Dutch Bankers’ Bonuses Go Bye-Bye, Thanks to Twitter

One thing journalists from other countries ask quite frequently is why there haven’t been more riots or other expressions of collective anger in Ireland, given the scale of the problems we’ve faced and the sheer injustice of some of the actions taken since all of this began in 2007. I always answer that I have no idea why we haven’t seen more grass roots reactions like Bondwatch Ireland. I really don’t know.

Last March in Holland we had an example of twitter-inspired social unrest leading to the reversal of bonuses being paid out. This is the first I’ve seen of it, so I thought I’d blog it.

From the piece:

ING customers mobilised on Twitter and other social networks to protest at bonuses paid to bosses at the bank, one of the biggest in the country. The threat of direct action raised the spectre of a partial run on ING, terrifying the Dutch establishment. Fred Polhout, union organiser at the bank, says: “People were outraged. We heard about the bloated sums being paid again in the City and in New York; but suddenly the issue exploded on our own front door.”


So severe was the public reaction to Hommen’s bonus that within days he had agreed to waive the award and told other ING directors to do the same.

Fascinating, and perhaps something to watch for in the coming months in an Irish context.

Portuguese Energy Privatisations.

All three ‘programme’ countries, Greece, Ireland and Portugal, are committed to privatisation of state assets.

In Portugal, the state owns 25.05% of EDP, a listed electricity generation, distribution and supply business, which also owns some gas operations. A slice of EDP’s operations are in Brazil, some in Spain, most in Portugal.

The state also owns 51.1% of REN, a listed business which owns the electricity transmission business and the high-pressure gas pipeline network in Portugal, as well as some LNG and gas storage operations. It has no significant activities outside Portugal. Both EDP and especially REN embrace regulated activities. Both gas and electricity were originally state-owned in Portugal.

The government has announced the sale of 21.35% of the shares in EDP to the Three Gorges power company of China for €2.7 billion, which will leave the government with less than 4%. The shares are widely held and Three Gorges will be the biggest shareholder. The government has also announced its intention to sell part of its stake in REN, presumably taking it below majority ownership.

These developments are interesting in view of the Irish government’s decision to eschew vertical separation at the ESB and to seek to sell a minority stake in the existing company. Portugal went for vertical separation of the network companies some years back, along the lines of the recommendation for Ireland in the of the Review Group on State Assets which reported in April 2011, and has now decided to exit ownership in powergen/supply more or less altogether. In addition, they seem willing to go below majority control of REN, the networks business. The State Assets report recommended retention of state ownership, at least for the time being, in these businesses.

ECB: A human rights perspective on senior bondholders; pari passu not an absolute principle

There is a new ECB legal paper on bank resolution regimes.  In discussing the January 2011 European Commission working document,  the paper states :

Under the statutory or comprehensive approach, a statutory power would be conferred on the resolution authority ‘to write down by a discretionary amount or convert to an equity claim, all senior debt deemed necessary to ensure the credit institution is returned to solvency’.

… .

Key factors in determining the success of such a bail-in regime will include its compliance with the principles of human rights law governing peaceful enjoyment of property and the predictability of its outcome and, hence, its alignment with the expectations of market participants. However, it would appear that the Commission is considering the possibility to accord resolution authorities the power to discriminate.

Discrimination between equally ranked creditors is highly problematic both from the perspective of human rights and predictability. Discriminatory treatment defined as treating essentially identical cases differently or essentially different cases the same is per se not justified by objective differences and, therefore, unduly infringes property rights.

However, the situation could arise where a differentiated treatment of creditors of the same class may be necessary to achieve an optimal result during reorganisation. In such a scenario, the overall outcome in resolution is optimised by not respecting the pari passu principle within a class of creditors. In order to achieve the intended positive consequences of such differentiated treatment, it is important that it follows transparent principles and safeguards and that the differentiation is justified by objective criteria. In those circumstances, it will not be discriminatory. In other words, any exceptional deviation from the pari passu principle cannot be allowed to build on discriminatory treatment and, in any case, it must be ensured that the principle that creditors cannot be worse off than they would be in immediate liquidation is respected. This differentiated approach shows that the principle of no worse-off than in liquidation functions as a bottom line in the system of creditor safeguards and has to be respected in all cases, while the pari passu principle allows for exceptions, provided these are objectively justified and, therefore, non-discriminatory.

A European Solution to a European Problem – It Might Work

The latest attempt by the ECB to get a grip on the Eurozone crisis might work. It has the potential both to push sovereign market yields toward sustainable rates, and to block self-fulfilling institutional bank runs in which corporate deposits move to stronger Eurozone countries, draining weaker member banking systems of liquidity and credit.

Colm McCarthy was keen on a “reverse tap” in which the ECB enforces a maximum yield (minimum market price) on Italian/Spanish/etc sovereign bonds using its money-creation potential to back up this policy. The problem with his plan, in my view, was the lack of a surveillance mechanism to ensure the funded countries were continuing their needed restructuring. Germany would not accept that solution. My own preference was for the IMF to serve as conduit for sovereign funding via official IMF programs backed by ECB-funded bonds. Colm criticized this as an unnecessary intermediation by the IMF in a problem that needed to be solved by Europe.

The new ECB unlimited-three-year bank funding strategy uses the banks themselves as the monitor for sovereign discipline. It also provides direct bank liquidity so that the slow-motion institutional bank run phenomenon is less likely to lead to the negative feedback loop (corporate depositors distrust the PIIGS banks, PIIGS banks lose liquidity and restrict credit flow to their national economies, PIIGS national economies slow down due to shortage of credit, PIIGS banks suffer due to national economic slowdowns). Actually the “G” does not belong in this acronym anymore since it is a separate case. Perhaps PISI? Commercial banks in the PISI who lose corporate deposits to Germany or elsewhere can replace them with even cheaper funding from the ECB.

Might the new ECB strategy work?

Ireland and Europe: the IMF menu

The IMF report on Ireland provides a menu of the different ways in which Ireland can be assisted by its European partners (point 42 on pages 26-27).  The IMF points out that such help would additionally benefit the wider eurozone by “enhancing the robustness of Ireland’s program, these and other potential steps would also provide a firewall protecting the euro area against potential shocks.”

I have enumerated the menu below.  While I imagine all of these are under discussion, I invite the readership to rank these options in order of importance.

1.  Underpinning growth and job creation

1A.  Enhanced support for appropriate public investment
1B.  Enhanced support for SME lending

2. Banks:  regaining market access and return to private ownership

2A.   Guarantees for term funding
2B.  conversion of short-term Eurosystem liquidity support into medium-term funding
2C.  capital support for vehicles designed to reduce deleveraging costs and spillovers
2D.  temporary equity participation in banks by European partners

3. Debt Sustainability

3A.  see 2D
3B.  refinancing prior recapitalization of banks
3C.  enhanced EFSF flexibility to facilitate Ireland regaining market access at reasonable cost

Economic Geography Conference, January 30

As part of its fortieth anniversary celebrations, the Department of Geography at NUI Maynooth is organising a one-day conference on Networks and Flows in Economic Space. National and international academics will present papers on export flows, spin-off networks, innovation networks, finance networks, multinational global production networks and regional development. The keynote speaker is Henry Wai-Chung Yeung, Professor of Economic Geography at the National University of Singapore.

Free Registration at: geography.department@nuim.ie
Conference details and list of speakers here.
For further information, contact: chris.vanegeraat@nuim.ie

Poll tax to be replaced by property tax

According to this piece in the Irish Times, the Cabinet have copped on that there is little support for a poll tax. Maybe they have realized too that poll taxes are not terribly smart from an economic perspective either.

An expert group will now be established, to report in Spring. As this discussion is not exactly new, our submission is as good as ready. Ronan Lyons’ has made good progress with his, as has Karl Deeter (also on video). Let’s hope the expert group will take this advice to heart.

Last week, though, I got a number of phone calls from journalists about a plan by the chartered surveyors that everyone should get their house valued by them. That would be an unnecessary transfer of money from the general population to a small group of professionals. There are substantial databases on property values already (CSO, revenue, estate agents, etc).

CORRECTION: The chairman of Residential Agency Practice Group of the Society of Chartered Surveyors Ireland points out that they have never called for all properties to be valued. Apologies to all involved.

IMF Fourth Review

The fourth review of the Extended Arrangement  for Ireland can be read here.  This is the updated IMF projection of the general government gross debt up to 2016.

In the third review the IMF had set a target of €7.4 billion for the primary exchequer deficit in June 2012.  This target has now been revised to €9.0 billion. 

The target this year had been €10.1 billion and the June 2011 outturn for the primary exchequer deficit was €8.4 billion.  We can have a €0.6 billion deterioration in the primary exchequer deficit in the first six months of next year and still meet the IMF’s target.

Bad News from Big Pharma

We have reached the long-awaited “patent cliff”. Lipitor, which Pfizer produces in Ireland, has just gone off patent and others are set to follow shortly. Big Pharma’s new product pipelines are sparse. Bloomberg reported on this a few weeks ago here.

I don’t think Chris Van Egeraat is quite as pessimistic as he appears to be in the article, and he tells me that the figures quoted come from Bloomberg’s database rather than from him.

Furthermore, Big Pharma is fighting back. And we know that mergers and acquisitions in the sector have increased in recent years, against trend, as the pharma companies diversify into biotech, from which the new innovations are likely to emerge. (See the section on pharmaceuticals, pps. 16-17, here).

But worrying all the same!

McCarthy: Time for a whole new strategy on negotiations

As chairman of the Limerick Branch of the McCarthy fan club, I hereby point you towards yesterday’s Sindo column where The Colm describes a new strategy for negotiating with our overlords cousins in the EU.

From the column:

The reported ECB attitude on Irish debt relief should come as no surprise to anyone. Taking one for the team will not go unpunished in the new European order.

Here’s an alternative negotiating strategy. The key premise is that debt relief cannot be confined to Greece, a centerpiece of the most recent deal in Brussels. This is, of course, a matter of judgement, but it is the judgement of the bond market, the one that matters in the end. The debt relief currently contemplated for Greece is inadequate, so there will be more. Debt relief will be required also for Portugal. If Ireland is to repay its core sovereign debt, there needs to be a deal on sharing the bank-rescue costs. Otherwise, Ireland will either join Greece and Portugal in sovereign default or will be reliant on official lenders indefinitely.

It follows that the number of European sovereign defaults can, with luck, be confined to two, but only with a deal on sharing some of the Irish bank-rescue costs with those who insisted that they be incurred.

Three questions immediately present themselves:

  1. Is this strategy realistic? Assuming it is, then:
  2. Assuming we adopt the strategy, how will our EU cousins react?
  3. Will the outcome in terms of debt sustainability be better or worse under the new strategy if it is successfully carried out?

Conference on Irish Economy January 27th

The fourth in the series of sessions on the Irish economy will take place on January 27th. The venue is the Radisson Blu Royal Hotel Dublin City Center. It will take place between 9.30am and 5pm. Co-organisers are Liam Delaney, Colm Harmon and Stephen Kinsella. RSVPs to Emma.Barron@ucd.ie A full programme will be posted here shortly. There will be approximately 20 talks on a range of issues relevant to the current economic situation.

Draft Treaty

A draft of the proposed Treaty has been released. I think we should be very very slow to look to put this to a referendum, if such is required (and it probably is).  Many things may happen in the meantime that could derail this particular process.

In the meantime, our leaders should stop making up exciting scenarios involving Ireland leaving the euro if a treaty is rejected. That Stephen Collins vehemently disagrees with this only strengthens my conviction on this point.

Promissory Note Campaign: A Quiet Downgrading

From the Irish Times:

THE GOVERNMENT has quietly downgraded its campaign to persuade the European Central Bank to change the terms of the €30 billion of promissory notes it issued to bail out Anglo Irish Bank, according to an authoritative Government source.

The efforts by Minister for Finance Michael Noonan to seek a reduction from the ECB in the 8.2 per cent interest rates being charged on the notes or extend the term of the loan has not really worked, said the source.

I suspect most of us can think of other euphemisms for “quiet downgrading”.

“Stones taught me to fly”

Sorry, couldn’t resist.

The quarterly national accounts are out, and it is not pretty. The domestic economy has contracted, quarter on quarter, by 2.2%. Things look even worse when looking at the components of GNP. From the report:

Personal Consumption (-1.3%), Government expenditure (-1.3%), Fixed Investment (-20.9%) and Imports (-1.5%) decreased on a seasonally adjusted constant price basis between Q2 and Q3 2011 while Exports (+0.8%) increased over the same period.

You can see the change in the figure below for GDP and GNP. Combined with the unemployment figures Kevin highlighted earlier this week, the picture is far from good heading into the holiday season.


Luckily we have the omnipresent Little Mix to cheer us up. I’ve heard the, ahem, song, 5 times already this morning. And I feel much, much better about things. Really.