Colm McCarthy expresses understandable frustration with the pace of developments in meeting the commitments made on June 29th(see here). Central to Colm’s criticism is what he sees as a fundamental inconsistency between the government’s claims of success in its crisis-resolution policies and calls for some form of official relief on banking-related debt.
Since the resort to an EU/IMF bailout in November 2010, the Government has pursued a strategy with two central components. The first is that Ireland’s debt is sustainable, since the economy is recovering and budgetary adjustment will be delivered on schedule. Ireland will re-enter the bond market and exit the programme at the end of 2013. The second is the pursuit of relief from a portion of the bank-related debt, on the grounds that it was improperly imposed.
Last week’s events should highlight once again the inconsistency of this strategy. If things are going fine, why is there any need for debt relief? The best case for debt relief (Greece was relieved of €100bn) is inability to pay.
The insistence that things are fine, that budget adjustments are on schedule, three-month Treasury bills can be sold and Ireland will exit the rescue programme next year, is a serviceable domestic political message. But it is also an open invitation to our European ‘partners’ to offer no assistance whatsoever outside the terms already agreed.
A better negotiating platform, and one with at least equal plausibility, is the following: that the debt is not sustainable and will reach 150 per cent of national income; the economy is flat and will remain so; the politics of further retrenchment are getting too difficult and debt relief is inevitable. The Government should quit behaving like the marketing arm of a debt-management agency.
Although I always hesitate to disagree with Colm, I don’t see the government’s strategy as fundamentally inconsistent. Since peaking at 15.81 percent on July 15, 2011, the yield on the benchmark 2020 bond has followed a strong downward trend to close at 4.53 percent on Friday (Bloomberg). Assuming a recovery rate of 50 percent in the event of a private-sector default, that the yield on the equivalent German bond represents the risk-free rate and risk-neutral investors, the implied probability of default peaked at 83.8 percent in July 2011 before more than halving to 39.7 percent on today.
Of course, a default probability of close to 40 percent is still very high. I think the main reason that the perception of default risk still remains so high relates to the uncertainty surrounding growth prospects. A poor outcome on growth could make the necessary fiscal adjustments to meet the conditions for official support without a private-debt restructuring politically – and possibly even economically – impossible. Adverse growth shocks will also do more damage to the ability to meet deficit- and debt-reduction targets the higher is the starting debt ratio.
Recognising the common interest in a successful return of Ireland to creditworthiness, there is a case for making adjustments to official policies that reinforces the improvements made so far. One such improvement would be to lengthen the period for paying down ELA and make continued access to that funding more reliable. By rewarding countries that meet their commitments rather than the opposite, such actions should also help to reduce official-lender concerns about moral hazard.
I worry that emphasising unsustainability under current conditions would suggest a weaker commitment to meet the conditions required for official support. Any resulting weakening of perceived creditworthiness could itself undermine growth by raising the spectre of Greek-style chaos. I believe it is better to emphasise that Ireland fully intends—and expects – to do what is necessary to avoid default, but there are certain factors that it simply can’t control. Recognising this, there is indeed a common interest in adjusting official support policies to further support a “well-performing adjustment programme.”
130 replies on “Colm McCarthy:Ireland gets its reward for being EU’s little pet poodle — nothing”
I actually think it is a pity that the bond markets did not react adversely to Merkel’s speech this week. The message that the bond yields were declining in the light of the Summit agreement, but would increase again if this did not go ahead, would be helpful.
My initial reaction to the June 29th annoucement was that it was fanciful to expect a straight write down in banking related debt on a purchase of the government’s stakes in the pillar banks at anything above fair value (see here). Nothing has changed my mind since. The real value in the annoucement may have been the signal that if Ireland needed additional support it would get it without forcing a private sector default (remember Deauville) and on favourable terms. It also might have strenthened the government’s hand in negotiations with the ECB over the PN/ELA arrangements. Probably more important to the steady decline in yields was the ECB’s annoucement of the OMT programme, which could he hugely beneficial in facilitating a robust return to creditworthiness. (Some thoughts in advance of the June summit on what I thought might be achievable here.) The non-movement in yields you point to suggests that the possibility of write offs was discounted by the markets from the start.
Although I pretend no expertise in the political arts, it has baffled me that the government has staked so much of its domestic credibility on something that seemed so unlikely. They seemed to cut a very big stick for others to beat them with. But I very much hope they prove me wrong.
I too agree with much of Colm’s common sense though he has attached himself to a couple of populist mantras like the ECB illegally stitched us up in 2010 and we should stop behaving as teacher’s pet.
Here he is making a simple strategic/tactical point. He thinks it’s better to plead “can’t pay” than “we are committed to meet our obligations”. For a government which is spending 1bn a month more than it is taking in and which relies on official support to surbive day to day, I can’t see how the former is the better tactic.
To say “we can’t” is by definition the surest way to actually not pay our debts. But that is not our current problem which is to raise further debt to fund day to day spending. You do not make raising further debt easier by threatening to walk away from past debts.
Ironically, if we ever get to the point of being self financing we can then contemplate the luxury of defaulting on our debts, but now that we are in desperate need of continuing support is not the time to be making these threats.
John, you know I like to keep on top of your math. I was surprised that current yields implied a 40% chance of a 50% default but as a mathematical exercise you appear to be correct. The same is then true of Italy and Spain. Somehow that don’t seem right. I think the key asumption of “risk neutral” is unsound. The people (banks) who buy these bonds are far from risk neutral and probably build in a heavy premium for any risk.
“The Government should long since have initiated legal action at the European Court against the ECB’s actions towards Ireland in the summer and autumn of 2010, which exceeded its statutory powers.”
Excellent article by C McCarthy.
Further the government should force the IBRC into liquidation by refusing to honour the PN, until the outcome of the ECJ action above is heard.
And telling Germany that its signature on the PN has the same status as the German signature on the June 29th summit communique. That Ireland was ‘ambushed’ by the ECB, just as Frau Merkel was ‘ambushed’ by the Italian and Spanish prime ministers on June 29th.
John Corcoran Says:
June 1st, 2012 at 5:05 pm
Firstly I would like to thank BBC radio which allowed myself and Paul Krugman to simultaneously address the people of the UK and Nothern Ireland and advocate a No vote. Unfortunately if the joint broadcast had been a day earlier I feel it might have been a swing factor.
We have thrown all our gambling chips away and betrayed our fellow european neighbours who are struggling with austerity. Raymond Crotty must have turned in his grave when the result was announced. We betrayed Raymond as well. In a country that elected the corrupt Charles Haughey and continues to vote Michael Lowry to top the poll it is of no great surprise. The most sophisticated electorate in the world–what a joke. The logic was simple if you vote No you get two votes –if you vote yes only one. Two is greater than one. Simple maths.
The train has left the station for Ireland and we have our bank debt forever tied to our throats. The oligarchs and their fellow travellors who frightened our people into buying vastly overpriced houses etc used the exact same tactics to frighten the voters into voting for a disastrous deal for Ireland. The soft landing professors and the other useful idiots did the rest. A sad day for Ireland. We betrayed ourselves and our fellow europeans.
The No people –fought the good fight–finished the course–kept the faith.
@ John McHale
You are not alone in your bafflement.
The other aspect is that the debate in Ireland – or should it be called the rolling uproar – is seemingly irrelevant in the context of the broader Europe debate. This is exemplified by this succinct summary from the Telegraph of what has happened.
Ireland is not even mentioned.
The situation now is that the subject is closed, at least for the moment, while the EU gets on with the crucial programme of work set out by the conclusions of the European Council and, notably, agreement on the multi-annual financial framework 2014-2020.
This will inevitably end up in a conflict with the UK on whether its current rebate should continue. As it has been rolled over continuously since 1984 because the UK has a veto in the matter, the likelihood must be that it will. The real political conflict will relate to the 75% reduction in the share of the cost of the rebate attributable to Germany (and the Netherlands, Austria and Sweden), the resulting substantial tab being picked up, for the most part, by France, Italy and Spain (!).
With regard to the bond markets, while the OMT announcement was obviously important, surely the explanation for the improvement is that the markets have gone back to their job i.e. of assessing risk correctly or, in other words, a return to the status quo ante the belt-tightening to meet the Maastricht Treaty criteria. The markets must be taking the view that Ireland is not as bad a risk as the purveyors of doom would like us to believe. But we have to continue to prove it by getting the budgetary arithmetic back in order and the faster the better. I would be surprised that the need to help this process along does not play a role in the outcome of the negotiations between now and Christmas e.g. in relation to the CAP and structural spending.
The last point that I would make is that it should be evident to all by now that Merkel is a consummate politician and head and shoulders above any of the opposition. She is not going to give any presents to Hollande before the new French government has demonstrated that it is taking the need for reform in France seriously. It took the last Socialist President, Mitterand, two years to do so.
@ John McHale
“Although I pretend no expertise in the political arts, it has baffled me that the government has staked so much of its domestic credibility on something that seemed so unlikely. They seemed to cut a very big stick for others to beat them with. But I very much hope they prove me wrong.”
I, too, very much hope they prove you wrong!
Unfortunately, their rhetoric throughout the 2011 general election campaign left them with little choice, once in government, than to be seen to be delivering on their core election promise to ‘renegotiate’ the debt deal. Most of the rest of what they anticipated should happen – such as a return to economic growth – hasn’t happened and appears unlikely to happen in the medium term. So the ‘debt deal’ assumes greater importance as the crowning achievement of this government, and a platform to retain power at the next geenral election, as time drags on.
The government has also failed to impress upon the public that there is a distinction between correcting the public finances and dealing with the legacy debt issue. Political dynamics and conflicting priorities within the respective parties of government give rise to difficulties in adopting a coherent approach to the former or in creating room to maneouvre as circumstances within our own economy, as well as external factors, change. The end result is a cascade of policy failures which are not lost on a public who are bearing the brunt of them. Politically, teh government feels they need a big win to restore their credibility with the electorate, and so the debt deal is ‘your only man’. As to whether those politicians whose role it is to close that deal with their coutnerparts in the EU fully comprehend what it is they are trying to do, as opposed to its political rationale back home, is another day’s work.
You think the markets have “returned to doing their job”. If you mean they are doing so in contrast to say 2000-2007 when credit risk was ignored they I think you are right. But don’t get carried away. To the extent that markets do function sporadically to accuretely discount things like the economic outlook and debt sustainability, they only do so when they are allowed to focus on these things.
Currently. economic analysis is almost peripheral to their calculations – guessing how and to what extent the central banks or creditor states are inclined to impose particular market prices is the big, near binary, game being played. The markets are officially rigged – very much like say, the Hong Kong stock exchange used to be in the eighties. In those days Western analysts would look with incredulity at the way their Eastern counterparts were obsessed not with the economics or market valuations, but at the latest rumour about what level on the Hang Seng would prompt intervention from the authorities.
I think Veronica is right about the politics. The last election was a disgrace in terms of misleading the population to think all equired was a change of personnel in cabinet and stern words to be spoken to the Germans for Irelands debt/gdp ratio to be dramatically reduced.
Not one party sort out popular support for a POTENTIAL confrontational approach – they all sold the line that Croke Park could remain in place (public sector votes: ‘Tick’), that FF just didn’t explain things to the Germans and that once that was done angela would write off legacy bank debt and see the error of her ways in asking for spending cuts, and all believed talk about global balance sheet stagnation was just those malcontents at work again.
Colm’s reference to ‘poodle’ is apt. Poodles don’t engage in the doggy equivalent of broken field rugby because they are too used to the parlour and everyone knows they are not prepared to get muddy – so they will do whatever they are told to if that’s the alternative.
@ J Mc H and Veronica: I am not in the least baffled by the politics. Its Political Science 101: Lesson 1:
“Promises are given according to motive, but are fullfilled according to circumstance”: [Igor Gouzenko: ‘Fall of a Titan’].
So I take it that “Labour’s way, not Frankfurt’s way” is not in vogue anymore?
Well it still is……. but only for the deluded!!
I’m baffled at your bafflement.
Here’s how it is: Ireland is currently surviving on a stimulus package of 18bn per year. This will run out and will then have to be paid back. It’s daft. A country living on borrowed money and borrowed time.
The govt know this. This part of austerity has actually been the easy bit. They are desperate for something positive. Can you imagine how awful it must be to be steering a train straight at a wall!
Is there a change in official policy on the sustainability of our debt? According to Namawinelake Minister Hayes is saying it is unsustainable..http://namawinelake.wordpress.com/2012/10/19/irish-junior-finance-minister-says-national-debt-is-unsustainable/
In contrast Minister Creighton recently informed her constituents that a deal on our 64b bank debt was done and dusted. This appeared in her autumn newsletter (which is missing from her web site).
Given that our debt is increasing at the rate of 1,250,000,000 per month it is simply incredible that the markets have driven down the yields to 4.5% on our 8 year. Something is amiss. We will have to wait for bank results to see if they are stuffed with bonds and perhaps this is one reason they won’t lend to anyone as the Regulator has admitted.
Maybe Enda and Michael should look to Greece for a few lessons on negotiation with the Troika.
10 posts in and the merkel nein is being blamed on the Irish public sector. Wow…that’s got to be a record. Is there anything they have not been responsible for, Grumpy?
Amazing the power of them. The Protocols of the Elders of Croke Park must be your favourite book.
“Since peaking at 15.81 percent on July 15, 2011, the yield on the benchmark 2020 bond has followed a strong downward trend to close at 4.53 percent on Friday”
In a cituation where we have a near static supply and a near infinite demand (that nice Mr Draghi) the price of an asset rises. No surprise there to anyone. That was the plan.
Unfortunately, the situation is that this solves a liquidity problem if and only if sovs can refinance in the markets at this rate. ITIR that the maturity weighted interest rate for our debt is not too dissimilar to that. So we would need to see much much lower rates , and a willingness from non official sources to absorb tranches of tens of billions before the Draghi plan made much difference even on liquidity. And that of course ignores the fact that fiddling with liquidity may not make much difference to solvency if we cant use the liquidity fall to kick that can down that road.
“One such improvement would be to lengthen the period for paying down ELA and make continued access to that funding more reliable. By rewarding countries that meet their commitments rather than the opposite, such actions should also help to reduce official-lender concerns about moral hazard.”
Liquidity. We need to sort the amount not the cost. Dr Honohan stated the second sentence 3 ½ years ago on this blog. We await action to do that. Here is a q : have the IFAC done sustainability analysis on the effect of scrapping the wretched prom notes? Will they? Have they got input from ECB and ratings agencies on the effect of lopping 30b off the debt?
“I worry that emphasising unsustainability under current conditions would suggest a weaker commitment to meet the conditions required for official support.”
Colm has seen more recessions than we. Im not personally convinced that this debt is unsustainable but he seems to be coming round that way. I think we can only say what our analyses tell us, without fear or favour.
oh, i forgot
Ceterum censeo IBRC delendam esse
Low government bond yields are a necessary, but not sufficient condition for recovery.
The aim of government policy should not be re-entry to the bond markets but a return to growth and a substantial reduction in unemployment. None of this will be possible with the current debt burden. There is no example anywhere or anytime of a state in a fixed currency regime having made a successful return to growth with a private and public debt burden as large as Ireland’s. Under the current circumstances nominal growth will not exceed 2% for at least another decade.
Draghi’s well-intentioned OMT will most likely prevent the failure of any EU soveriegn debt markets for a long time, at least until the accumulation of government bonds gets so large that it becomes politicially unacceptable. Ironically, this will prove to be bad news for Ireland because there is no incentive at EU level to ensure we return to growth.
There are only two ways the current depression will end in Ireland:
1. Greece exits the Eurozone and the EU sets up a firewall around the remaining nations that includes the restructuring of sovereign debt and a recap of banks on a grand scale.
2. Ireland leaves the Euro. The US, EU and ECB may step in at the last minute and cajole us to stay and they may not, but that is sort of irrelevant. Either way we would write off the promissory notes thereby reducing the sovereign debt burden by 20%. Leaving the Euro would enable the inflating away of household debt and return of strong nominal growth. This is the only tried and tested way out of financial and debt crisis of this scale.
Unfortunately, the government, armed with their apologists such as yourself, will accept whatever is given to them by the EU. We will continue to roll-over our debt and the state will become a vehicle for servicing debt. The young will emigrate and our towns and cities will be gutted. But politicians and public servants, including economics professors, will retire with their oversized, Euro denominated pensions, so it won’t all be bad.
Ok GTFaway, can you explain to us how the Irish state could have kept Croke Park in place while not having access to the Troika’s credit line?
If you can’t, then how can you possibly imagine that the public commitments by all significant Irish politicians to keep CP in place did not undermine any potential threat Ireland might have made to do anything the official funders might not like – say burning senior bank bonds?
If you want to threaten to play rough you have to credibly be able to convince your adversaries you have public support to go to a primary balance pronto if necessary. Croke Park remders that impossible.
Its just logic.
Clearly they couldnt. No more than they could have paid for the lawyers yachts and the lavish bailing out of unguaranteed unsecured bondholders.
here is my question, which i ask of all (and the asking of which has had me declared an inveterate supporter of all things socialist) : what do you mean by ditching CP? And, as a follow up, how do you convince/placate teh 300k citizens?
All I want is for people to think it through. I suspect you can.
Meanwhile, back in bond land…
oh, i forgot again
Ceterum censeo IBRC delendam esse
Indeed; I’ve been saying it for a while. We haven’t reached Greek, or Spanish, or even Italian levels of economic desperation, yet at least – but you only have to look at Italy, Spain or Greece today to realise that if those kinds of hard times do come here, it’s not assured that something will have to happen and we’ll be all right. The Greek example shows that even a sovereign default may not be enough to get us out of the mantrap. Ah, sure it couldn’t happen here? Do tell.
But one always has to remember the conflicts of interest inside this country. Who cares if the Irish economy never recovers, as long as the dole stays high, Croker remains in place, the official creditors get their payments, business as usual continues for the multinationals, and private-sector pensions remain denominated in Euro and protected from the consequences of an Irish bank failure? Well, the people who care care, but they (mercifully) can emigrate. The only problem is that there are so many different groups on the escape balloon this time, and as it continues to lose gas some of them will have to be shown over the side to keep it afloat. The spectacle of the next few years may be watching to see in what order the passengers leave the balloon. But, again as in the Greek case, don’t expect a quick change in the political consensus after a few people fall out.
Its a question of having your guys turn up at the negotiating table with the words:
“Anything shirty we say is 100% guaranteed bluff!”
tattooed on their foreheads…or not.
The possibility (credible, that is) of Ireland being willing (and that means national public opinion) to go down the “sub-optimal” route of going to primary balance pronto if necessary would have been a powerful negotiating tool.
Sometimes nations make choices that cool calculation suggests are sub-optimal ones, but that is because of human nature in response to provocation – its a good job cold calculation didn’t win the day in Downing St in 1940 for example.
The only way of getting public support would have been for politicians to have perhaps been more receptive to alternative advice containing a bit more foresight, perhaps been more honest with themselves (and certainly the public), and to have sort out national solidarity in response to an external threat.
Brian Lucey suggests that the fall in bond yields is down to ECB intervention. Whilst undoubtedly a factor it is misleading to suggest that the only or even the main buyer at these levels is the ECB. There is a genuine market – how else is there a difference between Spain, Italy and Ireland if the ECB was in effect setting the prices?
And of course the prof in stating that the ECB’s capacity is infinite. It has specifically stated that its intervention will be sterilised and so is limited by the market not the printing presses, which are indeed infinite.
Yom Trinity knesset kippur inri (Hebrew)
At this point in time we remain the exemplar of the ‘conflationist fallacy’.
Debunk it or we are done.
“is wrong” missing from previous post and of course
Yom Trinity knesset kippur inri
It looks like we’re now a ‘Special Case’.
Apparently it was all a misunderstanding..
Kenny and Merkel: the statement in full
“The Taoiseach Enda Kenny and Chancellor Angela Merkel spoke together this afternoon.
They discussed the unique circumstances behind Ireland’s banking and sovereign debt crisis, and Ireland’s plans for a full return to the markets. In this regard they reaffirmed the commitment from June 29th to task the Eurogroup to examine the situation of the Irish financial sector with a view to further improving the sustainability of the well performing adjustment programme.
They recognise in this context, that Ireland is a special case, and that the Eurogroup will take that into account.”
Doesn’t change much…with a view to further improving the sustainability…
You have nailed it! And the contradiction imagined by CMc exists only to the extent that many have contributed to egging on the government to pursue this will-o-the-wisp. But those responsible for setting it as a target in the first place – and still credulous enough to think that the electorate have not twigged long ago (as confirmed in the IT MRBI poll) – carry the biggest responsibility; and deservedly the opprobrium.
Events at a European level as of today will force a change in media coverage. Assuming the “serious” press have some semblance of wit. A big ask, as the youth of today say.
There is a chart showing the bond spreads between the peripherals and Germany from about 1997 onwards which could be described as “the history of the euro crisis in one chart”. I cannot lay my hands on it. Maybe some of the more expert contributors could oblige!
@ Brian Woods II
The “winning post” has disappeared again in the fog. A few of us realised that it was never there. How are we to make sense of seismic shifts and winning posts becoming visible when we have not even begun to address our problems on the domestic front.
It changes a lot! It detaches Ireland from the the intended targets of Merkel’s comments.
And once again illustrates the canniness of Merkel. But it is to be hoped that it will not be presented as a “seismic shift” or a “game changer”. The bear’s skin has been sold too many times already.
I’m not so sure that detaching Ireland from the other problem pupils will do us much good. The wording doesn’t suggest any seismic change in the german stance…there will be no retroactive bank debt deals.
Unless of course Angela now accepts Colm’s view that we were bounced into debt by the actions of that dastardly Frenchman.
Enda must have taken fright at the lousy coverage he got this past few days. Enough to disturb Angela’s Sunday brunch.
It also, incidentally, shows up the lack of any thought through Irish policy position. Does this statement now trump the “legal position” as set out in the 29 June conclusions, supposedly adopted by 27 countries of the EU?
“The Eurogroup will examine the situation of the Irish financial sector with
the view of further improving the sustainability of the well-performing adjustment ” programme. Similar cases will be treated equally.”
Luckily not! Protocol No. 14 to the TFEU (Article 1) states that “The Ministers of the Member States whose currency is the euro shall meet informally”.
Do you mean this one 🙂
November 14th, 2011 at 12:33 pm
Here is a link to a graph via the FT which every EZ politician should be forced to hang on their office wall. It is ‘required reading’ for those who want to, or think they do, understand what has gone on in Europe over the last fifteen years.
some lite reading …
Sunday, October 21, 2012
Neoliberalism Kills: Part One
By letsgetitdone (Joe Firestone, who is Managing Director and CEO of the Knowledge Management Consortium International (KMCI). Originally published at Corrente.
Lambert here: I’ve commissioned Part Two from Joe, which will address the issue of how to spot a neo-liberal “in the wild.” Beautiful plumage!
It will! The Spanish would hardly deign to maintain that their case was similar to that of Ireland.
The general point is that there is, in fact, recognition that the burden of banking debt for Ireland is unreasonable. The trick for Berlin has to be how to to do something about it without triggering a cascade of similar requests.
It is time that some of the more trenchant contributors to the debate gave a little more thought to the subtleties of the situation.
This is the bit to focus on:
“They recognise in this context, that Ireland is a special case, and that the Eurogroup will take that into account.”
There are tensions around “equivalence” here, and I’d be interested to know if anyone thinks this goes beyond discussions about the potential for Promissory Note NPV alterations to being off the table?
That’s it! Except, of course, for the fact that it does not show the dramatic improvement in Ireland’s position relative to the other peripherals in recent months; bringing us back to where we were twenty years ago. What an achievement for FF!
On your most recent post; don’t look a gift horse in the mouth! By any measure, the statement is a major negotiating achievement.
Law mediates the relationships between the systems of Money, Power, and Lifeworlds. I agree that it is time for Citizen Joe and Joan of the Hibernian Lifeworld to lodge relevant and substantive document with the Highest Court of Justice extant in Europe.
What do we want?
Bank debt relief.
When do we want want it?
Er, in due course. If that’s alright.
“The Eurogroup will examine the situation of the Irish financial sector with
the view of further improving the sustainability of the well-performing adjustment ” programme. Similar cases will be treated equally.”
So now that we are a “special case” as distinct from “similar cases” does that mean we will get preferential treatment for saving the euro?
As for Spain..I believe its problems are remarkably similar to ours except for the fact that they are still refusing to recognize the extent of the property bust.
If we have 160000 mortgages in arrears and another 50000 restructured what are the likely numbers in Spain with their 25% unemployment.
If you are asking me what the other members of the Eurogroup will make of this bilateral statement, effectively re-writing the 29 June statement, I have not the vaguest idea.
As to Ireland’s role in “saving the euro”, please spare me! The main players must be regretting letting Ireland join it in the first place.
I can think of a lot of words to describe the gyrations of the Irish body politic over the past couple of days and edifying is not one of them.
Do you hear that Colm McCarthy? Our very own Tokyo Rose is warning you about the dangers of sounding off. For Gods sake man we could endanger our membership of the Greater North European Co-Prosperity Zone!
This could not be more wrong. What little progress this statement represents is due to Enda (possibly under pressure from his justifiably terrified of political oblivion Labour junior partners) mouthing off in public about Merkel’s statement about the non-retroactive character of bank funding meaning some other think than it clearly did. They made it a public fight.
This tiny victory (and like the earlier promise of banking debt relief it may disappear) is the result of confrontation, and Ireland’s approach to the EU will need to be based on confrontation until it emerges from the shadow of Merkelism.
As an aside, this is the first time I have read “trenchant” being used in a prerogative sense. Unsurprising but still unsettling.
Thanks to the wonders of modern technology my sentence was auto-failured.
I suspect today’s press coverage’s effect on political activity is straight out of ‘The Thick of It’.
I am fascinated by the thought of how the “medja” will play it tomorrow given all the hostages to fortune given today.
How the markets wil treat it is another matter. With one big yawn, I suspect.
Roll on the budget!
They’ll write what they’re paid to.
And lo and behold, the Irish Times already has a beaming editorial. And it seems they pulled all their commentary and opinion pieces on Merkel’s Friday comments just in time for them not to sully this momentous and celebrated new development.
Why am I not surprised?
Sorry for being a party pooper but the bottom line from Derek scally et al
In the IT…
“German officials insist the June declaration, while vowing to look at improving Ireland’s EU-ECB-IMF programme sustainability, carries no obligation or deadline for action, and no link to an EU banking regulator or bank recapitalisations.”
That says it all.
Your link pretty much nails it on the head. NAMA is and always has been a joke, as it is an artificial market, rigged to keep people down. Rather than empowering Irish people to benefit from cheap homes and repay our debt with homes as collateral, the government decided that the homes whould become the property of the IMF and ECB, and ..the the Irish people still have to repay the debt – incredible!!
Following Sunday’s Merkel-Kenny statement, the situation appears to be back to what should have been presented after the June 29/30 summit.
There would be negotiation on reducing Ireland’s bank related public debt burden in the short to medium term.
The summit ended at 4:30 am on June 30. There had been no agreement on details or what debt would be covered. Countries such as Belgium would for example be entitled to draw on the ESM fund if it was explicit that legacy bank-related public debt was covered.
Kenny called the move “a seismic shift’; Gilmore called it a “major game changer.”
Clever politicians would try to downplay expectations but Irish ones seem to be particularly addicted to spin and it of course can boomerang.
Those who expected the full €64bn in bank support, including cash from the pensions reserve fund, as a refund from the ESM, were as naive as those cargo cultist folk in the South Pacific. Commissioner Olli Rehn may not have been so far ‘at sea’ as true believers but his statements since the summit confirm his position as a powerless bureaucrat.
At official level, there is a desire to spin headline economic data while at the same time plead for help to ease the debt burden.
We are after all experiencing an export boom — merchandise exports were up 16% in the month of August and 18% in 12 months. Minister Bruton said the “record figures show that Irish exporters are performing extraordinarily well in a tough environment.”
Maybe — on the other hand, production for manufacturing industries for August 2012 was 0.7% lower than in July 2012. On an annual basis production for August 2012 increased by 0.2% when compared with August 2011.
European bond yields 1992-2002 (second chart)
@ brian lucey (@brianmlucey)
I guess that it would be harder to placate an organised group with a grip of the public megaphone than the tens of thousands of anonymous victims of this brutal recession.
The lawyers even lobbied the IMF to keep their Victorian system intact.
Note how that specie known as the “rural TD” is much more identified with the wish lists of the IFA and vintner groups than desperate urban dwellers they represent; note how a charge for septic tank inspection to ensure safe water became a cause célèbre while the 30% increase in average farm income in 2011 was an unmentionable. Public welfare comprised 73% of average family farm income in 2011 – – a reduction from 97% in 2010.
A government in these times should show leadership, not surrender to powerful vested interests.
There are at least 2 resident representatives of the Troika in Dublin, who follow the day-to-day carry on and we must assume that behind the public pats of approval for sticking with the bailout terms, their superiors are kept informed of the murkier reality.
Having waded through the “meedja” this morning, herewith the piece that everyone needs to read. The rest can be thrown in the bin.
With the exception, perhaps, of the closing paragraphs in the Indo front-page article.
A German mep on the wireless cast doubt again. Saying that special means we have tried really hard. Those pats on the head must be irritating even to inda now.
When you were here before
Couldn’t look you in the eye
You’re just like Angela
Your economic nihilism makes me cry
You float like a feather
In a Manichean world
I wish I was special
“Show me the money”
The quality of mercy is not strained.
I suspect we will get a write down equating to about 5bn or a conversion of the PNs to some kind of bond before Decembers budget (nick of time kinda stuff).
But it will be too little too late. The damage has been done.
As DOCM hints we are becoming an irritation. Nobody really respects an ass.
I have had enough though of our leader traipsing around Europe with a begging bowl. 800 years we waited for their help – we even kept their religion in the vain hope they’d assist us. Our grandiosity and stupidity prevents us from seeing that we a rainy little island of 4.5 million people who has only managed 10 years of economic prosperity in the past 500 years and that was on the back of German credit. It’s time to call en economic emergency
This graph on US sov debt is very informative
Any chance of something similar for the Irish case ? It would be interesting to see how negligible the bank debt is, per DOCM.
Right on cue on the front page of the FT; the inevitable budget row with the UK.
Merkel clearly intends to get her retaliation in first.
Why Seafoid, the real problem is not how the European public has been forced to pay for the crisis in the financial sector (each nation’s public in inverse proportion to its influence in the EU), but that Ireland’s neoliberalism is insufficiently doctrinaire – the dogs in the boardroom know it. There is not one ECB stooge who would say otherwise.
I must put together the numbers for Frankfurt Rose’s recent contributions but he has been especially engaged in muddying the debate recently. There must still be hope – I wonder if Enda has been forced to make noises about not being able to support IBRC any more? As Brian Lucey says, its one sure way to cut the national debt and remind people of where the problem really lies.
And then if they get the multiplier wrong and the amount of money stuffed into the banks is insufficient and there’s another bailout – presumably that’s also going to be negligible.
@ Colm McCarthy
“Last week’s events should highlight once again the inconsistency of this strategy. If things are going fine, why is there any need for debt relief? The best case for debt relief (Greece was relieved of €100bn) is inability to pay.”
Actually in Irelands case I think the injustice of the bank debt being forced on the Sovergin is a stronger arguement. Even if we could afford to pay we shouldnt have too.
“The Government, uniquely, was bounced by Jean Claude Trichet’s ECB into paying off unsecured and unguaranteed bondholders in bust banks which had already been closed down. Most of the Irish public debt represents accumulated budget deficits — true sovereign borrowing. The extra pseudo-debt contracted under duress is the bit that has pushed the sovereign into the red zone of potential default.”
@ John Mchale
“I worry that emphasising unsustainability under current conditions would suggest a weaker commitment to meet the conditions required for official support. Any resulting weakening of perceived creditworthiness could itself undermine growth by raising the spectre of Greek-style chaos. I believe it is better to emphasise that Ireland fully intends—and expects – to do what is necessary to avoid default, but there are certain factors that it simply can’t control.”
John I said it to you a couple of years ago and Ill say it again.
That is a dead Parrot!
I think the only people who believed that we could avoid default on the site were Seamus Coffee John the Optimist and yourself.
I think Seamus’s position has softened as when I asked recently he said that he thought europe would do what was nessesary in order that we did not have to default. He can correct me if i am wrong but I presume he is talking about some kind of relief or restructuring from Europe.
Are you still of the mind that we can to get out of this ourselves without any help?
I know from reading the transcript of your meeting with the finance commette that you are aware of the ballooning off balance sheet items that are forming part of our debt. (they were the reason you gave for asking for bigger cuts) Never the less we still have to pay the interest on the off balance sheet payments as it falls due.
Even without taking these accountancy tricks into account the deficit is closing extreemely slowly. When you add them in it shows just how unsustainable our position is. You know this.
Why do you continue to persue a policy that is clearly failing and causing huge social problems?
@Brian Woods, excellent quote, dashed up to the UL library to get the book, thanks for the reference.
@ Michael Hennigan and Brian Lucey
“I guess that it would be harder to placate an organised group with a grip of the public megaphone than the tens of thousands of anonymous victims of this brutal recession”
I agree totally with the mood and tone of the above statement.
I have been doing some analysis and i think I might be able to identify many the tens of thousands of annonymous victims.
Using data from a recently published (September 27th) CSO paper on population.
In 2008 there were 781k people in their 20’s living in Ireland. In 2012 the figure was 618k. The general population actually increased in this time. They are leaving in their droves.
Recently 2 sociologists wrote a task report for Task
‘The untold story of the recession, gender equality and inequality’
They did excellent work in compiling the Data from the CSO and proceeded to almost ignore the obvious findings.
The untold story was not is gender discrimination it was age discrimination.
in 2007 the % of 20-24 employed was 67% for females and 74 % for males. In 2011 it was 48% and 47% respectively. an average decrease of about 32% the decrease for 15-19 yearolds was was over 50% down
The general population was down about 10% One group faired unusually well. People over 55. their employment remained flat, (women actually went up significantly)
A recent Study on hunger by the department of social also had some alarming results that it too seemed to ignore. The HRP (High risk of poverty) rate for 18-30 year olds was 18%
For people over 60 it was 5% Young people are over 3 times more likely to be suffering than those 60+.
This is a dramatic turn around on a very short period of time and is a result of sustained government policy against younger people. Their social welfare rates have been slashed.
Ireland seems almost unique in its capacity for self interest, to the extent that she is ever willing to sacrifice her own children in order to protect the middle aged.
Labour in the UK stood up to unions and insisted on pay freezes rather than job losses. Compare that with how labour and the unions reacted in this country. No new employment for young new entrants. Continuation of incriments and generous unafordable pensions (considering they rely on contributions from younger people they are currently kicking out of the country) for those who retire.
If wanting to uderstand the reason for Irelands periodic return to emmigration we have to start looking at these policies.
It seems very clear that young people have been thrown off the circling wagons yet again and in a very calculated way. It sounds too disgusting to be true, but the latest CSO results are conclusive.
Theirs is the untold story of the recession.
I respect your opinion, but don’t share it. With bond yields at 4.5 percent — while still too high — it hardly seems mad to think we could get through this without default. However, I am not saying we don’t need help given that the path is still treacherous. While we might think the moral argument for additional help is strong, I don’t think it cuts any ice in Germany etc. But they do have a (selfish) interest in an Irish success. I see the best way to get that help is to show full commitment to doing what is necessary to restore our creditworthiness, but stress the challenges and uncertainties. This would go with grain of the Merkel position as reiterated last night.
@ Brian L.
I see the fall in yields at the 8 year maturity as reflecting a real reduction in perceived default risk. The yield reflects the perceived default risk of the marginal buyer — and the ECB is not buying at the moment. If we can robustly lower the perception of default risk I wouldn’t worry too much about buyers — we are small and there is a very big international bond market. (Some earlier thoughts here.)
As to modelling the effect of debt reduction on yields, we have looked at the relevant literature but have not done any modelling of our own. Most of these stuides use linear models using, say, the stock of debt and current deficit as explanatory variables. I don’t think these type of models would be much help at the moment, given the importance of such variables as the perceived reliability of future conditional support with imposing a private-sector restructuring. For example, there has been little change in these fiscal variables as the yield fell from over 15 percent to under 5.
The last bit you quote was aimed at the government not at Colm.
Heres the thing – if we walked away from the ProNotes, there would of course be a gain. but there might also be losses, if for instance the ratings agencies didnt buy the argument that there was clear blue water tween that and the real debt. Thats what im wondering.
On the last bit – yes, i got that. Alas the govt (perm) dont….
As long as we focus on the fundamentals (access to bond markets, supply side “reforms”, punishing those greedy nurses, and various other confidence fairy summoning rituals) the causes of this current crisis can be ignored until they have recovered all their money and have complete control of our national finances.
We can hope that Colm McCarthy’s slow but certain conversion to being a member of the reality based community and Enda and Gilmore’s attempt to embarrass Merkel into acknowledging her part in the crisis (doomed though it may be) signals the realization in official Ireland that the path of the Fiscal Compact, the almighty ECB and a German Europe is not one that Ireland can
How exactly we extricate ourselves from the toxic mess of EMU with German sado-monetarist characteristics is another matter but a good start would be announcing that IBRC can no longer be supported and see how that concentrates minds.
You say walk away form the PNs. That is a nice way of saying let’s default on the ELA. For a country with a bond yield of 4.5 percent, relatively high public sector wages and a total tax take of around 35 percent of GDP, how do think the ECB would react to being defaulted on? It is hard to see an scenario that would have us staying in the euro. Maybe that is what you have in mind?
You write above
“With bond yields at 4.5 percent — while still too high — it hardly seems mad to think we could get through this without default.”
What do you mean by “get through this”? Do you mean a return to growth and a reduction in unemployment? If so, then it is completely mad to think we can both without some form of restructuring that delivers a 25 or 30 bn reduction in government debt (not even mentioning household debt).
Can you please outline, perhaps with reference to historical example, how it might be possible to return to growth under such a massive public and private debt burden?
Ahem..what about average rent/mortgage repayments + utilities + food costs for the average person not on welfare (I.e no rent subsidy or other)
Add that to the tax take and see what you end up with.
A lot of people want to take money from people but seem nice about it by not mentioning welfare reform. Doesn’t work like that.
Also why is it hard to grasp that debt burden has an inflationary pressure on an economy.
Forget about what the
Market has done for the moment. Pretend you were a really disciplined fundamental analyst fully expecting Market prices to get things way wrong from time to time. Would you think likelihood of an eventual default absent intervention via pro note restructuring or yield suppression by the ECB is higher, the same, or lower now than it was 12 months ago?
I wonder how solid the foundation of a 4.5% bond yield is. Risk is on again but for how long ?
When or if the day of reckoning comes, and the Minister is no longer able to cope with his ‘budget arithmetic’, should Ireland;
A) default on the PN/ ELA, issued under duress from the ECB to protect the investors in a failed private bank from losing their investment.
B) Default on its sovereign bondholders (including An Post savers) that the State issued, willingly and without any duress.
I also note that in the discussion above, no rebuttal has been offered on C McCarthy’s suggestion that Ireland take a case against the ECB to the ECJ.
What is the reason that Ireland should not take such a case?
Is it that the ECB might make good its threat to implode the banking system and the country?
Yes, I say esactly that. Walk from the ELA. I have said that for yoinks. And I have yet to see a mechanism whereby in doing so FOR IBRC ONLY and making it clear that in doing so we are cutting this off to save the sov debt, the ECB can force us out of the euro.
How, exactly can they do that? A default on them would result in them having 30b more in circulation than they wanted. Gee….
Would they for example stop taking irish govt debt at the repo? Would they force the other banks to stop repoing? I freely admit that I dont know but heres the thing – all I ever get is “oooohhh, thatd be fierce bad altogeher, sure theyd…..theyd…theyd cut us off, and….and…and theyd throw us out of the euro”. How? What is the mechanisim?
More pertinently, what would it benefit them? Say we did, and they did. Think the euro would survive to lunchtime? Maybe secretly the ECB is a suicide cult, but I somehow think not
So – how and why…..
You guys are piling it on!
I am under no illusions about the weight that large debt places on the economy — even without the exaggerations identified by Seamus C. However, Ireland does have the advantage of a dynamic export sector. A stabilsation of domestic demand — probably still some way off — would allow a return to reasonable growth. While many households are hugely squeezed, this does not apply to all, with high levels of precautionary savings contributing to the demand problem.
Attempting to stay the course with a phased adjustment, supported by official lenders and avoiding what is likely to be costly default is certainly not an easy course and is by no means guaranteed to succeed. But it has to be compared with the alternative. It is worth noting that writing off 25 to 30 billion in debt would save perhaps 1.5 billion euro in interest costs per year.
Putting official lenders aside, lacking their own central banks, it is hard to see countries with large debts/deficits and weak/uncertain growth prospects as being creditworthy. The developments of broader euro zone support policies are thus central. I think the main reason that yields have come down is that Ireland has shown it can meet the conditions and official lenders have stepped back from threatening to force default on private debt holders (in case of the need of an extended programme) for countries with “well-performing programmes”. Official lender policy is core to the fundamentals and will be for the forseeable future — even if only as a backup. While markets do of course get it wrong, I would guess that those buying Irish bonds know exactly the punt they are taking, and are watching domestic and European-level developments very closely.
“Attempting to stay the course with a phased adjustment, supported by official lenders and avoiding what is likely to be costly default is certainly not an easy course and is by no means guaranteed to succeed.”
ah, very Lear
“But I am bound upon a wheel of fire, / That mine own tears do scald like molten lead”
You are more of a gambler than I am. As to why the ECB might act harshly, I don’t have to tell you they take their “moral hazard” concerns very seriously — and would probably be willing to pay a big short term price to punish the transgressor. Under present circumstances, a default by a low tax–high spending–almost creditworthy country is likely, in my view, to be a step too far. Based on their risk framework, I doubt if they would have much trouble cutting off Irish banks. But who knows? Back to work.
“While many households are hugely squeezed, ….”
Many people would see this as a really big problem.
“this does not apply to all, with high levels of precautionary savings contributing to the demand problem.”
A lot of people would call this inequality.
How much more do you keep “squeezing” those households? When the savers stop saving what happens to the banks? Will they need more money?
Take a step back and look at this. Everything is interlinked and weighed down by debt. It’s frustrating that you are separating the economy from the plight of “the many households” which are being greatly squeezed. Those households are the economy
how though John? they havent cut off the greeks. This is political economy – we need to have a story that is clear and clean. And shrugging and going “yerrah, shure, well have to puck on lads” aint it.
I still dont buy that they would risk the collapse of the euro for IBRC. I suspect nobody does.
I think this type of thinking needs to be impressed on the DoF relentlessly until it penetrates.
In fact, I would go one further:
If the Irish government were to announce at the first EU summit in 2013 that it is going to unilaterally default on the P-notes do we seriously believe the ECB would torpedo the Irish banks and risk the demise of the Euro a few months in advance of a German election?
Not a chance.
In your reply to Grumpy you say that markets do get it wrong and I would suggest that they are doing so now. The 4.5% 8yr yield appear to have an inbuilt expectation of debt relief on so called legacy debt and ignores the 1.25b a month increase in overall government debt. Absence such relief the pile is getting higher (106% debt/ GDP reported today) and the current market rates may not reflect the reality…relatively small bond market, a few players with relatively high exposure (Wilbur/ Templeton) and a state controlled banking sector and insurance sector.
Here is a good analysis of where we (eurozoners
Are at now.
Refreshing to read articles without spin.
Does anyone know if it has to be the Irish government that takes the ECB to the ECJ (per C McC’s suggestion) or can any concerned citizen/underemployed barrister start the ball rolling? Since our European partners are acutely aware that our government are incompetent negotiators, maybe there needs to be a new player introduced to the game that is perceived to be crazy enough to put the cash machines at risk.
That’s a legal campaign I’d contribute to.
I have no idea if there is any kind of a case there at all but would love to read the reaction of the German press.
German news agency DPA: German government spokesperson Steffen Seibert has said Ireland won’t enjoy exceptions to the European Stability Mechanism procedure, but said special circumstances are taken into account.
He added Ireland does not enjoy “special status” in the support of its banks.
Bloomberg were carrying a story earlier which said that Ruadhri Quinn said we had a noose around our neck which would choke us if we didn’t get debt relief.
Curiously, this quote has disappeared from the story.
I rang one of his people and asked if I could quote him on that 🙂
He said it was a Fianna Fail noose!
“Putting official lenders aside, lacking their own central banks, it is hard to see countries with large debts/deficits and weak/uncertain growth prospects as being creditworthy. The developments of broader euro zone support policies are thus central.”
Yes, but that’s not what I asked you. I’m focussing on the underlying economic fundamentals.
“Official lender policy is core to the fundamentals and will be for the forseeable future — even if only as a backup.”
Maybe we understand the meaning of the word ‘fundamentals’ differently here. It (official lender policy) clearly is core to decision making about investment in Irish gilts but that I think is more of a technical ‘wall of money’ aspect. Its a bit like concluding that the fundamentals of AIG, Quinn Insurance or Anglo Irish Bank could be judged OK because bailouts would likely be forthcoming.
“I would guess that those buying Irish bonds know exactly the punt they are taking, and are watching domestic and European-level developments very closely”
Of course quite a few do, but quite a few don’t. Don’t forget that Ireland is a tiddler in international portfolio management terms. Many people don’t have the time or familiarity to follow Ireland the way many contributors to this blog do. Depending on the mandates, fund managers can focus on bigger fish and just buy an index weighted or benchmark neutral position in Ireland on the basis that’s not where their expertise lies. Some can like what they hear about the place without digging too deeply and buy a slightly overweight position – but because it is small it is more of a punt on the margin of the fund. There are also funds that will buy on the back of things like “technical analysis” or “momentum strategies” and the guys running the funds may know nothing at all about Ireland.
Ireland had hedgies shorting and long-only selling that overshot. That has reversed. I’m not suggesting that’s all there is to it, but I think that has been a big influence on the gyrations and I think you can over-analyse market moves. A year or so ago even BBC News 24 and Twitter were thick with the latest 2 decimal point implied proty of default for Ireland. Utter claptrap.
Now, nobody is remotely interested…..
… special …
Parallel Universes in Paris and Berlin
Is the Franco-German Axis Kaput?
By SPIEGEL Staff
The most recent European Union summit exposed deep differences between German Chancellor Angela Merkel and French President François Hollande. Berlin wants Brussels to be bestowed with greater power over national budgets and Paris is calling for an end to austerity. The dispute threatens to intensify the euro crisis.
Well the good news is that we are not a PIIG anymore…we are classified by Bloomberg as a SPEC.
Thanks for link. A good article. The conclusions are a bit scary…
“If an amendment to the treaties is to be discussed at all, it will have to include the so-called communitization of debt, says Hollande, in reply to German thoughts on the issue. But this would be “out of the question” as long as “there are individual national budgets,” the chancellor said after the summit.
The fronts are hardened, and time is running out. Under the agreement reached by the European leaders, the EU reforms should be approved by December, if possible.
Much is at stake. If the quarreling partners don’t find a convincing solution, the euro crisis could intensify even further, with unforeseeable consequences for all of Europe. The fear of a crash is the one sentiment Paris and Berlin still share wholeheartedly, and it’s what Europeans are relying on.
“Germany and France will come to terms in the end,” says a senior EU official, “as they must.”
As the saying goes…it ain’t over till the robust lady sings..
@ Brian Lucey
Yes indeed, you have for yoinks been saying walk away from the PNs and you have suckered Peter Mathews into that line as well. Karl, I am not so sure of, but he too talks of simply cancelling CB money, no harm at all.
Let’s get real here. If we unilaterally defaulted on those PNs we would immediately be recognised as the pariah of the EZ nay of the EU. Of course, the ECB and the rest of the EZ are not going to do anything rash which will backfire on them, so maybe no, we would not be thrown out of Euro just yet.
Here are a few consequences which would undoubtedly follow.
1) Our market yields would sky-rocket
2) Absolutely no chance of Program 2
3) Forced budget balance in 2014 (maybe that’s what you promote)
4) End of preferential CT rate
5) Zero negotiating power on CAP etc.
6) MNCs pack up and go
This is not a gamble. This is Russian Roulette with a full chamber!
That is simply rubbish.
The PN have nothing to do with sovereign bondholders, so our bond yields would actually go down due to the decreased debt burden.
There is absolultey no relationship between our CT rate and the P notes. CAP will be determined by the French anyway. Even if you thought we had some influence over the CAP, do you think this is worth 20% of GDP? And the idea that the MNCs will pack up and go because the soveriegn has less debt is laughable.
If anything, ditching the PNs will result in improved creditworthiness and will mean a quicker return to the bond markets, so it will make Programme 2 less likely. In any case a second programme is not desirable as that is the one thing that could really threaten our CT rate.
Yours is the kind of non-argument that Brian Lucey was referring to above. I’ve come to realise recently that your kind of “logic” is precisely what is wrong with much of what passes for debate in Ireland.
Extract from The Fitzpatrick Tapes by Tom Lyons and Brian Carey;
Chapter 7 “Massacre”
“Our exposure is not to the building it’s to the money that comes from leasing of it. If the value of the property goes down it dosn’t matter we still get our loan repaid”
” Our exposure is not to the building it’s to the money that comes from the leasing of It. If the value of the property goes down it dosn’t matter we still get our loan repaid”Fitzpatrick was nothing if not consistent in this, one of his core philosophies.
If you examine Fitpatrick’s core philosophy, if the property was worth zero ,it didn’t matter because he was lending against the leases, not the properties. Ruinous Irish commercial lease law i.e. upward-only rent reviews tied to long leases say 25/35 years with no break clauses, were only available in Ireland. No other eurozone country or any other country in the world allowed this ruinous lease law. This is the real Anglo Republic story.
Simon Carswell refers to it slightly in his book “The Republic of Anglo”Page 127
” In the autumn of 2007 I met a casually dressed Fitzpatrick in Anglo’s lobby on St Stephen’s Green.
We walked down the Green to a coffee shop at the top of Dawson Street. It was a nice afternoon so we sat at a table outside. Fitzpatrick started from scratch, describing Anglo’s business model. He pointed across the road to the building on the far corner. using it as an example of how the bank wasn’t a property lender but a lender on the cash flow from rock-solid tenants in the building.
“There could be a major shop on the ground floor,one of the biggest accountancy firms on the first floor and one of the biggest law firms on the second floor” he said. ” Anglo was covered on it’s loans,not just on the value of it’s property but on the strength of the businesses in the building. The strength of the bank loan on the building was a sign of the strength of the economy. ”
It was Fitzpatrick’s stock presentation. It tripped off his tongue from years of practice . As he was elaborating, Anglo non-executive board member Fintan Drury, a close friend of Fitzpatrick’s walked past, noticing Fitzpatrick in full flow. Drury leaned over the railing next to our table and interrupted him. ” I’d say there’s a lot of shite being talked here” he said. We all laughed.
Drury may have been joking, but with hindsight he was right-the Fitzpatrick’s banking model was shite. It took a property crash to expose how flawed it was. “
@ Brian Woods
Greece got a bond swap deal, which involved an overwhelming majority of Greek bondholders, the country knock over €100 billion off its national debt this then opened the door for EU ministers to approve a €130 billion package to Athens. Bering in mind what the Greeks achieved, are you trying to say the sky will fall in if the best boys and girls act don’t hand over 30bn to the ECB in dribs and drabs of 3bn to be ceremonially burned so that the ECB can pretend that money supply has not been expanded when in fact Draghi has expanded the balance sheet of the ECB by over a trillion over the last twelve months alone accepting some very questionable collateral in the process.
Bondholders don’t give too hoots if Ireland “burns” the ECB it is private sector involvement that worries them. The ECB blackmailed Ireland we need to say we are not paying the ransom even if in installments of 40 years which is what we are going to hear hear next, al la “Ireland is a special case”.
Brian you are huffing and puffing this is the kind of stuff that Lenihan, Cardiff and Honohan caved into into. The suggested solution of taking the bonds on to the books of the state is what would cause our yields to increase.
Lucey asked for a mechanism. You’ve given the usual scare stories. How will the CT rate rise? Or MNCs flee? The lack of logic is appaling. It’s risible scare stories that have had this country in the gutter. I’ll ask you again: how will the ecb punish us if we walk from the notes? And don’t response with Halloween generalities. Specifics or nothing.
You forgot the dead rising (Walking Dead Series 3 starting wednesday – great series), and the poor pensioners of AIB (know any?) being hurt.
Lets see your arguments..
“Yes indeed, you have for yoinks been saying walk away from the PNs and you have suckered Peter Mathews into that line as well. Karl, I am not so sure of, but he too talks of simply cancelling CB money, no harm at all.”
Actualy Peter first suggested this to me over a coffee waaay back when he was literally unknown. Karl doesnt AFAIK agree at all at all at all. Nor does Steve Kinsella nor many others. But, their arguments are technical and sobre. Not chicken little auld guff.
Let’s get real here. If we unilaterally defaulted on those PNs we would immediately be recognised as the pariah of the EZ nay of the EU. Of course, the ECB and the rest of the EZ are not going to do anything rash which will backfire on them, so maybe no, we would not be thrown out of Euro just yet.”
I can live with being a pariah. I suspect most of us can. Im old enough to remember “no irish” in the UK, and that changed. I can recall gettting hassled by the UK polis in the 80’s, and that passed. This time is never different. Hands up all of you who would be a temporary pariah for 30b?
“Here are a few consequences which would undoubtedly follow.
1) Our market yields would sky-rocket”
Really? Gov Honohan, when he was but a mere prof, disagreed. In fact, i have yet to hear a definitive statement from a ratings agency or non domestic bond investor that that would happen. anyhow, as we are fully funded to half 14 we are grand for a while.
” 2) Absolutely no chance of Program 2
3) Forced budget balance in 2014 (maybe that’s what you promote)”
Thats actually something possible. But, we do need to balance the budget sooner or later. Yep, it would hurt. But, its gonna come. And, we would be (much much) poorer but significantly stronger. So, a wash?
“4) End of preferential CT rate”
How? I do love these apocolyptic shibboleths. How and in what manner would the default on the PN’s cause the 12.5% to rise?
“5) Zero negotiating power on CAP etc.”
apart from the veto… What etc? BTW?
“6) MNCs pack up and go”
do they? Why? Suddenly we have a more sustainable economy, and a govt that shows that it will take hard decisions.
” This is not a gamble. This is Russian Roulette with a full chamber!”
nope, thats your opinion. Your fully entitled to it, as am I to mine. What your not entotled to however is your own facts. I have consistently asked for a mechanism as Anewdawn noted. Just like i ask for “scrap croke park”, I want it spelled out. You havent given that – youve in fact done as Bazza noted and spewed out a lot of scare statements. As an ex senior banker in AIB you should have better arguments than that. As an actuary you should have better respect for fact and accuracy than that. Saying “i think your so full of it your eyes are brown” is fine. Asserting as fact that which is opinion and blustering and booming isnt. Go off now and enjoy your AIB pension, which is as state funded as me uncles. And ask – in your time in AIB what could you have done different, the kind of question i ask as an AIB shareholder.
BTW Brian Woods do you speak for AXA here or is this just you speaking for yourself?
‘The european position was imposed on Ireland’
The most telling words in all of this recently.
Gormley on the agreement reached on the bank guarantee in the week leading up to the supposed ‘all-nighter’: http://www.youtube.com/watch?v=vPR2Iwcpu4U
Loth/Meath Green Part report on euro-Green meeting on the future of europe:’Eamon Ryan made a strong contribution at this point regarding the unhelpful position taken by the ECB and Commission around the Irish bailout and their insistence that no bank be allowed fail.[He has twice made the same remark on the VB show]
It shook the meeting to hear that in that time of crisis it was the IMF who were most flexible and least dogmatic around terms and renegotiation. On the margins later one senior Green MP acknowledged a certain naiveté at how the ECB conducts its negotiation and that the reality check was a useful one.’ – http://www.markdearey.com/green-convention-on-the-future-of-europe/
Just another point on Enda/Hollande today – RTE have twice said that Hollande supports a ‘deal on Ireland’s bank debt’.
It might have escaped me, but did he really say that, or has the translation been somewhat spun ?
Hollande and Merkel are speaking about two different things that happen to have one common denominator viz recognition that Ireland was landed with a wholly unreasonable burden of debt in the early stages of the euro crisis. Hollande wishes to see retrospection with regard to banking debt. Merkel has ruled it out.
Provided that there is an understanding of this fundamental difference in approach, there is no reason why Ireland should not seek to navigate between the two approaches. But is there?
cf. the latest by Paul de Grauwe; like a lighthouse in a fog of irrelevant discussion.
The Guardian certainly does not see the distinction in approach.
Back to the future of the euro!
‘Back to the future of the euro!’
Drachma to the future.
Gideon Rachman on the rise and rise of Germany.
Franc Francais more likely!
Picture the following conversation between begging punter and BoI
BP: Can I borrow some coz I can’t make ends meet
Evil BoI Manager: I see you already owe us 50k and u also owe AIB 50K
BP: Don’t worry about that, I ain’t goin’ to pay them
EBM: Oh great, how much do you want?
Let’s get realllllllllll
I think you’ve nailed it on the head there. Damn those nurses and binmen!
Not the binmen – they’ve been ‘Liberalised’
It would be nice if posts had to sport a little badge that said “Vested interest in the Financial Sector not paying for the the Global Financial Crisis.” or “Agent of Foreign Power.” but at least Brian Woods is using his own name.
@BW2, Brian L
If the first 50k was accumulated via extortion, or borrowed and handed over to 3rd parties under threat, that might rather alter the potential lender’s view.
Of course, the production of some evidence would probably be pivotal. What is the evidence, all the evidence?
Official Ireland pushed the line that the bank liabilities had to be honoured because to do otherwise would undermine confidence in Gilts. This tallies with what Stephen Donnelly says he was told last week. Where did the advise to that effect come from?
It was however a bizarre analysis and it was that determination to pay the banking liabilities that diluted and finally undermined the creditworthiness of Gilts.
It is fascinating that these questions are deemed unimportant curiosities,…move along please.
That people haven’t been on the streets demanding a Hutton style public inquiry is quite a comment on public expectations.
Trick or treat?
You are on top form today Mr G.
The lack of any transparency is awful (and leads one to suspect a “Murder on the Orient Express” type explanation as regards the extension of the bank guarantee) but remember that the Irish public associates inquiries with a five year all expenses paid party for Ireland’s plump and connected Senior Counsel and not much else.
Also, the silence has been deafening on whether Ireland’s economic health might be better measured than the yields on small amounts of bonds (While it is possible that these are savvy investors who believe in the robust health of the Irish economy it is also possible they are ambulance chasers who think the Euro has a large insurance policy.).
Reinhart & Rogoff on VOXEU always worth reading.
“Official Ireland pushed the line that the bank liabilities had to be honoured because to do otherwise would undermine confidence in Gilts. This tallies with what Stephen Donnelly says he was told last week. Where did the advise to that effect come from?”
Simple. Merrill Lynch…source, Michael Lewis.
Stop this campaign against ECB policy
By Paul de Grauwe
The European Central Bank’s recent decision to be a lender of last resort in government bond markets is a turning point in the governance of the eurozone. By committing itself to unlimited government bond purchases, the ECB prevented a panic that would have pushed governments into liquidity and solvency crises, destroying the eurozone.
Key to the success of the Outright Monetary Transactions programme, however, is its credibility. Investors must be convinced that the ECB is fully committed to the programme, or they will hesitate to step into the peripheral countries’ sovereign bond markets and the ECB will have to make unsustainably large purchases
The trouble is that the credibility of the OMT programme is not guaranteed, mainly because of the opposition of the Bundesbank and its president, who is taking every opportunity to campaign against it. The Bundesbank is seen by most Germans as the guardian of monetary and financial stability. When its head mounts the barricades to tell the German public that the ECB is on a path that will destroy Germany’s stability, he is organising German hostility to the ECB and the euro. Sooner or later, this hostility will be unstoppable and may lead to German exit from the eurozone.
The spectre of such a German exit will paralyse the ECB when action is necessary. Investors will sense this, making the OMT ineffective.
This guerrilla warfare by the Bundesbank president is based on a failure to understand the role of a central bank in a modern economy. Central banks were created to deal with the endemic problem of financial capitalism: its instability and the impact this has on the banking system. This has led to the consensus that the central bank should be a lender of last resort in the banking system to ensure that the bubbles and crashes that are part and parcel of capitalism do not bring down the banking system.
Should this role of lender of last resort also be extended to the government? It must be, if financial stability is to be maintained, because the sovereign and the banks hold each other in a deadly embrace. When the banking system collapses, this threatens the solvency of the sovereign. When the sovereign defaults on its debt, it pulls the banks into default. This means that the banking sector cannot be stabilised if the sovereign is unstable. A central bank that wishes to stabilise the banking sector is condemned to also stabilise the government bond market. Failure to do so leads to a banking crisis, forcing the central bank to provide huge amounts of liquidity to banks that it refuses to provide to the sovereign.
Standalone countries such as the US and the UK understand this and have an implicit contract between the government and the central bank, whereby the latter will always provide liquidity to the government in times of crisis. Without such a contract, financial stability cannot be guaranteed.
The eurozone did not have such a contract between the sovereigns and the common central bank, explaining its fragility. It now has one with the OMT programme. Without such a contract, the eurozone cannot be stabilised. Of course, many other institutional changes will have to be introduced to make the eurozone sustainable. The fact that this contract is not sufficient, however, does not reduce its necessity.
Intelligent people such as the president of the Bundesbank certainly understand this logic. Why, then, has he decided to wage war on the ECB, thereby threatening the future of the euro? Here is my hypothesis. The Bundesbank has been an enemy of the eurozone right from the start, for understandable reasons. Before the eurozone’s creation, the Bundesbank reigned supreme in Europe, dictating monetary conditions not only in Germany but also in all the European countries that pegged their currencies to the Deutschmark. With the introduction of the euro, the Bundesbank lost its hegemonic power and became a central bank like all the others.
The eurozone crisis has created a window of opportunity for nostalgic souls in the Bundesbank to restore its hegemonic position in Europe. This opportunity can be realised by a German exit from the eurozone, which now appears possible. If the Bundesbank wishes to precipitate such an exit, a campaign to convince the German public that the ECB’s OMT programme will lead to monetary instability could prove to be a lethal weapon.
I hope that my hypothesis is wrong, and that the Bundesbank has buried its nostalgic dreams of recovering its past hegemony. In that case, it will have to accept that there is no other path to financial stability in the eurozone than one in which the ECB maintains its role of lender of last resort in the government bond markets.
The writer is John Paulson chair in European political economy at the London School of Economics and Political Science
It would sure be grand if there were no downsides.
One consistent trait through the crisis is is that suggestions to quit the euro or default, seldom if ever get beyond the pub level.
There were no downsides to the biggest decision made during the crisis – –
“the cheapest bail-out in the world.”
Four months later when the decision to nationalise Anglo was made, there was zero leverage available.
Maybe the ECB would be willing to be made look a fool and ignore a default by a bankrupt country or maybe not.
Is John Poulson anything to Hank?
Or at least a board member memeber of Goldman?
This article is almost unbelievable in the antidemocratic jumps it is taking.
“Should this role of lender of last resort also be extended to the government? ”
By implication this means that it should definitely be lender of last resort to private banks there by explicitely giving them free reign to wreak havoc on society by underpricing risk and never having to live with the consiquences.
The Central Bank is set up for the benifit of the general population and its needs are serviced by the government. The idea that bondholders in banks should be 100% protected but the soverigns are debatable is risable.
This article is the best arguement I have seen for maintaining one large retail bank in public ownership at all times, so that the rest know that if they lend wrecklessly they will be allowed to fail. Its not quoted much anymore but Keynes believed banking should in the main be national
Far From Being some sort of Rogue the Bundes bank could be seen as the Citidel for financial fairplay within the Euro zone.
The only banks that have been treated properly in Europe were in the nordics who wisely stayed out of the Euro
The Bundesbank feels as if it is under attack from the brave new ideologies of Wallstreet and london and the takeover is nearing completion.
Classical economists thought central banks should stay out of an economy, Keynes thought CB’s should involve themselves in order to help the national economy.
The guys from Walstreet and London believe we need to interfer primarily to enrich them, but also perhaps to save the governments from soverign defaults.
I think Merrills correctly advised that a broad bank liability guarantee would potentiallu undermine gilts, not the other way round.
“One consistent trait through the crisis is is that suggestions to quit the euro or default, seldom if ever get beyond the pub level”
What’s your point? Manyommentators more qualified than you have suggested leaving the Euro or unilaterlally ditching the P Notes may be the only way out of the crisis so its not just pub talk. In any case, is the correct course of action always the most popular one? Or maybe Very Serious People like yourself need to endorse Serious policies in order for them to work?
The consistent trait of this crisis is that conventional economic and policy wisdom has turned out to be pure charlatanism and is often informed by special and/or personal interests.
As Upton Sinclair would say…
“One consistent trait through the crisis is is that suggestions to quit the euro or default, seldom if ever get beyond the pub level”
What’s your point? Many commentators more qualified than you have suggested that leaving the Euro or unilaterlally ditching the P Notes may be the only way out of the crisis, so its not just pub talk. In any case, is the correct course of action always the most popular one? Or maybe Very Serious People like yourself need to endorse Serious policies in order for them to work?
The consistent trait of this crisis is that conventional economic and policy wisdom has turned out to be pure charlatanism and is often informed by special and/or personal interests.
As Upton Sinclair would say…
‘… The consistent trait of this crisis is that conventional economic and policy wisdom has turned out to be pure charlatanism and is often informed by special and/or personal interests.
Real conventional thinking here…there were many ‘qualified’ people who messed up in the past decade. How about all those ‘brainy’ folk on Wall Street?
Heard of David Halberstam: he said the title of his book ‘The Best and the Brightest’ was often misused…failing to carry the tone or irony that the original intended.”
Do you mean: degrees; work experience; having had to make consequential decisions in one’s professional life?
A key qualification which you wouldn’t know If I had it or not is:wisdom and you may not know either in respect of others.
You missed the point of my post which wasn’t taking a position on these consequential issues.
My point was that many make potentially consequential proposals but it’s rare to see an exploration of the downsides; cf Government Buildings Sept 29/30 2008.
The downsides are also important as impact can vary: a struggling SME may for example be more exposed to the turmoil that would follow an exit from the euro than for example an academic.
Oh well, Schauble is in Dublin on Monday. That will keep Endy feeling important for a while.
@ PR Guy,
Well now that we are officially “Special” does that mean we have gone from Poodle to Strudel?
European Poodle Of the Year!