Reliance on austerity is counterproductive, says former IMF mission chief Post author By Philip Lane Post date April 11, 2013 The Mody interview is available via this page. Categories In Uncategorized 159 Comments on Reliance on austerity is counterproductive, says former IMF mission chief ← Slides from Gaspar Talk on Portugal → Euro Crisis Roundtable: TCD, April 18, 4pm 159 replies on “Reliance on austerity is counterproductive, says former IMF mission chief” …a bit late now… The IMF are jumping off the ship they put a hole in and blaming those still on board for allowing it to sink. More alarming is the news that half of the 50b in SME loans are non performing.. “Targets have been set for the banks to resolve the troubled loans by the Troika, but she said she would not be happy until they were all dealt with. Ms Muldoon added that it would not be clear if the Irish banks would need more capital until they had worked through their non-performing loans. ”It is not yet certain as to whether the banks have enough capital to deal with all of their issues and that is because they have not yet worked through all of their issues. It is not yet possible to know with any degree of certainty that there is too much capital or too little capital in the Irish banks as they stand today,” she stated.” If you add the non performing mortgages then the situation looks bleak for the banks and therefore the country. This is a remarkably frank admission from the Central Bank and makes one wonder about all the spin we have encountered over the last twelve months. Also interesting is the Fiscal cOuncil stance…more austerity…versus the former IMF staffers assessment. Wonder who is right? Calling John McHale. A country is parked outside and gardai are unable to get it to start. Do you know where the keynes are? I seriously wonder if the headline on this article can be a fair reflection of what Mody said. Given the extreme size of Ireland’s negative primary balance, it is hard to imagine that a substantial degree of austerity could have been avoided. Surely, his message must have been that sole reliance on austerity to the exclusion of imposing losses on bondholders is counterproductive. It was apparent through the bailout crisis that this was the IMF position, and that it was over-ruled by the other members of the Troika, so I think it is unfair to accuse him of changing his position. It’s not too late to change course on the bondholders. @ Fiatluxjnr It seems less than coincidental that Mathew Elderfield jumped ship prior to that statement. @BCT “It’s not too late to change course on the bondholders.” They are all gone. Their illegitimate offspring remains in the form of the PN ver 2.0. Our population might be grouped into three: those who knew, those who did not, and the delusional. The first is small in number and are p*ssed on any time they venture out into the open. The second lot are the majority – a flock of sleepwalking sheeple. The third lot are the problem. They are the ones in charge – they make the decisions that effect all the rest of us. They know they must be right and behave accordingly. Its hard to decide whether they are knaves or fools. But one should not assume malice when stupidity is a plausible option. It appears that the greater a persons intellect (or their political office) the greater their displays of ignorance and arrogance. Anyone with 6th class maths could compute the outcome. Income down, expenditure up => insolvency. The proof would be found in a knowledge of the different behaviours of linear and exponential functions. Suprise, suprise they diverge! Are econs supposed to be good at mathy stuff? Seems they may have a blind spot somewhere. Suppose there were no interest payments due on our debts – could we even pay back the principle? I have grave doubts. There is of course the more interesting question. How much of the money that was ‘borrowed’ was fiat credit – that is, it had no prior existence as money until it was created? Can the owner of something created from nothing actually claim ownership? And demand repayment – with interest, if loaned out? I thought that created stuff only belonged to the almighty! Seems money is the exception. Unless there is a significant level of debt writedown and writeoff, we are not going to exit this mess – ever! Ah, shure! Why worry! Something will turn up! ps: @ Paul Ferguson: I got those books you recommended. Thanks. @John Foody Good point. He would have known what was coming down the track. Not to be alarmist but this is probably the single most important piece of information on the state of the banks…after dud mortgages. I haven’t seen such a huge number for distressed SME loans in any other eurozone country..not even Greece. Of course this also reflects the state of the wider economy and does not auger well for any recovery. So a 25b potential liability for dud sme loans and say another 20b for dud property loans makes it likely that further capital will be required. This is probably what Christine was referring to yesterday. Keep the austerity (as per the Fiscal Council)going and that 50% default figure could rise substantially. @Fiatluxjnr “More alarming is the news that half of the 50b in SME loans are non performing..” Even though I would not have known the numbers, the fact that 50% SME loans are not performing does not surprise me one little bit. I doubt that the banks are surprised either, whatever about the CB, or the ptb. The debtors list in many SME companies has become more a wish list than anything else. Do you have the original ref for 50% figure and who used it? PS. Company Law and the ODCE has shown itself to be utterly useless in the shambolic area of small companies. The equivalent of jingle mail is now a common practice. Directors just walk away and leave. There is no requirement in company law to put a company into liquidation. Just stop trading and walk away. Another practice is not to pay, knowing that a liquidation will cost minimum €20,000, with the chances that the unsecured creditor will get nothing anyway. The banks and the revenue will have whatever cake is left. So why thrown good money after bad. Indeed, a potential liquidator or receiver will often give the advise that there is no need to pay staff their wages, salaries etc as the State redundancy fund can do this. I have a lot of doubts about the legality of such advise, but the people giving such advise must surely be well informed! Look – we know s**t will hit fans. I’d love to trawl back over the site and see who said what when but there’s no point. A property collapse has been turned into a general economic collapse by the Troika policies. But life is never perfect. The last 5 years have been a lot less difficult than they should have been. Now we’re into a more difficult phase. Fiat, When you are running with a 6% plus deficit and 120% debt GDP you have little alliterative but to be austere. Well you have one which is default which is actually an austerity accelerant. @Joseph Fiona Muldoon …head of supervision at the Central Bank…as reported by RTE.. http://www.rte.ie/news/business/2013/0411/380882-central-bank-sets-sme-arrears-as-priority/ @ Tull So what’s the solution. A slow lingering inevitable death or a dose of unpleasant medicine with the prospect of a reasonable recovery within a relatively short time frame? @Eureka et al The collective genius of the elites have been very slow to figure out that a bank’s loan book is as fragile as the income and livelihoods in the economy it serves. “Now we’re into a more difficult phase.” I agree with you on that. On a general note, the whole crisis has been a master exercise in monetary retreat by Germany. Outstanding. Planned and organised from day one, with very clear objectives. Cyprus was just a tactical enemy mauling in that retreat, as a warning to others who may be getting ready to jump ship, while the retreat to the core proceeds. @ Tull Default is inevitable. The timing is all that’s left to decide. How will the 50bn in banks be dealt with? Who will pay? How will they pay? Musashasigi suas says there is timing in everything. Why would Mody break cover now? What is going on? Fiat, Default is a relatively high probability now. It does not follow thar it leads to recovery. Has any country ever defaulted to prosperity. Moreover, when we default, the periphery may follow so European backdrop will be poisonous. @ Tull You make it seem like avoiding default is a real choice. Ok – it’ll be bad but it won’t be as bad as you think. You have to be careful with history here. There are a few different things to look at: 1: The reason for the default. Is it due to a systemic fault within that country that persists after the default or is it due to a transient external factor? Big difference. I can just go to 1 at the moment Eureka, I would like to see a proper debate on the pros and cons of policy ranging from continuance of the status quo with efforts to change t&cs to other options which must include default, reform and leaving the EU. @Seafoid Musashasigi suas was regrettably as láthar on the night of the big wind. “Half the €50 billion loans to small and medium firms are non-performing” + “Ms Muldoon said 70% of people in the private sector were working for small and medium firms….” = disaster. Simple as that. Yet, none of this is “surprising”. @ Eureka “Now we’re into a more difficult phase.” Yes…..or at least getting to that more difficult phase. On this trajectory, there’s still a long way to go! The Germans & co. will keep squeezing and extracting. Any bets against additional conditionality in return for loan extension? Approx. 750k people are employed in the public sector and MNC sectors and are relatively protected. The balance of 1.8m working people in Ireland will continue to be hammered. Mention in the papers today that the Germans may target the 12.5% tax rate will add to the debacle. At least we are getting some official “honesty” about the full extent of this disaster for Ireland. However, as BW Snr says above, the math simply does not add up (except in the context of imaginary Official projections). John McHale & Fiscal Council seem to be glued to the Official Govt Strategy, rather than being an independent think-tank. Within those confines, I can understand their desire to get to a less than 3% or zero deficit as soon as possible. However, they are deluded if they think that they can get ahead of the falling knife of unsustainable sovereign debt. On this path, the day will come where deposits and funded pension funds will be attacked (again). @Tull Agreed on necessity for debate and rational thinking rather than a list of TINAS. Imho leaving the EU, or conceding that the EU must be toast, would be a mistake at this stage. The Soros document is as good a starting point as any for EZ countries to forge a path out of this. Such a path, at this point has to include capital controls and Germany leaving the EZ. The alternative is an uncontrolled collapse back to national currencies, but only after much more damage is done; which damage may well finish the EU. @ Tull 5 years later and we debate the strategy….. You’ll never get consensus on this. Civil wars came out of less. So a perfectly viable strategy is to quietly prepare for default as in look into punt printing and safeguarding energy supply while ostensibly continuing to play the game. No party can choose default – as that would lead to major social division. So playing the game as is is fine but plan B must be ready to roll @JR “the retreat to the core proceeds.” Don’t under-estiamte the extent of the damage to the core in all this. I was in the Netherlands last week. Met most of the banks. SNS (#4) is nationalised, ING Bank (#2), ABN Bank (#3) are getting there…very bust and not lending. ING Bank used to boast that it was the biggest Commercial Real Estate (CRE)ng bank in the world…! The only bigger bank left standing in the region (including Benelux…Dexia, Fortis are bust of course…KBC having its troubles also) is Rabobank but it is in retreat mode to protect itself, build capital, etc. The German banks and funds are in full retreat from the Dutch market also. With no bank lending, liquidity has become a huge issue…people, businesses are going bust….PE is arriving but its cost of capital is much higher than for a bank….. Where have we seen all that before…. @Let there be a little light … Going by the report, Mody envisaged defaulting on sovereign debt. There’s still plenty of that. @BeeCeeTee +1 We knew this was the IMF thinking. Mody repeating it publicly is very helpful. The only downside is the utterly predictable reaction in the press who are warming to theme (e.g. FO’Toole the other day) that the IMF is making the argument the government should be making. IMAGINE BEING DEPENDENT ON THE IMF TO MAKE THE CASE!!! Of course the government is making the same argument. September cannot come quick enough. Interesting quote from eu offical in ft article re loan extension for Ireland. http://www.ft.com/cms/s/0/d7fec044-a2bb-11e2-bd45-00144feabdc0.html#axzz2QC3Ydpx4 “No one wants to force them into a new programme,” the budget expert said. “The question is whether they really have advanced as far as they say. We want to be sure there is no danger of another round of bank recapitalisation.” @Paul W This new found “official honest” is a little bizarre. Elderfield bails out yesterday and Muldoon gives a speech in Tralee ( don’t think Reuters have a station there) telling us the banks are knackered. Christine Legarde tells the world yesterday that a lot of European Banks are also knackered. The Governer of the BoE tells us last week that British banks are knackered. The road to Damascus or a clever official ploy. Maybe they are testing the new policy! @BCT I think Mody had bank bond haircuts in mind. However, things have moved on and raiding depositors savings is the new template per Dieselboom. Once it’s uttered (and tested) no amount of PR spin will undo it. Paul W, It would be very helpful if something went badly wrong in Benelux before September as that would put France into play through BNP ownership of Fortis. I cannot imagine that Merkel plan of keeping things tight til September will work. In the first 2 years post the crash, with bank debt and unlimited deposit levels guaranteed, the tax base suddenly shrunk, the ECB providing wholesale funding to the banks, and expected budget deficits were dependent on financing from mainly foreign investors, what was a government to do — cut less and tax less? Would the fairness of the burden have been different? I doubt it: the minority who are the real victims would have been largely the same people even if there was less austerity. For the majority including most of those who opine on austerity, the status quo remains remarkably intact. Remember that statistic from the Spanish tourism office in Dublin that 1.3m Irish visited Spain last year! What crisis? The Anglo rump remained top heavy with overpaid management and about 1,000 staff until it was realised that it could be shut down after all. The euro has provided financial stability for the insiders and as Minister Richard Bruton said about his own pensions and his brother’s, they are protected by the property provision in the Constitution – – the same provision that underpinned the corrupt land rezoning system. In 2001 spending on social protection stood at €7.84bn; by 2010 this had grown to almost €21bn – an increase of 266%. Inflation increased by around 30% during the same period. In 2001 the Exchequer net pay and pensions bill was €10.2bn; it was €16.2bn in 2006; €18.7 in 2008 and €17.1bn in 2011 – – an increase of 5.6% since 2006 and 67.6% since 2001. The Department of Finance said in its Stability Programme Update April 2012: “While taxation receipts in 2012 are projected to be just above 2004 levels, the gross voted expenditure of Government Departments and Offices in 2012, at an estimated €56bn, is projected to be 37% above the level it was in 2004, despite the very significant adjustments to both revenues and expenditure since mid-2008. While the gap between the State’s revenues and expenditure is clearly on a downward trajectory, it remains at an elevated level and it will need to continue to be addressed by economic and fiscal policy over the coming years.” Bail-ins and what so-called core countries could do in terms of stimulus to offset austerity elsewhere are legitimate questions. However, the focus generally has been the soundbite approach to whip up outrage with simple remedies absent inconvenient downsides. Seamus Coffey estimated in 2010 that half the bank bond debt was owned by Irish residents, possibly some pension funds for those in the private sector lucky to have one, while also half the bank sovereign support was a depositor bailout. @ Fiatluxjnr So while the NTMA is lauding every sale of bills or bonds as a huge achievement towards returning to market, the Central Bank is saying that the banks remain in a mess. Apart from individual mortgage arrears, many SME owners have investments in bust hotels etc. It’s extraordinary that this situation still remains full of unknowns. If half the €50bn loans to small and medium firms are non-performing, then what economic scenario in the next 5 years will change the fundamentals? @ seafoid Calling John McHale. To paraphrase the late President Harry Truman, maybe John wants to be in a kitchen with air-conditioning, like some fragile colleagues, to save himself from the barbs of us plebeian rabble? @Michael Hennigan “So while the NTMA is lauding every sale of bills or bonds as a huge achievement towards returning to market, the Central Bank is saying that the banks remain in a mess.” It’s this spin versus “honesty” that is difficult to understand. Something strange is going on. Perhaps it’s Central Bank independence. Note Draghi’s threatening letter to the President of Cyprus about removing their Governor. Is the Central Bank at odds with the Government..it would appear so. Perhaps this is why Elderdield decided to bailout while the going was good. Or, to put it succinctly… Mody: “Oops.” And finally…a harsh dose of reality from Ambrose… “It should be clear by now that the solemn pledges of EMU leaders are expendable. They change their mind whenever its suits them, and whenever the internal politics of their own countries demands.” http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100023990/emu-plot-curdles-as-creditors-seize-cyprus-gold-reserves/ @fiatlux “they change their minds whenever it suits them”. Paul Quigley is better at explaining it than I am but that is your social magic there at work. Elites always make it up. The media turn it into credibility. After 4 years of chaos in Ireland maybe the media transmission mechanism is as banjaxed as its banking equivalent. It’s a clash of fairytale spinners and agencies such as the Central Bank and the IFAC that are reluctant to tell little emperors that they have no clothes. Michael Noonan himself is also trying to ride two horses at the same time — so on his second objective to get debt relief, when should the story on SME debt be revealed? Fiona Muldoon doesn’t inspire much confidence with this accountancyspeak: “We believe that the banks now have credible credit assessment tools. We have overseen that operational skills and resources are improved and that appropriate external help is engaged where necessary. Policies and Key Performance Indicators (KPIs) are in use in the banks to measure their success. The banks’ management teams must now be accountable for the implementation of the strategy and measured in terms of their success in that implementation. We receive regular updates from the banks management on their progress against plan. In this way, restructuring and re-underwriting will continue to take place throughout the year.” Progress against plan?? The Central Bank simply doesn’t know the facts. @ MH-ff: ” Minister Richard Bruton said about his own pensions and his brother’s, they are protected by the property provision in the Constitution – the same provision that underpinned the corrupt land rezoning system. ” The assertion by the minister – and any other folk, about art 43, that it is an ‘absolute’ protection for private property, is pure PR spinola, if not outright deception. Its just that there has been no determined challenge. And its sort of ‘funny’ that Art 45 is not mentioned. I wonder why! The Constitution cannot, and does not, give any absolutes to any citizen. All our ‘rights’, apart from my Right to Life, are conditional concessions. Dead men wrote the Constitution, but live ones may re-write it! The majority of our citizens are semi-anaesthesized sheeple who just want to be ‘left alone’. Sophie Scholl (The White Rose Papers) has a useful explanation. Principled folk are few. Principled folk with surplus of funds to spend challenging ruling elites and their self-protection laws are on the UN Endangered Species list. Our legislators are a bunch of self-serving individuals, intent of re-election, and they would not dare invoke any legislation which regulated – “in the interest of the common good”, the ownership rights of private property. It would be a recipe for political seppuku. Says a lot about Irish social mores. And sentient folk ‘worry’ about the mess we are in? Austerity is wrong? I was in the rather unfortunate position of having to listen to Mr O Rehn yesterday. He said that calling it “austerity” is wrong (and he went into some gobbledegook about how people using the word “austerity” are somehow likened to people who eat children – it was all very odd). He tells me we should call it “reform.” He then went off on one about the media and how he had written an article but the editor (Telegraph I think) had taken out his “reform” and replaced it with “austerity.” He seems a very odd man Mr Rehn. You get the impression he’s confused most of the time. Perhaps he’s one of those people who are going senile early. The impact of austerity is starting to spill over now (I think the IMF more or less said the same thing themselves recently in their Global Financial Stability Report) and I suspect are going to be a lot more difficult to ‘manage’ (hide/cover up) from this point. I have a mental image of something slowly building up over a period of time then collapsing very quickly. If an official in Ireland is telling us that 50% of SME loans are non-performing then somebody is setting the scene for some very bad news a-coming. The banks are knackered. Banks all over Europe are knackered. I doubt that the raid on depositors in Cyprus was a one-off. More like a carefully planned toe in the water (pulled out quickly when the reaction of those holding 50k holdings will be safe. They will find some ‘acceptable’ level under 100k. It’s just a matter of time. @BCT “It’s not too late to change course on the bondholders.” They were the first ones (and maybe only ones) given lifejackets. Perhaps they will come back at some point in the future to pick up the pieces cheaply. @Joseph Ryan “The collective genius of the elites have been very slow to figure out that a bank’s loan book is as fragile as the income and livelihoods in the economy it serves.” I can seriously assure you that they (elites or bankers) don’t care. If people had to sleep in the bushes and go begging on the streets with their children (or even die of starvation) they wouldn’t care as long as they were getting their money back and their ridiculous incomes/wealth. Some of the people who run these organisations have to be worked with for a while to truly understand what being a psychopath or sociopath means. http://voices.yahoo.com/sociopath-vs-psychopath-there-difference-1906224.html Oh no! The voices in my head have started again. “reaction of those holding 50k holdings” Sorry but somehow a chunk of text got deleted between “holding” and “50k holdings” – I was basically saying I’m not sure even those holding >50k are safe. High rents linked to the rental ratchet,are killing Irish businesses and jobs; I was walking in today along the Dublin quays where the European flags are flying bravely up in pairs. Readers may be interested to know that: Ireland is paired up with Greece (Ah, now your honour, can’t say we’re anything to do with them at all). France and Spain are surlily lined up together. Cyprus is flying next to….. Italy! (heh, heh. Suckers.) Germany, for some reason, is going it shoulder to shoulder with the Estonians. @Michael hennigan Responding to your comment on the other thread – The interviewer did ask Mody was he responsible for the mistakes. He said he was along with others. The interviewer did not pursue it in the usual childish way as if the personal flaws of one man were more important than the economic suffering of a nation. That is why it was a good interview. The only question: how long can current approach of ECB emergency funding plus smoke and mirror accounting hold together? If a few trillion Euros are not printed soon to generate inflation plus nominal GDP growth the whole thing will fall apart. Correct me if I am wrong, but what the Central Bank are saying is that we have no hope of getting out of this mess if we do not address the issue of personal debt and SME debt head on. The economy is running into the ground because the banks won’t do any deals. People did borrow stupidly but we are 5 years into the crisis and there is still no end in sight for people who are willing to pay what they can to have a future. Unless people have prospects to work towards they will not work or spend. The morons in the banks managed to persuade the Government that their approach of soaking everybody slowly would work. It hasn’t worked. It has made things worse. What they can recover on foot of loans is diminishing as they clowly strangle the businesses which are supposed to service the debts. Worse than that, the morons in the banks managed to distract the media and turn us against each other with the “can’t pay/won’t pay” nonsense resonating with our baser nature and obscuring the bigger picture. It is time for not only our politicians, but also our media and our populace, to wake up to the serious ill effect on the general economy of Banks not resolving SMe and personal loans and Government giving banks a veto over personal insolvency. one last thing… Just because John corcoran keeps on repeating himself doesn’t mean he isn’t right. Upwards only rent reviews should be revoked, by Constitutional amendment if necessary. Their ill effect on the general economy vastly outweighs the losses to pension funds etc. Sez one expert (Professor Mody) Mr Mody also said that the construction of the country’s rescue package was wrong. Speaking on RTÉ’s Morning Ireland, Mr Mody said that the Troika had other choices apart from austerity, adding that bondholders could have been brought in to bear some of the cost of the “sovereign distress”. “We are seeing a belated recognition of the fact that the constraint imposed only by austerity was untenable,” he stated. “Clearly the experience, if experience was needed, has demonstrated that reliance on austerity is counterproductive.” Sez another (Carmen Reinhart) SPIEGEL: Do you think it is wrong for Europe to focus on austerity measures with inflation at such a low level? Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level. […] You need a combination of austerity, so that you don’t add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation … http://www.zerohedge.com/news/2013-04-11/carmen-reinhart-no-doubt-our-pensions-are-screwed @ Zhou + 1 The behaviour of the banks since their bailouts has been very poor. The whole credit transmission mechanism is FUBR. The ordinary SME gets shafted. Hardly a surprise there is so little growth amidst so much dysfunction. @ Michael “Policies and Key Performance Indicators (KPIs) are in use in the banks to measure their success.” KPIs for me would be Number of loan-related suicides SME’s in receivership Unemployment rate Emigration rate GDP change year on year The rest is just horses*it. I think Noonan and co. can expect a lot of cooperation from the Troika now that things look as though they may be headed for Pear Shaped Central. Ireland is the poster child for austerity. It has immense PR value with cranky peripherals. Look at Ireland ! Never underestimate the attraction to the powerful of retaining power. They will say and do anything. They might even be forced to play good cop ! Or just cop on. Ireland will not be allowed to default absent the complete breakup of the Euro @seafóid The lack of a set of agreed socially meaningful KPIs to judge the success (or not) of the current policy set is pretty revealing. Instead we have the fiscal fascist position now – the five measures of national success are budget deficit, inflation, inflation, budget deficit and electoral benefit to the CDU. I think you have a good list of KPIs, I would add in GINI coefficient and evenness of second level educational attainment across income strata. @ zhou_enlai If you are implying that it’s wrong or discourteous to raise issues about previous positions with an interviewee, then you are naive. Many people made fools of themselves by accepting ‘expert’ opinion during the bubble and these peddlers of snake oil seldom were challenged. Mody isn’t an outsider like for example Paul Krugman but had the responsibility to know much more about the running of the Irish economy than the typical Irish citizen. This is from an IMF financial stability report on Ireland in 2006 – – the craziest year of the bubble – – that Mody approved. No wonder the folks on Dame Street believed that 30% annual credit growth and 100% were no bother: “the financial system seems well placed to absorb the impact of a downturn in either house prices or growth more generally. The results of stress tests undertaken through the Central Bank and Financial Services Authority of Ireland (CBFSAI) and the major lending institutions confirm that the major domestic lending institutions have adequate capital buffers to cover a range of large but plausible hypothetical shocks that reflect the above risks. Further, good progress has been achieved since the 2000 FSAP in strengthening the regulatory and supervisory framework. The Irish Financial Services Regulatory Authority’s (IFSRA) strategy of creating a unified approach to risk with common elements across different sectors where appropriate, but differentiated where necessary, is being put into practice well and is facilitating work prioritization and planning within the Authority. The insurance regulatory regime has also been significantly improved since the 2000 FSAP and continues to be further enhanced and developed. In parallel with these improvements, financial institutions have improved their own risk management practices, so that the financial system as a whole is better placed to identify and manage risks.” Michael Hennigan whats your forecasting record? I mean it would be nice if you told us. I guess that it may be less than perfect as else you’d be rolling in the dosh. @Gavin Kostick I am impressed you can recognise the Estonian flag. I would have had to consult the Observer Book of Flags to pick it out. For those of you who didn’t grow up with the pocket-sized Observer books: http://en.wikipedia.org/wiki/Observer's_Books I still have a motley collection of them out in the shed. For those of you who would like to see the Estonian flag: http://www.flags.net/ESTN.htm And for those of you who like their European flags slightly more well done: http://www.google.co.uk/imgres?imgurl=http://blogs-images.forbes.com/afontevecchia/files/2011/12/burning-euflag1_Greek_Crisis_EU.jpg&imgrefurl=http://www.forbes.com/sites/afontevecchia/2011/12/15/ghastly-eurozone-pmis-even-france-and-germany-already-in-recession/&h=296&w=350&sz=91&tbnid=TwM8dkzli_u1aM:&tbnh=94&tbnw=111&prev=/search%3Fq%3Dburning%2Beu%2Bflag%26tbm%3Disch%26tbo%3Du&zoom=1&q=burning+eu+flag&usg=__IVKfCbDe61zXXwIlaJJGzGhjhuA=&docid=ubQp_f7E8PKffM&hl=en&sa=X&ei=bvFnUbqrLJOXhQfwyIDQDg&sqi=2&ved=0CDUQ9QEwAg&dur=1625 On the upward only rent reviews, NAMA are now funding the Bewley’s saga to be appealed to the Supreme Court, presumably because it interferes with THEIR property portfolio, rent roll’s and god forbid, pension funds that invested based on legal fiction i.e. that rents could only go upwards. It never occurred to them that the business could go bust, the buildings become empty with no substitute sucker available at any rent. NAMA trumpet to every available spin merchant “we are doing this for the taxpayer!” but they have an exceedingly narrow definition of what is good for the taxpayer, they seem to think that it is good for the tax payer working in Bewleys Grafton Street that their employer pays rents that are plainly daft and that elsewhere employers go out of business to uphold the sanctity of the notion of UORR. They definitely are part of a cult that believe no matter what the damage done it is better to try and keep back the tide even if the dam is made of straw and the tide is rising all the time. I have also noticed that jurisprudence in Ireland can turn on a dime and is driven more by necessity than it is by sound legal principles. Look no further than the Hall case against the promissory notes, did not have legal standing nonsense then not allowing TD’s that moria had proper legal standing to join the case basically doing a job for Michael Noonan and the DoF. @Michael Hennigan The interviewer did raise it, but he didn’t get side-tracked by it. @ robert browne http://www.law.uchicago.edu/alumni/magazine/spring08/posnerhowjudgesthink One of the chapters in Posner’s ‘How Judges Think’ is titled ‘The Supreme Court is a Political Court’. You have it nailed. @ Paul Quigley How could it be otherwise? It is hardly a coincidence that Scalia and his unique take on the founders of the constitution and what they meant came along as the plutocrats really got going . @Shay Did you ever come across the Disposable Heroes of Hiphoprisy ? http://www.bandmine.com/artist/video/disciplesofhiphoprisy5/919211/2/kqB-wf49Xsc The question is larger than “are there enough dollars to educate our children”.. The question is “do we want to educate our children” And it is all about what you measure and how you measure it @ Educare Michael Hennigan whats your forecasting record? I mean it would be nice if you told us. I guess that it may be less than perfect as else you’d be rolling in the dosh. Educare, you care about education or you’re making a living from it? Online when an individual who hides his or her’s identity asks a pub stool style question that is prefaced with something like: “If you’re so smart…..” the recipient is at a disadvantage. Anyway, in this particular case, the issue was wisdom and commonsense not forecasting that in a particular timeframe x or y would happen. I could cite my own commentary pre-2007 but from a pub in Kuala Lumpur whyv would I waste too much time. I would however claim to be a generalist even though I have a postgraduate degree in economics. Of course there was nothing new in the bubble hysteria and farmers I spoke to in West Cork were as wise as I would claim to have been! The Scottish philosopher-economist Adam Smith wrote in his Wealth of Nations, which was published in 1776: “A dwellinghouse, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it.” Louis Menand, a renowned author and Harvard academic, wrote in ‘The New Yorker’ in 2005: “Our system of expertise is completely inside out: it rewards bad judgments over good ones.” In a review of the book: ‘Expert Political Judgment: How Good Is It? How Can We Know?’ by Philip Tetlock, he wrote, “that people who make prediction their business – – people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables – – are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons. They have the same repertoire of self-justifications that everyone has, and are no more inclined than anyone else to revise their beliefs about the way the world works, or ought to work, just because they made a mistake. No one is paying you for your gratuitous opinions about other people, but the experts are being paid, and Tetlock claims that the better known and more frequently quoted they are, the less reliable their guesses about the future are likely to be. The accuracy of an expert’s predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge. People who follow current events by reading the papers and newsmagazines regularly can guess what is likely to happen about as accurately as the specialists whom the papers quote.” Professor Tetlock conducted a 20+ year study of 284 professional forecasters. He asked them to predict the probability of various occurrences both within and outside of their areas of expertise. Analysis of the 80,000+ forecasts found that experts are less accurate predictors than non-experts in their area of expertise. Tetlock’s conclusion: when seeking accuracy of predictions, it is better to turn to those like “Berlin’s prototypical fox, those who know many little things, draw from an eclectic array of traditions, and accept ambiguity and contradictions.” Ideological reliance on a single perspective appears detrimental to one’s ability to successfully navigate vague or poorly-defined situations (which are more prevalent today than ever before). @ PR Guy (ahem. don’t tell anyone but I looked carefully at the colours and looked it up afterwards. And I had to check Germany wasn’t Belgium. But as I say, let’s not mention it – the people on this blog can be savage.) @ zhou_enlai “Upwards only rent reviews should be revoked, by Constitutional amendment if necessary. Their ill effect on the general economy vastly outweighs the losses to pension funds etc.” So you are condoning a wholesale bailout for a narrow section of society paid for in the initial instance by someone who isn’t you (landlords) and in the final instance by taxpayers in general? Have you prepared any analysis to back up your claim that the results of such a high-risk strategy is outweighed by the impact on the general economy? I seems to me that this issue is largely a zero sum game – the tenant’s rent goes down and their profits go up, while the landlords income falls (at this stage quite a lot of properties would end up being foreclosed upon by the bank). Why are a tenant’s profits more important than a landlord’s? Do you honestly think that all commercial property is owned by large pension and insurance funds and that there aren’t people out there who depend on rental income to live on or retire on? I could understand the logic of your argument if landlords and tenants existed in separate vacuums but my experience is that most landlords would rather have a live tenant paying at or closer to market rate than a dead tenant on 2007 rates and are open to trying to find an agreement on rent abatement if the tenant is genuinely likely to fold and reducing the rent would save them (e.g. NAMA is approving 97% of request for abatement per NWL http://namawinelake.wordpress.com/2012/06/23/nama-is-approving-97-of-requests-for-rent-abatements-from-commercial-tenants/). If anyone has some statistics that indicate that a large proportion/majority of landlords do not actually try and keep hold of their tenants (rather than watch them go bust and have trying to fill a vacant unit in this market) it’d be great to see them. People are rightly going nuts about the expropriation of deposit holder’s money in Cyprus and the subsequent impact it has on non-oligarchs and here you are calling for the Irish government to enact a wholesale transfer the wealth of private landlords to any businesses that happens to be overpaying on rent. The best thing the government can do is stay out of it and let tenants and landlords sort it out themselves. @ Robert Browne Let’s be very clear about the Bewley’s Café case – the parent, Campbell Bewley Group, made €500k profit in 2011 (on €85m revenues) and can afford to pay the rent on Grafton Street (http://www.independent.ie/business/small-business/bewleys-grafton-st-landmark-high-court-ruling-could-mean-lower-rents-for-businesses-29152550.html) – they just don’t want to pay the rent and would rather than they made €1.25m in profits by having their landlord half their rent. There is no risk that Bewley’s Café will be closed because of the rental costs if the parent continues to trade and has guaranteed the lease (as appears to be the case) and I for one would rather that the full rent was paid to NAMA and taxpayers rather than the shareholders of Bewleys. This is a clear cut case of ‘can pay, but won’t pay’ that has a strong parallel with the elderly couple from Killiney who played the poor mouth and were evicted from their home for non-payment of their mortgage despite owning 21 properties in Dublin and a further 13 in London. @ Michael Hennigan I think you just did a Will Hunting on Educare. Why shouldn’t I work for the NSA? @Edward v2.0 I am happy for Landlords to get market rent. That way the tenant still pays the full appropriate rent for a premises. It makes the situation equitable and allows for invesment in property and for investment in businesses availing of said property. “I seems to me that this issue is largely a zero sum game – the tenant’s rent goes down and their profits go up, while the landlords income falls (at this stage quite a lot of properties would end up being foreclosed upon by the bank). Why are a tenant’s profits more important than a landlord’s?” The tenant’s profits are more important because the tenant employs more people and is engaged in greater economic activity. The country is suffering from decreasing domestic economic activity. In any event, I don’t favour one party over the other. I simply think that certain types of contractual agreements should not be allowed as they do not make sense. Landlords only got UORRs because there was a shortage of rental properties and therefore they were in a dominant position. There was no logic to UORRs except for that dominance. Allowing one party or sector to behave in a dominant manner and to coerce another sector or party into signing up to unreasonable or oppressive contract terms is always bad for the general economy. I feel the same way about supermarkets and their suppliers. Said suppliers need the protection of the law. @Edward v2.0 BTW – landlords would do well to look at the onerous commercial rates which are eating into the rental value of theri properties. Doing some back of a beermat calculations on the Central bank comments on SME’s in the Journal one coould make the following assumptions. http://businessetc.thejournal.ie/impaired-small-business-loans-fiona-muldoon-866813-Apr2013/#comment-1104383 Using some fairly basic math’s you could have written a far more shocking but true headline. “HALF OF ALL LOANS to small and medium-sized businesses in Ireland are impaired, a leading regulator at the Central Bank has said.” “Given 70 per cent of people in private sector employment are employed by SMEs, there is a further direct knock-on for these employees and past employees into the whole area of household debt and mortgage arrears in particular,” 1.8 million people work in the Irish economy. 1.5million work in the Private sector. 70% of that work in the SMB sector (1.05million) If you presume that the SMB with impaired loans have the similar number of employees as those who don’t ie. Half of them work in companies with loan impairments. Here is the Headline. ‘It is estimated 525,000 people are working SMB’s that have impaired loans’ I think that’s a fairly scary number. Edward, There are many questions that have gone unanswered on UOR. Some of these are 1. What proportion of commercial leases pre their abolition have such clauses? How big a problem is it? 2. What proportion of these have been renegotiated for reasons stated? 3. Why have those that contend they are illegal not taken a case to the higher courts to prove their point? 4. Are there particular types of investor who are unwilling to negotiate? Why? The points you make about Bewley is relevant. This is a dispute between two big boys over a share of profits from a profitable business. Let the courts decide. @ Michael Analysts are crap at forecasting too. The average profit rescale is -5.6% per the FT. Expect equity re pricing over the year as it becomes clear the EZ is not going to recover in Q4 even though Dieselboom says it is still on. @edward v2.0 Why are a tenant’s profits more important than a landlord’s? The prosecution rests its case milud. Given Ireland’s historical experience I would have thought that defending the right of landlords to squeeze their tenants until the pips squeak would be a rare viewpoint but if you can defend the continued enforcement of upward only rent reviews you are probably not a big student of history. People are rightly going nuts about the expropriation of deposit holder’s money in Cyprus and the subsequent impact it has on non-oligarchs and here you are calling for the Irish government to enact a wholesale transfer the wealth of private landlords to any businesses that happens to be overpaying on rent. The best thing the government can do is stay out of it and let tenants and landlords sort it out themselves. Well, if the last five years has thought us anything it is that the market will sort things out in an optimal way for the country if left to itself. @ Edward V2.0 Wow That is one hell of a high horse you are on. Lets be clear Landlords are rentiers that suck life out of an economy. SME’s employ 1.05 million people and are the engine of the economy. The lower rental costs are for businesses the easier for them to set up and more importantly likely to succeed. Rent is the largest expense in many SME’s. Anyone seeking to protect the rent of landlords is working for the darkside. The vast majority of commercial spaces in towns and cities are sown up by a small number of very powerful landlords. http://en.wikipedia.org/wiki/Rentier_capitalism @ zhou_enlai “In any event, I don’t favour one party over the other. I simply think that certain types of contractual agreements should not be allowed as they do not make sense.” You are absolutely 100% favouring one party over another and concluding that: (a) landlord’s property rights don’t count because they are not as productive as tenants (even private individuals who have done nothing more than have the gall to buy some property as a pension nest egg who could have said egg taken by the bank); and (b) there should be no distinction between those who can pay and those who can’t – all tenants should get a ‘rent jubilee’. Commercial leases are legal contracts between professional parties that have risks attached (as does any business). Based upon your logic, we should also allow people to reverse any purchase they made of a home or apartment during the boom – developers and existing house owners were in a dominant position because there was a shortage of available homes. Allowing them to behave in a dominant manner was unreasonable and oppressive so anybody who purchased a home at an inflated price should be able to force the vendor to buy it back at the price they paid. What’s the difference between the two positions? In fact why stop at leases and houses, what about cars and jewellery and art and all the other boom-time mistakes? @ eamonn moran And if landlords didn’t exist then who would rent spaces to SMEs? Also, I’m not sure if you read my post, but it was about existing upwards-only leases, which by definition are already in place and have no impact on businesses looking to set up. I don’t own any commercial property and have no financial interest whatsoever in protecting said rents, I was merely struck by the simple-mindedness of this narrative that the issue is black and white and all landlords are evil, have no impact on the local economy and should be struck down in favour of tenants (every one of which is a struggling SMEs that just need a break). @Gavin K I think your thoughts on economic forecasting on the FAC thread are broadly correct – and it is absolutely appropriate that thse like yourself on the other side of the drawbridge take ownership of this subject, as it can be argued it is the only ‘practical’ contribution the econowonkeratti actually make. There is an old tale about an Emperor and the publication of his latest wardrobe trendiness estimates. Be aware that the results of “surveys” often provide the core variables for models/forecasts. These are in numerical form, obviously, but that doesn’t alter what they are. Think about that. I used to find that some surveys provided very useful input for forecasting certain numbers. Ex-finance always very much easier to forecast accurately. Actually wrestling with a wonderfully Heath-Robinson forecasting system assembled over decades which also utilises surveys – along with chewing gum and old shoe laces – at the moment. It is, as of yesterday, trying to convince me there is an 80.72% probability share prices could fall notably in the next six months vs only 15.42% probability they will rise significantly. That doesn’t happen very often. Have decided to eye it, warily, for now. Might run it again later, with a bit more Blue-Tac, just in case. With all due respect, the intention of a rack rent lease is not the equivalent of a mortgage or a house purchase where your kiability is known from the outset. In the first instance, a person who did not agree to the moronic rent assessments of auctioneers and other bubble-merchants were punished for those third parties’ stupidity through rent reviews. The bubble rents were not market value – they were lunatic value. The lease did not properly effect the intention of the parties which was that the tenant should pay a reasonable market value rent for the property for the duration. Secondly, small retailers are not professionals. They cannot be expected to understand Marx’s theory of use values and market values, or the issues John Corcoran has highlighted. Accordingly, rent review is an appropriate area for the state to regulate (which it has done prospectively). Thirdly, in a lease situation the landlord retains ownership of the property and therefore exposes himself to ongoing risks. It is his choice to participate in a contract which must be performed over a long period. He takes on the risk of economic collapse and tenant default. He aslo takes on the risk of legislative change. If he is a professional as you say he should be fully aware of all these risks risk. BTW – pensions can go up as well as down. @Tull “I cannot imagine that Merkel plan of keeping things tight til September will work.” Me neither. Maybe the best thing would be to bring forward the German election @ Shay Begorrah I am certainly mindful of relevant history, but given the Land War has absolutely nothing to do with upwards-only commercial leases in 2013, I think my case will stand. You may be disgusted by this but despite eating them 6 days a week growing up, I rarely eat potatoes now and often travel to England without ever using the words “700 years of oppression”. @Edward v2.0 800 years! 🙂 and never forget your famine dead 🙁 Seafoid, I want a full blown crisis before the election. I have the beer and popcorn stored in my panic room, beside my shotgun. A source has advised me that Ashoka Mody did not have responsibility for Ireland until 2009. It is Ajai Chopra’s name that often comes up in the relevant documentation prior to the bust. Both Mody and Chopra were involved in the bailout negotiations. I had done some research sometime back and came across some earlier report on Ireland that Mody had co-authored. There was nothing personal against Mr. Mody. I had discovered that he had survived being shot through the jaw at his home in Maryland in 2009 just as he had arrived home from work, allegedly by a former IMF economist. http://online.wsj.com/article/SB126263967129515255.html I apologise to Mr Mody for my error. @grumpy That model is predicting less than 4% chance of market going sideways. Short Butterfly Spreads. @ zhou_enlai I take your point that there is a subset of the population of businesses with an upwards-only lease that were signed prior to the boom and subsequently saw their rents balloon to levels far above what they ever thought was possible, so the eventual liability was unknown from the outset. I believe that they should have known the risks before signing (or should have gotten better advice) but I accept that others may disagree with me and in a democracy, if the majority of people believe that leases should be regulated, than so be it. Where I think you are side-stepping the main point of my argument is by arguing in terms of a broad thesis wherein ‘landlords’ and ‘tenants’ are both homogenous entities and all these situations are the same – which is what a blanket re-writing of all upwards-only leases would do. Small retailers may not be professionals but large ones certainly are – should Tesco get its rent reduced on an over-rented building owned by a widow with two adopted orphans who have no other source of income and will lose the property to the bank if the rent is reduced? Do you know what proportion of upwards only lease tenants are proletariat vs. bourgeoisie? What about small-time landlords vs. big bad pension and insurance funds (which by the way are the pensions of people ordinary people and the insurance funds that impact the price of the premia we all pay). Also, you say that for a house purchase the liability is known from the start but that’s disingenuous, people knew how much their equity was and thought they would be able to sell the house if they wanted to move (and how much profit they might make) – they never could have believed how far underwater they would be and how much that negative equity would impact their lives. I stand behind my parallel between the two situations as equivalent by your argument. @ zhou_enlai Thanks. I haven’t used the oppression line since before the millennium and I’m sure it was 700 then! @Edward v2.0 Hard cases make bad law. The widow and the two orphans should have reviewed their luck levels before leveraging up to become landlord to Tesco. I don’t have any great time for large retailers but justice is blind. The Vendor in a house transaction does not expose him or herself to legislative risk or ongoing risk of default by the purchaser. The bank providing the mortgage did so expose themselves and have to suffer legislative risk re reform of personal insolvency, land law reform (e.g. botched Land Act provisions re registered property), bank regulation etc. I would not say landlords are equivalents to banks and desrve the same treatment. Even landlords don’t deserve to bne lumped in with that shower. @ Tull You are not Enya, by any chance? @Edward…ah Edward Tesco etc are specifically excluded from the one stat or link you provided,are there really that many mom and pop landlords enjoying usirous rents from multi nationals….just a hunch huh,overheard in a pub ? Any link…..breakdown btw. Institutional and private ownership… http://www.nama.ie/download/publications/GuidanceNoteOnUpwardOnlyCommercialLeases.pdf @ zhou_enlai Come one now – so now the widow and orphans are supposed to take a view on the legislative risk of constitutional change to invalidate existing lease contracts, but the small retailer is supposed to be let off because they couldn’t understand an upwards-only lease? Hard cases making bad law is exactly my point – we hear all about small retailers being killed by high upwards rents so there is a clamor to come up with a constitutional change with enormous impact on everyone involved in every facet of Irish society (if rental contracts now, then what will the government come after next?) in order to protect these test cases. And as Tull Mcadoo highlights above, we don’t have any clear picture of the size of the real problem let alone the impact of such a change. The playing field needs to be leveled,many Irish and smaller retailers signed PG’s,putting their gaff directly in the firing line. Ch 11 is a frequently used business strategy to void unprofitable locations and negotiate reduced rent,as is the retailer threatening BK…sadly in that backward little country,the landlords and banks have way too much say. @ John Gallaher I would love to know what the breakdown between private and institutional ownership is – I spent a little time earlier on the Google but to no avail, if you can find something please post. It’s somewhat missing the point of what I’m saying though – in the same that I can’t tell you how many orphans rent buildings to Tesco, you can’t tell me how many illiterate shopkeepers are being gouged into insolvency by a German insurance company. The Government shouldn’t re-write the constitution and create massive and unknown consequences in order to accommodate either of these two minorities. If tenants can pay, then they should pay. If they can’t pay then most landlords will come to an arrangement with them and if not they can go to the Government’s new Kangaroo court on lease disputes. Being a tenant is not somehow more moral or pure than being a landlord. @ John Gallaher Err.. not sure if you’re aware of this but back on the Aul’ Sod we have this thing called Receivership which is very similar to Chapter 11 and is also used in exactly the same way to shed unprofitable locations. Opps.. I mean Examinership, I always get the two mixed up. @Edward,indeed and it may shock and surprise you that the most often cited reason for it is….no not lower trading profits…..wait for it….intransigent landlords and over market rents ! @ John Gallaher By definition that is complete nonsense. If trading profits were in-line with peak levels then rents wouldn’t be out of sync. @Ed it’s moot investors discount overage utilsing a higher discount rate or ignore it all together. A health ratio is most common metric,that’s the relationship btw. rent and turnover,the higher….oh never mind. @Ed RE nonsense….. Atlantic’s landlords took a €5 million a year reduction in their rent, but some of them got to keep their tenant. The group proposed closing five stores when it entered examinership, but ultimately shut just two. Presumably it kept the other three because landlords were suddenly willing to talk. It might be pushing it to suggest that examinership is the now ultimate bargaining chip with stubborn landlords, but you could be forgiven for thinking it. If it is, then it’s time to find some other way of tipping the balance in tenants’ favour. http://www.irishtimes.com/business/economy/examinership-a-bitter-pill-for-landlords-1.1251968 Given that its estimated post Bewleys that’s AIB’s Project Aspen was smacked by 20% perhaps time to revisit,gotta go meeting. Apols it’s NAMA not AIB…more caffeine required. “The Starwood and Pimco bids are coming in at €185m-€190m. The recent Bewleys judgement and due diligence could peel back the price to €170m, or a swingeing discount of 20c in the euro.” http://www.independent.ie/business/irish/nama-developer-is-top-bidder-for-his-own-former-assets-29165077.html Can somebody here explain to me, how all this talk of “unsustainable” meshes with a 5 b 3.9% coupon 10 year Irish gov bond (ISIN IE00B4S3JD47) that is slightly above poland and china, but below italy and spain. As far as I know, there is no ESM application from Ireland, and therefore neither the ESM nor the ECB can buy. Do I miss something here ? @Francis It is the hunt for yield. What can you get with the Schatz these days? And the belief Draghi will ‘do what it takes’. The Bewleys judgement,Ed it’s all about the health ratio,buyers run their numbers based on prevailing market rent. They tranche the income and apply different discount rates defendant on covenant….impending legislation,court decisions etc. But anyone enjoying usurious rents from smaller retailers is having their last drink at the last chance saloon…later. http://namawinelake.files.wordpress.com/2013/03/bewley.pdf Health ratio “In order to structure the best economic lease terms for both landlords and retail tenants, it is critical to understand the occupancy costs as they relate to the retailer’s business. The Occupancy Costs, or the total of all expenses the tenant pays for their retail space, is usually displayed as a ratio to sales. The formula Annual Gross Rent divided by Annual Sales = Occupancy Cost(as a %) is closely watched by investors as they demand the costs be at a level that still allows the retailer to purchase inventory, pay employees, and make a reasonable profit” http://blog.capitalretailgroup.com/2011/06/retail-occupancy-costs-to-sales-ratio/ @ seafoid, the way I read it: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro” http://www.ecb.int/press/key/date/2012/html/sp120726.en.html and: “A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme” ” the Securities Markets Programme (SMP) is herewith terminated.” http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html The financial crisis /austerity is having a negative impact in Germany too… http://www.thelocal.de/money/20120703-43529.html http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/global-debt-sales/Documents/germany-2013.pdf It’s all relative of course. However, Germany’s banks too are not in great shape either, and the Germans are still in kick-the-can mode, while e.g. the Dutch are moving onto the next stages of distress….. Francis, I would not bother reading the rules of any EZ wheeze. If necessary they will be ignored. There are only 2 rules that matter: 1. If German Bondholders are in danger of being burned, all bond holders will be bailed out at the expense of the local taxpayer. 2. If no German Bondholders are in play, rule 1 does not apply. @Paul W…hallelujah they back buying yippee 🙂 http://uk.reuters.com/article/2013/04/08/uk-mufg-deutsche-idUKBRE93702E20130408 @paul w Very interesting to see what is happening in the netherlands. They had a big housing bubble too. It will be interesting too to see how the crisis hits the medium sized insurers in France and Germany. Senior hurling is on . @ Paul W, your first link, talking the HRE in July 2012, was before they “found” 55 b Euros somehow there in Ireland again. that seems to be the main difference for “Deutsche Pfandbriefbank” in: the second link refers to NPL (non-performing loans) data in 2010, like ancient history @ Tull, the german taxpayer ( I am more directly related to) did take a hit of 127 b HRE (or is that now minus the 55 b?) + something of 17 b Sachsen LB from the irish financial supervision I wonder, is my writing style now getting to short / cryptic for most folks here? Given the lack of response to the interest rates? @JG If only the Europeans would get on with allowing the markets to clear in their own back yards…..Kicking the can is just causing LT pain and cost, killing economic activity. When it comes to the US, they have no problem with disposal, etc……quick, market-driven change of the guard, and start again. Problem is Europe protecting the Old Guard on own turf…..simple as that. Keeping the Old Guard in place with taxpayers money too. @BWII I haven’t heard anyone use the term ‘butterfly spread’ since the 1990’s. Is it a tactic still widely employed? Must be expensive but then again, if you get the volatility you expect then you’re quids in. And 4% chance of a sideways market?….. yeah, I’m in. @Francis Yes…..Just looked for the most recent I could find! FMS is not very transparent. However, my point is that their banks and system is sliding also….just at an earlier stage of stress…moving in the direction of distress. They have “imported” quite some problems too. @Francis In fairness, the KPMG link is 2013 outlook….. @Paul W at for the links here you go…current enough! http://www.project-syndicate.org/blog/the-cyprus-doctrine-does-not-apply-to-german-pfandbriefe—by-christopher-t–mahoney Paul, I am for sure not blaming you, not at all, just pointing out in the source. And I am appreciating the effort! Trying to put things into some referenced, simple perspective, is something I have to struggle with, too. Looking up BIS data, constantly not finding metal worker Union data again after a few months ….. @Paul W ta for the links,have bow out,above is worth a …… @JG Good article. Actually reflects what I am seeing there. It’s not just the banks though. Huge number of downstream German (levered) investment funds and partnerships in trouble…..Many being moved to the German Bad Bank, FMS, where German taxpayer money allows indefinite can-kicking…..Bad business in the LT. And its not just real estate (although that is a big asset class)…..It is much broader than that. http://www.bloomberg.com/news/2013-03-01/german-banks-with-record-soured-ship-loans-forgo-seizing-vessels.html @eamonn moran Rentier is a word that isn’t used enough. But it’s like KPIs. Who sets the terms of the debate? That all said, it’s not all bad for the German banking sector. Took me awhile to locate this article I remembered from February. http://www.ft.com/intl/cms/s/0/1de6f8d0-769b-11e2-ac91-00144feabdc0.html#axzz2QHO1HdoA @ John Gallagher, the syndicate / moodys link looks interesting. But it seems to me, that it is a little rich on allegations and short on specifics. Would you mind, to explain here shortly how those D and E ratings relate to more conventional ratings like AAA to CCC ? This former chairman is talking about his own ratings, and doesnt seem to care about the spelling of the new Euro group chief “complicated name”. I am trying hard to follow up on such things, I am not taking sides, I just want to know, do I have skeletons in my closet? http://www.marketoracle.co.uk/Article39921.html Back to the man on the street in NL, how familiar and comparable to the Irish scenario…..but much earlier in the stressed-to-distressed cycle. hmmm, and looking up this mahoney and his organisation, they make a living of putting out credit ratings for things, he says are a “mystery” to him and “wouldn’t understand” To me, with very little knowlegde of the specific laws, it nevertheless looks very much like he is making a case against him and his organisation for “credit fraud”, “Volksverhetzung”, from a lay persons point of view. How can you issue a credit rating on something you dont understand ? @Francis Is that a serious question or just (valid) sarcasm? “How can you issue a credit rating on something you dont understand ?” Isn’t that what the whole credit rating industry were (are) doing…? @ Paul W, good point, you got me being maybe a little naive. When Italian police raided S&P and Moodys http://www.guardian.co.uk/world/2011/aug/04/police-raid-milan-moodys-standard-poors I thought, what a poor show. I have second thoughts now. John Gallagher, a somewhat indiscreet question, I know, but may I ask what your relationship to Moodys is ? employee, stakeholder, shareholder ? @Francis I know someone senior at one of the rating agencies, in NYC. He recently said to me that he couldn’t understand the credit rating rationales for half of Europe…particularly Ireland. Says it all! John has probably headed off to his bar stool. I’m heading to mine now. Have a good one. Seafood, Eamon M, Landlords may be a rentier class, but what do you call the shopkeepers of Ireland who probably earned the highest margins in The known world during the boom. They should have enough salted away for a couple of generations unless they bought property themselves. (slightly off topic) Isn’t the Savita Halappanavar inquest making gripping reading? Imagine if CBI, DoF, or FF were subjected to such a detailed inquisition in which they had to account for their actions hour-by-hour on the night of the guarantee. Or even those bankers/regulators. Isn’t the Savita inquest – conducted in the full glare of the media – a model for what Colm McCarthy has been seeking? The more I read of this case the more I think (a) if Savita had been a private patient the outcome may have been different, and (b) there could be many ‘Savitas’ out there whose blood tests, etc. are not being followed up and there are daily systems failures. The point is, every time I follow up on allegations that Germany or german organization do something wrong, it ends like this here, people with weird credit ratings without references. unsourced allegations, and most the times with stuff which looks like deliberate slander, as soon as you ask just one step further. I am open for evidence, to follow up, just there isnt any. EU growth strategy a failure…according to their own study http://www.guardian.co.uk/business/feedarticle/10743843 And they want to raid depositors sooner as the ECB cannot sustain losses…according to Asmussen http://www.guardian.co.uk/business/feedarticle/10743843 Sorry..wrong link for first article.. http://www.guardian.co.uk/business/feedarticle/10743842 fiat Bruegel is certainly not the “EU” and in the second “The whole purpose is to resolve banks without using taxpayers’ money while at the same time maintaining financial stability, this is the treaty (“no bail out”) and law, protecting poor taxpayers from the criminal rich in other nations. Who are you working for? There are people, who believe that all checks have to be funded by the productive power of people, and honoring a check is a sacred obligation, and not just some tactical decision. Martin Luther King 28 Aug 1963 It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check which has come back marked “insufficient funds.” http://www.youtube.com/watch?v=smEqnnklfYs to care about “all of God’s children”, and not just the bankers and lawyers and some self defined verbose “middle class” @ grumpy Thanks for that encouragement. I shan’t be retiring the envelope yet, but I may try out a sweet jar or two on the side. Stephen Kinsella in today’s Independent. ‘Tacit admission that austerity isn’t working’ http://www.independent.ie/opinion/analysis/tacit-admission-that-austerity-isnt-working-29193507.html Another way of looking at it is that bailout countries were/are initially punitive terms which are gradually eased just enough that the sovereign doesn’t actually need a second bailout, ensuring the maximum possible is paid. A metric on that is the 120% of GDP. Moodys approves. By the way, is anyone arguing that Ireland has just defaulted? I thought a while back that even asking for a change in terms was seen in some quarters as tantamount to looking to default and would spook the ever panicky markets. Meanwhile Catalonia has a go at saying ‘no’. ‘Catalonia says no to austerity in standoff with government’ http://www.guardian.co.uk/world/2013/apr/12/catalonia-spending-cuts-spain @ Tull ‘Landlords may be a rentier class, but what do you call the shopkeepers of Ireland who probably earned the highest margins in The known world during the boom. They should have enough salted away for a couple of generations unless they bought property themselves’ What proportion of Irish retail is owned by British and other multiples ? I recall there was comment about criminal markups in the Irish market. t @ Bunbury The Galway tragedy/debacle is a local event, but it happened in a ‘centre of excellence’, and raises very serious questions about how our healthcare system, and our society, really operates. It’s clear that the issues are going to be in the headlines for a long time, and will have very serious political, legal, institutional, professional, and personal, repercussions. @PAUL W re Netherlands http://www.marketoracle.co.uk/Article39921.html I bit of an eye opener for me, if the report is accurate. I was not aware of the extent of the Netherlands housing boom. Permit me a little scahenfreude. Mr Djjsselbloem may be testing his template on home turf sooner than he thinks. @Tull “I would not bother reading the rules of any EZ wheeze. If necessary they will be ignored. There are only 2 rules that matter:” I would absolutely share your analysis re the twin rules governing EZ policy making. @Francis “the german taxpayer ( I am more directly related to) did take a hit of 127 b HRE (or is that now minus the 55 b?) + something of 17 b Sachsen LB from the irish financial supervision” So it was Irish financial supervision that sunk Hypo and Sachsen! Is there anybody in head office putting their hands up? PS. Would you care to put a cost on the destruction by joblessness of young peoples lives in the periphery countries, caused by current German financial and economic dogma. @ GK Stephen Kinsella is rather missing the fundamental point that the entire exercise is about a trade-off between (i) conditionality (AKA austerity) and (ii) assistance from official lenders. The bottom line as far as the last-mentioned are concerned is to maximise the chances of getting their money back. Doing so is requiring adjustments as economic developments dictate. Success or failure cannot yet be established. What is really interesting are the manoeuvres in the UK and German domestic contexts. As the FT put it in its leader; “Another worrying delay relates to the ambitious banking union project, which is essential to deal effectively with failing banks. In March it was decided that the European Central Bank would become the single supervisor. But Germany is now holding up the agreement on technical grounds. It may be that the political constraints facing eurozone governments are becoming bigger. Politicians in Berlin are reluctant to show much solidarity in the run-up to a general election in September. Italy’s prolonged political stalemate means there is no working government, let alone a coherent drive for supply-side reforms.” Derek Scally today on the first really eurosceptic party in Germany. http://www.irishtimes.com/business/economy/europe/upstart-political-party-challenges-germany-s-consensus-on-the-euro-1.1358908 The supposed alliance that is being attempted between the AfD and the Conservative right as headlined by the paper of reference is a strange development. http://www.telegraph.co.uk/news/politics/david-cameron/9990805/Tories-build-secret-alliance-with-Eurosceptics-behind-Merkels-back.html The “alliance” of convenience between the Conservatives and the governing coalition in Berlin on the supposed need for treaty changes, the first seeking to repatriate powers, the second seeking to do the opposite is also unprecedented. But then, politics is a strange business. @ Joseph Ryan Would you care to put a cost on the destruction by joblessness of young peoples lives in the periphery countries, caused by current German financial and economic dogma. If this is more than a rhetorical question, it would be necessary to start at home base first? In countries such as Spain and Italy, they have had youth employment problems for at least 40 years. How would the data be disaggregated? @ Bunbury As with economy/ business class on airflights, the private service is likely to be better: ratio of staff to patients and maybe unwittingly wealthy staff inclined to give more attention to their own. A good test of a service is if the people responsible for providing it, are willing to use it. Last year the Irish Independent did a survey on use of private health insurance. “Several left-wing TDs are among a raft of politicians, hospital bosses, HSE managers and senior civil servants in the Department of Health who declined to answer the simple query.” http://www.independent.ie/irish-news/health-critics-refuse-to-reveal-if-they-have-private-cover-26816992.html Paul Quigley refers to the tag ‘centre of excellence,’ and it’s as a reliable as the ubiquitous use of what is a bullshit term in Ireland: ‘world class’ (Irish Times report on 10 Oct, 2010 titled: ‘Fás board to agree plan for new ‘world-class’ skills body’ — ‘bog standard’ would possibly be an improvement!). That boring issue of accountability or more precisely the lack of it is hard to develop in a culture that has so long operated without it. It’s often striking how hospitals fight negligence claims cases for years; then cave in and it’s seldom clear if anyone is held accountable except. @ All FYI http://www.4-traders.com/news/Dutch-Finance-Minister-in-Favor-of-Limited-Treaty-Change-for-Banking-Union–16685722/ How limited is a limited treaty change? MH, The leader of SF has the best healthcare plan of any pol. He can either get an eye op at HMG expense in Belfast or fly to NY for another procedure at the expene of a pal. Michael Hennigan are you sayimg the wealthy (!!!!) Nurses and midwives give bettercare to wealthy (aka insured) clients? Truly is tthere no low to which public sector bashing cannot sink? @Michael Accountability should be a leaving cert subject.’Sure it’s grand’ doesn’t work any longer. Trust has taken a real battering in the last few years. Maybe if the core starts to suffer there will be some impetus for change across Europe. Neoliberalism doesn’t do accountability either. I have to say btw that ding dong the witch is dead is encouraging. Society is still there. Ms educare, If you’re here for an economic education, it’s unlikely that you’ve the capacity to absorb it. Strange that I implied nurses are wealthy when medical consultants are among the highest paid in Europe. In 2007, a salary of €205,000 pus a bonus of €40,000 for a 39-hour week was dismissed as ‘Mickey Mouse’ money. Nurses of course cannot rack up 39 hours by mid-day Wednesday to then coin it in the private domain for the rest of the week. How dare anyone even impugn these demigods! You need to acquaint yourself with the hierarchical decision structure in Irish hospitals or try and see the world beyond self-interested blinkers. You self-styled victims using the riposte ‘public sector bashing’ like Tea Party types in the US, need to check out what it is really like to maintain a family fearing running out of money during this brutal recession. You seem to be a reincarnation of another ‘victim’ who struggled to make a coherent point beyond the greedy banshee wail of ‘public sector bashing.’ @ seafoid Yes it’s true: there is no Utopia anywhere or in any sector. Nevertheless as bad as it seems, the modern world is more balanced than it has ever been since the Industrial Revolution ushered in general rises in standards of living contemporaneous with the decline of warfare. @MH Well done your apology above re Mody. I should have phrased by question thus: ” Would you care to put a cost on the destruction by joblessness of young peoples lives in the periphery countries, caused in a significant part by current German financial and economic dogma.” I accept that German policies are not responsible for every ill on the planet. On the necessity of tackling the issues on the home base, I agree with you. It seems to be a tortuous process to get any movement. The remuneration of tribunal lawyers should have been made the first and non-negotiable condition of the ‘bail-out’, a condition that should have been demanded by the home side, if they were serious about the future of this country. Have tribunal lawyers been cut? I do not know, but I doubt it very much. Both FG and Lab seem very protective of legal cronies. Well I suppose you never know when you might need their very special expertise. But from my perspective structural adjustments, while essential, will make little difference to fundamental problem of lack of demand in Europe. This fall in demand is imho caused by a number of issues, the most important of which is deleveraging by banks.That is the huge policy driven mistake, that is being forced on the EZ and indeed outside the EZ at present. It is an economically moronic policy, that very few seem prepared to call. Its effect on aggregate demand is, imho, far more damaging that any government cutbacks, now labelled austerity. Deleveraging is a creditor dominated policy that lacks any economic validity. If a bank is insolvent deleveraging will not help it. In fact it will make things worse. AIB and by extension the Irish people lost one billion, in the forced early sale of Zachodni bank, with somebody else picking up nice profit two years later. If a bank is illiquid, then what is the purpose of deleveraging, other that a way for a central bank to duck out of one of its standard essential tasks of providing liquidity. @DOCM re: Mr Dijsselbloem and his response to German requested treaty change. I have to wonder if he is a real idiot. Germany knows full well as do other countries that selling any EU treaty change right now in Europe would be an impossibility. The only treaty change likely tom pass would be a mechanism allowing exit from the euro. On a broader issue, it is time for more responsible politicians and statesmen in Europe, to recognise that the EZ is a dead duck, or at least a duck that will not survive the next few pluckings. People who value a peaceful, fair and economically prosperous Europe, should set about the task of disentangling the euro from Europe, and disentangling Europe from the grip of banks and financiers. Europe to survive must be taken back from a banking hegemony at whose behest a supine political class is about to destroy it. @francis,your question is not at all indiscreet,I have a much closer relationship to Jameson than Moody’s….actually it was a rather nice bottle of Johnny Walker “spice trail” that did me in last night ! But no relationship to Moody’s at all,the credit ratings of Germn banks worthy of a thread all to itself,don’t want hijack this one with regards. Interesting article by Neil Collins in the FT today about how to solve the crisis. Basically the idea is to call in all 500 euro notes by a set date and anyone depositing them into a bank account would have to explain where they got them. I suppose you could use the Bertie horse explanation. Apparently there is 290 b in that denomination in circulation and the UK serious fraud people believe up to 90% is in the hands of criminals. As the author says the idea may not be as whacky as it sounds. I got into a pretty bad mood last night, soo @ fiat, my words were a little harsh It made me also think today, how to make bankers and layers and credit rating agency employees useful members of society. In German prisons, people can do apprenticeships until the age of 50, in occupations which have nothing to do with money: „Koch, Bäcker, Metzger, Industrieelektroniker, Konstruktions-, Industrie-, Zerspanungs-, Werkzeug- und Kfz-Mechaniker, Teilezurichter, Fräser, Schreiner, Maler/Lackierer, Maurer und Gärtner.“ Given that they have the skills of reading and calculation, etc, they can even have an accelerated 1 year version, and even if it is clear, that they are deported upon release. @ Joseph Ryan I said it here already in another entry, that I don’t see it as productive to grind into each other with blame games. As in most disasters today, like air plane crashes, etc, when you do the follow up, it is a combination of usually at least 3 different factors. In some way, that is also showing that we sometimes learn something, if it takes a 3 or more combination. 1. Those Hypo and Sachsen folks went to Ireland for the reason of lax supervision, something which was hailed in many places, not just Ireland, as a good thing, just those stupid, old fashioned German brick heads don’t understand : – ) 2. The Rating agencies were very creative in massaging the underlying assumptions to create the ratings for structured products, they were paid for, to sell them to stupid, gullible German bankers. There was some 1400 something pages long court verdict in Australia last year, detailing this even for prison sentences, I believe to remember. Not really sure what the punishment was. 3. Naïve German bankers / board Well, I got reminded here yesterday, that I am too still a little naïve by myself, sometimes. We chopped so many heads here (Sachsen, figuratively of course : – ), the whole management, and most of the board (incl. prime minister, finance minister) that some of the few not immediately fired employees, needed to wind down the complete business, even dared to ask for bonuses. One day only. Responsible people are taken to court, sentenced; I believe it is the Bayern LB / Hypo Alpe Adria, where a guy is already out of prison again, after a 1 year term. Soo, I think we should not engage in national blame games, the first obvious consequence on Euro level is the central banking supervision. Gosh and everything was going so well….oh ! Schaeuble has long had reservations about banking union, which would be a step towards allowing the euro zone’s rescue fund to directly assist banks, a move Germany fears might leave it facing the bill for reckless lending by foreign banks.” http://my.chicagotribune.com/#section/-1/article/p2p-75391814/ With all due respect Francis , Hypo was several years ago. Bringing it up is like George Osborne blaming Labour for the fact that the UK is in triple dip land. Ireland was banned from driving nearly 3 years ago. Turns out the ones behind the wheel now have no answers either. @ seafoid, I was trying to NOT bringing it up as any kind of blame, more like an obituary. @ John Gallagher, I was actually working on a thank you note for you, before seeing your reply. More a little later. The reason I come here and to several other blogs in other countries, why I bring stuff like the Sachsen LB in some local detail here is, that at some point I realized, that it is often the “thick description” behind the official simple stuff, like the new 10 year irish bond, coupon, volume, ISIN, to a lesser degree the law behind them. These are easy, hard quantitative stuff we understand in the very same ways. Org plans, law texts, and what they mean in the local context, much less so. I had a short discussion with a spanish entrepreneur, complaining about his law situation, and I asked, where the problem is, his llp laws seemed to look very similar to our GmbH and US equivalents. And he answered: yes, their laws were actually some kind of fusion of the others, but what a judge in a spanish court does with them, is very different. What is in Germany a controlled, limited damage, wind down of a failed idea, is in Spain a potential bankruptcy of something much larger. So, I try to provide some more of the “thick description”, but please tell me, when I start to get on your nerves with too much german stuff here. It is an Irish blog. @francis I was just testing the famous German sense of humor…..or taking the p*ss….regards and I’m based in US. Enjoy your posts and apologies for “poking” you 🙂 @John Gallagher From your link…Schauble says we need Treaty change. Over on the new tread DOCM has posted Barnier’s take on the situation and he believes it can be done under present Treaties. Is it any wonder the Eurozone is in such a mess. Btw, guess who wins that argument. @Fiat,hi fiat it’s a Reuters piece,was teasing Francis,picked a crap newspaper too! There was tread on here about this book,here’s Larry’s review fits in with the above. http://www.ft.com/intl/cms/s/2/5097537a-a034-11e2-a6e1-00144feabdc0.html#axzz2QNBP8JX7 I am looking forward to a summer of u turns as the chaos hits the soi disant serious countries of the core. Sarko said once he took some measure so La France would avoid the fate of Ireland. As if. And what is it with all the Thatcher tributes saying she rescued dear old blighty from the shame of the imf in 76? This neolib crash is bigger than the end of the postwar consensus and there are no handy shafting opportunities to get the animal spirits going again. @ John thanks ! probably winding it down here. I got a little careful with jokes, e.g. when Bryan got choked up a little bit with me using the words “capital crime” : – ) Some academic folks are somewhat sensitive. In an corporate environment people are more use to words like “food chain” or some GM guy giving the Hannibal to unrepetent Opel workers in Bochum. Last thing, I became aware of, that bankruptcy is something people here are pretty used to. But I have to work on that a little bit before folks in polyanna countries are getting ballistic over the wording : – ) I hope people enjoyed my detailing prison apprenticeships : – ) @francis agreed and enjoyed the exchange,sat afternoon Masters on….cold beer calling.Yes I got and enjoyed your prison analogy. “57 per cent say the Government should hold a referendum to end upward-only rent reviews, rising to 65 per cent among 45 to 64-year-olds” http://www.independent.ie/irish-news/shock-poll-75-per-cent-despair-of-government-29194711.html @zhou thanks for that,but was it not an election pledge by both FG and “Labor” in effect they already had a referendum on this.The AG is a Labour appointee perhaps labour now supports UORR….cause I have no idea what they stand for any more. @John Gallaher Until the electoral system is undergoes serious reforms it is likely that all our po0liticians will stand for is being professional in dealing with local issues and gettign votes and, if in power, accepting the advice of civil servants or private sector lobbies if the civil service no longer has relevant expertise (i.e. the banks in the case of finance). Labour opted to give us the sop of a constitutional convention rather than real political reform. FG offered us 6 less TDs rather than real political reform. The best opportunity for proper political reform since the 1937 constitution was enacted has been squandered by this Government. I can forgive them a lot of mistakes because it is not an easy job, but I cannot forgive them for passing up the opportunity to reform the Dail and the electoral system. The disingenuous lip service paid to the reform agenda is even more offensive than their inaction. @zhou my post was most likely not clear,both parties made pre-election pledges to abolish UORR but… However,Peadar Tobin did table a bill,ignored naturally. http://www.sinnfein.ie/contents/22790 May have well give a shout out too JC-they/he after much encouragement on here and elsewhere set up a web site-well done John and best of luck. https://www.facebook.com/ICTA.Ireland Comments are closed.