In 1919 Lord Keynes penned a wonderful tome, The Economic Consequences of the Peace. It is a profound work, written by him to express his concern, as an economist, with the punitive and inflexible approach being taken to German debt. It contains nary an equation but is one of the best pieces of economic analysis you will find anywhere. It would be well worth a read by the politicians of Europe.
There is an interesting opinion piece in the Irish Times today, by Michael Noonan, the finance minister. It is being spun as “were going to get our money back from the banks”. This is not the first or second time of course we have heard that we are going to get the money back, and it will not be the last. We need to take enormous caution when interpreting what politicians say, especially when they talk about banks, and especially when they talk about banks in the run-up to an election. Continue reading
An interesting re evaluation of the longterm effects of debt.
Here is the bottom line. Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.
Worth a read..here is their takeaway graph
So, once again (what is it now, the fourth time?) we have a greek debt deal. Great. Except, its not. The essence of this deal (which has delayed funds since may..) is a maturity extension and a rate reduction on existing and new Greek debt. This will reduce the present value of greek debt and make it easier to repay. There will also be a bond buyback from private investors, which might or might not succeed. It is all useful stuff, if a little hopeful, and might well give a breathing space to greece.
In the Irish context there is however little to cheer. Recall that the only significant chunk of debt which we hold which is in play is the wretched promissory note for the whirlpool of debt that is IBRC (the zombiestein that is Anglo and INBS). This is 30b euro which is structured in a complex way to ensure that each year for a decade more we pay over 3.1b (the total amount of the budget austerity package to be unveiled 5/12/12) to the Central Bank of Ireland and they ….destroy it.
No interest relief is relevant here: this has been well parsed by among others Karl Whelan. An extension of the repayment schedule would help, in that instead of the CBank destroying 3.1b each year it might destroy 1.5, or .75b. This of course is to accept the lunacy of the whole project. From the greek debt deal, and greece is in a much worse place than we, it seems that maturity extensions and interest relief is the only game in town for official creditors.
Expect little relief for the Anglo promissory notes, the most toxic legacy of the FF/GP folie de grandeur. Expect what little relief we get to be spun like a top. Expect the media to swallow said top with glee. Expect all that but dont expect any meaningful relief.
So, it seems now that Dr Merkel backs the idea that no, there should be no retrospective debt deal. Where does that leave us?
We have invested 20+ billion into the pillar banks (or another word starting with P and ending in X as a noted economist of many years standing is wont to call them). This is valued at 8b in the NTMA, and consists of the ownership of AIB, ILP and a chunk of BOI.
The ESM it is now clear will only deal with new claims. Therefore we will not get this back. Even if we did, in the context of a gross government debt of 170b, its a drop in the ocean. Even the whole 20b would not be meaningful. We face debt/GDP levels of 120% in the near future and when we measure against the taxable GNP we are heading towards hellenic hellish numbers of 150% plus
We have 28b in the wretched promissory notes. These are as flammable as petrol soaked crepe paper but the government refuses to consider setting match to them. And so they advance into the budget with 3.1b (6w tax take) in the hole of nonvoted captial spending, aka money to Anglo to give to the Central Bank which will destroy it.
History tells us that countries with unrepayable debts restructure, default outright, fiscally repress or let inflation do the dirty work. Where we now stand the latter is not possible with the BundesHawks at the ECB vigilant against weimarian excesses; repression takes time; default is a last resort. So we need to restructure. The only choice is what and how. The only stuff we can restructure is the ProNote. Id restructure it to zero. Talking to politicians they are obsessed with the 3.1b- this is a liquidity issue. Unless we get the entirety of the Pronotes removed we are in deadly danger. Even with them gone we still labour under a massive burden of debt.
Unpalatable choices abound.
Is our debt unsustainable? One Irish minister for finance thinks so….
As someone who has watched in frustration as both our Minister for Finance Michael Noonan and Department of Finance have consistently maintained that our debt:GDP % is “sustainable” on the basis that it will eventually come down, it came as a welcome, though surprising, relief last night to hear Brian Hayes, junior minister for finance at Brendan Howlin’s Department of Public Expenditure and Reform, say that the debt was “unsustainable”. Minister Hayes was speaking on RTE’s Prime Time current affairs programme and his statement was a bald “our debt is not sustainable” This contrasts with, for example, the view of the Department of Finance which in May 2012 produced a document “The Irish Economy in Perspective” from which the graph above is extracted, along with the official view that our debt was “sustainable”
To me, this was a “game changer” of “seismic” proportions, because up to now, the official line…
View original post 266 more words
This is an extended version of a column published in the irish examiner. The Irish government find themselves on the horns of a dilemma. They, quite properly, seek a write down, from somebody, anybody, of a large part of the banking debt, which has accumulated. At the same time they wish to convince the markets that everything is ticketyboo and, and that any day now we will return to normal funding of the ongoing government deficits via the private debt markets. These two issues cannot be reconciled. What the government are saying is in fact the Irish debt is Schrödinger’s debt. It is both sustainable and unsustainable. In this thought experiment we the people who pay the debts are left in the dark. Economically, we are Wigner’s Friends. It is manageable debt if you are trying to persuade bond investors to buy into the idea that having failed over decades to run the country as a a going concern we have now mended the error of our ways and will be prudent. It is unsustainable if you are in talks with Troika officials and you need them to persuade their government that we are at the brink of penury and revolution. That these meetings take place in a peaceful prosperous country where nary a revolt is on the horizon is unfortunate…
In June of this year the government announced to great fanfare that a decision had been taken, in principle, which would greatly alleviate the Irish debt position. This was, we were told, “seismic”. It came from the 29 June meeting where the phrase “similar cases will be treated equally” was used in relation to ESM dealing with Bank debt. Thus far the evidence is that if it has been a seismic experience It is more an event of Richter scale 2 than of Richter scale of 10. The earthquake off Mayo in early June was scale 4, and nobody really noticed.
Throughout the summer it has been clear that the event that preoccupies the European government is when, rather than if, Spain will be forced into seeking a bailout. As the fourth-largest economy in the Eurozone it is too big to ignore. We on the other hand can be very safely ignored. We have shown over the last four years that we are perfectly willing to acquiesce to every requirement that emanates from the center of Europe, no matter how deleterious this may be to the long-term health of the Irish economy. The Irish negotiating position has been to lie around with a pathetic look on its face hoping someone will take pity on us while we continue to annoy them with various quaint local customs such as having a low rate of corporation tax, paying ourselves over the Euro area median salaries in all sectors, and generally not being good germanofinns.
I have characterized this numerous times as sending out nice well meaning Irish fellas to negotiate with the heirs of Bismarck (who suggested swapping the Irish and Dutch populations, enabling the Dutch to feed the world while we would drown in short order) and Richelieu. Throw in the Finns, a dour doughty lot who don’t back down (they took on the Red army in 1939 and beat them to a standstill, with the world record sniper being Finnish with over 500 confirmed kills) and we are hopelessly outclassed.
At the end of 2012 the national treasury management agency estimated that our national debt will stand at €187 billion. This is 117% of GDP, Just behind Greece and Italy/Potugal. If we accept that there is a large chunk of GDP, which cannot easily be taxed, then the appropriate metric becomes GNP, and the figure then makes Ireland look much closer to Greece than it does to Italy. Of course, the wedge between GDP and GNP is one that we have allowed to grow as a consequence of our reliance on high money low job FDI, and that policy choice of acting as a tax arbitrage location is one that is hard to explain as being a core tenet of economic growth to a German, a Finn or a Dutch official or minister. And lets not even go near the French…
Of our debt two thirds has been accumulated in the old-fashioned budget deficit way. While the debt exploded after 2009 this is not all bank debt. A large part is down to the hole in government spending that had opened up through overreliance on bubble taxes. And it will have to be paid down in the old fashioned way – by reducing spending and increasing taxes. Indeed the deputy governor of the central bank has gone so far as to suggest that we run surpluses to pay down the nominal debt rather than letting it erode through time and inflation. He doesn’t see growth roaring ahead. How this will happen is unclear as every single special interest group are NIMPPs – Not In My Pay Packet. Absent a banking debt mountain we still have a problem. That said, the willing lunacy of the bank guarantee and the Anglo bailout tipped the country from a fiscal problem to a fiscal basket case.
We have poured in in excess of €60 billion into the banking system. We have put in approximately €20 billion into the main banks, which equity is now valued at approximately €8b. The statements recently from Finland , Austria, Netherlands and Germany (FANGs we may call them) makes it very clear that the creditor nations are willing to contemplate the GSM only taking further equity stakes. In other words legacy bank debt is not going to be on the table. We are therefore stuck with this ownership, stuck with the money sunk into the banks, and unlikely to see a rapid return on this money. The largest part of the banking debt that can be put into play relates to the IBRC promissory notes. Every year, on 31 March, the Irish government pay €3.1 billion to IBRC, who pay this onto the central bank, Which then destroys the money . I have consistently been of the opinion that this is political, economic, and indeed in the context of swinging budget adjustments moral lunacy. Successive Irish governments have taken the approach of Mr Micawber, that something will turn up, in relation to this Schrödinger’s debt. Something has turned up, but it’s not a something to our liking. At very best it is likely that this promissory note (which is not government debt, as if it were a government debt then Anglo could have gone to the European Central bank and obtained liquidity rather than having to go through the Irish Central bank) will be replaced by longer dated government debt. This will reduce the annual outflow, but will not reduce the stock of debt. A year ago I suggested that on the return of the Dail the Taoiseach should have stated that we were no longer going to pay this debt. I stand by this. If the Irish government were to tear up the promissory note, is my view that nothing will happen. At least, nothing bad will happen. Both Anglo Irish bank and Irish nationwide building society would become immediately insolvent. This would then force them to be wound up. The central bank of Ireland would either have to sue the government for the repayment of the promissory note or have to accept the loss of it. The consequence of this would be that the €30 billion would remain as created money.
The argument against tearing up the promissory note runs that upon this happening the ECB would cut off all funding to Irish banks. The latest data suggest approximately €60 billion in ECB funding is made available to the Irish covered banks, and some €80 billion to all credit institutions in Ireland. This argument is bunkum. What the ECB would be doing in that context would be punishing a well performing (within the troika program) peripheral country for taking immediate steps to ensure that its sovereign debt is sustainable. It would become clear that no matter what their government did it would not satisfy the monetary uber-Hawks of Frankfurt. It would crystallize the fear that many on the periphery of Europe have, that in the eyes of the core (in reality in the eyes of a toxic blend of populist politicians and frightened faceless bankers in thrall to the ghost of a memory of a supposed consequence of a monetary event in the 1920s) the periphery is dammed if it does and dammed if it doesn’t. I do not believe that the ECB is a suicide cult, which is what it would have to be if it were to in effect force Ireland out of the euro. That is what logical endpoint of cutting off liquidity would be, and no organization willingly engages in an action which will result in its own demise. .