 From :
evil_giraffe
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Posted : 01/03/11 at 09:03 |
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I originally put this into the Paul Sommerville thread but I’d prefer to leave that as a little commemoration of the last time I ever felt optimistic.
I’ll stick it in here instead.
The following is to be contrasted with Enda Kenny’s “We’ve always paid our way” approach to insurmountable debt wrongfully incurred.
(It’s from zerohedge so pinch of salt and all that.)
http://www.zerohedge.com/article/how-ireland-can-leave-euro -one-experts-view
How Ireland Can Leave The Euro: One Expert's View
Via adamsmith.org
The following memo, which has fallen into our hands, is a draft of advice to the new Irish Minister for Finance from a British colleague who has a wealth of expertise on how to handle economic crises. He prefers to remain anonymous for professional reasons.
Dear Minister,
Congratulations on your new appointment. As you read the civil service briefings on the present crisis, you will come to appreciate that Ireland's problems would be much easier to manage if your administration could choose the country's own exchange rate and interest rate. However, your officials and your colleagues may believe that there is no practical way to leave the present European monetary union and so achieve this flexibility.
In fact, there is. Leaving the euro is politically tricky and economically costly in the short-term. But it is far from impossible. The long-term advantages clearly outweigh the short-term costs, and the politics can be managed. The following outlines how it can be done:
1. Announce on a Sunday morning that Ireland is “temporarily suspending” its euro area membership.
It is obviously vital that this announcement come as a surprise to markets. So you cannot discuss it with many people in advance. The Taoiseach and the Governor of the Banc Ceannais na hÉireann must obviously be informed and agree. However, even discussing the idea in a wider circle is likely to lead to leaks; in turn, this will cause a run on Irish banks and a complete collapse of deposits, destroying what is left of the economy.
2. As of L Day (Leaving Day), all Irish assets and liabilities are denominated in the ‘Irish euro’, initially at the exchange rate 1:1.
This means that there is limited disruption of cash. People will continue to use euro coins with the Irish national side and euro banknotes with the letter ‘T’ (for Ireland) in the serial number. You thus avoid having to change ATMs or any other machines that take cash. For the initial period of a fixed exchange rate (see below), Gresham’s Law will operate and ‘non-Irish euros’ will disappear from circulation in Ireland. You may later wish to take a leaf from the successor states of the Austro-Hungarian Empire and stamp ‘Irish euros’ to highlight their national character further.
3. Announce that there will be temporary exchange controls pending a resolution of outstanding issues such as Irish euro-denominated debt.
On this, you have a choice. You can announce that Ireland will honour its euro-denominated debt until roll-over. This puts the exchange-rate risk on you. Since a main reason for Ireland to leave the euro area would be to devalue, this move would increase your debt, but would facilitate any negotiations with your euro area partners. However, it is an expensive route.
You may therefore prefer to announce that as of L Day (Leaving Day) all external Irish euro-denominated debts are also denominated in the ‘Irish euro’. That puts the exchange rate risk on your creditors. It is cheaper, though it leaves you open to substantial lawsuits.
The exchange rate will of course not remain fixed for long. Nor would you want it to. But until the transition period is over, you may have to rely on the black market (which you will, of course, criticise) to provide you with accurate information about the appropriate Irish/euro are exchange rate.
4. You should in any case now go for a default – which of course you will describe as “a renegotiation of public debt”. Since you will in any case devalue (which is a form of default) you might as well get everything out of the way at the same time. Offer creditors a (say) 50% haircut on any debt that is maturing over the next few years; or a new bond maturing (say) 15 years down the line. With any luck, they will take the 50% and run.
You will no doubt be told that if you do this, Ireland will be shut out of capital markets for years, perhaps decades to come. Perhaps. But if you have a primary budget surplus you will not need to borrow much anyway. Moreover, history clearly shows that when the only threat your creditors hold over you is that, should you default, they won’t lend you any more money, then you should default at once. In any case, knowing international markets, they will realise that the combination of default, devaluation and a return to being able to set a monetary policy suitable for Irish needs, will actually give a boost to the economy. They will therefore be eager to lend.
5. One last thing. You will eventually want to move away from ‘Irish euros’ to a proper national currency (you can still keep notes and coins looking the same to ensure that cash machines will work). When you do, I suggest that you do not tie your currency to any other currency – the whole point of this exercise is to be able to conduct an independent monetary policy in the interests of Ireland.
Yours faithfully,
(signed)
cc, mutatis mutandis, to Ministers of Finance of Greece, Portugal, Spain and Italy – and Germany.
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From :
number10
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Posted : 01/03/11 at 12:06 |
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This is the debate that really matters now. The how to renegotiate the debt issue is the one on which the future of the country hangs.
I'd like to feel that there was a good team going to bat...
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From :
evil_giraffe
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Posted : 01/03/11 at 13:00 |
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There’s no debate. The debate’s over. We voted for people who are going to tweak the interest rate and pay for all debt in the universe.
How can you negotiate anything when you’ve committed to paying back every penny and taking on more debt to cover any “Unforeseen” banking losses? If that’s our starting position what are we hoping to negotiate towards?
The script is written now.
Watch the triumphant return from the Ecofin meeting in a few weeks. Renegotiated interest rate. “Peace in our time”.
See how that works out.
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From :
number10
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Posted : 03/03/11 at 00:18 |
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| Have to say that you're right on this: I couldn't understand how FG and Labour were so stupid as to commit themselves to the ECB/IMF deal on the run-in to the election. Why not say: 'we have to wait to get into Government, see how bad the situation really is and develop our policies from there. We will be determined to reduce the imposition on Irish citizens by as much as we possibly can. But we're not committing in advance to paying or not paying anything...'
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From :
evil_giraffe
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Posted : 04/03/11 at 13:42 |
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Meanwhile, in Australia.
http://www.smh.com.au/business/aussie-home-prices-worlds-mo stoverpriced-survey-20110304-1bhhy.html?comments=210#comment s
“Not much mention seems to be made of the number of interest only loans still being made. I read somewhere recently that interest only loans made-up 50 percent of housing loans. If this is correct, it would suggest many punters will require continued Capitol appreciation to get out.”
“'Most overpriced' housing also means 'people have made a huge profit here'. That will keep the buyers buying, and keep driving prices up. Australians (and now foreigners) love Australian real estate. I honestly can't see a time in the near or medium term future where prices in good quality areas are not growing at least 10% per annum. As long as you don't buy in a slum area you cannot lose.”
“While interest rates remain comparatively low and demand far outstripping supply, there will be no bursting of bubbles, perhaps a slight flattening of prices due to affordability but nothing more dramatic than that. I cannot see how the current demand for housing is going to fall especially with the huge levels of immigration we are currently experiencing. Economics 101. (This mainly applies to Sydney and Melbourne as Brisbane's housing market is tanking, and to a lesser degree so is Perth, Adelaide flat.)”
“These articles are so boring and repetitive. It's apples and oranges. Sydney is not Hong Kong and Hong Kong is not San Francisco which is not London or New York or Tokyo. Every one of these places has it's own identity and appeal which, in turn, determines it's level of 'liveability' and, ultimately, the demand for housing. These stories just serve to scare those who aren't on the property ladder yet or, worse, give them unwarranted hope that the market may crash a la the US. While Australia continues to be at the top of the list for immigrants looking for a better life demand will outweigh supply and we all know what that means...”
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From :
cyberbuli
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Posted : 04/03/11 at 14:06 |
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| Yikes, just like we were 10 years ago. Refusing to even look at the bubble, never mind fearing it will burst. I hope for all our emigrants in Oz's sake that their bubble will not burst in the next few years.
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From :
number10
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Posted : 29/04/11 at 13:05 |
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All very well for them! They have hot spas up there to keep them going...
Actually, it will be very interesting to see if the markets can fuck them or not, cos if they can't, the model is there for anyone and everyone else. Which of course is how it should be...
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From :
tricky
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Posted : 29/04/11 at 17:42 |
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| funny thing about the Aussies is that their base interest rate has been substantially higher then europes for a good while which should have depressed the market to some degree - or at least that would have been the default position of many economists.
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From :
evil_giraffe
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Posted : 07/05/11 at 10:42 |
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I'm on study leave again. Just like September 08. That means I have loadsa time to worry about the state of the world.
....and Morgan Kelly's back...
Ireland's future depends on breaking free from bailout
OPINION: Ireland is heading for bankruptcy, which would be catastrophic for a country that trades on its reputation as a safe place to do business, writes MORGAN KELLY
WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.
Ireland is facing economic ruin.
While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.
As a respected academic expert on banking crises, Honohan commanded the international authority to have announced that the guarantee had been made in haste and with poor information, and would be replaced by a restructuring where bonds in the banks would be swapped for shares.
Instead, Honohan seemed unperturbed by the possible scale of bank losses, repeatedly insisting that they were “manageable”. Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s.
Rising dismay at Honohan’s judgment crystallised into outright scepticism after an extraordinary interview with Bloomberg business news on May 28th last year. Having overseen the Central Bank’s “quite aggressive” stress tests of the Irish banks, he assured them that he would have “the two big banks, fixed by the end of the year. I think it’s quite good news The banks are floating away from dependence on the State and will be free standing”.
Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person. Armed with Honohan’s assurances that the bank losses were manageable, the Irish government confidently rode into the Little Bighorn and repaid the bank bondholders, even those who had not been guaranteed under the original scheme. This suicidal policy culminated in the repayment of most of the outstanding bonds last September.
Disaster followed within weeks. Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion. Despite aggressive cuts in government spending, the certainty that bank losses would far exceed Honohan’s estimates led financial markets to stop lending to Ireland.
On November 16th, European finance ministers urged Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.
At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.
Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.
Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”
The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.
The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.
In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.
The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy. Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.
Six months on, and with Irish government debt rated one notch above junk and the run on Irish banks starting to spread to household deposits, it might appear that the Irish bailout of last November has already ended in abject failure. On the contrary, as far as its ECB architects are concerned, the bailout has turned out to be an unqualified success.
The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.
The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.
Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.
But why was it necessary, or at least expedient, for the EU to force an economic collapse on Ireland to frighten Spain? The answer goes back to a fundamental, and potentially fatal, flaw in the design of the euro zone: the lack of any means of dealing with large, insolvent banks.
Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans. Had the collapse been limited to Irish banks, some sort of rescue deal might have been cobbled together; but a suspicion lingers that many Spanish banks – which inflated a property bubble almost as exuberant as Ireland’s, but in the world’s ninth largest economy – are hiding losses as large as those that sank their Irish counterparts.
Uniquely in the world, the European Central Bank has no central government standing behind it that can levy taxes. To rescue a banking system as large as Spain’s would require a massive commitment of resources by European countries to a European Monetary Fund: something so politically complex and financially costly that it will only be considered in extremis, to avert the collapse of the euro zone. It is easiest for now for the ECB to keep its fingers crossed that Spain pulls through by itself, encouraged by the example made of the Irish.
Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.
Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.
The ECB applauded and lent Ireland the money to ensure that the banks that lent to Anglo and Nationwide be repaid, and now finds itself in the situation where, as a consequence, the banks that lent to the Irish Government are at risk of losing most of what they lent. In other words, the Irish banking crisis has become part of the larger European sovereign debt crisis.
Given the political paralysis in the EU, and a European Central Bank that sees its main task as placating the editors of German tabloids, the most likely outcome of the European debt crisis is that, after two years or so to allow French and German banks to build up loss reserves, the insolvent economies will be forced into some sort of bankruptcy.
Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off.
Worse still, a bankruptcy can do nothing to repair Ireland’s finances. Given the other commitments of the Irish State (to the banks, Nama, EU, ECB and IMF), for a bankruptcy to return government debt to a sustainable level, the holders of regular government bonds will have to be more or less wiped out. Unfortunately, most Irish government bonds are held by Irish banks and insurance companies.
In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico.
Suppose that we did not want to follow our current path towards an ECB-directed bankruptcy and spiralling national ruin, is there anything we could do? While Prof Honohan sportingly threw away our best cards last September, there still is a way out that, while not painless, is considerably less painful than what Europe has in mind for us.
National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.
First the banks. While the ECB does not want to rescue the Irish banks, it cannot let them collapse either and start a wave of panic that sweeps across Europe. So, every time one of you expresses your approval of the Irish banks by moving your savings to a foreign-owned bank, the Irish bank goes and replaces your money with emergency borrowing from the ECB or the Irish Central Bank. Their current borrowings are €160 billion.
The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.
This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.
At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.
So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.
Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position. By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions. Just as importantly, it sends a signal to the rest of the world that Ireland – which 20 years ago showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers – is back and means business.
Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival. It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy.
The destruction wrought by the bankruptcy will not just be economic but political. Just as the Lenihan bailout destroyed Fianna Fáil, so the Noonan bankruptcy will destroy Fine Gael and Labour, leaving them as reviled and mistrusted as their predecessors. And that will leave Ireland in the interesting situation where the economic crisis has chewed up and spat out all of the State’s constitutional parties. The last election was reassuringly dull and predictable but the next, after the trauma and chaos of the bankruptcy, will be anything but.
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From :
igor
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Posted : 07/05/11 at 17:31 |
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| I see Jim Corr is back... Zzzzzzzzzzzzz!
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From :
Daedalus
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Posted : 09/05/11 at 13:42 |
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Ha. Igor, mending wall, yae or nae?
Evil, do you want to come to Cork and I will give you some weed and whiskey and we can listen to the sea and watch some world go by and chill out and be thankful for the stars and animals and womens inner thighs and striploin steak and cheese and life?
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From :
tricky
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Posted : 09/05/11 at 15:35 |
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"Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans."
this is very funny though (if it weren't us that were having to pay for it and all that!)
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From :
evil_giraffe
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Posted : 28/09/11 at 01:22 |
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| Happy Birthday Bank Guarantee.
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From :
hydra
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Posted : 29/06/12 at 10:07 |
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According to Colm Tobin from the same paper"
@colmtobin
If the EU crisis were the Bible, Ireland is dragging a huge cross of bank debt for 2 years & Spain just drove past with theirs on a digger.
@colmtobin
Is there anything in the EU deal that explicitly allows us to go back to dipping ourselves in pesto for a decade? Goods times.
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From :
tricky
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Posted : 29/06/12 at 11:21 |
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I'm with you on the catch Evil. But jaysus it could be the kind of result that is a bit of a gamechanger
(as long as we keep doing the other stuff that we were doing - ie: driving down costs of public sector)
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From :
hydra
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Posted : 29/06/12 at 11:25 |
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Evil, queries from another forum, I'm too busy listening to Bernard Purdie to go hunt for the answer:
"Does that apply to just the 30 billion Anglo notes?"
"That's the big question if it's just the Anglo note then it will mean all the money that was poured into the banks to recapitalize them by the Irish state will be gone for ever."
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From :
tricky
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Posted : 29/06/12 at 11:46 |
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Going by Eamon Gilmore that promissory note business seems like the big prize the they're aiming for. That essentially they won't pay it, it'll go on to Anglo's balance sheet again and the ECB or someone else will have to absorb it.
Honestly even if they get 10-20 billion dealt with in this way it's a huge vindication of their positioning. Colm McCarthy said there was about 67 Billion of our debt that was aligned to the banking crisis so that's what's going to be looked at and the question then is how much can be shifted back on to the 'bad bank'
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