Tag Archives: bankruptcy

Jackie Lavin – A Meme Girl for Irish Higher Education

jackielavin_SIEducation is a complex matter while reducing it to simple soundbites is easy. Ignorance, in the pure sense of not knowing, abounds when it comes to higher education. Alas, ignorance creates memes that are powerful.

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Ireland is not …Detroit

Screen shot 2013-07-26 at 14.19.23Both are broke and under emergency care. One is a post industrial landscape where people eke out a miserable existence, the other is a city in Michigan.

Seriously, in one or two ways its perhaps worse…See the figures for 2012 below (detroit figures taken from the Emergency Managers Report)

Detroit Ireland
Population 684799 4585400
Labour Force 343852 2126184
Unemployment 63896 294600
LF as % Pop 50% 46%
Dependency  1.99  2.16
UE 19% 14%
Income 1196 36646
Expenditure 1318 44950
Deficit -122 -8304
DEf as % income -10.2% -22.7%

ok so we dont have the same level of crime and the same degree of urban blight. But they have arguably better weather and at least as good a music tradition.


Can investors not afford firesales or just dont want to engage in them?

Property prices  in Ireland have dropped precipitously  and yet we still see few (apart from those that Alssop Space) enough investment properties (buy to lets) coming on the market deeply discounted. A fascinating study (firewall alas)  suggests that it is not simply an unwillingness or inability to lock in the loss that causes people to hang on. The authors employ a survey of 750 investors, and find three main behavioural reasons why people dont list for sale underwater investments

  1. Familiarity bias : this refers to the trait that people “know” their own asset. The investors know their asset, their property, is different. They are too close to it. This bias causes people to overestimate possible returns and underestimate risk.
  2. False Reference : people have locked in the purchase price, and even when they “know” the fair value is much lower they find it impossible to change the reference point to a lower value. Thus they stay at the unrealistically high “frame of mind”
  3. Status Quo Deviation Aversion: it is psychologically costly to change your mind, so people stay the course and refrain from listing at a lower price. After all, prices might rise.

What they dont find is also interesting: the affordability issue is not as important as the (combined) behavioural issues.

All of these of course can be applied not just to individual us property investors : think of NAMA and government policy – we saw the setting of November 2009 as the (false) reference point for prices, we see that the argument of Ireland being fundementally different is still potent, and we see that there is no amount of evidence or argument that will sway the goverenment from its course….

The Psychology Behind Why UnderwaterInvestment Properties Are Not Listed for Sale
Michael J. Seiler, Mark A. Lane, Vicky L. Seiler ,  The Journal of Behavioral Finance & Economics Vol 1 (2)  Spring 2011

IBEC and IBRC and the IMF

This is a version of a column published in the Irish Examiner

It must be dangerous to be a bird in Dublin these days. The government that promised transparency has instead adopted a kite-flying approach. The kites pop up, and like modern day Benjamin Franklins the government minister hangs on as it drifts into the storm, and then gauges the lightening. Occasionally they get singed, sometimes they escape, and withdraw for another day. And its not just the government. Every other aspect of social partnership is busy with economic bals and fiscal paper and silk, constructing and testing kites. In the best Japanese tradition, and as we are heading towards a Japanese style lost decade why not, we even see kite wars. Some kites are saw edged and designed to cut down others. Some kites get smashed down and then amended get relaunched.


IBEC have joined in this pleasant pastime recently, with their proposal that public sector increments be paused. The saving from this would be approximately 1b per annum it appears. The problem with such increments is that they are generally paid regardless – one is on a salary scale along which one advances by dint of survival. In a modern managerial environment that doesn’t make a lot of sense – there is little incentive to excel, and little disincentive to slack. Of course, we have know this for decades and for a long time it suited IBEC as a member of social partnership to allow this to go on. Peace at any price was the seeming mantra. Cutting a billion euro from the state budget is eminently justifiable in the context of borrowing a billion. However, throughout the crisis the argument on cutting public sector wages has been notable for a lamentable lack of follow on argument. Cutting X does not save X. At the most basic it saves less than X due to the fact that yes, public sector wages are subject to tax. So 0.7X might be the after tax savings. And then there is the knock-on effect…


we have seen recent estimation from the IMF of these effects. In economics the effect of changing one item on another is known as a multiplier. The assumed and conventional multiplier for government expenditure was in the region of 0.5-0.7. This would imply that cutting X would in the end result in a fall in overall economic output of 0.5 – 0.7X. In other words, cutting wages would not have the overall effect of reducing the economic cake by the same amount as the wage cut. This may now need to be revisited in the light of the IMF world economic outlook report which suggested that far from being less than 1 (implying that cutting public sector pay would result in a small fall in output) these shortterm multipliers may be significantly greater than 1. In other words, cutting X will result in a decline of 1.5 X– 1.9X .


Whatever the attraction from a government accounting perspective of cutting the short and medium term effects on the rest of the economy would be significant and negative. In the Irish case the effects are complicated by the GNP/GDP issue – while GDP can be growing or contracting slowly the GNP component can be falling more rapidly. Thus we cannot say with confidence that based on the IMF analysis the multiplier is too small we can take it that some very significant work on same needs to be done, pronto, by a combined ESRI-DFinance-C Bank team to ascertain the best evidence. In that context, we might want to hold fire on accelerating the pace of consolidation


IBEC have not, to my knowledge, come up with a comprehensive set of implementable performance metrics – that to be fair is not their job – but one must applaud their desire to save a billion. However, why stop at a billion? Why not save three times that much, and harm nobody? Part of the problem with cutting government expenditure is that it gets recycled into the economy. It is rare to have government expenditure which is totally isolated from the economy, and yet we have such.

Each year the government spends 3.1b feeding the IBRC (anglo/inbs) black hole. This year in a cunning plan instead of real money they issued a bond to the beast. The borrowed or tax derived money, you will recall, is given to the Central Bank of Ireland who then destroy it. As far as I can ascertain IBEC have not expressed concern about that, except in so far as the technicalities of the bond v cash 2012 payment impacted on government aggregates. It is abundantly clear that there is little appetite in the ECB for a deal on this money. At the very best we might replace this promissory note (which is not government debt) with a 40y bond. At worst we will be stuck with the full repayment schedule. It would cause nothing but the closure of IBRC and a technical temporary accounting headache for the Central Bank if the government were to announce that in framing the 2013 budget they were not going to make the March 2013 (or any subsequent payment). The ECB would be unhappy but I guess we can live with that. What they would not be able to do is to “cut us off” from liquidity. It would be nice if IBEC were to advocate saving 3.1b but then again IBRC is a member firm of IBEC. This money does not get spent in the Irish or European economies. It vanishes. We borrow it, and we destroy it. Why not…not borrow it.?


Minister says NAMA can continue to operate even if balance sheet-insolvent

Bankruptcy is no bar to NAMA it seems, as the minister suggests that solvency = liquidity. Hmmm… that sounds awfully like what we heard re banks in 2008…

NAMA Wine Lake

It seems to be a moot point for the time being given that NAMA is saying it will make a profit of €200m in 2011, but Minister for Finance, Michael Noonan last week said in a reply to a parliamentary question that NAMA does not have any minimum capital requirements and can accordingly continue to operate even if balance sheet-insolvent.

So what is “balance sheet-insolvent”? This is where a company’s assets are worth less than its liabilities. For example, Independent News and Media – the loss-making media group that Denis O’Brien and the O’Reilly family are scrapping over – recently reported its preliminary 2011 financial results and said that its assets came to €573.7m, its liabilities to €596.5m and the company therefore had €22.8m of net liabilities. It is balance sheet-insolvent. Now this is not to suggest that IN&M can’t pay its bills as they fall due, it seems to…

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