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Archive for November 15th, 2010

Conspiracy 2: the bailout

A few weeks ago in a brave attempt to lighten the gloom, the Irish Times organised a competition around the twin themes of Halloween and the recession – come up with a movie title, tagline, cast list and censor’s warning to reflect our current circumstances. Alas my own entry didn’t win but I reproduce it here anyway:

Title: Conspiracy

Tagline: “Gentlemen we have a liquidity problem” The story of how a two hour meeting on Upper Merrion Street in September 2008 set in train the actions which would impoverish a nation not in a decade or even a government term but two years, though the legacy and significance of the meeting might last a thousand years.

Cast: Brian Lenihan as Reinhard Heydrich, David Doyle, Secretary General at the DoF as SS Maj.Gen. Heinrich Müller , Kevin Cardiff, Second Secretary at the DoF as Adolf Eichmann, Attorney General Paul Gallagher as Dr. Wilhelm Stuckart, BoI CEO, Brian Goggin as Dr. Roland Freisler, BoI Chairman, Richard Burrows as Dr. Alfred Meyer AIB CEO, Eugene Sheehy as Dr. Joseph Bühler, AIB Chairman, Dermot Gleeson as Undersecretary Martin Luther , Central Bank Governor, John Hurley as as Dr. Gerhard Klopfer, Financial Regulator chairman, Brian Patterson as as Dr. Wilhelm Kritzinger, Financial Regulator chief executive, Patrick Neary as as Dr. Georg Leibbrandt, Merrill Lynch adviser as SS Lt.Gen. Otto Hofmann, Rotschild adviser as SS.Col. Eberhard ‘Karl’ Schöngarth, John Gormley as Erich Neumann of the Four Year Plan

Censor’s warning: Any resemblance between the cast and nasty Nazis is for entertainment purposes and is co-incidental. After all Heydrich was shot in an ambush, Eichmann was abducted in Argentina, tried and hung in Israel. Stuckart was convicted of war crimes and served four years in prison. Friesler was killed in an air raid in Berlin.Hofmann was sentenced to 25 years in prison for war crimes. Meyer committed suicide. Liebbrandt served four years in prison. Buhler was executed for war crimes in Poland. Schongarth was executed by hanging for war crimes. Kritzinger publicly declared himself ashamed of the atrocities committed by the Nazi regime. No resemblance whatsoever.

What I was poking fun at was the summary manner in which Ireland in September 2008 was bounced into providing a guarantee to the banks’ liabilities, then worth €440bn – a guarantee that has effectively cost us €50bn+ today. It seemed to me that this meeting in September 2008 had some similarities with the meeting in the suburb of Wannsee in Berlin in 1941 where the Nazi’s Final Solution to destroy Jews was hammered out. To be clear I wasn’t suggesting that Brian Lenihan knew that the costs would turn out as they did – my personal opinion was that he thought the costs would be minimal especially compared to the damage that might have been wrecked on the economy if banks failed. Whether others around the table (and of course John Gormley was famously at home asleep with a dead mobile phone so his inclusion above was for comedy) had any inkling that the costs would be so high, I don’t know. But regardless, fast forward two years and we are again as a nation facing a dangerous crisis – the costs of the banking crisis are known to be €46bn according to latest DoF estimates, though some believe the costs might rise to €70bn+. That is not all – the State still has a dreadful structural deficit as a result of current spending being largely matched to a level of tax receipts that collapsed three years ago. Whilst we do have the funds to tide us over our day-to-day spending for six months we are likely to need assistance after that (and even if we liquidate the pension reserve we are still likely to need assistance in 2012).  The past weekend has seen a flurry of rumours about a bailout, the upshot of which is that we appear to be engaged in “technical” discussions about the operation of any potential IMF/EFSF (they’re likely to be a joint package) bailout but there has not been any formal request for a bailout. There are also rumours that Ireland is being beseeched to take a €80bn bailout.

Like September, 2008 these are momentous times. The participants at the weekend economics/comedy jamboree in Kilkenny felt that Ireland should default (at least in part) on its debt obligations. And those debt obligations include some €50bn of bank debt, which without that guarantee decided upon at that meeting in September 2008, would directly be the problem of bondholders and depositors over €100,000. A hurriedly enacted piece of legislation in 2008 saw bank debt become sovereign debt. Could another piece of legislation relinquish State commitments? Not as easy as that for sure because our banking system is still weak but it is a legitimate question I would argue.

Last week, there was a piece on here that examined EU Competition Commissioner Joaquin Almunia’s speech to the European Banking Federation. Of all the countries in Europe, he extracted the Irish and German banking problems. When I read the transcript of the speech I smiled because he seemed to me to be describing the ying and yang of the European crisis – the Irish borrowed like crazy cheap money from German banks. Because the German banks hadn’t a presence in Ireland, it was actually the Irish banks that borrowed from German banks through the issuance of bonds. And those Irish banks, AIB, Bank of Ireland, Anglo, EBS and Irish Nationwide Building Society lent those funds to property developers and others who now can’t repay the debts. So the Irish banking problem is also the German banking problem.

A bailout would mean we pay back 100% of the debts over time. A default means German bondholders don’t get repaid 100%. Not a great situation for Ireland which has never defaulted – mind you the citizenry have never before absorbed commercial debts in our State either. The position of Ireland in respect of bondholders has been ambiguous – on one hand the legal position is that senior bondholders are treated like depositors and repaid in full and on the other it seems we are open to having “amicable discussions” with the senior bondholders. To complicate matters it seems that Irish banks are in receipt of €130bn of lending from the ECB.

If the rumours over the weekend are correct then we need to be very careful before accepting a sovereign bailout. We can repudiate the bank debt through legislation but we can’t repudiate a sovereign bailout in the same way. I hope whatever decisions are taken now are not taken in another 2-hour meeting on Upper Merrion Street based on inaccurate information and that there is proper oversight and consensus on the terms of any bailout. One conspiracy would be damaging enough, a second might finish us off.

UPDATE: 15th November, 2010. Intriguingly our new-found friend, Commissioner for Economic and Monetary Affairs, Olli Rehn is now confirming that pressure is being brought to bear on Ireland to access an EU-led bailout, but according to Olli the pressure is not coming from the European Commission but from “another player”. Does this other player stand to attention before “Deutschland uber alles”? Is this other player trying to shore up the balance sheets of a whole host of German banks that lent heavily to Ireland during the mid 2000s? Would an Irish bailout mean these German banks were more likely to recover their lending to Ireland? It might be another country on the periphery of course that is bringing pressure on Ireland but I would have said it was ultimately German banks that have most to gain from any Irish bailout.

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