The Irish mess « naked capitalism

Friday, July 23, 2010

The Irish mess

Just a reminder of one little corner of the toxic debt fiasco that has plenty of bite still left in it.

The Irish banks got in a big mess with duff RE loans. The government swapped discounted bad loans for government-issued bonds. A new agency, NAMA, monitors the duff loan portfolio. There are half a dozen Irish banks participating in the scheme:

AIB
Bank of Ireland
Anglo Irish Bank
Irish Nationwide
Irish Life & Permanent
EBS

Here’s the FT’s take from a while back. Applying only a 30% discount to these duff loans is generous, so the whole thing is the usual dump onto taxpayers. Here is some criticism from an earlier stage of the plan. The details have changed and firmed up but the outline is as discussed there.

There’s a bit more to those politically connected developers though. It turns out that loans to no more than ten or a dozen of these developers account for EUR 20Bn of the EUR70Bn face value of the debts exchanged in the scheme. Seemingly this has come out as NAMA identified the counterparties that crop up (in multiple loan books, on the different bank systems that NAMA now have to interface to) and – as part of the exercise of analyzing the loan concentrations – have discovered the interconnections between various companies. One can only guess at the banks’ credit control process; and how much they were currying political favour by making the loans. It looks like huge incompetence at best, or maybe just a race to the bottom, with a side order of utter corruption.

There are something under 2,000,000 Irish taxpayers. The extra national debt incurred (so far) equates to EUR25,000 per taxpayer. And EUR6,500 of that goes to repair damage inflicted by just a dozen well-placed spivs.

Then go for some fairly brutal austerity to sort out the new debt/GDP ratio (Irish unemployment was 13.5% the last time I looked). You will have some pretty discontented citizens, and the debt/GDP ratio will stay the same, or get worse, so you cut again.

The row has plenty of mileage left in it; likewise the loss recognition process (as well as that very friendly 30% haircut going into NAMA, the Irish banks have got CRE loans in UK and US which they haven’t marked down much yet; and Irish banks aren’t the only ones with Irish CRE exposure).

Updated: numbers now reflect ‘taxpaying’ rather than ‘of working age’; oops; thanks Mack. Another mess or two to come – so I hope the context will become more obvious.

38 Comments:

michel says:

July 23, 2010 at 3:40 am

Yes, the account of what has happened is spot on. Now, one interesting question for this forum is, what would the situation be on MMT if Ireland were to be running its own currency?

The basic facts would not have changed, would they? We would still have the loans, the developers would be bust, the banks would be going bust. The state would still have bailed them out. There would still be $15k per taxpayer of additional debt, on which there would be an obligation to pay interest and principal.

Exactly what would the Irish be able to do differently that they cannot do now, and why would it work?

attempter says:

July 23, 2010 at 4:07 am

It seems to me that MMT is nothing but an academic exercise if it takes the current political parameters as given.

For policy to be based upon it at all presupposes a general radical polical transformation. So I think MMT can be part of the mix of transformative ideas, but is doomed to impotence if its advocates see themselves as “reformers within the system.”
reslez says:

July 23, 2010 at 4:20 am

There would still be $15k per taxpayer of additional debt, on which there would be an obligation to pay interest and principal.

What? No. A sovereign government has no need to issue debt unless it chooses to in order to manage interest rates or meet private demand for sovereign debt. And the government always has the ability to pay interest and principal in its own currency. That’s what it means to be sovereign.

Ireland would be in a very different place now had it retained its own currency and followed the principles that logically follow. Its banks would still be a mess, but it wouldn’t be forced by the bond market into the faux austerity measures that have torpedoed its economy.
- John says:
  
  July 23, 2010 at 6:14 am
  
  A sovereign government with its own currency has no need to issue debt. A government using Euros doesn’t have its own printing press and has many fewer options in terms of monetary policy. Ireland’s stuck here.
- John says:
  
  July 23, 2010 at 6:23 am
  
  Sorry @reslez, I misread your comment. Please ignore previous.
Andrew Bissell says:

July 23, 2010 at 4:29 am

The bailout simply would have been funded by directly pole-axing savers with balances denominated in the sovereign currency.
/L says:

July 23, 2010 at 10:54 am

What it would have been with MMT is hard to say, I’ll guess MMT or any other monetary system is fool proof. But if Ireland didn’t been an euro country there is probably a good chance it wouldn’t have had interest rates suitable for Germany but instead had intrest rates suited for Ireland.

attempter says:

July 23, 2010 at 4:03 am

After all those years of fighting to get out from under the English thumb, this is the slavery to which they submit. Not even a military conqueror, but a handful of finance gangsters. How pathetic.

And so far the American people are being just as servile. Permanent Bailout, permanent war, permament 20%+ unemployment, incipient Second Great Depression, intensifying police state.

Up next: Gutting Social Security, and then the health racket mandate. Then we all starve and freeze to death incardboard boxes, because that’s evidently what we want, just like the Irish, Lativans, and others.

Only Iceland and Greece are showing some signs of fighting back.

Vinny says:

July 23, 2010 at 1:05 pm

It may not be a bad idea for the Irish to start learning German… Not that the Germans really care about retiring to a cold, wet, and sunless island, but they may soon arrive as slave-masters to proud Irish shores…

Vinny
Bev says:

July 24, 2010 at 11:11 am

Cops Charge Irish Government With Treason

http://www.opednews.com/articles/Cops-Charge-Irish-Governme-by-Gabriel-Donohoe-100722-896.html

For OpEdNews: Gabriel Donohoe – Writer

When a national police association accuses its government of what amounts to treason it is time to sit up and pay attention.

Michael O’Boyce, President of the Garda Representative Association (GRA), said at its annual conference in Limerick, at the end of April, 2010, that the Irish Government had been ‘corrupted’ and had been ‘bought’ by developers and bankers. (A garda is an Irish policeman, gardaí in the plural.)

Mr. O’Boyce, speaking on behalf of the country’s 11,000 gardaí, charged government ministers with sacrificing the country to protect ‘wealthy cronies’ who had bankrolled the leading government party, Fianna Fáil. Such criticism of a serving government by its police force is unprecedented in Irish history and extremely rare in any western democracy.

Smarting from recent government disparagement of the gardaí a rankled Mr. O’Boyce pointed to an aggravating Fianna Fáil gaffe. While the government referred to the gardaí as ‘self-serving, overpaid, underworked and dishonest people’, it at the same time praised the ‘entrepreneurial skill’ and ‘business acumen’ of failed banksters like Sean Fitzpatrick (Anglo Irish Bank) and Michael Fingleton (Irish Nationwide Building Society), two people who played a huge part in bringing the Irish economy to its knees.

Clearly infuriated by collapsing living standards and the abject state of the economy, Mr. O’Boyce intended to deliver his speech directly to the Minister of Justice, Dermot Ahern, who was scheduled to attend the annual conference of the GRA. However, Mr. Ahern was sent a copy of the speech in advance and hastily declined to attend.

Mr. O’Boyce would have castigated the Justice Minister directly by saying, “The Government of which you are a long-serving member has mismanaged the wealth of this country for more than a decade by allowing our assets to be plundered and robbed by bankers and speculators, and you are making generations of Irish workers pay the price for this treachery…

“…You did this because bankers and speculators have bought your party, and in return you have sacrificed the greater good and prosperity of the Irish nation for the benefit of the few – the few who have now taken their ill-gotten gains and secured them in tax havens around the world. Truly, a government of national sabotage.”

dearieme says:

July 23, 2010 at 4:23 am

Alternatively, its being Ireland, “It looks like utter corruption at best, or maybe just a race to the bottom, with a side order of huge incompetence.” My Irish grandpa’s words of wisdom were not wasted on me.

Tao Jonesing says:

July 23, 2010 at 4:34 am

Sigh.

I miss Yves.

Can’t wait until she’s back providing her cogent point-counterpoint commentary.

I’m sure the post that I’m commenting on is wonderful in the abstract, but that’s not true in comparison to what Yves manages to do. A little more context and source material would help bring things up to expectations.

Sorry.

Dan Duncan says:

July 23, 2010 at 8:37 am

Richard, for what it’s worth:

You’re doing a fine job. The posts have been neatly organized, to the point and generally interesting. I imagine that you actually have a life of your own, and that you have to carve out the extra time as a favor to both Yves and her audience. It is much appreciated.

The Tao Jonesing comment is passive-aggressive idiocy.
- Skippy says:
  
  July 23, 2010 at 8:46 am
  
  Every one has a life of their *own* dan, thats a gimmie, thanks for the lesson in life.
- Tao Jonesing says:
  
  July 23, 2010 at 1:49 pm
  
  “The Tao Jonesing comment is passive-aggressive idiocy.”
  
  Actually, it was mild but constructive criticism.
- Anonymous Jones says:
  
  July 23, 2010 at 2:33 pm
  
  Dan, for what it’s worth:
  
  That was one of the shortest comments you’ve ever left at this site; yet you still managed to misuse words! :)
  
  http://www.mayoclinic.com/health/passive-aggressive-behavior/AN01563
  
  The prank continues! Whoever you are, you are freaking *brilliant* in your satire of confused reactionary souls!
  - Anonymous Jones says:
    
    July 23, 2010 at 2:36 pm
    
    Sorry, I’m totally and completely off topic again! I meant to add that I don’t necessarily agree with Tao Jonesing and that I really appreciate all of Richard’s posts. I fell icky (agreeing with Dan again…shudders…).
  - Anonymous Jones says:
    
    July 23, 2010 at 2:40 pm
    
    Ach. “Feel” icky. :(

michel says:

July 23, 2010 at 4:40 am

reslez, could you be a bit more specific. The developers would still owe money they could not repay, so they would be defaulting on their loans. The banks would still be incurring large writedowns, which would impact their reserves, in some cases make them go bust, so shareholders and bank bondholders would lose their money, and depositors too. Unless the government stepped in and assumed the debt.

Now, could you explain exactly what the government would do, given it ran its own currency, and also say exactly what would happen next?

michel says:

July 23, 2010 at 4:43 am

In the present case, the government incurs obligations by effectively going into debt and using the money to buy into the banks. It then must service interest and principal of that debt.

So, we are being asked to believe that in some unexplained way, if you run your own currency, you do not incur debt? Or you do not have to service it?

I really do want to understand this, but am so far failing to grasp what the prescription consists of, in a particular case.

Mack says:

July 23, 2010 at 6:05 am

Richard –

There are less than 2 million Irish workers (it was 1.94 million this time _last_ year)

http://www.cso.ie/statistics/empandunempilo.htm

And income taxes are low or non-existent for the bulk of low paid workers.

http://www.ronanlyons.com/2009/04/27/are-irish-workers-undertaxed/

Richard Smith says:

July 23, 2010 at 7:06 am

Ulp – will fix.

alex says:

July 23, 2010 at 6:26 am

“Applying only a 30% discount to these duff loans is generous”

Not nearly as generous as the Fed’s 0% discount (*cough* Maiden Lane X *cough*).

“so the whole thing is the usual dump onto taxpayers”

Whereas the Fed can print money to buy trash so that everyone can pretend that it cost the taxpayers nothing.

“have discovered the interconnections between various companies … with a side order of utter corruption”

Like the Minister of Finance (or whatever they call it) being a former CEO of a big bailout recipient? Or, after a change of majority, the new PM’s chief of staff and chief economic adviser having made millions from cushy bank jobs?

At the (not very great) risk of American hubris, I’ll say the Irish have nothing to teach us about corruption.

aet says:

July 23, 2010 at 8:10 am

Why are not the “spivs” being named in public?
Why not warn the world that they are not creditworthy?
Name the people and companies that have screwed up.

dippy says:

July 23, 2010 at 6:57 am

What a strange millstone have we attached to our necks as a species…a planet ripe with fruit…we bicker over its price and whom benefits from it…strange.

RagingDebate says:

July 23, 2010 at 11:03 am

Strange, yet beautiful! You could chalk up the global calamity here and unfolding to advances in health and longer life. Evolution.

The desire to collaborate with one another and improve is a desire for centralization. Pushing growth to it’s limit and breaking becomes the next stage – decentralization. Breath in, breath out.

The management paradigm is going to change from pyramid shape to circular and we (if we get to survive the next decade or so) get to see it and build it. The most dangerous yet exciting time to be alive at the ending of an era and the start of a new one!

There will be other more patterns of centralization and decentralization centuries from now until death itself is a thing of the past. At that point, the need to hoard and conquer one another to do so will be unecessary.

The commentator here named Toby discusses the paradigm of Scarcity vs Abundancy. Scarcity or simply Supply Side Economics will eventually be going the way of the dodo.

RagingDebate says:

July 23, 2010 at 11:06 am

Richard. I really enjoy your posts! You are doing a fine job in Yves absence. You are a humble person as well as knowledgeable. My kind of people!

Vinny says:

July 23, 2010 at 1:08 pm

Richard,

I second RagingDebate’s comment above. You do a fine job in Yves’ absence. Keep up the good work.

Vinny

Ed Rector says:

July 23, 2010 at 1:39 pm

If Ireland had had its own currency Irish interest rates 5 to 10 years ago would have been higher. Therefore the cost of new mortgages during that period would have been higher, which means the amount of new mortgage lending would have been smaller, which means housing inflation would have been less and fewer new housing units would have been built. So the size of todays housing over-investment problem would be that much smaller.

So with a smaller problem and its own monetary policy Ireland could now lower its rates (which would devalue its currency vs. the Euro) to stimulate domestic demand and lower the price of its exports of good and services. And so it goes on and on – - – -.

Did everybody follow that ??

NOTaREALmerican says:

July 23, 2010 at 3:01 pm

Re: Did everybody follow that ??

Yeah, you’re not a team player! (j/k).
michel says:

July 24, 2010 at 3:38 am

Yes, I did follow that. The question was, what, if it ran its own currency, would or could Ireland do differently in the situation where its banks are going bust due to defaults on loans they have extended.

What Ireland has in fact done is: the government has taken over the banks for more than their market value, and thus incurred huge debts, to both their own citizens and to foreign investors. They have then raised taxes and reduced spending in order to generate surpluses to pay interest and principal on this debt.

One part of the reply is is that if they had been able to have higher interest rates a few years ago then they would not be here, which may be, though running your own currency is no guarantee that you will have interest rates appropriate to your economic situation, as any US reader post Greenspan should be painfully aware.

This part of the reply is therefore irrelevant. Ireland could be here after running its own currency, the question is, what could or would it then do, if it were here?

The answer seems to be, it would devalue and lower interest rates. “Ireland could now lower its rates (which would devalue its currency vs. the Euro)”.

This part of the answer does not address the problem. It could by devaluing default on the debt owed to foreign investors. It could default on that debt without running its own currency. The effect is the same. The argument is fallacious, running your own currency does not make anything different possible as far as this argument goes.

Competitive devaluatins were tried on a grand scale in the last century; they do not work. This was one reason why the Euro became a plausible solution for Europe. There is no reason to think that a continent whose countries indulge in them will come out of recession any faster than one with the Euro.

The real answer in Modern Monetary Theory to the question seems to be that in some way, Ireland could rescue its banks without incurring any government debt. It would then not have to generate government spending surpluses to service that debt, so it would carry on government spending at present levels.

Well, that would be wonderful. Leave aside the question of why that continued government spending is of any use to anyone. What one would like to hear is exactly what this way is. What exactly would the Irish have done with their bankrupt banks, and what exactly would the ramifications be? Inquiring minds want to know.

If you can’t answer this question clearly and simply, the MMT emperor has no clothes.
- attempter says:
  
  July 24, 2010 at 4:54 am
  
  Does “MMT” (hardly a monolith as far as the prescriptions with which it can concur, I gather) support “rescuing the banks”?
  
  It seems to me MMT could be part of the package of smashing the big banks completely. If the government directly issued greenbacks, who would need the Fed or Wall Street (or their Irish equivalents)?
  
  The only reason the Fed exists at all is to coordinate government actions for the benefit of Wall Street, while the only reason Wall Street exists is to seek its own benefit.
  
  MMT says neither needs to exist at all.
  
  (Of course, your question may stump a “reformist” MMTer.)

Bernard says:

July 24, 2010 at 1:25 am

so why does the irish taxpayer have to bailout the banks? i still don’t see what or why the public should bail out the banks. they are private, not public and not taxpayers owned or concerned. if those banks fail, so what. how does the private failure to lose money be a public concern. let the banks fail, have th government start a new one or encourage other banks,

but why not let the banks fail and the taxpayers keep their money?

michel says:

July 24, 2010 at 4:21 am

The bottom line about MMT is a bit like the bottom line about Keynesianism: they work perfectly in one particular set of circumstances. Unfortunately, these are not circumstances often found in the world as we know it.

In the case of MMT, it perfectly describes the situation of, and powers available to, a government of a country with a non-convertible currency and no foreign borrowing. It is, in consequence, totally self sufficient. If it ain’t made there, you cannot buy it.

Such a country, let us imagine, has one bank and one developer. The developer borrows from the bank to finance house building. There is a housing boom. Excessive credit is extended to buyers. The bank has a sudden rush of blood to the head. The buyers start defaulting, the developer defaults, the bank is about to go bust. The government assumes the banks loan portfolio and declares it sound again. The buyers have their debts wiped out. Life starts again. Probably with the government owned stock of housing having risen.

All this seems to be fine. There is no reason for the government to default, in fact, it is hard to see what this means in this situation. Default to who? It is also clear that the government does not need to sell bonds. It may want to operate government run savings banks, but it has no need to sell bonds to raise money.

There are some severe disadvantages to living in such a country. If it is the size of Ireland, it probably cannot manage to make all the electronic components it needs. It cannot attract foreign investment. It probably cannot even make steel. Over time, foreign currency assumes the role of hard currencies in the former Soviet Union, the two, local and hard, run in parallel, with a black market for exchange. Firms run two accounts, one in dollars, which they use to buy goods and which they sell in. The other in punts to pay the staff.

Gradually, the dollar takes over. People start demanding to be paid in dollars so they can shop in the foreign currency shops which spring up. Or, if these are made illegal, which the government is probably reduced to doing to keep its own currency afloat, the role of companies involved in export and import becomes limited and the economy falls back to subsistence agriculture, autarky and a rentier landlord class. In short, back to Ireland in 1870. People emigrate in large numbers. You build a wall to stop it. You have problems making the rifles and watchtowers for the guards however, and need to sell grain, possibly at the price of a little famine, in order to finance them.

Just as the Euro implied a loss of sovereignty and a degree of political integration, so having a totally non-convertible currency will enable the government to finance anything it wants whenever it wants, but it too will have political consequences, and as the Bible says, you last state, should you seriously embark on such a thing, will be worse than your first.

There are worse things than not being able to set your own interest rates and not being able to devalue the currency you no longer have, and non-convertibility, rigorously enforced, is one of them.

Ed Rector says:

July 24, 2010 at 7:48 am

” . . . .This was one reason why the Euro became a plausible solution for Europe.”????

The Euro has worked out as a very plausible solution for Germany and the Netherlands — both of whom run large trade surpluses vis-a-vis other EU countries. It hasn’t worked out quite so well with Ireland, Greece, Portugal, & Spain. To say nothing of the dire economic situation of the Baltic countries who have adopted severe deflationary policies just so they can join the Euro bloc.

Remember the goal of MMT and Keynesianism is to maximize the output of the REAL economy — not to improve the relative position of creditors and investors, who seem to be doing quite well these days protecting their own interests.

michel says:

July 24, 2010 at 1:41 pm

It is essential for a prescription to be useful that we know what exactly it prescribes. Keynesianism, we pretty much know, it calls for counter cyclical government spending, moving from surplus to deficit and back depending on where we are in the business cycle. This may be right or wrong, but it is at least clear.

MMT is apparently arguing that Ireland, were it in exactly the same situation of insolvent banks owing to imprudent loans to developers, but was running its own currency, could take some action which would rescue the banks without it having to obtain credit by selling government bonds, and without having to generate budgetary surpluses of tax receipts over government spending.

I am just asking, please tell us what this thing is they could do.

So far, we have been told that the reason they are there is because they were not running their own currency, which is silly, since countries running their own currency get into the exact same position, and its anyway irrelevant to the question, which is not how they got there, but what they can do in various circumstances having got there. We have also been told Ireland can lower interest rates and devalue, but there is no explanation how that would make the banks solvent again, or raise the capital they need to furnish them with to avoid them going bust.

So exactly what is it they can do, that their membership of the Euro will not let them do, that will be effective?

As to whether the Euro is good for everyone, is the dollar good for Maine and Texas? If it were so great for Europe to have all those different currencies, why would it also not be great for every US state to have its own currency? Then when, like California and Illinois, they run out of money, they could just implement the prescriptions of Modern Monetary Theory, if only someone would tell us what they are, and all would be well.

Right now it seems there is a serious obstacle to doing this, no-one seems to be able to say what it is that can or should be done. That must somewhat diminish the chances of anyone doing it.

yoganmahew says:

July 25, 2010 at 10:33 am

PS. The Permo (PTSB) is not participating in NAMA… yet!

yoganmahew says:

July 25, 2010 at 10:42 am

@Ed Rector
Ireland is a large net exporter to euro nations too…

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