Tag Archives: default

On Burning Bondholders and Constitutional Politics

So : we know now that Ireland was indeed threatened. But a bigger issue seems to lurk , but this may be just my ignorance Continue reading

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The Running Sore that is Anglo Part 2,339

So Minister Creighton is happy, she has gotten positive indications from Berlin that they will look favourably on our negotiations on the Anglo Promissory note. Of course thats nice and all but then the people that have to make the final call are the ECB. And of course the ECB is above politics, and we could never imagine that german politicians would have any influence on the ECB, could we..

The promissory note is not complex and not techinical. It is in essence money created by the Central Bank of Ireland and given to Anglo who used it to pay off depositors and bondholders. The ECB doesnt, for a number of reasons some good some bad some plain bonkers, want this money to stay in the system and so the Irish government takes tax or borrowed money, gives it to the Central Bank who then destroy it. Yes, the way in which this round robin within the country works is complex but the principle is not.

Anglo is a running sore, an affront on an ongoing basis to the state. In 9 weeks a sum of money equivalent to the total amount saved in the budget will be destroyed. That is immoral and politically and economically bonkers.

Anglo gains a very large part of its ongoing income from the interest on the pro note. It gets  about 1.5b pa on an ongoing basis. Thats a vast sum and beyond the annual report we know very little about what it is used for. We do know that Anglo has annual expenses of c 300m, so that 1.5b comes in handy. We know that Anglo has a very different attitude to its dealing with the minister (who stands in loco parentis us in dealing with this wayward scion of the celtic tiger) : they ignore him and he seems to ignore them, allowing them to escape oversight and analysis. The every super Namawinelake has a set of posts on this : see here on wages, here and here on NAMA v IBRC .  Six Anglo staff earn over 500k per annum – why beats the ever living hell out of me, for running what is in essence a giant debt collection service.

The government have staked a lot of political capital on a “deal” (nature unspecified) on the Anglo pro notes. The deal must do three things : it must, if as seems probable we are stuck with Anglo for the forseeable future, give sufficient income to Anglo to allow it to run in the manner in which it has become accustomed ; give a saving to the state in terms of cash outflows; be simple enough that it can be sold to the domestic public that count (the labour backbenchers mainly), although  we can be sure that any sop thrown to them will be lauded by the media cheerleaders as a heroic seismic massive breakthrough

Or, it could decide that after 2 years in office with zero progress to show, it annouces that it will not be paying. This would have to be done by Enda and Noonan standing up in the Dail and saying so. Not a penny, no more, the letters of comfort underlying the pro note are withdrawn. That would of course represent a massive headache for the ECB, for the Central Bank and for the exceedingly well remunerated board and senior staff of Anglo. Some would cry it a sovereign default when in fact it is designed to avert same. Legal challenges and cries of dismay would emanate from the depths of the Bundestag  but a Jardnyce v Jarndyce approach would spin that out.  A clear statement now in public that we are not paying this in any way any more is needed. Delaying the repayment over 40 or 50 years is a cop out – its designed to avoid confronting the issue. Reducing the interest rate is a worse cop out as the flows of money are circular within the state. The moral, politically sensible and economically meaningful solution is to walk.

Fianna Fail, I am convinced, willingly or not, laid a trap for this government into which they have fallen and in which they are now writhing on the stakes. The trap was that no matter what austerity or restructuring, we would not get meaningful traction on getting out of the mire with the Anglo note hanging round the state finances. A person who is now a minister told me in january 2011 that “we will simply have to walk from Anglo” as the political and economic cost would be too much. Two years on its time to go walkies.

After Merkel…Ireland’s unpalatable choices

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.

The real problem country in Europe….

This is an extended version of an opinion piece published in the Irish Examiner Saturday 25 May 2012

So another European summit concludes inconclusively, with the poor ole can again booted down the road, hopefully avoiding the fork that said road will take when, as seems probable, Greece departs the euro. To be fair, while inconclusive in terms of its outcomes there was a clear sense that the ground has shifted, away from the coordinated austerity for all pushed by Germany for the last two years towards a more balanced approach. Perhaps we should recall and amend the words of Churchill, substituting European for American and noting that Europeans will do the right thing only when all other alternatives are exhausted. Eurobonds, where a central or pooled treasury issues bonds and then doles out the cash to members of the pool, are at least back on the table, there is a recognition that growth needs to be at least as much a focus as fiscal discipline and there is an acceptance that bank recapitalization costs cannot fall only on the taxpayer.

However there is still a massive problem. Europe is mired in recession. Recent PMI indices, indicators of future economic activity, are all pointing recently to a deep slowdown. Spanish banks are treading the same dreary path as did Irish banks, with each deep look at the depth of the damage caused by its property boom revealing deeper and deeper holes, and the state adopting sequentially more and more drastic action to stem these holes. At least so far they have avoided a NAMA or bank guarantee fiasco. Meanwhile Greece continues to fester and the dreadfully dangerous precedent of an exit from the monetary union (which would render it no more than a fixed exchange rate zone, and we know how the last one of those in Europe ended) inches closer.

There can be no doubt looking at the economic history of the last decade that the biggest winner from the adoption of the euro was and is Germany. It has achieved massive relative competitive advantages over the other nations, mainly it must be admitted by the less than optimal actions of these countries, but also by reducing the labour share of the German cake. From close to 70% in the 2000 period employees compensation as a % of GDP is now closer to 60%, and German net exports to the Eurozone rose nearly fourfold in the ten years to 2006. A very crude characterization of the euro might be that the core lent money to the periphery that bought core goods and now the bills have come due.

The reality is that in this environment sides, the core and the periphery (which now seems to be everybody bar Germany and Finland…) are locked in a symbiosis. Coordinated austerity is not going to allow the peripheral nations to grow and in not growing they will neither consume core goods nor indeed repay core credits advanced to stem the losses arising from the credit bubbles or to shore up fiscal ssytems that were not fit for purpose.

The sad reality for Europe is that we have a weak german leader in a strong german economy who for too long was propped up by an even weaker French leader in a weakened france. The European experiment, of which the euro is the latest embellishment, is predicated on france and Germany being strong and democratic and working together to keep each other in check and at peace. In that it has succeeded but the reality now is that to get Europe out of the mess Germany is the only feasible paymaster. It will have to pay in one or more of four ways. First, there is a debate on an arcane interbank settlement system called Target 2. In essence there is nothing to be worried about absent a break in the euro, but were that to happen then Germany would be left with a large hole in the bundesbank. While that might appear problematic it can equally be argued that the net cost would be minor. But that would in any case be unthinkable to the money hawks in the German economic apparatus. A break of the euro would entail the return to the DM, which would result in a massive appreciation, resulting in lower German exports and lower German economic growth. While Germany has shown that it can survive and even thrive with a hard currency the dislocation would be large. Again, a break in the euro would also result in massive losses to German financial institutions, running potentially into hundreds of billions of euro, which would have to be recapitalized by the German taxpayer. The alternative to these is some form of Eurobond (which is constitutionally difficult and politically anathema to Germany) resulting in a rise in German borrowing costs, or a fiscal union including transfers from Germany and eventually France. . The latter in particular would insist that there be tax harmonization in some guise as a condition of entry.

Thus, we face more weeks of high political economy drama and economic highwire acts . Germany and to a lesser extent France need to accept that the costs of saving the Eurozone are going to be (short run and ongoing) high, and weight these against the incalculable disruption and losses of it collapsing. A Greek exit would be in my view an irreparable damage, as it would show that the Eurozone is not a monetary union. For Ireland the question will arise sooner than later: what are we willing to give up to remain in the enhanced European system, or do we take our chances on the outside. The stakes could hardly be higher.

For Europe as a whole and Germany in particular we might do well to recall the words of that most supreme political operative, Cicero , who stated :

“Six mistakes mankind keeps making century after century:
Believing that personal gain is made by crushing others;
Worrying about things that cannot be changed or corrected;
Insisting that a thing is impossible because we cannot accomplish it;
Refusing to set aside trivial preferences;
Neglecting development and refinement of the mind;
Attempting to compel others to believe and live as we do.”

Germany under Merkel has committed most of these follies, insisting that only german management of the economy is the right way (6), that there must be no increase in money supply regardless of the pressing need (4), that Eurobonds or debt monetization are so anathema to them that they are impossible (3), that if only the rest of Europe were German then there would be Germanic economic ordoliberalism prevailing (2) and that we must all simultaneously engage in austerity while exporting to each other (1, 2, 4 and 6).

At least German culture remains as refined as ever. Maybe we should reach into the shared common stock of European culture and recall the words of Voltaire, as echoed by Uncle Ben Parker in Spiderman, who noted that with great power comes great responsibility. It is time that Germany took that responsibility as seriously as its power demands.

Default, Regulatory Capture and Banks

Last night in the (darkened, of course for the books and not very conducive to photography on the hoof) confines of the TCD Library Long Room Senator Sean Barrett launched “What if Ireland Defaults”, the book of essays previously noted on the irish debt and economic position. Having entered into TCD ESS (now BESS) in October 1981 I had an idea of economics as a possible route. I was still deciding when the first lecture I had in my second year was in a course which I was thinking maybe/mabe not. It was “public sector economics” and was taught by Sean. Immediatly I was captured, as Sean outlined in 20m a course that would give us a helicopter tour d’horizon (that turned out to be a tour de force) of the then myriad ills afflicting the Irish economy. And yes, dear children, they were arguably as bad as here and now.

Sean, along with such luminaries  Louden Ryan, John Bristow, Alan Mathews and John O’Hagan inspired a desire in me to work in this area and I have been honoured to have worked with Sean in particular as a student and latter as a colleague and constituent. Archaic and sclerotic as the Seanad can be at times, the reality is that the university senators have a large and diverse voting base to serve and they serve it well. Any changes in voting for Seanad Eireann should try to capture more of the essence of the university senators of all hues over the years.

Sean very kindly launched the book last night and his speech is reproduced, with permission, below.

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My first duty is to congratulate the three editors, twenty-one authors and the Orpen Press on the publication of this excellent volume. It deserves to be widely read as Ireland faces a continuing crisis in which unemployment has risen over three fold and our debt has risen from 28% of gross national income in 2005 to 114% in 2011 as noted by Stephen Kinsella and the combined debt burden of the state, household and corporate sectors is almost five times GDP as noted by Peter Matthews.

In the words of a great TCD man, Oscar Wilde, Miss Prism tells Cecily to read her political economy in the absence of her tutor. “The chapter on the fall of the rouble you may omit. These monetary problems have their melodramatic side.”

Ireland’s economic policy unfortunately followed Miss Prism’s advice. We sleepwalked into the euro currency and the regulatory body played lots of golf with bankers through an unsustainable property boom.   Stephen Kinsella notes that we doubled the national debt in 2008 by bailing out the banks. Relative to GNP this was a gold medal in regulatory capture by world standards. Regulatory capture of governments by national airlines or sheltered sector professions pales into insignificance compared to the Irish bank capture of the exchequer.

Kinsella states on p.85 that “we don’t need  to default on our debt but we may need some further assistance from the EU/IMF.”   Default, austerity and restructuring of debt are all reviewed by the various authors in this fine volume.  Nobel prizewinner Joseph Stiglitz warns that “financial integration raises the overall risk of large negative shocks” and that “capital market integration could increase, instead of lower , the likelihood of a financial crisis in a given economy.” (p.40).  As we survey the lack of an exit mechanism from the euro, the large differences in the sizes of the Eurozone member states, the one size fits all interest rate, the lack of fiscal transfers and labour market mobility between the members, and the lax entry requirements to the currency we see the urgent need for a look again at the optimal design of international financial architecture. This requires from Brussels and Frankfurt the words of explorer Tom Crean.  “I heard something I never heard before in service- I made a mistake!”

“How to Survive on the Titanic- Ireland’s Relationship with Europe” is therefore an apt title for Megan Greene’s chapter 6 in  the book.  She states that bringing back the drachma would be a much faster way than austerity to revive the Greek economy.  She notes Ireland’s five austerity budgets in a row and high unemployment. She sees the fiscal compact as a surefire recipe for recession in the peripheral countries. A compact is defined in the Oxford English dictionary as a small vanity case.

My Fiscal Responsibility Bill was introduced in the Senate last December.  The competing versions from the Fiscal Council and the Department of Finance have yet to appear and are overdue.  Ireland urgently needs to reform its governance. Far too many of those who caused this crisis have been exempted from its cost. Far too many institutions remain unreformed.

Elaine Byrne and Huginn Porsteinsson point out that Iceland was lucky. Their banks at ten times GDP were impossible to save.  Irish banks at five times GDP were thought possible to save and we will take far longer to recover.  A totally ludicrous project  is thus shown to be a better protection for the citizens than a scarcely plausible one.   The decision to save Anglo Irish Bank becomes ever more difficult to understand or defend.  The continuing decision to defend a bank that has been shut is impossible to support.

Making private debt public is a naked transfer of wealth away from taxpayers as noted by Tony Philips. Karl Deeter echoes many fears about our monopolistic pillar bank strategy designed to eliminate competition.  These are just some points that caught my attention. In fact on every page of this book there are interesting and stimulating ideas. I commend it warmly And again congratulate all those involved in an excellent venture.

What if Ireland Defaults?

Well, if you want to know the answer to that question you will have to buy my new book, which contains a bunch of essays.

Contributors include:

  • Nobel Laureate Joseph Stiglitz
  • Constantin Gurdgiev, Megan Greene, Seamus Coffey and  Stephen Kinsella
  • Peter Mathews TD
  • Senator Sean Barrett
  • businessman and political activist Declan Ganley
  • politics lecturer and journalist Elaine Byrne
  • Sam Roberts, urban affairs correspondent for the New York Times
  • Huginn Thorsteinsson, philosopher and adviser to the Icelandic Minister of Economic Affairs and the Icelandic Minister of Fisheries and Agriculture
  • John Walsh, editor of Business & Finance
  • Peter Brown, director of the Irish Institute of Financial Trading
  • Karl Deeter, director of Irish Mortgage Brokers

Aimed at the general reader and published by Orpen Press it is available from all good bookstores and from Amazon.  An ebook/kindle version should be available by 6/April/12