The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
@The Guv’nor et al.
‘Conventional wisdom holds that all nations must repay debt. Regardless of the legitimacy of the regime that signs the contract, the actual use of loan proceeds, or the exigencies of any potential default, a country that fails to honour its loan obligations damages its reputation, inviting still greater problems down the road.
Yet difficult questions have arisen from this assumption: Should a black-African-led South Africa really be expected to repay apartheid era debt? Or, given that Saddam Hussein was a dictator who used funds for the oppression of a majority of Iraq’s population, would it be appropriate to require future Iraqi generations to pay for his iniquity? Although the strict repayment norm comes into starkest relief in situations of regime change and transitional justice, its expectations filter into debt negotiations more generally. If repayment is expected even in such extreme circumstances, then it is reasonable to expect debtors to bear most of the burden in all other situations as well.
Rethinking sovereign debt [read on]
… in particular, one might add, its ‘odious’ component!
“.an excessive reliance on a regulatory philosophy that implicitly trusted that well-governed banks could be relied upon to remain safe and sound. ”
Greenspan said something similar
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders…” (Greenspan ‘shocked’ that free markets are flawed, November 23, 2008).
“This approach emphasised process over outcomes, and downplayed the quantification of risk”
I think they did try to quantify risk but they were far too smug and had far too much faith in their models. So when the models failed everything collapsed.
From the Irish time article today:…….Asked where that €40 billion had gone, Prof Honohan replied that it went “up in smoke” on property. He said “it went on buildings nobody wants to live in” and on wages to those who built them……
I would have added and the ‘holders of rezoned property’.
It’s easy to be wise after the event but the denial among the insiders did not end in Q4 2008 when 53,000 jobs were lost.
In February 2009, exactly 2 years after the subprime crisis broke out in the US, the Irish unit of PricewaterhouseCoopers (PwC), the biggest of the Big 4 accounting firms, delivered a report on Anglo Irish Bank to the minister of finance.
It said: “These annual impairment charges were €2.3bn and €3.0bn respectively per annum under the two scenarios for the years ended 30 September 2009 and 2010. The two PwC impairment loss scenarios exceeded Anglo’s worst case impairment loss scenario.”
Jones Lang LaSalle valued a sample of 160 properties held as security in relation to the top 20 land & development exposures on Anglo’s books.
Anglo Irish Bank reported a loss of €12.7bn for the 15 months to the end of December 2009 – the largest loss in Irish corporate history – after charging €15bn to cover bad debts.
At least the burning question is beginning to be posed.
Not that it will ever be satisfactorily answered. But the exercise should help puncture the illusion that the taxpayers of some other country or countries are about to pick up the bill. On debt, as the new commissioner in charge of EMU, Pierre Moscovici, former French finance minister, put it recently, “loans are not agreed to be written down”. The iron law that they must be repaid, unless creditors agree otherwise, stems from the nature of the system not any moral views with regard to those who granted or incurred them. Or, as the French put it, “l’argent n’a pas d’odeur”.
This looks like an enormous U-turn in Honohan’s assessment.
What I don’t understand is how would nationalising Anglo and Irish Nationwide have saved us €40bn? Surely as State owned institutions we would have had to honour its debts or would we have selectively paid out the depositors but not the bondholders and got away with it. Were Sinn Fein right all along?
It all seems very contradictory. A mistake and yet to do otherwise would have made us pariahs and much worse.
Honohan has to be asked a supplementary. He is in effect saying that we should have burnt the bondholders and lived with the pariah status. Well then should we now unilaterally repudiate that €40bn debt which we now owe to official sources and live with pariah status?
Honohan’s about turn simply beggars belief. Is he saying that the correct thing to have done in hindsight is to have nationalised the ugly sisters, put them into liquidation and then illegally put depositors and Irish bank creditors ahead of other senior bondholders, and live with the pariah status?
I also find the new narrative, that Brian Lenihan was pushing this silver bullet but Biffo was the villain of the piece, a bit obscene. I presume Biffo will have himself well advised in order to be able to put this one to bed when he comes before the committee.
Honohan says that the 40bn went “up in smoke” to building workers, for example.
Interesting that he singled out the workers. But of course it went to other windfall participants; VAT receipts, Stamp Duty, reduced income tax, bank executive pay, pensions, bonuses and share options, but most of all to those developers who were left sitting when the music stopped and those lucky landowners who got ludicrously uneconomical prices for their land both from the State and developers. It did not go to Germans.
@ ‘The Second’
My take is he’s saying we should have removed the management of the ugly sisters and let them go bust but engage our European partners in the process. Due to the fear in Europe/America of Lehmanns 2, there would have been a ‘compromise’ found. I.e we could have used the fear of Lehmanns two as leverage for a European bailout of the ugly sisters.
Not to worry about The FF/pdTaoiseach in the room at the time. His legal eagle colleagues, following the recent Flood (which, apparently, cleansed all alleged villians of any accountability ‘whatsoever), simply went up every tree in North Dublin and plucked themselves a cool €150 million. Pro bono one assumes. Peanuts, of course, in terms of the horrendous financial system debacle.
Spose your deutscher ‘Iron Law’ demands that the humble citizen-serfs pick up this tab as well.
No accountability either due to ‘light touch regulation’ [luv dat lite touch] in 2003 reg (PD/FF) based on the light touch report chaired by the EMH Progressive Democrat ideologue, Michael McDowell S.C. (these legal eagles are everywhere) while nest-less in his Dublin S.E. tree.
@all budding pariahs
Methinks The Irish Citizenry is viewed as a ‘light touch’ by The Financial System, the ECB, IMF, EC and sundry other reasonably upper-echelon connected professions …
Spartucus reloaded anyone?
I don’t see a U-turn in what Honahan has said. I see him expanding in a logical manner on his previously stated position that the bank guarantee was overly broad.
Missing from The Second’s list of beneficiaries is any recognition that something of the order of half the €122bn increase in property development and commercial property lending went straight back out of the country, benefiting foreign landowners and workers.
Although Patrick consulted widely with the soft landing economists-he never consulted with any of the alumni of the Galway Tent School of Economics and never once mentioned Ireland’s unique and extraordinary property lease law.
No mention of the Society of Chartered Surveyors who supplied all the very expensive property valuations, and who organised the cartel in the commercial property market. How sad is that.
Yes, the money that went to Bulgaria etc needs to be factored in. It is not as simple as how much was invested abroad, one needs to allow that some value remains but you are right that this is money up in smoke so far as Irish citizens are concerned
It still remains that if Drummer had stayed in America and brought Fingers with him we as a nation would have 40bn less debt today but we would all have paid more taxes and a tiny minority of us would have been denied their windfall fortunes. German bondholders would have lost 25bps in interest to be sure.
Cowan stands accused out of his own mouth as of March 2012. “The euro area policy of ‘no bank failures and no burning of senior bank creditors; has been a constant during the crisis. And as a member of the euro area, Ireland must play by the rules…”.
There was clearly no legal obligation to play by this specific “rule”.
The Second is quite right as usual.
There are two reasons why the banking problems (which were common to many countries) didn’t cripple the economy for a generation as the politically-motivated cognoscenti predicted back in 2009/10.
(1) The losses have turned out to be much less than they predicted. Their predictions were based on property prices falling much further than they did and then remaining at rock-bottom levels forever. This hasn’t happened (to know why, read my posts here circa 2009/10). The latest figure for estimated losses is down from 64billion to 40billion. I’d expect this figure to fall significantly further if the economy continues its present growth and, as an inevitable consequence, the property market continues to improve.
(2) Most of the taxpayer money to finance the losses has not gone out of Ireland but to investors within Ireland. If it was mostly going out of Germany, there would now be a huge hole in the balance-of-payments. Instead, the balance of payments is in massive surplus. Show me the item in the CSO balance-of-payments statistics indicating massive payments being made from Ireland to Germany. It doesn’t exist. One can argue about the morality of protecting one group of residents in Ireland at the expense of others, but in terms of the overall effect on the economy, it is obviously much less than if the money was going out of the country. Whether or not it was the right decision to do so can only be determined by the path of the economy over the next decade. If it continues on its present path, it will clearly be proven to have been the correct decision.
THe public were sold a politically-motivated lie in 2009/10. They were told the banking/property losses were so great and that financing them would send so much money out of Ireland (mainly to Germany) that the economy would be cripple for a generation. This has spectacularly failed to happen, as becomes more and more evident each day. Je suis Bertie.
It’s a minor point in this context, but I don’t believe the allegation that we would all have paid more taxes in the absence of the boom and bubble is entirely true. I believe that the idea rests mainly on developments in income tax, but these were not evenly distributed. Those on low to middle incomes benefited enormously from changes in tax bands and rates. Those on very high incomes benefitted greatly from tax shelters. But those in between these tiers received much smaller benefits through changes in rates and bands largely being offset by the shift from tax allowances to tax credits.
The attitude of Finland towards further debt forgiveness for Greece (or any other country involved) would, undoubtedly, be shared by a majority in Ireland were the boot on the other foot.
It underlines a point often, it seems, forgotten; the governments of creditor countries also have to protect the interest of their taxpayers.
Needless, to say, Irish politicians are clambering, with their usual alacrity, on to what they imagine may be the latest bandwagon. Their voters, it seems, expect no less.
@ That’s Legal, BCT
I think you are a tad generous to the Prof. In his official report on the Guarantee he stated that the decision was broadly justifiable but could have been refined around the edges, for example with regard to juniors. Now he is saying that it was a 40bn “mistake”. 40bn is not around the edges. This is a seismic change in his assessment.
I think you agree broadly with me that a substantial part of that 40bn did not “go up in smoke” but represented an obscene transfer of wealth from the bulk of the Irish citizenry too a tiny and in many cases unscrupulous few.
Did Drummer and Fingers know how ugly they were? The Tapes and the scene in the Guarantee where Drummer and Seanie gloat over the Decision suggest that they had at least deluded themselves that it was merely a liquidity issue.
How The ECB Can Structure Quantitative Easing Without Fiscal Transfers
16/01/2015 by Paul de Grauwe and Yuemei Ji
The ECB has been struggling to implement a programme of quantitative easing (QE) that would successfully target deflation. The main difficulty is political, stemming from opposition from German institutions. Their argument against is that a government bond buying programme by the ECB would mix fiscal and monetary policy. This column argues the opposite – such a programme can be structured so that it does not mix fiscal and monetary policy. It, therefore, would not impose a risk on German taxpayers.
Mus’nt upset the poor Germans!
the Germans learnt the wrong lesson from the 30s.
And they forget the 50s boom was based on investment in productivity and debt forgiveness.
Auf der Wirtschaft blüht eine kleine Katastrophe
und das heisst Deflation
boom boom boom
One difficulty is political the other economic- no one has demonstrated how QE in the current euro area environment would generate inflation. There is nothing else left in the monetary tool box so lets give it a go is perhaps a better explanation for Draghi’s plan.
Patrick failed to mention Paul De Grauwe’s article in the FT February 1998–could what had happened in Asia to the Asian Tiger happen in Europe? and he predicted say Spain / Ireland would have a property bubble which would bankrupt their banks.
Also Patrick failed to mention this man’s name who spoke the following year 1999;
“The attitude of Finland towards further debt forgiveness for Greece (or any other country involved) would, undoubtedly, be shared by a majority in Ireland were the boot on the other foot.”
“It underlines a point often, it seems, forgotten; the governments of creditor countries also have to protect the interest of their taxpayers.”
In opposing any debt forgiveness for Greece, the Finnish government is behaving perfectly sensibly from its own point of view. They should be supported by Ireland.
The harsh reality is that Finland’s economy is in deep trouble. As Finland is an Aryan, blond, protestant, socialist, high-tax, high-spend, politically-correct country, its economic problems will never receive the attention that, say, Ireland’s would. There is simply no political mileage for left-liberalism in highlighting Finland’s economic problems, since Finland has long done all the the things that left-liberals advise Ireland to do – increase taxes, increase spending, clear religion out of the public space, facilitate easy abortion, easy divorce etc etc. In the eyes of left-liberals, doing all these things should lead to economic and social nirvana. However, Finland’s statistics show otherwise:
(1) Since 2011, the Finland’s economy has contracted by 1.5% – Ireland’s has grown by 10-11% (GNP measure).
(2) Ireland is forecast to grow at an annual 4-5% up to 2018, Finland by under 1%.
(3) Finland has moved into a balance-of-payments deficit, while Ireland and the majority of EU countries have moved into a surplus. This reflects Finland’s growing uncompetitiveness.
(4) Finland’s unemployment rate is rising (8.9% in November) while its falling in the majority of EU countries (with Ireland’s fall one of the largest).
(5) Finland is the most expensive country in the EU and, unlike Ireland, its rate of inflation has been well above the EU average in recent years. Finland badly needs to reduce its cost base as Ireland has done in recent years, but I am doubtful if it has the same flexibility to do so.
(6) Finland is likely to be hard hit in the next few years by the oil-price-driven and sanctions-driven contraction of the Russian economy (not to mention the collapse of the rouble which will make Finland’s exports to Russia very uncompetitive). It is also likely to be hit by the oil-price-driven slowdown in the Norwegian economy.
So, when Finland quite sensibly refuses to cough up any money for Greek debt forgiveness, I hope they are not going to be pilloried on here.
Strip out the mood music and presentation from what Honohan said this time and in his report, and the analysis that remains is not much different between the two. The report has a prominent footnote in its conclusions that quite obviously represents his view as to what should ideally have been done, and it is precisely the same as what he advocated at the inquiry. The only difference is that in the report he made even more excuses for those who took the decision that was actually made than he did on this occasion.
I should have added:
Given these statistics, if Enda Kenny (or anyone else) thinks there is the slightest possibility of Finland agreeing to an EU debt forgiveness package for Ireland, he will need to have his head examined.
On the matter of compensating bank creditors in the event of a shut down, I think we have to parse what the various players have said much more carefully. I am relying on news reports of what Honohan said rather than listening to his 4 to 5 hours of testimony, but my impression is that he has been misinterpreted in what he advocated, with his description of Brian Lenihan’s position being conflated with his own.
I believe that Brian Lenihan made a big deal over pari passu between depositors and senior bondholders because his version of the plan involved nationalisation of Anglo rather than winding it up. Under that plan, it seems plausible that no event would have taken place that would have allowed senior bondholders to be treated differently to depositors. (That said, subsequent events in Cyprus have demonstrated that governments can made this stuff up as they go along under EU law, whatever about the Irish constitution.)
It seems to me that on the plain meaning of the words he used what Honohan has advocated is quite different – using ELA to keep Anglo open until the next weekend and then shutting it down. Under that plan, shareholders and unsecured subordinate bondholders would have been wiped out, and the remaining assets would logically have been split pari passu between depositors and senior bondholders. The State would then have separately and legally have compensated depositors for their losses on deposits of up to €100,000 under the deposit guarantee scheme, which does not protect bondholders. It is conceivable that the State might have chosen to retrospectively extend the scope of the deposit guarantee scheme to cover some additional classes of depositor.
I go along with most of that.
It still remains that the Guvnor was a bit OTT in describing it as a 40bn mistake. A more surgical operation might have cut off some fat but the muscle representing depositors and Irish bank creditors would have had to have been made good. 10bn “mistake”?
I see Cliff Taylor in the IT has largely presented these same points, so I am not alone!
My reading of what Honohan said is that the net loss to the State works out about €40bn, but that he did not make an estimate as to how much of this was avoidable through a narrower.guarantee. My *guess* is that the avoidable part of this is well in excess of €20bn, and possibly as high as €30bn.
I wrote my earlier comments today partly because I thought Cliff Taylor’s analysis in today’s Irish Times was double plus ungood.
Looks like the establishmentarian revisionists are out in force ….
BTW Debt/GNP remains ~140% … wonder how can they reduce this one?
Interest repayments remain ~>8 Billion p.a. …. ditto.
Of course, Hibernian establishmentarian ‘accountability’ remains at a well propertied ground ZERO. ZERO statsig************************
“Wasn’t it the case that the ideology of the government, the banks, the speculators, most of the media, was at the heart of the problem that led to the collapse of the economy?
Wasn’t it all about an ideology involving the greedy pursuit of “super profits” by the banks? Didn’t that result in a regulatory system where the “prevailing spirit is don’t separate the lion from his prey, but let them at it”. [Joe Higgins]
“That’s right,” said The Guv’nor.
And WHO designed this ‘regulatory system’? Are you ‘roight’ there Michael? Are you ‘roight’?
Dan O’Brien of the Sindo is even more forceful on my central theme. Some new stuff as well. He points out that Anglo, unlike the Pillars, was relatively devoid of bondholders. It had €70bn of deposits!!
Even if the damage had been limited to the €100K deposit guarantee this would have cost an immense amount. And if that was the case the focus of the inquiry would shift to why and who gave the €100K guarantee? This after all was only given two weeks earlier.
So my assessment of the direct impact on the taxpayer of the decisions made that September are €20Bn for raising the guarantee from 20k to 100k, €5bn for making the deposit guarantee unlimited, €10bn to make good Irish bank creditors and €5bn which might have been saved by more surgical fine tuning.
But, as Dan O’Brien points out, whilst the direct costs of the guarantee can be identified, the indirect costs of letting Anglo go, partially or fully, bust are incalculable. There would have even been some indirect costs if surgical precision had been applied; how easy would the pillars have found raising funds, for example?
Patrick failed to mention that David McWilliams had been calling a property bubble since 1999,nor did any of the banking inquiry politicians raise it.
In Patrick’s report chapter 6 subsection 6.13 page 81
” The 2004 Financial Stability Report highlighted the fact the price-rentals ratios were already suggesting overvaluation-of between 55% and 63%. Most independent authors were also beginning to find it hard to explain house prices on the basis of fundamentals of supply and demand”.
Below is the link to the elementary property valuation error that bankrupted Ireland;
Are you saying Finland’s ‘Aryan, blond, protestant, socialist, high-tax, high-spend, politically-correct country’ is responsible for the gutting of Nokia or the slow down in the paper industry or the collapse in the Ruble?
I would suggest these mix of external forces, which can happen to any economy are mostly to blame and Finland being high tax high spend plays a minor role. Then you probably know that.
Luckily, having less than half the government debt and being charged less than half the interest rate of Ireland (as a result of being governed more responsibly) Finland has room to cope with such shocks.
I didn’t say that being an ‘Aryan, blond, protestant, socialist, high-tax, high-spend, politically-correct country’ is the cause of Finland’s current poor economic performance. I said it was the reason why its current poor economic performance receives little media attention, especially Dublin 4 media attention. Politically-correct countries such as Finland (and the other Nordics) are not subject to the level of bile from the likes of Fintan O’Toole, Vincent Browne, Gene Kerrigan et al that countries like Ireland receive. All current indications are that Ireland is going to completely outperform Finland and the other Nordic countries for the rest of this decade (just like it did from 1990 to 2007), but rest assured that coverage of this fact in the Dublin 4 media will be minimal.
“So, when Finland quite sensibly refuses to cough up any money for Greek debt forgiveness, I hope they are not going to be pilloried on here.”
The EZ is running deflation so either debt forgiveness or default seem the only options when things go too far .
I think the protection of the interests of financiers since 08 is one of the main reasons the crisis has lasted so long.
I wonder how the cost of writing off debt versus that of lost output due to the ongoing mess would look .
Perhaps the guarantee was just a dream, an illusion. The way the numbers are being worked, its cost will soon be down to zero.
The logic, as far as I can detect is this.
The cost of the bank guarantee was less than €40, because if we had not given the bank guarantee, we would have had to pay out on the second bank (deposit) guarantee that we had given, free gratis, two weeks earlier.
The facts are that the state put €64 billion into the ‘banks’, and has managed to get a few billion back in fees, sales etc.
On a very good day, somebody hopes to recover enough from AIB, BOI etc to get the net cost down to €40 billion. The fact that the guarantee drover the state bond rate up to 14% and bust the country, is not counted.
But even that €40 billion does not even being to record the true cost of the bank guarantee to the country, as distinct from the cost to the state.
There is now, clearly in the minds of those adding the figures, a distinct difference between the two entities.
PS: About the second bank (deposit) guarantee covering all deposits up to €100,000, the majority of deposits, I assume. Total banking deposits are in the region of €150 billion.
1. Has the legislation been changed yet to make that guarantee a first preferential (priority) debt in the event that BOI, AIB or whoever goes bust next time. Or is the state merely acting as a free gratis re-insurance company, that will see bondholders and depositors get a % of their funds, while the state ponies up for the balance lost by the depositors.
2. When AIB sell into the market, will it sell with free gratis deposit insurance, for the next screw up?
I agree, all current indicators are that Ireland will outperform Finland.
However, I feel the reason that RTE etc don’t report on Finland’s economic woes is because the economic shocks received by or threatening the Finnish economy are of little interest to the Irish population. There is also no real evidence that the high tax high spend policies they follow is responsible for their problems.
So why report to John and Mary Murphy that Nokia lost out heavily to Apple or that the Ruble is falling against the euro.
John and Mary care about solutions to unaffordable childcare, rent inflation, the lack of reasonably priced housing, their son/daughter after a 5 year master being employed but not employed on a jobsbridge scheme, their pension (if they’re in the unrepresented and so unprotected sector of the economy) or the public health service if they’re sick etc etc etc
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