Olli Rehn, the EU Commissioner for Economic and Financial Affairs is a great man for traditional proverbs from his native Finland. Who can forget his “better not paint the devil to the wall unless you can wash it off from there” (meaning hyping up problems can make a situation worse than it actually is) and “salmon is such a noble fish that it is worth fishing even if you don’t finally catch one” (meaning the journey is as important as the destination). Mind you, we have our own rich stock of proverbs here in Ireland and there is one that might become quite apt in the coming days – “you might as well be hanged for stealing a sheep as a lamb” which means if you are going to face consequences for some transgression and the consequences are fixed (being executed by being hanged, for example), then you might as well maximise the value of the transgression (taking a meaty sheep rather than a puny lamb, for example)
In the context of any future bank recapitalisation the proverb could be interpreted to mean “if we are going to default, then we might as well default without putting any more money into the banks, rather than putting in another €10bn and then defaulting”
On a day when, shockingly, it has been announced by the Central Statistics Office that the unemployment rate was 14.7% at the end of December 2010 compared to 13.7% at the end of September 2010, it is perhaps equally shocking that unemployment was not addressed by a single party leader in the inaugural Leader’s Questions in the new Dail, this despite Fine Gael’s election motto “Let’s get Ireland working” The questions focussed instead on last week’s EU summit and the perception that Ireland failed to get a reduction in the interest rate charged on bailout funds because we refused to make concessions to our 12.5% corporate tax rate or to the basis on which the tax is levied. And it was during these exchanges that FG party leader and newly-inaugurated Taoiseach, Enda Kenny did say on several occasions that his government would not put any more money into the banks until the stress test results were known and considered, “beyond those funds already committed”. And he was careful to use those words “beyond those funds already committed” and he used them almost as a fixed suffix to his bold declaration that Ireland would not be putting another cent into the banks.
It is not exactly clear what An Taoiseach actually means by “beyond those funds already committed”. The deal with the EU/IMF anticipated €10bn being injected into the banks by the end of February 2011 unless (hee-hee) the banks were able to raise the funds themselves privately. Beyond that, the bailout deal makes up to €35bn available for recapitalising the banks including the €10bn that was to have been injected in February, 2011. And in fact that €10bn wasn’t injected in February 2011 because Minister Lenihan decided that he didn’t have a mandate with the impending general election and the putative Opposition parties said they wanted to see the results of the stress tests in March 2011 before making any commitments.
So what is going to happen if BlackRock’s stress tests show there to be an additional capital requirement in the four financial institutions – Allied Irish Banks (AIB), Bank of Ireland, the Educational Building Society (EBS) and Irish Life and Permanent – in the €25-35bn zone. The common view of a capital requirement in this zone is that it is unsustainable and would demand some degree of burden-sharing (that is, partial default on bank debts). But coming back to our sheep/lamb, why would we put anything further into the banks if the stress tests do show such elevated losses as now seem widely anticipated? Why would we even put €10bn into the banks without imposing some losses on bank creditors (commonly, bondholders).
NAMA Wine Lake 
“Under the terms of the Promissory Note 10% of the initial principal amount will be paid in March each year to the holder of the Note. In the case of Anglo Irish Bank, this amounts to €2.53 billion per annum, with the first such payment at the end of March 2011 from the Exchequer.”
– Minister for Finance Brian Lenihan, Thursday 20th January 2011 speaking in response to parliamentary question from Pearse Doherty TD.
I would suggest that money already pledged concerns the payment of the promissory note which will have to be done by the end of March.
Hmm, interesting John, isn’t the holder of the INBS and Anglo promissory notes the Central Bank of Ireland. So I’m sure the initial payment could theoretically be deferred. In practice though, what would that mean for the CBI and its relationship with the ECB? That’s difficult.
You may be correct that in theory it may be deferred but throughout the election campaign and as you say in today’s leaders questions, Enda has been at pains to qualify his “no more money” statements with “beyond what is already committed.”
The only money that is “committed” is the payment of promissory notes which has been accounted for in Budget 2011 estimates. No other money has been committed as you rightly identify.
The continuous repetition of this sentence in television and radio interviews by Kenny would suggest that he has been given a carefully worded speaking point from economic advisors in FG. I’m only speculating that this sentence refers to the payment of promissory notes.
I would expect that the promissory note for Anglo and INBS will be fulfilled on the due date as it is likely that the advice Fine Gael/Labour have received is that the notes must be honored on that date.
It is not plausible that FG will have found agreement on a different Anglo plan which would involve it being wound down by the end of the year and haircuts imposed on senior bondholders in a couple of weeks and therefore there would likely be outstanding issues if these promissory notes were not honored which could wrangle on for months. That is a position which is unlikely to be sustainable from ECB and EC side.
Here is a little Dickens-est to warm your heart on a cold Irish night. Kind of puts things in perspective in the world of high finance.
“High Court Judge Ms Justice Elizabeth Dunne yesterday placed a stay on a repossession order granted to Start Mortgages Limited after an elderly farmer from Galway asked for five years to sell his family farm, once valued at more than €1m.
High Court Judge Ms Justice Elizabeth Dunne yesterday placed a stay on a repossession order granted to Start Mortgages Limited after an elderly farmer from Galway asked for five years to sell his family farm, once valued at more than €1m.
The farmer, with a 29-year- old son who has a mental age of 9, is €21,500 in arrears on a €100,000 mortgage he took out on his house in 2007.
“I want to take all I have and leave him (his son) a good home, that’s my ambition,” he said.”
http://www.independent.ie/national-news/courts/woman-took-on-20pc-loan-rate-to-pay-tax-bill-and-exhusband-2579246.html
Thanks Jake, it reminds us that the “billions” and the “policies” and concepts like “sustainability” and “manageability” ultimately boil down to a human level. Up to now Ireland has had a very low foreclosure/repossession rate but I think that this is about to change and was signalled in the Central Bank of Ireland governor, Patrick Honohan yesterday when he said “We will seek to largely free the tests of any excessive expectations from Irish exceptionalism in loan-loss recoveries (over the years very few Irish residential mortgages have been foreclosed in downturns by comparison with the experience in the UK and US, for example: with the help of external consultants we are referencing experience in those countries – though not slavishly so – in the analysis that will lead us to choose new tougher capital levels for the banks sufficient to convince the markets. And less reliance will be made on extrapolation from recent experience.”
http://www.financialregulator.ie/press-area/speeches/Pages/Address%20by%20Patrick%20Honohan,%20Governor%20of%20the%20Central%20Bank%20of%20Ireland%20at%20the%20%20ICMBS,%20Geneva.aspx
Our “exceptionalism” has been 500 repossessions a year. In Nevada, a country with 3m people and 1m homes and a similar property bubble and economic crisis and recourse mortgages (like our own) they repossess over 100,000 a year. So I think the story you share above will become a common feature in our media in the months to come.
https://namawinelake.wordpress.com/2010/05/16/viva-las-vegas/
We are headed for the precipice. If we give up the 12.5% corporate income tax rate our industrial base will evaporate.
Europe gives us Hobson’s Choice.
Ireland is paying nearly six percent for its loan, while GDP has contracted over TWENTY percent.
Default (or whatever they will call it) is inevitable.
I’m not so sure about this 12.5% corporate tax rate that everybody says is essential.
What if all tax shelters across the EU were done away with (Ireland, Netherlands etc) and the tax rates for corporations were harmonised at the same rate in all member states? Surely that’s a level playing field and regions can then complete for corporations on other local factors… quality of workforce for example.
Or are the supporters of the 12.5% suggesting that the only reasons corporations come to Ireland is the tax rate.
In any case one politicians start drawing “lines in the sand” you know a U-turn is not far away.
It is time that we accepted the inevitable and dealt with the truth.
Some truths:
Portugal will accept a financial bailout within the next couple of months.
Greece and Ireland will default under some nice new term “restructuring, debt for equity… whatever. It’s a “rose by any other name.”
Historically:
Greece has defaulted or rescheduled its debt five times since 1829.
Spain has done the same 13 times since 1476.
Germany and France have both done it 8 times.
The U.K. has never done it since William the Conqueror invaded in 1066 (Let’s join with Sterling!).
Greece, has existed in a “perpetual state of default” since its independence having spent 50.6% of those years in default or rescheduling.
Russia is next highest, with 39.1% of years spent as a bad debtor after defaulting or rescheduling five times.
Hungary has defaulted or rescheduled seven times since gaining independence in 1918.
Concluding that countries like Ireland, Portugal or Greece will never default again because “this time is different due to the European Union” may prove a very short-lived truism.
So, it is not as though this has not happened before.
It is also true that bondholders are delighted to lend to countries post default/restructuring because they have a much better balance sheet. The “credibility” issue is a canard. Ireland is not a credible borrower now because the debt burden is obviously unsustainable.
The impediment is not the Ireland won’t be able to borrow post default. It is a question of how ugly the economy will get and how protracted the decision making process will be before the european politicians finally embrace the default/restructuring process.