Economic Letter from the Central Bank here.
Archive for the ‘Banking Crisis’ Category
The economic rationale for the new Insolvency Service of Ireland is well-founded in economic theory. It hinges on the concept of Pareto improving bargains. The idea is that a debtor, with the guidance of a personal insolvency practitioner, can construct a Pareto improving bargain to everyone’s benefit: the debtor, the lender, and society as a whole.
Consider a debtor with unsustainable debt who, to avoid the personal and social costs of bankruptcy, goes to a personal insolvency practitioner (PIP). The PIP objectively examines the debtor’s situation and suggests a payment scheme which offers only part-repayment of loan value. Let the offered proportion of loan value be denoted by OFFER where OFFER < 1. If OFFER = 1 then the debtor is not insolvent since he/she can afford full-value payment and the PIP has no role. The PIP describes the offered repayment plan to the lender (or lenders).
The lender knows that the alternative to a personal insolvency plan is bankruptcy for the borrower, and that bankruptcy entails large financial costs, most of which will be borne by the lender. The uncertain proportion of loan value received by the lender after accounting for bankruptcy costs will be denoted by RECOVER. The debtor will accept the PIP offer if it provides higher expected value of total payments:
OFFER > E[RECOVER], (A)
where E[ ] denotes the expected value.
The economic rationale for this process is that it can make all three interested parties (debtor, lender, and society) better off. The debtor avoids the personal/social costs of bankruptcy; the lender gets a loan recovery amount which is higher than the expected bankruptcy-cost-adjusted amount received otherwise. Society avoids administrative bankruptcy costs and gets the benefits of a debtor freed more quickly from debt distress. Of course the PIP has lots of other duties (counselling the debtor, dealing with multiple lenders, administrative duties) but dealing with equation (A) is very fundamental.
The banks understand equation (A); the politicians understood equation (A) when they set up the enabling legislation. Does anyone in the Insolvency Service of Ireland understand equation (A)? It is fundamental to the Service performing its important task competently.
The Primetime news show recently highlighted a young couple whose PIP offer was rejected. I do not want to focus particularly on the individual case, keeping in mind the adage “hard cases make bad law.” According to the discussion in the show, the couple owed a mortgage-related debt of €276,000 and their PIP constructed an alternative loan repayment of €2,000. That is, relying on the numbers as discussed in the show, they made an offer of:
OFFER = 2,000/276,000 = 0.0072.
It is important for clarity to note that this does not denote a concessionary interest rate of 72 basis points; rather, 72 basis points is the total proportion of repayment including all principal repayment. Unsurprisingly, the PIP offer was rejected by the lender.
One could argue that the bank could just forgive the couple the loan debt as a gift (skip the 0.0072 partial payment which is too miniscule to consitute a meaningful debt settlement arrangement). That is, the insolvency system can be brought in as a useful component of parish pump politics, in the good sense, of parish pump politics as using the political system to create unfunded sources of benefits for local causes. There is certainly a case for doing this, but it was not actually the intention of the legislation. Doing so would greatly increase the effective political power of the ISI as controller of this new source of unfunded social benefits.
A technical feature of equation (A) is a convexifying effect for OFFER proportions close to zero. OFFER is known with certainty whereas RECOVER is a random proportion. Since RECOVER has a lower bound at zero, Jensen’s inequality means that the expected value of RECOVER is much higher than its maximum likelihood value in the region near zero. Is seems extremely difficult to create a scenario where E[RECOVER] could fall as close to zero as 0.0072.
The head of the Insolvency Service of Ireland was on the Primetime show, but he did not seem to be familiar with equation (A), or did not consider it relevant. He did seem to understand that if the ISI had the power to force deals without worrying about (A), then parish pump political considerations would give the agency much greater power. Yet equation (A) was extremely relevant and the absence of any appropriate analysis associated with it detracted considerably from the clarity of the discussion. The staff at the Irish Insolvency Service could benefit from the 30-minute lesson in the economic rationale for their agency’s existence.
[I added a few edits to correct typos, respond to comments (thanks to Sarah Carey and to other commenters who induced me to think more carefully). There may be some time-inconsistencies between the earlier comments below and the later edits.]
The details for the calibration of the EU-wide bank stress test are now available. Looking only at Ireland, and only at one of the key variables in the stress test, the calibration looks problematic. It may be coincidental that the Irish adverse scenario has been badly chosen; it might be that all the other member countries have reasonable calibrations. If the others are as problematic as in the Irish case, this is not a reliable EU banking sector stress test.
Under the adverse scenario, Irish property prices are assumed to suffer a cumulative three-year drop of 3.03%; equivalent to a decline of 1.02% each year for three years in a row. Over the period covered by CSO data, 2005-2013, Irish residential property prices had an annual sample volatility of 11.7%. This in turn implies (under reasonable assumptions) a three-year volatility of 20.27%. In risk analysis it is conventional analytical shorthand to measure adverse outcomes in “x-sigma” units defined as the outcome as a multiple of the standard deviation. For an adverse scenario calibration, the assumed outcome is usually roughly a two-sigma or three-sigma event. Using a four-sigma shock would not be unusual (due to fat tails in some probability distributions). The EBA has calibrated the adverse price shock as a 0.1492-sigma event. That is not credible as an adverse scenario in a stress test.
Keep in mind that the stress test is meant to reassure market participants that even in an adverse scenario the Irish banks are sound. This test reassures us that if property prices fall by as much as one percent a year over the next three years, the banks have enough capital. In the case of a two-percent fall, there are no promises.
As a caveat, this does not mean that the Irish banks need equity capital. They have already had a credible stress test (in 2011) and a big capital injection. Also, the Irish property market although very volatile has a maximum likelihood price change which is positive over the next three years. However the asset class also has considerable “downside” potential and continued high volatility. Conventionally, at least in the case of portfolio risk analysis, the unconditional mean of a stressed variable is set equal to zero for risk analysis purposes. The EBA has chosen to build in a big positive benchmark price rise for Irish property assets, and this is part of the reason that the adverse scenario is unacceptably mild. In any case, this calibration is extremely mild as an adverse scenario and not reassuring for the EU-wide test.
16th April 2014: Sean FitzPatrick has been found not guilty of all charges relating to the Maple 10 transaction. First the judge (for some of the charges) and then the jury (for the remaining charges) examined the evidence carefully, and declared him not guilty. The Maple 10 scheme was truly outrageous, but there is no reason to second-guess the verdicts as given.
From a broader perspective, these not-guilty verdicts might encourage a deeper understanding and better public response to the Irish credit bubble and financial collapse. It is a myth that Sean FitzPatrick caused the Irish financial collapse. Sean FitzPatrick was a major character in the Irish credit bubble, but not a fundamental cause. The collapse is better explained by the extremely “light-touch” financial regulatory system which was deliberately chosen by the democratically elected government of the Irish state, and to a lesser degree by the deeply-flawed Euro currency system chosen by member states. Over the short term, the Irish public benefitted handsomely from both the flawed Euro currency system and the very flawed light-touch Irish financial regulatory system. The Irish electorate was keenly enthusiastic for both.
The Maple Ten scheme was an outrageous transaction whose sole purpose was to unwind another outrageous transaction – the accumulation of a disguised 29% ownership of Anglo Irish Bank by Sean Quinn using contracts for difference (CFD). CFD’s are only legal in some countries, are a naturally toxic trading vehicle, and evade corporate governance rules by disguising true share ownership. Ireland during the boom was a world leader in the use of CFD’s, and Sean Quinn’s disguised 29% ownership position using CFD’s was particularly outrageous. The Irish financial regulator was simultaneously monitoring (or not monitoring) two very large and very dubious financial transactions in a relatively tiny domestic financial system. To lose track of one large, dubious financial scandal may be regarded as a misfortune, to lose track of two looks like carelessness.
During the bubble period macro-prudential risk regulation by the Irish Central Bank was also (with hindsight) very poor.
The fundamental causes of the Irish financial collapse were two flawed systems – a flawed Euro monetary system and a very flawed Irish financial regulatory system. Both of these systems were built up in broad view and with enthusiastic public support.
- – - – - – - – - – - – - – - – - -
See Corbet and Twomey for a technical treatment and empirical study of CFDs, with a focus on Irish CFDs.
According to the Irish Independent, Minister Noonan was worrying in public last night about the shortage of family homes in the Dublin area. But he also apparently said:
“We need to get property prices up another bit.”
To which the only possible response is: “why”?
If you are stuck in a malfunctioning currency union and can’t devalue, then don’t you want to get all costs down as much as possible, especially if they are going to feed into wage demands? Why interfere with the market in this particular case?
A memo prepared in November 2008 by Merrill Lynch in advising the then government on the developing banking crisis has been released following an FOI request from Sinn Féin. The 45-page memo is here.
Some government statements issued around time include:
- 30.11.08: Announcement in relation to Covered Institutions
- 14.12.08: Statement by the Government on the Recapitalisation of Credit Institutions
- 21.12.08: Government Announcement on Recapitalisation
- 15.01.09: Statement on Nationalisation of Anglo Irish Bank
It is an interesting read but has anything been unearthed aside from further evidence that the scale of the banking bust was massively underestimated?
The Central Bank have released the Q4 2013 update of their mortgage arrears statistics.
For Primary Dwelling Houses (PDHs), 12.6 per cent of accounts are in arrears of 90 days or more. This compares to 11.4 per cent of accounts in similar arrears in the unaudited monthly data for December published by the Department of Finance.
The Department of Finance figures cover the six banks operating under the Mortgage Arrears Resolution Targets (MART) process. These banks (ACC, AIB, BOI, KBC, PTSB, ULSTER) provide 90 per cent of mortgage lending in Ireland so it is clear that the remaining 10 per cent of mortgages (from the former BOSI and INBS as well as the various sub-prime lenders) have a far higher arrears rate – somewhere around 23.5 per cent. The 90-day arrears rates for the INBS and subprime mortgages are greater than 50 per cent.
In today’s Central Bank statistics we see the total number of PDH accounts in arrears continue to fall and for the first time there was a decline in the number of accounts 90 days or more in arrears.
However, the situation of those in existing arrears continues to deteriorate with yet another significant increase in the number of accounts now 720 days or more in arrears (31,834 to 33,589).
On average the accounts greater than 720 days in arrears are just under €42,000 in arrears. Across the statistics there is an average of roughly 1.25 accounts per household.
The outstanding balance on mortgages in arrears fell from €25.6 billion to €24.4 billion of which €18.2 billion are in arrears of 90 days or more. The total amount of arrears rose from €2.17 billion to €2.24 billion.
The total amount of PDH mortgage debt continues to fall and is now at €107.4 billion, compared to €118.6 billion when the series began in September 2009. However, it should be noted that the release mentions “asset sales” that took place over the quarter but it is not clear what impact these have on the figures. The sales refer to mortgages that were sold by one of the reporting institutions, and are therefore no longer included in the statistics.
At the of December there were 84,053 restructured PDH accounts and 79.3 per cent were deemed to be meeting the conditions of the restructure. There is a new table providing these rates by each type of restructure.
Reduced payment less than interest only (4,264) and arrears capitalisation (18,516 accounts) are the worst performing restructures for PDH accounts. There were only 14 accounts granted a permanent interest rate reduction.
As expected the number of split mortgages continues to grow rapidly. It increased from 1,154 in Q3 to 3,268 in Q4 and, with 96.3 per cent compliance, it is the best performing restructure for PDHs. This is likely linked to the incentives built in to the restructure. There are likely to be many more split mortgages coming through as there are 9,722 restructured accounts classed as “Other” most of which are “accounts that have been offered a long-term solution, pending the completion of six months of successful payment.”
There were 63 forced repossession in the quarter and 105 voluntary surrenders.
Court proceedings were initiated in 1,491 cases. Up to Q2 2013 the average number of proceedings issued per quarter was around 250. This increased massively in the second half of 2013. During Q4, 258 court proceedings were concluded and 82 court orders for repossession were granted. Of the 176 concluded by other means it is probable that many of these see the borrower and lender enter a new arrangement through a restructuring of the original loan agreement with others ending by way of voluntary surrender/abandonment.
Data on the Buy-to-Let sector are also included in both releases.
The Irish Times today features two contrasting strategies for dealing with the debt legacy created by the Irish bank bailout.
- Ireland urged to play ‘hardball’ to get a deal on legacy bank debt
- Sale of State’s AIB stake will not rule out retroactive aid
An interview RTE’s Sean Whelan did with Willem Buiter is available here.
Organised jointly by the ESRI, Dublin Economic Workshop, UL, and UCD’s Geary Institute, this year’s policy conference (see previous years here and here) will be on the theme of economic policy after the bailout. This conference brings policy makers, politicians, civil servants and academics together to address this question of national importance. The venue will be the Institute of Bankers in the IFSC. (Click here for a map).
Date: 31st January 2013
Venue: Institute of Bankers, IFSC
9:15 – 10:45: Plenary: The Impact of the Crisis on Industrial Relations
Chair: Aedín Doris (NUI Maynooth)
- Kieran Mulvey (Labour Relations Commission) Prospects for Pay and Industrial Relations in the Irish Economy
- Shay Cody (IMPACT Trade Union) “The impact of the crisis on industrial relations – a public service focus”
- Michelle O’Sullivan/Tom Turner (University of Limerick) “The Crisis and Implications for Precarious Employment’”
10.45-11.15: Coffee Break
11:15 – 12:45: 2A. Migration and the Labour Market
Chair: Philip O’Connell (UCD Geary Institute)
- Piaras MacÉinrí (UCC) ‘Beyond the choice v constraint debate: some key findings from a recent representative survey on emigration’
- Peter Muhlau (TCD) “Social ties and the labour market integration of Polish migrants in Ireland and Germany”
- Alan Barrett (ESRI & TCD) and Irene Mosca (TCD) “The impact of an adult child’s emigration on the mental health of an older parent”
2B. Economics: Teaching and Practice
Chair: Ronan Gallagher (Dept of Public Expenditure and Reform)
- Brian Lucey (TCD): “Finance Education Before and After the Crash”
- Liam Delaney (Stirling): “Graduate Economics Education”
- Jeffrey Egan (McGraw-Hill Education) “The commercial interest in Third Level Education”
12:45 – 1:45: Lunch Break
1:45 – 3:15: 3A. Health and Recovery
Chair: Alex White, TD, Minister of State
- David Madden (UCD) “Health and Wealth on the Roller-Coaster: Ireland 2003-2011”
- Charles Normand TCD) and Anne Nolan (TCD & ESRI) “The impact of the economic crisis on health and the health system in Ireland”
- Paul Gorecki (ESRI) ‘Pricing Pharmaceuticals: Has Public Policy Delivered?”
3B. Fiscal Policy
Chair: Stephen Donnelly TD
- Seamus Coffey (UCC) “The continuing constraints on Irish fiscal policy”
- Diarmuid Smyth (IFAC) ‘IFAC: Formative years and the future’
- Rory O’Farrell, (NERI) “Supplying solutions in demanding times: the effects of various fiscal measures”
3:15 – 3:30: Coffee Break
3:30 – 5:00: Plenary: Debt, Default and Banking System Design
Chair: Fiona Muldoon (Central Bank of Ireland)
- Gregory Connor (NUI Maynooth) “An Economist’s Perspective on the Quality of Irish Bank Assets”
- Kieran McQuinn and Yvonne McCarthy (Central Bank of Ireland) “Credit conditions in a boom and bust property market”
- Colm McCarthy “Designing a Banking System for Economic Recovery”
- Ronan Lyons (TCD) “Household expectations and the housing market: from bust to boom???”
This conference receives no funding, so we have to charge to cover expenses like room hire, tea and coffee. The registration fee is €20, but free for students. Please click here or on the link below to pay the fee, then register by attaching your payment confirmation to an e-mail with your name and affiliation to firstname.lastname@example.org. [Block bookings can be made by purchasing the required number of registrations and then sending the list of names to email@example.com]
Yesterday Moody’s downgraded BOI, lowering deposits to Ba2 and senior unsecured debt to Ba3, with negative outlook. These are the same speculative grades it applies to AIB. The agency has PTSB lower with a B1 rating for deposits and B3 for unsecured debt.
The Moody’s report on BOI is here and gives some useful insights into the reasoning applied by Moody’s. The rating on subordinated debt in BOI was raised from C to B2 with preference stock raised to Caa2 also from C. Senior bonds covered by the ELG remain at Ba1 with stable outlook.
This is a chart of Moody’s recent deposit ratings for BOI.
AIB and Bank of Ireland have released statements (one somewhat shorter than the other) following the results of the balance sheet assessments carried out by the Central Bank.
UPDATE: The statement released from PTSB at 11am also reflects a paucity of information.
UPDATE. The following is probably also relevant here:
Bond Repayments: Motion [Private Members]
“That Dáil Éireann:
calls on the Government:
— to immediately lobby the European Central Bank for a one-off exemption from the rules of monetary financing, to allow the Central Bank of Ireland to destroy the €25 billion in sovereign bonds issued in February of this year, in lieu of the remaining promissory notes, plus the €3.06 billion bond also being held by the Central Bank of Ireland in payment for the 2012 promissory note; and
— to cease any and all interest payments currently being made on those bonds.”
- The first part of the debate on this motion is available here.
- UPDATE 2: The final part of the debate on the above motion is now available here.
By Alan AhearneThursday, November 21st, 2013
The Institute of International and European Affairs will host a conference in the Convention Centre Dublin on Monday, 2 December that will feature a series of keynote addresses and panel discussions to consider the rapidly changing banking environment in the context of the proposals for a banking union in Europe. The implications of these developments, including what they mean for the future of the euro, the management of financial crises in the Eurozone and the likely impact on businesses and individual consumers, will also be addressed. Additional details can be found here.
Alan Ahearne writes on this issue here.
By Aidan KaneWednesday, November 6th, 2013
via Gavin Kostick in comments, earlier
Fishamble’s production of ‘Guaranteed!’ by Colin Murphy is back on national tour, starting at Kilkenomics this Friday. First panel discussion includes Bill Black and Dan Ariely.
The financial architecture of the Eurozone is still a mess. One possible improvement might be a wave of cross-border bank takeovers and mergers. Such a change might make the Eurozone less fragile since country-specific economic shocks would not have a two-way negative-feedback through the balance sheet of country-specific banks. This change would also kill the potential for country-specific deposit runs. The bank regulatory authorities in the U.S.A. (FDIC and Federal Reserve) often arrange mergers and takeovers of troubled banks to snuff out liquidity/solvency crises at individual banks and/or dampen regional shocks. J.P. Morgan was encouraged to take over Bear Stearns and Washington Mutual by the regulators for exactly these reasons. Now, quite appropriately, J.P. Morgan is responsible for the “legacy liability” issues of these two absorbed banks, and it looks like the final bill for J.P. Morgan could be over $10 billion. J.P. Morgan is the legal successor and a change of ownership does not eliminate the liability, even if (as in this case) the regulator gave you a Best Boy in Class ribbon when you agreed to the takeovers. The J.P. Morgan case is in a foreign jurisdiction, but nonetheless this case will have knock-on effects for the Eurozone. The J.P. Morgan case makes it less likely that there will be any takeovers of troubled or formerly-troubled Irish banks.
Òscar Jordà, Moritz Schularick, Alan Taylor have a new piece on the issue, available here.
By Ronan LyonsTuesday, October 1st, 2013
The end of one quarter and the start of another sees the usual slew of economic reports and the start of Q4 is no exception. Today sees the launch of the Q3 Daft.ie Report. In line with other reports in the last week or so, and indeed with the last few Daft.ie Reports, there is evidence of strong price rises in certain Dublin segments. What is new this quarter is the clarity of the divide between Dublin and elsewhere: all six Dublin regions analysed show year-on-year gains in asking prices (from 1.4% in North County Dublin to 12.7% in South County Dublin), while every other region analysed (29 in total) continues to show year-on-year falls (from 3.1% in Galway city to 19.5% in Laois).
The substantial increases in South Dublin over the last 12 months have led to talk of “yet another bubble” emerging, with internet forums awash with sentiment such as “Not again!” and “Will we never learn?”. To me, this is largely misplaced, mistaking a house price boom for a house price bubble. Let me explain.
Firstly, I should state that, unlike “recession” which is taken to mean two consecutive quarters of negative growth, there is no agreement among economists on what exactly constitutes a bubble, in house prices or in other assets, but the general rule is that prices have to detach from “fundamentals”. For example, the Congressional Budget Office defines an asset bubble as an economic development where the price of an asset class “rises to a level that appears to be unsustainable and well above the assets’ value as determined by economic fundamentals”. Charles Kindleberger wrote the book on bubbles and his take on it is that almost always credit is at the heart of bubbles: it’s hard for prices to detach from fundamentals if people only have their current income to squander. If you give them access to their future income also, through credit, that’s when prices can really detach.
My colleague Tom Flavin and I are preparing a paper for the Dublin Economic Workshop on the financial characteristics of Irish Mortgage defaults. The analysis relies on a donation of anonymized data on mortgage arrears from Permanent TSB and we are grateful to them for their assistance. Tom will give a fuller account of our data analysis at the conference; this blog entry highlights some of the strong evidence for a very substantial proportion of strategic arrears in Irish mortgage arrears. (more…)
Fiona Muldoon, Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, gave a speech yesterday in Glenties at the MacGill summer school (h/t John Gallaher). The topic of the speech was “Restoring Confidence in the Irish Financial System.” Ms Muldoon gave a fairly upbeat assessment of progress. I am less sanguine. The problem is not lack of international confidence in Irish banks and businesses, but rather lack of international confidence in Irish financial regulation. It is still not clear if the Irish Central Bank has the backbone for the tough tasks it faces in the current environment.
It is important to remember that the weak regulatory stance of the Irish Central Bank during the credit bubble period was one of the chief causes of the Irish economic crisis. The Irish Central Bank’s soft and timid approach, and its willingness to be swayed by political and business interests, was a major cause of Ireland’s economic disaster (for evidence, see my paper with Brian O’Kelly). Has the Irish Central Bank sufficiently altered its approach?
The Irish Central Bank has reformed enough so that if the challenges of 2002-2008 ever reoccur, it will be ready for them. This new resolve to block credit bubbles is not likely to be tested for many decades. The Irish Central Bank needs to have the strength and fortitude to deal with the very different challenges of 2013.
The Irish Central Bank showed no leadership during the fiasco of the 2009 Land Reform Act/Dunne Judgement. The previous government (perhaps deliberately) slashed a gaping hole in Irish financial contract law when it passed the flawed 2009 Land Reform Act. The flaw was pointed out by Justice Dunne, and the judiciary reasonably expected that such an egregious flaw (called a “lacuna” in legal parlance) would be fixed by amending legislation. However the legal flaw was politically convenient since enforcing mortgage contracts would have been politically painful at the time. Ignoring the Dunne Judgement and leaving the flaw in place was very poor practice in terms of restoring international confidence in the Irish financial system, but it was politically convenient for a domestic audience. The government did nothing at all about this legal flaw, despite the obvious impact on Ireland’s international reputation.
It took outside interference by the Troika to get this legal flaw fixed. The Troika repeatedly noted the unacceptable situation in their quarterly reviews, and when government action was still not taken the Troika demanded that the Irish government act by an imposed deadline or face a cut-off in national debt funding. Throughout this long, confidence-draining saga, the Irish Central Bank stood meekly by and said nothing. A stronger-willed central bank (US, UK, Germany, others) would have been screaming from the rooftops about the need to fix such a gaping hole in the country’s financial contracting law. It is not to the credit of the Irish Central Bank that we needed Troika intervention to get this problem acknowledged and fixed.
The Central Bank’s response, or lack thereof, to the explosive growth in mortgage arrears is another case where its stance was timid. Even by late 2011 it was obvious to hard-headed observers that some substantial fraction of the mortgage arrears explosion could be traced to strategic behaviour by households. Mentioning strategic default is offensive to many people since it means acknowledging that some Irish people are acting dishonestly in their own self-interest against the interests of society. A few people were brave enough to mention the obvious (take a bow, Karl Deeter!) but none at the Irish Central Bank. Up until early 2013, the Irish Central Bank effectively had a ban on any mention of strategic default by any central bank spokesperson. This gave rise to some stilted presentations, where Central Bank senior spokespeople railed about the explosion in mortgage arrears without any mention of one of the key causal factors. This omerta was finally broken by Patrick Honohan in early 2013. That was too late in the process to be an international confidence-booster. A strong imperative by the Irish Central Bank not to cause anyone any offence is not a good foundation for building international confidence in Irish financial regulation.
On the positive side, the Irish Central Bank’s actions against Quinn Insurance were tough and bold. So the bottom line is that in terms of restoring confidence the Irish Central Bank has a mixed record over recent years.
An interesting article on property debt restructuring deals by Mark Hilliard in today’s Irish Times, “Secret Deals on Mortgage Arrears Raise Concerns.” For many of us it will bring back our graduate school days studying Stiglitz, Rothschild, Ackerlof, Spence et alia on information revelation and efficient contracts. The laudable goal of the Irish mortgage debt arrears policy is to ensure that almost all householders who cannot pay their mortgages can keep their family homes. The difficulty is that it is virtually impossible to distinguish can’t-pays from won’t-pays except at untenable cost and personal privacy intrusion. So the unwritten “policy” is to restrict the flow of information to consumers regarding restructuring terms and conditions. This is intended to limit the flow of potential won’t –pays into the system. In the article, Noeline Blackwell of FLAC is quoted lamenting the lack of a clear detailed list available to consumers in terms of debt restructuring options. She is correct, but this lack of information is not a bug, it is a feature of the evolving Irish system.
There is nothing new in this, but the number of shady episodes that Lanchester reminds us of, and the quality of his writing, makes it well worth a read.
Dermot and Brendan Walsh have just published a provocative comment in the British Medical Journal on the link between health and austerity [http://www.bmj.com/content/346/bmj.f4140/rr/651853].
Momentary relief from the deliberations on Anglo!
The comment reads:
Ireland is – after Greece – the country where the post 2008 structural adjustment programme, aka austerity, has been proportionately most severe. Yet there are few indications that this has had a significant adverse effect on basis health indicators.
The crude death rate in 2012 was 6.3 per 1,000 compared with 6.4 in pre-austerity 2007. The suicide rate in 2012 was 12.8 per 100, 000 in 2012 compared with 13.2 in 2007. Admission rates for depressive disorders fell to 117 per 100, 000 in 2012 from 138 in 2007. The percentage distribution of self-assessed health status did not change between 2007 and 2010 (the latest available year).
Overall there is a striking lack of evidence that the major austerity programme implementd since 2007, and the concomitant trebling of the inemployment rate, has had a significant deleterious effect on the health of the Irish population. This evidence needs to be given due weight in international assessments of the impact of economic policies on public health.
The Eurozone banking system is not working properly due to fragmentation between core and peripheral banking systems. In a recent speech, the president of the ECB, Mario Draghi, has acknowledged this, but argues that fixing this problem is someone else’s responsibility. The ECB has the tools to address this crucial flaw in the Eurozone system, and over the medium term horizon there is no other Eurozone institution that can. The ECB should use the tools available to fix this market fragmentation, in particular, the ECB should engage in aggressive, long-term asset refinancing on sufficiently generous terms to encourage bank participation. (more…)
This interview with Athanasios Orphanides will ring a few bells in Dublin. I remember in the autumn of 2010, when the ECB in a similar fashion threatened to pull the plug on the Irish banking system, thinking that this was not a credible threat, since such action would de facto mean expelling Ireland from the Eurozone. Would an unelected bunch of central bankers really be willing to do something so political?
I can understand why Irish policymakers were not willing to test this logic at the time, even though I was very angry with them for giving in to ECB pressure not to burn the Irish banking system’s creditors, and still think they shouldn’t have done so.
One thing seems certain however. The ECB cannot have it both ways. It cannot simultaneously threaten to expel a member state from the Eurozone, and also expect us to believe that it will do “whatever it takes” to save the euro.
What investors (and, to be honest, I) have forgotten is that Draghi qualified his pledge: the ECB would do whatever it takes “within its mandate”. It isn’t clear that investors will continue to believe that “it will be enough”.
This piece by Nicolas Véron is well worth a read, even though it was posted yesterday and the situation is fast-moving.
I can’t quite believe that the EC has said this, but they apparently have. Unbelievable. Its obvious implication is that bank runs in troubled countries, if they ever happen, now risk being nation-wide, rather than limited to failing banks. Hat tip Eurointelligence, who call the statement hugely damaging, and Gavin Kostick in the comments.
I thought I would hoist this comment by Gary O’Callaghan onto the front page:
Karl observes in his article that Ireland’s citizens must be feeling foolish today: “After being reassured time and again that all depositors and senior bond creditors of … Anglo Irish Bank must be saved in the name of European financial stability, they find out that Europe’s leaders now believe hair-cutting depositors is fine and fair and doesn’t cause contagion.”
In a related dynamic, there appears to have been a subtle turn by many commentators (including on this site) from the “serves them right” school of economics. That School, most righteously established by LBS, argued that Irish taxpayers should carry the can for bank losses because they “should have” sought better supervision on banks. Many from the same School now appear to argue that depositors (creditors) “should have” been more careful in the Cypriot case and deserve to suffer for their stupidity. Serves ‘em right!
Of course, there is a practical limit on the burden that Cypriot taxpayers can bear in this case but such considerations never bothered the LBS School before. Do they now grant that Irish taxpayers were not fully “to blame” (and that burden-sharing from bondholders was warranted)?
Would they now agree with Karl that “the moral grounds for a retrospective compensation deal for Ireland have increased substantially with this new development?”
The problem with theorizing from morals, of course, is that the ground can shift (and come back to meet you).
I am tempted to add that if we ask “cui bono”, there may be less inconsistency here than at first glance meets the eye.