McCarthy: This burden of bank debt is simply not sustainable

Does anyone know what proportion of total ECB liquidity support, Ireland presently gets? Irish banks had €87bn of direct ECB lending at the end of February.

And how does the present position compare with the height of the crisis in Sept 2010 – Feb 2011?

Have the power positions between Ireland and the ECB shifted in the last 18 months?

As Weidman’s response indicated, the ECB undermined its own anti-inflationary stance with the LTRO exercise. But that action was perceived as absolutely expedient, as an EZ banking collapse would have hit the ECB stakeholders themselves.

As the sociologist Pierre Bourdieu puts it, the powerful maintain their position by constantly changing their stance. The new ECB stance, however, has made left them open to allegations of arbitrariness.

This piece reflects the increasing alienation of ‘mainstream Ireland’ from the EC. It’s also a measure of the degree to which the ‘odious debt’ argument is gaining respectability 🙂

The Governor, MoF are the new Sec General of the DoF are going to be increasingly isolated domestically if the trend continues, because we are headed towards a proconsular-type administration. A thumping Dail majority is no guarantee against economic stagnation, with ensuing institutional, or even constitutional crisis.

I think there is a bit of revisionism going on here here. In September ’08, our government decided that all stops should be pulled out to keep the Irish banking system afloat, hence the unilateral blanket guarantee which I understand got up the nose of the EU/ECB.

They could have chosen to let Anglo go ala Lehman, the ECB could not have objected as this was a legal recourse. But concern for depositors and concern for the contagion effect on our “pillars” made our government decide that Anglo (et al) should be supported at all costs.

Subsequently the depositors have been evacuated from Anglo and so far as I know there is now limited risk of contagion in walking away from Anglo. In fact the main “loser” would be the ECB. And so we convince ourselves that our commitments to Anglo where forced upon us by the ECB and therefore why should they expect to get all their money back? Shame!

Let us remember what really happened. Anglo borrowed money from German banks. It lent it to Irish developers. They in turn gave it to Irish landowners in silly prices for their land. Work it through. What we are asking is that those former landowners should hold on to their false windfalls and the ECB should retrospectively foot the bill. Shame again.

@ Grumpy
There is no letter. Brian Lenihan started hinting at duress so that history would be more forgiving. Colm McCarthy may well have been told there was a letter but I bet you he has not seen anything of the sort. He has been fooled on this.
This “letter” idea is just a shoddy stupid lie propagated by Fianna Fail to get them off the hook.

Colm’s article caught my attention yesterday, I’d kinda given up on Colm McC and lately also virtually given up on many Irish economists in relation to their position on the Troika bailout,negotiating a deal for Ireland.

In various ways I believed they were under the spell of Tir na NÓg variously capitulating to LB/FG Weltanshung FED by masters in the Irish financial, political, banking arena, ‘technical’ spells negotiated a la the Merkozy.

Often, I read Colm’s Indo articles and see him variously lay out all the compelling arguments
only to be disappointed at that point when all the dots gets joined together and he would, in my view, not see the full picture; but see him fall back to some rather circumspect mode that at most would be a critical appeal for eg ‘we’ll have to vote yes, even though there are problems with Europe’ or similar appeal for compliant leniency pleading favour that should be extended to us.

Colm’s Indo article made me feel good. This was in economic Joycean terms, an epiphany equivalent to
Joyce’s, the Dubliners. He’s found his true voice and found himself at the same time. He has bluntly called a spade a spade and in so doing has raised himself head and shoulders above all the sirens and censorious wafflers and supporters of the Troika debt agency edicts handed down to us with the lies we should honour odious debt.

Colm’s piece is excellent analysis of why the Irish right-wing authoritarian Irish Government version of Marshal Philippe Pétain, which came to power in France following the defeat of France by Germany in 1941, who’ve sold out this country to the bankers and the Troika, should be opposed in their goal to subjugate us to the gremlin, authoritarian bureaucrats in Europe or at home.

Well done, Colm, nice one. Good to Colm’s eyes opening. My faith has been restored in the old alma mater. Welcome aboard the Mary Celeste and welcome home from Tir na NÓg 🙂

@jagdip

Presumably there is a difference of perception for the ECB in that the LTRO applies some whopping haircuts – particularly to assets which are akin to business loans – and the EZ banks take the liquidity. You can argue some of these assets are duff beyond the haircuts but that is not established.

In the Irish situation the assets had been revealed to require writing down to the point the banks were definitely insolvent so what many in Ireland would like to think was only ‘pretend capital’ (the pro notes) was stuffed into them and the liquidity freshly printed up by the Irish central bank.

The EZ view is not that the LTRO is a printing exercise, although at the Germanic fringes they argue it is at least a bit.

The right thing to do was to have made as really really loud noise about the bank bond repayments and make it crystal clear to the international financial and political community that the Irish government thought repayment was a bad idea and was being AT THE TIME forced by specific threats to do so. Instead the government line has always been to play along with the idea that it was its duty to and in Ireland’s direct interest to pay out the bonds.

There was a much bigger appetite for applying capitalism to the bonds than what many view the pro note write down argument as – ie printing money to finance state deficits. The guys who were in the markets in the late seventies along with the Germans, are programmed to react against that.

paint ….corner….into…..strategy….awol….

@eureka

I think there is a letter. The question is, if the contents were published, would most people recongise it as the letter it is supposed to be. Professional cynics also have a duty to consider the possibility it is the Irish side that don’t want it published and have asked the ECB not to – because its publication might reveal to the public that there was little or nothing more than polite discussion and an expression of preference and the ‘duress’ story is politically convenient.

(There are lots of professional cynics in the financial markets).

Sorry Grumpy – crossed posts and not meant to be a personalised reply.

Colm of course isn’t from the same mold as Viktor Orbán, the right-wing Hungarian prime minister, who told thousands of supporters on Thursday that he would resist EU pressure to amend legislation passed last year and compared “European bureaucrats” to the Soviet apparatchiks who ran the country for decades after World War II. “Hungary will not be a colony!” he shouted to thousands of supporters.

Colm also knows that the while some would like to have a single self-satisfying soundbite: ‘we was robbed,’ that is not credible.

It would be nice to get a Greek-type deal as it would for Spain, Italy and Portugal.

It is likely that there will be a recheduling of the debt.

Dan O’Brien’s article from last Friday:

http://www.irishtimes.com/newspaper/finance/2012/0316/1224313394342.html

Colm McCarthy is absolutely correct, both in principle and in practice, but I’m not sure what purpose is being served by lamenting that EMU central banking, bank supervision and financial regulation isn’t, and demanding that it should be, broadly similar to the institutional and procedural arrangements that took more than a century to establish in the US.

Even with this solid foundation the US has struggled to repair the damage caused by the bonfire of financial regulation in the late 1990s. The confict between federal governance and states’ rights endures. The Dodd-Frank Act is not pretty and falls short of being fully ‘fit-for-purpose’, but it was probably the best that could be achieved given the political exigencies. It was passed in the teeth of growing opposition to any increase in federal governance fuelled by those who espouse the perverse notion that since regulation that was designed to fail inevitably failed the answer is even less regulation and who have not accepted the democratic legitimacy of an elected Democratic Party President since 1992.

The EU has its own variants of these inbecilities and, even worse, in the context of the institutions and procedures of governance, is little more than a ‘gentlepersons’ agreement’ with, in many areas, and, particularly in the areas of central banking, bank supervision and financial regulation, an entirely inadequate development of the necessary institutions and procedures. The EMU was based on this ‘gentlepersons’ agreement’ that everyone would behave responsibly, that each would not do damage, by commission or omission, to others or to the collective interests and that, given these undertakings, there would be limited central/federalesque legal invigilation or enforcement of these undertakings – mainly because the member-states would not consent to this.

Ireland broke this ‘gentlepersons’ agreement’ almost unliaterally and more violently than any other member-state. Its actions stretched the EU’s institutional capability far, far beyond what it was designed for. There are no heroes in this mess; just a cast of villains seeking to evade, self-servingly, the varying degrees of culpability they should be required to bear. And some are more adept than others in doing this.

Setting out the principles of democratic and institutional governance from the economic high ground is fine, but perhaps a bit of humility all round might be more appropriate and a recognition of the unique nature of the EU as an association of sovereign nations bound by treaties and of the variety of institutional and procedureal challenges that goves rise to – particularly in a time of stress.

@ BW II

My own sentiments and thoughts entirely agree, but the reflexive grasp for the charity cup is long embedded in the Irish psyche. Don’t you know, we are owed a living?

Some in the chorus in demanding a debt deal for the big numbers seem fiercely resistant to a debt deal for ordinary citizen.

While talk is of recovery, under the hood it looks pretty bad. No doubt when the final tribunal bills are sent in, a fair number of the great and the good will sleep easier.

@ The Alchemist

‘Don’t you know, we are owed a living’ This kind of statement is nonsense in relation to the Bank Debt. It’s more like ‘we’re owed a CHANCE at a living/future’.

@Colm Brazel,

The EU emerged to constrain the madness and folly that, from time to time, seizes groups and even nations and over time has sought to minimise the incidence of stupidity in political and policy decision-making – and the outcomes of the inevitable stupidity – and to expand the rule of law, democratic governance and economic prosperity within its expanding borders. It is probably the worst means of achieving this; but it is far. far better than any means yet conceived and capable of implementation.

It is very easy to denigrate this enterprise as a total failure; the charge-sheet is long. And you will not be short of allies building and expanding your ‘bell, book and candle’ condemnation. But wishing so fervently for a demolition that you seem to consider inevitable and, indeed, arguing for this demolition, should impose some obligation to outline alternative, replacement institutions, procedures and arranagments that will fill the gap if or when this enormous edifice crumbles or is demolished. Because the gap will have to be filled.

So, perhaps, if you were to ease off on your rants about the obvious and inevitable imperfections of what is in place and reflect a little on what you think might be more fit to replace it those of us with much more modest ambitions might have an opportunity to engage constructively without being distracted by these rants that unfortunately seem to secure some traction with those who, either deliberately or unwittingly, choose not to inform themselves to the extent they probably should.

@michael

I agree with you on the grants scheme. It makes no sense for the capital asset value to be excluded. The same farmers that whine about the terrible injustice of factoring in the asset value have no difficulty cut out a site or two for the favoured sons and daughters for houses. What value should be placed on that opportunity?

I have said here several times that CAP should be abolished. It has kept subeconmic units intact rather than allow a more natural market in land to emerge. It is no more than a form of rent supplement with the same built in distortions.

This ultimately comes back to the issue over what burden of responsibility a sovereign state has to responsibly manage and regulate its financial system, especially when you include Ireland’s membership of both the EU and EZ and the responsibilities we have to them. Given the lack of either practical resolution schemes or an answer to the “too big to fail” question, i would suggest we haven’t come close to figuring put an answer to this issue yet. Saying simply “let them got bust, that’s capitalism”, when banks get into difficulty, is naive in the extreme, and completely ignores how the developed world economies are currently structured. We haplessly mismanaged our entire banking and credit systems, as well as our public finances, and it was not simply a “rogue” bank that was at fault in our economic collapse. The ECB was of course completely asleep at the wheel during the credit bubble, and bears major responsibility in creating the conditions which led to the crisis, as do the leaders of most Eurozone economies for continuing to push pro-cyclical economic policies reliant on massive amounts of cheap and easy credit. So there is a duty for more sharing of the risks and losses arising from this crisis. But anyone who thinks that “this is Europes fault” is either being dishonest or is intellectually challenged.

@ John Foody

An awful lot of Irish people were made extremely rich and remain so as a result of the silly bubble prices for land. We don’t seem to have any mechanism for getting that money back off our own citizens though personally I don’t see why we don’t have retrospective super taxes on bubble gains.

So if we cannot get back this windfall from those Irish citizens who were so lucky to be in the right place at the right time, whose responsibility is it to fund that windfall? Seems to me more of an Irish responsibility than a European one.

How much could have been saved if burden sharing was applied to unguaranteed unsecured senior bonds in the banks?

A 50% haircut on all of these outstanding on Feb 18th 2011 would have generated €8.2 billion. If BOI is excluded the savings would have been €5.6 billion.

At the end of this year the general government debt will be around €183 billion.

@Mr. Bond,

Thank you. It seems you are fated to keep repeating these simple facts and unaddressed challenges. But I suppose we will always have those determined to keep their ears and eyes closed.

Ironically, in terms of bank restructuring, bank supervision and financial regulation, Ireland is probably in much better shape than most other EZ members. But this has been secured at an excessive cost. Though I remain convinced some means will be secured to reduce the on-going annual burden of this cost. And I doubt that frenzied comment here or elsewhere will speed up this process.

And it is an, oh so, convenient distraction from the huge amount of work that needs to be done. This combination of salami-slicing of public expenditure and incremental increases in taxation without any effective, counter-acting structural reform is worse than medieval blood-letting.

Most of Official Ireland seems to think that by sticking with the main fiscal and banking elements of the Troika’s programme, cunningly and deviously playing silly buggers with the Troika’s extremely limited structural reform programme and accepting, unquestioningly, the outcomes of the EU’s Grand Panjandrums machinations they will arrive, very soon and relatively unscathed, in the ‘sunlit uplands’. They may very well achieve this, but it will be at an enormous, and totally unnecessary, cost to the majority of citizens and residents outside of this ‘charmed circle’.

@overseas bloke

“Let’s be serious: those bondholders were stupid enough to believe that there was a government ,a regulator and a central bank in Ireland, all of them doing what they were supposed to do .How naive of them! Let’s punish them! It is only fair!”

Evidently you have heard of ‘government, ‘regulator’ and ‘central bank’. Have you ever heard of ‘fund manager’, ‘buy-side analyst’, ‘sell-side analyst’, ‘broker’, ‘market strategist’, ‘risk manager’, ‘fund trustee’, ‘prop desk’, ‘ swaps dealer’, ‘investor’?

Do you think these roles and others exist because the three institutions you mention are supposed to be so smart that it is assumed everyone can simply rely on them to get things right?

@ PAul Hunt,

Re ” So, perhaps, if you were to ease off on your rants about the obvious and inevitable imperfections..”

I’m altogether amused at what qualifies for rant and what qualifies for considered intellectual and informed reasoning with considerable research and intellectual backing. Rant becomes what one doesn’t agree with, an object of inversion of black to white. Out of this septic bag of tricks to quell opposition to ludicrous nonsense, comes appeal to
some personal view as to the best of all possible alternatives being compliant, unquestioning, blind adherence to ill informed understanding:-)

So, to avoid ‘ranting’ that you so perfidiously rant about, here’s I’m sure an unwanted answer to your question, stated in the bluntest and simplest terms.

On Mar 31, whenever the due date of the ¢3.1 bn falls (should be April 1), simply shout in the manner of a Mr Rajoy, simply say, NO, not paying it, we are referring it to International Court for Banking settlements, in the Grimsson manner,
http://www.pca-cpa.org/showpage.asp?pag_id=1157

You’ll have to read back on my posts to see what else I got to say about alternatives, but that should be enough to get you going 🙂

Glad to provide some amusement. And good luck in the Permanent Court of Arbitration.

I have it from very (very) high up financial services people that there was definitely a letter from JCT and there is supposed to be a ‘second’ letter though I have no idea who from (I’ve heard more than one EC official/EZ politician’s name linked to it – it’s impossible to know what’s true and what’s speculation).

@DOCM
The peripheral bank bond market dwarfed sovergin debt by a large amount.
I don’t have the historical numbers at hand but remember a FT graph back in the day that put the entire credit hyperinflation into perspective.
Ireland & Spain alone were huge dead whales of things.

What the ECB perhaps do not wish to confront is that they have destroyed the long term value of the currency by not liquidating this malinvestment that would have had no significant effect on day to day demand but would have reconfigured the entire investment landscape which was obviously deeply flawed at that point.
The bank bond debate is effectivally over now but when the CBs do not now produce enough base Euros to pay off the malinvested debt they are committing a double crime of immense scale and darkness.
Economies throughout Europe are screeching to a halt now as not enough medium of exchange is available to oil commerce.
It is the sacred duty of sovergin goverments to produce domestic taxable currency now – otherwise all commercial activity will cease.
Multiple Closed shops in the centre of Cork simply do not make sense unless you realise we are living withen a non optimal currency with a CB operating with full executive fiscal power.
EMU / euro has effectivally inverted the city / hinterland relationship withen Ireland since 1979 / 1987 which is a quite unnatural but extraordinary achievement.

@ Gavin Kostick Says:
March 19th, 2012 at 1:24 pm
Sort of off-topic, but related.

Depressingly priceless.

For the delusional and self-interested folk with the weight of the victim’s cross on their backs, who believe foreign taxpayers should pay for all the debt consequences of the banking bust, wonder if you are a citizen of Finland – – a small country like Ireland – – that was also a member of the EMU from the start, would you honestly think the Irish expectation of a full write of banking debt given the reckless political leadership and regulatory mismanagement, fair or reasonable? The same political groupings, oozing with arrogance and fatuous self-entitlement, were reelected twice – – some here no doubt had drank the soup.

What should the ratio of blame be in respect of Ireland and the EU: 80/20 or 70/30?

Even if some of the public money spent had been allocated wisely, there would have been some legacy to build on.

Economist Rossa White said in 2010 when he was chief economist at Davy said:,

Probably the best way to compare the wealth of countries is to look at the capital stock. Years of high income can be turned into physical wealth if invested properly. let’s take three small nations as an example: Belgium, Finland and Ireland. The three are closely matched in the euro-area income per capita table, albeit that Ireland slipped behind in 2009. But no Irish resident who has visited Belgium or Finland would have the audacity to claim that this country is wealthier. Transport infrastructure is vastly superior in those countries, as is the telecommunications network, and public services are delivered from higher-spec schools and hospitals.

He added:

On the face of it, Ireland’s capital stock soared from 2000 onwards. In the eight years to 2008, the net capital stock of the state had more than doubled from €222bn to €477bn. But, as we know only too well, too much of it went into that unproductive asset: housing. The net capital stock of dwellings jumped from €118bn to €302.5bn, an increase of 156%. Ex-housing, the productive capital stock rose by only €70bn to €174.4bn. It is remarkable to think that in 2000, the unproductive capital stock exceeded the productive stock by €14bn. By 2008, that gap was a whopping €118bn!

http://www.davy.ie/content/pubarticles/economy20100219.pdf

@ Seamus Coffey

Thanks for your useful debt analysis.

Facts of course are not always a counter to ignorance.

“because it was set up as an SPV …” should be

…because it was set up as an SPV was allowed not to be considered as part of the national debt…

@Seamus Coffey,

We all benefit from your efforts to put these numbers in to some sort of context. But it be might be worth while pushing a bit beyond many economists’ obsession with a stock (GGD)/flow (GDP) ratio and trying to disaggregate the elements even further. Even if half of the €65 billion put in to the banks is a total write-off, the other half should really be classed as an ‘investment’ which should be recovered (including the net cost of funds in the interim) eventually. A ‘revised measure of GGD would deduct the portion of half of this €65 billion that is currently included and the related net cost of funds would be netted out of both sides of gross government receipts and expenditures.

Similarly a portion of the GGD was built up to finance public capex so there are assets being backed by this portion of the GGD. In turn the value of these assets should be deducted from GGD and the implied net cost of funds (plus the annual depreciation charge) should be deducted from gross government receipts (on the assumption that this investment washes its face – a bit heroic I know).

Making these adjustment to GGD and to gross government receipts and expenditure might give a better handle on the amount of the GGD that is related to current economic activity (or the lack of it) and on the ‘real’ gap between gross government receipts and expenditure. I suspect a restructured annual IBRC/PN/ELA whatever payment would amount to a very small portion of this gap.

Yet there seems to be a view – widely held (apparently both by the informed and the swivel-eyed) – that this debt and these payments are the main thing – if not the only thing – that is pushing Ireland in to the mire.

@ Brian Woods II

The AIB ‘value’ of €50bn+ follows a reichmark like issue of 500,000,000,000 new shares at a cent each to the MoF last July.

@Micheal
You pick a obvious feather from this Davy Turkey and declare it somehow a revelation – we all know this is a feather.
Then you praise Seamus for his debt anylasis as if they were both directly related.
“A country that is sovergin does not have to produce debt or obtain it.
Believe it or not, the European countries and others can simply use printed currency to retire their debts. This isn’t original or earthshaking in concept. Sovereign nations have always been able to issue their own currencies at will without taking on specific liabilities. President Abraham Lincoln issued greenback dollars during the US Civil War. By his doing so, the Union was able to finance what was up to that point the world’s most expensive war without having to borrow from banks”
Steve from Virgina.

What we cannot afford is the export of at the moment very valuable euros to pay for example 5.168 Billion on petroleum products in 2011(A record & 3 times the worth of the road vehicles imported at 1.706Billion)

This is why we have a domestic demand crisis in Ireland – why shops in the very centre of town are closing while shopping centres are thriving.
Its a completly unnatural occurrence and has been accelerating at a faster and faster rate.
The Irish physical economy is unable to cope with the European monetory system.
Lets just accept this as a fact of life shall we.
All efforts to integrate with the continent has been a failure…….some of which have simply not been our fault as to use the late B. Lenihens stunning revelation we are a Island.

@ Gavin

“@AlanFarrell: Properties owned by Govt Depts are exempt from the household charge, NOT personal properties owned by Ministers.” – from FG Alan Farrell

@ Mr Bond.

Thanks. I shall breathe deeply and lower my blood pressure. I used your quote to find this.

http://www.thejournal.ie/government-ministers-homes-not-exempt-from-household-charge-389793-Mar2012/

That 50 billion valuation of AIB must make the Minister the best share punter of the century. Even George Soros couldn’t match that gain. (smile).
Pity about the 50 million a day that Joan said we were borrowing to pay the wages.

@hoganmayhew

Make the ECB accountable to whom? It is already accountable to the banks, is that not enough?

Hogan, I missed you.

John Quiggan will be touching on it in the paperback version of Zombie Economics but the hugely negative role played by the ECB in the current crisis is just the most egregious example of the dangers of state institutions escaping popular democratic control – monetory policy should never have been given the same grandiose treatment as the judiciary – it went to their evil little heads.

Yes, perhaps, the Euro was a bridge too far, but the EU can only try to shore up things and advance. Any retreat runs the risk of disintegration. Disintegration has its fans here, but I have seen little evidence of a careful thinking through of the implications.

And yes, it is easy to demonise those who were and are charged with responsibility for monetary policy and financial stability, but who were deprived of the authority and tools that were ‘fit-for-purpose’ in a time of extreme fnancial stress. And it is even more easy to underestimate the extent to which Ireland’s action in 2008 stretched the exercise of this limited authority and the use of these inadequate tools beyond their limits.

And it is unfortunate that the dominant political hegemony is of the centre-right and that any movement towards medium or longer term resolution over the next 18 months is constrained by the need to pander to the whims and prejudices of right-wing or right-wing leaning voters in France and Germany. But those on the left and centre-left might profitably reflect on how they have vacated the field.

@Seamus Coffey

Your post seems to be mixing up gross and net costs in a quite unbalanced way, using net costs on one side of the argument and gross on the other. If you apply a net cost approach across the board, and compare the two scenarios of with and without banking support, you’ll have €32bn in the NPRF/Exchequer accounts in the “without” scenario, that is not there today. That money could have been used to avoid further borrowing in the same amount. As a result for the purposes of general discussion it is far more accurate to say that the total cost of the bank bailout is closer to 1/3rd rather than 1/5th of GDP.

As you point out there will be some revenue flows from the banks back to the state via preference share sales, fees, ELA interest, contingent capital returns etc. but overall these are still relatively small compared to the amount of money injected, and bring the cost down closer to 30% rather than 20% of GDP.

@ All

For fans of sole IMF involvement!

http://blogs.ft.com/brusselsblog/2012/03/is-the-imf-already-assuming-greek-failure/#axzz1pap32BnA

CMcC draws a distinction between the ECB and EU Commission, however to date there has been no difference in substantive policy positions, whether claiming Greece was solvent in Summer 2011, or that Ireland had an obligation to pay back unguaranteed bank bondholders. In effect you could say that the EU Commission is the fiscal policy wing of the ECB.

A key test of whether this will change or not is the upcoming bank recovery and resolution legislation. The framework document had provisions for a “comprehensive” approach to resolution, which involved non-voluntary write-downs of senior debt and forced debt to equity swaps. Let’s see if these provisions make it into the proposed legislation. The issue of whether there will be a permanent blank cheque provided by taxpayers to bank bondholders will have to be addressed at some point. The legislation cannot be delayed forever.

DOCM,
Almost certainly true. Every Govt obligation would be haircut to restore debt sustainability- wages, transfers and Bondholders.

@DOCM

Underlying your post, and indeed all your posts on this topic, is the assumption that governments should be responsible for the “solvency” of private banks, using as much public money as necessary. That assumption is deeply flawed and corrosive to good public policy.

I should have made it clear that the “comprehensive” approach that I referred to was one of two approaches described by the Commission in their discussion of a debt-write down tool – the other was a “targeted” approach which required banks to issue a certain amount of debt which could be bailed in. The point is that there is a legal framework and practical planning (including pre-funded resolution schemes) for senior bondholders to take losses rather than taxpayers, and restructuring procedures put in place to allow payments systems and other essential functions to continue with minimal disruption. At this point there is a lot of “prior art” in place (e.g. in the USA, Denmark etc.). There is no need to re-invent the wheel.

Whether this occurs at national level or EU-level is secondary – the point is to decouple the banks from the sovereigns. If there is no EU-level agreement on detailed legislation, national governments can and should take their own actions. However it is important that politically at EU-level the principle of senior debt bail-ins and debt write-downs is supported, to face down the ECB. If Ireland unilaterally produced bank legislation tomorrow with mandatory write-downs and bail-ins, what do you think the reaction of the ECB would be?

@ Paul H,

I blame Eurostat! The general government debt is far from the optimum measure of public debt but it is the most widely used. As you rightly point out its gross nature does tend to overstate the level of indebtedness. Our own measure, the National Debt, overcomes some of these but does not have complete coverage.

It is a pity that a complete public balance sheet is not created. The CSO give a financial balance sheet in the Institutional Sector Accounts.

These show that at the end of 2010 the general government sector had €149.5 billion of liabilities, which apart from Accounts Payable is General Government Debt. (Eurostat report a GGD of €144.3 billion for 2010)

At the end of 2010, the general government had €72 billion of financial assets. These were:
+ €21.6 billion of cash
+ €10.9 billion of securities other than shares
+ €8.2 billion of loans
+ €23.2 billion shares between quoted, unquoted and mutual funds
+ €8.1 billion of other accounts receivable

The net financial position of the general government sector was negative €77.6 billion, which is less than half of the GGD figure, though this will have deteriorated further in 2011.

We could go down the line of including publicly-owned capital assets (i.e. non-financial assets) but unless they are going to be sold, the schools, hospitals, roads and other infrastructure held by the State have little debt-reducing potential. They do generate value but this is through use by people rather than in money earned by the State. They would of course be on a public balance sheet if such a thing was available.

The Estimates of the Capital Stock show that there was €347 billion of fixed capital stock in Ireland at the end of 2010, but does not give a breakdown by government, household and corporate sectors. Here are some largely (but by no means exclusively) state-owned categories of capital stock
+ Water Supply: €6.9 billion
+ Public Admin & Defence: €9.9 billion
+ Roads: €24.0 billion
+ Education: €6.5 billion
+ Health: €4.9 billion
The State will also own a portion of the €192 billion of dwellings.

Consumption of Fixed Assets (depreciation) was €16.2 billion in 2010. The Institutional Sector Accounts attribute €2.7 billion of this to the general government sector. Making a heroic (undoubtedly incorrect) leap and assuming the the proportion of depreciation (16.7%) represents the holding of capital stocks would, put the government capital stock at around €58 billion in 2010.

You are right to suggest that a public balance sheet would not look as bad as might be believed. However, I think the emphasis will remain on stocks and flows.

“Whatever about declaring losses, never say you have run out of cash” is an approach for businesses that want to stay alive. Ireland’s GGD reflects the losses (banking but mainly deficits) and the “we’re fully funded to the end of two-thirteen” line tells us when we will run out of cash.

@Bryan g

VLTRO probably.with a side order of recaps.

@Bryan
Yes Indeed , but goverments can still say No – the great weakness of the ECB is that it has no tax raising powers – any Treasury with Liathordi can do a Ian Paisley Act but they need populist support first I guess.

@Seamus
Most of that capital stock is very input sensitive – I guess we are a victim of bean counters who know the cost of everything and the value of nothing.
1 Sizewell B PWR for example could be reducing our magnificent Gas bill significantly every year for the next 40 years and yet it would show up as being worth perhaps a tiny 4-5 Billion , nothing really in the context of all that useless real estate concrete.

Do you Agree the Goverment can modify its tax policey to force people to make the most effiecent capital good purchases ?
Most of the car stock bought before 2008 is grossly inefficient.
I have mentioned bringing in a new A+ vehicle class of 100 or 90 g per km(the skoda Greenline is 89g perKM)
I seem to be getting no response despite the magnificent Petroleum bill we must pay this year and into eternity.
What does it take ? must we reduce our food imports to mere Gruel to pay for our car & home heating folly ?

@ SC

What I am disputing is that 40% of GDP has not been added to our general government debt because of the banks. In gross terms the banks have cost us 40% of GDP but if the debt is 120% of GDP at the end of 2013, one-third of that will not be due to the banks.

?

Ah right – got it.

@ Mark

I guess that you believe your version of events in respect of the ECB and bank guarantee is based on what you believe to be ‘facts’ and maybe some speculation.

On Sept 29/30 2008, the guarantee decision was made without any prior consultation on the actual detail with ECB officials, Joaquín Almunia, then EU commissioner for monetary & economic affairs; the heads of both the Ecofin and Eurogroup finance ministers’ groupings.

Ireland was the only Eurozone country to guarantee bank debt.

Anyone who has had a position of responsibility in a multinational company would know that an individual unit would not go ahead with a major decision on the basis of a phone call with one division head.

The decision not to consult was deliberate.

Sept 30 was Anglo’s fiscal year end; it was at the cliff’s edge having begged arch rival BoI for an alliance and it desperately needed to window-dress its balance sheet with a loan from IL&P.

There was no contact with Europe because Anglo had to be saved and a negative response was feared.

As for the ECB’s expressions of distaste for the gurantee, it didn’t last long and was followed by repeated objections to allowing the guarantee to expire when due to do so.

This is more fantasy…

If the document below is evidence of the ECB putting pressure on a reluctant government, then you confuse your fairytales with the facts.

It begins with the central bank slamming the Department of Finance for the short notice period in respect of its request for an opinion on the Eligible Liabilities Guarantee scheme:

http://www.ecb.int/ecb/legal/pdf/en_con_2010_75.pdf

Fintan O’Toole i today’s FT.

“What’s Latin for tear up these odious notes?”

“Secondly, are the promissory notes covered by any international treaty? No. They represent an agreement between the Irish Central Bank and the State. Not only is there no treaty, but the agreement is not even international. If the promissory notes are torn up, there is no cost to the European Central Bank or the European Union as a whole. The money is effectively burned by the Irish Central Bank – every year for the next 20 years. This payment structure was, as Karl Whelan, puts it, “tacitly agreed to by the ECB governing council”. But there’s a vast difference between silently allowing something to happen and entering into a binding international treaty.”

http://www.irishtimes.com/newspaper/opinion/2012/0320/1224313579564.html

@ Michael H

The objectives of the domestic and European players are not necesarily contradictory. Anglo was politicallly systemic in Ireland, so the collapse had to be managed locally. The ‘fix’ was carried out under cover of a broad sovereign guarantee. An Irish solution to an Irish problem, or so it was thought.

The extent of the Anglo losses began to become clear over the following months. The losses the other domestic banks also began to emerge, and the real effects of the guarantee started to crystallise. Absent bank resolution mechanisms, the ECB had little choice but to weigh in behind the rescue.

The culpability of the ECB does not hang on its role (if any) in the guarantee. It arises from its failure to address rampant speculation in European financial markets. Its Council overlooked the massive involvement of core EZ banks in toxic derivatives, and sat on their hands while trillions were malinvested in EZ property.

DOCM and others argue that the ECB lacked the authority to prevent any of this, because national goverments were unwilling to cede the necessary powers. Trichet could, and should have threatened to resign unless such powers were provided.

He did not do so, because he lacked the required commitment to the European project. The ECB Council did not press for the necessary bank resolution mechanisms, because their primary loyalty is to their associates in the world of banking.

The Dork has it right.

‘Its Council overlooked the massive involvement of core EZ banks in toxic derivatives, and sat on their hands while trillions were malinvested in EZ property. ‘

Correction. That would be a trillion plus in US property based derivatives and hundreds of billions in European property lending.

@Seamus Coffey at 9.25pm

“We could go down the line of including publicly owned capital assets(i.e. non-financial assets)but unless they are going to be sold,the schools,hospitals,roads and other infrastructure held by the State have little debt reducing potential. They do generate value,but this is through use by people rather than money earned by the State.”

In valuing these assets you might use the concept of “deprival value” developed by Professor WT Baxter former Profosser of Accounting and Finance at the London School of Economics.

@ All

Sorry! Wrong link.

http://www.independent.ie/opinion/analysis/yes-we-should-pay-our-31bn-iou-but-not-until-were-on-our-feet-again-3054664.html

@Bryan G: Very well said, thank you!

Seamus is one of the best contributors on this site. However, I think some of his comments on this post have missed the mark. The banking and fiscal costs are being paid by a pool of money made up of NPRF and borrowed funds. Money is fungible, and assigning the NPRF exclusively to banking costs is arbitrary and very misleading.

@ DOCM

“Fintan O’Toole also, evidently, never heard of the ESCB nor the rules applying to the granting of ELA.”

I wouldn’t bet on it. He puts it in a rather casual way:

“This payment structure was, as Karl Whelan, puts it, “tacitly agreed to by the ECB governing council”. But there’s a vast difference between silently allowing something to happen and entering into a binding international treaty.”

But his point is that the PN/ELA arrangements are not the subject of an international treaty.

“The established meaning of “pacta sunt servanda” in international law is, to quote the Court of Arbitration at the Hague, that “Every state has to execute the obligations incurred by treaty bona fide”. We can break it down into three simple parts: (a) a state entered into an obligation; (b) that obligation is part of an international treaty and (c) the obligation was entered into bona fide – in good faith. Not one of these conditions applies to the promissory notes.”

Hmm, you could argue that the government did sign on when it signed the July 2011 agreement with the sovereign pen – but I’m arguing that that treaty has clearly been overtaken by events and contradicted by the shiny new compact.

I see Namawinelake is also going off on a “ourselves alone” canter:
http://namawinelake.wordpress.com/2012/03/18/irish-government-strategy-for-dealing-with-anglos-promissory-notes-thanatosis/

The ‘money shot’, not surprisingly, is right at the end:
“The country needs to adopt the stance of a predator fighting for its very survival and assert its innate sovereignty on Anglo’s promissory notes now.”

Observe our fury, ye mighty, and despair.

This is getting totally ridiculous – and what a gloriously convenient distraction from the abject failure of democratic governance which led to this mess and the continuing failures of governance that are helping to conceal the extent of the mess and preventing taking the necessary steps on the path to recovery.

Finally, the penny is starting to drop. Central bank central planning has failed utterly. Stalin would have been proud of the ECB and FED. Ireland is now behoven to the ECB. This is not how it should work. Why are we bowing in front of this bank? It is only a bank afterall. As Colm said, we never made a treaty with the ECB. The consequences of this subservient attitude to the ECB will be deep and serious in the years and decades to come.

@ Bryan G,

If there was a commonly used measure of net debt this issue would not arise. Alas there is not, and the debate tends to focus on the gross general government debt. A net debt measure will have increased by the cost of the banking bailouts.

If we had €65 billion in the NPRF and used all of that for the banks there would have been no impact on the gross debt and there would be no statements relating the cost of the bank bailout to the debt; the cost of the bailout would be fully reflected in the destruction of the NPRF.

We are somewhere in between. Some of the bailout was funded with borrowed money; some was funded with existing savings.

Absent the bank payments the GGD would be c. €153 billion in 2013 AND we would have a c.€26 billion sovereign wealth fund. As it is the GGD will be €197 billion (+€44b) and the wealth fund is down to €5 billion (-€21bn). These changes reflect the full €65 billion injected into the banks.

General Government Deficits (estimated excluding bank payments)
2008: -€13 billion
2009: -€16 billion
2010: -€16 billion
2011: -€15 billion
2012: -€14 billion (f)
2013: -€11 billion (f)

This gives a running total of around €85 billion. With equivalent deficits of €7 billion and €4 billion forecast for 2014 and 2015 (under fairly strong revenue growth forecasts) the total won’t be far short of €100 billion.

Also regarding Colm McC

“Even if there were no question marks about debt sustainability, there is a portion of the Irish debt which was incurred under duress and inappropriately, under threats from the European Central Bank.”

Not only that, but the govt got conned and govt then conned taxpayers. Govt was misled and perhaps criminally misled there was a liquidity problem, but not a solvency problem. NTMA and Regulator still havn’t adequately been grilled as to how this happened. We still havn’t had the case against IBRC in the courts ! Directors loans, B&B loan breakfasting, we’ve still no analysis of the bonus led culture or how certain developers got their loans passed. These developers are hidden away in NAMA and legally through NDA with NAMA may be prevented from giving evidence in any IBRC case. We had the saga of the leaping billions of debt pulled out and piled in successive tranches onto the taxpayer. Was this done in that way to keep taxpayers on the hook?

@Colm Brazel,

I don’t know how many times I have to write it, but any privatisation of infrastructure or utility services that does not have economic efficiency as its primary objective is bound to end up in some sort of costly mess. And the second vital condition, for both the public and private provision of infrastructure and utility services, is that unless there is effective advocacy and representation of the collective interests of users of these services it will also end up in some sort of costly mess.

In the Irish situation local governance is a sick joke and the semi-states, some more than others, and their unions simply have too much power. In the decades through to the mid and late 1990s they progressively captured successive governments. Since then governments have gleefully seized on ‘economic regulation’ to conceal the extent to which they have been captured, to avoid taking responsibility in the public interest and to distance and insulate themselves from the political implications of the costs this policy and regulatory capture imposes on households, businesses and the economy.

The economic regulators are doubly bound. They are obliged to act as the proxy implementers of government policy – with government able to hide behind this fiction of ‘regulatory independence’ – and they have been totally captured by the semi-states. The CER is the most tightly bound of all – and, surprise, surprise, it is proposed to give it regulatory responsibility for the new Irish Water semi-state.

Those who prevent government from governing in the public interest are the government. Hail to our real masters.

@Fintan O’toole fans

” If the promissory notes are torn up, there is no cost to the European Central Bank or the European Union as a whole. ”

So let me see if I get this. You are allowed to print an international currency ‘co you can’t raise any on the basis that it will be temporary – you will on schedule reverse the printing.

a) That, despite letters of comfort and the sovereign signature, is not really in any way binding?

b) If everybody who was short of cash just printed some, there would be no cost to those that didn’t?

Is he just trying to fill space in the paper or does he really think the Irish side can argue this?

@colm brazel

Colm McCarthy gets it. Yet, from Karl Whelan and now Stephen Kinsella, we get this pitiful, nonsense, no analytic data provided to demonstrate its validity, except the faint whiff of dreamlike supposition, etc.

Really and truly, this ad hominem stuff adds nothing to the debate. I know none of the people you mention though I would recognize one maybe two in public.

No one has responded to the piece of information I left here yesterday, namely that Pimco are staying away from Irish debt – El Erian mustn’t have heard of the 6% growth prospect rocketing off next year.

Surely it is reasonable to infer that if the government insists that growth, recovery and a return to the bond markets is around the corner (around the bend might be more apposite), and also insists on some form of debt restructuring of PNs because the debt repayment is unsustainable, that something is awry in the works, like a clock deciding to go against itself.

Moreover if it is acceptable to write off the big debts because they should never have been incurred on that scale, were an example of ‘wool over the eyes’ practices, and based on inaccurate and optimistic projections, should not all in sundry be making the same argument for personal debt ran up during the bubble years? Why is ok to contemplate ‘tearing up’ 30 odd billion of PNs but not even 6 billion of mortgage debt?

@Colm McCarthy

I concur.

Wonder what part of UNSUSTAINABLE does the ECB not understand?

@ The Alchemist

Re “Really and truly, this ad hominem stuff adds nothing to the debate”

This fluffy, weasily ad hominem nonsense is just meant to smother and stifle debate. I’m specifically referring to a position on debt management held by Stephen and expressed in article referred to above.

I don’t do ad hominem. We need robust debate of ideas especially in the land of binn beal i do thost of LB/FG.

Anytime I disagree with a person on a specific point of debate, means I’m not attacking them as a person. I’m challenging their views. Its called mature exchange of opinion on matters of mutual concern.

We can become all autocratic, authoritarian and precious about the views and information we exchange, but its unprofessional, unscientific and frankly rather childish and peevish if we deny others the right to challenge the views we publicly send out there.

Laws of libel, slander, etc I concur with. But if I can’t disagree with someone on the basis of alleged ad hom, dude, perhaps we need other rules of debate more fitting to a more closed society such as USSR. Looks like we could be going there anyway with EUSSr 🙂

@ Michael Hennigan

“Should the emergency funding of Irish banks be subject to an international treaty? Why not the bailout?”

No, I wouldn’t think so, not any more treaties anyway – not sure which bailout you’re referring to in the second sentence, there have been so many.

Rehn boinked the Irish with ”pacta sunt servanda”, and McCarthy and O’Toole are making the point that this phrase has “no pact to refer to”. It’s a bit of a picky argument, but one the whole the principle is no objection can be taken as tacit acceptance, so you’re as well to object.

@ Seamus Coffey

The problem isn’t the difference between net and gross debt. The problem is that your argument effectively denies the fungibility of money.

Suppse that I need to buy good X and good Y. I use a debit card to pay €10 for good X, and this empties my bank account. Then I use a credit card to pay €10 for good Y. I now have a debt of €10.

Of course, it wouldn’t make much sense to say “100% of your debt is due to good Y”. I could have just as well used the debit card for Y and the credit card for X, and my situation would be just the same.

@Colm Brazel

“Argentina, after its debt restructuring, grew at an average annual rate of more than 8 per cent for six consecutive years until the global economic crisis hit.”

It’s no Shangri la. Argentina is still shut out of the bond markets and reduced to making noise over las Malvinas and blackguarding Repsol.

http://www.ft.com/intl/cms/s/3/c46c4850-6edf-11e1-afb8-00144feab49a.html#axzz1pZPTMdVP

@seafóid

And John Teeling, now that he is off the drink!, suggests deferring 80 billion on Brady-Noonan bonds ….

Plenty of options still available …. UnSustainable is Unsustainable …

@David
In reality its people deferring consumption and yet the Official sector is profiting from this rather then increasing rational fixed capital spending.

We are dealing with a vast criminal conspiracy.

@DOD
I was going to say we have a 50 billion bank to show for all the dosh spent and then Carson went and spoiled it with his technical analysis.

I suppose you could take the view that we have a nicely propped up state apparatus for the 50 million a day we are borrowing…for now.

I must commend CMcC for his article.

The concept of odious debt is gaining momentum (I note it being used in Stephen Kinsella’s most recent article).

Time for Ireland /the Irish to better fight their corner. However, as I have argued before, simply asking the EU for debt forgiveness will not achieve it. It will have to be taken to them. As Michael Hennigan has long argued, there will be consequences….it is not an easy proposition. I agree, but it at least offers the potential for a better future than the withering and crushing path the Govt is currently pursuing.

In more normal times, the Fiscal Compact vote would /should not perhaps be the focus for such a change in direction. However, its overlay effect on the existing Programme is likely to make things much worse as we have debated here before.

Clearly, in the absence of Govt willingness to make a change in strategy, the vote offers an opportunity for the people of Ireland to effect change, if that is what they wish.

If the FC vote is no, there will be a need for an alternative strategy. It needs to be thought through now. CMcC’s article greatly assists with that debate.

Joan Burton alluded to the subsidised placing to-date of 28,000 people – positively taken off the dole queue, paid for by the State. However, when added to the 70,000+ leaving the country this year alone, it underlines a much higher underlying unemployment rate than the official Irish rate. More likely, the real rate is towards 20% and continuing to rise. That in itself underlines the need for something to be done to improve the situation.

@DOCM

OK – seems to be a terminology issue, though I think “responsible for bank regulation” is better than “responsible for bank solvency”. Private banks are responsible for their own solvency. Governments should provide a framework to allow insolvent banks to be resolved, and a government’s financial responsibility should be limited to the shortfall, if any, between the amount of money in an industry-wide pre-funded deposit guarantee fund, and the money needed to meet the obligations of a limited deposit guarantee.

@Seamus Coffey

You’re still missing the point – saying the NPRF/Exchequer cash transfers to the banks has “no impact” on the GGD is only true in the context of an artificial and contrived backwards-looking-only viewpoint. If there were €65bn sitting in a government account today, would future debt issuance, debt levels and debt trajectory be different from a situation where there was no such account? If “yes” then the absence of such an account has a very real and material impact on the GGD, taking a forward-looking viewpoint, which is what matters. If “no” I’d be interested to hear why.

@ CP

payout was relatively small on them, and was related to coercive restructuring of subordinated debt, not a default on senior debt, but the CDS pays out regardless.

http://www.isda.org/dc/closed.asp?y=2011

@ Bryan G

I think I am with you though not usual for SC to get these things wrong. One way to look at was to imagine that back in 2008 say, when we saw the writing on the wall we decided to use the NPRF to pay down our debt. It would then look fairly clear that the money subsequently put into the banks all derived from an increase in GGD. But SC is certainly right that we should allow for the value of the Pillar Banks as an investment when making these sort of assessments, so I prefer his 24% to CMcC’s 40%.

@Overseas
The remaining “structual” adjustment is a result of the bank credit investments also – especially those made since 1987.
Our built envoirment is a consumption sink because it was designed that way.
We were a conduit for European funds funded by Saudi & others surplus energy production.
Now the core wishes to push us into 19th century energy surplus again without taking any loss on their “investments”
Does the expression F£$k off mean anything to you ?

@Stephen Kinsella

Thank you for posting.

Well done to both Colm McCarthy and Fintan O’Toole for attempting to address the legal and moral basis for paying these bondholders via PNs or otherwise.
This matter is surely not beyond the fine legal minds of our former AGs, who felt impelled to save us from ourselves at the last referendum. Where are they now with their country in its hour of need.
Surely there is case here for European Law to answer.

But before we get carried away, Ireland should look to her history and particularly her history of taking on powerful forces in open field battle, before she considers any action. It is not a tactic that works well for a small nation.
The last time Ireland became the theatre in a European conflict (1688/1691), things worked out very badly for Ireland.
Open field battle was not a strategy that the 1798 rebels found successful. Ireland will need to use other tactics to resist this odious debt.
Why not start with a legal challenge?
If the EC feel believe they have European Law on their side, we should test that first. Lets see what the European Court thinks about the imposition of private debts on the public purse of a particular country. Lets see the ECB defend its actions and lets have full discovery of all documents.

@ Bryan G,

Yes, I am missing the point and will probably be foolish enough to continue doing so.

The gross general government debt makes no provisions for assets so regardless of how much is sitting elsewhere the GGD does not change. My view is indeed “backward looking” but it is only by doing that do we know how we got here.

Ireland’s general government debt was €167 billion at the end of 2011 and no amount of assets can alter that. It would be different if we borrowed (or more particularly spent) less money but would be just changing reality.

I think assets are important but they are not counted for the GGD. For example we have a cash buffer of around €16 billion in the Exchequer and other accounts. This was primarily created through advance borrowing by the NTMA in 2008 and 2009 when the cash held by the State was increased from its typical level of €4 billion. This buffer has been maintained as part of the EU/IMF programme.

The increase in Ireland’s general government debt since 2007 debt includes €12 billion for cash we have borrowed and still have on deposit with the Central Bank. We could reduce the GGD by nearly 10% of GDP using this.

In future years we could use this cash buffer so that the increase in the GGD is lower than the annual deficit, but having this cash does not make the GGD any lower now.

Of things would be better of we hadn’t poured €64 billion into the banks. In my view we would have a GGD that would be around €46 billion lower and an NPRF that would be around €18 billion higher.

A measure of net debt would incorporate all this into a single figure and I am not disputing that such an approach is best. A net figure would eliminate a largely circular discussion of whether money that is spent comes from borrowings, savings, or even income (which has been ignored so far).

Any discussion that uses the general government debt measure can only reflect the amount of money borrowed as no account for assets is taken.

The GGD will head for 120% of GDP over the next few years. At the end of 2011 it was €167 billion.

If we add the 2007 debt (€47 billion), the increase in cash (€12 billion), the deficits from 2008 to 2011 (€61 billion) and the outlay on the banks so far (€64 billion) you get €185 billion.

As the debt is €167 billion there is a €18 billion balancing item to be found. This is the money that was taken from the NPRF. Without this, the debt would be €18 billion higher. It is pretty clear we agree on that.

I make the leap and say that this money was used to reduce the borrowing necessary for the bank payments. As the €18 billion in the NPRF (plus another €3 billion transferred from the Exchequer in 2009) was used to “buy” stakes in the banks I don’t think this is entirely inappropriate.

@Seamus Coffey and Bryan G,

I possibly added to the confusion by looking for a breakdown of the GGD into (1) the portion financing assets (both financial and non-financial), (2) the portion that is lost in the IBRC (reparation for past sins?) and (3) the portion that represents accumulated excesses of expenditure over receipts.

In this respect the use of the NPRF is neither here not there. If it hadn’t been readily available presumably more of the debt would have been paid off. But the cost of building up this amount again via borrowing might have been greater than the opportunity cost of using it as it was used.

@Joseph
You will merely further legitimise the European court – you would be playing into their hands

@Seamus
Do you find it distasteful that Hibernia must act like a Private Corporation ?
Husbanding cash only for it to be probally taken off us by Troika Dictat at some future arbitrary point.
Many of us have had enough of this Ireland Inc Meme.

@Joseph
Sometimes enough is enough.
No Quarter will be asked or given.
http://www.youtube.com/watch?v=BEtPluUi0_U

For instance, and additionally, could JR’s legal challenge be used to delay the FC referendum as has been well and very logically argued here, so that the referendum vote becomes a fallback, alternative strategy as opposed to being in the vanguard?

Plenty of options…….even if the Govt won’t cooperate.

@ Michael Hennigan 9.49.am

‘Despite its narrow mandate, the ECB has generally responded to the crisis faster than political leaders’

The ECB has consistently misrepresented this crisis as a crisis of fiscal governance. While that is part of the problem, the core problem is financialisation of the real economy. As a public institution, the ECB should be helping to unravel that. Instead it is bent on denying the reality, and kicking the can down the road.

‘So should the ECB have an obligation to be the lender of last resort for Ireland: both funding Irish banks and also accept all the boom losses of the banks?’

The derivatives losses of core banks far outweigh the loan losses of the periphery. LTRO is a big bazooka, and the ECB will defend the Eurosystem until it implodes.

Funding insolvent Irish banks is part of the process whereby private losses are transferred to the state(s), under the guise of ‘saving the economy’. Leaving the politicians to sort out which group of citizens takes the hit.

Divide and conquer has always been the way.

@ Seamus Coffey

You said:

“Of things would be better of we hadn’t poured €64 billion into the banks. In my view we would have a GGD that would be around €46 billion lower and an NPRF that would be around €18 billion higher.”

But it’s very unlikey the NPRF would be €18bn higher. Surely it would just have be used to pay for non-banking costs instead. This is the key point I suppose. If we hadn’t poured €64 billion into the banks then in fact our GGD would be €64bn lower and our NPRF would be depleted, just as it is now.

@Bond. Eoin Bond

@ Paul W/Joseph

Eh, challenging what, and on what basis exactly?

That the ECB exceeded its legal mandate by using its powers, solely intended to guarantee price stability, to interfere in national fiscal policy to achieve political goals that suited its stakeholders and helped made European policy on behalf on the financial sector rather than the people? Not a very hard sell surely – Trichet’s stock drops all the time, Bini-Smaghi is hiding in Harvard, probably with a bodyguard.

Having said that I think it is a mistake to imagine that there is a likely legal remedy in European law, this outcome (policy being made on behalf of the creditor countries and banks) was how the law was intended to function and as DOCM and Gavin Barrett will volunteer we are being robbed entirely within the law and we should rejoice in its majesty (nice to see that the ECHR backed kettling as well, Europe gets ever less liberal).

So the law is the problem, since there is little philosophical ground separating Enda, Michael and Angela we should not expect our current representatives to pursue a different political approach until they have no other option, which is why ensuring a no vote to the Fiscal Compact should be every progressives primary concern.

@ Tunafish/Bryan G,

That hypothetical scenario could never be tested. If there was no bank bailout and the NPRF remained intact, there would be no IMF to require us to liquidate it to fund other costs. It is the bank bailout that forced us into the programme in the first place.

The Irish contribution referred to by Chopra was the €17.5 billion (€10 billion NPRF, €7.5 billion cash) which was part of the €35 billion set up as a ‘worst case scenario’ contingency for the banks.

If the GGD was around €120 billion now (i.e. no banking costs) it is unlikely there would be a need to liquidate the NPRF to reduce it by another €20 billion. If we wanted to reduce the GGD we could just use the cash buffer we have built up. It is only because of the bank bailout that the NPRF was tapped into (and over €10 billion had been used by December 2010).

Absent the bank bailout the GGD would not be €60-odd billion lower.

@ Shay

“its powers, solely intended to guarantee price stability”

These are not its “sole” powers, just its primary mandate. It is also charged with “contributing to prudential supervision and financial stability”, and it is required to be consulted on any “(European) Union act in its (the ECB’s) field of competence”. Further they are tasked with “monitoring” and “promotion of arrangements for maintaining” financial stability and “effectively managing financial crisis”.

You can argue about whether their conduct has been the correct course of action, but clearly they have a strong argument that all of their decisions have been in the pursuit of “financial stability”, even if their effect has been mixed or poor in some regard.

http://www.ecb.int/ecb/educational/facts/orga/html/or_010.en.html

@ Paul Quigley

my reference to “boring” was the decision over the promissory notes and the fiscal compact. Some people are expecting Tom Cruise to start demanding answers from a ranting Lorenzo Bini Smaghi at the ECJ – “Did you order a side letter be issued?? Did you order a side letter be issued??”. More likely we’ll have a Kevin Cardiff-type citing EU and Eurostat regulations in coming up with their decisions.

@ Bond 11:18

Re
“Eh, challenging what, and on what basis exactly? The ECB didn’t “impose” the debts, they basically said if you want to retain access to a set of facilities we’ve already loosened up significantly, you’ll stand behind your banks, take it or leave it. And this came after our government, of its own free will, no doubt cajoled and ‘advised’ by the ECB but still of its own free will, put in place a blanket guarantee. How about the EU takes us to the ECJ for happlessly mismanaging our banking system? That should be a larf.”

Err, indulging in a bit of fallacious sophistry there, I see, Mr Bond.

You describe the Irish Titanic threatened and bullied to accept the debt only iff a portion of debt is used to bailout French and German banks? If this were the FOMC, Anglo would have been closed immediately, the ‘guarantee’ useless as it was would have been denied.

@ Paul Hunt

Re ” is so far removed from these concerns as to appear as if it were taking place on another planet.”

I hope to welcome you back to planet Earth someday 🙂

Seems to me the ECB is well on the way to becoming a rather large version of Ireland’s Anglo Irish Bank. The Greek and peripheral crisis is merely ending its beginning.

@ Bryan G

So let us take as our goal to identify how much of our net indebtedness is due to the fact that we lived beyond our means and continue to do so and how much is due to the banking system failure.

We have to hypothesise that the banks behaved well. This thought experiment quickly leads to a realisation that an awful lot about our finances in say 2007 was an illusion. The low GGD, the very existence of an NPRF largely subsidised by property boom taxes as well as illusory savings on social protection. The “structural” GGD, whatever that means, was much larger than the nominal GGD.

Now lets do another calculation. Imagine we hadn’t applied the ludicrous and illusory FF increases in Public Sector pay and pensions and Social Protection payments and that we had not implemented Charlie McCreevey style income tax and capital tax handouts. I haven’t done the sums but I imagine one will find that the vast share of our current GGD is down to living beyond our means in the last decade or so.

The banking dimension is merely payback time. We all lived high on the construction boom, but it was an illusion, now we have to pay. Can’t see how we can legitimately ask Germans to pay. As Enda wouldn’t say it is indeed our fault.

@ Seamus Coffey

I promise this will be my last post. Suppose we imagine two scenarios:

Scenario 1: The government uses €21bn from the NPRF to pay for banking costs.

Scenario 2: The government uses €21bn from the NPRF to pay off €21bn of debt. And then immediately after that, the government borrows €21bn and uses that money to pay for banking costs.

Would you say that in Scenario 1, banking payments account for roughly around a fifth of our debt. And that in Scenario 2, banking payments account for roughly around a third of our debt?

@ Bond,

Ah, my Titanic analogical metaphor, you have difficulty with. Fair enough, not everyone is smart to see the iceberg of default or Captain “Enda” Smith binn beal i do thost …. 🙂

“A closed mind is not only closed to outside thoughts, it is often closed to itself as well. It is closed to new thoughts and anything that threatens the status quo. But if you can open the doors, maybe just a crack at first, the ideas that have been patiently waiting at your gates will flood in.”

http://creatingminds.org/quotes/openness.htm

History will tell its own story. As regards legal challenge, as I’ve stated before, odious, unconscionable debt of IBRC, Director loans,
B&B loans, confidence trickery, criminal misrepresentation and falsification of records, wrongful and criminal representation of information, criminal negligence, liquidity vs solvency coverup, a coverup of ¢31 bn of debt loss foisted on gullible, if not incompetent, Irish financial regulators and politicians amounting, if proved, to charges of embezzlement of public money?

Isn’t it disgraceful we’ve only 10 garda investigating matters such as the above, the outcome of such a court case meaning our case against odious debt, could be challenged in some International Court of Settlements?

Time will tell.

@ Paul Hunt,

Re ” They can decide to land this craft in a reforming Euro Area….”

Now there’s a leap of faith. I think I missed the ‘reforming part’.

The Fiscal Compact is to reform as water is to fire…sure, begorrah, I don’t know how the ECB put up with us, at all, at all, anseo in dTir na N´Og 🙂

Fair enough, we’re not going to agree, are we ? Lets just agree to keep poring over the evidence 🙂

@Shay Begorrah,

““Idealists” is shorter and I would humbly suggest that had their been more of us in positions of power in Europe this disaster of the dissembling, elitist, financial sector friendly, market crazed, pan European neoliberal centre right would not have escalated to the level it has.”

Hmm…. Idealists with a limited purchase on reality are often more dangerous than the most vicious misanthropes. And I’m not sure who this ‘us’ is. As for this ‘dissembling, elitist, financial sector friendly, market crazed, pan European neoliberal centre right’ I couldn’t agree more, but the challenge is to secure the democratic consent to shunt it aside. Raging about it among the converted may generate a warm, fuzzy feeling, but it is ultimately futile. And the first step in the task of shunting it aside is to understand why it has been able to establish this apparent political hegemony.

So we need to parse your mouthful:
dissembling: all poltical systems require a certain amount of cant, hyposcrisy and bullshit if they are to function. The problem arises when these define and characterise the political system. I would contend that the Irish system is more full of these than that at the EU-level.

elitist: the EU from the beginning was an elitist project, but, again, ever so slowly, steps are being taken to enhance democratic legitimacy.

financial sector friendly: governments of all complexions over the last 20 years entered in to a faustian pact with banks to support ‘privatised Keynesianism’ (h/t Aidan R) to compensate for wage repression and the hollowing out of traditional employment.

market crazed: those who most loudly advocated ‘free markets’ absolutely loathe, hate and detest them. They will do everything in their power to rig, distort and subvert them in their own narrow interests – and suborn government to achieve this. Genuinely competitive markets are in the interests of the vast majority of citizens and consumers. But those on the left seem to retain their obsession with the omniscience of the state.

pan European: in a world increasingly sominated by large emerging powers I would prefer this to any alternative.

neo-liberal: it is probably true that most genuine neo-liberals fail to understand the extent to which their have become useful idiots for the neco-cons.

centre-right: the question for the left is why given the extent to which effective collaboration between the liberal centre and the left provided the basis for and secured much of the post-war settlement is it that the liberal centtre has been pulled rightwards.

And some interesting recent research on how political preferences are related to the extent of moral sentiment that people possess:
http://rstb.royalsocietypublishing.org/content/367/1589/640.full.pdf+html

So, maybe the left might give some thought to how it might pull the liberal-centre in its direction to secure sufficient popular consent to shunt this vile hegemony aside – rather than engaging in the ritual of abuse and name-calling.

@Colm Brazel,

As for ‘poring over the evidence’, I tend to focus on what is being and might be constructed for a better tomorrow; you seem to be on the lookout for icebergs the ship might hit and appear to salivate at the prospect of the mayhem that would ensue. And, unfortunately, you don’t seem to be alone on this thread.

@paul hunt

Thank you for the detailed reply. I’ll go through it after work.

@paul quigley

This is a marathon, not a sprint. My guess is that both of you dedicated bloggers are going to see your fairly complementary critiques accepted in the mainstream, as the wheels come off the overloaded Irish state and the badly designed EZ. We will see then what can be attempted.

As always Mr Q, you are the hateful, hateful voice of reason and civility.

I understand the position of those think that Ireland can market and/or democratic “reform” our way out of trouble but in the face of the current combination of a ludicrously inappropriate Fiscal Compact, a basically untamed and dangerous European financial sector (sorry BEB), a Eurozone that does not make sense and a European political consensus starkly at odds with reality (obligatory smackdowns from Krugman) I think keeping our heads down is a terrible, terrible mistake.

Someone has to mention the naked Emperor.

@Shay
Don’t understand your man crush on Krugman – the guy called for a housing bubble to get out of the equity bubble for Christ sake.

@The Dork of Cork

Don’t understand your man crush on Krugman

It is mainly the beard and that “Am I a downbeat private eye investigating the mysterious death of an old friend or I am a professor of economics investigating why western economies are being mutilated?” look – so mysterious, so sexy. Great teeth too.

It might also be that he seems to be a moral man who uses his intelligence and grasp of statistics in the service of his human empathy and not in place of it – the global financial crisis radicalised him in a way that I did not expect.

It would be nice if he, Stiglitz and the MMTers could get together over a bagel and a few coffees and produce a synthesis that better modelled the role of debt but like the man says, nobody’s perfect.

@Eoin Bond

i’ve never denied that the size or scope of the European financial system was dangerous

Is it Paul Quigley who has done this to you? Nah, you were always this reasonable.

So, and I doubt the adults are reading any more, how do we start to tackle the hangover of the thirty years since Reagan, Thatcher and the primacy of financial capitalism?

Those of a optimistic nature see Draghi’s LTRO blitz postponing the moment of reckoning in Europe until we are ready for it (or can get a cushy, well protected, teaching number in Harvard), to others it looks very much like Europe is once again prioritizing its financial sector over its member states – the fact that the law prevents the ECB from directly funding states is not a terrific justification – its one of the primary causes of the crisis.

With such a fundamentally wrong headed approach to the balance of the public and the private sector and the role of money the current European (and perhaps western) economic and policy making framework seems built to fail us and simultaneously determined to preserve itself for as long as possible.

What would you do, if you had the power?

Some here appear to have the view that we should only accept EU/EMU rules when it suits.

Not a net cent has been paid to the EU budget since 1973 and cash gain of €42bn in nominal terms is likley close to the whole cost of the bank rescue.

So, some here may believe that countries like Germany and the Netherlands should pay the whole bill for the Celtic Tiger folly plus continue supporting a high standard of living — solidarity please without strings!

The public pay, pensions and welfare costs are higher than at the peak of the bubble.

Private sector pensions are likely to remain in a very bad shape for years and the VHI loss in 2011 of €23.5m on subordinated bank debt is an illustration that simple solutions without downsides are simple.

@ Shay

Bond is a thinking man, or he wouldn’t be putting his time into these exchanges. He has his take, which is evolving like yours and mine. Lets hope there are a few more Bonds in and around the markets, because we can’t get out of this hole without them.

@ Shay/PH/PQ

almost every debt crisis in history has been solved not through outright default, but through stealth default via inflation. The hope is that eventually the Germans realise this, even to some small extent. Key to this will probably be disguising inflation as “growth”. This is the current challenge facing Ireland – reflating an economy with a large debt overhang when nominal growth is at a cyclical low, so even when real GDP growth could end up being solid, its impact will be much less than in the 80/90s.

For those who urge an allegedly short, sharp adjustment of our oversized financial system, i would suggest you are condeming a sizeable amount of people to 5-10yrs of unemployment – 5yrs of deleveraging followed by 5yrs of economic shock adjustment.

Against that, a 20yr deleveraging process, which would allow for a much more acceptable deleveraging process, runs the risk of running into mission drift or a change in the political winds or simply another bubble being blown by very long term easing on monetary conditions. We could end up back at square one.

There’s the rough two choices in terms of downsizing the global financial system, and neither of them are perfect. Like i said, a 30yr credit bubble, if you want to completely unwind it, as opposed to deflate, patch up, and reflate (the standard reaction we have had to recessions post WWII), is either a long term plan, or an unpleasant short sharp shock. Not sure which is more acceptable to society. Anyone offering fantasy solutions in the short to medium term deserves contempt in my view (just being honest), they are peddling falsehoods.

@ Bond
But the ECB are pledged to fight inflation and current strategies are working for Germany
Plan B is called plan B for a reason…

@BEB
You start by expressing the hope that Germany will tolerate default via inflation and you end by expressing contempt for those who peddle fantasy solutions. If you are to be consistent about this a little self-contempt would seem to be in order.

@ Bryan G

Stretching out ELA? I think you are in a different thread. Colm is not arguing for a stretching out, he is asking for an outright default or forgiveness, I think.

My point was a bit corny but I’ll give it another go using a very simple thought piece: Bank borrows 100, lends to developer who buys land and develops, generating stamp duty, VAT, income tax, CGT, a reduction in dole queues, let’s say 50 for the Exchequer in total versus if the bank hadn’t made that borrowing. Bank goes bust with a hole of 50. State has to fill the hole. Quids in. Simply paying back what we didn’t have in the first place.

Of course the Exchequer’s mistake was to spend a lot of that 50 and to set itself on a ledge where it has to continue the illusory largesse. It had also built up an NPRF which was also an illusion.

Unfortunately the process did involve a mass internal transfer within the coubtry from future taxpayers to the public service and the windfall winners of the boom.

@ Bryan G

Yep, the government cuda walked from the banks, pocketing its own windfalls from the lending boom. It would of course have brought down our banking system and our economy. The government decided wisely that it better pay back its illusory windfalls rather than try to hold on to them.

I remain convinced that a request to default/be forgiven our obligations is asking others to fund the windfall transfers within our own borders. There is no moral or legal basis for expecting that.

@ paul quigley

As this thread has turned discursive let’s take your lad Bourdieu out for a spin and see what he can do.

Bourdieu suggests that we can think of society as made up of three kinds of capital: economic, social and cultural. These all interreact. Further, in his model, these types of capital can be manifest in two ways – subjective and objective.

For example, in cultural capital, Ireland has a long tradition of boxing. The training of boxers is a kind of embedded cultural capital. If a boxer wins an olympic gold medal, they have turned this into objective capital. A kind certificate which says ‘this person is the best amateur boxer in their weight at this time’. These certificates can be devalued (eg too many drug cheats, too many medals like swimming), but they still have an agreed value.

Similarly social capital might lie in neighbourliness, and its certificat might be a Tidy Town, or a UNESCO dedication. These can be ‘cashed in’ eg through tourism. Cultural, social and economic capital can all be interconverted – hence the Aviva stadium. And the corrollory is that damage can cause damage – the Aviva stadium.

My suggestion that whilst Ireland has just seen its economic capital destroyed it still has huge reservoirs of cultural and social capital. The Irish family and neighbourly networks are soaking up the strain with the cultural tradition of emigration as a valve, which the less engrained social solidarity of trade unionism isn’t yet being deployed, other than to hold on.

Splitting post here.

@ Gavin

This board is a good example of Bourdieu’s ‘interpretive structuralism’ in action. Some posts provide lots of numbers, which help us to grasp the dimensions of the various issues under discussion, or set out the structure of the various instituitions, regulations, or instruments at work. Other posts focus on the agency isues, the individual or corporate actors, and the sort of concerns may motivate them. A good historical acccount, such as Joe Lee’s Ireland 1912-85 is able to take us into the minds, and the dilemmas, of leaders like Devalera or Cosgrave.

Bourdieu takes the view that ‘homo economicius’ is a product of history. The US and the Taliban are not just fighting over a piece of ground. Each of them is the Great Satan (Shaitan) in the eyes of the other. What is common sense and reason to one is absolute anathema to the Other. Any objective observer would, however, immediately note that there is as much religion in the US as there is business in Afghanistan.

Bourdieu conducted initial researches among Algerian peasants, where values of honour still prevailed. There are parts of the western world where that sort of thinking still survives. Drug dealers operate, like bankers, on gentlemen’s agreements, and people don’t usually charge their families the going rate.
Ireland has a mixed value system, and people who lose out in the modern sector may well take refuge in some of the old decencies. Nothing wrong with that. Our ghettos will be much less violent if the mainstream of our society becomes a bit more thoughtful, flexible and co-operative.

As the Dork always points out, it makes no sense to waste capital. This point applies equally to social or cultural capital. The bankers weren’t the only professionals who abused the position of trust they were given, and the damage to professions across the board is profound. Joe and Jane Public will be a lot wiser by the time all of the bubble costs are totted up.

There are errors, and there are big, historic errors, which lead to major system change. As Paul Hunt says above:
‘It’s been a long time in the making and this debacle had many fathers and mothers – even if it looks to some like a recently born orphan now – and it will take a long time to unwind.’.
Bond says:
‘There’s the rough two choices in terms of downsizing the global financial system, and neither of them are perfect. Like i said, a 30yr credit bubble, if you want to completely unwind it, as opposed to deflate, patch up, and reflate (the standard reaction we have had to recessions post WWII), is either a long term plan, or an unpleasant short sharp shock.’

Like all the greats, Bourdieu has absorbed the ideas of his philosophical and sociological predecessors. He suggests that we need to retire ‘homo economicus’, or at least make him part-time. We gave him a good lash, but he is taking us all over a social and ecological cliff. A shopping state of affairs, you might say.
http://facta.junis.ni.ac.rs/pas/pas2005/pas2005-05.pdf

You can emigrate from Ireland, or Spain, but you can’t emigrate from the biosphere. So this isn’t just Ireland’s problem, not by a long chalk, as many posters note. Maybe Randall Wray’s Job Guarantee ideas, as linked elsewhere by the Dork, need a closer look. Let no man say to the march of a nation ‘ne plus ultra’ and all avenues should be explored in a crisis.

I don’t know the President, but I read his recent book, and I’d say he would have a few interesting thoughts of his own to add. Sometimes less is more.

@ paul quigley

A classic post. I shall consider and respond when I have time to digest.

“Drug dealers operate, like bankers, on gentlemen’s agreements, and people don’t usually charge their families the going rate.”

As I have the pleasure of knowing both drug dealers (reformed, so they tell me) and bankers (unreformed), this rang very true.

Feel free not to reply – do you teach at some level? It would be a great service if you did.

@Shay Begorrah

Dan O’Brien’s article is yet another attempt to play down the central role of the financial sector (and their ECB sponsors) in Ireland’s current crisis because since the very beginning of the European component of the global financial crisis the political right has tried to shift the blame for a staggering market failure (which they will not accept any blame for enabling) onto the state, particularly those elements of the state that were social democratic in nature.

An editing function would be appreciated.

@Seamus Coffey

Between 2008 and 2015 we are going to run deficits of around €100 billion, excluding the direct bank payments. Of course the actions of the banks led to a situation where such deficits were possible but that €100 billion is not been borrowed and spent for the benefit of the banks.

Absolutely, even if the banks had not been bailed out we would still be feeling the effects of the GFC and still be faced with large fiscal adjustments. The structure of our economy was already wrong before the bailout, and had been wrong for five to ten years (including pay in the public sector and taxation)

However a controlled restructuring of the economy became almost impossible after the banking bailout. If our debt/GDP was a bank bailout free 90% as opposed to a bank bailout inclusive 120% (naive, I know) we wound find ourselves in the company of France, the UK and Canada – in short people without serious funding difficulties. The size of the banking bailout served not only to nearly bankrupt us but caused the interests of the larger EU countries to become misaligned with ours – had they faced knock on effects from the lack of a bailout and a touch of contagion we would be in the same boat and arguing over slight changes in course, not destination. The ECB would long ago have found a way to work around its mandate and Merkel and the Mitteleuropeam austerity chorus would find themselves isolated.

Therefore when Dan O’Brien gives his bullet points the second one is right, right and right.

* The economic and budgetary outlook would be transformed if banking debt could be offloaded.

It is right financially, right politically and, no, wait, I only had two rights….damn.

A Europe in which the Irish banking crisis had already been confronted would have been better for everyone not invested, socially or otherwise, in the financial sector and Ireland’s level of economic flexibility (by which I mean more or less state spending on infrastructure and training) would match that of many of our neighbours. By attempting to play the good Samaritan to the money lenders (forgive me, it’s Friday) we took the wrong side and prevented the financial crisis from being resolved, something policy elites are still determined to do.

Therefore the banking bailout and its political and institutional sponsors are the central feature of our economic crisis and Dan O’Brien’s analysis is seriously clouded by neoliberalism.