Peston reports on his interview with Brian Lenihan in this piece.
While it is an interesting piece, a regrettable feature of the article is that he cites the BIS aggregate number to capture the level of international bank exposure to Ireland without fully explaining the limited relevance of this number, in view of the high degree of ‘offshore banking’ that has nothing to do with the local economy.
The text of Peter Sutherland’s speech to the Institute of Directors is below:
Notwithstanding the successful auction of €1.5bn of government debt on Tuesday, there is no doubt that in recent weeks (and in particular in the last two weeks), Ireland’s position in the debt markets has deteriorated markedly and the sale came at a high cost. This has been the consequence of a number of factors. Some of these are objective facts about the dire state of our public finances. Others are the result of market perceptions. It is hardly surprising at present that there is an air of fatalism consistently nurtured by negativism but it is surely not in our character to give in to this. We can and will get out of this mess if we have the will to do so.
Let me say a word first about market perceptions. We seem to have a remarkable capacity to damage our public image abroad. The prevailing and understandable sense of depression in Ireland is made worse by a media often seemingly intent on presenting the worst perspective on current events. The recent Barclay’s analyst report, which was wrongly presented by some in the Irish press as being far more negative than it actually was, is a case in point. You may say, “Well so what? Those professionally concerned with our credit worthiness surely do not decide their approaches on the basis of second hand commentary on an analysts report?” Well, yes and no. The national media reaction is taken seriously and market reactions are often instantaneous.
It is time that we separated two big issues, the underlying budget deficit and the bank crisis. The first of these presents a very challenging issue but it can be dealt with if we have the collective will to do so. The collective will can only result from an understanding of the facts. We are running a revenue to spending gap of circa €20 billion p.a. and simply cannot continue to do so. As Willem Buiter, formerly of the London School of Economics, said this week, the cost of borrowing is becoming unsustainable. Our national debt is accumulating still at an alarming rate as a result of government spending but is being obscured as an issue in public debate by the constant and intense focus on the nature and effects of the banking crisis. Terrible though these are, they are identifiable and should be considered separately.
It is now pretty clear that the government and Anglo management are shaping up to do a buyback deal on Anglo’s outstanding €2.5 billion in subordinated debt after the original CIFS guarantee expires at the end of the month.
Here’s my question. Given that
(a) The terms of these securities allow for the possibility of them not being paid back if the bank is insolvent (this is why banks get to count these securities as part of their regulatory capital).
(b) None of this debt matures until 2014 at the earliest (see page 56 of Anglo’s interim report).
(c) These bonds will no longer be covered by a state guarantee.
why would we do this? Why not let the bonds sit as an obligation of the Asset Recovery Bank, let it go about its business of recovering value from assets, and then let the next government make a decision in 2014 as to whether we want to put in taxpayer funds to pay off these bonds?
Those of you who want to comment that you think a bond buyback is a good idea might help clarify things a bit by explaining what type of deal you would offer (i.e. how much of our money you’d give the hedge funds and other distressed debt outfits that now own these bonds.)
His article is here.
Patrick Honohan’s address to the SUERF conference (Dublin), “Banks and the Budget: Lessons from Europe”, is available here.
While the address contained important observations on the interaction between the budgetary and banking crises, I expect it is his comments on the fiscal adjustment programme that will make most news:
I have recently been looking more closely though at the multi-year prospects for the budget. Of course it can be said, if the economy stays close to the track originally envisaged, the deficit would come close to 3 per cent by 2014. But as the IMF and others have noted, the real economy, the price level and also interest rates on Government borrowing, have evolved in a less favorable way. Servicing of the additional debt related to bank restructuring is also a negative factor.
Some explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon if debt dynamics are to be convincingly convergent. Recent movements in the yield spread on Government debt – both for Ireland and for some other countries – readily demonstrate the costs that can result unless international lenders remain convinced that the budget is going to be kept on a convergent path, as indeed the Government is committed to ensuring.
During the 1980s Ireland paid a high price in terms of borrowing costs because the markets feared much steeper exchange rate depreciation than actually occurred. An equilibrium of pessimism, with the economy struggling, and investors requiring a risk premium that imposed additional costs on the taxpayer, displaced what could have been an equilibrium of self-fulfilling optimism. It is important now to re-set the fiscal path to ensure a virtuous cycle of lower borrowing rates contributing to even faster fiscal adjustment and a lower overall cost of the adjustment to society at large.
While there has been an international debate on this matter for larger countries, there seems to me to be no question, for Ireland and for other small financially-stressed sovereigns, but that national growth is best served by ensuring that the public finances are convincingly on a convergent path: the impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending.