Architect of Ireland’s ‘Bad Bank’ Sees Lessons for Spain

This post was written by Philip Lane

Eamon Quinn has an interview with Peter Bacon on the WSJ website here.

33 Responses to “Architect of Ireland’s ‘Bad Bank’ Sees Lessons for Spain”

  1. What Goes Up... Says:

    The architect of Ireland’s failed ‘bad bank’ sees fat consultancy fees in Spain.

  2. seafóid Says:

    He didn’t mention “mark to hope”. Or the need for a proper bank resolution scheme instead of marking to hopelessness.

    Remember the brief Bacon was given :

    Mr Lenihan said he was “prepared to discuss schemes for assessing and eliminating risk” for the banks but that it would have to involve “careful protection for the taxpayer”.
    http://www.irishtimes.com/newspaper/breaking/2009/0212/breaking17.html

  3. seafóid Says:

    No mention of the unmentionable

    “Economist Dr Peter Bacon has advised the Government to establish a bad debt company to take problem loans off the banks’ balance sheets to free up lending. ”

    http://www.finfacts.ie/irishfinancenews/article_1016242.shtml

  4. Colm Brazel Says:

    Peter Bacon should be in hiding shamed by the failure of NAMA (not to confused with National Association for Mathematics Advisors UK) instead he’s touting it as a solution for Spain. I’ll not go into the mess. Look at some of it here http://namawinelake.wordpress.com/ I believe Treasury Holdings are the latest to take NAMA to court looking for compensation of up to ¢5 bn Its a large toxic trough leaking taxpayers money everywhere and destroying the Irish property market the longer it goes on.

    Countries will not be copying the NAMA mess. In Spain 100,000 education workers will lose their jobs even before the banks try to stick taxpayers with their losses.

    http://www.euronews.com/2012/05/22/school-s-out-in-spain-as-teachers-strike-over-cuts/

    You can be sure Spain won’t be guaranteeing all its banks either.

  5. Kevin Donoghue Says:

    Mr. Bacon said he isn’t optimistic that Spain and Ireland can get out of their legacy banking debts entirely through their own efforts. Europe’s banks will in time need the European Central Bank to act like “a real” federal central bank, and provide the ultimate firewall by printing money, he said.

    Good luck selling that idea to the Germans.

  6. Ordinary Man Says:

    First things first.

    Make financial non-disclosure a criminal offence by any bank official or anyone advising or acting on their behalf - start at the board and work your way down.

    Then engage some objective forensic accountants, do an ‘a**l audit’, identify the s***e, isolate it, dump it or doze it and all signatories take the immediate hit.

    Financially incentivise the FAs on a fixed rate per loan basis - start at the top 15% of loans/assets by Euro value and work your way down.

    If the bank looks like it is going to go pop - don’t call the PM, call the ECB and let them take it from there.

  7. BeeCeeTee Says:

    The guy is flat out wrong. Ireland’s experience demonstrates conclusively that it would not be in the interests of the Spanish people for their government to take on sovereign responsibility for bank losses. The solution is straightforward - if a bank is insolvent, put it through a resolution process that hands it to its creditors. If lack of liquidity gets in the way of settling deposit insurance claims, settle them with publicly issued bonds or similar.

    If creditors respond by trying to close down too many of the banks (that are now well capitalised), come the heavy through banking regulators.

    If the ECB or other EU government don’t like it, tell them they are welcome to recapitalise the banks themselves, but failing that they should keep their noses out of Spain’s internal affairs.

  8. David O'Donnell Says:

    Breaking Newz

    “We export one hundred percent of our GDP.”

    Minister Lucinda Creighton on Drivetime roight now ….

    No comment.

  9. BeeCeeTee Says:

    Translation of the Lucinda Creighton quote: “We import most of the materials, components and services that go into our exports.”

  10. Ordinary Man Says:

    @DOD

    Yeah just heard that - that’s what I call a grasp of your brief.

    What chance has the country really got with stuff like this?

  11. V Barrett Says:

    @DOD

    Not sure how they propose to ship that snickers i had at lunch time!

    Barristers eh! bless em!

  12. tullmcadoo Says:

    DOD/Beeceetee

    She is actually more correct than you are.
    GDP at constant market prices in 2011=161bn
    Exports of Goods and Services=161bn
    Imports of Goods and Services=123bn

    A Gentleman would issue an apology to the Minister but in your case?

  13. grumpy Says:

    @tull

    Ireally shouldn’t, but…wouldn’t she expect that most listeners would think she meant that all of Ireland’s production is exported.

    Is it likely she said that because she wanted to use that phrase to magnify in listeners’ perceptions the importance of export market, or because she doesn’t understand?

    She didn’t say “has a value equal to…”

  14. BeeCeeTee Says:

    Umm. Tull, perhaps I should have been more didactic. My point was to highlight why what appears on the surface to be an assertion that we export everything we produce could actually be true.

    GDP represents value added rather than gross output. If all the value in our exports was added in Ireland, then Lucinda’s statement would have been logically equivalent to saying that we export everything we produce, inclusive of heathcare, education and public administration.

    However, because we import most of the materials, components and services that go into our non-food exports and quite a lot of what goes into our food exports, the part of GDP associated with those outputs is much less than the gross value of the exports. This is what makes Lucinda’s quote consistent with the reality that we do consume a lot of what we produce.

    Even so, what she said is a horrible example of a school of speechwriting that sacrifices clarity to produce a superficially impressive statistic. It’s probably not her fault though. I’m fairly sure I have heard the same turn of phrase from many other Irish politicians in the past, so it’s probably in the box marked “Boilerplate for Ministerial Speeches” in more than one government department.

  15. tullmcadoo Says:

    Grumpy
    As ever you are a voice of reason and sanity. Clearly the talking point is that we should not harm our prospects by doing anything which frightens foreign investors. To underscore that point she emphasised the importance of exports (equivalent to 100% of GDP as you say). Equally she could have been pointing out that a currency deval would stoke inflation given our high dependence on imports. These are reasonable talking points about which we can reasonably take an opposing view.

    However, my point is that in shouting “Gotcha,” DOD revealed a lack of familiarity with the numbers that one would not expect of a poster on an economics blog.

    BCT,
    now we are straying into the field of net exports. However her ref. seems to have been to gross exports. We all use the same data set to back up our argument and we bend the stats to suit our point of view. In this case the Miniter seems to have a point and does not deserve a “gotcha”.

  16. David O'Donnell Says:

    Breaking Newz

    “We export one hundred percent of our GDP.”

    Minister Lucinda Creighton on Drivetime this afternoon ….

    No comment.

  17. David O'Donnell Says:

    @Greek Citizenry

    But the Keynesians can also draw on recent economic history to support their views. Austerity has failed to reduce debt as a proportion of GDP in every European nation in which it has been tried since 2008. More to the point, it has also—as Keynesian economists predicted—directly resulted in another recession in much of Europe, thus reducing tax revenue. I argued in the NYRblog at the beginning of January that this would be the likely outcome.

    [...]
    Though the negotiations will be difficult, the recent elections in Greece may actually create a blueprint for such a solution and force Germany to come to its senses. It has long benefitted from purchases of its goods in Greece and the other periphery nations, exploiting a low-valued euro. It is time to give some of that back. And in the process, once a plan for true growth is in place, Greece will have to manage itself well, end patronage, spend cautiously, pay its taxes, and stand tall as part of the EU. It will meet this challenge because it will be then be able to, and it is, I suspect, eager to do so.

    May 17, 2012, 12:50 p.m.

    http://www.nybooks.com/blogs/nyrblog/2012/may/17/eurozone-crisis-end-austerity/

  18. BeeCeeTee Says:

    Tull, more briefly this time, it wasn’t a gotcha. I was pointing out why what she said wasn’t dumb.

  19. David O'Donnell Says:

    Isolated at Home and Abroad

    Merkel Loses Her Triple-A Popularity Rating

    By Philipp Wittrock

    Usually, Angela Merkel enjoys her presence on the international stage. It has always provided her with an opportunity to shine, and it is where she developed a reputation as “Miss World” and “Miss Europe.”

    Right now, though, things aren’t going so well for the chancellor, as she travels this week from one international summit to the next. At the NATO summit in Chicago, a dispute developed over the Afghanistan withdrawal, while at the G-8 summit at Camp David, France’s new President François Hollande flexed his muscles. He said he would do the same at a planned dinner in Brussels this Wednesday with the leaders of the European Union member states. The Socialist leader is searching for allies to break Merkel’s austerity-led approach in the euro crisis and to back euro bonds, which are deeply unpopular in Berlin. His efforts haven’t been fruitless either — and Germany could soon face further isolation.

    That might all be more palatable for Merkel if things were going better for her on the domestic political front — and if she could rely on the stability of her coalition government. But the domestic front for Merkel is anything but quiet. Merkel’s decision to fire her environment minister, Norbert Röttgen, last week has created turbulence within the coalition government of her conservative Christian Democrats (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the business-friendly Free Democratic Party. The CDU is unsettled following the dismissal in ways seldom seen before. But this time it isn’t over differences in policy. This time it is about the chancellor herself — about her leadership style and her character.

    http://www.spiegel.de/international/germany/german-chancellor-merkel-under-pressure-at-home-and-abroad-a-834450.html

  20. David O'Donnell Says:

    FYI @Minister of State for European Affairs & @Minister for Finance

    Visit to Germany
    Tsipras Says Berlin Must Back Down on Austerity
    By David Crossland

    Charismatic, eloquent and defiant, the leader of Greece’s Radical Left party, Alexis Tsipras, visited Berlin on Tuesday to ram home the message that he will scrap austerity if he wins the June election, and that no one, not even mighty Germany, has the right to evict Greece from the currency.

    … The charismatic leader had visited Paris on Monday as part of a tour to convince a skeptical European public that he is not bent on wrecking the euro. In Berlin, he was hosted by Germany’s opposition Left Party, which agreed a six-point program with Syriza calling for an end to austerity, taxes on banks and the rich and economic stimulus measures.

    http://www.spiegel.de/international/europe/greek-leftist-alexis-tsipras-calls-on-germany-to-drop-austerity-demand-a-834579.html

  21. Tullmcadoo Says:

    BCT,
    Sorry my bad. I was not trying to imply u were saying gotcha particularly after reading your reply. My drafting skills are rusty. Probably reason I never made it beyond AO.

  22. David O'Donnell Says:

    @Peter Bacon

    Mr. Bacon said he isn’t optimistic that Spain and Ireland can get out of their legacy banking debts entirely through their own efforts. Europe’s banks will in time need the European Central Bank to act like “a real” federal central bank, and provide the ultimate firewall by printing money, he said.

    Mr. Bacon said giving the European Stability Mechanism — the euro-zone’s permanent bailout fund — powers of a bank to borrow money would also fall short of what is required to resolve the region’s debt crisis.

    “It is a euro-zone-wide solution that is required for Ireland and Spain. You cannot put a figure on a firewall. In my view the real firewall is that the ECB role is to be a bank of last resort,” he said.

    Spain’s banks, like those in Ireland, won’t have the resources to settle their own debt crisis, he said.

    I suspect that the road to Damascus will be fairly crowed by year end! I hear that you handed the consultancy fee back to the state Peter! We musta turned the corner - now that credit is flowing. NAMA + PNs = Bones of €60 billion …. JHC cubed!

  23. Joseph Ryan Says:

    On a quick reading of the article I am not sure whether it is the chutzpah of Peter Bacon or the humour of Eamon Quinn that strikes the most impact.

    The only piece of that article that Spain need to concern itself with is in the preamble:
    “the Irish authorities needed to show international investors they had a grip on the crisis and persuade international debt investors to keep buying Irish government bonds.”

    You would ruin your siesta utterly if you tried to digest the implication of that sentence.

  24. tullmcadoo Says:

    DOD
    Mr T famously wrote to SF after GE11. Will he be coming here and will he meet Northern Command who are after all implementing Tory austerity in the Wee 6.

  25. seafóid Says:

    Los Madrilenos are very unlikely to listen to Bacon . Jamon Iberico is much better.

  26. Robert Browne Says:

    NAMA was the quick road to ruin. Why anyone would want to interview Bacon is beyond me. Bacon was a director of Ballymore Properties who are now in the SPV designed by their former director. Spain will be looking for the ECB and the ESM to step up to the plate for their banking system.

    What was said about “Nama only game in town?” It will get lending going again? It is a millstone round our collective necks.

    The only reason they should look at NAMA is, it will show them what not to do.

  27. PR Guy Says:

    @seafóid

    “Economist Dr Peter Bacon has advised the Government to establish a bad debt company to take problem loans off the banks’ balance sheets to free up lending. ”

    I recall it (free up lending) gave the banks a good laugh that one.

  28. John Foody Says:

    ‘Free up lending’ that was a good one. A phrase that went unchallenged in a lot of the media at the time.

  29. Frank Galton Says:

    The WSJ has elevated the item to a story in Wednesday’s paper, and with good qualifications

    At the time of Mr. Bacon’s report, the Irish authorities were racing to shore up confidence in Irish banks and the nation’s finances, and needed to show investors they had a grip on the crisis to keep them interested in buying Irish government bonds.

    As Ireland’s bank losses escalated, NAMA paid an average discount of almost 60% on the property loans it bought—double the estimate made by Mr. Bacon—because the lenders’ property losses were much larger than first thought. Over several tranches, NAMA paid in all €32 billion in NAMA bonds to the lenders for €74 billion of their property loans. The bill for the Irish govenment in recapitalizing its banks escalated further

    When bond investors took fright at the bank-rescue costs in late 2010, Ireland was forced to seek a €67.5 billion bailout from the European Union and International Monetary Fund.

    http://online.wsj.com/article/SB10001424052702304019404577420300134053184.html

  30. PR Guy Says:

    @Frank Galton

    “As Ireland’s bank losses escalated, NAMA paid an average discount of almost 60% on the property loans it bought—double the estimate made by Mr. Bacon—because the lenders’ property losses were much larger than first thought. ”

    …and now they’re wishing they had gone for 80%….. which is precisely where it’s heading.

  31. PR Guy Says:

    @John Foody

    “‘Free up lending’ that was a good one. A phrase that went unchallenged in a lot of the media at the time.”

    A phrase also used more recently, in the LTRO splurge. That was the original reason given for LTRO.

  32. seafóid Says:

    Pushing on a string is more like it

  33. David T Says:

    Apologies for dumbing down the Creighton argument

    @tull @dod @bct

    GDP = C+I+G+(X-M)

    Granted, in Ireland’s case X and GDP are in overall terms equal.

    However, surely stating that X is 100% of GDP implies to the public that it is the only contributory factor to GDP and that if we stop exporting in the morning GDP would be equal to zero!

    Politicians may need to simplify things for the general public, but this was a step too far!

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