“There’s always an alien battle cruiser
or a Korilian death ray…
or an intergalactic plague
about to wipe out life on this planet.”
Men in Black
This Thursday 21st July, the 165* men and women who comprise our main democratic organ, Dail Eireann, will take off for their summer holidays and return again eight weeks later on 14th September. Nothing unusual about that – last year they took off on 8th July and returned 12 weeks later on 29th September, and we now know that in August 2010 the distinct possibility of an IMF bailout was known in government circles. And the year before, 2009, they took off on 15th July and returned nine weeks later on 16th September, during the period of the bank guarantee, after the fiscal shock which saw our deficit needing €500m per week in borrowing, on the eve of the creation of NAMA. So the 165 men and women might say that there is ALWAYS the political equivalent threat of a Korilian death ray, but politicians are workers like anyone else and are entitled to time off, from what can be 24/7 jobs. And further, they might ask, is the present crisis in the EuroZone and major questions over domestic banking policy, bailouts and the likelihood of the most austere budget ever in December 2011 really good enough reasons to keep politicians away from the beach for eight weeks (there will be some work in committees during the period and there may be some constituency or extra-curricular work, but the statement broadly holds true)
Indeed there is another issue – many of the 165 men and women in the present Dail may not have much to contribute one way or the other, to dealing with current threats. After all, the decision-making cabinet comprises only 15 ministers, and within the Opposition, Fianna Fail hasn’t even appointed a finance spokesperson after the death of Brian Lenihan in June. Last night on RTE, Minister for Children, Frances Fitzgerald told us that a 2% interest rate reduction on the bailout was worth €1bn a year whereas Minister Noonan was telling us only a matter of weeks ago that a 1% reduction was only worth €148m. With economic literacy like that coming from the childrens minister last night, would it make any difference to the country if the entire Dail spent the next eight weeks at the beach?
Yes it would. Whilst Minister Fitzgerald mightn’t have the best grasp of the detail of the country’s financial crisis, she most certainly is a capable minister for childrens rights and she has a major policy workload, graphically illustrated with the publication of the Cloyne Report last week into clerical abuse of children in the diocese of Cloyne. The calls to tighten processes amongst social services, to provide greater protection to children are all very well and good – and indeed some extra protection might be provided by charities and greater efficiency amongst social workers – but the bottom line is that many initiatives will need funding. And when the Minister for Children asks for that funding, she is likely to be told the cupboard is bare because of cuts to the public sector needed to balance our deficit and pay for bank losses.
Economics is not the main discipline or concern of the majority of deputies in the Oireachtas. This was graphically illustrated during the debate on the Finance Bill in January 2011 – remember that was the Bill which was crucial to this country as it contained budget measures demanded by our bailout creditors. At the time, there were vociferous demands for a proper allocation of time to debate the Bill and not have it galloped through the Oireachtas; in the end the government reluctantly gave way and allowed a few hours of debate. Only to get contributions like this one from that great windbag, Mary O’Rourke (very nice woman personally and quite popular amongst her constituents even she lost her seat at the last general election). During the debate on the crucial Bill, Mary entertained us with stories about geriatric sex but managed to completely ignore the content of the Finance Bill itself. The present Dail has fewer Mary O’Rourkes, but all deputies, in government and Opposition will face a barrage of challenges later this year as austerity measures are revealed. And “I know what you did last summer” may well become their own personal horror films.
So what could the Dail usefully debate in July and August?
(1) The bank recapitalization. Minister Noonan has twice deferred the recapitalization of the banks, and those deferrals came after the former Minister for Finance, the late Brian Lenihan, deferred once. The current plan is to shovel some €20bn into the banks in July 2011. And last week, the Troika frequently referred to the July 2011 deadline. But shoveling €20bn into the banks now will not restore confidence, not whilst there is a firestorm raging through Europe’s economies. The stress tests conducted in March 2011 are redundant and sovereign bond exposure has grown considerably since March (and demonstrably, just compare present yields with those in March and the assumptions in the stress tests) whilst both commercial and residential property prices have since shown that even the adverse stress test scenarios in March 2011 were not adverse enough. There is no rush to recapitalize the banks in these circumstances, and remember the Troika won’t be back here again until October 2011 and the ECB has guaranteed its non-standard liquidity funding of European banks to October also, so why the rush?
(2) The calculations that it is better to comply with ECB wishes and repay bondholders in Irish banks rather than unilaterally burn said bondholders, are secret it seems. Governor of the Central Bank of Ireland, Patrick Honohan seems to be privy to the calculations but precious few others are. And yet, over the next few years we will repay €60bn+ to bondholders. And such payments will be funded in part by the State, or more precisely by you and me through higher taxes and cuts to services and social welfare. Don’t forget that austerity will, in addition, be needed to balance our budget which has practically nothing to do with the banks. But still, each deputy in the Dail should understand why Ireland has adopted the position it has with bondholders, and what the calculations are. Because each deputy will need look their constituents in the eye to explain why in May 2011 we repaid €200m of unsecured senior bondholders in the zombified Anglo Irish bank. And in November we will repay €700m, again to bondholders in a bank which is benefiting from €29bn of public money. And in September, we will repay €1.5bn to AIB bondholders, AIB being the “pillar bank” which is due to get €10bn from the state in coming weeks.
(3)The banking sector in Ireland. It is still not clear why this State needs two pillar banks and why it can’t manage with a single “obelisk” bank together with a competition oversight department in the Central Bank. For a detailed argument in favour of one bank, rather than two state banks, see here. With the Post Office, which according to reports this morning holds 10.3% of all deposits in the State, a credit union sector and local units of foreign banks, do we really need AIB and Bank of Ireland? Or rather, do we need shovel €10bn into AIB if we planned to run down or merge that bank with Bank of Ireland?
(4) Developments in the EuroZone. According to Deputy Shane Ross, there are now dark rumours that the Central Bank of Ireland is secretly printing a replacement for the euro, should there be a fissure in the EuroZone. There are similar rumours that Germany is contingency planning for a future outside the euro, with a return to the deutschemark. Rumours aside, it seems pretty much agreed that Greece’s debt of 172% of GDP, according to the IMF, must at some point be written down or defaulted upon. There are some who say Ireland’s debt is also unsustainable and must be restructured in some way, and possibly in a way in which there is some element of default. Portugal is likely to need a new bailout. As for Italy and Spain, well? I would not be surpised to see Spain’s debt downgraded this week by Moody’s. At Aa2, it looks like an island in the sky when you analyse the health of Spanish banks and the Spanish property market. On Thursday this week, the scheduled last day of sitting of the Dail, there is due to be a landmark meeting of EU leaders to thrash out a solution. Yet this solution will not be debated here afterwards in the Dail until at least the middle of September.
(5) Budget 2011 and beyond. Whether it’s €3.6bn of €4bn or €6bn (these estimates only tend to go in one direction), it seems likely that the December 2011 Budget will be the toughest budgets in the history of the state. After three austerity budgets that have taken unprecedented sums of money out of public spending or pay packets, we are to have another budget which may take a smaller additional sum, but remember the low-hanging fruit have already been picked; that is if you want to call pension levies, the universal social charge, reductions in tax thresholds and previous cuts to services “the low-hanging fruit”. In the next four years, we plan to eliminate the deficit entirely and we cannot rely on substantial economic growth or emigration to take a significant amount of the strain. So there will be cuts and there will be new taxes, and lots of both. That austerity should be prioritized and debated openly so that whatever measures are taken are owned by Irish society. And that debate shouldn’t be a few hours in the Dail in December. The changes coming will be massive and politicians should be debating measures now.
So are the threats this year any different to previous years? Would a shortening of the Summer Recess appreciably improve the prospects of this country and mean forthcoming austerity is better owned by Irish society? The view on here is “yes”, and no holds will be barred in the next two months in highlighting the democratic deficit, which will be placed at the door of An Taoiseach, in not being engaged during a period which is expected to be turbulent at best and chaotic at worst.
*The normal Dail complement is 166 members. Brian Lenihan’s death in June 2011 has left a vacancy in the Dublin West constituency, which has yet to be filled.
Would there be any point in the politicians hanging about the Dáil over the summer break ?
Last summer, there was plainly a break with tradition and civil servants at least were active in August. When it came to the “negotiations” on the “bailout”, that was a “technical matter” and the politicians didn’t go near them.
Let them eat icecream.
Aren’t we safe in the hands of the civil servants ?
@C, that being the case, why not take a longer or even permanent break? Whether or not there is going to be a full-blown economic fissure in Europe in July/August/September is debatable and in any event there could be an emergency recall. But the austerity budget is a fact and is known about now, as is the recapitalisation and continuing cost of the bank bailout.
A permanent but please unpaid for break!
“We have a new form of government, a new form of democracy, proving to the world that this crazy idea that you need full government with full powers may be just not true,” says Dave Sinardet, a professor at Antwerp University and the Free University of Brussels, with a heavy dose of irony.
http://www.bbc.co.uk/news/world-europe-13725277
A interesting scenario in deed, and apparently it is possible to be without a government for a longer time without a complete social breakdown, having said that I consider ireland without government in deed. They constitute EU/ECB/IMF compliance managers and further representing the interests of the European Peoples Party while debating the dress code.
Altkanzler Helmut Schmidt was unusually expressive when he stated last week that it is the Hedge Funds and Investment Bankers that – ‘Haben uns in die Scheisse geritten’- drove us down shit creek, and instead of the political class doing something about it, they were allowed to continue gambling and circumventing the moderate Basel III requirements already before they are enforced.
The disconnect of politicos with the people they are supposed to represent has reached a new level, and the indifference of the people as well.
Both, H. Schmidt and H. Kohl, are making surprisingly clear statements on Merkel’s political decisions, she appears to be immune against this public onslaught and is rather busy selling weapon systems in Saudi Arabia and now Africa, how convenient.
It is not only Ireland where ethic has been lost on purpose to nourish profit desires of vested interest groups with the strongest lobbies, the latter being the truly systemic problem in Europe.
Can we have a clear analysis on the threats/costs of not repaying the $60bn to bondholders,
- collapse of banks from ECB liquidity withdrawal?
- exit from the Euro?
– inflation spiral from devalued Punt
– collapse of over sea’s investment
– benefit to Ireland’s competitiveness
- requirement to remove the deficit overnight?
- future borrowing ability?
etc, ect, I would love a post that brings this altogether.
@Karl, me too, though this might be helpful
http://namawinelake.wordpress.com/2011/06/28/patrick-honohan%E2%80%99s-calculations-and-fermat%E2%80%99s-last-theorem-will-we-have-to-wait-350-years-to-understand-both/
When I referred to the Dail being ignorant of our economic choices this is one of the key areas I had in mind. I don’t think many in FG/Labour understand the calculations, and I’m pretty sure few of the Opposition do, mostly because they have not been provided with the calculations.
@Karl Deviah
1. Why would ECB withdraw liquidity? Are the council members on retainers from bondholders? Why is the ECB protecting these bondholders at the expense of taxpayers.
2. Exit from Euro. No this is not a logical consequence of not paying bondholders. Again ECB propoganda to protect bondholders.
3. No exit from Euro. Ergo no inflation spiral.
4. Collapse of overseas investment. Au contraire. More investment as burning bank bondholders makes the State finances more secure. Ergo more not less overseas investment.
5. See 4.
6. The deficit would have to be reduced anyway but over an 18 month period. The roll over of State funding may present a problem, but less of a problem than if bank bondholders are not burned.
7. The Future. This is all about the future. Ireland’s future which is currently being destroyed to pay back the bondholders of bust banks.
Your premise, taken from the ECB blackmail book, is wrong. The ECB have no mandate to collapse banks or withdraw liquidity because the State refuses to bail out bust banks. It is not in their mandate. It is sheer unadulterated blackmail. Blackmail at the behest of large wholesale bank and financial institutions.
I do hope the ECB has kept records of all calls, memos, meetings etc over the past four years. They will make very interesting reading some day. Hopefully in a court of law, that seeks answers for their unabashed, unashamed support for large bondholders at the expense of depositors, taxpayers and all other creditors.
The ECB is a rogue institution.
Why would the ECB continue to support the Irish system if we don’t do as we are told. Got to question why you honestly believe the ECB would continue given that we have written off some of their collateral and potentially opened the gate to writeoffs across the market.
I suppose the biggest problem is we don’t have a primary surplus – i.e. even ignoring national debt, and interest there on, we don’t have enough of receipts to pay general government spending. So… the first consequence of not paying the bondholders potentially would be the ECB/IMF extending further funds, and therefore some people don’t receive benefits/wages. (Even after the last two years of “austerity” we still spend €11 for each €10 we receive in – we been the Irish state). And the consequence would be more severe austerity and quicker. No waiting until 2014.
Exit from the Euro – possible – if we don’t play by their rules why would they tolerate us – and would potential be a positive for future growth – but given how much inflation and products we import as a country, would make everyone severely worse off than currently. Also, do you convert all assets and liabilities in Euros into a new punt – hugely negative to those who have saved and are not in debt (and this is actually a large number of people) – hugely positive to those who were reckless/unlucky and have overborrowed.
ECB been a rogue institution – we mightn’t like their mandate but it was set up to promote and sustain price stability – and aim to safeguard financial stability and promote European financial integration – they will argue that they are sticking to their mandate.
And they actually do have a mandate to withdraw support from rogue nations or banks to maintain their own capital and protect their investors – i.e. the states of Europe. (Not that comfortable with your choice of words of “blackmail” either).
And why do you put depositors in a different bracket to bondholders – both “lend money” under good faith to these institutions.
@KD
- collapse of banks from ECB liquidity withdrawal? (they can’t withdraw the money, it’s already spent)
- exit from the Euro? (yes)
– inflation spiral from devalued Punt (no, copy what Brazil did in 1994)
– collapse of over sea’s investment (no, unless we raise our corporate taxes and leave the EEC)
– benefit to Ireland’s competitiveness (yes, by being forced to slash the public sector and welfare the real economy will become more competitive)
- requirement to remove the deficit overnight? (can be done. Ireland’s public sector and public benefits are so bloated and exorbitant that it will be easy, by international standards)
- future borrowing ability? (it’s all about cash flow. If the tax take is more that our expenses, we’ll be able to borrow)
An equally interesting question would be – “Take a time machine back to mid 2008 and put yourself in Lenihan’s shoes, and knowing what you know now, what would you do?”
@ Frank
Leaving the euro & reverting to our own currency means we have the freedom to adopt different ways of running our banking & monetary systems.
At the heart of the Euro crisis (besides the fundamental issue of economic imbalances & any structure to manage those – greater fiscal union or whatever) is the debt mountain, both private, and following bank bail outs & recession, public also. The ECB game plan is to protect the wider Euro banking system (& beyond) from having further losses on bad gambling & derivative losses, potentially bankrupting, exposed. So more debt is being piled on to states that, in reality, have little hope of even managing the interest with severe downward spiral austerity applied at the same time, let alone repayment of principal.
The problem is debt. And at the heart of the debt problem is a monetary system that gives the banks the privilege of introducing all money into the economy as debt. You might consider for a moment what an incredible free lunch this is. But when you consider the sheer irresponsibilty of all the off balance sheet (& some on) derivate this, securitisation the other, ways of massively leveraging & creating even more debt, well, the mind boggles at the short term greed of this. They haven’t just grabbed the free lunch, they have gone for the entire restaurant & hotel as well. In insisting on repayment and ensuring a real threat of systemic collapse if not repaid, this is a massive burden on the only source of wealth creation – the real economy. The real Euro crisis derives from the uncertainty whether not just minnows like Ireland’s or Greece’s real economy can just about service the interest, but whether equally indebted large economies like Spain & Itlay can. In terms of both private & public debt. Both really matter. Whilst citizens are repaying, or refusing new debt, ‘demand’ suffers & so does growth.
Sure, the banks are prepared to take us all to the brink. But not primarily just to get repaid. They are protecting their system of privilege for creating new debt.
Governments of sovereign currencies have the right to create new money – FREE OF DEBT – themselves. Nor is there EVER any need to repay, or pay interest on, whatever deficit balance might pertain. Governments could spend (over taxation income) to stimulate growth & then tax back to prevent high inflation as maximum capacity (particularly in terms of low unemployment) is reached. So questions of public deficit or need to borrow become irrelevant.
(Please do not insult my intelligence by talking such fear ridden nonsense as ‘Weimar’ etc. – we have more than ample ability to manage such an economy properly & transparently in these times of computers & information technology.)
Over time, the cumulative double effect, of new money introduced ‘free’ & not as debt is profound. Real & greater wealth accumulates over a much broader section of society rather than banks & the super rich few.
A proposal has been put forward to the UK ICB (Independent Banking Commission) here:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
A ‘lay’ explanation video is here in two parts:
This is the kind of system we should be considering in our cost benefit analysis of continuing euro membership. Leaving is a no brainer in my view.
While you guys were squabbling you missed the starting pistol fired by Egan & Jones – Ireland will definitely default, 70% haircut (& all european banks are zombies, including UK’s definitely):
http://video.cnbc.com/gallery/?video=3000033600
“We’re looking for good management basically.”
@Joseph Ryan – So many times in our Ballyhea Says ‘No! to Bondholder Bailout’ I’ve been asked Karl’s (very legitimate) questions above. Will have to copy and paste those answers somewhere, they are more or less what I’ve been saying, though far more concise! What say you NWL, do you agree with the above analysis?
@Diarmuid, I think the ECB’s position is more sophisticated than just protecting big bondholders in France and Germany. However, I have been trying for some time to research the ECB’s position, so as to understand its concerns. It is plainly a sensitive subject when talking directly with the ECB and it tends to refer you to its statements on Ireland which are not very helpful in understanding why this society must bear 100% of the cost of repaying bondholders in private companies.
I think there’s a lot of merit in Karl’s questions and Joseph’s responses. And given we live in a republican democracy, perhaps it’s time for some political leaders to display leadership in the 21st information age and disclose the basis upon which the present course is judged better than alternatives.
By the way, I wholeheartedly recommend Diarmuid’s labour of love with the community in Ballyhea to provide up-to-date information on bonds in Irish banks so that society can track payments and compare the sums being spent in the banks with cuts to services and additional taxes.
http://www.facebook.com/pages/Bondwatch/136610376421120
@Diarmuid
Not being an economist, the cut and paste will have to at your own peril. But you are most welcome.
To the people who say ‘Don’t burn the bank bond holders’, how about ‘why burn the taxpayers’?
And keep up the protest. When the history of this episode is written, future generations will want know ‘whose side were you when the bondholders were being paid at the expense of the Irish people’.
The answer that we were all afeared of an institution that will no longer exist will not have a patriotic ring to it.
before answering kd’s question I think the following argument is valid…..
There comes a point when ‘how you get there’ is not important anymore, for example, heading toward the ground at 600 miles per hour, it does not matter if you fell out of a spaceship or if you are on-board a crashing plane.
Likewise, burning bondholders is a bit after the event.
For many, Ireland should be rebuilding, new alliances, new goals, new rules.
Instead they are arguing over the best way to hit the ground at 600 miles per hour.
Burn bondholders? why not burn the Dail as well, they are two sides of the same coin. Burn Eu membership documents while you’re at it, and breath a fresh new start as an small independent nation.
And I know we are all conditioned to fob off such radical ideas as ranting, while accepting the crap we hear from the Dail as ‘serious’. But what has the establishment done for us lately?
@Joseph Ryan
Excellent work. I would add the bond market vigilantes in there with the ECB. However, they are not very fond of blackmail, takes too long. They go straight for the jugular.
re headline:
“The EuroZone in crisis, the toughest Budget ever in December, a Dail mostly ignorant of the economic crisis – time to head off to the beach with the bucket and spade for eight weeks”
overheard from EK…….’for jaysus sake don’t mention buckets and spades or ye’ll have all the developers following us’
Boys may not make it to the beach before Ireland is gone. PIMCO wants to dump Ireland, Portugal and Greece and build a trillion, yes trillion, Euro firewall to save the “core”. On Fox news today. Sorry, could not find original in English.
http://www.eleconomista.es/economia/noticias/3241670/07/11/Pimco-Habria-que-permitir-el-default-de-Irlanda-y-Portugal-no-solo-el-de-Grecia.html
En anglais:
http://www.cnbc.com/id/43794479
He doesn’t mention what happens to euro membership.
All the talk of consequences, what really burns me (apols for word-choice) is this – almost everyone in this jurisdiction is suffering a sorry consequence of the past ten years of madness, some hit harder than others (those at the most vulnerable level badly affected, but we all got our share).
The bondholders too got caught up in the Irish madness (I would argue they helped to fuel it – without their too-easily accessible billions the banks wouldn’t have been in position to fund the developers etc. etc., but even that isn’t relevant here), invested heavily. They did so freely, eyes wide open, consenting adults.
Even in their own profit-hungry world, they understood the risks – dammit, even at the smallest level we’re all warned, ‘you’re investment may fall as well as rise’, right? So, why is it that they must now be paid that investment in full? And why must they be paid that investment, in full, by a third party which itself is already suffering from the fallout of that failed investment?
Cast all else aside, that is a wrong at the most fundamental level not just of economics, but of life itself. Surely we should all pay for our own mistakes, yes? Simple reasoning, yes, but to break down even the most complex problems you usually have to go back to the basics, the fundamentals. In this case, there’s right, there’s wrong – that decision to bail out the bondholders was nailed-to-the-wall wrong, regardless of the extra-curricular reasoning.
But perhaps that is the issue – we are not suffering the consequences – very few people are having their possessions repossessed, turfed out of their houses, and made go to debtors jail. OK last comment a little provocative, but the person on the street are not suffering the consequences.
The government still spends more than it receives in taxes (before even contemplating interest and debt repayment on the national debt, of which c.50% is banking crisis related)
So, if why should one constituent of irish life, those over leveraged be bailed out, and professional and personal investors in debt be punished. Bondholders, some who are savers in Ireland, who instead of borrowing and spending reckless, saved their money and invested it, now take the pain on behalf of everyone.
There is also criticism here of the ECB but unlike other Central Banks they have protected the savers in controlling inflation and not allowed their respective governments to print money and inflate their way out of the mire we are all in.
We should all pay for our mistakes – then lobby your TD to bloody hell stop borrowing more money. Perhaps the Republican/Tea Party movement in the US has a point (and although not successful in the UK, but was supported by 4 members of Treasury Select Committee, there is a movement across Europe for similar moves, note Germany limiting their deficit by law.
Regarding what exactly was going on last August, I’ve been intrigued by this exchange in the Dail at the tail end of the last government:
[Joan Burton] Why did the Canadians come at the end of the summer [2010]?
[Martin Mansergh] The Canadians came because the Canadian Minister is head of what is known as the [IMF] constituency. At ministerial and sub-ministerial level they visit occasionally to maintain good relations and discuss matters with us. It is part of keeping in touch with the constituency. I am sure they do the same vis-À-vis Caribbean countries. It would be wrong to see the purpose of the visit last August, which is somewhat of a holiday period in Canada as well as here, as in any way preparing for the agreement which came up at much shorter notice in the autumn. There are no resident IMF officials here but there are number of IMF officials currently in Dublin on a technical mission for a week to ten days.
Which I take to mean that even last summer, Official Ireland was on its holliers except for a few lads who had to stay around because those pesky Canadians with their non-busted banking system kept working through August.
Also, remember the firmness with which the Brians handled the furore over the upgraded loss estimates for Anglo in August last year? Neither do I.
@Frank, by the way, the source for saying that an IMF bailout was being talked about in government circles in August 2010 was the Vincent Browne show, on 7th July when Fianna Fail senator Thomas Byrne referred (at 26:00)
http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne&tv3_preview=&video=37685
Vincent Browne: Why was there such denial that there was an IMF/EU deal impending?
Thomas Byrne: Well I can’t answer that except none of this was any of our proudest moments, I don’t know how I can put it
VB: Well surely you asked somebody, what was going on
TB: I did and it was certainly put to me last August that this was a distinct possibility. before Christmas
The LBS account of August 2010 is also very interesting in that respect.
Incidentally, that Mansergh-Burton exchange has another interesting item in the same link (why I was looking for it in the 1st place) — Joan was indicating an interest in who Ireland’s alternate executive director appointment at the IMF would be. We’ve since reached into our skilled pool of banking supervisors for that slot, with not a word from Joan.
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