A better deal on bank debt: What is achievable?

In the wake of the referendum result and speculation of the ESM directly injecting capital into Spanish banks, there is a lot of discussion about the possibility of Ireland “getting a better deal on its bank debt”.    It would help if people were more explicit about what they had in mind.   I would not be surprised that many in the public believe that it means there would be retrospective collective European absorption of already crystallised losses in the Irish banking system.  Although I would love to be wrong, I believe that the odds of this happening are approaching zero.   Failure to deliver such absorption would increase the sense of grievance on Ireland’s treatment in relation to the bank and bondholder/depositor rescues.   Some might argue that a sense of grievance is useful in strengthening Ireland’s bargaining position.   I doubt it; and any benefits are unlikely to outweigh the costs in reduced domestic support for Ireland’s necessary adjustment efforts.    

It is worthwhile to consider what an extension of the ESM’s role could realistically mean for Ireland.  I consider some possibilities below.   I would be interested in people’s views. 

First, if additional capital injections are needed, Ireland would have a strong case for these injections coming via the ESM.   However, this would not be a direct transfer, but a capital injection in return for a fair stake in the bank.    The advantage would be that it would reduce the uncertainty around the value of balance sheet of the State relative to State making such injections. 

Second, it is possible that the ESM could take over some or all of the State’s existing ownership stakes in the banks.  Again, I think it would be unrealistic to expect the ESM to pay more than fair value.   The advantage would again be reduced uncertainty over the value of the State’s balance sheet.   But it is again important to recognise that this would be of considerably less value than any absorption of already crystallised losses. 

Third, the fact that Ireland’s bank-rescue efforts preceded any development of the ESM as a mechanism for recapitalising banks could help Ireland get more traction on the extending the repayment schedule for the promissory notes/ELA.   (It does seem unfair to be disadvantaged for faster recognition of the reality of bank losses.)

In considering the likelihood of a deal on the promissory notes, it is worthwhile to recognise the reason for the ECB’s strong opposition.   The provision of ELA to IBRC effectively amounts to temporary monetary financing of a government.   The euro system has allowed the Irish central bank to print money to temporarily finance IBRC, but on the understanding that the funds will be repaid by the Irish State, and the money creation eventually reversed.   A monetary union could not survive with individual countries printing money on a permanent basis, as it amounts to a transfer to the country printing the money from other countries in the system.   We would and should be firmly opposed to other countries engaging in such a practice.   The ECB is therefore extremely uncomfortable with even temporary money creation.   Extending the ELA beyond the agreed schedule has, so far, been a bridge too far.   The question is whether the advantages of facilitating Ireland’s return to market creditworthiness by reducing medium-term funding needs means that they are willing to hold their noses a bit tighter and allow a longer repayment schedule.   I think there is a strong case to be made for such extended repayment schedule, but we should not be surprised that it has been so difficult. 

Fourth, an alternative to extending the maturity is for ESM to make long-term loans to the State to allow it to redeem the promissory notes.   The ECB would certainly be happy with this arrangement.   However, the benefits in terms in terms of longer maturity would have to be weighed against the higher interest rate, recognising the ultimate interest cost to the State from the promissory notes/ELA arrangement is very low.   We would have to see the details to assess whether this would be a good deal. 

88 replies on “A better deal on bank debt: What is achievable?”

If the next iteration of bank bailouts could be taken care of by the ESM on less punitive terms it would be something.

And paying E17bn on E31 bn borrowed as the EZ heads into a period of deflation is punitive. Some mercy on that would be welcome.

One of the problems with the return to market creditworthiness is that the creditworthiness of the State is subject to such inscrutable and capricious decisionmaking at Euro level. And that would all have to be priced in.

“The ECB is therefore extremely uncomfortable with even temporary money creation. Extending the ELA beyond the agreed schedule has, so far, been a bridge too far. ”

But it wasnt entirely a selfless act from their part but very much a self-interested action.

Their is a sense of epectation being built up by the Govt. that something will come of this new push. Politically they need it because the road being travelled whereby Ireland plays the good european but later finds regulatory obstacles put in its way with no respite offered is poltically a short one.

That has consequences as well

ECB uncomfortable with temporary money creation? Why have insisted, nay demanded it then?

This is one of the reasons why I think the Goverment’s obsession with avoiding crisis is misguided. Under crisis conditions, we could burn the ECB, just as Greece seems likely to do in the near future.

No need to change path in this period of relative calm for Ireland, but when Greece blows, possibly followed soon after by Portugal, Spain and Italy, there may be crisis enough going around so that we can do the needful while still appearing relatively reliable to the private sector interests that actually matter.

Isn’t it time we stopped being so passive in this. Let’s start making our own noise about having to leave the Euro and join sterling if this mess isn’t sorted. Let’s tell Angela that the only way we’ll regain competitiveness is if we say goodbye to the Euro. We are in a very strong position after the yes vote (oh how they would have loved to pin the blame on us!)
Let’s play hard ball

Here’s some commentary from a well known Trotskyist


States can accumulate debts which simply cannot be met and debt relief becomes inevitable. But states can also accumulate debts improperly.
Commissioner Rehn and his colleagues in the Commission effect not to understand that not all debts are created equal. There are objections to at least a portion of the bank-related debt now carried on the books of the Irish Exchequer that are in the nature of moral or ethical objections, arising from the circumstances in which the debts were created.
The case for a proper negotiation on the bank-related debt, or at least a major portion of it, does not arise solely from Ireland’s high debt burden and consequent concerns about debt sustainability. 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.

‘..many in the public believe that it means there would be retrospective collective European absorption of already crystallised losses in the Irish banking system. Although I would love to be wrong, I believe that the odds of this happening are approaching zero’

Very likely zero.
I don’t know if very many people believe it either; more just the line peddled by the papers on Saturday, next to their ridiculous ‘Nation breathes a sigh of relief’-headlines.
The effort to get writedowns, the promissory-note issue, etc, have been virtually nil from the govt.
I really can’t believe there’s anything more going on than post-ref. posturing as a fob to voters who supported it.

Why would europe do anything unless a threat existed ?

re- Eureka

– I agree entirely, but do you think it can be expected ?
Enda & co. are the administrators of ECB policy, and don’t represent or even acknowledge that such a thing exists as Irish interests in the sense that most of us recognise.

We could potentially have to default at a later date, doing so on the promissory notes would be politically easier than via the ESM. The fact the ECB would like the notes paid off by the ESM is reason enough not to do it. I’m for keeping them where they are and using any goodwill towards us or Spain to argue for extending the term as far further as possible.

Have the ESM to finance our next bank bailout.

@ john
The ECB cannot have it both ways. Opposed to losses on senior unsecured debt, opposed to longer term funding/ela, and wants sovereigns to restore their creditworthiness. The first policy has contributed to the development of the second by ela national states, leading in some countries (Ireland and Spain) to the third.
The ECB policies could be contrasted with the Fed wind down of Aig and other questionable assets via the maiden lane portfolios. Secured funding for the past few years and unwound via recent sales. Just because the ECB or political leadership don’t want to consider alternative policies, doesn’t mean there aren’t any.

re- John Foody

‘a coordinated European approach to reforming labor markets, social security systems and tax policies, German officials say’

There’ll be a tragically humerous aspect to seeing how Enda & co. present this.

Regarding point made in the article about the delays, etc. of necessary treaty change – The only way this can be circumvented is to create some skeleton of it that can operate in parallel to a public facade, or to declare some kind of emergency wherein normal procedures are suspended.
Martial law for finance & democratic curfew.

On the evidence, Portugal is acting the sovereignty-compromised victim, while Spain is asserting a degree of sovereignty. If the ECB and the EU want to protect bank bondholders in a stage that retains sovereignty, they should logically have to pay for the privilege. Only where sovereignty is severely compromised should they be in a position to blackmail the country into bailing the bondholders out.

@ John Foody

It remains, nevertheless, a legitimate question, especially in Ireland’s case!

It must be regarded as a tactical move in the early stages of a search for compromise on institutional matters. But the trade-off in the meantime is one of concessionary loans in return for strict conditionality.

In Ireland’s case, we have a government sticking to a pre-election platform of (i) no increase in income tax (ii) no reduction in social welfare payments and (iii) no changes to the CPA. This makes the implementation of the conditionality agreed much more difficult, especially in relation to long overdue reforms (residential taxation, water, sewage etc.) which might have been more easily addressed in the boom times.

Something has got to give! It will not be the purse strings of the German taxpayer.

@ BeeCeeTee

The action of Rajoy borders on the pathetic. If there was a centralised European control of national budgets, this would resolve the problem of the runaway budgets of Spain’s 17 autonomous regions for which his own party is largely responsible. Would you describe this as behaving in a sovereign way?

You’re right. Something will give – the Euro itself.
I’ll be glad to see the back of it..

A large fraction of the mortgages will never be repaid .Sooner or later the banks will have to recognize that and be recapitalized .At that time any help by the ESM will be very helpful.

You appeared to be focusing on national policies on insolvent and undercapitalised banks. If that wasn’t the point of your comparison between Portugal and Spain, what was?

@ Mark

Indeed it will. My guess, they’ll send/keep Enda to ground and alternate sound bites via ministers and RTE to push the boundaries of logic and reason until they get something that sounds like:

‘This is opt in lack of sovernity, which is fine because it means we’ll get a deal on our bank debt, in the future sometime and some structural fund scraps in the mean time’

Revisiting the treaties, Sinn Fein will be rubbing their hands.

@ BeeCeeTee

The point I was making, although perhaps not as clearly as it should have been, is that the creation of sovereign credibility in the financial markets is largely a function of the actions taken nationally by governments. This penny has yet to drop in Madrid. Whether it has dropped or not in Dublin is open to question.

@ Eureka

I hope that in the circumstances – and assuming that you are using the euro – you are making the necessary arrangements before it drops any further in value.

Fair enough, but it was a very odd choice of link to illustrate the point you were endeavouring to make. Most of the article did not address your point at all. The part that was somewhat relevant highighted how unsuccessful Portugal has been at regaining market credibility despite compliance with its bailout programme.

Just briefly

“The provision of ELA to IBRC effectively amounts to temporary monetary financing of a government. The euro system has allowed the Irish central bank to print money to temporarily finance IBRC, but on the understanding that the funds will be repaid by the Irish State, and the money creation eventually reversed.”

Spot on, and people should realise the ECB and the Buba wing in particular actually understand this. It provides the context of the staring point for any ‘renegotiation’.

@John McHale

“I would not be surprised that many in the public believe that it means there would be retrospective collective European absorption of already crystallised losses in the Irish banking system. Although I would love to be wrong, I believe that the odds of this happening are approaching zero. ”

I can only agree. They will simply say “That was then, this is now.”

The Troika have never really cut Ireland any slack, know they can get away with that and will not do anything that isn’t in their own interests. That, I’m sorry to say, is business.

@ BeeCeeTee

Given the economic data, that Portugal may need a second bailout is not a real surprise. In Ireland’s case. however, the circumstances are different. What I was also trying to get at was the general attitude of mind in Ireland as revealed by the surreal nature of the referendum debate. It could be summed up as; “where will we get the money to pay our nurses/guards/etc. etc.” as if it was axiomatic that we had to borrow the money from somewhere, the discussion then turning to where that “somewhere” might be.

The obvious conclusion that, if we could not raise the funds by taxation to pay for the services, we could not afford them seems to have been lost in the ether.

I am pleasantly surprised by the general media reaction to the outcome of the referendum. The governing parties seemed to have completely misjudged the situation. It is time to get down to the real business of sorting out the public finances. Having the department responsible divided between two parties with fundamentally different ideologies is not an asset in this context.

The train left for Ireland last Thursday and the bank debt is now copperfastened forever.

An asset/property has two values, the price you can get for it,or the net present value of it’s future cash flows. If somebody auctioneed a 5 euro note on Grafton Street and an unwise person bidded it up to 20 euro, then a surveyor would value all 5 euro notes as 20 euro notes. Likewise if an unwise person paid 2 million euro for a house whose net present value was 0.5 million euro ,then a surveyor would value all other similar houses in that housing estate at 2 million euro.

Almost all of the Irish banks reckless lending was done using surveyors/auctioneers valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.

The fifth alternative:

As the rules of capitalism were overturned to protect bank creditors, particularly bondholders, the consequent illegitimate costs imposed on private citizens should be reversed.
In Spain’s case the answer is simple. Capitalism. Burn bank bondholders.
In Ireland’s case, this being too late, the losses to be shared by Ireland/ECB/EC being all parties responsible for the imposition.

For my part, I will never accept the legitimacy of those bank debts.

I remain 100% convinced that their imposition had only one purpose. To eschew the normal rules of capitalism and transfer the losses from investors.
That is still their purpose when it comes to Spanish banks.
What is wrong with applying the rules of capitalism?
Why is that not the very first alternative?
Why play a game where the rules change to produce the desired winner?

So all told the net affect on our national debt is very little in the case any of these possibilities materialises? some inteest reduction perhaps which will benefit the deficit.

My question is…where is the outcry and indignant remarks in relation to the ongoing accumulation of debt? We cant reverse the bank debt related to bondholder bailouts etc, however we can insist on the arrest of further debt accumulation… or is the case that only a certain type of water should be allowed sink our shit country

@ Grumpy

I note your use of IBRC and feel it deserves wider recognition within the language. Crises often expose the limitations of language and IBRC could be the word to fill a massive gap. Currently we have few terms such as “useless”” written off” and ****ed – the Yanks also have ” FUBR” but none of these have the potency of “IBRC” . Most mistakes are self contained but you need a word like IBRC to capture a disaster that destroys the lives of thousands and sends a whole country back x years.

It could be used in a wide variety of scenarios.

“He totally IBRC’d the car”

“England were IBRC today at Wembley”

“If you don’t listen to your father you’ll end up like IBRC “

Why on earth would the troika give Ireland a better deal on anything…haven’t we just sent out an emphatic statement to all concerned that ‘paddy’s alright’…our government representatives have played footsie with the likes of merkel and sarkozy this last 12 months and they have been given a ringing endorsement to continue in that vein. Any extension on the promissory note will be purely to get us back to the markets at circa 6.5% without coming back cap in hand…a deal along those lines will be a pyrrhic victory…we’ve bought the ESM insurance policy….we might as well put on the “neck collar” when the whiplash of the 2nd bailout is imminent

I don’t think people have fully focused on the 1st and 2nd options in JMcH’s post. An ESM taking stakes in peripheral domestic banks would be the mother of all sector-specific lean-against-the-wind hedge funds. Not to mention questions about what its corporate governance policies would be. No clean solution there.


It is time to get down to the real business of sorting out the public finances.

Except those parts of the public finances that relate to propping up the financial sector, right. I mean who even knows how large that cost is now? Forty five billion?

Anyway, it is time to address only those factors which did not cause Ireland to be so seriously damaged by the European component of the global financial crisis, and to studiously ignore the ones that did.

Never discuss the malign influence the banks. Never acknowledge the trap of EMU. Never consider whether the structure of governance in the EU is one in which Ireland can prosper.

You are quite a character.

@ Frank Galton

Both options are, indeed, utterly unrealistic but I assume from the overall presentation that John McHale is aware of this.

Even the timid proposals that the Commission will table Wednesday are likely to run into determined German opposition. There will be no burden-sharing of responsibility at the level of the governments in the EA as far as I can see because the political conditions for such simply do not exist. However, one wonders if it might not be in the interest of the large European banks to push for some steps that might restore confidence between them. They can hardly all afford to retreat into their national kraals.

cf. http://www.ft.com/intl/cms/s/0/f3853c48-ae39-11e1-b842-00144feabdc0.html#axzz1wTpMVWxx

Ireland’s current debt burden is unsustainable. If we do not get a restructuring of the bank bailout cost that brings the debt to GDP ratio down to between 100-105%, then we will be unable to meaningfully borrow in the bond markets over the long term and will be unable to recover. Leaving the Euro will likely be our fate in the long term. The government should be making this clear in Europe and also highlighting that the simplest way to avoid this fate is by cutting the value of the promissory notes by about 60%. From a European perspective this would be almost costless compared with the enormous cost of a disorderly and uncooperative Irish exit.

It doesn’t matter that the ELA amounts to temporary financing of governments. LTRO has had the same effect in Italy and Spain. Making excuses for appaling ECB policy mistakes in the past is wholly unhelpful and just plain wrong.

If Spain manages to avoid Ireland’s fate because the ESM is allowed to directly recapitalise Spanish banks (in return for ownership) then it would be unacceptable if the same deal is not retrospectively applied to Ireland. It is not sufficient to shrug our shoulders and say it would be a bit “unfair” as John McHale seems to do.

@Frank Galton

“I don’t think people have fully focused on the 1st and 2nd options in JMcH’s post.”

This bit caught my eye:
“Second, it is possible that the ESM could take over some or all of the State’s existing ownership stakes in the banks. Again, I think it would be unrealistic to expect the ESM to pay more than fair value. ”

Fair Value? So we pay the ESM to take over a negative!
The only basis worthy of consideration from an Irish perspective is as follows:
Irish Govt bailout = X billions = Y percentage of ownership.
Ergo ESM funds = X/2 billions= Y/2 percentage of ownership.
That makes ESM fund state equity to date on a pari passu basis.

Otherwise the state has absorbed all losses to date and the ESM comes in late in the day, just like a vulture fund and gets the benefit of any gains from here on in.
That is exactly the kind of stupid deal that Ireland is capable of making to get its hands on cash and proclaiming it a victory just as they did with BOI.
The BOI sale was a ~80% loss on an investment that was just 12 months old.
We need another of those like we need a hole in the head.

People should be very careful what they wish for.
The ESM will recapitalise banks in exchange for equity. Then it will sell off performing loans to the likes of Goldman at a discount (since Goldman will be funding the ESM anyway). Then the ESM has tremendous powers to call on states to boost its coffers to deal with the non-performing loans.
The ESM is the giantest tentacle of the giantest squid that the world has ever known. No wonder Draghi likes it.
Problem is not economics – it’s the politics. Will the ESM lead to growth in peripheral countries (not on your nelly)?

So Ireland should try for some better deal but Ireland should be very prepared to quit this fiasco. It should isolate loans owed to the UK and undertake to repay those and pretty much not bother with anybody else. It could do this by defaulting on all loans and then arranging a bilateral loan with the UK to repay all the UK debt (in essence setting up the UK based loans again). This is to ensure that the UK Central Bank will prop up the Punt.

In the banking coup it’s still all to play for…..

A great post and one that was needed since a deal on the bank debt was so vague.

I’m glad to see some discussion on money creation and indeed the reversal on money creation.

I’m surprised that since the Irish Central Bank creating euros is so unusual, the question as to who creates euros in the normal run of things hasn’t been asked.

It’s the commercial banks which create euros and they do so with a corresponding debt. This is obviously the root cause of the debt crisis and we can’t expect to resolve this crisis with bank loans as the only source of new money.

A new source of digital money makes sense on many levels

re- that Guardian article, ”Joschka Fischer, the former German foreign minister, warned that his country was at risk of destroying itself and Europe for the third time in a century, and gave Merkel just a few months to change course and save the currency. In an article published yesterday, he wrote: “Germany destroyed itself – and the European order – twice in the 20th century. It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time.” ”

– Now that’s a very interesting approach from Herr Fischer;
Identify the very cry that is certain to arise with this German manoevre and attribute the feared scenario to what will happen if they DON’T take coercive control of the continent.

The UK will (something their media seem not to have realised) either have to undergo several degrees of economic subjugation or enter into the same political subjugation as the new protectorates.
Whatever game Cameron has been playing will have to declare itself soon enough.

@John McHale

‘I would not be surprised that many in the public believe that it means there would be retrospective collective European absorption of already crystallised losses in the Irish banking system. Although I would love to be wrong, I believe that the odds of this happening are approaching zero.’

In that case, UnSustainable leads to Default.

Let’s get planning – …

FYI Der Spiegel International [good graphic on Ireland’s DECLINE

Banking Woes
Ireland Still Long Way from Overcoming Debt Crisis
By Christoph Pauly in Dublin

Irish voters have approved the fiscal pact in a closely watched referendum, to the relief of European leaders. But the country is still a long way from solving its debt crisis, and its banks will soon need additional billions in fresh capital. ……..
Illusory Confidence

In 2010, the European Union had to support the country to the tune of €67.5 billion ($84 billion). Ireland’s local banks had gambled and lost on real estate loans, and had been bailed out with comprehensive state guarantees. Soon thereafter, the Irish and their fellow Europeans throughout the continent had great hopes that the worst was over. Recently, the Irish were considered a paragon for the entire euro zone. In 2011, the economy even grew, albeit only by 0.7 percent. But such confidence proved illusory.

As things now stand, Ireland will have to be bailed out a second time. The banks have proven to be a bottomless pit. They have to be recapitalized once again. The previous write-downs of the 10 largest consumer banks, amounting to €118 billion, are still not enough.


@ John McHale,

I had a second review of this PBS Frontline piece this afternoon, and also a look at some of the other ‘election 2012’ specials from PBS Frontline.

Jon Corzine, MF Global and the disastrous gamble that brought down a company.


I was quite interested in some of the commentary in regards to Tim Geithner versus Larry Summers. Summers, and some others were heavily in favour of taking on Wall Street – talking on at least one of the ‘two large to fail’ institutions – and breaking it up into smaller pieces. That is, Summers was in favour of an approach that would really change things on Wall Street.

Geithner on the other hand, was presenting an option of softly, softly, looking to restore some confidence, and the whole notion of publicly available stress testing results for the large financial institutions.

The program characterised Summers’ approach as being like Old Testament justice. But in the end it was Geithner, the Treasury Secretary who won out in the debate, not the president’s own economic adviser.

There appears to be a bit of the same debate happening in regards to Europe, and the notion of significant intervention in the banking system. At least, if the United States example is anything to go by, even a central figure in charge, such as the president of the US (with the backing up of the entire Federal financial oversight and regulation system), could not see fit, to take even one of the large institutions ‘out of the woodshed’ – then it very hard to see how this could happen in Europe either. BOH.

John McHale wrote,

The provision of ELA to IBRC effectively amounts to temporary monetary financing of a government. The euro system has allowed the Irish central bank to print money to temporarily finance IBRC, but on the understanding that the funds will be repaid by the Irish State, and the money creation eventually reversed.

What you describe there in those sentences, is not unlike what Jon Corzine, was attempting to do at MF Global, in regards to internal re-purchasing (one part of a company providing a loan to another part, on a temporary basis). The regulators in the United States have banned this ‘internal repo’ option, since the crash of MF Global. BOH.

It is a good post – if only to highlight how far away we are from any such deal.

It is a funny prospect that has been put forward in the media:

“Let the ESM loan the money directly to the banks”

1) Loans don’t count as capital
2) It also can’t be a loan because there is no real chance of payment.

So the story then changes to:

“Let the ECB take a stake in the banks in exchange for capital”

1) KW actually put this idea forward last year
2) How long before the Europeans taxpayers realise (in the unlikely event their Governments agreed to it) they are spending cash on a share in nothing
3) How many years, being ultra realistic, would it take to such money back in dividends?
4) What the hell happens to Ireland with the ECB in charge of banks? Do they lend even less? Are rates pushed up? Is there even more downsizing?

Basically, we seem to be wanting to justify some kind of return for Europe when there is none. Simpler to just admit the preference is for the burden to be shifted away away from Irish taxpayers and spread evenly amongst the Eurozone.


As you are a fan – spot the Lucinda_izm

‘In order to make life easier for the banks and ultimately itself, the government is resorting to all manner of tricks. According to conditions established by the ECB, the nationalized banks are supposed to pay 9 percent interest on the €31 billion in aid that they have received. Last month, the state itself borrowed money — no less than €3.1 billion — so that it could transfer the interest payments.

Ireland is being “disproportionately burdened” by the interest on the bank aid, says European Affairs Minister Creighton. She anticipates proposals from the ECB that would significantly reduce the interest rates.’

p.s. best to DOCM_Og (aka J-PMC)- has he raised the one and fourpence yet?

From the nytimes:

‘Under the plan, largely ignored when it was introduced late last year, the debt overhang in the 17 members of the euro currency union — defined as any debt exceeding 60 percent of gross domestic product, or nearly $3 trillion by some estimates — would be transferred into a fund that would be paid off over roughly 25 years. The proposal differs from euro bonds in part because it is limited in scope rather than open-ended, which could help win approval by the German Constitutional Court’


The best Ireland can hope for is continued low interest rates and an extension of the repayment terms on all outstanding sovereign debt.

Should Spain or Italy get better terms we would have every right to demand equeal treatment.

Following the “Yes” vote last week, I think we can practically wave goodbye to a debt write-down. We don’t have anything to negotiate with – ethics and economics are next to worthless in an EU where 120% debt:GDPs in Italy, Portugal (soon) and Greece are acceptable.

Did I hear the Leo the Innocent say during the weekend that any arrangement that applies to Spain should apply to Ireland as it was practice in the EU for modified arrangements to apply retrospectively?

The best we can hope for is lending at the German cost of funding, 1.2% for its 10-yr bond, to pay for the extant IBRC promissory notes. How do we convince the Germans that the risk inherent in Ireland’s predicament shouldn’t mean an additional risk premium on top of the 1.2%? Could we work out an arrangement whereby the NPV of the repayment of any loan to Germany didn’t rise above a level indicated by a 1.2% annual interest rate but where initial payments of interest recognised the risk premium?

As for any EU organ taking stakes in our banks? Which might need €4bn of new capital according to the CBI. And which might need far (far) more if the mortgage crisis and new personal insolvency regime combine to crystallise property losses. As the Italian-Americans might say “fuggetaboutit”

Apparently the answer John is “none”
“Germany has cast doubt on any deal on bank debt following the fiscal treaty referendum outcome, saying it would be a “negative signal” to reopen Ireland’s bank rescue arrangements.

Taoiseach Enda Kenny raised the bank debt issue with German chancellor Angela Merkel last Friday, but senior German officials dispute Mr Kenny’s interpretation of Ireland’s fiscal treaty vote as a “message to European Union leaders” for a “just” debt deal.

“We see no need for movement at the moment,” said Martin Kotthaus, spokesman for finance minister Wolfgang Schäuble.”

@eureka, ordinary

Would it be awfully rude and distastefully suboptimal to leak the evidence that proves Ireland was “forced” to bail out all bank creditors totally?

Or is that just a load of blarney, which would explain the non-appearance?

@ Grumpy
It was utter blarney. Our late MOF screwed it up all on his own. I would like tp be proven wrong but i think his aunt is just very skilled at trying to get him off the hook. As it stands history (as in established factual history) will not be kind

Ireland signed up to this… Admittedly the previous government, and they boasted about closing all loopholes……. A democratically elected government made the decision. tough

you want change, Imprison the previous cabinet and bank directors who bounced the country into the guarantee, knowing the state of the banks. That will be a message, voting yes for more loans from Europe is not a message for any kind of deal.

@ John Foody

The proposal is too indigestible politically at this stage. However, the fact that it was made confirms that serious thought is being given to the issue of re-establishing a stable market for government bonds in the EA. The EFSF seems to be carrying out a bit of a test run already although the level of shared liability is less.


@ Eureka

What does the IT report say about the general appreciation of the situation in Ireland? And the “strategy” of the government?

Merkel to Dublin: Drop Dead
I simply cannot understand how any government could be as inept as ours. At this rate Sinn Fein won’t need any coalition partners to form the next one.

Merkel to Dublin: Drop Dead [again]
I simply cannot understand how any government could be as inept as ours. At this rate Sinn Fein won’t need any coalition partners to form the next one.

Docm, are you really saying that what Spain needs is to go all in behind its banking system . How is that anything but a reciepe for disaster Let’s call it the Brian lenihan gambit.

Ciarán. I am not saying it. The most recent statement that Spain “can manage on her own” is from the deputy leader of the governing party.

I can only repeat a point that I made earlier to the effect that the creditworthiness of a state is largely in its own hands. This is not a value judgement but a statement of fact. Three-quarters of the deficit that Ireland has to correct has nothing to do with the banking debt but to still excessive levels of public expenditure. We can get ourselves out of this situation by going cold turkey (default) or on a managed programme (Troika) and the Irish people have had the good sense to see this and have chosen the latter.

Unfortunately,on the evidence, the government has not understood the message of the referendum and continues to insist on walking into walls.

I thought its pretty clear that the Spanish are holding out for a new European regime in dealing with failed banks(surely the sane approach is to have the ecb do it rather than throwing tax payers money at it, I know that this is legally possible at the moment but something will have to give )

Since your praising Portugal for recapping their banks I concluded that your calling for Spain to get out on front in recapitalisation. Given the potential scale of losses this seems like a dangerous territory.

I’m not sure what spin your putting on the yes vote, but afaics it was more about taking the path of least resistance / don’t rock the boat etc than anything else

Merkel is the least of our problems. Could you imagine Enda Kenny doling out aid to half a dozen EZ countries that were governed irresponsibly with the Irish electorate supporting him.

The upcoming crisis will be the looming total collapse of the Euro. This will be as serious for Germany as it is for Ireland. German public opinion will change from being opposed to rescuing the weak sisters (France, Spain, Italy) to avoiding a serious blow to the German economy. A strong Deutschmark would do as much to undermine the German economy as Versailles or WW2. Add in the evaporation of demand of over 200 million EU citizens due to currency turmoil and you have the mother and father of all crises. The beauty of the EZ is that to save the big fish most of the minnows will also benefit.

The Spanish Gov’t is in deep denial and statements by its spokespeople should be taken with a grain of salt.

DOCM, how can a state’s credit worthiness be largely in its own hands without the backing of its own central bank?

Add to this a range of bond options within a single currency and an assumption that at least one must be backed in the event of EU wide economic IBRCing.

Just not a workable system.


At what juncture? It’s very likely that the original blanket guarantee was completely or almost completely a domestic idea. At the time of the Trokia bailout, or the beginning of the new government shortly afterwards? It’s scarcely plausible.

(Among other things, I think Colm McCarthy had some awareness of what was going on in government by the time of the Troika dance? Apologies if I’m wrong about this.)

Darren + 1
Exactly even America would
Be feeling the pressure if they had to actually borrow/tax to fund their bailouts . the divergence between indebted eurozone and non eurozone countries seems pretty instructive .

Also I note that namawinelake tends to quote the cost of the bank bailout at 40% of GDP or 1/3 of the overall debt , what’s the accurate figure?

I love the way some people are able to just wave their hands and disregard billions in debt when it comes to certain things.


Cost of bailing out the banks so far €62.8bn of cash (practically all borrowed since we have been in deficit since 2008) and promissory notes plus €5bn of state-aid given by NAMA to the banks, which needs to be repaid by NAMA by 2020 or else the State is on the hook for it.

Total GDP in 2011 = €161,034m

The “accurate” figure is €67.8bn/€161.034bn 0r 42.2% of GDP.

So if our debt:GDP is 120% in 2013 (peak) then one third could be attributed to bailing out the banks.

Thanks for that man! You see a bit of a range of figures quoted and it makes you wonder sometimes . Although I guess there is a certain amount of judgement involved in things like that

@ Jagdip

The first estimate for nominal GDP in 2011 is €156.4 billion which would put your figure at 43.5%.

It is not correct to count all this in the general government gross debt (GGD). The 120% of GDP debt in 2013 will be €197 billion.

In 2007 the GGD was €47 billion. The primary deficits we started running in 2008 will have summed to nearly €60 billion by 2013. General government interest expenditure over the same period will be around €32 billion.

There is also a stock/flow adjustment of around €16 billion which in large part is to account for the substantial cash buffer we have built up.

These items comprise €155 billion of the 2013 debt. The residual is due to “temporary and once-off measure” which in the main is the bank recapitalisation payments. They will have contributed 21% of the 2013 GG debt.

I’m not sure how “accurate” the €67.8 billion figure is. I’m not disputing the outlays thus far and the potential shortfall to be made good in NAMA, but there has been some flows in the other direction.

Up to the end of March there had been €3.1 billion of fees received as part of the various guarantees that have been in place since September 2008. The State has received close to €0.5 billion in income as a result of its preference shares in BOI. There is also the increase in the Central Bank Surplus bank into the Exchequer Account. This has jumped from an average of €170 million in the four years to 2008 to almost €1 billion this year and it is expected to stay at that level for the next couple of years.

If we are going to count outlays that may not arise until 2020 then it seems appropriate to count inflows that have actually been received. Whatever way it is looked at the cost is horrendous.


I would accept much of that – I quickly lifted the first GDP figure from the CSO report and examining it more closely, it is the 2011GDP at 2009 prices, Your figure of €156bn is the correct GDP figure for 2011 at current prices.

As regards the deficit 2008-2013, you’re assuming its all being paid for from borrowings, an alternative assumption would be that it was paid for from current receipts and that the cash injected into the banks came from borrowings, thus the statement “So if our debt:GDP is 120% in 2013 (peak) then one third could be attributed to bailing out the banks.”

As regards the cost of the bank bailout, you might also include interest on borrowings to fund the bank bailout so far which might have been paid out of current receipts or borrowing.

So we might agree on the statement that the bank bailout is about 40% of GDP and that 40% of the 120% of the peak debt :GDP could be attributable to the bank bailout, with the remaining 80% arising from starting debt in 2007 and subsequent deficits.

anonym:’It’s very likely that the original blanket guarantee was completely or almost completely a domestic idea.’

Not at all likely, as has been brought up here a lot recently (and not always by me !)
Eamon Ryan: ‘The ECB told us in no uncertain terms were we to allow a bank to fail’.
Jorg Asmussen was at pains to deny that the commission knew about it, but never mentioned the ECB. He later admitted that in the promissory note case, the risk of contagion to other European banks determined ECB policy (which equates to FG actions). Is it really such a difficult leap to believe that the same thinking didn’t inspire the ECB in 2008 ?
It has long since come to light that B.Lenihan & the DoF were not in some sort of bunker at the time, but were in regular consultation with Trichet right up until the night of the Guarantee.
Other circumstantial evidence: The last CB governor made remarks to the media that hastened deposit flight, and pushed Lenihan’s hand (though I certainly don’t exonerate B.L.) The CB, remember, is the local office of the ECB, and the ECB has been operating as a political entity for a number of years now.
Somebody else gives one of the links for the Colm McCarthy pieces on this subject, above. There are several more worth reading. He’s currently of the opinion that an enquiry needs to be held into the matter.


Even if contacts with the ECB were extensive in 2008 (and afaik there’s still uncertainty about what contacts if any there were) at that point the Bank just wasn’t in nearly as great a position of power over us as it was at the time of the Geithner/ECB squeeze in 2010. (Meanwhile, it seems that the blanket guarantee came as an unpleasant surprise to other EU governments.) And on the other side of the coin, we know pretty well the kind of worshipful reverence the Irish establishment shows towards the two brazen idols of its own hand, AIB and BoI. We can be pretty sure those two were on the side of a blanket guarantee. If there was input from the ECB in 2008, the government may well have received it less as a terrible threat which must regrettably be bowed to, and more as “a grown-up said it was okay!”

It’s absolutely true that an enquiry is in order.

@ Jagdip,

If we could pay for primary expenditure from “current receipts” then we wouldn’t have deficits. We may have been able to pay for them from previous receipts via the NPRF but we did not choose to do so.

For the general government here is total revenue minus underlying primary expenditure since 2007, €billions

2007: 68 – 66 = +2
2008: 63 – 73 = -8
2009: 56 – 72 = -16
2010: 54 – 67 = -13
2011: 56 – 66 = -10
2012: 57 – 64 = -7
2013: 59 – 62 = -3
2014: 62 – 60 = +2

Between 2008 and 2013 the Irish government will have spent nearly €60 billion on pay, pensions, transfers, goods, services and capital projects than it will have collected in tax revenue.

Interest expenditure, €billions
2007: 1.8
2008: 1.9
2009: 3.2
2010: 4.9
2011: 5.4
2012: 6.5
2013: 9.2
2014: 9.4

It is hard to assign a certain portion of this to the bank payments but I would say that maybe around €5 billion of the €31 billion of interest paid between 2008 and 2013 was due to bank payments.

If we add up everything that could have added to the debt we get some strange results

General Government Debt at end-2007: €47 billion
Primary Deficits from 2008 to 2013: €60 billion
Interest Expenditure from 2008 to 2013: €32 billion
Stock Flow Adjustments (Cash Buffer): €16 billion
Total Payment to Banks: €63 billion

I think we agree on all of these but summing them gives a total of €218 billion. The projected debt includes all these elements and puts the end-2013 general government debt at €197 billion. There is €21 billion in the above list that did not add to our debt.

Your include the full amount of the bank payments. I include the full amount of the primary deficits. The €63 billion of bank payments are in the past but the primary deficits are ongoing and accumulating. We can get to a primary surplus by 2014 but will have built up another €10 billion of primary deficits by then.

In 2007, we were spending €2 billion a year on interest which was largely a legacy of the deficits ran in the 1980s. If we assume that this has been paid with borrowed money since 2008 it could add another €0.5 billion to the interest bill. Between 2008 and 2013 there is the €60 billion of primary deficits. Again assuming all this was borrowed there is an interest bill of around €3 billion a year associated with that. The extra money we borrowed in 2008/09 to build up a cash buffer probably generates another €1 billion or so of interest expenditure.

That is a €6.5 billion interest bill in 2013 before even mentioning a cent that has gone to the banks. As shown above, the actual interest bill we be just over €9 billion. Of the difference, around two-thirds, or €1.8 billion, will be due to the interest on the Promissory Notes. As we have already seen with the recent Central Bank surplus paid to the Exchequer a sizable portion of this money will circulate back as revenue. This flow will be reduced as the Promissory Notes are paid off with (external) borrowing.

There is no doubt the bank bailout has crippled the State but it will be developments in the primary balance that determine whether the debt burden is sustainable or not. The projections show that there will be a primary surplus in 2014 and by 2015 the projections are that this will be big enough to enable the debt ratio to fall.

A deal on the bank debt, however that is defined, will be of assistance but unless we can continue to make progress on the primary deficit it will be for nought. It has moved €16 billion in 2009 to €7 billion this year. By 2015 an even greater improvement to a surplus of €5 billion is needed.

We are spending huge amounts of money on ourselves in excess of what we raise in revenue. We are also spending huge amounts of money on interest because of instances where there was an excess of expenditure over revenue. We need to deal ourselves with the primary deficit, and if some deal on bank debt from an unspecified source does materialise we need to ensure we are in the best position to benefit from it.


Thanks though I think we agree that €1 spent on the bank bailout in 2009 might have come from borrowing or receipts, and by extension we can say that of the €197bn of GGD in 2013, that €63bn could be attributable to the bank bailout. The €5bn state aid in NAMA is an oddity and the hope would be that NAMA can recoup this with a recovery by 2020 which is strong enough to make up the €5bn plus operating costs.

I disagree with you a little on the debt sustainability, and would say that interest payable on the State’s debt is just as relevant as the primary surplus.

Agree with you fully on the need to get to a primary surplus.

@ Jagdip,

Yes, we are fairly close. Maybe I was a little loose with the primary surplus/interest cost relationship to debt sustainability. These are all interlinked the interest cost determines the size of the primary surplus that must be run in order to stabilise the debt ratio if the interest rate on the debt exceeds the nominal growth rate of the economy. I just don’t see the debt sustainability requirements for Ireland changing much if there is a ‘deal on bank debt’.

Of the €63 billion we have put into the banks, the only thing that is on the table is the €25 billion of Promissory Notes. The €20 billion that has come from the NPRF and the €18 billion put together from a combinations of our other resources and EU/IMF loans are not up for discussion.

We can only really gain from the Promissory Notes if they are not repaid. The Promissory Notes have a high interest coupon but the net cost to the State is the money paid by the Central Bank to the ECB to allow it to use the ELA facility. This is the ECB’s main refinancing rate which is currently at 1% and does not look like it will be increasing any time soon.

We can only guess at what is being discussed but a delay in the payment of the Promissory Notes seems unlikely. This would improve our debt sustainability as the repayments on the Promissory Notes means that low-interest debt is being replaced by high interest debt. A transfer of the debt to another creditor is also unlikely to be hugely beneficial for the same reasons. A 30-year loan to the State to repay the Promissory Notes from something like the ESM at 1% would be a gain but that is not likely. We have been hearing for six months about technical discussions about technical things but we are no nearer knowing what is actually being proposed.

I think the best that is likely from any deal is an improvement in our funding requirements rather than a substantial improvement in debt sustainability.

One change I think might help would be the incorporation of the IBRC into the general government sector. This would mean that the interest on the Promissory Notes would not be added to the deficit from next year. This interest starts at €1.8 billion and is a significant drag on getting the deficit down to 3% of GDP by 2015. Substantial tax increases and expenditure cuts are being introduced to offset a massive interest payment that is being made to an entity that is 100% state-owned.

It is hard to know the exact impact the inclusion of the IBRC would have on the deficit. In 2011, the IBRC made an operating profit before provisions of €620 million largely because it booked €1,447 million of interest on the Promissory Notes. Is this €827 million not a better reflection of the ongoing cost of the IBRC rather than the interest cost on the Promissory Notes?

This change would mean that the entire liabilities of the IBRC would be added to the general government debt and not just those covered by the Promissory Notes. We are already on the hook for these if the IBRC’s non-Promissory Notes assets generate less than the €25 billion they are marked at. The change would add around €22 billion to the gross general government debt (bringing it over to 130% of GDP!) but as an equivalent amount of assets would also be included the net effect on the general government balance sheet would be zero.

re- anonym

(hate to resort to wikepeedja, but it saves trawling trough buckets of articles looking for pieces I remember reading. There have actually been a number of the dates of ECB/DoF contacts published, not to hand at the moment)

‘In an April 2011 interview Lenihan claimed the European Central Bank forced Ireland into taking a bailout and rejected claims by a senior ECB figure that the bank warned Ireland in mid-2010 of the dangers it faced. He has also accused members of the ECB executives of briefing against Ireland and of “betrayal”. Lenihan criticised some of the 17 governing board members of the bank for the “damaging” manner in which they had briefed some media about Ireland. He said, “On the betrayal issue, I did feel that some bank governors should not be speaking out of turn and that only the president should speak for the bank.” The position of the ECB on Ireland’s seeking of assistance was different from that of the European Commission, said Mr. Lenihan. “I don’t think the commission were anxious to bounce member states into a programme. “That was my strong impression from my discussions with Commissioner Rehn.” he said, adding that “the ECB clearly subscribed to a different view.” He gave a graphic description of his feelings when the bailout talks were concluded. “I’ve a very vivid memory of going to Brussels on the final Monday to sign the agreement and being on my own at the airport and looking at the snow gradually thawing and thinking to myself, this is terrible. No Irish minister has ever had to do this before.”[

This letter appeared in the independent last month :

‘Three years later, a public inquiry is being formulateby the Oireachtas to investigate, among other things, the reason for this particular decision.
The forensic investigation would reveal the depth and breadth of exposure by German, French and British financial institutions in bonds issued by Irish banks. The identity of these “money providers” (ie, bondholders and pension funds) of Irish banks has remained largely secretive to the present day.’

Not so secret; I don’t think this list of the bondholders has been contradicted:

@Jagdip Singh & Seamus Coffey

Methinks NAMA might place a hotel suite at your disposal for the duration – and hire that lovely data whizz on Criminal Minds as your assistant. Such a Troika might do the citizen_serfs some service … I might even persuade Seven-of_9 to pop in at times if and when she changes her mind, if ever so slightly, that the Irish Earthlings are hopeless fools.

Keep up the good work – spose a little list of upper-echelon & politico clients of Anglo_Irish and INBS on the blog might be deemed a trifle ‘sensitive’ at the mo? Next week would be grand ….

Around the time that Bertie and Brian were making the decision to backstop the banks a Civil Servant who was in the habit of drinking at Flanagan’s in Drumcondra told me that things were getting very serious. The party line as imparted to him was that if the Gov’t and banks were shut out of the bond markets his pension would either be significantly reduced or in a worst case scenario he would get nothing. Was this a ploy to get consensus by targeting a weakness in a single person or did they truly believe that economic collapse was assured if they did not backstop the banks, assume bank debt and imperil the sovereign.

Ireland is a small country noted for producing charismatic and competent politicians who serve in foreign governments. Those governments have depth and breadth in their Civil Services and Regulatory Agencies who provide sound advice and guidance to Parliament. We do not have the population to have a world calibre Civil Service. In addition we have the problems of cronyism and nepotism as well as the ould Irish lax attitude to contributions to the cause. Underlying it all is the fact we tend to vote for “fine fellas’ who will diligently work to get us the gravy that we know Kildare St. owes us.

From what I see this crisis did not trigger the will to make the fundamental changes that are long overdue. So we fumble and bumble our way into the inevitable next crisis. The blind faith people used to have in religion and the miraculous cure is now transferred to Saint Frau Doktor Angela, St. Francois, St. Carlo, St. David. We aspired to be self sufficient and self supporting people in a free country. Now we a have our hands out begging for alms. This has to stop, I for one detest this helpless and hopeless posturing. As my mother used to say get off yere useless asses and do something useful.

We are in the greatest free trade zone the world has ever known with a sound currency and we are still bollixing it.

FYI Der Spiegel International

Spain needs help, that much is clear. The country’s banks are teetering under billions of euros in bad real estate loans with experts estimating that between €75 billion and €100 billion are needed to recapitalize them.

Just what that help might look like, however, has been a matter of some debate. Europe, led by Germany, has insisted that the euro backstop funds not be allowed to provide direct funding to banks, preferring instead to deal with national governments only. Yet Spanish Prime Minister Mariano Rajoy has been reluctant to ask for such aid, wary of the conditions that come attached. A situation similar to the one in Greece, with a public outraged at deep cuts and painful reforms, is one he would like to avoid.

Now, a compromise to the standoff appears to be taking shape. According to the center-left daily Süddeutsche Zeitung on Wednesday, European leaders are currently considering a plan which foresees euro bailout money being provided to Spain’s “Fund for Orderly Bank Restructuring”, or FROB, a bank bailout fund set up in 2009. In return, Spain would pledge to restructure its financial sector, but would not be forced into extensive economic reforms and austerity measures of the kind that have been imposed on Greece.


@Mickey Hickey

Former AG and Minister and leading neo-kon ideologue in the ‘boomier’ PD/ff times today representing NAMA in court on repossessing a developer’s property ….

No conflict of .. er .. interest! Must be a pro-Bono …. ?

View from Berlin on Spain

Pressure is growing for Spain to tap into European Union bailout money to stem its banking crisis, but the country has stubbornly refused. Instead, Madrid hopes to get around bailout conditions with direct aid to its banks. German commentators on Wednesday say that the time for pride has passed.

Both German Chancellor Angela Merkel and her Finance Minister Wolfgang Schäuble agree that Spain should be forced to accept bailout money from the European Financial Stability Facility (EFSF), the temporary euro bailout fund, to inject liquidity into the country’s struggling banks. The two settled on the strategy last week. Last Wednesday, Schäuble pressured his Spanish counterpart, Luis de Guindos, to accept the emergency funding.


The Frau Doktor is now stricken with the fear that a Spanish collapse is imminent. Further the Spaniards are known to have an exaggerated sense of pride. So Angela dons the kid gloves and gives Spain the tender loving attention it needs but is too paralysed by pride to beg for.

Von Clausewitz triumphs again as Angela acts to save Germany from the EZ collapse that Spain would trigger if not rescued. Now the shoe is on the other foot.

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