October 1, 2008

Lenihan's masterstroke has bought us time to sort out our own problems

Posted in Banks · 160 comments ·
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We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed they hardly deserve to be covered by the guarantee.

Finance Minister Brian Lenihan has made a wise choice. By coming up with a unique, Irish plan — guaranteeing all deposits — instead of importing a failed solution from abroad, he has instilled confidence in the Irish financial system.

Most importantly, Irish banks are now safe. This is the single most crucial upshot of yesterday’s move.

Political and financial reaction has been positive and, encouragingly for the challenges ahead, when everyone else around him was losing their heads the minister kept his.

The financial markets abroad have taken the news very positively. This is doubly impressive when you think of what is going on outside the country. Granted the markets will be jittery and unstable for some significant time to come.

However, by drawing a line in the sand and by indicating that the sovereign state will do its job and preserve the system, the minister has shown real leadership.

We now have an anchor and the stability banks needed to sort out their own houses. The whole point of this is to get credit and loans back into the real economy as quickly as possible.

Nor should the guarantee come for free. The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.

One way of looking at these events — when sellers are attacking the Irish system — is to compare it to a military attack.

Time is of the essence. If the defences are crumbling everywhere — as they have been in the UK, Netherlands, Belgium and the USA — it’s no use mounting the same defences as those which have been overwhelmed elsewhere.

You have to insulate your own system first by using tactics that no one else has deployed.

Near term, this government guarantee obliterates the sellers who do not have Ireland’s national interest at heart.

Further out, it also buys us time to sort out our problems. (I’d have paid good money to see the faces of hedge-fund managers in London yesterday morning when they suddenly became conscious that their strategy against Ireland was in tatters and they realised that they stood to lose the millions they gambled against the Irish system).

We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed that they hardly deserve to be covered by the guarantee, but the choice was between the system or bust.

The minister obviously thought that by guaranteeing some banks and not others — as many of his advisers argued — he would open up the prospects of the weaker banks undermining the stronger ones. He has put the system first and this can only be a good thing.

As this column has argued before, there is plenty of time for recrimination. By keeping the banks liquid, the private sector will solve the problem of writing down bad loans, working with debtors to get the best deal and, most importantly, by doing all this in a controlled, not panicked fashion. When people are panicking, they tend to make the wrong decisions.

The nub of the minister’s dilemma was how to do something revolutionary that was quick, decisive and, most importantly, simple.

If we look at what the rest of the world is doing to try to stabilise their banks, we see all sorts of convoluted plans which amount simply to a large game of pass the parcel.

Every time a weak bank is passed on to a not-so-weak bank, market confidence takes a hammering and we are back to square one. The guarantee eliminates all this nonsense.

Now, we have to plot the next phase. How do we keep credit flowing in to those parts of the real economy which are productive? How do we accelerate the process of cleaning up the banks’ balance sheets and in time, and how do we punish those who recklessly got us into the mess?

But yesterday was for action not ideology; it was for stability not recrimination; and, most crucially, it was a time for practicality not complexity.

Over the course of the next few days, we are likely to see capital inflows into the Irish banking system as investors elsewhere seek the sanctity of a government bank guarantee as opposed to the uncertainty of a bank deposit, when it is clear that the banks are operating on the hoof.

Longer term, we can expect foreign banks to move here, setting up offices in Ireland and creating a banking industry which will thrive. We have set the template. The upside greatly outweighs any possible downside. The system is the most important thing at this stage. A threat can now, with the right accompanying policies, be turned into an opportunity.

In time, Brian Lenihan’s move yesterday will be seen as a masterstroke and a practical blueprint for the new financial architecture which will emerge from this global crisis.


  1. Deco

    David – thank you. Modesty is another virtue !!!

    Ireland has to rein in the reckless of the banks. And put a cap on all bank salaries, pensions and bonuses. The taxpayer should not be subsidizing the yuppie ethic.

    Ireland has to next do something about the competitiveness of our economy. Because we are losing jobs and business in this area. And if this continues, there will not be buyers for all those empty residential units. Therefore the private sector needs to be assisted ASAP. It is urgent. Because (once again) the private sector will be the engine to get us fixed. And the Irish lifestyle will have to be curbed, and the lifestyle loans will have to get paid off.

    This also makes Irish government borrowing more expensive. Therefore the government should cut the state borrowing. The ECB’s commentary on the issue will be interesting.

    • Finbarr

      There is no proof yet that this will make borrowing more expensive for Ireland – The markets since the move have not shown any change in Ireland’s credit rating which suggests it wont increase our rates. The fact that this is done will mean that it never be needed. The French will do this next and then the EU will do something after seeing that.

      Fact is, as far as Ireland was concerned, a situation was never forseen where banks could have the latitude or Market to be so reckless with their behaviour. Its not the first bank bailout and part of the deal here should be that if a bank carries on so wreckless again it should be law their board of directors are fully answerable to the Central bank, who should be able to put their heads on the block. Regulation is not generally good for growth but it’s enivitable now. It will important to get this regulation balance absolutely correct.

      Dont they say the chinese word for ‘crisis’ is the same word for ‘opportunity’ ..or something like that.

      Well, we have taken this step, so we should sell the hell out of the upsides and innovation of this.

  2. Ger Kennedy

    David

    I agree about the modesty. Well done. Someone was reading your column.

    However this article eludes to the fact that you think Ireland is about to become some sort of banking nirvana like Switzerland. I dont agree. The whole of europe is probably going to have to do this (or something like) now too so we wont have that advantage for long I think.

    Furthermore I hope that our politicians don’t use this as some mechanism to bail out the builders/estate agents and make houses more expensive by pushing the banks to loan out wads of their newly found cash for overpiced shoeboxes. I dont think that this will happen but it is hard to teach an old dog new tricks. Its hard to get the property bug out of the Irish mind and a lot of FF’s builder buddies are hurting. However I think the government and bankers may have gotten enough of a scare on Monday last to make them think twice about this.

    Hopefully they now make moves to fix the economy and make Ireland a realistic place to live and work on a long term basis (besides the weather). I hope they do. I know they cant fix the weather but you never know. Maybe Ireland as a nation can develop some weather control technology and we can export to the rest of the world and make buckets of cash. Or maybe we could put a roof over the place and put all those unemployed builders to work! Certainly Ireland has plenty of motivation to fix the weather given the last two summers.

    Stay on their backs and don’t let them pull any more s__t. You have done a great job in the past 5 years of telling it like it was. It took some cajones. But you did it when many in the economist/builder/banker/estate agent/government classes tried to ridicule you.

    Keep up the good work.

    Ger

  3. Kevin

    Very interesting article, in that it elaborates on some on the economic nationalism David has espoused in the past. Note the ‘Uniquely Irish solutions’ and and desire to see the London hedge fund managers suffer for shorting Irish banks. This follows on from some of the views in the past about perhaps Ireland needing to step back or at least not jump at every commandment from Europe.

    Im making no comment, but its an interesting side to DMW’s views, he obviously has a strong nationalistic streak, which is unusual to see in a trained economist, (maybe its not, but I would have imagined given his training etc he would be a free market no borders survival of the fittest type person). Thats the core of capitalism isnt it? Open borders, competition.

    Again im making no comment, its just…interesting. One thing you can say about David, is that he certainly has his own view on things, which is highly valuable given the age old interests and cliques that seem to dominate Irish political thinking.

  4. Kevin

    ->Ger Kennedy,

    .. the rest of europe cant do it, their banking systems are too big. A bit like Irelands other piece of economic nationalism, the low tax rate. Other countries just cant do it, too much revenue would be lost. Good for us I guess. All credit toooooo being small.

  5. Woodsey

    David,

    Absolute rubbish!

    €400 billion is $580 billion and the US bailout is reputed to be €700 billion. But the US is a continent with an annual turnover in the region of $13,850 billion, 60 times more than this tiny island’s €160 billion. How do we actually back up a ‘guarantee’ of €400 billion?

    I would just like Brian Lenihan to try and understand that my part of the €400 billion ‘guarantee’ is already with the banks that I’m ‘guaranteeing’.

    Far from underpinning the Irish banking system and improving Ireland’s access to international funding, I think Brian Lenihan has merely drawn the attention of the world’s financial providers to Ireland being over-borrowed, overstretched and over here.

  6. Lorcan Roche Kelly

    David > We are not out of the woods by any stretch of the imagination.

    But at least we have found a path.

    The Bill is available to read now, it’s well worth a look.

    http://www.oireachtas.ie/viewdoc.asp?DocID=10023

  7. MK

    Hi David,

    > By coming up with a unique, Irish plan – guaranteeing all deposits –he has instilled confidence in the Irish financial system.

    Guaranteeing deposits of 400-500 billion is one thing, but the key aspect of this proposal (it is not yet enacted, it was a 1 page press release!) is that the LOANS the banks have received are guaranteed. Yes, it is perhaps unique and Irish as you point out, perhaps too much paddy-whackery, because like a badly written insurance policy, problems could come home to roost, very major ones. What it doesnt deal with and which is the underlying problem, are bad debts. It also doesnt solve the problem that banks have getting interbank money and on the now inflated LIBOR rates.

    > Most importantly, Irish banks are now safe.

    No, Irish Banks are NOT safe. All the Irish plan does is state who will pay for cleaning up a mess when a bank has problems (ie: it will be you and me, the taxpayer, our children when they pay tax and those taxpayers not born yet) should the worst come to the worst. It does NOTHING to change the underlying landscape of the banks problems. It may have changed some perception. It may allow the banks to get some more credit. But it wont stop people reneging on their loans and loans going bad, which is the underlying problem.

    > when everyone else around him was losing their heads the minister kept his.

    IF we have to, in the end, pay out say 10% of the 400-500 billion of deposits and a percentage of the loans the banks have (which are much more I’d imagine!), perhaps people in hindsight will be saying that the government who decided this DID lose their heads. The cost to Ireland and our economy could last for a generation or more as the taxpayers pay off what would be a hugely increased government debt.

    > upside outweighs downside

    Well, its a gamble as we dont know what the magnitude of the downside will be. It all depends on those loans and the ability of people to pay. Its an insurance policy. Like Cowen said, it will cost us nothing if we dont have to pay out on any policies. If we do have to pay for a lot of car crashes, it will be all downside.

    CREDIT = HEROIN
    I’d like to leave people with an analogy of what the credit hyper-binge has been about. Think of heroin as the currency. Banks are the drug dealers. They are supplying heroin to the masses. The world has binged on this credit heroin. We need it to get by. We are addicts. Like any addict, we need it to function and to live. We have got ourselves into such a state that we need more and more to function. The drug dealers are no longer dealing with each other due to shortage of supply. The central banks are ‘helping’ by providing their own heroin at increased levels which are unprecedented.

    So, what has the Irish Government done in this analogy? They have stated that any heroin drug deal and supply, whether an abuser stashes some in a bank, or whether a bank has borrowed some heroin from a major supplier, is that we will honour any deal, good or bad. The government will pay for the drug. The catch is that the estimated amount of heroin held in bank stashes is 400-500 billion and on the supply side the banks own probably a multiple of that. Our government itself already owes 40 billion of heroin itself (ie: national debt), is spending 40 billion of heroin itself this year (and only getting in 35 billion) and will have to borrow some heroin for itself. Its a guarantee that would affect the lives of many for decades to come if it is called upon. Of course, it does nothing for the vast swathes of heroin abusers who need the heroin to survive (those who have taken loans out).

    (figures are ballpark and may not be exact)

    MK

  8. MK

    typo:
    > the banks own probably a multiple of that

    the banks OWE probably a multiple of that

  9. Jerry

    Come on David, give yourself some credit here. The world and its dog knows you were the brains behind this, and for free too! Your most recent column told the minister what to do using words that a 4 year-old could understand, and he goes ahead and does it without even mentioning your name. I’m sure he’d claim it was just a coincidence, but the fact is you had a hand in this. Clap yourself on the back. Lenihan won’t.

  10. Furrylugs

    Come on MK. Jouney of a thousand miles etc. One small step for a small island.
    You’re probably right in that the short sell SAS will probe again to find another weakness but for now we’ve repelled the attack. And attack it was.
    One thing about the Brits is if the Realm is threatened, they unite like glue.
    We could do with a bit of unity like that.

    Now we need to see IBEC step up to the mark and make up for their regulatory failings over the past collective agreements. The unions et al did their bit whilst the business community were myopic in selling out the Nation. We need a cross business model setting up Ireland Inc to be unassailable(Unity between all the social partners). The vultures will seek easier pickings elsewhere.

    The bulk of the worlds liquidity is now Far Eastern so maybe now is an opportune time to build relationships there. That way we’re not entirely dependant on US inward investment alone. The principal being that the low cost base may be Far Eastern but the market is Europe. We could be a stepping stone for Eurasian raw materials being finished and sold from Ireland into the EU.

    Shure once we stabilise the economy and halt the thousands of one way tickets out of here, we could always have another Tribunal?
    What thinks thee?

  11. Furrylugs

    BTW David.
    Large earthenware pots are available from http://www.gurupots.com
    Congrats on a good shout.

  12. Kevin

    CREDIT = HEROIN

    What are you talking about? Can everyone stop the stupid simplistic metaphors to explain the crisis. I really dont need Money is like milk and the banks are the farmers and central bank is the co-op stupid metaphors to explain how an economy works. spare me please i cant take another one.

  13. Garry

    “Nor should the guarantee come for free. The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.”

    Now we need the follow through….. This is the area we are traditionally weak in….. but its critical that we start repairs ASAP. We need the state to start kicking people in meetings with the banks, if necessary doing their own audits, and seeing how legally to make senior executives personally obligated to fix this…. whatever it takes, making the banks robust enough that they don’t need us to guarantee their loans should be the first item on the agenda of every banks board meeting until its fixed.

    While we need the US, UK, EU to pull through, its good to see we are prepared to think for ourselves and go for it, we need to use every single advantage we have.

    We must have the self confidence and belief that we are as good if not better than anyone else at finding solutions. And sure if the rest of them copy some ideas from us, well sure what harm.

  14. Paul

    David McWilliams should get the nobel prize for economics. well done!
    Why you dont run for the Dail we could do with a TD like yourself!
    Lets hope now they implement your other plans and give passports to Irish Ex Pats.

  15. Kevin

    come on guys. gotta see if the guarantee works first. the way the markets are at the moment it would not surpise anyone who participates in it if they just ignored it. no bank is safe, anywhere.

  16. Tullaman

    Hi David,

    some clarification on a few points would be good.

    > hedge-fund managers … gambled against the Irish system

    - I thought shorting had been banned several weeks ago?

    - If this was a liquidity problem then why didn’t the banks just go the ecb? Apparently they will loan up to a certain percentage of the banks assets. Perhaps the ecb does not believe the valuations of houses and land on the Irish banks books? Is this really a solvency problem?

    - On the radio this morning the Irish Banks (the 6 covered by this I presume) were mentioned as having liabilites of 400bn and assets of 480bn. Given that the 480 figure surely involves unrealistically high valuations on land and other assets used to secure loans is that not a very slim margin of comfort for the tax payer?

    While the broad brush strokes might make for better news copy would you not consider a few more detailed articles for the web site?

  17. Furrylugs

    Index Value: 3,702.55
    Trade Time: 10:26AM
    Change: Up 151.92 (4.28%)
    Prev Close: 3,550.63
    Open: 3,543.88
    Day’s Range: 3,543.88 – 3,703.55
    52wk Range: 3,288.09 – 8,509.20

    So far so good???

  18. Malcolm McClure

    Lenihan is like the Half-sozzled Manager of the Ballybobeen branch of the EC Bank, who’s just been informed by a fly-boy crony that his business is bust and his million loan spent on futile trash.
    “Och, sure we’ll see you right, Paddy; the ECB has plenty more where that come from. Ballybobeen would be a poorer place without entrepreneurs like your gracious self.”

    H-s M knows that ECB won’t audit his accounts for months yet, so there’s a fair chance things will pick up in the meantime. Even if they don’t, all its other branches are in equally dire straits, so the bosses of ECB will have enough problems to deal with in its large branches to bother much about the odd million in Ballybobeen.

  19. Lorcan Roche Kelly

    Tullaman > I thought shorting had been banned several weeks ago?

    Shorting of financial shares is banned, but hedge funds can still profit from falling prices, it just requires a little more imagination.

    It is still perfectly legal to short ETFs based on the Irish financial sector, for example.

    But Hedge Funds are on the rack at the moment.

    An article in the today’s FT highlights their woes “according to figures from Hedge Fund Research, the industry data provider, the hedge fund market is on course for its worst year of performance since at least 1990, when its records began”

    I doubt there will be many sheding a tear if Hedge Funds are a casualty of the financial crisis.

  20. Ger

    “The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.”

    After all you have written do you actually believe this? Are you for real? Do you expect banking practices to change so radically?

    You are expecting the impossible, the politicians are in bed with the Bankers and so called financiers……..they are bailing out their buddies and using the taxpayers money, the very people the bankers, builders, property speculators and other ‘esteemed’ money men’ have been exploiting since time began.

    This government package gets the chestnuts out of the fire, but to expect a government who presided over this debacle to now reign in the banks is quite simply illogical.

    We are not as immune as the government and other spinsters would have us believe.

    Disgraceful mismanagement of this economy, no public transportation system worth speaking of, third world health service, total failure to regulate banks, privatisation of the education system (reintroduction of fees) and predatory lending by banks giving mortgages to people who couldn’t afford, economists and other talking heads speaking after the event where were they before this?

    Massive debts incurred by property developers and speculators, over dependence on multinationals/construction industry, giving our sovereignty to Brussels, selling off our national resources (oil and gas)……..it is quite simply disgraceful, short term solutions for long term problems.

    Overpaid politicians who CANNOT identify with average persons struggles, 200,000 to renovate Bertie Ahern’s new office, millions spent on tribunals, 1 million for a sweet shop in the Dail, €280,000 per annum for Cowen, €250,000 per annum for McAleese – this is sheer madness for a country of 4.5 million people. When will the Irish wakeup?

    A pigeon could have told you this economy was built on a house of cards……..but politiicians were falling over themselves with this Celtic tiger nonsense. Time has revealed all. We could be a world leader in IT, green energy, home grown industries, would the banks take a chance on entrepreneurs? We have become a dependant economy which is cruelly exposd by a few who wanted the quick buck. Let them all be exposed.

    • Garry

      Do you expect banking practices to change so radically?

      Why not? It takes a crisis to effect change and this is as big crisis. We have a once in a lifetime opportunity to get change, the window for forcing change will close very soon. Thats the logic of “The Shock Doctrine”, it would be nice to see it applied to some of the institutions who practiced that doctrine on countries whose finances got into trouble.

      The craic in only starting, the government will have to bring everyone along and they must realize if the public are to take hits in the budget; they have to be equally tough on the banks. Otherwise its the black economy and money under the mattress.

  21. This was a good short-term move and typical of our decision making. We need a very serious crisis to get policymakers’ attention.

    However, as the international recovery is likely to be gradual from 2010, there will be no early dawn for developers with big debts. Given that the likes of Sisks are tendering for the reduced number of projects: big and small – and ones that they would have never have considered a year ago – means that many developers cannot trade out of their problems. Fear of unemployment in the private sector will keep a damper on housing demand for some time.

    The 3-month Euribor rate is 5.291% today – so add the margin and it’s a lot of interest on multiples of €100 million.

    So the washout of the debts is still a huge overhang for the banks and the economy, because of its impact on lending.

    During the good times, we didn’t want to know that up to two-thirds of the shares of Irish banks were held by foreign residents/funds and as for hedge funds, we have thousands of people working in the sector – - a sector that will see falling Irish employment in coming years.

    Given the experience of Irish funds with domestic shares, it is likely that the weighting will be reduced in future as it would be prudent — putting more pressure on the banks at a time of slow growth.

    We are bound to suffer an impact from the contraction of the US financial sector, while I would be surprised that we can operate under the radar in Europe, as we did when we were “poor” Ireland.

    Besides our negative image from the Lisbon Treaty result, with recession pressures on the likes of Merkel and Sarkozy, they are not likely to turn a blind eye to Ireland getting business/employment at their expense. Growth in the UK will remain low also for at least some years and the same pressures will be on them.

    If Tuesday’s move was to herald a new approach to reform, wouldn’t it be a good thing but that would be wildly optimistic.

    Finally, the Government with the support of the enterprise agencies, has focused on marketing rather than policymaking over the past decade and in advance of Cowen’s visit to China later this month, Enterprise Ireland has been bragging about the 30% rise in exports to China and HK last year. I have asked EI to give their estimate of sales from Irish-owned companies as I guess that it is about 7%-8% of the total.

    I have been told that when the recent services strategy report was being worked on, there was a decision taken not to split the data on exports by foreign firms in Ireland who are responsible for most service exports (90% of merchandise and service exports) and small Irish firms that are involved in the sector.

    Cui bono – from the marketing spoof, one may ask – it certainly isn’t the Irish economy.

  22. dr

    Ballsy, Innovative but VERY risky.

    All the country’s chips are down in one bet.

    If it works then history will judge those involved accordingly.

    If it doesn’t work and 4m of us are given a 100k bill for our play then we’re looking at mass emigration on a scale not seen since the 1840′s.

  23. Stephen Kenny

    Although it’s a phrase that makes most right thinking people shudder, “This time it’s different” is appropriate in one way. The Republic doesn’t have it’s own currency. Were the US or UK to try this, the currency markets would respond with a huge raspberry, as it’s clearly making a promise that can only be kept by enormously inflating the currency.
    If Germany or France were to try it, it would probably damage the Euro, for the same reason.
    But the Republic? A few hundred billion Euros is neither here nor there to the currency. Future debt is tomorrows problem, the value of the country’s assets (as measured in it’s currency) is today’s.
    The ECU is a funny beast. After all this, one could see a lurch towards more centralised European financial systems. But, while the sun shines…… sort of….

  24. Nitram

    Given that the Government and taxpayer have saved the banks. do you thing the bank will do the right thing and stop protecting their developer mates?.

  25. But won’t this be shot down by the EU competition authority? Apparently one senior British banker has said, “If this is legal, then I’m a banana”

  26. christophe villa

    The problem of having an overvalued currency and a grossly inflated commercial and residential property sector still hasn’t been solved.What happens to Irish businesses if sterling depreciates by 10% against the euro?.Do I get a bail out as well?.The correct strategy-ditch the euro and set interest and exchange rates that suit Ireland.Pity it wasn;t done a decade ago !.

  27. Lorcan Roche Kelly

    James Corbet > But won’t this be shot down by the EU competition authority? Apparently one senior British banker has said, “If this is legal, then I’m a banana”

    The one thing that stands out from reading the bill for me is the amout of discretionary power it gives the minister.

    Such powers have proven unconstitutional in the past, and if they are not tightly constrained they will leave the bill open to legal challenge.

  28. Kieran Magennis

    Is there a real risk that money deposited in Ireland will become worth less in the real world as a result of this? e.g. will it accelerate inflation or drive down the value of the Euro?

  29. Skin

    The French are now considering a similar tatic to the Irish…if the trend continues then the rest of Europe could follow.
    In essence, the banking runs/collapses/bail-outs will come to an end, but the monetary system will still be paralysed by the underlining problem – bad debt.
    Ultimately, when the government gets its teeth into these banks via the proposed deposit guarantee what should happen is wholesale writing down of bad debt and a car boot sale of property. If the rest of the EU follows, higher interest rates are on the cards (how high is anybodys guess).
    Expect a lenghty period of deflation and high unemployment and higher taxes.

    The only indicator of real recovery will be the fortunes of the Irish soccer team!!…..Through FDI in the form of Jack Charlton in 1986 (not forgetting of course Gordon Mackays goal for Scotland versus Bulgaria) Ireland went through a period of unprecedented international soccer success which peaked in US 94. The economy subsequently followed a similar pattern.
    Through the McCarthy years there was some limited success but it was only papering over the cracks – the Roy Keane episode exposed the underlining weaknesses of the Irish set-up (the economy is now mirroring this). The endgame of the Irish soccer success came through the shambolic Staunton era (this is what is to come).

    Only the fortunes of the Trappatoni era will indicate what the future holds for the economy.

  30. christophe villa > The correct strategy-ditch the euro and set interest and exchange rates that suit Ireland.Pity it wasn;t done a decade ago !

    You seem to be an adherent of the Michael Foot school of economics.

    Have you heard of Iceland – another European open economy?

    The benchmark interest rate is 15.5% and inflation is 14% because of the dive in the currency.

    Ireland is more dependent on foreign direct investment than any other developed country. So exiting the euro would be the equivalent of a national suicide note.

    • christophe villa

      No , it is called the Alan Walters school of economics.You can’t buck the market.Iceland won’ t have an unemployment rate in double digits (unlike Ireland).David suggested dropping the euro in his column a few weeks ago.Neithe of us wear a duffle coat!.

  31. P M

    There was an argument Tuesday night on Prime time between commentators on the amount of bad debt on the Banks books. The pessimistic commentator stated that it was very large. The optimistic one that it was around 5bn euro.

    Richard Bruton on Morning Ireland this morning reported that the banks had 80bn euro of loans in intensive care, thereby rubbishing the optimist on Prime time.

    In addition if the government guarantee does not extend to an overseas bank then it effectively rules out any non irish institution buying any of the 6 banks for the 2 year period. They can neither buy them (because if they did so the first thing that the Irish depositors would do is to remove their deposits and put them into one of the other five 100% guaranteed banks) nor bail them out.

    Whats to stop any of the banks with the 80bn in intensive care turning off the life support system and turning to the Irish taxpayer to foot the bill.

    And all of this is being done in 2 days without consulting the Irish Tax Payer, whatever happened to act in haste repent at leisure…etc

  32. Philip

    Timing is key here and a good sense of open and transparent ethics.

    Reading the history books around the depression is actually very scary. I think people need to understand very clearly what is meant by a political collapse and economic collapse. This is just not a case of people loosing jobs and having to live on bread and water for a few months while they try find another job. This is dangerous territory where there is institutional collapse. No police, health or educational systems. So conceiving of economic collapse is just not an option.

    I think David is right – Lenihan has made a sound move. His next moves are crucial. Private enterprise needs to be rolling again and my fear is that the “closed club effect” could hamper things. Lenihan now has to make some enemies. He has to put the squeeze on his friends in the legal, banking and construction sectors. These guys need to know that all they will loose is money and some reputation (which they recover again in the future) – not their lives and that of their families etc. The alternative of looking after Joe Builder is just not to be contemplated. Just look at Zimababwe – I hope none of these guys are thinking they can hole up in some richman’s compound while the “nobodys” grin and bear it?

    We should wish our civil service and Lenihan the best of luck in tackling the next parts of this exercise smartly and fairly.

  33. Fergus

    Well fair play to you David, the highest paid prime minister, minister for finance and central banker in Europe have taken your advice. Not a bit of gratitude from them, of course, but if things don’t work out and the poker bluff fails, they’ll be sure to say twas your idea, guv.

    I can understand the rationale behind this Bill, and I would prefer Brian Lenihan anyday to his two predecessors at Finance, but I can’t say I’m happy with it. I find it mentally impossible to admit that it was done for the benefit of the general economy and society, when it was done behind closed doors between the banks and the de facto representatives of the builders, ie the Government. I feel they always act in their own interest, and they have form in this. The people might finally wake up and have something to say about all this, as they did in the US on Monday. I just can’t get my head around a few points made by senior politicians in the last 36 hours.

    One TD asks: The Government is guaranteeing €400 billion. What will it charge the banks for this insurance policy? The Bill does not tell us what the banks will pay for this facility. The rate in credit default swaps is approximately 2%. This means the banks are getting an insurance policy worth €8 billion for two years.
    (Fergus asks: Are the banks paying €8 billion for this massive underwrite? Of Course not. How much are they paying? We are not told. Why? Because this country is institutionally corrupt IMHO.)

    The same TD asks: What is to stop the banks that are covered by this guarantee from poaching deposits from those that are not covered and lending them on to make enormous profits? It appears to us that there is no attempt to limit the competitive damage to other banks not covered by the scheme.
    (Many on this forum have pointed out that this is probably in flagrant breach of EU competition law, while section 7 of the Bill gives Lenihan the power to completely ignore the Competition Authority, the powers abrogated by him are probably unconstitutional, and he a shaggin’ senior counsel!, and I heard on Newstalk this morning anecdotal evidence which suggests that millions are being withdrawn from Ulster Bank and are being deposited in the guaranteed banks. Unbelievable that these reckless madmen are now being rewarded, and more prudent banks are losing deposits!)

    Another TD asked whether we are seeking to address a liquidity crisis or a solvency crisis. Is it a liquidity crisis or a capitalisation crisis?
    (And this is THE question: we are told that nobody is lending to Irish banks because there is a liquidity problem, ie a shortage of cash. Yet the truth appears to be that no international bank will lend to our banks because they know damn well that Irish banks’ loan books are stuffed with bad debt. The taxpayer has now guaranteed the solvency of the banks, so the risk takers have been shielded from the consequences of their actions, and it has been shifted on to us. Again, this is unbelievable and logic has been stood on its head.)

    The Tanaiste this morning: The assets of the banks exceed the guarantee.
    (And this is the poker bluff. The world is expected to believe this. I’m sorry, but I don’t.)

    Finally, that clown Marc Coleman was saying on Newstalk that limitations on executives’ pay was a vote catcher that would only discourage the most talented from running the banks. The most talkented? Are you referring to Michael All First Buckley? You’d think with worldwide nationalisations, taxpayer funded bailouts and guarantees, the right would be in a humiliating retreat, but not a bit of it. Have they no shame? And have we no anger?

  34. Kevin

    Comment by Philip, October 1st, 2008 at 2:45 pm

    seriously what world are you living in? its not the 1930s. Nazis are not going to take over the EU. the world has moved on in the last 80 years!

  35. Jan

    I think this is a great move. However nobody has asked the questions about how was this allowed to happen. We have the regulations but they appear to not have been applied correctly if at all.

    From the Irish Financial Regulators report from 2007 comes the following “Total remuneration paid to the Chief Executive for service during the year ended 31 December 2007 was €260,857.”

    €260,000 of our money and nobody has asked questions of the regulator’s role. I have not heard a peep. Apart from that, is it not the case that it was ordinary people who borrowed more than they could afford. It was ordinary people who lied on their morgage applications……..There seems to be a real “pass the book” mentality in Ireland. And I think heads should roll whether it be in the banks, the govt, the civil service or wherever the fault lies.

  36. Ger Kennedy

    Jan

    Good point. Where was the regulator?

    Liar loans as they call them were a big part of this mess everywhere. In the US they were officially called “no doc” loans but they became known as “liar loans” because people just made up how much money they made so that they could “afford” the repayments. This was all done with the “realization” that the property would be worth much more in a few months when you sold it and therefore there was no problem as long as you could make the payments for a few months. This was all done with the full knowledge of the mortgage brokers and bankers with a nudge and a wink.

    In the past they had a name for this. It was called loan fraud. In Ireland it was probably more rampant than anywhere else because of the wild profits available from property.

    The regulators turned a bline eye to it everywhere because everyone was having a party.

    Hopefully this mess puts banking back on the straight and narrow and banks start lending to people based on sound econimic fundamentals for good business ideas rather than smoke and mirrors. However human nature being what it is….

    Ger

  37. Deco

    Malcolm McClure – you are more correct than you may realize concerning the half sozzled analogy and certain members of the cabinet. The reality is quite alarming. But this is Ireland, so you will never see the truth on a newspaper in the morning-the law on ‘right of good name’ is biased in favour of the coverup artist.

    Irish people and banks have had a rather one-sided relationship. The banker has been telling lies, abusing trust and doing whatever he likes. Meanwhile the citizeness is at home keeping the household in good order, whilst being abused on a wholescale manner. The litany of bank scandals seems to go completely unnoticed. I am concerned now because we have a three way relationship, and the banks are required to cough up documentation at the various tribunals. It is not healthy for democracy to have bankers and politicians intertwined in such a manner. The Irish bankers have been highly arrogant, highly irresponsible, and extremely reckless. The better behaved banks (NIB-Danske, ACC-Rabo, Credit Unions) are now watching from the sidelines. They must surely feel greatly annoyed.

    What concerns me are the political ramifications. I am very sceptical about large parts of the provincial Ireland, and working class Dublin being eager to pay more tax/live with ramshackle services while the State subsidizes overpaid bankers partying in the corporate suites of unwanted sports stadia, laughing at the plebs in the rain beneath. If this does not work you can expect large sections of the population will go into silent rebellion. This would make the Roy Keane affair look like a picnic. The element that sided with Keane, voted against EU centralization, and generally likes to ignore central government of any form will not accept the bill. There will be massive defections west of the Shannon, out of Fianna Fail. Working class Dublin, and especially Cork will see riots. The moral outrage. I don’t think the government have any idea what will happen should this fail. Large parts of the Irish electorate regard banks as legalized swindlers. This could even be the legislation that could make the Labour Party, and finish Fianna Fail forever.

    I recommend that the Department of Finance -
    i) Establishes a cap on the salaries of all bank managers, and employees.
    ii) Stops all dividend payouts.
    iii) Stops property loans until the builders return what they owe.
    iv) Buts an end to all the prestige activity in banks including company cars, company holidays, binge weekends, air miles gathering, sports sponsorship etc.. and all that other wasteful nonsense.
    v) No more bonuses. No more payrises within the banks. No new branches. And no new nepotism, hiring in the banks. No severance packages to get rid of useless bank directors !!! No pension increases. All bank share options cancelled.
    vi) the government has the right to sack anybody in the banks who is witholding information concerning the financial condition of the bank, it’s assets, it’s creditors.
    vii) Full transparency to the public.
    viii) heavy charges on any bank that does not clean up it’s liberal lending practices.
    ix) cuts down on all the nonsense costs in the bank(hospitality, managers having booze weekends etc..), throwing money at golf clubs, rugby clubs, the GAA etc..This is now the taxpayers money !!! And the state should know the moral outrage of the taxpayer in regard to the bankers.

    I also think that the Government have overstepped their mark. Full gauranteeing of the Deposits makes good sense. But the boldness of the move suggests that the government thinks that even the deposits are insufficient to keep the banks going.

    What happens if one of those banks does not have it’s house in order in 24 months time ??? I mean I doubt that the middle two of the six will be sorted out in

    I am getting increasing sceptical of the government on this area of policy. It seems that they are overly concerned with the property market, and missing the issue of competitiveness in the general economy. Also let us not forget that AIB and BOI are majority owned by Americans plus British investors. We owe these people nothing. They have made massive profits in previous years, and used the Irish consumer and the duopoly as a means of extracting excessive profits. They are Irish in their level of honesty, their tendency to go overboard in events, their liberal attitude to money, and their their involvement in prestige sponsorship. And they are renewing a well established tradition when things go wrong of going back to the Irish taxpayer to pay the bill for all their the bad habits.

  38. roc

    Bravo, Davo… Now, it is very important to have faith in people. I believe this faith perpetuates itself… But, can we really convince the right people to act in the ‘national interest’? They must. Yet, it seems to me that institutionalisation often runs so deep… Are these people capable of acting in the national interest? I believe they can…

  39. Colin

    Deco,

    I’m with you 100% on that. Those bankers need the smugness beaten out of them – not in the literal sense of course.

  40. Jaysus its busy in here! Forget this game of smoke and mirrors…moving the furniture on the titanic etc.etc. , get ur hands on some gold and diamonds……things that mankind valued before paper, plastic and a good credit rep (what ever that constitutes) coz when ur out in the streets fighting with ur neighbour for the last loaf of bread in the shop these are the commodities that will help u out if u aint a scrapper. Just kidding……….I hope

    Well done David….one of the enlightened

  41. shtove

    This will succeed only if Germany says so, and then we have to pray the euro maintains stability.

    Otherwise Ireland is insolvent and headed for bankruptcy.

    The problem is not liquidity. It’s not about finding time to get over a hump.

    The problem is insolvency amongst the banks. Despite all the “interventions” from central banks and treasuries, despite all the cheesy metaphors from business journalists, the market will work relentlessly to solve that problem.

  42. Philip

    Kevin, clearly you’ve not seen much of the world and how events can change rapidly for the worst. I was in Zimbabwe shortly after it transitioned from Rhodesia. It was modern, well run and full of all the creature conforts typical of a 1st world 1980s modern economy. Look at it now.

    People are only a few salary cheques from poverty and this applies to the majority of people – except for the well off few.

    Ireland’s economic fabric is very fragile as has been well pointed out. We simply cannot afford mistakes

  43. janey

    Very clever move from the Irish Government – again this proves that we are slick and as usual, we Irish will always stand up for each other in times of crisis.

    What do people think about the cheek of G Brown to ask us to comply with EU rules? They’re jealous that they cannot act due to their sheer size. Also they are peeved that their UK companies are moving to Ireland for tax reasons. The UK are complete Euro sceptics – the cheek of it! Why cant they just admit that the Paddys are just smarter than they are!

  44. AndrewGMooney

    I await (with interest) the reaction to this ‘daring’ Irish initiative over the next few days. Already there are, quite rightly, discordant noises from the EU competition authorities (and British Bankers) as to the legality of this move – never mind its’ probity and ethics.

    Assuming there is a flight of capital from other European countries to Irish Banks: Then the governments of other countries will have no option but to match the Irish move.

    A zero sum game may thus unfold which will do nothing to address the underlying systemic crises in liquidity and solvency. No doubt retail depositors will be able to choose between the ‘cast-iron guarantees’ of the governments of Ireland, France, Italy and Greece within the next few weeks.

    What if Germany decides to flex it’s ‘sovereign debt guarantee’ muscles?

    All that will happen is a further erosion in citizen’s confidence in the ability of European governments to respond collectively: Appropriately and effectively.

    It would certainly be helpful if Euro-zone counties adopted a ‘Common Fiscal Policy’ in tandem with their experimental ‘Common Currency‘. Actually, it might have been a good idea to organise that prior to printing all those pretty new notes. But that’s hindsight for you.

    As the ante is upped exponentially, and prematurely, from the issue of solvency amongst private banking institutions to a Governmental ‘beggar-they-neighbour‘ fight for the ‘security’ of retail deposits: One can begin to see the credibility and coherence of the entire ‘European Common Market Project’ being called into question by ‘sceptical voices‘.

    It’s not quite cricket, is it?

    Given the Irish dilemmas over The Lisbon Treaty: It’s not immediately apparent how this unilateral act will do anything other than raise serious questions as to the motives and aspirations of the current Irish Government.

    It was bad enough when an individual bank was ‘ring-fenced’ for it’s indiscriminate delinquency (Northern Crock), but it’s quite another matter to erect an indiscriminate fire-wall to any and all market participants purely on the basis of some irrelevant supposed ‘national‘ identity.

    You can’t have a ‘Common Market’ without having a common and united procedural framework to address systemic crises. Jumping the gun and ‘going for broke’ (possibly literally) may precipitate a situation entirely opposite to what its’ proponents intend.

    Ireland: Nil points.

    Kindly yours

    ‘Mad Paddy from Brum’

    • Garry

      Far from being ring fenced, Northern Rock was getting deposits from Irish customers up to very recently, as it was seen as safest, i.e. backed by the British Government. and it’s still an option…. At the time, I was surprised the EU allowed Britain to rescue the bank, after all I cant see them allowing a rescue of Alitalia, which is another basket case but in a different industry… But I guess politics prevailed and the rescue went ahead…. and the issues of a rescued company then using a state guarantee to compete for deposits were ignored….

      There is a common currency, and we do have a Common Fiscal Policy, thats why our Common Currency is successful; maybe some still think of it as experimental. At this stage, I enjoy winding up Londoners by calling the pound ‘local currency’, I know I shouldn’t but sure aren’t we all Europeans now (oops there I go again). Windups aside, it isn’t in Ireland’s interest to see the UK situation deteriorate any more.

      Interesting view from your side of the sea, there is a fear the strategy will be too successful and may cause problems elsewhere. Just because we have done something doesn’t mean an EU/Euro wide approach cant be done, and maybe our initiative (or stunt depending on your viewpoint) might provide some clues as to what might work or what might fail. Whether our action or indeed any joint action is ethical is very questionable.

      On Lisbon, the problem we have is the anti Lisbon brigade are completely dishonest about what would be happening if we were not in the Euro or the EU. And also they object to stuff thats not in the Lisbon treaty.

      Our problems are not because we joined the euro but our attempt at a solution is only possible because of our Euro membership. You wont hear that from the media.

      • Ruairi

        Garry, well done a bit of jokey good humour condescension is no harm for our Limey brethren!!

        However >>Our problems are not because we joined the euro but our attempt at a solution is only possible because of our Euro membership. You wont hear that from the media.<<

        This is hardly true Garry. If we weren’t in the Euro, our borrowing and excesses would have been nipped in the bud a long time ago by a more watchful Central Bank, as a result of the ?1992? devaluation crisis and other such Irish nightmares. So we would have pulled the safety cord.

        But now we can’t. Instead, as David skillfully pointed out, we leverage the very channels that lead us into temptation (very successfully I might add, thank you ECB) to now buy us some time!

        I wouldn’t be surprised if David gets a standing ovation tonight at the Entrepreneur of the Year awards (If not, you’re getting it here Sir). He deserves much more air-time. He’s not always correct but he’s usually set the terms of discussion closely enough for even the thickest of politicians to keep up.

  45. I don’t know David, if this is really such a great move now the other banks want a stake in this insurance scheme. Considering the speed with which it is been put into legislation is what has me worried , less than two weeks ago Mr Patrick the banking regulator said our banks were safe, then he calls Mr Brian Finance on Sunday to help his mates, this is well scary. When all these banks assets are over valued, if Mr Brian Finance fixes a premium for these banks to pay, what’s to stop them paying a few premiums , then finally admitting they can’t get a cent from the Developers nor can they sell their over valued land banks ( their assets ), and what about all the high mortgages and credit card debts that we are carrying.?
    It is going to be interesting to see the final Bill they put to our Senate and what will be more interesting is what he will have for us in the Budget, I’m glad now I don’t take a drink . We have a long way to go and I hope now our Government has the balls to call in the heads of our Banks and then major share holders should look for E.G.M’s to fire these gangsters who have been gambling with our futures.

  46. B

    The government has lived up its billing.

    Yesterdays answer to tomorrows problem.

  47. Lorcan Roche Kelly

    David > there is plenty of time for recrimination.

    There is always time for blame. I have been looking for the causes of this crisis (both Irish and international) and I think I have found two likely suspects. What follows is only slightly tongue-in-cheek.

    Firstly, the international credit crisis. It seems to me that the globalisation of regional banking problems can be blamed on Credit Default Swaps, the mechanism used by banks to reduce their individual exposure to ‘suspect’ debt.

    But where did these CDS come from?

    The answer is Basel I, the 1988 agreement among G-10 central bankers to apply minimum capital standards to their banking industries. This agreement gave different weight to different types of debt, with corporate loans attracting the maximum weighting. Reducing risk exposure to corporate loans became an important strategy for banks in the signatory nations. So they devised over-the-counter (ie, off the record) products to spread the risk of the corporate loans. These are what we now know as Credit default swaps.

    Like most new ideas, it had small beginings, mostly done as private deals between institutions. Ten years after the market in CDS began (1998) it was worth $350 billion. Ten years later (June 2008) it is worth $51,000billion (according to the bank of international settlement at http://www.bis.org/publ/otc_hy0711.pdf?noframes=1 ). Debt, and more importantly bad debt, has been internationalised.

    So a liquidity inconvenience for banks caused by Basel I (a deal reached to reduce the likelihood of banks going bust) has caused an international liquidity crisis which has led to banks going bust. It would be funny if it wasn’t so serious.

    Secondly, the Irish problem.

    I’m putting the blame squarely on the property boom here.

    Increased wealth and cheap credit were the fuel for the boom, but somewhere in our recent history a seed was sown that, like Basel I, set wheels in motion that have led us here. I think I may have found that seed.

    It was sown back in November 1982 when Tony Gregory backed Haughey’s government in exchange for what became known as the ‘Gregory deal’. Tony Gregory was a newly elected independant TD whose Dublin inner-city constituency was one of the poorest in the country. In return for his vote, after intense bidding from both Haughey and Fitzgerald, he got Haughey to agree to invest public money in a major redevelopment of Dublin inner-city.

    Government money and the builders (we din’t start calling them developers until much later) got in to bed together and they got on really well. It was the start of a beautiful friendship, and didn’t they do well.

    What do Tony Gregory and Basel I have in common?

    They were both deals that had nothing but the best intentions. Tony Gregory was doing his best for his constituents, and the Basel I signatories were doing their best to stabilise the banking system.

    It is very harsh to blame either for the bind we now find ourselves in, but it does make one wonder what we will reap from today’s government’s best intentions.

    Lorcan.

  48. [...] Strangely, "told ya so" appears nowhere in McWilliams’ Indo column yesterday. Lenihan’s masterstroke has bought us time to sort out our own problems David McWilliams Archi… [...]

  49. Ger Kennedy

    This makes interesting reading. Potentially unintended consequences.

    http://www.irishtimes.com/newspaper/opinion/2008/1002/1222815457103.html

    Ger

  50. Ger Kennedy

    Of particular note in previous noted article

    “The particular risk that the Government now faces is that Irish banks will package toxic loans as asset-backed securities and sell them off with a Government guarantee, passing on their losses to the Irish taxpayer.

    Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan’s signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking up the tab.”

    I didnt see that potential consequence.

    • Kevin

      no, you are incorrect here. you miss the fundamental fact of securitzation, that it represents a true sale to a bankruptcy remote vehicle. ergo the guarantee does not cover it

      • David

        Can you explain what you mean by “it represents a true sale to a bankruptcy remote vehicle” and how do you know the guarantee does not cover this?

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