Governor Honohan at the Oireachtas Finance Committee

This post was written by Seamus Coffey

The opening address by Governor Honohan at today’s meeting of the Joint Oireachtas Committee on Finance, Public Expenditure and Reform is here.  The transcript of the meeting will be available in due course. [UPDATE: The transcript is here.]

There are several topics briefly covered in the opening address. On the Promissory Notes he says:

… there has been a very intensive process of discussion and negotiation on this matter, which is one of the two main thrusts of the Government’s policy to have a euro area review of the indebtedness arising out of the banking crisis. There is considerable goodwill from all interlocutors in this process. Nevertheless, it has not been easy to find a generally acceptable solution. Taking into account both the statutory position and wider policy stance of the ECB, an initiative of this type will be novel and as such challenging. Using our knowledge of central banking law and practice, we have been working carefully to build understanding and confidence around a set of proposed transactions designed to deliver for Ireland, while not taking other decision makers too far out of their comfort zone. The ECB is an organisation that seeks to proceed as far as possible by consensus, and it is not surprising that this work has been taking quite a while. In fact, what we have designed is, I believe, largely in the interests of the eurosystem as a whole.

In the subsequent words of Governor Honohan it seems that any deal is not “done and dusted”.

32 Responses to “Governor Honohan at the Oireachtas Finance Committee”

  1. Paul W Says:

    “it has not been easy to find a generally acceptable solution. Taking into account both the statutory position and wider policy stance of the ECB, an initiative of this type will be novel and as such challenging. Using our knowledge of central banking law and practice, we have been working carefully to build understanding and confidence around a set of proposed transactions designed to deliver for Ireland, while not taking other decision makers too far out of their comfort zone.”

    So, first, no debt write-off.

    Replacement /refinancing of the PNs with ESM or other longer term EU financing is clearly difficult to do at a low interest rate if pricing is market benchmarked. So I’m guessing it will be financing of the Irish sov with conversion of the higher, longer term interest basis to a shorter term interest basis, with cheaper all-in interest rate. The ‘basis swap’ from LT to ST will likely be magicked in Ireland. Can’t wait to see the ‘complex’ details….and how they will explain it to the ‘plebs’!

  2. tullmcadoo Says:

    Paul W

    On what basis did you think there would be a debt write down when 120% is the forecast peak when other countries in EZ are already at that point and Greece is forecast to get there in 2020?

    That is of course distinct from should be or eventually will be. It seems to me that the solution will be a lengthening of term and a lower of debt service cost-say 50bn for 50 years at 2.5% with moritorium on interest for 5 or 10 years and a baloon at the end.

    As Sir Humphrey might say something that will make it the problem of a future govt. in 3o years time a future EU regime will quietly decide to right all this stuff of…if there is an EU.

    Or we could default, declare our independence, leave the EU and suffer an immediate bout of austerity.

  3. Fiatluxjnr Says:

    @ Tull
    If the debt is stretched out then it is unlikely we will get a better rating any time soon….
    http://www.rte.ie/news/2013/0116/irish-banks-will-need-more-capital-sps-business.html

  4. David O'Donnell Says:

    123

  5. Gavin Kostick Says:

    From the speech.

    “Overall employment and incomes would have fallen even further were it not for the offsetting performance of exporting firms despite the much weaker international environment even than was expected two years ago.”

    A bit convoluted, but for the second part of the sentence.

    No.

    The weaker international environment was not an unexpected Act of God but an entirely predictable and predictable consequence of austerity all round.

    The weaker international environment was not, and should not have been by the Central Bank, unexpected.

  6. anewdawn Says:

    that’sthe second government that the good professor has cut off at the Knees.

  7. What Goes Up... Says:

    Looks like the lad has finally taken off his green jersey.

    Number of mentions of the word “Manageable” = 0

    Also, clearly stating that the PNs were PAID last year:

    As you will recall, an interim solution was applied to that instalment, which was effectively settled with a long-term Government bond rather than cash.

    But he may still be wearing green underpants!

    The Government has recovered access to the bond markets and, while the cost of borrowing has come down a lot in the past half-year, I am sure that spreads would have fallen even lower were it not for the wider uncertainties in sovereign debt markets.

    Riiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiight…..

  8. DOCM Says:

    @ All

    FYI (also posted on another thread).

    http://blogs.ft.com/brusselsblog/2013/01/in-ireland-to-omt-or-not-to-omt/#respond

    No comments!

    The game has not changed one iota in months of to and fro! Irish politicians in general - and much of the commentariat - suffer from the delusion/illusion that politicians in other countries will take political pain on their behalf. This form of arrested development is reaching its limits.

  9. David O'Donnell Says:

    danger of a Hibernian precedent - so sacrificed for the colllective good. [€CB]

  10. Mickey Hickey Says:

    News from Russian Central Bank.

    Predictable, “De ja vu” all over again.

    Via Bloomberg

    Jesse’s Café Américain

    “Monetary Union without Fiscal Cohesion is inherently unstable and unjust.” Jesse
    16 January 2013
    Central Bankers: World Is On Brink Of Fresh Outbreak of Currency War

    “The government will make use of these powers only insofar as they are essential for carrying out vitally necessary measures…

    The number of cases in which an internal necessity exists for having recourse to such a law is in itself a limited one.”

    Adolf Hitler, On the Occasion of the Enabling Act vote Gesetz zur Behebung der Not von Volk und Reich, 23 March 1933

    The global trade and currency regimes are becoming even more dangerously unstable the longer that the real problems underlying the enormous imbalances and rigging of markets that have been occurring for the past twenty years or more.

    A war ended the last Great Depression, it is not surprising that this one may end similarly as well.

    The finanical engineers have failed, repeatedly. But rather than admit their failures and corruption it is likely that they will consistently seek more and broader power to manipulate and allocate the wealth of the world. Fiat is like a Ponzi scheme that must keep enlarging its span of control in order to remain viable.

    ‘Give us more power and we will save you.’

    The tune may change, but the song remains the same.

    Bloomberg
    Russia Says World Is Nearing Currency War as Europe Joins
    By Simon Kennedy & Scott Rose
    Jan 16, 2013 11:24 AM ET

    The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

    “Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.

    The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.

    The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.

    Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.

    G-20 Clash

    The skirmish may lead to a clash of G-20 finance ministers and central banks when they meet next month in Moscow, three months after reiterating their 2009 pledge to “refrain from competitive devaluation of currencies.”

    While emerging markets have repeatedly complained about strong currencies as a result of easy monetary policies in the west, the engagement of richer nations is adding a new dimension to what Brazilian Finance Minister Guido Mantega first dubbed a currency war in 2010.

    After Switzerland blocked the franc’s appreciation against the euro since September 2011, Japan has reignited the latest round of rhetoric as newly elected Prime Minister Shinzo Abe campaigns to spur growth via a more aggressive central bank. The yen has slid 11 percent against the dollar since December and this week touched its lowest level in two years.

    Now other policy makers are speaking out. Juncker, who leads the group of euro-area finance ministers, said yesterday that the euro’s 7 percent gain against the dollar in the past six months poses a fresh threat to the European economy just as it shows signs of escaping its three-year debt crisis…

    ‘Negative Impacts’

    In Norway, Finance Minister Sigbjoern Johnsen said in an interview that a strong krone challenges the economy and that the government must ease pressure on the Norges Bank to avoid krone strengthening by conducting a “tight” fiscal policy. Norges Bank Deputy Governor Jan F. Qvigstad said yesterday that if the krone remains strong until policy makers meet in March, “that of course has an obvious effect on the interest rate.”

    That pushed the currency, which has emerged as a haven from the European crisis, to its lowest level in more than two months versus the euro…

    If Japan continues to pursue a softer currency, reciprocal devaluations would hurt the global economy, Russia’s Ulyukayev said today. That echoes recent concern from other international policy chiefs.

    Federal Reserve Bank of St. Louis President James Bullard said Jan. 10 that he’s “a little disturbed” by Japan’s stance and the risk of “beggar-thy-neighbor” policies. (China has been doing it for about fifteen years, but the imbalances generated favored the American oligarchs. - Jesse)

    Reserve Bank of Australia Governor Glenn Stevens said Dec. 12 that there is a “degree of disquiet in the global policy- making community,” while Bank of England Governor Mervyn King said Dec. 10 that he worried “we’ll see the growth of actively managed exchange rates…”

  11. Gtfaway Says:

    So what’s the response from the government! Honohan is putting it up to them and indeed to the market who’ve been making soothing noises about deals for some time….

  12. David O'Donnell Says:

    … of the €Z financial system. [€CB]

  13. PR Guy Says:

    No deal for Ireland…… unless……

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_16/01/2013_478881

  14. David O'Donnell Says:

    @The Labour Party

    Humbly suggest that you Pull out of Gov right now and lets have a General Election on how to deal with Financial System Debt.

    On country on record has taken on a financial system debt of 50%GNP and prospered. FG will agree to pay every cent.

  15. David O'Donnell Says:

    No Monetary Financing [Draghi, 2012]

  16. Gtfaway Says:

    Pr guy your full of happiness and flowers aren’t you :(

  17. bazza Says:

    Don’t think Governor is his first name.

    Anyway, what will be interesting about any deal will be the seniority of any new debt.

    That is, it Ireland ends up paying off the prom notes and incurring ESM debt instead, whatever the maturity and interest on the ESM loan, it will be likely to rank pari passu or even senior to existing sovereign debt. Also, it will be issued under foreign law, as opposed to all our sovereign bonds, which are issued under Irish law.

    In this case, we would effectively be sacrificing the interests of our sovereign bond holders in order to appease the rules junkies in Frankfurt.

    Any such deal would be an absolute scandal and should criticised vociferously by anyone who understand the issue.

    @Seamus,

    You are on record, in the Indo I think, as criticising Colm McC’s call for legal action against the ECB over senior bank bondholders. You claimed, if I remember, that any deal on the prom notes would be likely to result in considerably more savings than the 4 or 5bn we would have saved had we went against the ECB and burnt senior bond holders.

    Does that mean that if this new deal does not deliver a meanigful reduction in the Eurostat value of our national debt, you will come out with vociferous criticism for the deal? Will you agree with Colm that legal action may be warrented?

  18. Desmond Brennan Says:

    here is link : http://www.centralbank.ie/press-area/speeches/Pages/HonohanStatementJCFPER.aspx

  19. Seamus Coffey Says:

    @ bazza

    This I think with subsequent thoughts here.

    As for:

    “Does that mean that if this new deal does not deliver a meanigful reduction in the Eurostat value of our national debt, you will come out with vociferous criticism for the deal?”

    A significant deal does not have to offer any “meaningful reduction in the Eurostat value of our national debt”. Replacing the €25 billion of Promissory Notes with a 100-year, zero-interest bond would be hugely beneficial, yes?

    That, of course, is not going to happen but a change to interest rates and terms is possible. Karl Whelan has estimated that replacing the Promissory Notes with a 40-year bond with an interest rate equal to the ECB’s main refinancing operations rate could reduce the net present value of the payments by 43%, with an associated related significant reduction in medium-term funding requirements. I would call that significant.

  20. bazza Says:

    @Seamus

    Its a fair point about the Eurostat, or book value. I am well aware of Karl’s analysis and I think there are some problems with it - I had some debate about that with him on his post.

    He used a discount rate of 6% but it is incorrect to use any credit spread in the discount rate. To do so would mean that the riskier that Irish debt becomes, the less the total NPV of that debt is worth to the Irish Govt. Discounting with a credit spread only makes sense if you are an investor and wish to take account of the credit risk of the issuer. If you are the issuer (the Irish govt) it is pointless to take into account your own credit risk when calculating the NPV of your debt outstanding.

    That doesn’t mean you shouldn’t discount. It is right that we should discount the national debt to take account of the time value of money. An appropriate discount rate would include the coupon on the instrument (in the case of the prom notes, 0.5%) plus inflation at 2%.

    With such a discounting methodology a 100 year bullet bond with a low rate of interest would indeed result in a significant reduction of interest. A 40 year bond would also result in a sizeable reduction, but not as much as Karl estimates (I did the calcs quickly and I think it was less than 30%).

    However, a 20 year deal would only see a reduction of about 19% in the real value of the debt, or around 6bn. Such a settlement would hardly help us at all.

    And most of all, as I said above, any of these deals would be disastorous if the the new debt was senior or pari passu with existing and future sovereign debt holders.

  21. Fiatluxjnr Says:

    @Seamus Coffey/Bazza

    “That, of course, is not going to happen but a change to interest rates and terms is possible. Karl Whelan has estimated that replacing the Promissory Notes with a 40-year bond with an interest rate equal to the ECB’s main refinancing operations rate could reduce the net present value of the payments by 43%, with an associated related significant reduction in medium-term funding requirements. I would call that significant.”

    Is it not the case that getting a deal for 40 years at current financing rates ( fixed) would be well nigh impossible?

  22. Joseph Ryan Says:

    “while not taking other decision makers too far out of their comfort zone.”

    Lets publish the ‘Letter from the ECB’ back in 2010. The letter that neither the DOF or ECB will release. I would like to see if that letter is within my ‘comfort zone’.

  23. seafóid Says:

    “it has not been easy to find a generally acceptable solution. Taking into account both the statutory position and wider policy stance of the ECB, an initiative of this type will be novel and as such challenging.”

    Poor Prof Honohan. Timeless really.

    I was listening to a piece by O Carolan last night called “Sí bheag sí mhor” which would translate into modern economic jargon as “big confidence fairy little confidence fairy” and in verse 2 the big “Draghi style” fairy says the following to the “Honohan” fairy

    http://www.youtube.com/watch?v=EBiTDLpTUxY

    “Ní raibh tú ariamh chomh uasal linn,
    I gcéim dár ordaíoch i dtuath ná i gcill;
    Beir uainn do chaint, níl suairceas ann,
    Coinnigh do chos is do lámh uainn!”

    You were never as noble as us
    In degree conferred in tribe or church
    Take your talk away from us ; it makes no sense
    Remove your foot and hand from us

  24. DOCM Says:

    @ All

    I will take the liberty of quoting this extract from the 23 October article in the Indo by Seamus Coffey.

    “The debt deal for Ireland will be a change to the terms of the Promissory Notes. If suitably low interest rates and a much extended repayment term can be agreed, this has the potential to offer real savings. Selling this from a political level will be difficult as the restructuring will not involve any capital writedown. The problems in this regard are mainly as a result of overselling the June 29 EU summit.

    Until the details are finalised and released, placing a value on the benefit of these changes is impossible. This year the government will have a deficit of €7 billion even before debt interest is taken into account and the €6 billion interest bill is mainly the legacy of previous deficits rather than the bank capitalisation payments. The bank debt deal is important but what really matters for Ireland’s future debt sustainability is a continued reduction in the deficit and a return to economic growth.”

    The present government, while it has made considerable progress in reduction of the deficit, has been shying away from grasping the final nettle of excessive payments across the public service, notably in the health and education sectors, and transfer payments generally, a situation compounded by the rising social protection expenditures to aid those directly impacted by the crisis.

    Those not so directly impacted will have to emerge from their “comfort zone” in short order given that 2013 is a crucial year and the government can no longer rely on the distraction of the long-running saga of the banking debt debacle.

    The present favourable situation in the bond markets (largely attributable, as Jon Ihle pointed out in the SBP of 13 January, to the search for yield as the result of concerted action by the major central banks in relation to rates), the coincidence of Ireland holding the presidency, and the light finally beginning to dawn that a radical situation requires radical solutions, would suggest that it is now or never.

    Peter Spiegel of the FT nails it in his blog commentary as to the political difficulties if some form of “troika lite” is also required.

  25. Paul W Says:

    @ Tull
    “the solution will be a lengthening of term and a lower of debt service cost-say 50bn for 50 years at 2.5% with moritorium on interest for 5 or 10 years and a baloon at the end”.
    The interest will be compounding…so your solutuion will be much more expensive than the existing PNs’ low interest rate. Balloon at the end may have a cashflow advantage, yes, but the sov accounts will still accrue? If it is cash accounted (not accrued), then ok there will be a kick of the can down the road to the country’s future. However, the underlying fundamental problems continue. The 122% peak will be breached this year……and that’s as per official (Troika) projections as we have seen….Growth is required, remember. Debt restructure too….2013 is a ‘pivotal’ year afterall!

  26. DOCM Says:

    @ All

    FYI a very thoughtful article by Brendan Keenan.

    http://www.independent.ie/opinion/columnists/brendan-keenan/brendan-keenan-understand-one-thing-about-bonds-none-are-totally-risk-free-3355680.html

  27. Fiatluxjnr Says:

    2013 crucial for others also…

    http://www.reuters.com/article/2013/01/17/us-greece-stournaras-idUSBRE90G0BJ20130117

  28. tullmcadoo Says:

    Paul W
    This is about kicking the can as far down the road in EZ until some future chancellor after a far off election writes the peripheral debt of the EZ countries off -if there still is an EZ. By buying time/postponing the evil day the magic of compound interest will increase nominal G*P and erode the debt ratio.

    The alternative scenario of real austerity (as preached by DOCM and me), default and EU exit has no constituency in this society.

  29. DOCM Says:

    @ TMD

    Although it is probably not necessary to say so, when it comes to default and EU exit, you can count me out.

    As to austerity, what has taken place to date is very real. What has been lacking is its even-handed implementation. We may be getting there under the relentless prodding of the troika.

  30. DOCM Says:

    @ All

    FYI

    It is not looking too bright for “legacy assets” either.

    http://online.wsj.com/article/SB10001424127887323468604578245311300558652.html

  31. Tullmcadoo Says:

    DOCM,
    Super Mario bought time with his liquidity and price support schemes for the EZ to come up with a new architecture for the single currency area. However the so called responsible adults seem prepared to squander that time. Remember, this crisis ends with either default breakup, restructuring, monetization or fiscal transfer in some combo.
    The FANGS seem set on default and breakup. The most messy outcome and the least egalitarian. So be it.
    Maybe the Americans will intervene in the nick of time. Is that not what they usually do in the face of European ineptitude or worse?

  32. seafóid Says:

    @Tull

    “The FANGS seem set on default and breakup. The most messy outcome and the least egalitarian. ”

    They seem set on procrastinating as long as possible and then compromising and repeating ad infinitum. The crisis took a good while to build up and will take a similar amount of time to undo. It won’t be over by Christmas.

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