Tag Archives: Anglo

Ok, the banks are fubar’d : April 17 2009

Here a bunch of us wade in suggesting that its time to call the ball. The banks are bust and will need to be taken into state care. Again this was published in the Irish Times

OVER THE last number of months extraordinary changes have occurred in the Irish banking and financial scene. We believe that we are now at a critical stage in Irish economic history and that it is crucial that the Government take the right course of action to deal with the problems in our banking sector.

The banking system is widely perceived to have seized in terms of lending, and whether correct or not this perception needs to be addressed. We believe that the correct action to take now is nationalisation of the banking system, or at least that part of it that is of systemic importance.

We do not make this recommendation from any ideological position. In normal circumstances, none of us would recommend a nationalised banking system. However, these are far from normal times and we believe that in the current circumstances, nationalisation has become the best option open to the Government.

Furthermore, we explicitly recommend nationalisation only as a temporary measure. Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.

In introducing its proposals for the National Asset Management Agency (Nama), Government Ministers and Peter Bacon, the consultant who recommended this plan to the Government, have stressed that they see their current plan as likely to produce a superior outcome to nationalisation (though they concede that majority State ownership may be required).

We disagree strongly. We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer.

We can summarise our arguments in favour of nationalisation, and against the Government s current approach of limited recapitalisation and the introduction of an asset management agency, under four headings. We consider thatnationalisation will better protect taxpayers interests, produce a more efficient and longer lasting solution to our banking problems, be more transparent in relation to pricing of distressed assets, and be far more likely to produce a banking system free from the toxic reputation that our current financial institutions have deservedly earned.


Our banks have made an enormous quantity of bad loans, mainly to property developers, and realisation of these losses will see a substantial erosion of their capital base. International financial regulations require that banks maintain certain levels of capital to be allowed to stay in business.

In addition, as the recession mounts, so too will bad debts in consumer and other commercial loans, and so our banks need outside capital investment to make up the losses on these loans. The highest grade, and most desirable, form of capital is ordinary share capital, and in the current circumstances the Irish Government is the only conceivable investor willing to provide this capital.

The Government has put forward Nama as a vehicle to take these bad loans off the banks at a discounted rate. To the extent that the realisation of losses on these loans erodes the capital position of the banks, the Government has indicated that it is willing to supply equity capital in return for shares.

Crucially, however, the Government s current descriptions of the range of outcomes from this process suggest that they are badly underestimating the scale of losses at our banks, and as such may end up substantially overpaying for bad assets.

Take our two leading banks, AIB and Bank of Ireland. Analysts have repeatedly estimated the extent of bad loans at these banks to be of the order of at least EUR 20 billion. Losses of this sort would wipe out virtually the entire EUR 27 billion of Tier 1 capital of these banks. This means that if the Government purchases these loans at fair market value, it will end up having to provide funds to replenish fully the equity capital of these banks and, in consequence, would end up with essentially full ownership of these banks.

There is thus a fundamental internal contradiction in the Government s current position. The Government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership.

These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if Nama purchases the bad loans at a discount but still well above market value.

With EUR 90 billion in loans to be purchased, the consequences to the taxpayer of overpaying for bad assets by 10 to 30 per cent are truly appalling. To put these figures in perspective, the effect in a full year of the Budget measures taken last week was to save the exchequer EUR 5 billion.

Peter Bacon and others have argued in recent days that the question of who owns the banks does not matter, because the ownership structure does not change the underlying size of loan losses. Frankly, this is argumentation by distraction.

Nobody is claiming that nationalisation changes the underlying loan losses on the bank balance sheets. However, what it does change is who owns the equity and also who has first claim on any increase in value in the new banks after they have been recapitalised. If nationalised, the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years time, and this would substantially reduce the underlying cost to the taxpayer.

Furthermore, nationalisation offers an opportunity, should the Government see such a need, to share directly with the taxpayers the upside in restoring banking sector health. Such an opportunity could involve a voucher-style reprivatisation of the banks and could be used to provide economic stimulus at a time of scarce resources, at no new cost to the exchequer.


With the Nama process charged with meeting the three mutually contradictory objectives above, it is also possible that objective (b), recapitalising, will not be fully met. In other words, a Government that needs to be seen to purchase the bad assets at a reasonable discount and that does not want to take too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, this process may continue to leave us with zombie banks that still require the State-sponsored life-support machine that is the liability guarantee.

However, once nationalised and with the promise of future returns for the State, the incentive for the Government will be to create well-capitalised healthy banks that can be privatised and allowed to operate independently from the State, as quickly as possible. We believe that full nationalisation now will end up getting the State out of its involvement in the banking business faster than the current approach being taken by the Government.

In contrast, a circumstance where a drip-feed of recapitalisations is required would be the worst of all possible outcomes.


Peter Bacon and Government Ministers have stressed that it is necessary to keep the banks out of public hands so that the process is a transparent one.

The truth is exactly the opposite.

Every additional euro that the State pays for bad assets is an additional euro for the current bank capital holders and one euro less of valuable equity investment for the State. For this reason, the process by which Nama purchases the bad assets is going to be an extremely controversial one. Already, analysts are citing ranges from 15 per cent to 50 per cent as appropriate for the discount on these loans.

However the Government decides to price these assets, whether it be via accountancy firms, auctioneers or economic consultants, the process is going to have an element of arbitrariness to it and is unlikely to be one that will be widely seen as fair and transparent.

By contrast, nationalisation per se requires no such controversial asset-pricing process. Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.

However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter. The Swedish bad bank experience (widely mis-reported in this country) involved an asset valuation board that set the price for assets transferred from nationalised banks, but the process was not a controversial one.

A related argument that Government officials have made against nationalisation is that it would remove the stock market listing and market monitoring function, rendering opaque the quality of the State-owned banks. However, the experience of recent years is one that would have to cast doubt on the ability of markets to effectively monitor financial institutions.


The Government s plans seem likely to keep in place the current management at our biggest banks.

For instance, the smaller discounts on bad loans being cited would, if paid, likely allow Bank of Ireland to maintain its recent levels of equity capital without taking more funds from the Government than the EUR 3.5 billion it has already taken (in return for preference shares which give an option for a 25 per cent State share.)

This type of incremental change will do little to restore the battered reputation of Irish banking. It would be difficult to avoid claims of crony capitalism and golden circles were billions of State monies to be placed into the banks with minimal changes in their governance structure.

Nationalisation provides the opportunity for a fresh start for Irish banking. The State should run the temporarily nationalised banks as independent semi-State operations headed by highly independent boards of senior figures of the utmost integrity. Executives for these banks should be sourced through an international search, and remunerated accordingly.

These executive boards should be charged with a clear mandate to improve risk management practices, restore the brand image of Irish banking and finance, and return the banks to private ownership in a reasonably short time frame, for as high a stock price as possible.

This would certainly see substantial changes in senior management and board members in these banks, and allow for a rebuilding of the reputational capital of these institutions.

To conclude, we consider that the Government s approach of limited recapitalisation supplemented by Nama represents only a partial solution to our banking problems, and one that is unlikely to protect the taxpayer. A nationalised banking system with a mandate to restructure and reprivatise would be a preferable approach at this time.

List of signatories

This commentary has been written by a group of Ireland s leading academic economists, several of whom have analysed and commented on the banking and financial crisis on these pages and elsewhere over the past year. They are:

Karl Whelan, professor of economics, dept of economics, UCD; John Cotter, associate professor of finance, Smurfit School, UCD; Don Bredin, senior lecturer in finance, Smurfit School, UCD; Elaine Hutson, lecturer in finance, Smurfit School, UCD; Cal Muckley, lecturer in finance, Smurfit School, UCD; Shane Whelan, senior lecturer in actuarial studies, school of mathematics, UCD; Kevin O Rourke, professor of economics, Trinity College Dublin; Frank Barry, professor of international business and development, school of business, Trinity College Dublin; Pearse Colbert, professor of accounting, school of business, Trinity College Dublin; Brian Lucey, associate professor of finance, school of business, Trinity College Dublin; Patrick McCabe, senior lecturer in accounting, school of business, Trinity College Dublin; Alex Sevic, lecturer in finance, school of business, Trinity College Dublin; Constantin Gurdgiev, lecturer in finance, school of business, Trinity College Dublin; Valerio Poti, lecturer in finance, DCU business school; Jennifer Berrill, lecturer in finance, DCU business school; Ciarán Mac an Bhaird, lecturer in finance, Fiontar, DCU; Gregory Connor, professor of finance, department of economics, finance and accounting, NUI Maynooth; Rowena Pecchenino, professor of economics, department of economics, finance and accounting, NUI Maynooth; James Deegan, professor of economics, Kemmy School of Business, Limerick; and Cormac Ó Gráda, professor of economics, UCD

Recapitalising the Banks : November 28 2008

Another oped for the Irish Times, from a similar group warning that unless we moved rapidly we would end up with credit crunches and zombie banks….


Only adequate recapitalisation of the banks is likely to stop them inflicting further pain on an already slowing economy, write Brian Lucey, Gregory Connor, Valerio Poti, Mark Hutchinson, Niall O’Sullivan, Patrick McCabeandCal Muckley

THE DEBATE on bank recapitalisation appears to have moved on in recent weeks. At first, bankers denied the need for it, now, there is a denial that it will be useful. The gist of the argument against recapitalisation is that it will not make credit more available. The argument is that companies, and the economy, will have to accept an indefinite credit famine from Irish banks. The main thrust of the argument is that lower lending will be determined by the need for lower loan-to-deposit ratios, so that increasing bank capital will not help.

Aiming for lower loan-to-deposit ratios is a sensible proposition, given the deterioration of the loan assets of the banks, itself a direct result of the over-rapid increase in housing and construction related loans.

It is true that the loan-to-deposit ratios of Irish institutions are uncomfortably high. According to a UBS survey of bank balance sheets published in April, Ireland’s average loan-to-deposit ratio is 163.1 per cent. The country’s largest mortgage lender, Irish Life Permanent (ILP), records a ratio of 277.4 per cent, one of the highest of any western financial institution.

The typical US commercial bank has a lower ratio, about 100 to 110 per cent. The average ratio in the euro zone was at last count an even healthier 86.6 per cent. So, there is a problem with Irish banks’ loan-deposit ratios and Irish banks are probably best advised to reduce them.

Banks are reluctant to accept new capital and thereby dilute the claims of existing shareholders. The banks’ preferred strategy is to rapidly reduce loans to Irish business to lower the loan-to-deposit ratio, and not accept any new capital injections. From a macro-economic perspective, we need to recapitalise banks, allowing for an orderly and minimally disruptive process so that banks can slowly decrease outstanding loans rather than engaging in a panic reduction.

Consider a simplified bank balance sheet, with loans that represent the sole asset, financed by debt (deposits and inter-bank borrowing) and equity. Assets and liabilities must balance, but the composition of the liability side of the balance sheet matters. Deposits represent relatively stable funding, whereas inter-bank borrowings can be very volatile. This is why prudent bank management would rather increase deposits and/or decrease loans. Equity is arguably the most stable form of funding, because the capital is tied up in a bank indefinitely. Deposits and equity capital therefore share a common desirable trait in that they represent stable sources of funding. Adequately capitalised banks will likely move to reduce the loan-deposit ratio more gradually, inflicting less pain on an already badly slowing economy.

There is also another consideration which reinforces the conclusion that recapitalisation would help reduce the recessionary effects of the banks’ efforts to reduce their loan-to-deposit ratios. This argument rests on the notion of the “money multiplier”. For every euro of extra capital injected into the banking system, the amount of deposits in the economy increases by a multiple, due to the chain of depositing and lending. A recapitalisation would inject more capital into the Irish banking system as a result of this multiplier effect. It is important, however, to note that if banks were to re-export the capital injection via lending outside the economy, the beneficial effect would be much reduced. Thus some element of contingency and oversight is required. The oversight would be a requirement that banks which receive the capital be encouraged to invest in loans to the domestic economy.

The Government could seek adequate remuneration for the risk it takes in buying bank shares. For example, if it was to buy preference shares, it could demand a dividend likely to be in excess of 10 per cent per annum (the figure for similar transactions in the UK is about 12 per cent) and the option to convert into ordinary equity so the taxpayer benefits from any recovery in bank share prices. Contrast that with the high teen returns that are required typically from private equity funds, an increased return that can only come from rationalisation of banks and from increased profit margins at the expense of an already deflating economy.

As the Japanese and Swedish experiences show, if this is done well, it could turn the economy around and end up as a good deal for the taxpayer. The Japanese economy recovered from the decade-long depression that followed the burst of the property bubble in the 1980s only after the Japanese government recapitalised troubled banks by subscribing substantial amounts of preference shares. This injection of equity capital started in 1998 and picked up momentum in 1999, when the Japanese government recapitalised over 30 banks.

The recapitalisation of troubled banks lifted Japan out of the long depression and turned out to be a profitable investment. A number of banks turned around early and bought back the shares faster than anticipated, at a large profit for the Japanese government.

More importantly, the injection of capital allowed banks to clean up their balance sheet. This was essential to restore confidence, while avoiding the credit squeeze that would have occurred if the clean-up exercise had taken place in the absence of recapitalisation.

In the Swedish case, the banks were recapitalised with government monies and again the government was able to eventually recoup a very large amount of the monies invested.

A foreign private equity component to the bank capital injection has the advantage of bringing fresh managerial expertise. However, too much foreign capital in the mix would mean handing over control of strategic assets. Given the current illiquidity of Irish business, it seems reasonable to think that the only domestic investor with sufficient financial resources is the Irish Government.

This does not need to be a Christmas present for bank managers and shareholders. Both management and shareholders failed in their duties. Managers have presided over a loss of wealth unprecedented in the modern economy. Shareholders failed in their duty to monitor and control management. Neither side should get away with this dereliction of duty. Nor should the recapitalisation be a bad bargain for the taxpayer. Structured in the right manner it should represent a good long-term investment.

Brian Lucey is associate professor of finance at TCD; Prof Gregory Connor lectures in risk management systems at NUI Maynooth; Dr Valerio Poti lectures in corporate treasury management at DCU; Dr Mark Hutchinson and Dr Niall O’Sullivan are co-directors of the Centre for Investment Research at UCC; Patrick McCabe is a senior lecturer in accounting at TCD; and Dr Cal Muckley is a lecturer in finance at UCD

Anglo, Politicians and the bogs…

I kinda like Joan Burton. No, not in strange way, but she always seemed (at least in 2008-9-10) to have a good solid handle on the banking calamity. It’s a pity she got the smeared end of the stick when labour went into government. Actually, when you think of it – labour got the ‘go away out foreign and don’t bother us’ Foreign Ministry post for its leader, the ‘minister for hardship’ for Howlin, the ‘minister for rolling back the welfare state’ for Burton and all for what?

Anyhow, I kinda like her.

I have no animus towards Billy Kelleher TD either. I have met the man once, over a coffee at a summer school and he seemed an affable enough version of FF V2.03, Haughey free and not too infected with the Bert virus.

That said, the interplay between the two of them on the RTE Saturday news show “Saturday with Claire Byrne”  (what used to be Saturday view when Rodney Rice ran it) was enough to cause me to begin to lose the will to live. In fact there were two episodes, either of which would cause one to lose hope in the ability of the Irish political system to take any form of action.

The first interplay was around the Anglo tapes. Claire Byrne asked both of them their reaction and also about  the allegations (which I note here) by the Taoiseach that the main thing from any inquiry was to uncover collaboration between FF and the bankers (because we didn’t know that they were close….). All round the country people are outraged at the arrogance and petulance of the anglo dudes and still, for we are a charmingly naieve people, look to the political class for leadership and some indication that there will be justice or even vengeance. Instead of a measured reaction from two intelligent people about the tapes, about the constitutional problems of the dail holding inquiries that apportion decisions and blame, about the nature of banking and finance, we got…squabbling. Political point scoring, squabbling, polite point scoring and name calling, and a degree of disconnect from the issues that was dispiriting. It’s a game. What we have in politics bears as much resemblance to the concerns of the ordinary world as Kabuki theatre does to the realities of modern day Japanese life.

The second spirit sapping discussion came at the end, neatly bookmarking a show that resembled a political sandwich with a policy vacuum as filling. We heard about the turf cutting standoff. Farmers had moved heavy machinery onto protected peat bogs and were engaging in strip-mining it.  Lets be clear – this wasn’t a few auld lads with sleans and bottles of tae but commercial contractors, doing to protected boglands the same as illegal mahogany loggers do in the rainforest .  This was being done on boglands that were designated special conservation areas under EU and Irish law. There were police present including a superintendent, a senior officer. The reporter noted that they were leaning over a ditch observing the law-breaking…observing it mind, not stopping it, not arresting those engaging in it, looking on at it. Again here was an opportunity for our political leaders to show leadership. During the show we had talked about the need for the Anglo issues to be dealt with, in criminal court if needed. We had talked about the legal aspects of the dail inquiry and on the need for forensic and detailed examinations of what happened when where and how. Then we moved onto flagrant, public, mass law-breaking in front of police….the two politicians hemmed and hawed, admitting that yes it was a breach of the law but there were circumstances, issues, complications etc.  I asked how many of those breaking the law on the bog would that evening be supping stout in the pub decrying the anglo chaps and urging the full rigor of the law to be applied, to silence.

If we don’t get leadership, if we cant get leadership, from two intelligent thoughtful politicians, if we cannot get them to urge on national radio that the law be respected fully and it be challenged by legal peaceful means only as we are a mature and peaceable democracy, then we wont be always. People will rightly despair that a state which allows open defiance of a senior police officer who is not then supported 100% by politicians, that that state can ever come to grips with as complex a catastrophe as the banking crisis that has engulfed us.


100 things Ireland could have got for the price of one Anglo Irish Bank…

With the #anglotapes this week it seemed to me a good time to recall those heady days of August 2010 when we had spent only 25b on Anglo. At that time Ronan Lyons and I penned this little piece in the Sunday Business Post…

This week, it was announced that the EU had approved a further injection of our taxpayer money into additional capital for Anglo-Irish Bank . This brings the total as of now to  almost €25bn. This is money going into a bank that is essentially in wind-down over the coming decade, money that the Irish citizens and taxpayers will not see again, as it is shoring up the balance sheet of a bank that had too much imaginary wealth. And that is not the end of the money, many fear.

So just how much is €25bn that we are having to borrow for Anglo? In one way, it’s small change, compared to what will possibly be €200bn in borrowings by the State to fund the non-banking deficit between the onset of the crisis and 2020. But to any rational mind €25bn is still a mind-bogglingly large amount of money. The State has limited borrowing capacity, limited by a combination of what the taxpayer can repay. In putting €25bn into Anglo, the government, on our behalf, has spent money that can not be used for other projects. Here is a list, then, of 100 things – grouped into various categories – that the government could have spent €25bn but chose not to.

Ireland could make a major contribution to Fight Global Poverty


€25bn would go a long way in the fight against global poverty. Here are a few suggestions:

100. Buy enough malaria nets to protect the entire malaria-affected population of the world (half a billion people) for 80 years (based on NothingButNets figures of $10 a net)

99. Completely fund the World Food Programme for five years

98. Repair twice over the damage done to Haiti in the recent earthquake

97. Fund enough clean water and infrastructure projects to meet the Milliennium Development Goals in those areas

96. Buy up and extinguish the national debt of Bangladesh

95. Fund the UNESCO “Information for All” Project for 1200 years

94. Provide food aid to Niger for 1000 years

93. Asphalt every trunk and regional road (110,000km) of substandard road in sub-Saharan Africa

Ireland could become a World Science & Technology Hub

leneyeMajor scientific and technological projects cost a lot of money. But rarely €25bn. Here are a few ways Ireland could have used the €25bn to become a global hub for major breakthroughs in science and technology.

92. Start our own space programme, with twenty €1.2bn space shuttles

91. Foot the bill for a century of global research into nuclear fusion (the current 30-year global ITER project is expected to cost €5-10bn)

90. Research & develop 5000 new drugs….one of em’s bound to be useful

89. Construct 6 Large Hadron Colliders – one for each Green Party TD

88. Build 5 James Webb Space Telescope (the successor to Hubble), and revolutionise astronomy

87. Build two magnetoplasma space vehicles which in theory could get to mars in 40 days

86. Build a space elevator

85. Build two ITER nuclear fusion reactors and provide the world with cheap, abundant energy..

We could decide to give ourselves a break

holidaysWhat about using the €25bn to give ourselves a break? Here are a number of things that €25bn could pay for, while we take a break.

84. Pay the interest on everyone’s mortgage for 4 years (€147bn of mortgages at 4% is €5.88bn a year)

83. Abolish income tax for two years (based on 2009 gov income tax receipts of €11.8bn)

82. Offer everyone on the live register €100,000 to emigrate (we could afford a 50% take-up by the 466,000 on the dole)

81. Abolish VAT for two and a half years (based on 2009 receipts of €10.8bn)

80. Remove exise duty from fuel, tobacco and alcohol until 2015 (based on exise receipts of €4.7bn a year)

79. Pay the grocery bills of everybody in the country for 2.5 years

78. Scrap all fares on all forms of public transport, intercity and commuter trains and buses for 33 years

We could just treat ourselves

scrooge-mcduck (1)We could just treat ourselves with the €25bn windfall. Here are some suggestions as to how.

77. Run the world’s best ever lottery – every Irish citizens is entered into a draw where 25,000 people become millionaires!

76. Give every OAP a pension of 55,000 for a year….

75. Fly the adult population of Ireland to Las Vegas, give everyone 10k to gamble with

74. Give every person in the country €5,555.56

73. Buy half a million ecofriendly Nissan Leaf cars and have enough for a 5GW nuclear power station with the cash left over

72. Provide a new laptop every year to every second level student for 147 years

71. Buy a 32GB iPhone, a 64GB iPad, a 13″ 2.13GHz MacBook Air and a 27-inch iMac for every man, woman and child living in Ireland

We could treat the world

icecreamTreating ourselves is probably a bit selfish. Here are some ways to make the rest of the world like us more!

70. Buy 6.7b copies (one for everybody in the world) of Joyce’s “portrait of the artist as a young man”

69. Buy a pint of guinness for everyone in the world to celebrate Arthurs Day (and it would count as exports)

68. Buy every child in the world a 99 ice-cream cone every day for a week

67. Send every adult in the world on an MSc in Social Media in NCI

66. Send 225,000 people to do the Harvard MBA

We could truly become the world’s biggest sports fan

10BestClubs_2012Sport is big business. But not that big. With €25bn, we could…

65. Buy the world’s 20 most valuable soccer clubs, worth €9.6bn, wipe their debt (€2.3bn) and move them to Ireland, building each a 75,000-seater stadium (€600m each, based off cost of Aviva stadium)

64. Host two Olympics games, based on the London 2012 cost of €11.2bn

63. Buy Tonga and Fiji, which would have obvious rugby advantages

62. Construct 25 Bertie-bowls (one for each county except Dublin!)

61. Buy 83,300 McLaren supercars

60. Buy the entire stock of tickets and merchandise for all premier league clubs for the next 12 years

We could decide to really become a major player on world markets

2374Banking and finance got us into this mess. Surely they can get us out?

59. Buy €600bn in Credit Default Swaps on Ireland (could pay off nicely in the next few years!)

58. Buy two of Asia’s largest banks – Bank Central Asia and Malayan Banking

57. Recapitalise ALL the banks in europe that failed the stress tests

56. Purchase Monsanto, as a present for the green party, or (buy Nokia as a present for Ivor Callely)

55. Give each one of the 10,000 most senior bankers a round of golf on old head kinsale, the most expensive course in europe, every day for 20 years, and hope that they come up with some ideas!

54. Subsidise the US postal service for ten years

53. Allow the Italian Government to not put in place its 3 year austerity plan

52. Pay the salaries of TCD and UCD academics for 100 years.

We could just do it  because we can…

Burj+Khalifa,+Dubai+-+828mWhile the Government says it’s not a waste of €25bn, many people believe it is. Here are ten ways to really spend €25bn.

51. Buy Steve Jobs (€25bn is actuarial value on his life) and get him to work for Ireland Inc.

50. Buy gold plating 1.75mm think for O’Connell Street

49. 25,00 carats of red diamond, enough to encrust a mercedes….

48. Build a shed 10k long by 4k wide and put it around Tullamore…

47. Buy every one of the 5.8m cattle in the country, and to keep their little feet cosy two pairs of jimmy choos each

46. Detach the People’s Republic of Cork from the Republic of Ireland, by constructing a 10-metre wide moat – the per-kilometre cost of the new Gothard Tunnel in Switzerland suggests this may cost €30bn but I’m sure we could haggle them down in a recession.

45. Cover the entire county of Dublin a foot deep in corn

44. Hire Bertie to speak for 95 years

43. Purchase carbon credits to allow us to burn 3000 sqmiles of hardwood forest

42. Build 20 copies of the Burj Khalifa Dubai, the worlds tallest building

We could just splash the cash

item0.size.queen-mary-2-100488-1When people win the lottery, there’s naturally a tendency to splash the cash. Winning a €25bn lottery would certainly allow us to splash the cash. Here are some ideas.

41. Buy 1,000 luxury yachts to kickstart the Upper Shannon Rural Renewal Scheme (78-footers, 2nd-tier Russian oligarch standard)

40. Buy over one third of Denmark, 10% of France or three Luxembourgs, based on 2008 land costs

39. Send 833 people into space (or perhaps just 1666 one way trips…)

38. Stay in the most expensive hotel room in the world for 3400 years (it’s the Atlantis resort, Bahamas in case you were wondering)

37. Build 50 ginormous cruise liners akin to Carnival Splendour or Queen Mary 2

36. Make 100 Avatar-type films, which lets remember made back its money x4 at the box office!

35. Buy every TD a boeing dreamliner, ideal for those trips to glenties

34. Purchase 35 of the world’s most expensive mobile phone (goldstriker iPhone 3GS supreme) for every member of the oireachtas!

33. Build four Libraries of Alexandia in each county

32. Endow one university to the level of Harvard

31. Tile Dun Laoghaire-Rathdown totally in nice porcelain

30. Buy five Nimitz Class Nuclear supercarriers to scare the bejaysus out of the Spanish trawlers

29. Or buy 17 Virginia Class nuclear attack submarines, if we wanted to sneak up on the Spanish Trawlers instead

28. Supply the water needs of Galway City, for a year…with Perrier water

27. Purchase four Birkin Hermes bags for every adult female in the country, one for each season’s wardrobe

26. Buy and install 100 sq yards of parquet flooring for every single dwelling in the country.

25. Fill the Jack Lynch Tunnel with Midelton Single Cask whiskey

24. Purchase 225,000 kg of the most expensive truffles in the world

23. Buy every house and apartment listed on DAFT.ie and still have 12bleft to refurbish them

We could transport ourselves  out of this mess

98962638.jpg.CROP.rectangle3-largeWith €25bn in our back pockets, all those pie-in-the-sky superprojects would no longer be pie in the sky! Here are ten ways Ireland could put itself on the global superproject map.

22. Construct our own “Channel Tunnel” from Rosslare to Pembroke (based on the cost of the Jack Lynch tunnel)

21. Build 1,000 km of high-speed rail, serving all major coastal cities on the island (based on recent costs in Spain)

20. Build 11,150 miles of dual carriageway

19. Put in place a 400 station metro (if we could build it for the cost of porto’s metro)

18. Put in place a Maglev train from Belfast to Cork via Dublin

17. Build our own Three Gorges Dam, complete with turbines

16. Put in place 12 new Luas lines

15. Build just short of two Hong Kong International Airport (€15 bn each)

14. Build 12 New York-style “Freedom Towers” at €2bn each

13. If we didnt want a tunnel we could five Oresund-style 20km long bridge (Denmark – Sweden, €5b)

We could pay for improved public services

childrenshospitalAnd lastly, ten slightly more practical ways to spend €25bn

12. Build 75 brand new 50-teacher schools and run them for 75 years

11. Build 35 new Children’s Hospitals (based on €700m cost of new Children’s Hospital in Dublin)

10. Pay for an extra 5,000 hospital consultants for 62.5 years, based on Finnish wage (or for 29 years based on Irish wages)

9. Pay for cervical cancer vaccines for every girl going into 1st year for the next 8333 years

8. Reduce the pupil teacher ratio in primary schools to 1 in 10 for the next 20 years

7. Given an ultra highspeed fiberoptic broadband connection to every single house (including ghost estates…)

6. Buy 8,500 years of private speech and language counselling and really help autistic and speech problematic children

5. Introduce free pre-schooling for 32 years, based on an average cost of €700 a month for two years of 10 months, for all 110,000 children in the country

4. Make education properly free – the current cost from primary school to degree graduation is €70,000 per child. €25bn would bring nearly 400,000 students through their entire education

3. Give medical cards to everyone, for 25 years based on €500m cost in 2009 to cover 1.5m people

2. We  could use the money to renew and replace the drainage and water system of all mains

1. Or we could buy one broken bank…oh, hang on…..

So, a mixture of the bizarre, the stupid, the deeply practical, the useful, all tinged with a sense of lost opportunity. A bit like the governments solution to the banking crisis really! What this list shows us is that choices matter. Its unlikely that any government would have #50, paving o’connell street in gold, as a priority (well, not perhaps unless its leader was from Dublin Central…), But wouldnt it be nice if we had a government with the courage and vision to do #18, a maglev on the east coast, which would catapult ireland into a world leading techological position and cement the all ireland economy? or decide  #96 to lift Bangladesh out of poverty? Or …the list goes on, a list of lost opportunities.  And when one considers the additional €100b that represents the structural element of the governent debt, well…While Colm McCarthy is correct, that anger is not a policy, its hard to be anything but enraged when one considers the sheer scale of wasted opportunities.

Note: Ronan and Brian would like to thank all the dwellers in Twitterland for suggesting these, and other more unprintable suggestions. Particular thanks to Lorcan Roche-Kelly and CG for good ideas well costed. We are open to more suggestions.

Brian Lucey and Ronan Lyons

The Anglo effect on austerity

drummerSeamus Coffey has a good nuanced discussion on his blog on Anglo options a la 2008. Despite what some might think, there were alternatives to the Guarantee. In any case, the evolution of general government debt since the start of the crisis is startling. In 2007 we had a GGD of €47.2, at end 2012 it was a whopping €192.5, an increase of €145.3. Of that we can allocate €30 or 20.6% to anglo. So a simplistic calculation is this : 1/5 of the total adjustment we have to make is down to Anglo. 1/5 of tax increases, spending and payroll reductions, down to Anglo. Ponder that…not really a laughing matter is it David?

Sowing the seeds of the next banking crisis…

This is a extended version of a column in the Irish Examiner 29 June 2013.

The revelations of the attitude of the Anglo bankers –sociopathic is a word that comes to mind- should remind us of the need to stop and look at the governments banking policy.

15998338What was surprising to many  about the Anglo tapes was that the speakers come across as densely arrogant, cavalier in terms of both their language and their approach to business and having forgotten that they were being recorded. Perhaps  however it was not so much denseness as insouciance – after all, for these would be masters of the universe they were untouchable, playing a game with other peoples money and winning regardless of how the game progressed. They had succeeded (despite protestations now that that was not what they had intended) in misleading the state into a rescue based on illiquidity knowing that they would at best require multiples of the initially stated sum and at worst that they would end up insolvent and wards of the state. They even had managed to poke the Germans and the British in the eye. So perhaps they can be excused. But they wont and they shouldn’t be. They played fast and loose with the rules, won, scooped the (personal) pot and then got exposed. What is interesting is what other revelations lurk in other tapes from other banks.

What cant also so easily be excused is the way that the government, permanent and elected, is planning to allow a structure whereby such arrogance and insolence can flourish again. Indeed, they are encouraging it. The problem with Anglo, in essence, was that the bankers felt that they had become to big to fail. Linked closely with the ruling party, bankrolling the turbocharging of the economy feted as financial magicians they felt financially and politically invulnerable, and this presumption proved correct. Alas, when the magic went away the benefits went also

too-big-vs-too-smallRight now the government plan for banking is to create pillar banks. It is to reduce and consolidate Irish banks into two main banks. While this will make the job of regulating them easier it is also quite clear that it runs grave dangers. We have seen how Irish regulators in many many areas are easily captured. We have seen how these regulators tend to actually regulate only when the external forces become too powerful to ignore  forcing the policy porcupine to unroll and face the world.  With few exceptions and regardless of their nominal power most Irish regulators have proven to be toothless. Think elder care or creches or waste water or FAS or…you get the picture. Most meaningful changes have come about not from internal regulatory pressure but from outside judicial and economic pressure. If regulators were unable to regulate Anglo and AIB and the rest from running amok, why would we necessarily conclude that they will any more effectively regulate pillar banks? Maybe this time will be different but would we want to count on that?

pillarbankThe pillar banks will be by design too big to fail. Therefore they both will not and cannot, regardless of their transgressions, fail.  One of them will have embedded into its corporate culture a shocking degree of moral hazard, having been rescued by the taxpayer twice in the last few decades. Moral hazard in a corporate culture is likely intractable and incurable and must inevitably run the risk of the organization eventually slipping back to the old ways – after all if the state will bail you out what onus is there on you to behave responsibly? Add to this the too big to fail, and add a generous dose of regulatory capture, and we have a recipe for the 2030 banking crisis.

zbThe costs of the Anglo collapse in plain numbers are bad enough – 30b euro wasted on feeding a zombie. Zombies when fed do not lie down-  they demand more.  The more that Anglo has consumed consists of our international reputation (twice) and was, I contend, the straw that has broken the back of the fiscal state. It is undoubtedly the case that absent the 64b bank bailout we would still have faced a significant fiscal problem. Our tax base had eroded and the world economic crisis would have made things worse. absent the Anglo 30b we would face not 117% debt to GDP but below 100%.  We might be facing some 1.5b per annum less in debt service costs. It is arguable that we might not have even had to seek a bailout. With the economy flat lining in a quadruple dip recession and emigration soaring the collateral damage of the madness of saving Anglo is incalculable and worse yet the social damage is generational and ineradicable.

lossesThe new EU procedures on how to allocate losses in banking failures are good in principle – the rank the taxpayer last in line after capital, including those heretofore untouchables Senior Bondholders, and after large deposits. But the taxpayer is still on the hook in theory.  In any case there are lots of hurdles, at EU and various national levels, that will have to be overcome before any such resolution mechanism is in place. At the earliest we will not likely see this before 2017. Are we certain that before then we will not face additional capital calls from the banks? Even after, with an effective duopoly banking structure, what confidence do we have that should one of them run into trouble the letter of the law will be observed in relation to loss allocation? In other words – if banks are overlarge and untrustworthy we need to change.

behemothThe planned pillar banks therefore pose, in my view, a grave potential risk. We should consider a strategy whereby the banks are made smaller and less systemically important. Even now the liabilities of the covered banks amount to over twice GDP, and those of the domestic banks (in other words including banks such as Ulster and KBC etc) to over three times. This is too large. Absent a proper risk sharing approach a further bank failure would result in at best bail-ins of depositors (destroying confidence in irish banking, if such exists) and at worse more calls on the state.  Conversion of the majority of the covered banks to pillar banks will leave the state in an extremely vulnerable situation. The solution must be two fold; shrink the absolute size of the banking system and shrink the average size of the components.  Shrinking the size of the financial sector worldwide will come with costs, and so too in Ireland. We have gotten used to the idea of a very large financial sector, in other words we have gotten used to easy credit. This will have to change, both at a corporate and at a personal level. reduced credit will imply a slowdown in economic growth from the heady days of the middle noughties which is no bad thing. In terms of size we need to have many more competing banks, each individually more connected with local communities, each definitively not too big to fail, funded mainly by deposits and regulated assertively in terms of credit quality. These banks must be capped in terms of individual size and the enture system capped at a level below that of national income. Again this will mean an end to easy credit. There is an old saying ; when the elephants dance the ants get trampled. Its time to cull the elephants and break them into their component parts.

(how) Should we spend the anglo savings?

money.This is a version of an opinion piece published in the Irish Examiner.So the Government has a deal on the anglo promissory notes in hand. There was an unseemly crowing from them and from much of the mainstream media when the deal was announced, the merits (some) and demerits (many) being lost in the laudatory glow. The deal was politically necessary for them – having staked their reputation on not paying the 3.1b this year they could do no other than produce some formula that would allow that. A key aspect of the deal is that it gives some breathing space. Many, myself included, have criticized the payment of any taxpayer money for private debts, but the fact remains that the government is in a better cashflow position now than it had expected to be when the present budget process was put in place. This raises the question of what to do with the savings. Lets leave aside that the savings are, for the future, dependent on the Central Bank holding onto the bonds, and concentrate on the here and now. The savings amount to approx. 1b per annum for the next number of years.

When a government has money it can do two things – spend it or save (pay off/accumulate less debt) it. There is an undeniable fact that regardless of the deal we are still in deep financial trouble. We are on target for 10b plus in deficit this year – the excess of government spending over income. While the meme has been fostered that “we are borrowing to pay the public service” the reality is that government money is fungible. Tax and borrowed money is deployed to pay for state sevices and to pay for the interest on borrowed money. No tax head is earmarked “teachers salaries” ; no bond is raised “for the guards overtime”. It all goes into one big pot and is spent as an when needed. It is fungible. And it is that fungible nature that is important here.

The reduction in planned borrowing can be put to the more rapid reduction of the overall likely burden of the national debt. That is a good way to spend it. It would give a return equal to the cost of borrowing, some 5% on the debt at present. But all government funding should be evaluated on a cost benefit basis. That is not the same cost benefit as would be used in a private company – the government has a social as well as economic payoff to take into account. While not building up a debt is a good thing, the question now is – is there an alternative use of this money, were it to be borrowed, that would generate a higher marginal (social and economic) return than not borrowing it and retarding debt accumulation. Having planned to borrow it, and having made budget and austerity decisions on the basis of that, might they wish to continue borrowing it even though it is no longer needed for the original planned purpose?

The call has been made to borrow this and to invest in capital. But the question is what kind of capital? The CIF would no doubt wish to see large scale engineering projects. But we have a decent, if needing some completion, motorway network and there is no crying need for any pharonic bertibowls in the near future. Much capital spending is of dubious longterm economic benefit. SIPTU has urged that the savings be used for job creation, but there is a lack of evidence that government helicopter money yields significant job creation. We need to think outside the box if we wish to borrow this money and use it

Two forms of capital rarely get mentioned – social and political. Take the latter – the reality is that we will still face into increased taxes, more taxes, reduced services and more expensive services for the next three years. But the governemtn is a coalition and FG is itself a well discuised coalition. Political capital has been squandered for two years in continuing to row back on or drive coaches and horses through promises made. If the government want to bring the population along with them for the next half of their tenure they need to show that the pain has been of some benefit. Modification of the fiscal adjustment to the relative benefit of lower and middle income earners via some part of the savings would yield political capital now to be spent in the future on truly transformative and thus disruptive changes to how we run the economy

Social capital, the glues that bind us as a society, have a complex but ultimately powerful impact on economic growth. As the recession has advanced we see that large parts of the country are in danger of eroding the social capital base. People in unsalable pyrite mansions, in developing sink estates, in rural areas that are poorly served with transport or modern IT, in far exurbs that demand hours of commuting, or in negative equity so deep that they can more easily move to ajob in Dubai than Dundalk are almost by definition going to be eroding their social capital. If we wished to use the money well we could do worse than dealing with some of these problems. We should invest in a proper national fiber broadband system, solve the most egregious mortgage issues, and deal with the issue of extreme commuting in so fare as we can. At the very least we should not reflexively recoil from borrowing in horror. At some stage this depression will end and the economy will stabilize. We need to start planning, something we are not good at doing, to build the kind of society we want to have. Because we live in a society not just an economy.

Anglo deal doesn’t quite cut it

This is a extended version of a column published in The Irish Examiner 9 February 2013

teddebtSo now we know – its Frankfurts way, all the way. One can only wonder what was going through the minds of the labour party ministers as they signed off the deal that irrevocably linked the Anglo debt to the state. Was it the words of Collins on his signing the AngloIrish treaty , in a political sense? Or was it the words of Mr Rabbitt on the distinction between electioneering and governing? Or was it simply thanks that there was a deal, any deal, that didn’t require a payment on 31 March? Regardless it is now clear that they have swapped a shortterm loan of dubious legality and even more dubious morality for a longterm loan of impeccable national standing. There is zero chance of ever getting out of this now. Zero. All major parties have now voted for the linking of state and private debts. Labour which stood against the 2008 deal, mainly because it gave too much power to the minister and was rushed through has now rushed through a deal that gives sweeping power to the minister. The view within the tent must be so much better than without.

In any sense, we now have the full foul flower of the 2008 banking deal. Having sunk 30+ billion of cold hard cash into the wreck of the banks we have now sunk a further 30b of taxpayers cash into an arguably worse deal, paying for the folly of the guarantee to the anglo subordinated bondholders. This deal flies in the face of all the talk (or as Pat Rabbitt might call it “Auld Palaver” ) at the European level of delinking banking and sovereign debt. It cements and accelerates at the European level the move away from an integrated and globalized banking system and reinforces the trend towards national based banking systems. It makes a mockery of the moves towards banking union in that it demonstrates explicitly the fact that the national state remains on the hook. This national banking approach is evident in more than this. Despite a desire and despite the evident need for one the European leaders still cannot put in place a proper banking union template – national taxpayer cofinancing for bank failures will still be required. In the UK the moves to increased regulation include a move towards a sharper distinction between UK, other EEA and non EEA banks. We have seen a continual concern in the core about TARGET2 balances viz a viz peripheral countries, with the most convincing explanation suggesting that these flows demonstrate a pulling back to the core of credit previously extended to the periphery. All round there is a renationalization in the financial sphere and this deal is part of that.

While financial globalization has brought problems to us, the evidence is by and large that it brings benefits. Deeper, broader more responsive banking systems are associated with greater economic growth. There is an issue as to the lags, and there is an issue also about what we might call utility (the basic money transmission and simple savings/loans) versus industrial banking, but overall the evidence is favourable. In acquiescing to this ECB driven linkage of the banking debt to the sovereign the Irish government has acquiesced in this renationalization.

What of the deal itself? Like any deal it has good and bad points. I remain convinced that the economically and morally appropriate thing to have done was not to pay. However, we have now done so. The deal is complex. It in essence involves IBRC being liquidated, the central bank seizing the asset (promissory notes) that was used as collateral for it extending liquidity, and the government and the central bank agreeing to swap this worthless wretched note for proper NTMA bonds. These bonds are of a longer term and at no more cost than the promissory note so in terms of the present day value they are less. How much less is a matter of some conjecture as the terms of the newly issued bonds are floating. But a reasonable conjecture would be that the value is between about 40-60% of the total amount.

Before we start doing cartwheels of delight however several notes of caution must be struck.

First, there is a requirement in the deal that the central bank will not hold onto these bonds to maturity in total. They will have to sell some. This introduces a degree of uncertainty as to the deal.

Second, the cost is unclear, but we know that we are right now at a low point of the interest rate cycle. As the cost of the bonds fluctuates upwards as do interest rates the cost must rise as do interest rates. The bonds are pegged to a cost over 6m EURIBOR rates. Nobody can forecast with any certainty the rate of EURIBOR, that rate at which large banks lend to each other, over the next few months never mind the next few decades. At a low point in the interest rate cycle a truly favorable deal would have fixed the cost now. The average 6m EURIBOR rate over the last twenty years has been just over 4%. By comparison a rate set at the ECB Main Refinancing Rate would have been cheaper. This leaves aside also the issue that the cy calculation of the EURIBOR itself is under scrutiny and threat, with panel banks pulling out of its calculation right left and center.

Third, much is being made of the argument that, over time, inflation and GDP growth will erode the “real value” of the bonds. This is in one way merely a restatement of the fact that the present value is lower than the total nominal amount. But it also seems to ignore that the ECB have an inflation target (and it has shown itself to be a strong inflation fighter) of 2%. The value will take a long time to fall.

Fourth, even if we were to take the present value as being50% of the face value we have still, at a stroke, added one years deficit. This is hardly consistent with fiscal prudence.

Fifth, there is a worrying line of argument, from the Taoiseach down, that saving the billion a year in funding as we are, we can thus relax austerity measures by a concomitant amount. Even as we are looking at structural budget balances forecast to be over 5% in 2014 ( versus a surplus in Greece ) it is hardly time to raise expectations that this deal is agame changer. Rather than relax the adjustment process (which can only be for party gain) the adjustment should be continued and in effect accelerated with this additional fiscal benefit.

Sixth, the bill contains sweeping powers for the minister for finance. Enabling acts that allow ministers to override commercial judgement on bank asset purchases, create at their own judgement securities (whatever happened to the idea of the Dail having a say on money bills?), or override and instruct the liquidator do not seem to me to be good laws. When dealing with billions of public money the elected representatives should always have the final say.

Finally, we have been here before. In 2008 we saw the oireachtas rush to judgment with complex legislation in the mistaken belief that the issue was one of liquidity rather than solvncy. Then it was the banks, now we are doing the same with the state. Saving cash on an ongoing basis is a liquidity issue. The deal does nothing to adjust the solvency of the state. And that is what a deal should have done.


Labour Senator calls for election if PN paid

@JohnGilroyTeam: i think that there will have to be a general election if promissory notes are to be paid

John Gilroy is the labour spokesperson in the Senate on finance. Throughout the last two years he has been one of the few people in politics who has engaged openly on social media. Most of his engagement has been in the issue of these wretched notes. He’s a serious sober thoughtful politician. People like him are the ones that if it comes will constitute the bulk of those in labour calling for an exit. Coming in the wake of the report that the Tainiste has suggested no deal would precipitate s government breakup is clear that the stakes in the game are ratcheting higher.

Have we the “bottle for the battle”?

Anglo..a view from Europe

So I spent the last few days in the very pleasant environs of Maastricht, as an invited speaker at a symposium on the future of international banking. Some really interesting papers and presentations were delivered, on which I will blog later.

At the conference were a goodly number of bankers, central bankers past and present, and academics on banking and related.

A summary of the views of the core Europeans would be ; Ireland is trying, and that's to your credit, but your legacy banking debts (read, the pro note) are going to be left with you, as YOU screwed up by lax regulation badly implemented. Oh, and your corporate tax rate? You want us to bail you out while you screw us with tax arbitrage? Not. Gonna. Happen.

I see that Brendan Howlin has stated that a deal on the note is essential. One hopes that he is talking to and listening to the same thing as I was hearing. It ain't pretty…