. If the government cuts expenditure by 15 bn GDP will crash by about 20 bn, long term damage will be done to the education and the health systems destroying long term productivity. However the Government will only save about 8 bn because of reduced tax take because of the depression it caused so the deficit will remain at 7 bn. However the Critical ratio of sovereign debt to will INCREASE to 100% as GDP crashes, making default more likely not less. This is problem with austerity it can if used to liberally quite literally kill the patient.

Given the international situation is deteriorating it is quite clear to me that if the government go for the significant cuts above the 3.5 bn demanded by the troika the country will immediately go into a steep secondary recession, the coalition will break and we will have a new government fronted by SF before the end of next year. In fact even with the 3.5 bn there is a significant chance that this may evolve. What they should be doing is pressurising the Trokia for some sort of break 30 – 40% on the 30 bn Anglo bonds – we only took on these bonds to save the German and French banks after all – and also look at much less cuts of 1 bn or so the difference made up by bond haircuts and a once off raid on the big 100 bn pension pot and getting their paws on some of that huge domestic savings of about 10 bn by a wealth tax, property tax or whatever.

This isn’t directly related to this topic, but I thought I’d stick it here anyway out of interest:


It seems the government is considering several options for the restucturing of the promissory notes. This is the first I had heard of it seeking to get the EFSF involved.

If Greek debt is restructured for a second time over the next few weeks (a 50% haircut is being discussed) then it could give us a window to renogotiate the promissory notes. If the EFSF were to take on €15bn of the promissory note for instance, it would make less headlines than a 10% writedown in Irish government bonds and yet could have a similar impact. Politically it might be preferable for European decision makers to give us a mini-default through the back door rather than a plain vanilla default ala Greece.

@ Jules: “It is all very simple really.” Thanks for that. If only … …

Now: Could someone please compose an :Idiot’s Guide’ to all
this bonding, etc., stuff.

I have a naive, unstructured and inadequate (aka: an everyday non-technical) understanding. I know that there are different types of bonds, and what this means in legal terms for borrowers. But a Gov? The state is a sovereign. It can, has done, and will undoubtly do so again, say to the institutions who lent it money: “No can pay”. What is the actual outcome here? Short v longish term? Who pulls the short straw?

If the Irish gov had told our local banks that no cash (of any description) would be given to them? Then what would they have had to do? File for liquidation, or what? Who would be out of pocket in that situation? Please do not tell me that the ATMs would shut down and the sky would fall in. I endured two bank closures. One of 3 weeks, the second of 10 weeks. Sky is still up there. The ATMs ceased to fuction: it was inconvenient, but the economy trundled on.

If I am a commercial bank, and I have 100 on deposit, how much can I legally lend out? 90? or 900? Makes an awful big differ. If that 900 is virtual money (I created it myself, on my own spreadsheet), then I lose nothing if the lender tells me to get stuffed – yes?. OK, I can sue. But if the guy is broke?

So, my significant question is this. If the origin of xx% of the loaned-out money is an electronic creation – who is losing, if its not repaid?

@ SK: Sorry for this pesky question, but I am mightly confused. I am unable to comprehend how one can lose something they never, actually, physically, owned.

Brian Snr.

Hmmm…it looks like we are going to wiggle out of this one

The Ecb, and German, concern was that there’d been a huge liquidity influx to the domestic system. And it’s confirmed that Ireland will take a sneaky approach to this issue:
1) Stop all loans outside Ireland, and sell exisiting
2) Do not make loans in Ireland to MNC’s, and ‘nudge’ larger domestic corporates to seeking credit facilities from abroad

These actions will of course reduce the bank’s gross balance sheet…but have no effect on the total quantum of liquidity in the economy

@Brian woods SNR

Goverment money both cash & bonds are tokens which are perceived to hold value – although the monopoly tax system makes them indispensable unless you are Grizzly Adams.
Deposits are loans to the bank which perversely are created by the bank.
But when you get into the Euro system which thinks commercial banks are the economy things get complicated…………………as the euro cash is not goverment money.

Thats my MMTish view anyhow.

Section 3.1 “The clear advantage of EDP debt is that no assumptions on the prices, marketability or liquidity of government assets need to be made”.

Typical of economics lets set out our false assumptions first, then lets build our “robust” model on that!

@ Carson

This link is entirely pertinent to this thread. However, it may be a bit premature to expect to ride piggy-back on this particular development. The problem with the insistence of the German government on a bigger write-down of Greek debt is that it is opposed by its own biggest national bank, Deutsche Bank, the ECB, France and other member states and, as far as I can see, has no actual support from any of the other AAA states.

Why then the obstinate pursuit of the idea?

The German government can hardly be unaware that one of the major victims would the Greek banks and the Greek pension funds holding government bonds. Political dynamite, in other words.

Curious, very curious!


You may be happy to invest in junk bonds or deposit at junked banks, I, and I suspect many others, are not.

Firstly let me say that O’Leary and Walshe are absolutely correct when they argue for slower deleveraging. The problem is that they do not go far enough.

The ECB was happy to see the expansion of longterm loan lending on the part of Irish banks funded by interbank and bond lending. Ireland, now the reluctant owner of the banks, should not agree to any deleveraging just because the ‘deposits’ have flown away. The ECB position on this is in fact ludricous as exemplified by an extrapolation of their position if deposits fell a further 50%. What then? The ECB solution would be more deleveraging.

Now to the green jersey.

A banking system, based on loans funded by deposits, was until the ECB arrived on the scene considered fundemental to the workings of an economy based on credit. I cannot therefore accept that the loans already advanced into an economy can be hauled back in haste precipitating the destruction of that economy, purely because the owners of deposits en masse, decide to withdraw those funds from the banks.

In such a situation capital controls are not only necessary but essential. It is not just the owners of capital that have rights, the citizens of a country also have rights.

Under no circumstances should Ireland accept the ECB premise of deleveraging based on a deposit base that is severely diluted through flight of capital. If Ireland does not have a LOLR, the ECB must act as LOLR until balance is restored in the ‘fullness of time’. It cannot and simply should not be allowed to destroy an economy just to ‘get its money back’. It is after all a central bank not a debt collector!

The issue of Irish pension funds not being allowed to invest in government bonds but allowed to invest in Greek, Spanish, Italian, Porteguese, French and German is so anti-green jersey as to amount to a decree of economic war against the State.
My own pension fund now stand at a loss of 15% over a ten year period. If all of that fund had been invested in Irish bonds over that period, I would be able to retire in a few years at 60, looking forward to a retirement foreseen by Lloyd George in his Limehouse speech:

It is rather hard that an old workman should have to find his way to the gates of the tomb, bleeding and footsore, through the brambles and thorns of poverty. We cut a new path for him, an easier one, a pleasanter one, through fields of waving corn.

Instead, the fund managers, invariably subsidiaries of banks, invested in other banks and more banks and more banks again until their bonus’ grew fat and the pension fund grew thin. A few years ago one Irish pension fund was doing road shows explaining that they were going to invest in a number of sure things. Right at the top were, Northern Rock and Anglo Irish bank.
Then the governemnt arrived and took some more just to pay Bertie, Cowen and the PS the very handsome stipends.

The waving corn has long since lodged in the field and the harvest is now looking very poor for private pension fund holders.

Nevertheless I would contend we are citizens before we are investors.
I already wear the green jersey in a 41% tax, a 7% USC, 4% PRSI, etc etc. But the heaviest cost I and many others bear in terms of the green jersey is the cost being meted out to the next generation.

I would happily bear a very heavy green jersey if their futures could envisage ‘fields of waving corn’ again.
Sadly it does not look that way.

@ All

Sarkozy quoted this evening.

“Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division on our continent.”

Now, who could he have in mind?

The German press is reporting a variety of themes, notably that Paris has dug in its heels on the Greek haircut issue, its stance being hardened by the Moody’s downgrade. It can only accept the technical changes adverted to by Rehn some days ago. Merkel has moved from reported “millimetre by millimetre” action at a governing coalition meeting to “important steps” in a televised comment. Schaeuble has been quoted as stating a ceiling of one billion euros effective lending for the EFSF, going the insurance guarantee route.

Still all to play for!

@Joseph Ryan

My own pension fund now stand at a loss of 15% over a ten year period.

JTO again:

I hate to be the bearer of bad news.

But, UK inflation hit 5.6% today.

UK inflation is now out of control.

The Bank of England has embarked on a new round of Quantitative Easing, which is economist-speak for they are going to print and print money until they run out of paper.

Prepare for UK inflation hitting 10% in a couple of years.

As a result, it is increasingly likely that the £sterling will suffer further falls in coming years. So, Irish pension funds invested in UK bonds yielding 2% will have their value eroded even more in coming years.

I do hope that you find a way to sue your pension fund manager.

You are dealing with puritanical priests who believe they have a higher mission – nation states are but archaic constructs to them – dispensable playthings that they themselves had created in a previous era.

The words of FOFOA……………………….
“Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men. The pre-22 gold standard, although it allowed gold to function, still carried the same flaw I point to so often; that using the same medium for exchange and savings leads to regular recurring conflicts between the two camps.

This is an important distinction to understand. Gold’s true function is relative to the real, physical balance of trade, not man’s flawed, political-overvaluation of debt and other monetary schemes. In 1971, the entire planet switched to using a pure token money as its medium of exchange. These symbolic tokens do fail miserably and regularly as a store of value, but they work remarkably well as a medium of exchange. They are not going away.

The whole ECB/Euro architecture was built to turn Genoa 1922 on its head, to reverse the damage done and to restore the function of gold which Jacques Rueff knew all too well. The ECB has one plain and simple mandate, to act with regard to a target CPI that is statistically harmonized across different economies dealing with different economic factors. In other words, the job of the ECB is to maintain stability in the purchasing power of a common currency against the general price level in many different countries.

This simple architecture is designed to work best in Freegold, where the price and flow of physical gold will automatically regulate and relieve the pressure of economic differences between member states. If the ECB had been designed to assist the European economies, it would likely have been given the second mandate, same as the US Fed. The Fed has two mandated targets: CPI and full employment. These dual mandates are like fair weather friends, because when the heat is on—like it is today—they actually become dueling mandates. The ECB, on the other hand, is not mandated to assist the economy like the Fed is. In fact, FOA wrote back in 2000: ”

“Basically, this is the direction the Euro group is taking us. This concept was born with LITTLE REGARD FOR THE ECONOMIC HEALTH OF EUROPE. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold.”

Dork speaking – there has been a massive export of European capital since Masstricht – where has it gone ? , we have gained income and cheap goods but where has the capital gone ?
What money built 2 coal fired power stations a week in China ? – how did the Chinese get such power – you will find your answer in Euro banks balance sheets

“Foreign ownership of Irish banks by well capitalised, well funded international banks would reduce funding concerns and also remove the contingent liability from the Irish government, resulting in a double benefit.”

This sounds like nonsense to me. Why would would foreign ownership make any difference. When the banks were owned by their shareholders – presumably many of them were foreign – bu=t we still felt the need to bail them out. What will have substantially changed?

There’s a lot of off topic stuff in this thread…matters seem to have moved from the specific topic, to the general Ez issue. I’d suggest a partial remedy to same might be to set up a rolling Ez crisis thread, and renew it say every 2 or 3 days.

This interesting Vox note claims to have constructed an econometric/game model, showing that deleveraging reduces employment:


the hypothesis being that deleveraging causes excess liquidity/capital to be available to the firm in question, and that workers bring bargaining pressure to bear in order to appropriate some of it. with ensuing negative consequences for re/hiring.


I have a suspicion that levering up increase employment. More of it = more employment etc until the sustainable limit is breached. At that point delevering becomes inevitable and this is negative for employment.

Should I write to Vox?

On the efsf we do seem to be heading toward a big spin about a big number, but it is so widely trailed that by the time it is announced (assuming Merkel doesn’t wimp out), the reasons the big number actually isn’t big, will also be widely known.

The authors claim have isolated the excess capital hypothesis in their model.

Sure leveraging up their capital gives more monies…can create more jobs…but over leveraging means the funding/loan becomes a capital/solvency risk. Their point seems to be that ‘over’ de-leveraging creates excess/unused capital, which the workers seek to appropriate.

The authors claim have isolated the excess capital hypothesis in their model.

Sure leveraging up their capital gives more monies…can create more jobs…but over leveraging means the funding/loan becomes a capital/solvency risk. Their point seems to be that ‘over’ de-leveraging creates excess/unused capital, which the workers seek to appropriate.

As said reasonable and novel hypothesis…just I tend to be skeptical about ALL evidence for ANY economic theory…as if it is empirical…I distrust data quality and/or controlling for other factors….and if it is model/game theoretic…I distrust both the axioms of the model, and simplicity of the model. But that’s just me…I’m weird and skeptical on all macro stuff 🙂

EFSF – yes we are heading for a big spin on the €2T number (got to outdo G. Brown and his 1T number after all) aka “look into this dazzling ball of light so I can blind you to not look at other things that maybe don’t bear up to scrutiny”

I’m still predicting 40% haircut on Greek debt (but done in a very complex way). When is 40% not 40% and all that?

I don’t know how FOI works in places like Belgium, France, Germany but if anyone does, they might want to see if they can get their hands on letters from the Chairmen/CEO’s of major European banks to various Finance Ministers and unelected EU officials in positions of power over the past couple of weeks.

You will probably see more ‘warnings’ in the press from bankers EZ politicians/the public over the next 3-4 days about collapse of world banking system, ATM’s switched off, riots, etc. if they don’t get things sorted out this weekend without forced recap of banks and no additional haircuts.

Is it true the Chinese have been dumping $ assets recently?

@DOCM: “Political dynamite, …” Yep. Also Known As: ‘sweaty gelly’.

When you hear ‘politician’ or any word with political in it: think the 3 Ts: temperamental, tricky, treacherous. Saves a lot of angst.

@DB: “But that’s just me…I’m weird and skeptical on all macro stuff”.

“Me three!” – (I think DoC may be with the programme also).

No comments yet on the use of a spreadsheet to create virtual money, asserting “This is MINE, I OWN it!” Then when you ‘sell it on’ to a third party you not only demand repayment (that’s OK), but you also demand that she pay you for the use she got out of it! Hmmmmm …

You purchase a car (outright) and the garage then demands you pay them a milage fee – or, “Its jail Boyo!”. Hmmmm, hmmmm …


Brian Snr.

@ All

The major conclusion of the document under discussion is as follows;

“Economic growth can happen while economies deleverage but the pace of deleveraging is important – Studies have shown that if private sector deleveraging can be slowed, this can have positive implications for GDP growth. For this to occur, further European assistance is needed to solve Ireland’s banking problems”.

The likelihood of this assistance materialising seems to me to be entirely pertinent to this thread.

It is now confirmed that the sum that Germany has in mind for the maximum firepower of the EFSF is one trillion euros. (Schaeuble is in hot water with his party colleagues but that is par for the course). According to FT Deutschland, the deal is to be set out in and EFSF guidelines document to be concluded tomorrow. The major difficulty, of course, remains the likely calls on this sum which can only be assessed in the light of the achievement of an overall deal, a possibility that Merkel is putting in doubt because, it would seem, of the difficulty in coming to an agreement with France, notably on the Greek writedown issue. If the latter is high, the additional calls on the EFSF in respect of the parlous situation of Greek banks (and other financial institutions – notably pension funds – holding Greek bonds) will obviously be higher.

The FAZ published a dialogue between Schaeuble and Issing some days ago where Issing, without blinking an eye, said that Greece could not, of course, be forced to leave the euro but were the country to decide to do so, that was its sovereign decision. cf.


@ All

I forgot to mention that the Google translate button does quite a good job as the German is the spoken text.


“The major difficulty, of course, remains the likely calls on this sum which can only be assessed in the light of the achievement of an overall deal, a possibility that Merkel is putting in doubt because, it would seem, of the difficulty in coming to an agreement with France, notably on the Greek writedown issue. If the latter is high, the additional calls on the EFSF in respect of the parlous situation of Greek banks (and other financial institutions – notably pension funds – holding Greek bonds) will obviously be higher.”

This is a choice as follows:

Do you want to keep the eventual Greek writedown liability in the books of the banks, waiting to go to the sovs and the efsf later, or do you want to skip part of that. There is an option value to not skipping any of it, not least political in nature. The flip side of that is that market participants have an option value to assess that reflects the possibility politicians do understand the context viz tail risk. The first option I mentioned might come at the price of having the second option valuation tend to zero in some ‘models’.

@ grumpy

As I understand it, the idea of Schaeuble is to force a write-down of Greek bonds to the level that the EFSF will now be lending (i.e. considerably less than what the swapped bonds would be earning) in the context of a still “voluntary” bond exchange. I have not the expertise to work out what this means in percentage terms. One assumes that banks holders of the new bonds could swop them for cash at the ECB. As to what others might do, I have not the vaguest idea. The view the markets are likely to take is to me as a layman quite straighforward. They will ask the question: whose government bonds are next for shaving?

I think that people may be overlooking how stark the political choices now are. If they are in any doubt I would recommend a reading of Trichet’s recent interview with the FT.


Do you really believe that nonsense after all that has happened ? – leveraging goverments base is a weapon of mass destruction – it cannot be a base if it is leveraged.
He does accept the crisis is centered in Europe – this is because Europe was the primary exporter of capital.
Why was that DOCM ?
It all goes back to the Euro.
Its the heart of darkness.
Especially since the early to mid 1990s they have been exporting european capital in a gigantic slave trade arbitrage.
This is the ECBs friggen baby
Trying to offload this crisis on Treasuries is vile.
Advanced Treasuries such as French & German fought the ECBs fiscal dogma mantra in the 90s but failed –
You are accepting political choices in a box of their making.
I smell tyranny.

@docm, efsf pimpers

Slightly duff bund auction today.

The mechanics are, in the view of investors, cannibalizing their own cars to get the required tasteful accessories to pimp the aforementioned financial vehicle.

@ seafóid

As you say, an outstanding article and one which fits into a thesis defended by Martin Wolf for some considerable time viz. that it is the commercial imbalances at both the EU and global level that are at the root of the crisis.

To take the masthead opening quotation from Schaeuble in the paper under discussion.

“Whatever the role the markets may have played in catalysing the sovereign debt crisis in the eurozone, it is an indisputable fact that excessive state spending led to unsustainable levels of debt and deficits that now threaten our economic welfare”.

This is simply not true. The unsustainable levels of debt in most countries are a result of the crash which is the result of the imbalances to which Wolf draws attention. These can and must be corrected. To quote his conclusion.

“A currency union with structural mercantilists in the core now threatens a permanent slump in the periphery. Solving that is the true cure. Can it be done? I wonder”.

He is too pessimistic. Barcelona and Milan, and the regions around them, have more in common with each other than they have with their respective capitals. And full use must be made of the new SGP arrangements to confront the mercantilists at the EU’s core. (It was, for example, idiotic to allow the two countries benefiting most from enlargement – Germany and Austria – to retain restrictions on full freedom of movement of labour for the full seven years post-enlargement).

The irony for Ireland is that the country has no choice but to try and imitate the behaviour of the mercantilists. Our defence is, and should be, that we maintain an entirely open economy (with a few significant exceptions which the Troika is now challenging) which is more than can be said for the countries of the Continent. In fact, the huge error by France, Italy and Spain is their failure to grasp that they cannot mix it on the terms set by the mercantilists. Their only salvation is to insist on a fully functioning and integrated internal market. The Commission has never fully lost sight of this and it now seems to be getting a fairer wind as the countries concerned finally grasp the reality with which they are confronted.

“it is an indisputable fact that excessive state spending led to unsustainable levels of debt and deficits that now threaten our economic welfare”.

This is BS. Chopra nailed it in his paper.

Because many European banks are large and global, but remain the responsibility of their home country when they fail, bank failures potentially threaten the sovereign where the bank is domiciled.

The absence of an EU wide bank resolution system threw the debt of the banks onto the sovs. The transmission system has to be bypassed. Like Kinnegad .

I would argue Germany is undergoing a long term industrial collapse also – the mercantilist policey is only a result of its previously captured banks not investing heavy duty long term capital back into the host country.
The abandonment of German Nuclear had nothing to do with Japan – that was the excuse – the banks want nothing to do with sinking long term capital into anything as that would reduce their profit margin.
They want to be footloose and fancy free playing one state off against another.
You cannot blame states for this mess – it all goes back to the banks & their precious Euro.

@ seafóid

I am, of course, in full agreement with this view.

The German media are now carrying suitably animated denials that Schaeuble mentioned any figure for “pimping” the EFSF.

Herewith another excellent article from the FT by Thoma Klau.


It is worth noting that what Schaeuble in his exchanges with Issing had in mind for “fiscal union” in the medium term was simply moving what is currently a competence to coordinate in the area of economic and monetary union to full EU competence i.e decisions by way of the “Community method”. As an example he mentioned competition. (What is often lost sight of in the Pavlovian reaction to anything to do with treaty change in Ireland is that the famous Crotty judgement implies that a referendum will be required only if the proposed changes alter the “essential scope or objectives” of the existing treaties).

That German bond auction must be raising alarm in Berlin. I think the poor showing was a bit more than “slightly duff”.

A very good comment here. The future is either going to be like the UK with a permanently depressed periphery and a dynamic Londonesque core country grouping or it’s going to involve some sort of Marshall plan driven by self interest to rebalance the EZ. I can’t see the peripherals taking Middlesbrough or South Wales status indefinitely.

Will it be the Premier League 2011 or the First Division 1975 ?



“New german occupation of Greece ?”

Yep, the Greeks are lined up to be the whipping boys this weekend alright.

I see the protests over there today are getting a little hairy.

Now, shall I jump on the private jet this evening to stand with the crowds (and they really do exist) outside the maternity clinic in Paris to cheer on the birth of the next generation of Sarko or shall I land in Frankfurt and go with the movers and shakers to JCT’s leaving bash with the fragrant Dr Merkel (and of course, Sarko is there instead of at said maternity hospital tonight). I notice that Silvio hasn’t been invited to Frankfurt. That “lardy-***” comment really didn’t go down too well.

It does look like we are coming closer to some sort of Endlösung. But that’s what they said back in March too.

Via the FT.

It is incredible anyone would want the banks to delever or indeed curtail their activities in any way!

“According to the SEC’s complaints, the Class V III transaction closed on Feb. 28, 2007. One experienced CDO trader characterized the Class V III portfolio in an e-mail as “dogsh!t” and “possibly the best short EVER!” An experienced collateral manager commented that “the portfolio is horrible.” On Nov. 7, 2007, a credit rating agency downgraded every tranche of Class V III, and on Nov. 19, 2007, Class V III was declared to be in an Event of Default. The approximately 15 investors in the Class V III transaction lost virtually their entire investments while Citigroup received fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of at least $126 million from its short position.”

“the hand of FG.”
Of course….didn’t Enda tell them last week not to change the Treaties.
We are punching above our weight and he has the ear of the Frau.

@PR guy
Sarky going to Berlin is instructive. Earlier reports that they were deadlocked must be accurate. Maybe he is hoping Angela will give him a present for the baby and save the French Banks. Then little Sarky will have a bright future.
He also wants JCT to buy a few bonds for the baby now that they are yielding over 50% more than bunds.

The ultimate treachery…
“(Reuters) – Citigroup Inc will pay $285 million to settle charges that it defrauded investors who bought toxic housing-related debt that the bank bet would fail, the U.S. Securities and Exchange Commission said on Wednesday.”
I suppose the only consolation is they had to disgorge the profits but you have to wonder why some executives are not on their way to Federal prison.


Yes, we were all at the opera while Carla was giving birth to a baby girl, Sarko and Merkel went off for a little Aida of their own (interestingly, the premiere of Aida was postponed because of the Franco-Prussian war!).

It’s all getting a bit close to midnight – which suggests that more fudge and can kicking will be the order of the day on Sunday


Looks like Barrosso is losing it….
“He told reporters: “This weekend, I will insist on the need for decisive answers on all the five points of this roadmap, of this comprehensive package … It is a question of credibility for Europe that it can turn up at the G20 in Cannes with the main agreements in place.”

And the Chinese are getting a bit uppity…..
“The solution to the eurozone crisis is for Europeans to work harder and for longer, rather than being cushioned by the welfare system, said Jin Liqun, chairman of China Investment Corp, China’s sovereign wealth fund. He warned on Wednesday that Europe’s fundamental problem was that its workers were simply not productive enough.
“The root cause is the overburdened welfare system built up since the second world war in Europe: sloth-inducing, indolence-inducing labour laws,” Jin told Channel 4 News. The average Chinese working week is nearly 48 hours, the maximum allowed under European law. “We work like crazy,” said Jin. Graeme Wearden”

“The root cause is the overburdened welfare system built up since the second world war in Europe: sloth-inducing, indolence-inducing labour laws”

No wonder Mao ran that cultural revolution where the bourgeoisie were targeted for reeducation. Underneath all those caps lurked the mentality of the Squid.

Euro crisis nothing to do with shadow banking either.


“Underneath all those caps lurked the mentality of the Squid. ”

I saw the interview with Jin Liqun – he’s a squid through and through.

I was in China not long ago and had some interesting conversations. The workforce is two-tier these days it would appear. Those who are now effectively working in the private sector for squids like Jin, working in terrible conditions and are being driven to early graves to make the squids richer. Then there are those still employed by the State, mostly in makey-uppey jobs (e.g. to stand in a uniform at the bus stop to wave down the next bus for those standing in line) so that there aren’t millions of unemployed roaming the streets and causing bovver and who are as idle as any “indolent sloth” European.

Of course, if Europeans did work as long and as hard and as cheaply as Jin makes out the Chinese do, he would be the first one to complain about the impact on China.

Anyway, what’s the craic today I wonder… will the summit this weekend unravel before it even begins?

Can we have a thread on here tomorrow just for the weekend summit? Please?

@Seafoid/Ceteris/PR Guy/

“Underneath all those caps lurked the mentality of the Squid. ”

Now if the west insisted that China and indeed oil producers were paid in their own currencies, Jin might have more to concern himself with than European sloth.

Figure 11 of Irish private sector debt to – confirms my belief about the nature of bank decapitalisations of real physical economies that drags consumption from the future into the present to increase short term profits

First the post 87 IMF piloted shock
Then the maastricht thingy really kicked in post 95
Then the Official Euro entry sent us into orbit.

2008 was all about running out of road – no more consumption no matter how many derivatives could be made to counteract the negative wealth effect of unproductive private debt.

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