Conor Killeen on How to Negotiate with Germans

This post was written by Colm McCarthy

Hidden away in the Business section of today’s Irish Times,

here

some thought-provoking advice from Conor Killeen of Key Capital deserves a thread.

242 Responses to “Conor Killeen on How to Negotiate with Germans”

  1. BeeCeeTee Says:

    +1

    Crisis is our friend.

  2. Kevin Donoghue Says:

    If “our real leverage with the Germans is the currency exit option and default” then we have no leverage at all. Maybe things will get so bad that we can credibly threaten such things. But in that scenario we won’t be bargaining with anybody, we will be burning the furniture to stay warm. Stray cats will be in danger of ending up in the casserole.

    Or am I missing something? I will admit I’ve given little thought to this mess recently, so maybe Conor Killeen has a better case than I’m seeing.

  3. Joseph Ryan Says:

    Stirring stuff, not for the faint hearted but very welcome in the context of looking to where the national interest lies.
    One small but important point re the assertion that;
    “our real leverage with the Germans is the currency exit option and default”.

    I would disagree slightly. The real leverage is leaving the euro but not default, at least initially, because it allows adversaries (not partners) to paint us as pariahs.
    The euro has allowed the imposition of the private sector debt of creditors countries onto the citizens of debtor countries. It has become an abominable construction. We should determine to leave it.

  4. Fiatluxjnr Says:

    “We may be disappointed again. Also, and this is not trivial, what will our negotiating position be like when, around the time of the German elections, our troika funds are running out? Not pretty.

    The central issue, most recently felt by our budget for 2013, is that we need to become solvent – financially and morally. We were supportive of Europe in 2008/2009 when called upon to effect emergency action by the ECB. The alternative, we were strongly advised, would have been financial contagion and wider European bank meltdown.”

    Not sure about our leverage. Noonan et al have given the opposite impression and it would now be very very difficult to do an about face. Angela can spot a bluff a mile away…she has emerged as the best poker player in the world.

    14b shortfall =dependency.

  5. Bond. Eoin Bond... Says:

    @ Kevin

    You can only threaten from either a position of relative strength (ie you have the flexibility to inflict mutually ‘bad’ things without killing yourself) or a position of complete and total weakness when you have no other choice (ie Iceland, Greece, and you’re willing to ‘go postal’). Ireland has always been in the bad-to-middling category, where we are unwilling to countenance the doomsday options (unilateral default, euro exit) but not in a strong position to have credible threats (ie bank defaults/liquidations, ending austerity). With the economy recovering, albeit slowly, we’re in even less a credible position to threaten anything now, especially given the complete unwillingness, politically or socially, to balance the budget in the morning (which is what would be required post-default).

    As an example of credible threats, or not, and relative strengths etc, Rajoy thought the Spanish economy was strong enough to ignore EU calls for austerity this time last year. He’s been proven mostly wrong so far (at various stages he’s been begging the ECB for help, at the same time as perma-revising his deficit/debt higher, and now risking secession from Catalunya), but by look or by crook he’s held on just about so far. Whether his bluff his finally called in 2013 is still an open question, but it still looks more likely than not. His position has been weakened enough over the last 12 months that considering a default on bank debt is completely put of the question for him. On that note, Conor Killeens suggestion that the Spanish bailout will be borne by the rest of Europe is completely and totally wrong.

  6. Bond. Eoin Bond... Says:

    @ Fiat

    “14b shortfall =dependency.”

    Bang.

  7. Michael Hennigan - Finfacts Says:

    There was a guy on Thursday called John Boehner who got his old job back and broke down in tears.

    He had reason to as he and his fellow gang members haven’t been very good at hostage taking. They have had a record since 1995 but have usually caved-in, ending up shooting themselves in the feet.

    John Boehner was re-elected as Speaker of the US Congress Thursday. His friends in The Wall Street Journal said:

    “We’ll support efforts to cut spending and reform entitlements, but the political result will be far worse if Republicans start this fight only to cave in the end. You can’t take a hostage you aren’t prepared to shoot. Do the two GOP leaders have a better strategy today than they did in 2011, and do they have the backbench support to execute it?”

    So the key missing ingredient in Conor Killeen’s argument is that it’s obvious that Ireland is not prepared for an exit from the euro. Would the threat to leave the euro have credibility and what would be the consequences of the threat even if wasn’t serious? After all, in terms of project management and decisions made in haste (Sept 2008?), the record isn’t good. It took 49 years to build a motorway from Dublin to Cork!

    Wonder how the exit or threat of it, could be managed in a panic situation!

    Like so many proposals made in recent years, there is the luxury of not having to consider the downsides.

    We cannot generate sustainable jobs ourselves to maintain an advanced country standard of living.

    Newt Gingrich, the architect of Grand Old Duke of York US fiascos in 1995 and 1996 cautioned this week:

    “They’ve got to find, in the House, a totally new strategy. Everybody’s now talking about, ‘Oh, here comes the debt ceiling.’ I think that’s, frankly, a dead loser. Because in the end, you know it’s gonna happen. The whole national financial system is going to come in to Washington and on television, and say: ‘Oh my God, this will be a gigantic heart attack, the entire economy of the world will collapse. You guys will be held responsible.’ And they’ll cave.”

    Killeen says:

    Regaining our national self-esteem or reaffirming our sovereignty is not optional. It is necessary.

    The point is, all things being equal, we will have to default without a deal on our bank recap debt. Therefore, best accept this and accelerate the discussion to generate the best outcome for Ireland.

    As soon as we get serious about planning an exit, chaos will break out in many markets.  

    Self-esteem and sovereignty are relative terms when most of the new FDI jobs in the past decade have been in the foreign-controlled financial services sector.

    Even if 40% is chopped off the value of exports to discount for MNC tax strategies, indigenous exports would still only account for 20% of the total!

  8. Frank Galton Says:

    He starts from a description of Chelsea’s strategy as to stay in the game and wait for a bit of luck.

    Actually, Chelsea’s strategy last year was rock solid defence and then score from the set-piece. It worked until they ran into teams that know how not to get suckered by the set-piece (see Juventus).

    We have our set-pieces lined up for 2013 — namely the various negotiations that will take place over ESM, SSM. With a good inswinger from Enda Lampard and a powerful finish from Didier Noonan, we can do it.

    Comical perhaps. But relative to the months of chaos that would come from an Eirexit strategy?

  9. colm mccarthy Says:

    Michael Hennigan:

    ‘It took 49 years to build a motorway from Dublin to Cork!’

    Michael this is dreadfully unfair to our dear leaders. It took 37 years - the project was first outlined in the 1974 Road Needs Study, accepted by the then government, and the final section opened in 2011.

    Happy New Year

  10. OMF Says:

    This advice is all irrelevant. The single most important factor in our negotiations with “The Germans” is the personal incentives of our negotiators.

    If Ireland try to resolve this crisis or break out of the euro, the Irish negotiators will lose their excessive entitlements and pay. However, if Ireland grovels abjectly and does the minimum amount required, their salaries will not only be protected, but will in fact be increased.

    Personal incentives. The managerial theory of the firm. Call it what you will, but our negotiating team is siding with money over country, and short term profit over long tem investment.

    The people acting on “our behalf” will always put their own pockets before the publics welfare. Every, Single, Time. And our creditors know that too.

  11. Eureka Says:

    Ok - we’re getting there. The position is actually more nuanced.
    Bond is right - an extreme threat is not credible. But how about this:
    We miss our targets and what are they gonna do about it?

    Tell me!

  12. Brian Cronin Says:

    Thought provoking piece - a rarity these days in an Irish newspaper. Agreed with many of the above comments (OMF, Eoin Bond etc), this advice will not be followed due to the Europhile nature of our political class and more importantly due to the need to balance the budget immediately if we did decide to follow this route. Any sensible analysis of our posiition, however, must have leaving the Euro on the policy menu. It is not clear that membership of a currency union where the central bank acts like the old German bundesbank is a good thing for this and other countries. The political elite here learned nothing from the ERM crisis of the early nineties.

  13. DOCM Says:

    @ Eureka

    Stop giving us the money!

  14. David O'Donnell Says:

    Negotiate? In an ideological war? Non serviam.

  15. David O'Donnell Says:

    90 Billion Euro ripped off from the Irish Citizenry by The Financial System! A generation sacrificed on the altar of Mammon. What’s there to negotiate? War.

  16. grumpy Says:

    “There is no doubt the European Central Bank put us under irresistible pressure to resolve our banking crisis.”

    …in Dublin, yes. It is delusional to think the opposing fans will be convinced of this without the equivalent of a slow-motion replay or two. I’m more sympathetic to the Irish position on this than most European observers (never mind the average voter who doesn’t even want to know), but I wouldn’t go into bat on this without seeing some actual evidence given the history of spin and bull emanating from Dublin. First there is the Irish decision to guarantee already issued bank bonds to be explained, then there is the “decision” to seek a bailout and renue the guarantee.

    “Today it is accepted that we paid a price that was, and remains, unreasonable.”

    …not by EZ voters it isn’t.

    “Since that time, the European Stability Mechanism fund has been created and become the preferred route of dealing with the continuing European banking crisis. The effect of the ESM is to socialise the banking sector problems in Europe. The Spanish bank bailout, for example, will be borne across all European taxpayers.”

    …I might have missed something and would welcome correction here, but per Eoin, I think this is mistaken - and going with the football analogy, it is the sort of mistake partial fans often make leading to what appears to neutral observers as unwarranted abuse of the ref. (see call for evidence rather than assertion above). Banking problems are socialised, but the Article on Pricing in the Treaty, and the requirement not to deliberately make a loss have been there all the time (though enthusiastically ignored in the Dublin media) and have been backed up by Germany. This meant that “legacy” losses in Spain would stay with Spanish taxpayers.

    For Ireland the negotiation is to a significant extent, around the extent to which Anglo and co can be classified as other than “legacy”.

    The basic point of the article is old ground for this blog. My position has always been that if you want to get tough with ‘partners’ you have to look like there is at least a possibility you are willing to get roughed up a bit yourself in the erm, “tangle”.

    FF’s negotiation, the Central Bank Governor’s “nation is defined by a network of contracts” approach and the General election scuppered any possibility of that, as the principle marketing strategy for basically all Irish politicians during the campaign was that Irelands’ much more expensive than creditor countries public sector would continue to be protected under Croke Park (ex 1:28 nach’) and Croke Park 2.0 - meaning bail-out funds would be taken at whatever price and on whatever terms were offered (side letter or wink wink nudge nudge or whatever). A sort of accidental bank bondholder/PS entanglement in short term strategic terms.

    Where is the evidence of this incremental rear-guard action even being challenged let alone abandoned?

  17. Tullmcadoo Says:

    Implicit in Mr K’s call to arms is the possibility that we must be prepared to lose and take casualties in the process. If the FANGS call our bluff, we must default, go to primary balance leave the euro and probably the EU. That probably amounts to a 40-50% set back in living standards at a rough guess for a lot of people. But a least we go up from there don’t we?

    Per MH quote from the WSJ, not only have we got to be prepared to shoot the hostage we probably also have to be prepared to be shot by the special forces sent to rescue it. I do not get any sense that there is that much of a constituency to that pain in this society.

  18. David O'Donnell Says:

    @Conor Killeen

    Text from Blind Biddy:

    The Blind Biddy Hedge Fund would like a strategy meeting - and a monogrammed bazooka is in the post as an icebreaker!

  19. Eureka Says:

    @ DOCM
    This is like pulling teeth:
    So how do we pay our debts if they stop giving is the money?

    Now just focus on that - no distractions no diversions - just that

  20. Mickey Hickey Says:

    Ireland’s age old problem is size, heft and weakness relative to other countries.

    The nuclear option is to walk out but we are not heart and soul into self immolation. I am reminded of our behaviour during the great depression when our great friends the USA and other countries imposed 30% tariffs on us and we retaliated by imposing higher tariffs on them. This nonsense continued into the 1960s as numerous non tariff barriers to trade. I distinctly remember being told that my family had to grease police and government palms to import furniture grade plywood in the fifties and sixties. The thieving bastards with their hands out like the beggars on Market street is how it was characterised. My opinion of the Irish Gov’t and its servants was formed in the cradle and I have seen no reason to change my mind since. We had politicians and party bagmen in the family. So while we recognised we were into the sleazy political game up to our eyebrows, business was business and you play the game or get out. Sure twas da culshur and there was always confeshun.

    By following the expensive and self serving advice of the consultants the gov’t retained we infuriated the rest of the PIIGS and near PIIGS. Our only hope of negotiating a fair deal with Germany, Finland, Nederland, Austria is to form an alliance with countries that are similarly inflicted. Instead our EU politicians are standing up in Brussels and acting like paragons of virtue on the verge of prosperity. In addition to the PIIGS we have France, Belgium, Cyprus and others also in dire straits.

    The solution is to give Germany ( and its like minded allies) the option to leave the EZ for five to ten years. The EZ would then be led by France and Italy, Germany and other creditor countries would be paid in depreciated Euros. The depreciation would be not less than 33%. This would solve a lot of our internal problems as well as alleviating the external debt burden. The effective reduction in income would then be blamed on the “market” beyond the power of our politicians (thank God). Within ten years we would be on an even keel followed by a period of prosperity leading to another dive off the cliffs of Ballybunion as opposed to the 2007 jump which was Moher by comparison.
    Hope springs eternal in the human breast;
    Man never Is, but always To be blest:
    The soul, uneasy and confin’d from home,
    Rests and expatiates in a life to come.

    -Alexander Pope,
    An Essay on Man, Epistle I, 1733

  21. Tullmcadoo Says:

    Eureka,
    We default then on D+1 all PS wages and transfers are paid in punt nuas at a nominal rate about 30% below current levels and in euro terms more. Our MNC sector has hissy fit as it tries to figure whether to go or stay. Our farmers try to figure out what incomes they generate at global prices.
    In short the incomes of the middle and lower earners are evicerated. If the FANGS do not roll over then we are toast.
    Of course they might just roll in response to us threatening to walk.

    The proponents of acting tough always fail in my mind to state the obvious that default is a crisis/austerity accelerator not a crisis resolution. In the end BB and DOD can threaten all he likes with his bazooka but it probably won’t work.

  22. Eureka Says:

    @ Tull
    Please think about this.
    What else happens? Think contagion, think dominos, think sovereign equivalent of Lehmans, think the only success story going bad, think the other peripheries on the brink as well, think of the fear……and then think of our position - being “forced” to default is stronger than choosing to do it (you can go 100% restore your punt and become relatively stable in a world trying to deal with the havoc that has been unleashed)

    And there’s nowhere else on earth MNCs will pay less tax so they’ll soon get over it

    They have as much (and probably more) to fear from this as we do.

    So the leverage is letting the targets slip and saying “now what the f*** you gonna do about it”

  23. DOCM Says:

    @ Eureka

    You may need a bit of dental work yourself if you take the time to absorb the facts advanced above by TMD and others above as opposed to the misguided opinions advanced by the author of the article in question.

    This is not some kind of kindergarten or football pitch where one can appeal either to the headmaster or the referee. If we wish to recover our sovereignty we might start by recognising this i.e. grow up.

  24. John Gallaher Says:

    @DOCM or grow a pair.. there ain’t no fairy godmother giving a handout,zero nada zilch.
    Why not grow what you have,close Anglo.
    Merge remaining into NAMA or AIB develop world class organizations and exit via public markets.
    Look to Boston engage the dispora not Berlin,stop begging and whining desperate is a very unattractive look so unbecoming.

  25. Tullmcadoo Says:

    Eureka,
    You could be right that nothing would happen if we adopted a more forceful posture. All of your counter argument has validity. But in advocating such a unilateral course of action -say do not pay the PN as a sign of a more Bolshie attitude - we do run the risk of a bad outcome occurring.

    In the end we will know soon enough. If for example there is no deal on the PN as envisaged by Prof Whelan, I think events will take a different turn. I think at that point there would be civil disobedience, the govts policy of softly softly would be undermined and we and others would be on the way out of the EU. We would be staring down the destruction of the economy of the continent for the third time in a century.

  26. Tullmcadoo Says:

    Btw, everybody should buy a copy of “The Guns of August ” written by Henry Morgenthau’s niece to see how this might end. Letting a strong Germany throw its weight around in Europe never ends well.

  27. Seamus Coffey Says:

    The position advocated in the article may be viewed as foolhardy or foolproof depending on your perspective, but when it is proposed on the basis of fiction it is just foolish.

    There is no doubt the European Central Bank put us under irresistible pressure to resolve our banking crisis.

    There is no doubt that the blanket two-year guarantee of almost all the Irish bank’s liabilities was a solo run by the Irish government. As clearly indicated in the Honohan Report the “no failure” policy for Irish banks was adopted here early in the crisis and in advance of the collapse of Lehman’s when a “no failure” policy was also adopted at European level.

    The only irresistible pressure from the ECB I am familiar with is a voicemail on Sat 27/09/08 left by Jean Claude Trichet which Brian Lenihan paraphrased as “you must save your banks at all costs”. This was so irresistible that Brian Lenihan spent the day at a Fianna Fail event at Gowran Park and did not listen to the voicemail until the day after. Does anyone have any evidence of this irresistible pressure? While the outcome under either scenario would likely have been the same saying “you made me do it” when they actually didn’t will ring hollow.

    Today it is accepted that we paid a price that was, and remains, unreasonable.

    Accepted by who?

    The Spanish bank bailout, for example, will be borne across all European taxpayers.

    Really? I must have missed that summit statement. The Promissory Notes/ELA framework is better (cheaper) than what Spain is being offered. The inequitable treatment of the next paragraph is to Ireland. Ireland was allowed to print the equivalent of 15% of GDP on the basis of no more than a promise from the Minister for Finance. Why wouldn’t Spain want a piece of that?

    Second, there was clear intent last May/June that there would be a special deal to address the unsustainable cost of our bank recapitalisation.

    Is it unsustainable? Who said we would get a special deal? What they said was:

    “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.”

    This isn’t promising a “special deal”; it’s promising equal treatment. So far we are doing alright on that score.

    I can only guess, but I assume there has a lot of background discussion at official levels on the Promissory Notes/ELA. It is also likely that proposals have been put forward from all sides. One major issue is that the money borrowed (printed) via the Promissory Note/ELA framework is just so cheap - currently 0.75% - that the hurdle for any “deal” to be beneficial is very high. The problem, of course, is paying off the PN/ELA debt with more expensive debt.

    Spain is going to be paying 3.0-4.0% interest on the borrowed money it uses to recapitalise its banks. Through the Promissory Notes we are getting there in increments of €3.1 billion per annum. Getting a 30-year bond at 2.5% would be a net positive in virtually any context.

    We were supportive of Europe in 2008/2009 when called upon to effect emergency action by the ECB.

    I can’t recall the ECB calling on Ireland to take any emergency action in 2008/09. This is the ECB opinion of the guarantee. One extract:

    “As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.”

    Ireland needed to act quickly and decisively for the benefit of all.

    Ireland acted completely in its (perceived) self interest. Alastair Darling certainly didn’t think the guarantee was for the benefit of all. Christine Lagarde went “Oh gosh”. Joaquim Almunia (albeit with the benefit of hindsight) has called the guarantee a “mistake”. At the time Darling said:

    “It just would have been a lot better if we had known in advance because we would have had proper measures in place when the bank branches opened. The lesson you draw here is you can’t do these things on your own, you’ve got to talk.”

    We were then offered an emergency programme with massive economic retrenchment.

    I shudder to think what the economic entrenchment would have been like if we had run out of money in the middle in 2011 and were forced to immediately close the budget deficit.

    The point is, all things being equal, we will have to default without a deal on our bank recap debt.

    No, we probably won’t. And anyway, Greece has defaulted twice in the past year.

    I have no problem with proposals of an alternative approach and if someone wants to suggest that we should threaten to leave the euro. Fine. More power to them. It would be great if we could observe some parallel universes where some of these proposals were played out. It would be a great learning tool but it mightn’t be much fun for our equivalents in those parallel universes though.

    In this case the only justification for wanting to pick up the ball and walk to centre circle is a subjective view that “the ref keeps favouring one side”. It is an approach that has very little going for it. Blaming the referee when you have scored a couple of own-goals before the opposition even touched the ball is more than a little lame.

    We do have legitimate issues we can raise. Most notably, there is the repayment of the €4 billion of senior unsecured bonds that remained in Anglo after the guarantee had expired. This warrants nary a mention and even Jorg Assmussen has told us that this was “to ensure no negative effects spilled-over to other Irish banks or to banks in other European Countries.”

  28. John Gallaher Says:

    @Seamus it was a rehash of Churchill’s quip regarding “Huns” neck and feet no more no less but provactive courageous and interesting non the less.
    Nice piece well done and provoked some debate not everyone puts themselves our there to be critiqued.
    Close Anglo yesterday….

  29. Tullmcadoo Says:

    Seamus,
    Such was the lack of pressure put n us by the PTB in the EZ that when
    Lenihan tried to burn some seniors on the arrival of the Troika, he was told to get lost. Same with Noonan when he assumed office.
    That the guarantee was a solo run was beyond doubt but if we tried to run in another direction we would have been put right.

  30. Mickey Hickey Says:

    The Germany of the 30s’ and 40s’ is not the Germany of today. Their behaviour wrt to a sound currency and facing the facts as they are goes back to the 1860s’. Britain abused them badly leading up to WW1 and then provoked the war in the same way that the Americans provoked war in Iraq, Afghanistan and now they are softening up US public opinion for a go at Iran. Hitler initiated WW2 so as to ensure Germany would not fall under the Anglo (US + GB) jackboot. It ended in disaster for Germany but it weakened GB to the point where they lost the Empire.

    Read Carl Von Clausewitz’s book On War and you will get insight into how Germans think and act. First and foremost nations do not have friends they have interests.

    Germans are rational, intelligent and value good gov’t a stable economy and sound currency. They have little tolerance for governments that grasp failure from the jaws of prosperity as we did in Ireland. It would be inconceivable in Germany that their Gov’t would imperil the state to save the banks. The concern now is that weaknesses on the periphery will pull down the German economy.

    They have to be offered a solution that appeals to public opinion and that is a return to the Deutschmark. Ireland and the other little countries desperately need the Euro and if they had a splink of sense would be forming alliances to ensure that we remain in a monetary union with a weakened currency. France and Italy along with another dozen or so weak sisters could form a credible monetary union. Mind you not so credible that it would quickly become overvalued.

    Japan and the USA are now beyond a shadow of a doubt actively working to depreciate their currencies. The world has already had an era of “how low can we go” (not the limbo) in the thirties. That did not end well.

    We have to disabuse ourselves of the notion that “ourselves alone” that idea that kept us in poverty for half a century is a viable solution

  31. grumpy Says:

    @tull

    By virtue of political promises, both of those guys were attempting to ask for something the others didn’t want to give them, with the words “Anything shirty we say is 100% guaranteed bluff” stamped on their forehead.

    What you say is just another Dublin based assertion. Meanwhile Europe’s ultimate bosses are far more interested in this sort of thing:

    https://www.itv.com/itvplayer/splash-

    I cannot overstate the shortcomings of the marketing on this by Ireland.

  32. Shay Begorrah Says:

    The article was common sense stuff, but spoiled by the urge to use sporting metaphors - nothing about the European component of the global financial crisis resembles a game and soccer shrivels the critical faculties.

    Good faith negotiating is not a concept they get. They make only deals that either suit them or deals they need to make.

    This we can all agree on. Germany in its current highly conservative incarnation has only its own narrow interests at heart and wants, like every other party, an EU that best serves its interests. The problem is that our economic interests and those of Germany are currently directly opposed.

    That it is why it is foolish and distracting to imagine that we can negotiate with a Merkelist Germany (or indeed threaten them) - the fiscal and monetary policy we want adversely affects them and vice versa. The European component of the global financial crisis has been a tonic for European conservatism (bizarrely) and German conservatives in particular will prolong it for as long as they are allowed to.

    We have two choices - we can try (as Philip Lane advises at in his recent Irish Times article demanding public sector pay restrictions) to make ourselves more German than the Germans themselves. We simply accept that we need to constantly mould ourselves to suit the dominant economic power in Europe and go the whole neoliberal hog. (”Willkommen to The European Peoples Party Republic of Ireland - We do as we are told.”).

    Our second choice, which we have repeatedly balked at, is making German interests match ours by refusing to cooperate in the great financial sector bailout. When market discomfort ensues and debt monetization becomes advantageous for Germany and the ECB it will become available to us and not before. Stopping international contagion (ie: protecting the European financial sector at the expense of the Irish state) was our real mistake, not the initial banking guarantee and we can still belatedly address it (though billions down).

    Obviously the time to try the second option was years ago, before the idiocy of the Fiscal Compact but missing the next ritual sacrifice of money to the FIRE sector would be a good way to make our problems European.

  33. Tullmcadoo Says:

    Grumpy,
    Please put your post in simple English for the simple minded among us?

  34. Tullmcadoo Says:

    Shay,
    I agree,with you. But let nobody tell us that option 2 has no costs associated with it. It may be our preferred option in the end. But it brings accelerate austerity not the avoidance of. It also brings economic and diplomatic isolation for a time until other countries leave EZ and until the EU disintegrates.

  35. Shay Begorrah Says:

    @Tullmcadoo

    But let nobody tell us that option 2 has no costs associated with it. It may be our preferred option in the end. But it brings accelerate austerity not the avoidance of.

    The assumed cost of letting IBRC die a long overdue natural death is that the Troika would then decide to self destruct the Eurozone just to demonstrate their fearsome resolve, which is I suppose possible. Perhaps if they are that fanatical it is best to find out now and not thirty five billion (or whatever) Euro down the line when the next crisis of capitalism requires more Irish sacrifices to keep the current flavour of EMU working?

    I think it is worth emphasizing how meaningless the sacrifices of national sovereignty and resources so far could be. We have effectively zero control over European monetary policy and the fiscal compact seems to indicate that as time goes by we will have less and less control of our fiscal policy. What if something else goes wrong?

    If there is another global financial or economic crisis, brought on by war, natural disaster or simply market failure like the current one what reason is there to believe that the current tag team of the ECB and the FANGs will not once again settle on a policy that privileges their interests ahead of ours?

    The talk of pooled sovereignty in EU has after all been revealed as a sham - we have given much of ours away while Germany has instead leveraged its own, the European Commission is ideologically compromised and the ECB is a bank we answer to but do not control.

    The long term risks of surrender on IBRC are too high.

  36. Michael Hennigan - Finfacts Says:

    @ colm mccarthy

    Colm,

    Those 12 stray years date from the genesis of the Naas dual carriageway.

    @ All

    Let’s not forget that the State bank guarantee was issued on the day of Anglo’s financial year end to effectively save it. Just over 4 months later in Jan 2009, when it was decided to nationalise the bank, Ireland had ZERO leverage with Europe, having unilaterally disarmed on Sept 30, 2008.

    It is of course more than a trivial issue that during the bubble, none among the local denizens of finance had the cojones to publicly address the sartorial shortcomings of the little emperors and NCB Stockbrokers, Conor Killeen’s old firm, housed some of the most ardent devotees of demographic fetishism, who provided the theological underpinning to the then famed Maestros of Merrion Street.

    Jean-Baptiste Say (1767-1832), a businessman who was the first professor of political economy in France, and who is said to have coined the word entrepreneur (’l'entrepreneur d’industrie’), is identified with the claim that supply creates its own demand. However the short-run and the long-run should of course be distinguished and Colm McCarthy pointed out in 2008 that: “If rapid population growth were the key to economic prosperity, sub-Saharan Africa rather than East Asia would be the current Wirtschaftswunder.”

    What is extraordinary is the enduring surrealism in the debate on the national economy.

    We have ministers being deluded by spin: last year the minister for finance opined that growth would take off ‘like a rocket’ when an international recovery takes hold (are there fools forecasting rocket growth in Europe and the US?) and this week, the deputy prime minister dabbled in astrology predicting “enormous potential for growth to our economy” in 2014 when “the political and economic landscape will alter radically.”

    Then its easy to be fooled by those huge ‘exports’ that Google and others magic up for us.

    Here are headlines from Friday: Surging exports spur Irish services on in December - PMI (Reuters); Services buoyed by surging exports (Irish Times); Surging exports spur Irish services on in December - NCB (RTÉ); Services activity remained strong in December — with some help from tax strategies (Finfacts)

    Colm McCarthy made some other perceptive comments in 2008 which should be used to counter the growth fantasies of Noonan, Gilmore and their echoes in the media, universities and so on:

    “Some well-heeled friends of mine held a pre-Christmas bash to mark the passing of the Tiger, which had been kind to them, but I think they were about six years late. Between 1994 and 2000, Ireland’s real GNP rose by more than six per cent every single year. But since then, the rate of GNP growth has exceeded six per cent only once, in 2006. That was the year we (unfortunately) built 88,000 houses, an unsustainable figure which artificially boosted the growth rate.

    On this reading, the true Celtic-Tiger period ended about 2001, since which time the economy has been operating around a more modest growth rate of four to five per cent, with excessive reliance on a credit-fuelled housing sector. The growth rate will be nowhere near this figure in 2008, and the return of the eight and even 10 per cent GNP growth rates of the mid- to late 1990s is a pipe dream.”

    Adam Davidson in the NYT today concludes a story on the prospects for the US economy:

    The story of this recovery may be unusually opaque, but the brightest forecasts are built less on a return to old consumption levels than on, for example, fracking. And that’s not necessarily a bad thing. There was so much bubbly growth in houses, cars and appliances during the mid-2000s, that it’s hard to see how any kind of return to those levels would lead to a healthy economy. The best thing we could hope for, paradoxically, is a return to 1999.

    http://nyti.ms/W1E2qK

  37. Eureka Says:

    There is the third option:
    Start missing the targets. Their options in that instance are very very limited.

  38. Eureka Says:

    Stumbled across this too
    http://www.irishtimes.com/newspaper/finance/2013/0104/1224328418861.html

    Would be interested to hear views on this. To me it seems that the EU just doesn’t do banking for the publics interest. Not surprising. Jean Claude Trichet’s management of Credit Lyonnaise scandal tells you all you need to know in a way - the states serve the interests of banks and not the other way around

  39. DOCM Says:

    @ All

    FYI

    http://www.independent.ie/opinion/analysis/now-were-asked-to-trust-the-guys-who-screwed-up-emu-originally-3343314.html

    On two points of detail, Sweden signed a treaty when joining the EU which required it to join the euro when it met the desired criteria, the government put the matter to the people in a referendum and it was defeated. The obligation to join remains.

    http://en.wikipedia.org/wiki/Sweden_and_the_euro

    With regard to Denmark, on the other hand, it has with the UK a negotiated opt-out but is a member of ERM II i.e. the Danish crown is in lock-step with the euro within set margins.

    This comment by Schaeuble is dismissed by CMc as a bromide.

    “To make monetary union crisis resistant, we need deeper economic and political integration, which means strengthening our existing institutions, creating new ones when needed and reinforcing their legitimacy, if necessary, via a reform of the European treaties.”

    It is, in fact, a carefully worded statement of the German position. It is qualified as far as the need for treaty change is concerned. There is no evident push from any quarter; other than the increasingly erratic posturing of Cameron to use the non-existent, at least for the moment, possibility of a treaty amendment negotiation to repatriate competences.

  40. DOCM Says:

    @ All

    FYI

    A suggested more realistic approach by the UK to the EU by a commentator in the FT which has the merit of bringing out the nuances in the relationship that the UK actually has with both the EU and the EA and not that imagined, it now seems, by a majority of popular opinion.

    http://www.ft.com/intl/cms/s/0/a7d3adae-55b7-11e2-bdd2-00144feab49a.html#axzz2HCGiHEOf

    Incidentally, if there is to be a new treaty it can only be agreed unanimously by the 27 Member States. There is, of course, nothing to stop a more limited number of countries agreeing whatever treaties they like outside the framework proper of the EU treaties (as the recent adoption of the Fiscal Treaty has demonstrated). But this cannot impact on, or alter, by definition, the texts and obligations agreed under the EU treaties.

  41. Eureka Says:

    @ DOCM
    I’m not sure I understand what your point is.

    From the Irish point of view the approach should change to this:
    Continue with reforms but forget the focus on targets. For example in developing primary care there will be a period of over run where it will be necessary to maintain secondary care while primary care is being developed so there’s a budget overrun for a year or two.
    Etc..

  42. John Foody Says:

    @ Seamus Coffey

    Great post.

    @All

    Great thread.

    As Eoin points out, we’re in a weak position as regards a threat to leave the euro is concerned. We’d be in a somewhat stronger position if the punt was in circulation with the euro. As in, a country can have more than one currency.

    Why not continue to commit to the Euro, while discussing openly the need for a re-introduction of the punt to complement it? Using familiar (to all Irish) language like ‘let us explore the option’… ‘Commission a report’…. ‘expert group’……’we are 100% committed to the Euro’…. ‘ It may help with our you g unemploed’……

    It will introduce to the debate the idea that the thin end of a wedge is being sought. There will be kilometres of newspaper coloumns and editorials about the next phase in the end of the euro.

    Of course the ‘expert group’ can always come back and advise a climb down. Though my guess is the ‘expert group’ would only do that if we were able to off load some of bank debt. Wink wink.

  43. OMF Says:

    @ Michael Hennigan

    Let’s not forget that the State bank guarantee was issued on the day of Anglo’s financial year end to effectively save it. Just over 4 months later in Jan 2009, when it was decided to nationalise the bank, Ireland had ZERO leverage with Europe, having unilaterally disarmed on Sept 30, 2008.

    Just to remind you as it seems you have forgotton.

    Ireland guaranteed its banks in Sep 2008 for two years. This was entirely a Dept of Finance and Fianna Fail led project. When this guarantee expired in 2010 Ireland renewed the guarantee. It was this second guarantee that the ECB was blackmailing Ireland over.

    Not that I entirely disagree with your point. Since AIB and BoI had not yet finished their plunder of the public treasury, I doubt their co-conspirators in Dept of Finance would have been inclined to let the guarantee expire either. One does not simply stop perpetuating the greatest fraud in Irish history.

  44. Michael Hennigan - Finfacts Says:

    @ OMF

    During the 2 year period, the Irish case wasn’t helped by the indecision as to what to do with Anglo and as bond yields rose and S&P downgraded Irish debt in Aug 2010, it was only then that there was an urgency to give an estimate in Sept 2010 of the total cost of the rescue. By that time, the ECB began to tighten the screws as CB financing jumped.

    @ All

    Wonder when Key Capital’s clients would be advised on what to do with their euros or would they await their punts like most of the populace?

  45. DOCM Says:

    @ Eureka

    My point is a simple one. We have signed a Memorandum of Understanding - effectively an international agreement - with the troika and we must stick to it as the alternatives (most, if not all of which, have been floated on this blog) are even less palatable.

    CMcC’s position is summed up in his article.

    “In domestic politics, the rise of the Europhobe UK Independence Party is threatening Conservative votes and seats. Prime Minister David Cameron is seeking a renegotiation of the terms of UK membership, to be put to referendum. The odds are that a deal will be done and the referendum carried, but these things can go wrong by accident and opinion polls regularly show that the British public is far less enthusiastic about Europe than the professional politicians.

    Irish public opinion is headed in the same direction. During 2010, the Irish Government was bullied and harassed by the European Central Bank, acting beyond its powers, into bankrupting itself through paying off foreign investors in bust banks. This ECB policy was supported by France and Germany. Commitments on debt relief made to the Irish Government in June 2012 have not been honoured. The damage to European solidarity caused by the mismanaged common currency project needs to be addressed, with humility, and 2013 could prove to be the final opportunity.”

    I find this narrative to be wholly unpersuasive (especially the use of terms such as “bullied and harassed” in relation to the ECB; I am willing to believe that this may be true but if it is, I would like to see evidence advanced for it; as Seamus Coffey has done in a cogently argued case for an alternative narrative above).

    The direction that the UK is likely to take is slowly being released by Cameron in dribs and drabs cf. this morning’s contribution.

    http://www.telegraph.co.uk/news/politics/9783545/David-Cameron-we-will-keep-out-EU-benefit-tourists.html

    The UK is hoist by its own petard, having been the most enthusiastic promoter of enlargement. (A perfidious thought that might occur to certain parties would be to propose legislative amendments i.e. not requiring treaty amendment that others might find alluring e.g. in relation to free movement or working time where restrictions would find a ready audience in Germany. Unfortunately, unless the Commission agreed to make the necessary proposal, there could be no agreement as the “legislative authority” i.e. the Council and the Parliament can only act on the basis of such a proposal. This example of the democratic working of checks and balances in the EU should serve to illustrate that the line being peddled about presidencies supposedly setting the priorities of the EU is so much twaddle. What presidencies can do is chair impartially and effectively the meetings dealing with the agreed work programme).

    Of the various alternative wilder scenarios advanced, the only one that I could see working, in the unlikely event of the euro breaking up, would be an agreement with the UK to re-establish parity with Sterling.

  46. Cormac Lucey Says:

    Policy discussions and policy makers are focussed (understandably) on the most acute symptoms of this crisis:
    * Broken public finances
    * Broken banking systems
    * Depressed spending
    * Rampant unemployment

    But this focus should not distract us from the essential root of the crisis, which is an INAPPROPRIATE CURRENCY & INTEREST RATE REGIME. Fitch reckon that, if it returned to the Drachma, Greece would merit a 63.9% devaluation (against the US dollar) based on the fundamentals. That figure, even if it were as low as 40%, illustrates the impossibility of what is being required of Greece.

    This calls to mind Keynes when he wrote of Britain made an illjudged return to the Gold Standard in the mid-1920s. He wrote:

    He [Churchill] was just asking for trouble. For he was committing himself to force down money-wages and all money-values, without any idea how it was to be done. Why did he do such a silly thing? Partly, perhaps, because he has no instinctive judgment to prevent him from making mistakes; partly because, lacking this instinctive judgment, he was deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts.
    - “The Economic Consequences of Mr Churchill”, 1925

    Fitch estimate that the appropriate devaluation for Ireland would be 15.6% (against the US dollar) but that this could rise to a 50-67% devaluation (against Germany) if Ireland were to depart the Euro under conditions of crisis (which are the most likely conditions of an Irish EZ exit).

    The advocates of an internal devaluation solution need to identify how this is to be achieved in Ireland, Greece etc where there are entrenched public sector interests dedicated to preventing any internal devaluation.

    In any event, liquidity cannot fix a problem of insolvency. We should have learnt that from Anglo, AIB etc. Even if our creditors are willing to continue funding us, our public finances are insolvent. This is especially so when one considers unaccrued public sector pension liabilities of €116b and unaccrued social security liabilities of €324b. Maybe John McHale might explain where (or indeed whether) these important matters feature in the deliberations of the Fiscal Advisory Council?

    Maybe John might consider these words from Reinhart & Rogoff “Debt sustainability exercises must be based on plausible scenarios for economic performance, because the evidence offers little support for the view that countries simply “grow out” of their debts” (”This Time It’s Different”, P 289.)

    Indeed maybe John McHale might consider some recent comments from Reinhart. In a recent interview with Barrons magazine Reinhart stated “The orders of magnitude are such that fiscal austerity, together with the ECB easing, won’t be sufficient to deal with the extreme debt overhangs in places like Spain and Ireland. And so, bottom line, we expect to see more credit events, including the writing off of senior bank debt.”

    We are not being pulled out of the water by the EU. But nor are we being allowed drown by them. Instead we are being sustained in treading water. That may be good enough for some. It would be certainly be good enough for Frau Merkel, given her electoral timetable. But why on earth should we deem it good enough for us?

    None of this is to gainsay the intelligent counter-arguments put by Seamus Coffey and others. There should be no doubt that a EZ exit and debt default would accelerate austerity. But that isn’t the issue. The issues are (i) whether the accelerated pain of a EZ exit and debt default would be justified by increased longer-term growth prospects and (ii) whether, if only for negotiation purposes, we should not be publicly considering these matters.

    Congratulations to Conor Killeen (son of former long-time IDA head Michael Killeen) for breaking with “the clamorous voices of conventional finance” on these questions.

  47. Eureka Says:

    @ DOCM
    That mou was based on a presumed return of the world economy to growth. Unfortunately that was a flawed presumption.
    You seem to suggest that the Swedes have also signed up to agreements which they are not too anxious to honour?
    Don’t get it

    @ Cormac
    Great post

  48. grumpy Says:

    @Cormac L

    “The advocates of an internal devaluation solution need to identify how this is to be achieved in Ireland, Greece etc where there are entrenched public sector interests dedicated to preventing any internal devaluation.”

    I have long held the view that this fly in the ointment was obvious and predictable. It isn’t just public sector interests, but rather all powerful or politically connected lobby groups. In short everyone except the economically vulnerable.

    Said advocates must therefore:

    a) be callous people who don’t mind about that
    b) be personally so positioned as to be on the right side of the skewed devaluation and set to improve their socio-economic position as a result
    c) be a bit dim

  49. Eureka Says:

    @ Grumpy
    On a sinking ship it’s everyone for themselves. Nothing more sinister than that….

  50. grumpy Says:

    @Eureka

    A lot of people don’t agree with you that the ship will be allowed to sink, rather that it is being loaded up and will just float much lower down in the water. They are only interested in making sure they are high enough to have a cabin with a porthole.

  51. DOCM Says:

    @ Cormac Lucey

    The error in your analysis is summed up in the following;

    “We are not being pulled out of the water by the EU. But nor are we being allowed drown by them.”

    Who, exactly, are “them”?

    Only the member countries - including Ireland - of the Euro Area have skin in this game. At the moment, the creditor countries are willing to raise finance on our behalf in order to enable us to make the necessary internal reforms - which does not equate to an “internal devaluation” - to allow us to continue in the game. The choice is ours as to whether we wish to do so or not. In my opinion, it would be an error of historical proportions to fail to do so. Historical references, otherwise, are of no assistance in this context. Nothing like the euro has ever existed in the past.

    If we make the error, the only choice, as I have pointed out above, would be to return to parity with Sterling i.e. resort to the kindness of another set of not exactly strangers.

    An example of the erroneous analysis being peddled left right and centre is the recent reference by CMcC to Sweden and Denmark having “avoided a falling knife”. In neither case has the knife yet hit the floor. The Swedish crown continues to strengthen which is not exactly helpful. Copenhagen is in the same relationship to Frankfurt as we would be vis-a-vis London where we to exit the euro.

    The advantage that both countries enjoy is that they are exceptionally well-run and have informed electorates (which may be said to have kept them at arm’s length from the euro experiment). Neither quality is, unfortunately, true in the case of Ireland.

  52. DOCM Says:

    @ All

    It might be of interest to note that the current controversy in Germany - in the comedy of errors that the campaign of the SPD candidate Steinbrueck has become - relates to his expressed view that the Chancellor is not paid enough! As he himself earned over a million euros in speaking engagement fees while in opposition, this has caused German eyebrows to rise even further. Steinbrueck, of course, served as Merkel’s minister for finance at the height of the euro crisis and is credited with a good deal of the design, if that is the word, of the defence in dealing with it.

  53. John Foody Says:

    @ Cormac

    +1

    Especially: ‘(ii) whether, if only for negotiation purposes, we should not be publicly considering these matters’

  54. Eureka Says:

    @ Grumpy
    Sorry - clumsy metaphor.

    It’s great to see a good debate on this.

    I still maintain the best option is this:
    1: Embark on reforms
    2: Be governed by principles of fairness, respect and responsibility
    3: Don’t pay the promissory note (they’ll let us defer it again)
    4: Be less hung up on meeting troika targets but still reform.
    5: Abandon Croke Park

  55. Yields or Bust Says:

    @All

    Whilst I have some issues with what CK suggests in the article his primary error is the idea that an Irish exit would aid the current state of affairs. Its not the leaving thats so important its the threat of leaving and vitally the public voicing of such a threat -this is where in fact we do actually have a great deal of leverage.

    Don’t ever understimate the element of surprise. What if tomorrow Enda was to come out and suggest that following more ‘complex’ negotiations re the PN it now looks increasingly likely that an Irish exist from the Euro is an option the Irish Govt is now having to vigourously explore amongst other options.(Lucinda Creightons line re the Euro is our currency blah blah would vanish into the night sky as a result - no harm)

    One could only imagine the impact this line of communication could potentially have were it to continue over a prolonged period of time. As the saying goes its always better to travel than arrive. This is why a well rehearsed and coordinated effort to reinforce this real and potentially live option should be pursued to ensure the remaining bank bonds are not paid and the PN remains a headache for the ECB but not the Irish citizen. Despite what Seamus Coffey states above it really doesn’t matter about who said what or when re the Bank Guarantee - the point being is that the Irish Govt actions ensured the position in Europe became no worse.

    Whether we deserve compensation or a kick in the arse for this is a mute point but given the effect this decision has had on the general well being of the Irish economy it would seem pretty obvious to me that the hope and wait strategy with which we’ve indulged ourselves and our EU friends over the past four odd years is not working and we need to change the game plan (by whatever means) or more importantly the underlying debt numbers.

  56. DOCM Says:

    @ All

    Meanwhile, elsewhere in Europe!

    http://www.ecb.int/press/key/date/2012/html/sp121219.en.html

  57. Eureka Says:

    @ YOB
    Should I stay or should I go now..
    Or should I stay and ignore them?

  58. Joseph Ryan Says:

    @Seamus Coffey

    “Does anyone have any evidence of this irresistible pressure? While the outcome under either scenario would likely have been the same saying “you made me do it” when they actually didn’t will ring hollow.”

    So why did Trichet attempt to call Lenihan on Sat Sept 27th. Hardly to discuss how he was doing at the races.
    The head of the ECB, that was providing up to ~160BN in liquidity, tells you that “you must save your banks at all costs”, an ECB that had the power to shut down banks and that we know made that threat at a later stage. Your own post even seems to indicate that a European ‘no bank failure’ policy was in existence after Lehmans and before the Irish bank guarantee.

    In my view not only was the pressure ‘to save the banks at all costs”, Irish costs specifically, virtually irresistible in Sept 2008, it was also virtually irresistible in Oct 2010 and indeed the pressure seems to be even more irresistible today. So irresistible in fact that, even at this late stage Ireland still cannot as much as contemplate telling the few unguaranteed or unsecured bondholders that remain to take a hike.

    “Ireland was allowed to print the equivalent of 15% of GDP on the basis of no more than a promise from the Minister for Finance. ”

    I take a very different view of that transaction. The alternative to ‘not allowing Ireland to print’, would have been the liquidation of Anglo, a prospect that would have had a significant attraction to Ireland even at that point. So the beneficiaries of ‘Ireland being allowed to print’ were in fact Anglo bondholders (the Chelsea owner them), most depositors having left at that stage. The PN was a excellent deal for the ECB and bondholders, but even at its naissence it was of no benefit to the Irish State.

    I see little benefit for Ireland in remaining in the Euro, though I concede that the process of extraction would be difficult, painful and would be powerfully resisted. But it should be on the agenda even for the medium term. The euro locks us into a currency that is clearly overvalued at present. It also locks us into a deflationary, depressive, German dominated economic regime that seems fixated on destroying Europe. The euro has also been a mechanism for the imposition of private sector debts on a virtually blameless majority, except for the culpability of that majority in electing cute hoors and idiots to run the country.

    Other European regimes have elected far worse than cute hoors and idiots and we could do without lectures from them on the morality of debt repayments.

  59. bazza Says:

    @Seamus Coffey

    A couple of comments in your post suggest that you think the Irish Government Debt is sustainable? How have you reached this conclusion, given that there no example of any state, anywhere or anytime, in a fixed currency, low inflation regime, recovering from government and private debt levels equiavalent to Ireland’s i.e. government debt in the region of 140% of national income and private debt over 200%?

    In response to
    ” The point is, all things being equal, we will have to default without a deal on our bank recap debt. ”

    You write:
    “No, we probably won’t. And anyway, Greece has defaulted twice in the past year.”

    So which is it, we will default or we won’t? Are you suggesting Greece as a role model here? As above, it is abundantly clear that we cannot grow or inflate our way out of this debt burden. If we do not restructure the banking debt then we will have to default on our sovereign bond holders. Plain and simple. Who’s interest is that in? Are you suggesting that we should just play along with the German charade, accept whatever bone they throw us and so what if our sovereign investors get burnt?

    It is high time that economists and commentators such as yourself started seriously thinking about things rather than just assuming the role of statistical and legal fact checkers.

  60. bazza Says:

    A good and timely article which I agree wholeheartedly with (even if the point about Spanish banks is wrong).

    In Nov 2011, I wrote to the Minister for Finance expressing many of the same sentiments. I wanted to impress on the Minister and his staff that their current negotiating strategy would not get them anywhere. Here is part of what I wrote:

    “So what to do? It is important to envisage the mindset of the ECB and, more generally, the German economic establishment. Whereas the German Government’s principle aim is to get re-elected, the aims of the economic establishment are entirely different. These people have dedicated their lives to the study and promotion of independent central banking and to Ordnungspolitik. They will not be moved by saying “please”, by trying to be a role model, by trying to curry favour or by any sort of cajoling. In fact, the moderate performance of Ireland in the bailout so far merely reaffirms their own idée fixe and makes any negotiated settlement even less likely.

    The only way to get such people to see sense is by threatening their credibility and their reputations.

    If Martin McGuiness were to negotiate on behalf of the goverment and went to Frankfurt and told the ECB that [Ireland would default on its bank debt], the ECB would immediately take notice. That is because the likes of McGuiness is considered to be unreasonable, whereas the likes of Michael Noonan and Patrick Honohan are considered to be reasonable and malleable.

    It is essential that the government adopt a position of strategic irrationality and, in all sincerity, threaten to unilaterally default on the private debts of the failed Anglo Irish Bank.”

    Regarding the credibility of any threat that we should make to unilaterally default on the promissory notes or leave the EZ, the threat itself does not have to be that credible. The Euro is a house of cards and as the article in the Times points out, even if we began talking about leaving the Euro, or took legal action against the ECB as suggested by CMcC, confidence in the whole project would be undermined. The ECB and the EU know this and it is only by repeatedly playing our politicians and our Establishment for fools can they achieve thier goals.

    Needless to say, you could play Platitude Bingo with the reply I got from the Private Secretary, which even went so far as to praise the role of the ECB in supporting Irish banks.

  61. bazza Says:

    One final thought…

    I am generally in favour staying in the Euro if we could get one or two from:
    - a favourable restructuring of our banking debt
    - help from the ECB with tracker mortgages
    - some form of EU supported private debt forgiveness programme.

    Otherwise I think we would be better off trying to negotiate a planned exit from the Euro.

    In any case, as this article hints at, we need have an open and honest debate about the future of Ireland in the Euro and what that means regarding public and private debt burdens, economic and political sovereignty, corporation tax and FDI.

    It is totally senseless to treat a Euro exit as taboo - a taboo that is propogated by those in the Media, RTE and the Establishment who are doing just fine and have one eye on collecting their Euro-denominated pension in 10 years.

  62. paul quigley Says:

    ‘There have been a series of recent studies that suggest that competitiveness is not only about flexibility, but also strongly connected to governance. There have been a series of recent studies that suggest that competitiveness is not only about flexibility, but also strongly connected to governance’

    And then he goes on to reduce the notion of governance to fiscal responsibility. Governance is a much broader set of values, as banker Asmussuen well knows, buit it doesn’t suit him to say it.

    We have a pluralist society, so it behooves us to see that each of our important institutions has some basic standards of governance. There has been an uncovering of institutional abuse, in recent decades, often involving cultures of ‘normal’ and ‘normalised’ abuse, from financial to sexual and lots in between. Accountability has been pretty limited, all told. Smelly stuff, by any reckoning.

    Routine and prolongeed over up by the institutinoal heads has been standard practice here, with the result that the media have had to do the heavy lifting.
    I would argue that the willingness to cover up abuse, of various sorts, is in, in practice, a requirement for appointment to a senior post, and that the fact of having done so in some lesser matter, is probably the required mark of ‘reliability’.

    Charles Tilly has a lot to say about trust and democracy, but, IMHO, our democratic beers don’t reach very far.
    http://understandingsociety.blogspot.ie/2010/04/trust-networks.html

  63. Tim O'Halloran Says:

    @ BeeCeeTee
    +1

    “Crisis is our friend.”

    Our politiicians should know better than any that politicians are psychologically oppurtunists, just trying to ride the tiger from one day to the next. They must forget their (partly justified) inferiority complex and realise that German politicians are only slightly more competent or sincere.

    I thought for a mad moment that Pat Rabitte had grasped this and had started rattling the cage. Then the awful truth dawned. Rabitte actually thought we did not pay the €3B promissory note last year!

  64. DOCM Says:

    @ Paul Quigley

    In the context of this thread, the most relevant element of the speech, it seems to me, is the following.

    “The Conclusions [of the European Council] propose to kick-start this much-needed process of reform through three avenues. First, a renewed effort to complete the Single Market, in particular by opening up services and increasing labour mobility. Second, a thorough assessment, carried out in all euro areas countries, of the compatibility of their labour and product markets with membership of EMU. And third, for the issues identified in this assessment to be addressed through the new concept of “Reform Contracts”. Let me elaborate some more on this last point.

    The idea behind the “Reform Contracts” is that countries would commit to specific structural reforms that have a direct positive impact on competitiveness, with those commitments formalised in a legally binding contract. The contract would be multi-annual and, to foster national ownership, initiated by the national government and approved by the national parliament. If the terms of the contract were met, financial support would be provided, targeted at the transitional costs arising from structural reforms – for instance, re-training programmes for displaced workers.”

    That is the deal on offer!

    Ireland is not directly concerned as we are already in a detailed programme. Do we need continued reform? In my opinion, the answer can hardly be in doubt. The sea change that has occured is that the man in the street has woken up to how the elements of the economy fit together and the need for reform. The lack of response to the demonstration by nurses is the most recent example of the general unwillingness any longer to fall for the defence of sectoral interests being presented as a defence of front line services. Indeed, the leader of the official opposition spoke today on RTE of the growing “apartheid” in the public sector and the need for a new “radical approach” (which did not include the introduction of a property tax as no one apparently can afford to pay it although a large percentage of home-owners have no mortgage!).

    A recent anecdote is typical of the crying need for the radical approach in question. A relative needing blood tests was advised that samples had to be taken not later than Wednesday in the week as any later and they would sit over the weekend in the only hospital laboratory in the region that can actually carry out the analysis and would therefore be unreliable! Why does this situation exist? In most European countries, tests can be completed in medical centres on the spot or carried out by a plethora of private laboratories.

    This is but one isolated example among many and far from confined to the public sector. In a once powerful bank, now owned by the taxpayer, staff had recently to be invited to turn off the pop music and turn their attention to business of banking, or what is left of it.

  65. paul quigley Says:

    @ DOCM

    ‘The lack of response to the demonstration by nurses is the most recent example of the general unwillingness any longer to fall for the defence of sectoral interests being presented as a defence of front line services’

    OK. How about we have an end to the defence of private vested interests, within and without the state, dressed up as defence of the state ?

  66. Eureka Says:

    @ DOCM
    Paying people less money to do the same job is wrong and unfair.
    You can’t run a society like that.
    The government must stand for something more than keeping banking happy. Else it loses all moral authority and society becomes very divided and nasty

  67. paul quigley Says:

    @ DOCM

    PS
    Your above slices of PS life are credible. The only thing I would add is that it’s not accidental. PS inefficiency contributes to private profit, in a number of ways. It’s more instructive to look at the puppet masters than the puppets.

  68. Bond. Eoin Bond... Says:

    @ JR

    “(the Chelsea owner them)”

    For the record, Abramovich owned Irish Nationwide bonds. And got wiped out on them.

    @ All

    Killeens argument is premised mainly on three points - that our banking bailout should be euro-sponsored like Spain’s (their’s wasn’t), that we could credibly threaten to leave the euro (70% of people are still pro-euro), and that our debt is unsustainable (that’s far, far, far from certain). His argument sounds lovely, but is inherently flawed.

  69. bazza Says:

    @eoin

    Why is it far from certain that our debt is unsustainable.? It is obvious that even the IMF thinks the government debt is unsustainable. Perhaps you could enlighten us with some precedents of states in fixed currencies sustaining such debts.

    So what if he got it wrong about the Spanish bailout, the point is we need restructuring of the debts incurred by your employers.

    Finally, it is irrelevant that 70% want to stay in the Euro when the Establishment hasn’t even seriously weighed up the pros and come of remaining in the Euro. In any case the threat does not have to be directly actionable in order to undermine the Euro and the ECB knows this.

  70. OMF Says:

    @Cormac Lucey

    But this focus should not distract us from the essential root of the crisis, which is an INAPPROPRIATE CURRENCY & INTEREST RATE REGIME.

    No. The root of this crisis was, and remains, criminal behaviour.

    Banks across the world, including Ireland, are run by career criminals. Criminals who Governments are now openly ouright refusing to prosecute, much less restrain. Bankers are free to ruin shareholders, depositors, borrowers, and nations, with complete impunity. This is the root of our present difficulties.

    In Ireland, sometime around 2002/2003, the executives of Irish banks made a decision to bankrupt their own institutions to enrich themselves. The political parties of Ireland and in particular the Department of Finance supported them in this decision. This support was founded on the unwritten(though probably not unstated) guarantee that the Irish Treasury could be raided to shore up the inevitable bank losses. In return for this support, politicians, regulators and civil servants were made millionaires with emperors pensions by the resulting bubble.

    There is no way any of this could have happened if there had been a realistic chance of the criminals involved being caught and punished. It wouldn’t have mattered how lose or inappropriate the currency or interest rates were. It wouldn’t even have mattered what was going on abroad. If Irish bankers had feared the law and the consequences of crime, they would never have risked bankrupting their companies, betraying their shareholders, and ruining Ireland to make a quick buck.

    But they did. They did because the law is weak in Ireland, and bankers are above western laws in any case. If the gangs of Dublin knew they would never be imprisoned for trading heroin, letterboxes across the city would have been stuffed with introductory samples and mail order offers, the very same as they were stuffed with credit card brochures, and 100% mortgage pamphlets.

    This crisis will not end until bankers are brought into the dock. No matter which currency we choose, no matter what our interest rate, no matter how much our economy grows, and no matter how we negotiate with “The Germans”, the criminals in our banks will always pauperise the rest of us to enrich themselves. Why wouldn’t they? — the law doesn’t apply to them. All that restrains them is their own consciences, something we have yet to see any evidence for.

  71. Bond. Eoin Bond... Says:

    @ bazza

    “we need restructuring of the debts incurred by your employers”

    You’re under some very mistaken belief there…

    Italy has a higher debt/GDP than us, and has had it for the last decade or so. No one thinks there’s even a remote chance of them defaulting soon.

  72. paul quigley Says:

    @ omf

    That’s a good start, as they say. It’s all about circles of influence, and it goes well beyond banking.

    http://www.makingisconnecting.org/gauntlett2011-extract-sc.pdf

  73. John Corcoran Says:

    @Cormac Lucey

    Below is the link to the elementary property valuation error that bankrupted Ireland;
    http://www.independent.ie/opinion/letters/bubble-values-3034584.html

  74. Mickey Hickey Says:

    @John Corcoran

    I will grant you that Ireland has its peculiarities but I do not accept that our banks are incompetent to the point where they only look at values provided by surveyors and auctioneers.

    In normal countries there is a property registry office where it is mandatory to register the sale including all the details including price and mortgage amount within 5 to 20 working days. The details are available on demand to the public by providing the address.

    The banks do extensive analysis on affordability, sales to listing ratios, time on market, forecast unemployment rates, inflation rates, bond rates. In particular close attention is paid to inflation rates and house price % increases over two decades or so.

    Bridge (to builders/developers) loans are carefully scrutinised with particular attention paid to pre sales and collected downpayments.

    While I do not like to disagree with an astute individual like yourself. If what you say is true I would have to be picked up off the floor.

  75. Michael Hennigan - Finfacts Says:

    What’s to worry about if the official narrative is accepted? It is accepted internationally and even economists at home buy it?

    So we expect the whole €64bn in bank related debt mutualised and at a minimum a rescheduling of the promissory notes payments?

    In 2014, Italy is expected to have a net debt of 104% of GDP; Ireland 109%; Portugal 119%; Spain 100%; Belgium 83%; France 87%; Finland -46%; Sweden -16% and Japan +149% (its bond yields are about 1%).

    The IDA this morning will add to the good news narrative and sometime this year the Government changes course and threatens to quit the euro and also warns of the spectre of default.

    This raises again the ‘Hotel California’ problem where it’s not easy to leave and the recent history of what Cormac Lucey terms ‘internal devaluation’ would see the people who have not the support of collective power or wealth, crucified again.

    While most people who’ve more than petty cash to spare, likely have some in overseas euro accounts, unless there were controls imposed, the banks again would come under siege.

    It’s easy to opine that leaving the euro would be messy initially but hopefully things would settle down.

    The last surge in inflation coincided with the worst decade for industrial disputes and in 1979, a total of 1,464,952 working days were lost, which was the second-highest figure on record. In that year the public pay bill jumped 34% according to Garret FitzGerald.

    Make patriotic appeals to ESB workers?

    It would be good to have an analysis of scenarios of a return to the punt.

    How would the indigenous firms who have survived 5 years of recession cope? The biggest area of growth in FDI jobs in the past decade is in financial services. How would the IFSC cope and so on?

    There is no easy panacea for a growth miracle. University research (5% of patents commercialised)? construction? more emigration? Twitter? Dropbox? or an indigenous revolution after a half century of playing second fiddle.

    75,000 officially unemployed in 2000; 325,000 in 2012 (this doesn’t include underemployed); almost 200,000 continuously unemployed for 12 months or more.

    According to the 2004 official report ‘Ahead of the Curve’, produced by the Enterprise Strategy Group: “Over the period 1990-2002, exports by agency-assisted indigenous enterprise grew in nominal terms at 5.5% per annum (versus 15.9% for foreign-owned companies). When inflation is taken into account, the real growth in both sales and exports was negligible.

    In 2002-2011, indigenous tradeable exports rose 4% annually in current price terms. Industrial production in traditional industries fell in the period 2001-2010.

    http://www.finfacts.ie/irishfinancenews/article_1025366.shtml

    Ireland is more dependent than any other developed country on US investment but jobs in foreign firms (including foreign owned retail) are less than a third of the Swedish level where the population is double. Foreign affiliates employed 221,000 persons (full time equivalent, FTE) in Finland in 2011.

    The market for spin will endure and today there will be claims on new FDI projects with an ‘R&D’ component and so on but the actual facts are seldom highlighted.

    There is however a very limited market for inconvenient facts despite the crash. What jobs crisis?

  76. Michael Hennigan - Finfacts Says:

    The euro design was flawed but why did the Finns not go crazy?

    Both Ireland and Finland had experienced serious slumps in the years before the launch of the euro.

    Apart from having 2 Swedes in senior positions at the Central Bank, there has been no significant reform in Ireland that would rank with Finland’s after the dip in trade in the aftermath of the collapse of the Soviet Union.

    In 2007, Finland had a net debt of -72.5% of GDP compared with Ireland’s +12%.

    Finland’s banks are strong and in recent times, the Finns have been discussing how a parallel currency would work.

  77. Gavin Kostick Says:

    This subject returned to by John McManus in today’s Irish Times:

    ‘We need to convince rather than threaten Germans’

    “The best argument we could make at this stage is that Europe has a chance to resolve the Irish problem reasonably cleanly if it agrees to some form of debt relief that ensures debt sustainability. (Its worth remembering that debt sustainability also requires not hammering the economy with tax increases every year.) The alternative – which seems to be the German view – is that we grind our way out of our indebtedness over however many years it takes.

    “Rather than threaten them we need to convince the Germans that this is a very risky course to follow and when it goes wrong it will take far more than a deal on historic bank debt to fix.

    “At a minimum it will require a second bailout and quasi default and at worst Ireland will have been destabilised to the point where an exit from the euro starts to make sense.”

    http://www.irishtimes.com/newspaper/finance/2013/0107/1224328507650.html

  78. echtIrish Says:

    “why did the Finns not go crazy?”
    because they are finns and its hard to tell ….:)
    More serioudly ; they are finns. not irish. we are irish, not finns. People want to be finns, go live there.

  79. John Corcoran Says:

    @Mickey Hickey
    Professor Neil Crosby’s online response to this Irish Independent letter
    “Bubble values” 29th February 2012

    “The analysis may be simplistic but unfortunately it is not flawed.
    Banks ask valuers to tell them what the market value/exchange price is
    at a point in time and then lend vast amounts over time based on that
    simple number. The surveyor gives them that simple number and do not
    think it is their job to tell the banks that the question they have been
    asked is stupid on its own and what they should have asked for is the
    underlying value. It was obvious in 2005 and 2006 that prices in the
    property market were higher than could be sustained by any rational cash
    flow analysis. But in a culture that rewards individuals for short term
    performance rather than longer term perspective, it was in neither the
    bankers’ nor the valuers’ interests to stop it. I cannot see anything in
    what the UK regulatory authorities have proposed that makes me think
    they understand the role of property valuation in driving asset bubbles
    and will prevent it all happening again sometime in the 2020s.”

    Neil Crosby
    Professor of Real Estate and Planning
    University of Reading

    John Corcoran - Neil Crosby is quite right to point out the critical and corrupting role of valuers and banks in the property bubble. RICS and other property related professionals should hang their heads in shame for not raising the alarm bells and not challenging landowners, banks and homeowners about the outrageous rise in property valuations which had no relationship with reality or ‘underlying value’. Their role is similar to that of ratings agencies which were paid to sign off triple A ratings by their clients for junk.financial instruments most of which related to property assets..Sadly it does not require a university professor to point this out.
    Anyone with a modicum of experience in property and development knew we were headed for trouble and I am sure I was not the only person to flag it up. If these so called professionals had been held to account by their so called professional bodies ( as the General Medical Council regulates doctors) half of them would have been struck off. Their primary responsibilty should have been to the reputation of the valuation profession and not their commission. In many countries property is taxed and valuers are independent or are part of the state.

    Radical reform is required or we will surely revisit this crisis again in the near future.

    *Neil Crosby Professor of Real Estate and Planning University of Reading

    Neil has been Professor of Real Estate at the University of Reading since 1994 having been previously Professor at Oxford Brookes and lecturer at Reading and Nottingham Trent Universities. Before that he was a practising valuation surveyor in a combined residential and commercial property private practice firm based in Nottingham. He specialises in commercial property appraisal and the commercial Landlord and Tenant relationship and has undertaken a series of major research studies funded by the UK Government and the UK property industry in these areas. In 2002 he was awarded the International Real Estate Society’s annual achievement award for his work in real estate research, education and practice. He has published well over 100 papers on the various topics listed above and the third edition of his textbook on Property Investment Appraisal with Andrew Baum was published in 2007.

  80. Eureka Says:

    @ Bond
    What’s the estimated interest repayment for 2013?

  81. DOCM Says:

    @ BEB

    If the 70% figure for sticking with the euro remains, I will have to revise my view of the Irish electorate being ill-informed.

    There are, however, two European trains heading for collision that may alter the background circumstances viz the real need for Spain to go formally into a programme and the electoral need for Merkel to avoid this happening cf. the speech by Asmussen.

    The pieces by Dan O’Brien and John McManus in today’s IT are a reflection, once again, of (i) our need to blame external forces for mistakes made domestically and (ii) our quest for assistance from every quarter except our own back yard.

    On the piece by Dan O’Brien, while I am no admirer of Merkel, the jury is still out as to the success or failure of her approach. In any case, electorates, the Irish included, do not take too kindly to being advised by foreigners as to who they should vote for (assuming anyone in Germany is paying any attention; which I doubt).

  82. bazza Says:

    @Eoin Bond

    Your point about Italy is relevant, because it employs the same misguided reasoning that was used to design the Irish and Greek bailout: Italy can support 120% debt to GDP, so so can the other guys.

    However there are several important differences between Ireland and Italy
    1. GDP doesn’t accurately capture our debt level. Using a GDP/GNP hybrid, a more accurate forecas, under benign conditions, is for our debt to reach 140% of national output - a good deal above Italy’s and the IMF predicts far higher ratios in a low global growth scenario.
    2. Irish private debt, of its citizens and domestic businesses, is very high, well over 200% of national income using a conservative estimate. On the other hand Italy has very low private debt.
    3. The Italian government has lots of valuable assets so its net debt is a lot lower than Ireland’s. Ireland’s assets includes the venerable and unsellable pillar banks and a few semi-states with massive pension holes.
    4. The Irish banking system is bust. The Italian banks are not that healthy either but have been massively helped by LTRO. In any case, the problem with Italian banks is not to do with their retail operations, its because they have invested so heavily in BTPs and get hit whenever Italian bond yields gap. Other than that Italy has not suffered a banking crisis and there is a functioning domestic banking system.

    In any case, you may have noticed the markets also started to question whether Italian debt is sustainable, with yields on 10 year debt heading for 7% in 2011. It required the intervention of Draghi, first with LTRO and then with OMT, to bring yields down to sustainable levels. Nobody believes Italian debt is sustainable without massive help (a defacto bailout?) from the ECB.

    However, you are right about one thing - the chances of Italy defaulting are much smaller than for Ireland. That is because the consequences would be so dire for the financial system, that it would be amazing if it were allowed to happen.

    But overall, the idea that Ireland’s debt is sustainable because Italy’s is, is pure folly.

  83. Brian Woods Says:

    @ OMF: re your 11.48 pm of yesterday.

    Staight talking at last. Pschyopathy on the rampage!

    @DOCM: “In most European countries, tests can be completed in medical centres on the spot or carried out by a plethora of private laboratories.”

    Its not that ’simple’ wrt pathology analysis. It depends on what the actual tests are (haematology, biochemistry, or whatever). Some are conducted daily, others are conducted in batches (you need a min number to run the batch). You would need to know the logistics of the pathology labs conducting the analyses. Long as piece of string as they say!

    @MH: I empathise with JC’s complaints. But:-

    “The banks do extensive analysis on affordability, sales to listing ratios, time on market, forecast unemployment rates, inflation rates, bond rates. In particular close attention is paid to inflation rates and house price % increases over two decades or so.”

    I am assuming that some persons are given responsibility for these analyses - but the lending decisions may be taken elesewhere. And as OFM has clearly - and correctly stated, the behaviour of these persons was most questionable indeed.

    I am certain (as I can be) that the analyses must have been ‘rigged’ - and are still being rigged!. You would have to be some class of a clown not to understand the critical relationship between nett (after tax) income and the optimum proportion of that income that may be devoted to (a) a self-amortizing mortgage and (b) total debt liabilities. Its very (like very) simple math. In fact its so simple, and so old, it is even expressed as The Golden Rule of Mortgages.

    The ‘clowns’ and their psychopathic bosses just decided to trash the Golden Rule. BOOM!

  84. John Corcoran Says:

    @Gavin Kostick

    It was John McManus’s newspaper who provided the property propaganda. They were the biggest property auctioneer in the country,owners of Myhome.ie, and the mouthpiece for the property industry. The Irish Times with their large property supplements allowed all these auctioneers/estate agents/surveyors free reign for their puff pieces,propaganda, etc etc.

    Essentially they were a property auctioneer with a newspaper tagged on.

  85. Michael Hennigan - Finfacts Says:

    @ Gavin Kostick

    I wrote before the Budget on the debt issue and the addiction to spin.

    http://www.finfacts.ie/irishfinancenews/article_1025285.shtml

    The Government is trying to ride 2 horses at the one time - - promote a rosy scenario based on unreliable headline data polluted by MNC tax strategies, while trying to also sell the story that the debt is unsustainable.

    The core countries are happy with the positive mood music but are not eager to hear the latter line because there are others in the same boat of high debt.

    So the IMF argues for debt relief while going along with the official figures and spin.

    The Mid-Term Fiscal Statement in Nov said: “Support for overall activity is coming from the exporting sectors, with services exports becoming an increasingly important engine of growth in recent quarters. This, in no small part, reflects the improvements in price and cost competitiveness that have been evident since the onset of the crisis.”

    This argument is simply nonsense.

    Meanwhile, Christine Lagarde forcefully pushed the argument that Greek debt has to be cut to 120% of GDP to make it sustainable. However, Irish debt will peak at over 140% of GNP and that’s based on optimistic growth projections.

  86. John Corcoran Says:

    @Michael Heickey/Brian Woods

    Extract “Breakfast with Anglo ” by Simon Kelly page 47

    ” Banks believe valuers,which always amazes me because valuers don’t buy buildings. Some time ago, a system evolved whereby a valuer’s word was absolute, and a valuation was almost as good as money in the bank.”

  87. Seamus Coffey Says:

    @ Joseph,

    The end-August 2008 data show that the covered banks had drawn down around €15 billion of Eurosystem funding and around €5 billion of ELA from the CBoI. Eurosystem borrowings increased by €20 billion during September. This is significant but a long way from €160 billion.

    Here are some extracts from The Honohan Report:

    8.17 As the discussions regarding procedures for crisis containment started to unfold, early on a clear consensus view emerged that no Irish bank should be allowed to fail, in the sense of having to close its doors and not repaying depositors and other lenders. This strong view departed from the textbook view that only systemically important institutions should be candidates for such protective treatment. But it was shared without reservation by all the key officials involved and, for good or ill, simplified the decision making process. By late September, it would have also reflected the broader reaction at European level to what was considered to be an ill-judged policy decision on the part of the US authorities not to save Lehman Brothers.

    8.20 Apart from the focus on liquidity issues, discussions were informed by the underlying principle - referred to earlier - that no Irish bank would be allowed to fail. In addition, it became apparent from informal contacts that notwithstanding the general turbulence, there was at that stage no European-wide effort under way to mount an initiative to help distressed institutions. Thus, each national authority would have to take whatever measures might prove necessary to deal with its own situation.

    8.48 Although it was not underpinned by specific analysis, the decision early on not to countenance the ―failure‖ of any bank simplified subsequent decisions. This decision was not initiated by the CBFSAI, but was consistent with its view. However, it was an oversimplification which short-circuited decisions that deserved closer scrutiny. Under the circumstances of the extraordinary international financial market environment of those weeks, it was an understandable position. But it could not be a permanent policy if severe moral hazard was to be avoided. And it was also conducive to downplaying the importance of developing an appropriate legal framework for a special bank resolution regime scheme.

    8.49 The “no failure”policy also took the question of optimal loss-sharing off the table. In contrast to most of the interventions by other countries, in which more or less complicated risk-sharing mechanisms of one sort or another were introduced, the blanket cover offered by the Irish guarantee pre-judged that all losses in any bank becoming insolvent during the guarantee period – beyond those absorbed by some of the providers of capital – would fall on the State. Given the “no failure” policy, a
    guarantee with its costs were inevitable.

    There are many who put a lot of store in this concept of irresistible pressure. Without even anecdotal evidence of it in the public domain I don’t. Ireland played with fire on its own free will.

    Separately the money provided to Anglo through the Promissory Notes went to pay off depositors. In September 2008, Anglo had €10.6 billion of senior unsecured bonds and nearly €72 billion of deposits. By the time the Promissory Notes came into existence 18-24 months later the level of bonds was about half as small again.

  88. DOCM Says:

    @ Brian Woods

    Regarding the issue of medical laboratories, I am fully aware of the situation you outline but the issue is not a question of how a service - simple blood tests in this instance - is provided but why it is NOT being provided. If one delves even a little into the situation, it is just another sorry story of unwillingness to change the status quo (rosters, standards, privatisation etc.) peppered with expensive and impenetrable consultancy reports commissioned by the parties in dispute.

  89. Seamus Coffey Says:

    @ bazza,

    The concept of default is subjective. We know that neither GNP or GDP are an appropriate measure of Ireland.

    Default will be a policy decision not the inevitable outcome of some natural process. If Ireland is to default (whatever that means) it will be because someone chooses it to happen.

    The gross general government debt measure is useful but it is important to remember some caveats for Ireland:

    - Ireland has €20 billion of cash in the Exchequer and Other Accounts
    - Ireland has €6 billion of assets in the discretionary portfolio of the NPRF
    - Ireland has banking assets that will be worth €X billion.

    The first two cannot be disputed and are equal to nearly 15% of GDP. The last one is anyone’s guess. John Fitzgerald has suggested a figure of 20% of GDP.

    A further complication is the Promissory Notes. These are a large chunk of the GGD (€25 billion at the moment) but no cash interest is paid out. The interest is accrued but, of course, the accrued interest is due to IBRC which is 100% state-owned.

    Also for debt sustainability it is not simply the size of the debt that matters. It is the interplay between the average interest rate, the nominal growth rate and the size of the primary balance that matters. It is expected that Ireland will be running a modest primary surplus by 2014.

  90. Yields or Bust Says:

    @Mickey Hickey

    You say

    “The banks do extensive analysis on affordability, sales to listing ratios, time on market, forecast unemployment rates, inflation rates, bond rates. In particular close attention is paid to inflation rates and house price % increases over two decades or so.

    Bridge (to builders/developers) loans are carefully scrutinised with particular attention paid to pre sales and collected downpayments.”

    I’ve alluded to this point many times before - lending money in a secured property transaction based on ones ability to repay seems reasonable however pricing a house on the borrowers ability to repay using his/her likely forward earnings is really stupid. Really stupid. But thats why we’re in the mess we’re in becuase that’s what the banks did - by the lorry load. I know I worked there for years.

    Sadly this is the model employed by the Irish banks for years and we know it doesn’t work. Its a myth that house prices are decided by Auctioneers or Valuers - they are not. In a ‘normal’ housing market which we’ve become accustomed to, which we witnessed here from about the early sixties to the middle of 2008, between 95% to 98% of housing transactions in that market simply would not have occured without the aid of the third party lender. In order words the oil that makes the housing market work is credit/leverage and its availability. Without credit there is in effect no housing market and the period since the middle of 2008 has shown this to be the case. Cash transactions play an increasingly large part in any trades completed and without credit we’ve seen the number of tranasctions collapse. This is not complicated stuff.

    In any asset market the party in control the the main ingredient which keeps that market alive and kicking controls the prices in the market. This trueism is the bedrock of most asset markets - housing is no different. Don’t be under any illusion that Valuers or Auctioneers have any significant part to play in pricing houses - they don’t - banks ultimately price property and until we get our collective heads around this I believe we won’t fully understand the extent of the pricing error committed by the banks in the years between 2001 to date.

    So be prepared to pick yourself from the floor - I worked in such institutions for years and what John Corcorans says it absolutley the true state of affairs.

  91. Bond. Eoin Bond Says:

    @ Bazza

    1. “The Italian government has lots of valuable assets so its net debt is a lot lower than Ireland’s” - actually this is not true. Ireland and Italy have roughly similar levels of assets (as a % of GDP) when u examine net debt/GDP, it takes both down by around 10-15% or so from gross levels.

    2. So you agree that Italy’s debt may be sustainable under the current monetary conditions? Would that not count as a precedent under the “perhaps you could enlighten us with some precedents of states in fixed currencies sustaining such debts” challenge you have given? After that, examining differences between Ireland and Italy becomes a subjective issue, and therefore, which was my point all along, it is difficult to say “we will have to default” or that default is all but certain, as Mr Killeen suggests. Italian yields going above 7% in 2011 was not about default risk, but redenomination risk. There’s a far greater chance of Italy redenominating to the Lira than there is on it defaulting on its external creditors, and it was that which the ECB was force to act against. Italy’s debt is highly sustainable via its domestic investor base for the most part (ala Japan, check out its 18bn issue towards the end of last year to retail investors. One word - stunning), hence the difference between redenomination vs default issues. This is also a key issue as regards Killeens article v-a-v ECB OMT etc - Italy had a credible, if unlikely, threat to leave the Eurozone, Ireland does not.

  92. Eureka Says:

    @ Bond
    We all know financial services aren’t great at doing debt sustainability stuff (that’s why we’re in this mess!)
    Two questions:
    1: What is the projected interest repayment going to be in 2013
    2: What is the debt burden in Ireland and Italy per productive labour unit (people paying taxes)
    Many thanks

  93. Bond. Eoin Bond Says:

    @ Eureka

    Conor Killeen is one of the “financial services” types…

    Service of National Debt is expected to be 8.1bn in 2013 per the Government’s “Receipts & Expenditure” white paper from late November.

  94. bazza Says:

    @Eoin Bond

    “Would that not count as a precedent under the “perhaps you could enlighten us with some precedents of states in fixed currencies sustaining such debts” challenge you have given? ”

    No, it wouldn’t because Ireland’s public debt to national income is higher and its private debt is much higher than Italy’s. Therefore, Italy does not set a precedent of service public and private debt together that is comparable to Ireland’s. That is not a “subjective issue” and is the mistake that the EU have made in constructing bailouts.

    “Italy’s debt is highly sustainable via its domestic investor base for the most part (ala Japan, check out its 18bn issue towards the end of last year to retail investors. One word - stunning)”

    I agree, and you are actually supporting my argument here. Ireland, unlike Japan and Italy, cannot rely on a huge domestic investor base to support its debt. This is yet another reason why Italy, or Japan, does not provide a precedent that Ireland can follow.

    And redenomination to Lire would certainly be counted as a default by the markets, even if CDS didn’t pay out. If you are a holder of BTPs and you get paid back in Lire instead of Euro, I think you would consider that has a default.

    The fact is, Ireland’s debt is unsustainable. Whether Italy’s debt is sustainable or not is irrelevant because its total debt, public and private, is much lower and the circumstances are very different.

  95. Fiatluxjnr Says:

    @Bond Eoin Bond/Bazza

    On debt sustainability…is it the case that a different solution is required?
    http://www.reuters.com/article/2013/01/07/us-eurozone-idUSBRE90603N20130107
    And today we see that they have watered down Basel 111 which now won’t be fully implemented until 2019.
    Too big to fail banks have got too bigger to fail…interesting times ahead.

  96. Fiatluxjnr Says:

    @Bond Eoin Bond/Bazza

    On debt sustainability…is it the case that a different solution is required?
    http://www.reuters.com/article/2013/01/07/us-eurozone-idUSBRE90603N20130107
    And today we see that they have watered down Basel 111 which now won’t be fully implemented until 2019.
    Too big to fail banks have got too bigger to fail…interesting times ahead.

  97. Seamus Coffey Says:

    @ bazza

    Ireland’s private debt is large but it is falling, and possibly even falling too quickly.

    Per Central Bank Quarterly Financial Accounts

    Household Loan Liabilities
    2008:4 €203 bn
    2009:4 €200 bn
    2010:4 €188 bn
    2011:4 €183 bn
    2012:2 €178 bn

    Short term loans (< 5 yrs) have fallen from €13 bn to €7 bn. Long-term loans have fallen from €190 bn to €171 bn. It is a massive debt burden but the nominal amount is falling. Household disposable income drops have meant that the fall in the debt-to-income ratio have been less pronounced and at the end of 2011 was still above 200%.

  98. bazza Says:

    @Eoin

    And regarding Italy’s net debt - it may be that Ireland’s and Italy’s government owned financial assets are comparable but their non-financial tangible assets are not.

    http://www.imf.org/external/pubs/ft/pdp/2008/pdp01.pdf

    Italy has non-financial tangible assets worth in the region of 70% of GDP. Whether or not these it is necessary or desirable to sell some portion of these assets is up for debate, but some portion of them could be sold in the future in order to reduce the public debt burden. The fact remains that Italy’s net public debt, when you include non-financial assets, is far, far lower than Ireland’s.

  99. Bond. Eoin Bond Says:

    @ Fiat

    Basel III issue is lower risk vs economic growth/banks able to lend. Tull has for a long time pointed out that higher capital requirements will make banking close to uninvestable for most investors in terms of RoE, unless you have much higher ’structural’ profitability, ie much higher credit margins/fees. So thats the balance that Basel III is trying to figure out, how to derisk the banking system, at the same time as not killing the economy.

    On the issue of debt sustainability, my only issue is that people are so so so certain about outcomes, when the figures are far from certain, and at various times people have been “certain” about Grexit, Italy/Spain asking for a bailout, Ireland/Portugal defaulting needing another bailout, banks about to go bust across Europe etc, all of which havent happened yet. The issue is not about paying back debt, so much as the ability to service the debt and to roll it over. If the NTMA can roll our existing debt at sub 4% levels (realistic given current rates), and we can generate nominal gdp growth of same (ie 2% inflation, 2% real growth, not an outlandish suggestion), then the debt is in fact quite easily sustainable, though it is difficult to actually reduce materially. Ireland, remember, will be moving into a primary surplus next year, something which is in fact one of the key determinants of ‘debt sustainability’.

  100. bazza Says:

    @ eoin

    You write above that the debt will be difficult to reduce materially. However that is exactly what we are required to do under the EU treaties. Service and roll-over is not enough.

  101. Bond. Eoin Bond Says:

    @ bazza

    we dont have to start complying with it until 2019. A lot can happen between now and then.

  102. Eureka Says:

    @ Bond
    Thanks.
    Now what is our actual tax base?
    4 million people (not all tax payers) and some big corporations (paying little in tax but really inflating GDP numbers).
    8 bn equates to E2,000 per person (a crude measure)

    So what I’m trying to say is that debt sustainability is elastic. It depends on taxable income and the level of service cuts a country can absorb.

    I can’t believe that sustainability isn’t calculated in some more complex way than just deficit per GDP

    It’s the subprime crap again only this time applying to entire countries

  103. Aisling Says:

    @BEB +1 on the certainty issue.

    The other point, frequently ignored, is what happens to domestic investors (they have to be made whole) when a sovereign defaults as with Greece and her banks.

    So taking into account the portion of our debt held by our official creditors, and the portion held by domestic investors, the amount by which we could actually reduce our debt stock by defaulting is really quite small. I seem to recall that Seamus Coffey did a nice piece on this a while back but I can’t find it.

    The official debt cannot be defaulted on unilaterally without us being prepared to exit the EU and that really would terrify the MNCs.

  104. Aisling Says:

    @Eureka it also has to take into account the strength of the social contract on which a society is based, and the willingness to default.

    Greece has defaulted (in the hard sense of the word) numerous times over the years, by contrast Italy (in the last hundred years) partially defaulted on those bonds held by investors of States it was at war with during WWII.

    The idea of a hard default is unacceptable in the country that gave us the word credit, possibly not unrelated to domestic demand for their bonds, so Italy will always find higher debt sustainable for political as much as economic reasons.

  105. Bond. Eoin Bond Says:

    @ Eureka

    “I can’t believe that sustainability isn’t calculated in some more complex way than just deficit per GDP”

    I completely agree. Hence why i find arguments like “but Ireland’s (gross) debt/GNP is XXX%, we have to default!!” to be of little or no value. Its why i have tried to bring in ideas like net debt, primary surpluses, debt cost vs nominal growth etc. But of course, most people have already made up their mind and don’t want to listen.

  106. Seamus Coffey Says:

    @ Aisling,

    This maybe?

  107. Eureka Says:

    @ Aisling
    That affects the will to default - the hard financial stuff determines the ability not to default. I think this is the shift in thinking that needs to occur.

    But this is not saying we stop reforming. We just change our focus. We grow a pair!

  108. Eureka Says:

    @ Eoin
    Is there any merit in using tax base or take or whatever you want to call it as a divisor to debt service costs? It seems there should be but I’m not sure.

    Our taxable base is limited. We can’t push up corpo tax much more and costs are so high (secondary to legacy mortgage/rent costs) etc that there’s not much more left to give here

  109. Aisling Says:

    @Seamus Thanks, that’s the one. Nice piece, and nice to see that the general thrust of this thread is less sympathetic to the “threatening default is the answer to all our prayers” cause than it might of been at the time you wrote that.

  110. Aisling Says:

    @Eureka A country rarely, if ever, “has to default” and thus the political will to default is important. You think that people cannot tolerate much more in the way of taxation etc but that is your belief, it is not a cold hard fact.

    Ireland still has a relatively light tax burden, and an incredibly progressive tax system relative to our peers.

    We still have a relatively generous welfare system relative to our peers.

    We still have an incredibly expensive public sector relative to our peers.

    We have impressively low poverty rates relative to our peers.

    All based on OECD data besides the poverty rates which come from the ESRI/ Dept Social Protection paper on low work intensity households.

    So it is political, it is not based on cold hard “facts” since there are few cold hard facts around when it comes to finance, and those that are around e.g. by referencing the OECD data, suggest that we’re really not all that badly off.

    Political. Not financial. Determined by social cohesion and political will.

    Unfortunately people don’t always seem to understand that.

  111. Eureka Says:

    @ Aisling
    Best to agree to disagree here.
    Debt is not infinitely sustainable. Our welfare needs reform but not without money for labour activation and stimulus of the domestic economy (to provide jobs for those coming off labour).

    We need the reforms but to do them properly and sustainably we might have to miss a few targets in the short-medium term. It’s a better way to go - and there’s not much they could do about it.

    BTW I don’t want to default but debt is not infinitely sustainable

  112. Eureka Says:

    …and to take another of the points - PS wages. How many mortgages are not in arrears because of these at the moment (that’s a real number) how many would fall into arrears if they’re cut (another real number) and how much more recapitalization would banks need if that we’re to happen (another real number). There are real numbers here - the cost of meaningful reform is greater than thought initially

  113. Yields or Bust Says:

    @Aisling

    “The official debt cannot be defaulted on unilaterally without us being prepared to exit the EU and that really would terrify the MNCs.”

    Why?

    The most properous time for MNC in terms of them entering the country was the late 1990s when the punt was still the currency - I’m not a big believer the in the conventional thought that we’d be eating seweed if we were to ditch the currency. The case is far from proven. By the way there have been well over a hundred currency unions of some shape or another dissolved over the past century or so and the economic outcomes has generally been a net positive following completion.

  114. Aisling Says:

    @Eureka You maintain that the debt is not sustainable but you’re not offering any credible analysis as to why this is.

    So long as there is the political will and social cohesion to be able to reduce the deficit and retain the ability to service the debt, provided that there is a sufficient appetite for Government bonds to allow the debt be rolled over as it matures, there is nothing to indicate that the debt is unsustainable at this time.

    As BEB pointed out if you look to Japan they’re sustaining an eye watering debt to GDP ratio, if you look to Italy they have consistently sustained a ratio well above ours, if you look to Argentina they hard defaulted with a ratio that would be the envy of Germany, the UK or the US.

    So since we agree that there is no magic debt to GDP ratio that makes debt “unsustainable” (and before we wheel out the old GNP line, Swiss GDP to GNP is more distorted than ours, the FTSE 100 distorts up UK GDP because dividends by parent companies to foreign investors do not get removed from GDP while dividends from subsidiaries to foreign parent companies do, it is an arbitrary term which everyone but Ireland accepts as a benchmark, Ireland is alone in insisting that an arbitrary benchmark is insufficiently precise).

    The public finances are coming into shape, there seems to be an appetite for both Government and banking debt at this time, and the revolution is not yet visible on the streets. So why, given this, do you insist that the debt is not sustainable?

  115. Aisling Says:

    @YOB read my post again. We cannot unilaterally default on the official debt without leaving the EU - not just the euro.

    If you think that the MNCs will be happy remaining in Ireland outside the EU then I beg to disagree, a big part of our appeal is EU membership and access to the common market hence all those exports to Belgium.

  116. Aisling Says:

    @Eureka I don’t disagree that this is complicated, cut PS salaries and you may put pressure on the banking system (although how many higher paid, older public servants have mortgages?). I’m just pointing out that a lot of this is opinion and not fact and the two ought not to be confused.

  117. Eureka Says:

    @ Aisling
    At the moment 2,000 Euro per person to service debt is sustainable.
    In Japan maybe they have a decent corporation tax rate that takes the burden or maybe they have a greater tax base (I know they have very low unemployment which affects hard facts and political willingness) and I think they have their own CB which can alleviate burden through monetary policy and I think most of their bonds are domestically owned so interest repayments recirculate in the domestic economy (it’s like welfare for oaps).

    It’s very complex really and very nuanced. Maybe take the percentage of debt servicing that is exported and divide that by the tax base or something - but there is a number…

    I don’t know the number but our fundamentals are pretty weak (high legacy costs) and an unsqueezable MNC sector

  118. Bond. Eoin Bond Says:

    @ Eureka

    with a strong hat tip to Michael Hennigan, but here’s a handy graph showing debt interest as a % of GDP and as a % of tax revenue, updated for Budget 2013. Its high, but no higher than the early to mid 90s.

  119. Bond. Eoin Bond Says:

    and here’s the actual link…(MH does in fairness raise the issue of EU subsidies at the time)

    http://www.finfacts.ie/irishfinancenews/Irish_Economy/article_1025273_printer.shtml

  120. Seamus Coffey Says:

    @ bazza,

    The concept of default is subjective. We know that neither GNP or GDP are an appropriate measure of Ireland.

    Default will be a policy decision not the inevitable outcome of some natural process. If Ireland is to default (whatever that means) it will be because someone chooses it to happen.

    The gross general government debt measure is useful but it is important to remember some caveats for Ireland:

    - Ireland has €20 billion of cash in the Exchequer and Other Accounts
    - Ireland has €6 billion of assets in the discretionary portfolio of the NPRF
    - Ireland has banking assets that will be worth €X billion.

    The first two cannot be disputed and are equal to nearly 15% of GDP. The last one is anyone’s guess. John Fitzgerald has suggested a figure of 20% of GDP.

    A further complication is the Promissory Notes. These are a large chunk of the GGD (€25 billion at the moment) but no cash interest is paid out. The interest is accrued but, of course, the accrued interest is due to IBRC which is 100% state-owned.

    Also for debt sustainability it is not simply the size of the debt that matters. It is the interplay between the average interest rate, the nominal growth rate and the size of the primary balance that matters. It is expected that Ireland will be running a modest primary surplus by 2014.

  121. Fiatluxjnr Says:

    @Bond Eoin Bond
    I wouldn’t disagree on your take on the sustainability issue, however, if Reinhardt and Rogoff are correct in their thesis debt over 90% to GDP will restrain growth and we may not get the growth you project (2+2). So perhaps our current situation is unsustainable….the only real way out is inflate it away.
    At the rate world central banks are printing the stuff it looks like inflation is inevitable. But forecasting, as you point out, is a hazardous game.

  122. John Corcoran Says:

    @Cormac Lucey
    It had nothing to do with low interest rates.
    We had low interest rates in the past without monster property bubbles,also low interest rates were available to all other eurozone countries and almost none had monster property bubbles.

    There were four reasons.
    1. The banks believed the valuers ,and there was a total misallocation of resources with most Irish banks becoming mono property lenders.
    2. There was weak or no risk management by the banks.
    3. There was inappropriate bonus schemes ,where banks paid large bonuses to lenders to lend money. Incentives work.
    4. Light or zero regulation.

    It had nothing to do with low interest rates.

  123. Eureka Says:

    @ Eoin
    Thanks - Will have to look for it
    Ah the 90’s - remember them well. We devalued by 10% in 1993 from what I remember.
    Now others will disagree but that helped the economy grow over the next 6 years to the point where it could sustain debt. We don’t have that option too much now. Also we were 7 years away from the credit bubble and Greenspans boom that made all that debt go away.

    Different times. Trajectories and policy options very different now. Just because it worked out ok then…..

  124. Eureka Says:

    At the risk of revealing mathematical stupidity doesn’t the y axis have GDP as a denominator? So higher GDP leads to a distortion?? I dunno.

  125. Aisling Says:

    @Eureka just a couple of points that you’re maybe not taking into account.

    Our corporate sector (especially banks and builders but also others reliant on the domestic market) made huge losses in 08/09 etc These losses are tax deductible reducing our corporate tax take. Once the losses are utilized, without the corporate sector generating any additional profits the tax take will appreciate. Through the amendments to the corporate debt regime, the introduction of transfer pricing, and the increase in the CGT rate the MNC sector is being squeezed through their effective rate, and can be squeezed more through their effective rate. All that should be sacrosanct is the headline rate as it gets us to the beauty parade final with Switzerland. Our workforce, education system, legal system, language and the goodwill of the diaspora close the deal, not 12.5%.

    Based on the Economist’s criteria the property sector is in the process of over correcting as is the norm when there’s a bubble burst. As a result our CGT and SD take is derisory at the moment. Once the bottom is reached and the prices start to appreciate these two tax heads will generate additional taxes without causing any additional hardship. We’re already beginning to see signs of life in the Dublin commercial property market and the introduction of REITs should help here.

    @All in my previous post I meant to say that the FTSE distorts up UK GNP and not GDP as the dividends are deducted from GDP to arrive at GNP.

  126. John Corcoran Says:

    @Michael Hickey

    The surveyors/auctioneers/valuers i.e the property professionals are an SRO i.e. a self regulated organisation which in Ireland means no regulation. These property professionals were responsible for three practices which created the monster bubble.

    First the valuation error i.e valuing all 5 euro notes as 20 euro
    Second the ruinous commercial property lease law organised by a criminal cartel.
    And third ,ninty five per cent of all property sold in the state is sold by surveyors/auctioneers.
    They controlled where the property advertising money was spent. Almost all of it was spent with the broadsheet media and the Irish Times, the mouthpiece for the property industry and owner of MyHome.ie , got the lion’s share. These property professionals. controlled the Irish Times property propaganda and all the other broadsheet media property propaganda. They had enormous influence in these papers editorial policies.

    This third item was the fatal one–the media faciltating this propaganda. There were other useful idiots like the soft landing economists etc

  127. paul quigley Says:

    Aisling
    ‘Ireland still has a relatively light tax burden, and an incredibly progressive tax system relative to our peers’
    Ireland has a maze of tax breaks, which allow individuals and corporations to shelter private income, and accounting professions to thrive.

    ‘We still have a relatively generous welfare system relative to our peers’.
    The low quality, or absence, of vital public services has been ‘compensated for’ by throwing cash at the problems. It’s a mess, and getting worse.

    ‘We still have an incredibly expensive public sector relative to our peers’

    One of the primary reasons for this state of affairs is the way in which individuals and corporations have been able to monopolise the provision of services to the state, and so exert effective price control. The TUs are merely following suit.

    ‘We have impressively low poverty rates relative to our peers.’
    We certainly have some pretty impressive slums.

    As for the sustainability of debt, Michael H is, as usual, on the money. Outside the FDI bubble, growth prospects pretty dim.

  128. Eureka Says:

    @ Aisling
    Don’t underestimate the value of that 12.5%. UK is cutting their corpo tax, many others could follow. The pap about education etc is just to mollycoddle us - Zuckerberg could put Facebook anywhere. The workforce will travel to him.

    No pick up in construction either accorded to Laing O Rourke - at least one more construction company will go bust soon with the contraction in capital spend.

    Property transactions will remain poor because credit is weak incomes poor and demand not great. But would love to be wrong here.

    Was good discussing this though. Could we agree that the ongoing sustainability of Irish debt is at least arguable?

  129. Aisling Says:

    @Paul tax breaks for individuals have been significantly reduced in recent years, they’re all now capped and the caps are generally being reduced year on year. Revenue hired a top “poacher” as the game-keeper in the anti-avoidance sections and the General Anti-Avoidance notices are flying thick and fast at the high net worth sector. The system’s not perfect but it is a damn sight better than it was in 2006 so credit where it is due. Ditto on the corporate side. In 2005 I remember saying that in my view CGT was an optional tax for corporates if they weren’t dealing in Irish property and as a decent tax adviser I can assure you I view it as being much more difficult to “scheme” these days due to the additional anti-avoidance measures introduced, although again more could be done. The disclosure regime now means that Revenue get sight of much tax planning around the time that it is implemented for the first time which gives them the opportunity to legislate to prevent other taxpayers using the same structure.

    The old line that there are multiple uncapped tax breaks out there and that the Government is doing nothing to stop it is just getting tired since it is not supported by the amount of anti-avoidance and capping legislation in recent Finance Acts.

    There are still tax breaks, some of which may not serve the public interest as they ought, some of which are under discussion at the moment, so of course there is more to be done. But the Government is not simply turning a blind eye to the cossetted wealthier classes. Quite the opposite.

    On the slums the ESRI survey indicates that our poverty rates are better than countries like France. Ideally there should be no poverty but we don’t live in Utopia, having less poverty than many of our peers means we should not over state the problem.

  130. Brian Woods Says:

    @ DOCM: “… but why it is NOT being provided. If one delves even a little into the situation, it is just another sorry story of unwillingness to change the status quo (rosters, standards, privatisation etc.) peppered with expensive and impenetrable consultancy reports commissioned by the parties in dispute.”

    True and fair summary! The structures are very bureaucratic. They rival military grade concrete in their impenetrability. The pathologists are a particularly difficult bunch. Its the ‘fees’ you understand!

  131. bazza Says:

    @Seamus Coffey

    I don’t know what you mean by “the concept of default is subjective”, but if you mean that an assessment of debt sustainability is subjective, then I agree. What is not very subjective, is a comparison between the public and private debt burdens of Ireland and Italy, or between Ireland and any other state in a fixed currency (gold, peg etc.) regime, past or present. Based on such a comparison the omens for Ireland’s debt sustainability are not good.

    Comparing the net debts of Ireland with other countries is not so easy, but I think it is very difficult to argue that Ireland is like Japan or Italy and that the Irish Govt. has a large stock of assets that has an unusually large impact on gross debt sustainability.

    I never claimed that GDP or GNP were an appropriate denominator in calculating Ireland’s debt ratio - a hybrid figure as used by others suggest debt peaking undering a benign scenario at 140%.

    Of course, one can define sustainability in whatever why one wants - the probable avoidance of default, the ability to roll-over debt, the ability to reduce debt in a reasonable time frame.

    In my opinion, what is definately not sustainable in the medium term is a country with very high private debt levels, very high unemployment, high levels of emigration and low inflation pissing away 5-6% of national income (140% x 4% avg. rate) every year in interest payments, with little or no prospects for growth in the domestic economy.

    Eoin thinks that a lot can change in next few years (up to 2019). If you exclude the possibility of striking oil off the west coast or some form of technologically induced boom, then the only event likely to precipitate a recovery is a public or private debt restructuring.

    Of course, by the end of the decade, many 1000s more in the Establishment (politicians, bankers, academics) will be that bit closer to their Euro-denominated pension, so who cares?

  132. Aisling Says:

    @Eureka of course it is arguable and dependent upon some things beyond our control e.g. global growth. I just don’t think it can be declared unsustainable at this time.

    On the property sector I was talking mainly commercial property hence the reference to Real Estate Investment Trusts (REITS) which the Finance Bill is bringing in. These will be fund vehicles which will allow mainly foreign investors to invest in Irish real estate with diversified risks.

    I accept entirely that we still have a credit squeeze which will continue to depress the domestic residential market, but the commercial market is not so constrained by the Irish banking crisis. If we see the commercial market ticking up that will improve the banking system’s balance sheet (and NAMAs).

    There are a lot of variables here.

    Oh, but on 12.5% trust me, it gets us to the table but it does not close the deal. Do you think that if Sudan introduced a 0% CT rate in the morning that they would see investment pouring in?

    Yes, the UK bringing down their rate is worrying, not least because they have the consumers, bankers as well as an equally business friendly legal system and workforce.

    Ireland has a reputation for communicating with the MNC community on tax policy, the UK has been catching up in this arena in recent years as well but that gets so much less coverage, and is in fact so much more worrying.

    But that’s tax competition for you. Live by the sword, die by the sword. We could probably do with coming up with a new string for our economic bow.

  133. bazza Says:

    @Eoin Bond

    Re. MH’s graph.

    So the mid-1980’s is something to aspire to now is it? In case you haven’t noticed, we are in a monetary union now unlike in the 1980s, so there will be little or no inflation, no currency depreciation and ultimately no way to grow our way out from under the current debt burden. Not to mention the fact we are unlikely to receive EU structure development funds again or that the private debt burden was much lower in the 1980s, so that once tax and interest rates were lower from historical highs, consumption increased.

    I too have tried to guage sustainability based on more than just public debt as a % of GDP. With unremarkable stocks of public assets, low inflation, low growth prospects, broken banks, high private debt levels and high unemployment and emigation, my assessments is not good.

  134. eamonn moran Says:

    The government seem very confident that they are going to get a deal by March. They have played up a lot so they understand if they don’t get one by then it would be a loss of any remaining credibility. We should start to think about playing a harder game but not till April. Colm McCarthy’s appeals about unfairness are well made and should be repeated as much as possible. Gilmore got in on the act too. Explaining the level of unfairness to Germans who have lots of other fish to fry should be the main aim of government for the next 3 months. The Advertising money spent on the gathering would have been better spent in Germany in an effort to create awareness of the way the banking losses of their banks were forcibly absorbed by a small Island nation which is now very evidently unable to pay its way.

  135. Joe Lawlor Says:

    Cormac,
    You have been one of the few commentators who points out that default and exit from the EZ is a austerity accelerator rather than an end to austerity. That puts you outside the mushy consensus of the commentariat.

    However, in going down this route do you not have to be fairly sure that the public finances are in an insolvent state. Can you provide more proof to advance the debate? If we use debt/output metrics we look dodgy but if you adjust these per Seamus Coffey it looks less clear cut. Moreover if you use debt/tax revenue we are in a difficult but not impossible position.

    If we move take in the off balance sheet stuff, everybody looks in trouble but here there look to be several problems. There is never a full reckoning of both public assets and liabilities so we are only ever given one side of the story. In addition, change some of the eligibility criteria and discount rates and estimates change a lot.

    So on net are we really sure that we are in as hopeless position to justify jumping into the unknown with a course of action that possibly involves leaving the EU? Is the current policy of muddling through and waiting to see how the game develop not the most rational policy?
    If the current level of low nominal growth persists in the medium term then the maths dictate the outcome and we and the other peripheral will probably end up defaulting and leaving but regimes can shift.

    I know at this juncture, above trend growth is deemed improbable but as somebody who occasionally tried economic forecasting in my youth and used other people’s forecasts since then, I would place more faith in
    Pricewise in the Racing Post. At least Tom Seagal seems to know what he is at.

  136. Brian Says:

    @bazza

    “Of course, by the end of the decade, many 1000s more in the Establishment (politicians, bankers, academics) will be that bit closer to their Euro-denominated pension, so who cares?”
    +1

    You might also have included senior civil servants.

    None of these are going to threaten to leave the Euro and if they did no one would believe them.

  137. Eureka Says:

    So there you have it. Debt sustainability is far from certain.
    We don’t want to default but we’ll have to miss a few targets to avoid it

  138. Cormac Lucey Says:

    @ John Corcoran

    I suggest you have a look at the graphs in table 8 (page 19) of this 2008 (!) OECD study in how a unitary Eurozone interest rate had differential impacts across the different countries within the Eurozone because these countries experienced differing monetary conditions.

    http://www.oecd-ilibrary.org/economics/monetary-policy-market-excesses-and-financial-turmoil_244200148201

    It is clear to me that those countries which got the biggest implicit interest rate tailwind, through the common EZ interest rate, also experienced the biggest boosts to lending volumes, construction activity and house prices. Inappropriate interest rates help explain not just what happened in Ireland
    but also what happened in Greece and Spain.

    The frightening thing is that when you update the Taylor Rule analysis, which forms the substance of the OCED report referred to above, it shows that Ireland (together with the other EZ peripherals) needs a deeply negative interest rate today i.e. having come close to the lower bound of base rates, we probably need aggressive QE.

    Absent such aggressive QE, we must endure Irish broad monetary aggregates which continue to shrink i.e. go in precisely the wrong direction. That’s another important reason to consider exiting the EZ. Or at least threaten to do so.

    @Joe Lawlor
    You don’t have to listen to me to wonder about our debt sustainability. Listen to John McHale’s NUIG colleague and adviser to Brian Lenihan when he was finance minister, Professor Alan Ahearne. He told the Sunday Independent in the autumn of 2011 “If you crunch the numbers now, Ireland passes the sustainability test… If growth comes in below forecast, then we fail that test. Our numbers will be unsustainable.”

    Since then, growth has come in continually and seriously below forecast. And that’s before we consider the fact that the official debt sustainability exercises are being done using GDP (rather than GNP) as the denominator. An article in The Economist this week graphically shows the impact of varying the denominator used.

    http://www.economist.com/news/finance-and-economics/21569049-irelands-success-attracting-foreign-investment-has-its-drawbacks-fitter-yet

  139. Bond. Eoin Bond Says:

    The NTMA riposte to Conor Killeen is apt…

  140. Joe Lawlor Says:

    Cormac,

    We are on the borders of sustainability now. But, we are being asked to make difficult policy choices on the basis of forecasts from a profession (cough) with a worse track record than a horse racing tip sheet.
    What did JK Galbreath say about economic forecasting-something along the lines of existing to lend credibility to psychics?

  141. skeptic01 Says:

    @ bazza

    Irish public and private debt levels are indeed very high relative to what might be considered sustainable for an independent, sovereign nation. Nevertheless the markets appear sanguine for now on the prospects for Irish debt. Perhaps the key words here are “independent” and “sovereign”.

  142. grumpy Says:

    @eoin

    Bearing in mind the comments volume on this subject (which had been put in a box for a while) this, which I had missed, is tangentially relevant re less subtle boxing. You might particularly enjoy the comments.

  143. grumpy Says:

    @eoin

    http://ftalphaville.ft.com/2013/01/04/1322513/financial-punditry-reportedly-criminalised-in-turkey/

    too distracted to paste the link..

  144. Seamus Coffey Says:

    @ Cormac,

    “Since then, growth has come in continually and seriously below forecast.”

    Yes, but debt contracts are written in nominal terms. In 2011 nominal GDP grew by 1.6%. For the first three quarters of 2012, nominal GDP is 3.5% higher than in 2011. For GNP, the nominal growth rate for the first three quarters of 2012 is 5.5%.

  145. Bond. Eoin Bond Says:

    @ Grumpy

    the Feds are coming for you first and foremost, but they havent a clue what to do with the Dork… :D

  146. John Corcoran Says:

    @Cormac Lucey.

    Korky’s of Grafton Street will close tomorrow-another victim of upward-only rents tied to 35 year leases. No other country in the eurozone tolerated these feudal leases, where the average lease length is 5 years.

  147. Gavin Kostick Says:

    @ John Corcoran

    Off topic.

    I brought my daughter shopping in the post Christmas sales and into Korky’s of Grafton Street. I saw the sign outside and wasn’t sure whether to take it at face value, or to send a message or post here.

    In any case, as you have brought it up, I really wish you all the very best with your various outlets and business for the future.

    Also, @Aisling: your contributions are like a poke with a sharp stick. I hope you find the time to post more.

  148. DOCM Says:

    @ Aisling

    “Political. Not financial. Determined by social cohesion and political will.

    Unfortunately people don’t always seem to understand that.”

    You are absolutely correct on both counts.

    One immediate test will be the method of implementation of the new property tax. This should - all going well - lay to rest for ever the Bertie/FF mantra of “taking people out of the tax net” as if they were unwilling agents for a power outside their control and were rescuing grateful voters from its clutches. All adult citizens not in fulltime education should be assessed for tax. It is a social responsibility. Whether they actually pay any is, of course, another matter. An entire section of society - how large it is hard to say - is totally unversed in the process.

  149. Joe Lawlor Says:

    DOCM,
    Au contrary, if there is one issue that will revive the politics of the free lunch or

    LSEP (let someone else pay) it is the property tax. It will launch the careers of a whole new generation of populists on the left and right of the spectrum just as it did in 1973, 1977, 1997 etc.

  150. DOCM Says:

    @ Joe Lawlor

    I do not think so! This time Sheriff Revenue Commissioners, or RC for short, is in town, not his Deputy with half-hearted support from a political establishment trying to assess which direction the electoral wind is blowing.

    And the Feds (AKA the Troika) are waiting in the wings should even the Sheriff’s commitment fail.

  151. the couchon Says:

    Ireland got a rare mention on the eurointelligence.com daily news review this morning for this Irish Times article. They called it “unhelpful advice”. Seems to be illustrating the point that the way to get heard is to get difficult. Maybe Ireland can piggy-back an exit on Britain’s re-negotiation?

  152. Eureka Says:

    @ DOCM
    You are wrong. Without growth the debt is unsustainable.
    You will see

  153. Aisling Says:

    @DOCM/ Joe this brings up a real bugbear of mine having practiced tax in both Ireland and the UK. If you don’t pay a tax which you are legally due to pay, and which you know or should know that you are legally due to pay that is tax E-V-A-S-I-O-N not tax avoidance. Sanctions should be criminal and not civil.

    Had Mick Wallace been in the UK, HMRC would have looked for jail time (as under the Irish tax code Revenue could have sought).

    But the ansbacher legacy here means that Irish Revenue don’t seem to understand the difference (again ansbacher account holders telling lies, rather than making a mistake, committed criminal and not civil offences, essentially theft from the State).

    So not only do we have a tax code which results in too many taxpayers not being in the tax net at all, benefiting from but not contributing to society and thus having no “skin in the game”, but we also have taxpayers flouting the law with impunity be they builders knowingly under declaring VAT, pensioners not declaring their pension for tax purposes, or people refusing to pay their household tax/ intentionally undervaluing their property. If not enforced properly against the well off, how can we expect to see the law properly enforced against the masses?

    Revenue are fine in terms of collecting the tax, interest and penalties. I actually think that they do a really good job, and they’re upping their game in the crisis while being sympathetic to put upon small businesses.

    But the ansbacher history means that there is little appetite for criminal prosecutions in all but the most grievous of cases. Maybe that will change, perhaps Revenue will yet do an “Al Capone” on some of our disgraced former politicians and bankers, suspect they’re out of time on Bertie’s “dig out” but there’s bound to be a lot more out there.

  154. John Corcoran Says:

    @Gavin Kostick

    Korky’s Grafton Street,will cease trading at close of business tomorrow the 8th January 2013. We have traded in the street for the last twenty years. Since our rent review in April 2005 when our rent was increased to 445,000 euro p.a. we have struggled to survive. The dispute between ourselves and Canada Life,our landlords, ended upward-only rent reviews in all future commercial leases in Ireland and the eurozone. Below is the reference in JC Wylie’s book “The Land and Conveyancing Law Reform Act 2009″

    The Land and Conveyancing Law Reform Act 2009:

    Annotations and Commentary by JCW Wylie
    Page 318
    “At the final Dail Report Stage the Minister for Justice,Equality and
    Law Reform introduced a provision to ban upward-only rent reviews(see s
    132). Previously the Master of the High Court had called into question
    the appropriateness of such clauses in the current state of the property
    market(in a decision on the application for the appointment of an
    arbitrator,Kidney V Charlton(22 January 2009),HC). There was a campaign
    to ban such clauses by retail tenants who claimed that such clauses
    forced them to continue paying rents well above the going market rate. A
    dispute over the refusal by a landlord to reduce the rent on a small
    shop on Grafton Street,Dublin brought the controversy to a head. The
    Minister was responding to this”

  155. DOCM Says:

    @ Eureka

    You are the one making predictions, not me! In any case, I think they are a waste of time. All one can do is make as accurate an assessment as possible of the situation as it is in the present and try to pick the best course of action.

    I consider that the steps we have signed up to are the best course of action.

  156. Aisling Says:

    Oh, and my other bugbear, because of the reticence to take criminal prosecutions, the civil sanctions in the Irish tax code which Revenue can and do apply, are way too harsh (relative to the UK) and probably illegal under European Human Rights law.

    We have a system that can over penalise a relatively innocent mistake, rather than properly distinguish and prosecute criminal tax offences. But that’s a tax nerd issue….

  157. DOCM Says:

    @ Aisling

    I was in a petrol station recently and the person behind the counter (Irish) was innocent enough to ask me did I need “a VAT receipt” rather than the usual “do you need a receipt with that?”. I replied in a very loud voice that I did and added “does not everybody?”.

    The fact is that the connection between tax and expenditure has never really sunk home in the Irish psyche; an inheritance from our colonial past, without any doubt. (An experience we share with the Greeks).

    My hope, rather than my expectation, is that the fact that the country is in receivership will finally drive the point home.

  158. DOCM Says:

    @ All

    Another contributor, this time from the UK, well outside his comfort zone.

    http://www.ft.com/intl/cms/s/0/d605dc9a-5663-11e2-aa70-00144feab49a.html#axzz2HKFI6ONM

    “Fog on the Channel, Continent isolated”.

  159. Aisling Says:

    @DOCM Imagine the fun I had buying a practically derelict cottage and having to deal with the builders and various suppliers to renovate it? Well intentioned friends (and I hate to admit, family) suggested I always ask for a “cash price”, when I really struggled to keep the smoke from coming out my ears.

    Amusingly, the same people suggested that I should investigate whether grants were available for e.g. the insulation that common sense required me to put in any way, and which I had factored into my budget.

    None of them spotted the inherent irony.

    I would say that the VAT receipt comment could have been innocent. As a consumer I don’t ever need a VAT receipt, I just need a receipt (and actually I generally never want one for something like petrol that I’ll never seek to return). When I buy items for the business I need a VAT receipt in order to recover the VAT. Maybe you looked like a travelling salesman?

  160. Aisling Says:

    @ John C While I admit that my shoe tastes have tended more towards LK Bennett for day to day, and Christian Louboutin for special occasions in recent years, the first pair of shoes I ever coveted (and finally acquired with birthday funds) were from Korky’s on Grafton Street.

    Very sad to hear that it is closing, especially over something like the daft upwards only rent reviews (matched in insanity only by public sector upwards only benchmarking). I’d second Gavin’s best wishes, and apologise that the shoe hound your store turned me into a long time ago went up market and deserted you as a customer.

    @Gavin Will take that as a compliment so thanks :-)

  161. Eureka Says:

    @ DOCM
    Loathe as I am to interrupt this love-in between you and your new found protege the purpose of predictions is to test the accuracy of your current grasp of the current facts.

    Takes courage.

  162. Joe Lawlor Says:

    Eureka,
    It requires absolutely no courage to make economic forecasts. Indeed,, if you are going to engage in that trade, make your forecasts outlandish so as to grab attention. However, judging by the accuracy of most of the predictions there is very little skill involved.

    If you want successful actionable money making ideas please avoid the output of economists. I find Pricewise in the Racing Post to be more accurate.

  163. Brian Woods Says:

    @ DOCM: ” … Irish psyche; an inheritance from our colonial past, without any doubt.”

    We never ‘enjoyed’ a colonial past. We always had either our own parliament or we sent over 100 MPs to Westminster. The ‘Irish psyche’ or whatever you wish to term it is the product of our own ‘rule’ over ourselves. A sad but inconvenient truth.

    Were the Scots ‘colonized’? 8-) Depends whom you ask, I suppose!

  164. Aisling Says:

    @Eureka Badgers will overthrow us and take over the running of the bovine tuberculosis policy from 1 January 2038.

    Don’t think that tells you much about my “current grasp of the current facts” but it most certainly is a prediction.

    In order for me to hold any belief as to its accuracy I would have to be both incapable of distinguishing “fact” from “opinion”/ “belief” and would also have to assume that social sciences were hard sciences like chemistry.

    Since I cannot adhere to either of the two positions required, I’m going to say I view economic predictions based on an assumption of how very many people will react to their perception of the current prevailing paradigms as having limited credibility.

  165. Eureka Says:

    It’s not my fault that nobody checks forecasts against actual outcomes. It’s a very valid way of checking credibility.
    The Romans made engineers sit under their bridges - making them personally invest in their grasp of the facts as they built that bridge.

    @ Aisling
    Now I’m getting a bit annoyed. DOCM, you and Bond have asserted confidently that Irish debt is sustainable and therefore that talk of default is unwarranted. That is a prediction. It seems too that you believe this with almost 100% certainty. That is a prediction.
    I believe that there is only a 60-70% guarantee that Irish debt is sustainable. I see that more assertive stances on corporation tax, fiscal adjustment in the US and further shrinkage of the Irish domestic economy all threaten debt sustainability. I say that our current negotiating position should take that into account. That’s my view. End of.

  166. paul quigley Says:

    @ BW

    We have had this out before, me old mate. The native population was excluded from the polity for centuries by the Planter colonists. The 18th c Dublin parliament was suppressed by the Crown. It took the late 19th c Balfour regime to eliminate rank sectarianism (aka native exclusion) in Irish public appointments.

    There were many levels of responsibility for mis-government, but the prime responsibility always lies with those who have the greatest power. That was, for a very long time, HMG.

  167. Fiatluxjnr Says:

    @Eureka
    I think your assessment is reasonable. (60-70%). As I said earlier the prediction business is hazardous. Someone bothered to check stock pundits 2012 predictions and guess what…they were out by a country mile. Can’t remember where I saw the article.

  168. Aisling Says:

    @Eureka Way to go in reversing positions. I believe our position is that at this time there is nothing to suggest that our debt is unsustainable, and that the unsustainability of debt is difficult to predict and must take into account many factors.

    By contrast your arguments seem predicated on the notion that our debt is “unsustainable” by reference to some indefinable, yet hard and fast mathematical ratio, which manages to distinguish many current examples of outliers without taking into account any context.

    In my humble opinion my badger prediction is really no more absurd.

  169. DOCM Says:

    @ Aisling

    Thank you for that elucidation of an exchange that was puzzling me. I obviously missed my real calling. My point really related to my experience of repeated deliberate attempts in petrol stations, and elsewhere, when cash is proffered, to avoid putting it through the till.

    @ Brian Woods

    You would not get much support, I think, for that view.

  170. paul quigley Says:

    Aisling

    Thanks for the very detailed and informative contributions. Indeed you are a decent tax advisor :)

    ‘Oh, and my other bugbear, because of the reticence to take criminal prosecutions, the civil sanctions in the Irish tax code which Revenue can and do apply, are way too harsh (relative to the UK) and probably illegal under European Human Rights law. ‘

    Ireland retain many aspects of a more closed, rural society (gemeinschaft as the sociologist Tonnies put it) , where respect for authority and authority figures was deeply (and in our schools violently) ingrained.

    The laying of criminal charges would be perceived as a ritual blot on the honour of the family concerned, contaminating them by contact with the lower orders. White collar criminals therefore get an amnesty, so as to protect our dubious social/moral rank order. These notions change very slowly in the absence of war or other catastrophe, such as national bankruptcy

    ‘Yes, the UK bringing down their rate is worrying, not least because they have the consumers, bankers as well as an equally business friendly legal system and workforce.
    Ireland has a reputation for communicating with the MNC community on tax policy, the UK has been catching up in this arena in recent years as well but that gets so much less coverage, and is in fact so much more worrying.
    But that’s tax competition for you. Live by the sword, die by the sword. We could probably do with coming up with a new string for our economic bow’

    That’s very interesting. I would think that this reflects the weakening position of the UK government in the face of the market state, as described by Philip Bobbit.

    As Dorko Gallilei has proven, the productive capacity of the UK economy has been eviscerated, and the North Sea bonanza has largely been wasted. The City and the property game have turned sour. In other words, Osborne hasn’t got enough strings for his bow either, so he’s stealing ‘ours’.

    http://www.guardian.co.uk/uk/2012/dec/05/corporation-tax-cut-autumn-statement

    @ John C
    Sorry for your trouble. Illegitimi non carborundum.

  171. Eureka Says:

    @ Aisling
    Ok we should probably just leave it.
    “…at this time there is nothing to suggest that our debt is unsustainable” and I say there is.
    Agree to disagree and adios

  172. seafoid Says:

    Back to the ur-irish economy discussion. It has become a tradition at this time of the year. Go mbeirimid beo ar an am seo aris. I presume it will be going strong until the mid 2020s at least. Hopefully Shefflin will have retired by then. Germany is very like Kilkenny really

  173. John Gallaher Says:

    @Eureka a little dated but ….also check out the True Economics blog,lots on this topic,that supports your point.The IMF also agrees with you….

    “DUBLIN, Dec 19 (Reuters) - The IMF turned up the heat on Europe to deliver on a pledge to ease the burden of Ireland’s bank debt, saying failure to do so could revive market doubts about Irish debt sustainability.”

    http://www.reuters.com/article/2012/12/19/ireland-imf-idUSL5E8NJ06V20121219

  174. grumpy Says:

    @Sustainability Predictors

    I think you all need to be careful you aren’t thinking about subtly different things. To the extent that sustainability is reflected in bond yields you have to remember that from the investor’s perspective, what is being guessed at is ‘likelihood of default’.

    You might think this is the inverse of ‘debt sustainability’ but it is not, as it also factors in the likelihood of what might be termed ‘official fixing’ of the game in the event that a lack of apparent sustainability might otherwise suggest an increased likelihood of default.

    There is now a decent form book on the Eurozone, ECB, IMF, Irish politics and core EZ politics which indicates that all manner of wheezes, delaying tactics, indirect monetary financing, signing up to MOUs, moving of targets etc will be deployed should sustainability decrease (but not so much to obviously make the calculation effectively binary).

    A sovereign bond is now equipped with near automatic official smack-down of any attempt by its yield to indicate debt unsustainability. If you hold bonds, that is what you are interested in.

    Most citizens have a different perspective to a bond investor. He or she doesn’t care that much if the reason he is reasonably confident there will be no default is, say, that taxes can still go up and the base be widened, or one or more iterations of a promissory note restructuring will be conjured up if unsustainability starts to look likely.

    The political landscape makes it look very unlikely an Irish Gilt would be defaulted on.

    That is a separate question to whether the current debt is sustainable. Sustainability itself may be a question of how much ‘austerity’ the country is willing to tolerate and how widely it is willing to share it out.

    Anyone spot signs of a revolution?

  175. John Gallaher Says:

    maybe not a revolution but most popular story on IT for few days,careful about the ‘brain drain’ and its impact on ‘growth’….

    “There is an air of resignation in the country now that is very noticeable. The fight has gone out of people, which I was saddened to see. I brought up the budget a few times in the pub, and no one wanted to talk about having less money in their pockets next year. At this stage, most people only have the energy to put on a brave face.”

    http://www.irishtimes.com/newspaper/features/2013/0104/1224328418074.html?via=mr

    Hopefully the 10 point underdog’s tonight Notre Dame have some fight in then..

  176. Eureka Says:

    @ John
    Thanks for the links.

    @ Grumpy
    I think I understand what you’re saying - they’re expecting the ECB or something else to buy the bonds in any event.
    There’s no revolution - there is a reduction of humanity to its lowest common denominator. People in debt slavery to banks. It’s just a bad way to run the world - absence of revolution does not make it acceptable

  177. John Gallaher Says:

    @Eureka a bank deal is ‘priced’ into the prevailing yields on Irish govt. debt.
    i questioned/asked as many hedge fund types/bond traders etc. over the holiday season in NY about dear old Ireland…a deal is expected on the bank debt…if you don’t get one the yields will move out.
    Today’s actions by the NTMA could be construed as a precursor to paying the PN note…or NOT paying depending on ones ehm ‘position’,in power or in opposition………
    @Aisling…REIT’s offshore investors..is there no withholding tax in Ireland?
    Perhaps,QIF’s more suitable vehicle.The problem with REIT’s in Ireland will be same as CMBS,lack of geographic/product diversity the markets are very correlated and small.

  178. Bond. Eoin Bond... Says:

    @ John Gallagher

    “a deal is expected on the bank debt…if you don’t get one the yields will move out.”

    You’re clearly talking to different traders than me. And I’m not sure how you could link the upcoming bond auction with the promissory note??

    @ Eureka

    “It seems too that you believe this with almost 100% certainty. That is a prediction.”

    I’ve never come close to such a statement. I’ve questioned the certainty of the unsustainability thesis, rather than push the “is so sustainable” side of it. I’ve simply said that using such blunt gauges like debt/GDP are damn ne’er pointless on their own. Using other gauges and you can create a credible “sustainable” argument. I’ve no problem with people thinking Ireland’s debt is unsustainable. But I do have a problem with people claiming, absent much argument, that default is inevitable.

  179. Aisling Says:

    @John H there is a restriction on QIFs owning property hence the need for REITs, not that QIFs themselves are the problem, depends upon whether they are UCITS or PPIU QIFs.

    Generally no withholding tax in Irish fund structures. Remains to be seen what the Irish REIT legislation will provide for when the Finance Bill reaches the second stage….

  180. Eureka Says:

    @ Bond
    I never said it was inevitable either but it is possible. And that’s what our negotiators should be pushing. Dismissing it one way or the other is stupid…

    There are significant risks though. The construction sector will suffer again this year with the reduced capital spend. The MNCs are coming under pressure, pharma will lose patents etc, etc, all in all the fundamentals aren’t brilliant. That US based broker chap will probay profit take at some stage during the year given that they dropped out if the top 30 this year. All in all best for our negotiators to play up these uncertainties while missing a few targets.

  181. Bond. Eoin Bond... Says:

    @ Eureka

    “That US based broker chap will probay profit take at some stage during the year given that they dropped out if the top 30 this year.”

    He can’t, his position is too big. He’s in it for then long haul. And I never dismissed the possibility of a default, I dismissed the certainty of it.

  182. John Gallaher Says:

    @Eoin………let me think ….the PN is 3Billion the tap is …
    “The debt issue could raise at least €3 billion Bloomberg quoted NCB Stockbrokers as saying. ”

    http://www.businesspost.ie/#!story/Home/News/NTMA+to+sell+2017+bond+in+%22massive+step%22/id/19410615-5218-50ea-e728-916c67523057

    I asked many people what they thought about investing in Ireland/bond prices you may be surprised that a lot thought you already had a bank deal….but that could be a reflection on the lack of coverage in the US..

  183. Eureka Says:

    @ Bond
    Fair enough.
    Goodnight

  184. John Gallaher Says:

    @aisling someone better explain that to frank daly over at NAMA….

    “The Agency will launch at least one Qualifying Investor Fund (QIF) this year as a way of attracting major institutional investors, such as pension funds and sovereign wealth funds, to buy properties on a phased basis.’

    http://www.nama.ie/news/nama-proposes-to-invest-e2-billion-in-ireland-to-complete-construction-work-in-progress-and-develop-greenfield-sites/

  185. paul quigley Says:

    @ grumpy

    Don’t know about a revolution, but that doesn’t mean things will be stable.

    ‘For the past two years, I’ve viewed the unfolding European crisis as a possible/likely catalyst for a problematic bout of de-risking/de-leveraging. I believe the worst of the crisis is still to come, although the current respite could prove somewhat less fleeting than the others. The economic diagnosis is terrible – and 2013 could see the “core” French economy particularly susceptible. The region – certainly including its bloated banking system - will continue to battle with Trillions (and counting) of suspect financial claims/debt. The political backdrop will continue to deteriorate. Italian politics will make for good drama.

    Especially if the situation continues to stabilize, I would expect a more cautious ECB to reconsider its expanded mandate. If Spain does request a bailout, the markets will see the OMT (Outright Monetary Transactions) in action. Who’s getting favorable treatment and how the pie is being divided will ensure recurring stresses and fractures. I still don’t believe the euro makes it. Yet Draghi changed the rules and altered the backdrop. His bold plan to use the ECB printing press to backstop the markets changed short-term speculative dynamics.

    The speculating community covered their European shorts and commenced building long exposure. This (certainly including the powerful short squeeze) incited robust financial flows into the region’s bonds, equities and currency. Such a backdrop opens the possibility that the resulting dramatic loosening of financial conditions proves constructive to confidence and even the real economy, along with further inflating securities markets. And these things tend to take on a life of their own, with unpredictable consequences.

    At the same time, this dynamic only exacerbates systemic risk to future de-risking/de-leveraging. The global response to last year’s worsening crisis was integral to increasingly unwieldy market Bubble dynamics all around the world. Moreover, Europe now – with the leveraged players back on the long side - becomes only more acutely vulnerable to a reversal of speculative flows and associated de-leveraging dynamics, a crisis of confidence and capital flight. The proverbial can was kicked – and indeed this time it appears a pretty good wallop’

    http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10746

  186. Eureka Says:

    This is interesting…and not one mention of badgers!!
    http://www.spiegel.de/international/europe/a-876124.html

  187. Bond. Eoin Bond... Says:

    @ John Gallagher

    Yeah, that’s where I thought you were going with that. Ireland had 24 bn in cash on hand at the end of December, so any required promissory note pay off has long since been funded. This weeks bond issuance is about pre funding 2014 requirements. And I reckon they’ll only decide to raise 2bn in any case (demand will be a lot higher).

  188. John Gallaher Says:

    @Eoin it’s all about the optics…hard cash..everyone gets that,But a bond ‘tap ‘ shur that’s not real money…and sovereigns always roll their debts we will never pay it…etc etc…it’s not like ‘real’ money !
    Ok bar stool Fighting Irish V Alabama ..

  189. John Gallaher Says:

    @Eureka great link thanks,zerohedge covered the same ground a while ago,so no deal before June…Eoin the plot thickens,the PN is getting paid on time in full.Most likely via some convoluted route to confuse…
    The cost to society has been completely ignored in this thread…Latvia anyone..Toronto/NY is gaining a large number of highly educated motivated Irish,there is a “cost” there.The cost to educate them for one.

    http://www.zerohedge.com/news/2012-11-24/myth-irelands-debt-sustainability

  190. grumpy Says:

    @John G

    The key thing the NTMA want to do is build momentum, not try to issue something there might not be demand for - hence a modest tap. The idea is that after a while the H&FMs who really don’t know much about Ireland go with the flow and get on board. Rinse, repeat. Momentum.

    Its competent bond marketing.

  191. John Gallaher Says:

    @grumpy …is this the Big Bang ….NTMA has been clocking up the air miles for..it’s good news but does tend to get a bit exaggerated in Ireland.
    If Ireland is fully funded and “confident” about returning fully to the markets is this not just pointless PR not to mention expensive.
    But “Fox” news gets it there you go all sorted…..
    http://www.foxbusiness.com/news/2012/11/13/analysis-tough-task-for-portugal-to-match-ireland-bond-success/

  192. Bryan G Says:

    Interesting thread. New Year, new enthusiasm, and why not…

    I expect all sorts of shenanigans regarding the “bank deal”, with clueless/spinning politicians talking to clueless/spinning journalists (or should that be scribes?), with most of the economists either AWOL or reduced to justifying various flavours of “only game in town”.

    Irish government negotiating skills don’t amount to much more than “I’ll have what she’s having” (e.g. interest rate reduction on EFSF loans, etc.), so you might think there would be lots of interest in the details of the two major bank recap schemes that happened last year (Greece & Spain) on the basis that the same mechanisms are likely to be used for Ireland. Of course such details might distract from the mystique of “complex” and “technical” discussions being diligently conducted by the PTB.

    Spain appears to have obtained a very cheap 15yr loan of 40bn from the ESM in order to recap some banks, at less than the ECB’s refi rate to start with, along with a nice 10 year repayment holiday. In parallel the ESM printed up some 1yr, 2yr and 3yr notes, which were given to the Spanish FROB to give to the banks to repo with the ECB for some cash. I presume the loan was used to “fund” the notes and that the debt servicing payments will be met by the Spanish government. Everything was “cashless” - no capital markets involved. I also presume the notes will be rolled over when necessary. The interest rate on these notes looks to be between 0.2% and 0.3% depending on maturity. So the cunning plan is to print up some collateral, then back-end load the repayment (or subsequent rollover), along with a super low interest rate. None of this pay-the-principal-as-you-go-along nonsense. That’s only for losers.

    The banks in Ireland are still very much broken. They are not profitable and are not lending enough. That’s the IMF’s view, not just mine. With stagnant growth Ireland’s debt ratio will grow without bound. That’s the IMF’s view, not just mine. A pre-condition for domestic growth is banks that can lend to business with sufficient volume at interest rates that don’t destroy the business plan. Hence the banks need to be fixed. Is the Spanish solution transplanted to Ireland adequate? Maybe, maybe not - Irish loan books are even weaker than those in Spanish banks, even post NAMA.

    The relevant decisions will be made in Berlin, Frankfurt and Brussels to keep the show on the road - the Irish government really has very little to do with it at this point, other than to do what it is told. The time is long past when it had any leverage worth talking about. I don’t take Enda Kenny and his EMC seriously - why should Frau Merkel or Signore Draghi do so? There are now huge and ongoing CB/government interventions all over the world in the capital markets to enable cheap government funding and to prop-up asset prices. Ireland can expect to be a beneficiary of all this in due course (being part of the system that must be saved), but will have to wait for the decisions to be made elsewhere. It will be cheaper for the German taxpayers to get the ESM/ECB printing presses running nicely rather than fund anything directly, so that’s the most probable outcome.

  193. paul quigley Says:

    @ Bryan G

    +1
    Happy New Year to you

    ‘There are now huge and ongoing CB/government interventions all over the world in the capital markets to enable cheap government funding and to prop-up asset prices. Ireland can expect to be a beneficiary of all this in due course (being part of the system that must be saved), but will have to wait for the decisions to be made elsewhere.’

    As Sam Beckett had it, ‘you must go on, I can’t go on, I’ll go on’

    ‘Those market operators most adept at betting on policymaking enjoyed yet another year of stellar returns – along with more incredible growth in AUM (assets under management). The cautious fell only further (and further) behind. The hedge fund community lived to play another day, although with each passing year it seems to become more a story of the giants growing more gigantic.

    There were notable prosecutions of insider trading, yet never in history has inside knowledge of policymaker intentions provided such incredible opportunities for riches. At the Federal Reserve, policies accomplished the objective of spurring the lowly saver further into risky securities. Overall, central banks succeeded in bolstering vulnerable global securities markets.

    Meanwhile, it became increasingly clear throughout 2012 that years of easy money, myriad (ongoing) policy mistakes and attendant misdirected resources have taken quite a toll on the underlying structures of economies throughout Europe, the U.S., Japan, China and around the globe.’

    http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10743

  194. Bond. Eoin Bond Says:

    @ John G

    citing Zerohedge as a source is the lowest form of commentary in my view. He’s becoming more and more deranged.

  195. Michael Hennigan - Finfacts Says:

    It is interesting to observe again that there is invariably more interest in an issue as reflected in the number of posts, when decisions depend on other countries.

    20 or so posts on those boring issues such as the jobs crisis and internal reform would be good outturns.

    A culture can’t be distilled into a soundbite but one-half truth at least would be: “We are victims and we’re helpless!”

    The box on the page linked to below has a chart of comparative risk exposures assumed by governments during the crisis. Adding in unlimited bank deposit guarantees sharply hikes the levels.

    Only Ireland and Denmark guaranteed existing bank debt.

    http://www.finfacts.ie/irishfinancenews/article_1021646.shtml

  196. Brian Woods Says:

    @ PQ: Hmmmm. Methinks that this ‘colonialism’ thingy is a tad misused. Convenient cognitive displacement of causal factors - and all! All those folk are long gone and we did have significant emigration. So who are the residuals then? - the ones with this ‘Irish Psyche’? I would argue that its a more modern - a 19th + 20th century, phenomenon. Say you ran a regression - use the RC Church, the GAA and Populist Politics as your dependents. What would your Rsq be?

    All three of these institutions (and there are others also) MUST have had some influence in shaping the contemporary Irish Psyche. And our population was overwhelmingly rural and agri-based - except for the Lagan valley. They built ocean liners up there!

    Perhaps the real causal factor - if there is indeed such an entity, is that we a just a bunch of superannuated Bogmen! - sorry, Bogpersons. 8-)

  197. Fungus the photo Says:

    Ireland’s strategies are as follows:

    Emigration (since 1840)

    Trojan Horse through Double Tax Agreements (since 1950)

    Growing banks (since CJH)

    We ignored the K cycle, Japan’s Depression, and what 9/11 actually meant: ZIRP and the dangers this represented for the money creation machine. Dreadful lapse!

    Trojan Horse means we are always the good citizen, sucking up to the Big Guys and siphoning off their tax revenues. We are the Kleptocrats!

    We cannot jeopardize successful strategies just because of a decades long dip in the credit cycle!

  198. Aisling Says:

    @John G There is nothing to stop a QIF from setting up a wholly owned company which invests in the property and develops it out, but the QIF itself cannot do this which means that the total structure is tax inefficient if e.g. the investors are UK Pension funds who would not suffer any Irish tax if they bought Irish property directly.

    If the target investors are e.g. UK Life companies it does not matter to them whether they’re paying Irish or UK tax and so the structuring is a moot point. Irish tax is not a cost.

    So NAMA could set up something other than a vanilla fund structure and market it to taxable investors, or they could know that REITs were coming down the road and set up a REIT and market that to all investors including non-taxables.

  199. Aisling Says:

    @John G I stand corrected. Having googled it it seems that QIFs can indeed hold property including development property which would then suggest that the introduction of REITs is targeted at retail investors (???)

    Never liked property taxes so have generally avoided them on the basis that earlier in my career I didn’t like dealing with the people who dealt in property. Too racy for my tastes.

  200. Fiatluxjnr Says:

    On debt sustainability…some doubts from Der Spiegal
    “Unfortunately, this gleaming façade obscures a rather dismal reality. Although Ireland’s economy has stabilized, its debts continue to mount — despite the fact that the country has been diligently fulfilling all of the demands made by the troika of lenders, which consists of the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB). This year, Ireland’s public debt is expected to increase to 122 percent of its annual gross domestic product (GDP) — in other words, beyond the limit at which the IMF believes long-term debt sustainability can be achieved.”

    http://www.spiegel.de/international/europe/ireland-seeks-to-have-europe-share-in-risk-of-ailing-banking-sector-a-876124.html

  201. seafóid Says:

    @ PQ

    “‘Those market operators most adept at betting on policymaking enjoyed yet another year of stellar returns – along with more incredible growth in AUM (assets under management). ”

    I dunno how valid that is. The Squid can barely muster an average RoE of 10% over 4 years, IIRC. That is the sort of thing a well run credit union would be expected to manage . Hedge funds that bet big and bet well may have made money but many are handing cash back to speculators.

  202. DOCM Says:

    @ FLJ

    A useful, and possibly helpful, article in Der Spiegel to the extent that it underlines that all is not rosy in the Irish garden. However, it exaggerates the scope and the role of Presidency.

    P.S. It may not be too rosy in the adjoining UK garden either.

    http://www.telegraph.co.uk/finance/comment/jeremy-warner/9786309/Sterling-crisis-looms-as-UK-current-account-deficit-balloons.html

  203. Fiatluxjnr Says:

    @DOCM
    Agree, it could be useful in the sustainability argument..a dose of reality in the midst of all the hype. I wonder about our Leader courting the opposition in Germany…counterproductive?

    @Seafoid
    Good article in FT today about the chase for yield. Can’t link at moment. Apparently too much money chasing everything that has a half decent yield and I wonder when it will end?

  204. seafóid Says:

    @ Fiatluxjnr

    They’ll buy any crap for yield. Filipino sovs, junk bonds, anything really. It’s just another bubble. They remind me of dogs attracted to table legs.

    It will all end in tears.

  205. John Gallaher Says:

    @Eoin it was from a while back,the post was by True Economics…I did catch up last night and he has certainly headed into “grassy knoll” territority,the commentary has also detoriated.Some of the guest posts are worth reading,excellent one yesterday on Japanese buying Euro’s and also the mobility of people in times of food shortages….or austerity.
    @Aisling agreed always give RE people a wide berth I try to too,but most the race horses are now gone.
    NAMA is/was targeting larger offshore investors with its QIF initiative,which has been on the table for a while…they may have even appointed a manager by now.REIT’s are targeted at smaller investors-tax efficient-way to get exposure to a larger more diversified pool of assets.NAMA which appears to have its own draftsman in the D of F around budget time has lobbied for REIT’s.
    There was one CMBS-securitiesied pool of commercial RE assets-done in Ireland-”Opera”- it matures this year and there is going to be a slight problem….values are way down.It was a Treasury Holdings deal,consists of a decent collection of CBD office’s and some retail.
    It would be very suitable for a QIF or REIT………the vehicle is in place,lots historical operational data available,nicely sized etc.
    This is a link some info. on the one and only Irish CMBS…future REIT!
    Have the prospectus and everything else,if anyone wants it,but this is decent intro…ah the good old days!
    http://www.finance-magazine.com/supplements/deal2006/display_article.php?aid=6405

  206. John Gallaher Says:

    @paul quiqly fantastic link above,great read thanks…ties into some other posts specifically the NTMA “tap”.
    All best to John Corcoran,crazy state of affairs.Some multi national retailer paying minimum wages employing part time workers,with no beni’s will most likely take the space at a significantly reduced rent.
    The agents and lawyers must be happy..

  207. paul quigley Says:

    @ Micaheal H

    ‘It is interesting to observe again that there is invariably more interest in an issue as reflected in the number of posts, when decisions depend on other countries.
    20 or so posts on those boring issues such as the jobs crisis and internal reform would be good outturns’

    There are some fairly obvious explanations for such a state of affairs, if true.

    Many comments contain links which extend and enhance the discussion in various ways. Where the subject matter is domestic, the supply of relevant material is very much reduced. There are few other economics blogs in Ireland, or focussed on economic themes. Like yourself, Gurdgiev does a good and consistent job in that regard with limited personal resources.

    There is little by way of relevant, critical output from our professional economic colleagues. Dublin is a small town, and our other academic centres are even smaller. We are still listening to the last bang from Morgan Sheehy. Seriously dissenting views are neither encouraged or appreciated, and are generally fatal to career prospects.

    Joe Lee said it all with his possessor/producer divide. Paul Hunt has clearly illustated the power relations and the monpolistic practices which hold back change. We are still convenient for the MNCs, but DOCM’s last linki above shows why Aisling is right to be worried. Absent that flow of financial resources and credibility, the waves will be coming in over the side of Hibernia.

    I am brazen enough, as a non economist, to believe that there are no viable solutions to our economic decline in the orthodox economic toolbox. Internal devaluation and PS shrinkage will probably lead to serious disorder. As Bryan G has it above, we are not going to be consulted anyway, so all we can do is wait for the Euro train to hit the buffers, and hope that some glimmer of MMT or Post-Keynesianism eventually takes hold.

  208. Fiatluxjnr Says:

    @Paul Quigley
    Euro train and buffers…..
    http://www.telegraph.co.uk/finance/financialcrisis/9787114/Eurozone-meltdown-cannot-be-discarded-in-dangerous-mix-of-global-risks-warns-World-Economic-Forum.html

  209. Joseph Ryan Says:

    @Bryan G

    re: Spanish Bank Bailouts
    Excellent information. That was certainly news to me. An interest only loan at .2% or .3%.
    So what did Rajoy have to do to get such a deal.
    I suppose Ireland had to be taught a lesson in moral hazard!

    “Spain appears to have obtained a very cheap 15yr loan of 40bn from the ESM in order to recap some banks, at less than the ECB’s refi rate to start with, along with a nice 10 year repayment holiday. In parallel the ESM printed up some 1yr, 2yr and 3yr notes, which were given to the Spanish FROB to give to the banks to repo with the ECB for some cash. I presume the loan was used to “fund” the notes and that the debt servicing payments will be met by the Spanish government. Everything was “cashless” - no capital markets involved. I also presume the notes will be rolled over when necessary. The interest rate on these notes looks to be between 0.2% and 0.3% depending on maturity. So the cunning plan is to print up some collateral, then back-end load the repayment (or subsequent rollover), along with a super low interest rate. None of this pay-the-principal-as-you-go-along nonsense. That’s only for losers.”

  210. Bond. Eoin Bond Says:

    @ Joseph Ryan

    NAMA bonds will roll at around 0.2% next time around…

  211. Aisling Says:

    @John G Not sure that I understand so if you have the prospectus that would help.

    Unlike real estate taxation I like securitization structures (although anti-avoidance legislation has made them so much less fun than they used to be back then…)

  212. seafóid Says:

    @Fiatluxjnr

    I think is the link to the bond article to which you referred earlier

    http://www.ft.com/intl/cms/s/0/f105cb6c-58b2-11e2-99e6-00144feab49a.html

  213. John Gallaher Says:

    @Eoin you were half right and i was half wrong-2.5Billion nice at a good rate but left a few bucks on the table…hope this does not come back to bite/haunt Corrigan at NTMA.He has a very sanguine view of the markets,not shared by everyone why not grab what you can when you can or is it the view that rates will go lower…..it would have been too obvious to take down 3 with the PN note pmt. approaching.

    @Aisling was afraid someone would ask.. actually its first thing here so my apologies for lack of clarity in earlier post.
    Opera-linked the OM-and some reporting on it…just perfect for Ireland’s first REIT or a RE QIF structure….
    One the issues with REIT’s will be who has ‘clean’ enough hands to run them….some ‘yanks’?
    Anyway,this portfolio is in ‘play’ NAMA has the 75mil B piece,from Anglo.
    http://www.sfmlimited.com/files/prospectus/Opera%20Finanace%20II/Opera%20final%20OC.pdf

    This part is for John C……….

    “It last estimated the value of the predominantly retail and office Dublin portfolio at €291.5m as at 28 February 2011, which reflects a 42% capital depreciation since the original December 2005 valuation by DTZ Sherry Fitzgerald.”
    http://costarfinance.com/2012/05/21/treasury-holdings-e300m-irish-property-sale-looms-as-cmbs-debt-nears-expiry/

  214. Bond. Eoin Bond Says:

    @ John G

    “it would have been too obvious to take down 3 with the PN note pmt. approaching”

    this genuinely isnt difficult to understand. They have 24bn in cash on hand. This money is not for 2013. Its for 2014. Its puzzling how people try to invest conspiracy theories like this.

  215. John Gallaher Says:

    @Eoin I was reading zerohege last night….in your opinion do you think the Govt. is going to come clean,put their hands up and state YES we paid in full the PN payment with cash!
    If so why are various representative making fools of themselves by claiming the last payment was not really made ?
    Eureka linked a good piece yesterday ruling out any ‘deal’ before June on bank debt…the tone of the article was a little chilly a bit sarcastic actually,faint praise and all that.

  216. Brian Woods Says:

    @ PQ: “I am brazen enough, as a non economist, to believe that there are no viable solutions to our economic decline in the orthodox economic toolbox.”

    You’re correct. But this will not stop folk attempting the same thing again and again - and expecting a different outcome!

  217. Bond. Eoin Bond Says:

    @ John G

    the last PN payment was settled via a direct issue, on the same day, of an Irish government bond, ie this was given to IBRC as “payment”. Thats the difference. What happened today cant be somehow, in almost three months time, be turned into the same transaction, as it involved different amounts, different dates, a different bond, different counterparties etc. But yeah, other than that, it does involve a government bond, so therefore its the exact same. Eh…

  218. John Gallaher Says:

    @Eoin hmm …….eh what was the NAMA bridge for them ?
    same day ?

  219. John Gallaher Says:

    @Eoin gotta jump here is BL on it and the misinformation campaign currently being waged by the Govt…
    http://brianmlucey.wordpress.com/2012/12/17/are-ministers-deceiving-themselves-or-deceiving-us-on-the-anglo-promissory-notes/

  220. Aisling Says:

    @John G thanks. Messy structure (as expected) so will be all down to the REIT legislation and how flexible it is.

  221. Bond. Eoin Bond Says:

    @ John G

    you’re referring to last year’s PN settlement issue. Today’s bond issue is completely and totally different.

    For that settlement, NAMA’s spare cash was used as a bridge to allow IBRC to repay the ELA before BOI could later step in to provide the financing. Again, im not sure of any way today’s bond issue could be linked to a PN settlement two and half months down the line.

  222. John Gallaher Says:

    @Aisling we actually started this conservation on a question regarding withholding tax,its applicable over here in US to offshore investors in REIT’s.Perhaps Ireland will except them…
    Its a REO/Treasury deal of course its ‘messy’ especially if you happen to still own any….the big question regarding REIT’s is there any apatite ?

    @Eoin nope ….was clarifying this actually…”the last PN payment was settled via a direct issue, on the same day, of an Irish government bond, ie this was given to IBRC as “payment”……

    What actually happened was this and keep in mind it had to approved by b of i shareholders and was extended-the bridge from NAMA.
    Either way its getting paid in full on time…via another sleight of hand is my guess.
    here is the d of f…oh this is due too !
    “Put simply, €3.06 billion will be settled by delivery to IBRC of a long term Government bond with an equivalent fair value. Ultimately, it is intended that this long term Government bond will be financed for one year, on commercial terms, with Bank of Ireland who may in turn refinance the bond with the ECB. While this transaction has been approved by Bank of Ireland’s board it remains subject to the approval of the Bank of Ireland shareholders.

    As a short term interim measure, pending the results of Bank of Ireland’s shareholders’ vote, the financing of the bond will be a collateralised facility provided by NAMA to IBRC on equivalent commercial terms as the financing with Bank of Ireland. NAMA is in a position to facilitate this collateralised financing from its own funds. ”
    http://www.finance.gov.ie/viewdoc.asp?DocID=7195

  223. Aisling Says:

    @John There would be no Irish withholding tax on a payment from a QIF to a US entity, which is one of the reasons I assumed that a QIF could not hold real estate. The QIF pays no tax, but Irish investors in the QIF pay tax.

    Just to clarify a QIF can be a unit trust, a partnership or an investment company, but if they meet certain criteria the normal tax rules don’t apply and the special funds rules do (but with specific anti-avoidance to prevent Irish investors abusing them).

    Generally Ireland is precious about its right to tax income and gains from Irish real estate and so a US taxable in receipt of Irish rental income would suffer 20% withholding tax. A UK pension fund would not but that is because the UK tax treaty grants them an exemption and I haven’t checked if the same is true for US pension funds.

    The question would be whether Ireland would want to forego the taxing rights over rental income in the hope of stimulating the market, in which case the REIT would likely follow either the funds rules (no withholding taxes other than in respect of Irish investors), or the dividend withholding tax rules (no withholding when paid to a resident of a State with which Ireland has a tax treaty).

    We’ll have to wait and see, Finance Bill will be out in the coming weeks. My guess is that it will be a no withholding tax vehicle since I doubt that they’re getting much tax on rental income from commercial property at the moment anyhow - with all the interest deductions out there, with the interest arising in NAMA or a bank flush with losses forward. But I wouldn’t bet the house on it as part of the reason for no withholding in the funds space is that we’re trying to attract foreign fund and foreign fund managers in, Irish real estate is already here and cannot leave.

    An additional issue would be that for a higher rate individual taxpayer the rate of tax applicable to funds is significantly lower than their top rate, but for a lower rate taxpayer it would be higher (poor people shouldn’t be investing in funds I guess). It is catching up on the higher marginal rate, but it is still around 15% less which would make a REIT attractive to Irish HNWs if it mirrors the existing funds regime.

  224. Joseph Ryan Says:

    @Bond. Eoin Bond
    Spanish Bank (ESM) rates
    re: “NAMA bonds will roll at around 0.2% next time around…”

    Let me try to digest this.

    If a ‘live’ bank is being funded or a NAMA or FROB (Spain) distressed asset vehicle is being funded, the rates are at or below ECB rates.
    But if a ‘dead’ bank is being funded (IBRC), then the rates demanded from the State (citizens) can be up be up to 8% (PN).
    What is the logic of that I wonder? It seem to be the ultimate incentive in a ‘no bank failure’ policy.
    But a fantastic incentive to keep a dead bank alive! Even to bring it back from the dead! Maybe that is what we should do.
    Arise Sir IBRC and take your place amongst the exalted!

    PS [I do appreciate that with the flow between the the PN/IBRC/ICB that the net cost to the State may not be ~8%].

    But the NAMA / Spain bond price is ok by me. Even though the debts are odious debts, regardless of who was culpable for its origin, a NAMA / Spain deal would be acceptable to me. Interest only at current ECB rate, rolling over for 50 years/in perpetuity.

  225. John Gallaher Says:

    @Aisling thank you for that,we will find out soon. I actually checked the NAMA website,Namawinelake has also provided extensive coverage on this topic.
    NAMA has already approved a manger for its proposed QIF.,Nov 1 announcement.The parent company is extremely controversial in the US, embroiled in various scandals…perfect for NAMA and Ireland :)
    A bit churlish of me but what the hell they should do their own due diligence..did NAMA really pick these guys given the history…really !

    Announcement here its a division ‘Mercer” of Marsh & McLennan.
    http://www.nama.ie/procurement/

    Some ‘dirt’ on the parent…and i took it easy.
    “Marsh paid an enormous price for its sins. It shelled out $850 million to settle the bid-rigging case. Putnam agreed to $110 million in penalties and restitution. Mercer returned its $450,000 consulting fee to the stock exchange. It cost Marsh another $400 million to settle shareholder lawsuits.”

    http://www.crainsnewyork.com/article/20120226/PROFESSIONAL_SERVICES/302269976

  226. Bryan G Says:

    @Joseph Ryan

    re: Spanish Bank Bailouts
    Excellent information. That was certainly news to me. An interest only loan at .2% or .3%.
    So what did Rajoy have to do to get such a deal.
    I suppose Ireland had to be taught a lesson in moral hazard!

    Unfortunately El Pais (English edition) is not Der Spiegel (English edition), and you don’t get the “the finance minister later appeared in the hotel bar in a dark mood, lit a cigarette, and ordered a gin and tonic” type of reporting, so the background and context is unclear. The complete lack of interest in Spain by the Irish MSM, given the similarity of the problems and their possible solutions, is a sad reflection on the state of financial journalism in the country.

    If a ‘live’ bank is being funded or a NAMA or FROB (Spain) distressed asset vehicle is being funded, the rates are at or below ECB rates.
    But if a ‘dead’ bank is being funded (IBRC), then the rates demanded from the State (citizens) can be up be up to 8% (PN).

    I believe the effective interest rate on the PNs is the ECB’s refi rate (0.75%). The rest is just being shuffled around between different State agencies. The financial system allows for bank financing at very low rates - i.e. the ESM can just print up collateral and grant it to banks, but cannot do so for sovereigns, where it must first raise the money in the capital markets, AFAIK. The problem for Ireland is not the interest rate, but the annual principal repayments.

    Minimizing the cost of the historical recap is only one aspect of the problem however. Honohan’s paper (on another thread) is basically saying that the only way that State-owned Irish banks can be profitable is for them to be sold to some public or private buyer, so that bank funding costs can be decoupled from a stressed sovereign. He is basically placing a “For Sale” sign at AIB HQ, looking for an owner with a large deposit base residing in a strong sovereign, or the ESM itself, so that the low ECB policy rate can flow through to day-to-day bank operations. I am sure Enda has a nice Powerpoint presentation with him on his latest trip outlining all the “Features and Benefits” of AIB.

  227. Joseph Ryan Says:

    @Bryan G

    “I believe the effective interest rate on the PNs is the ECB’s refi rate (0.75%)”

    I have seen that argument made and I understand the logic being applied but do not agree for the following reason.

    The difference between the ~.75% and the PN interest rates of ~6%-8%, is eaten up by the day to day expenses of IBRC, effectively winding up costs that are being borne by the State.
    If Anglo/INBS had been liquidated ab initio, these winding up costs would have been borne by the bank creditors. Therefore the decision not to liquidate the bank initially cost the State in two ways. Firstly the losses had to be absorbed but also the winding up costs.
    The neat trick was hiding the winding up costs in a higher PN interest note so that it would not appear as an annual DOF expense line item.

    On the issue of selling the ‘Irish’ banks and of Mr Honohan’s opinion that you paraphrased;
    ‘that the only way that State-owned Irish banks can be profitable is for them to be sold to some public or private buyer, so that bank funding costs can be decoupled from a stressed sovereign’;
    It seems to me that the argument is full of flaws. The primary flaw is this:

    ‘Irish’ banks cannot be profitable subsequent to a sale to private shareholders , without being made unprofitable from the point of view of the nation.
    The reason is simple.
    In order to make an ‘Irish’ (or any) bank profitable, a foreign owner will have to pay less for Irish deposits and charge more for Irish loans to customers.
    The result is that any profitability to the sold bank will come at the direct expense of the wider economy.
    There will of course be some funding advantages but these will not form the focus of the strategic thrust of a new buyer, and there may well be some administrative savings but these too will come at the cost to the nation.

    I am very perplexed as to why the idea of having the future income stream of potential profits of Irish banks, achieved at the expense of national depositors and national borrowers, sold for a pittance is not challenged more robustly.
    Mr Honohan should know better.
    I have no idea why he should hold the opinion he does. IMHO, Mr Honohan should be asked to state what cap he is wearing on this occasion, that of Governor of the ICB with the national interest being the primary interest, or the cap of the ECB/ESCB whose primary interest is the preservation of an EZ banking system, regardless of who bears the cost of same.

    Perhaps Mr Honohan will produce a national cost benefit analysis. I would certainly like to see one. I thought that all these major decisions were predicated on a cost benefit analysis!

  228. Bond. Eoin Bond... Says:

    @ JR

    You think winding up costs amount to 1.75bn per year or so?

  229. Joseph Ryan Says:

    @BEB

    If the funding costs from the ICB is .75%, why does the State pay 6%-8%. You tell me where the difference goes.

  230. John Gallaher Says:

    @Joesph when the PN’s were issued the rates were based on the prevailing yields on comparable Irish bonds/gilts they had pick something…
    ELA is estimated at 0.75-the ’spread’ btw. the ELA and PN notes depending on ‘who’ you listen to is a wash for the state…….i think its integral to the runoff as the loan book is pretty much garbage at this point.
    But your point is well taken and Anglo should release its run-off scenarios.
    Here you go .the PN pmt. schedule.
    http://www.kildarestreet.com/wrans/?id=2011-09-27.896.0&s=promissory+notes#g897.0.q

  231. Bryan G Says:

    @Joseph Ryan

    What matters is the net outflow from the State - shuffling money around between different pools of money may give clueless/spinning politicians some fuel for deception, but that is a second order issue.

    I am sure Honohan’s argument would be that it is not a zero sum game, and that there would be a net gain to the economy. If the funding premium as a result of the bust-sovereign/bust-bank were removed then with the same profit margin you could lend into the economy at a lower rate. I think there are certainly issues to be looked at carefully, but it seems to me that most of these could be addressed by regulation and supervision. It is not at all obvious to me that Ireland needs an Irish-owned or Irish-scoped banking system - it needs a functioning banking system. Remember that Irish banking and Irish bankers have been abject failures measured by any standard - amongst other things the milieu in which they operate is too small, too personalized, and too interconnected. It leads to all sorts of soft corruption and herding behaviours. What Honohan is saying is that unless the banks are sold, they will end up needing to be recapitalized again, and will still be without a solid business model. Maybe there’s an element of scare tactics as part of the “bank deal” process, but the fact remains that AIB and BOI are both losing money at a rate of 2BN a year.

    Decoupling the banks from the sovereign means, well, decoupling the banks from the sovereign. If that means the end of small general-purpose country-specific banks so be it. Hire a bunch of stubborn Swedes, Finns and Dutch to help with proper regulation, supervision, transparency, lending standards, consumer-protection etc. and move on…

  232. paul quigley Says:

    @ Bryan G

    ‘Decoupling the banks from the sovereign means, well, decoupling the banks from the sovereign. If that means the end of small general-purpose country-specific banks so be it. Hire a bunch of stubborn Swedes, Finns and Dutch to help with proper regulation, supervision, transparency, lending standards, consumer-protection etc. and move on

    Move on to where, with respect ? . We have many overseas banking groups in the IFSC, so it’s not as if Ireland was somehow cut off from the benefits of international financial services. The big boys have no interest in economic development these days. As Dork continually demonstrates, the banks only game is leveraged speculation and capital extraction.

    The shambles in our banking had at least two roots. One is the corrupt nature of our (relatively recent) democracy and our leading public and private institutions. As the Russians say, the fish rots from the head, and Joe Lee showed long ago that small size in not the problem. Ireland has a very different history from the likes of Finland or Denmark, and it showed when the chips were down.

    The other factor is the widespread corruption of western democracy, and the destruction of its productive capacity, by the above financial interests. Your stubborn Swedes etc would be better employed tackling that problem, if they have the cojones for it, because until it is addressed, nothing that is done in Ireland will fix the banks.

  233. Bond. Eoin Bond Says:

    @ JR

    assuming we keep the policy of not letting Anglo default on any of its obligations, the PN note exercise is 90% internal circulation of cash between three State entities - CBI, IBRC and DoF. The real cost is the ELA rate, not the coupon on the bonds. We went through this before on here, did we not, when we tried to figure out of the BOI/NAMA/IBRC prom note settlement was more expensive or not??

  234. seafóid Says:

    @PQ

    “Ireland has a very different history from the likes of Finland or Denmark, and it showed when the chips were down.”

    I think it shows if you read any copy of the Sindo . There is very little decent analytical content in it but it is fascinating -not as a newspaper but as a way of looking at things.

    I was at a meeting in Switzerland the other day. A gathering of apartment owners in a ski resort. They were discussing the building of a new chalet next to theirs and the question of snow removal in the winter came up. How would the costs be divided between the 2 buildings. And a man from Geneva said “the neighbour can’t get services for nothing. Everyone has to contribute” . Comme il faut. Denmark is probably similar. And I was thinking of Joe Lee.

  235. Joseph Ryan Says:

    @Bond. Eoin Bond

    “We went through this before on here, did we not,”

    Yes we did, and I recall you patience as you explained the process. I do agree that if one rules out the liquidation of IBRC etc, the cost to the State on the PN is ~.75%.
    The point I was getting at is that the true cost of the IBRC closure includes the continuing wind down costs, costs normally borne by the creditors in a typical liquidation process. IBRC is funded to a large extent for these costs by the differential interest rates between the PN note and the ELA funds.
    It is pretty much irrelevant at this point from a practical point of view, but it is a relevant point in the PN technical discussions that are supposed to be ongoing all the time, in that it brings out the true cost of the IBRC wind-down. i.e The true cost of the hit taken ‘for the team’.

  236. seafóid Says:

    @PQ

    “Ireland has a very different history from the likes of Finland or Denmark, and it showed when the chips were down.”

    I think it shows if you read any copy of the Sindo . There is very little decent analytical content in it but it is fascinating -not so much as a newspaper, rather as a way of looking at things.

    I was at a meeting in Switzerland the other day. A gathering of apartment owners in a ski resort. They were discussing the building of a new chalet next to theirs and the question of snow removal in the winter came up. How would the costs be divided between the 2 buildings. And a man from Geneva said “the neighbour can’t get services for nothing. Everyone has to contribute” . Comme il faut. Denmark is probably similar. And I was thinking of Joe Lee.

  237. grumpy Says:

    Since this thread is supposed to be about how to negotiate with Germans, maybe someone should think about introducing them to the concept of “consistency”. German politics seems to be an irony-free zone. Enjoy..

    http://ftalphaville.ft.com/2013/01/09/1327783/take-the-german-political-landscape-add-cypriot-banks-slowly-do-not-allow-to-boil-umm-whoops/

  238. seafóid Says:

    I wonder what % the pirate party will get in the upcoming German elections.
    I read a very interesting thing in the NZZ a while ago about the capriciousness of German voters.

  239. Bryan G Says:

    @paul quigley

    Move on to where, with respect ? .

    Move on to an environment where banks can lend in adequate volumes to businesses and individuals and away from needing further public recapitalizations - i.e. the opposite direction to the current trajectory.

    The are small, medium and large problems, and reconstructing the global financial system, worthy as that may be, is one of the large ones, but should not be a precondition for fixing the banks in Ireland.

    The problem in Ireland had nothing to with modern complex financial instruments or the IFSC, but was a classic 19th-century style credit bubble. Given the restricted problem space, I would maintain that the fundamental issue to be addressed is that of adequate supervision and regulation, and that this is far more important than the geographical operating scope of a bank, or its ownership structure. I don’t trust the Irish banking milieu to regulate itself, hence the need for some adult supervision.

  240. Bryan G Says:

    @Joseph Ryan

    I accept your point about the true cost of the bailout needing to include all the costs that would otherwise have fallen on private parties. For IBRC the operating costs look to be about €200m a year, for example.

  241. paul quigley Says:

    @ Bryan G

    I have learned a lot from your posts, but I have to dissent on this point. Our 19th c credit bubble was funded by some 21st c fiancial speculative interests. It’s an example of what Mark called the uneven devlopment of history. If minimal Euro governance structures had been in place, the debacle could not have happened.

    There is little point in arresting junkies and small time steeet dealers, as they are all ultimately disposable. The big, predatory, fish threaten all European democrats.

    If we Irish can’t learn to manage our local credit dealers, we don’t deserve the title of nation. And maybe that’s how it will all pan out, but as we say in the Royal County, it ain’t over til it’s over.

  242. Mickey Hickey Says:

    @Grumpy
    Russia needs an aircraft carrier in the Eastern Mediterranean. Cyprus fits the bill. Hopefully they know how to play their cards to best advantage.

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