Seamus 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?
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.
What 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
Right 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?
The 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.
The 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.
The 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.
The 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.
.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.
This is a extended version of a column published in The Irish Examiner 9 February 2013
So 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.
@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”?
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…
To recap..A Reuters report yesterday, still unmodified, notes that the ECB has rejected the proposal made by the government on dealing with the Anglo Promissory notes. Ireland's national broadcaster NASA report which says that the ECB have denied this. However that latter states that baldly and gives no detail.
The proposal was that the government would issue a long term (term unclear but presumably more than 10years) bond
Irish Finance Minister Michael Noonan had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank with the intention of keeping the bonds in its portfolio for a long period.
This was unsurprisingly rejected by the ECB as tantamount to monetary financing. They don't, can't, do. That.
So why did the Irish givernment, two years into the negotiations, propose that? Was it naivety? Stupidity? cunning? We're they proposing something so impossible that the ECB would reject it?
As things stand we pay 3.06b each march 31 through 2023, 2.2b in 2024, 0.9b 2025 to 2030 and a final 0.1b in 2031. That is 23 years, a generation, after Anglo imploded and the FF government pushed the taxpayer into the black hole after it.
There are only three things that can be done with a debt to reduce its impact; reduce the amount, the interest rate or the time. For complex reasons better explained by Karl Whelan here the interest rate issue doesn't matter. So we deal with the time (stretching it out longer means less, in today's terms, of a burden) or the amount. The deal proposed seems to have been a too clever by half attempt to deal with the time issue. A bond of say 50 years would be “cheaper”. Exactly how much would depend on the time span and the interest rate but it could be a few billion.
My view is that we cut this at the core. Pay nothing. The promissory notes were another too smart by half attempt to fool the markets by the bright boys in the FF government, by a structure that both locked the state into keeping Anglo alive and tried to keep the cost of same off the national books. Nobody treats the debt a not real debt so one argument is why not simply convert to actual NTMA debt, and be honest and open.
To my mind there is no downside to the government stating now that it will not pay the note due now or ever. Three arguments are advanced.
First, the ECB will “cut us off”. Gov Honohan, who sits on the ECB board, alluded to this or something else by saying that th ECB would not look kindly on such a move. The ECB could, in theory do a number of things if we defaulted on the Anglo payment. It could invoke the risk control framework and deny Irish NTMA issued bonds as being eligible for collateral at the discount window. That would cut Irish banks , good bad and indifferent, and indeed any holders of Irish bonds, off from liquidity. The result would be that to keep the ATMs fed and money flowing in the economy we would have to issue own liquidity. we would in effect be expelled from the euro. Think of this : the only succes of the troika, doing something to ensure its long term fiscal stability, being subjected by a troika member to exemplary punishment. What would the effect of same be on her other peripheral nations? Would they calculate that there was literally nothing that would satisfy the fetishistic desires of the ECBundesHawks and contemplate leaving? Would the IMF like to see massive currency instability in an already fragile currency environment? Maybe the mooted IMF “it's a standby not a bailout” trailed last week is evidence of some forward planning here… My view is that the ECB would be extremely miffed and would like to but would balk at this. They are not a suicide squad.
Other issues suggested were we to walk are that MNCs will depart, that we will lose credibility and that…errr…that's it.
why an MNC would leave a country making itself more stable, not less, is beyond me. I haven't seem or heard a single MNC executive address this. I haven't heard the IDA say walking from the Anglo deal would make their job more difficult. Maybe I missed them. As for reputation, to whom does it matter? Again, as this is not government debt it's not a default. The bond markets, truth be told, care less about what we do with Anglo. It only enters into the mix in so far as it gives an indication of whether we are more or less credit worthy on real NTMA issued debt, Removing the rotting albatross that is Anglo makes the state more, not less, creditworthy, more liable to repay and in full on time, not less. Patrick Honohan in 2009 stated
mature reflection by the financial markets would recognize that a country honouring its debts and guarantees to the letter–and not beyond–was more creditworthy than one which handed over money lightly to unguaranteed risk investors
What went, but was ignored, for Anglo and bondholders in 2009 goes double for handing over money to a central bank to destroy it. It's morally, economically, politically and in every way wrong.