July 22, 2010

Ireland is staring down the barrel of bankruptcy

Posted in Debt · 138 comments ·

Why are interest rates for Irish debt rising? Because the risk of a blowout here is rising — it really is that simple

IN THE summer of 1787, determined to show foreign ambassadors the might of Russian power in the newly subjugated Ukraine, Catherine the Great organised a boat trip down the Dnieper, past modern-day Kiev.

Her trusted field marshal — who was also her lover — Prince Gregory Potemkin organised a series of mobile villages to appear as soon as the imperial barge, stuffed with innocent and gullible foreign dignitaries, came into view.

When the boat came within earshot of the river bank, the villagers would break into a spontaneous, sycophantic chorus of praise for the empress, giving the perplexed foreigners the impression that not only had Russia pacified Ukraine, it had also managed to win over the local peasantry — which was no mean feat in the 18th Century.

As soon as the imperial barge turned the corner, the villagers would dismantle their villages and rebuild them overnight further downstream, with a view to performing precisely the same malarkey the following day.

This continued each day for over two weeks. The overwhelmed foreign dignitaries then reported back to Berlin, Paris and London on the marvel of the Russian conquest and pacification of Ukraine.

Thus was born the ‘Potemkin Village’ approach to economic and political progress. Over the years, the Russians perfected this approach of half-truths, misinformation, disingenuous analysis and obfuscation.

Russian governments perfected the art of identifying culprits on whom to pin the blame for their own failings: Jews, Poles, profiteers, priests, intellectuals, kulaks, enemies of the revolution and so on.

Typically, if there is a problem, a few culprits are rounded on and grandiose decrees are announced to fight the evil, whether it is economic, social or political.

Our Government behaves the same way. The truth is always secondary to the spin. So during the ‘binge’ (because it wasn’t a ‘boom’, it was a splurge), the Government accused the few who saw through the hype of “talking down the economy” and tried to pin the slur of “doom-mongers” on others.

Now, we know what was going on. Yet, despite this, no lessons have been learned. We see again today the Government complaining about too much “negative” comment. They just don’t get it.

Analysis is not about positive or negative anything, it’s about the truth and telling it like it is. And in truth, the situation is getting worse.

We are not turning any corners. In contrast, we are being subjected to a series of economic Potemkin Villages — such as guff from silly politicians — that are designed to obscure.

Before we get bogged down in more spin, let’s look at the facts.

The Live Register is at 444,900. The ESRI predicts that 120,000 will leave the country in the next 18 months, on top of the 100,000 who have already gone in the past 18 months.

Government income is only covering 70pc of its expenditure (that is before accounting for the bailout of Anglo.)

Our national debt is heading inexorably towards 100pc of GDP, driven by both our falling GDP and our rising debt.

And now that the State is paying nearly 6pc interest on our debt, this means that the debt-to-GDP ratio will spiral out of control. A simple rule of thumb on debt dynamics is that if a country’s debt gets to 100pc of its income, the growth rate has to be greater than the rate of interest on the debt in order for the debt to stabilise.

Our growth rate will probably not hit more than 6pc again in a generation. So without huge increases in taxation and deep cuts, the deficit will spiral out of control. But the more you cut and tax, the less the growth rate and the more the efforts to cut the debt fail. This process — known in economics as a ‘failed fiscal adjustment’ — occurred all over the world in the 1980s.

This is why the markets are penalising Ireland. As pointed out by Paul Krugman, the Nobel prize winner for economics, far from being rewarded for our orthodox, IMF-friendly deficit-cutting programme, the markets are charging us more for debt. Why are interest rates for Irish debt rising? Because the risk of a blowout here is rising. It really is that simple.

The internal inconsistencies will overwhelm the whole effort.

Think about it. The latest NAMA loans transferred from Irish Nationwide have a discount of 72pc. This is just junk.

It means that the value of the loans extended against property during the binge have fallen by 72pc. And we are supposed to pay for this.

Because of this collapse in loan quality, the banks — which we are stupidly trying to save — need to get money from somewhere, anywhere. So yesterday, they announced that mortgage rates for 300,000 people will be increased.

What do you think this will do? In a situation of rising negative equity, rising unemployment and rising taxes, higher monthly interest payments will obviously lead to increased defaults.

The ‘haircuts’ we are seeing from the ‘big guys’ in NAMA will be repeated for the ‘little guys’ all over the country in the form of mortgage default.

This is why the financial markets are worried — because they see the steady path towards bankruptcy. And investors realise that there will only be a recovery when the return on equity rises dramatically. This will only happen if either we become considerably cheaper or productivity rises rapidly.

We can’t get manifestly cheaper while we are in the euro and we can’t raise productivity unless we have a massive increase in investment — but investment is collapsing.

So we are stuck, staring down the barrel of bankruptcy.

Instead of this honest — if admittedly unpleasant — analysis, we are forced to listen to so-called economic commentators bleating about practically inconsequential press releases from multinationals who might want to employ a few dozen people here and there.

But by focusing on these tiny scraps, some parts of the media are behaving like propagandists for the State. They then appear surprised when the facts on the ground don’t match the rhetoric of the spin.

This press-release approach to analysis is the Potemkin Village of modern Ireland — and obscuring the truth does nobody any favours.

  1. Deco

    Dermot Ahern has indicated that the problem is that people are saving too much. And now he has decided that something needs to be done about this. So this means more taxes on the people. This will undermine the ‘Long Term Economic Value’ concept.


    Now I was told information that amounts to an inside line on this-and I cannot say how I know.
    The GP have been pushing for this, and also it has been an ILP policy desire, but in both cases they are silently in favour of it and against it officially. FF cannot make up their mind because they want the money to prop up their various quangoes and schemes. FF are not as afarid of talking about it because they they they can ‘sell it’. (we are taking money from you because it is for your own good). FG are against it (because this is the FG line on property taxes).

  2. Deco

    Rumours on the internet about the Chinese Coastal city property bubble about to become unstuck.

    Also there is massive internal pressure concerning wages, working conditions, and the level of supervision of the citizenry.

    This could be a ‘black swan event’.

  3. Deco

    Is Britain worse than Greece ??


    This has severe ramifications for Ireland. Measured in terms of jobs, Britain is our number 1 export market. Forget transfer pricing. British consumption is a lifeline to a large proportion to middle Ireland.

    And that is without mentioning sterling. Britain does mean business and will be serious about rectifying it’s problems.

    • Malcolm McClure

      Even the minds of the wizards at This is Money boggle at the size of the figures involved.
      They say that UK national debt will be £932m by next spring when in fact it is a thousand times bigger.
      It’s time to call a halt to this insanity. A world wide military coup would simply involve blowing up every bank’s computers and backup drives and telling them to start again.

  4. I don’t know many of the contributors here are from a metropolitan setting but out here in the sticks it’s getting gloomy.
    Department officials arriving with more bizarre dictats by the day. A bloated central legislature completely divorced from rural reality propped up by “Green” interference in practical matters little understood by champagne environmentalists.
    The village structure under attack from all sides and a perception that the law is actively forcing people off the land onto the boat.

    Meanwhile every whim emanating from Europe is slavishly adopted as policy without any assessment of how that theoretical trash impacts on family and social life.

  5. So we now know that the fuckwits in the DOF brought in an American Investment bank for “Advice”. Well you can be pretty sure that the very same investment bank was advising it’s other client’s to short the fuck out of the Irish banks. What a shower of complete Gobshites.

  6. Fergal73

    Guys, I’ve sat back and been reading the goings on in Ireland, both in the Indo and the Tines online. I’ve also kept an eye on DmcW (who was part of my reasons behind emigrating back in 2004, when I was convinced that the property bubble would condemn me to penury if I entered it) and this site.

    People here talk of the need for a new party, I agree. FF have been shown for generations to be full of gombeen men and cute hoors with the nod and the wink and the pulling of the fast one. Now they’ve pulled the country and its population into a debt spiral that will only get worse. Think property has hit the floor? I’ve travelled quite a bit and from what I see of the level of Irish wages / taxes / infrastructure, there’s further falls to come as wages drop and taxes rise. FG might be the party of good intentions, but to date they’ve not stepped up to the plate.

    If you want change, either you change it, or you get out. My advice is to emigrate. You owe your country nothing (no matter what NAMA might say). Ireland sold its young people a mirage and encouraged them to take on huge debt as a result. Don’t get caught in the hangover from the party where you were tucked in bed while the adults partied with your “long term economic value” paying for it.

    Ireland is still giving golden handshakes and pension top-ups to civil servants that simply wouldn’t be considered in the private sector. Those top-ups are your taxes (those of you lucky enough to remain employed).

    I know some people will say “hey, say something positive or say nothing”. To them I say we’ve talked about positive actions on this site for 6 or 7 years. The government did nothing – except compund the problem, while the electorate re-elected them.


    Or start a new party and try to change it. Change from within the system will not happen in Ireland.

  7. @Fergal73
    Your comment is well made, has been made before but nevertheless is timely.
    My comment would be thus;
    I saw the crash and I’m still here for personal reasons. I’m in the middle of it.
    I’m starting a new venture, which has great local support, as a niche operation. Logically it’s suicide but c’est la vie with niche operations. I had some sensible advice the other evening from one of our contributors which helped the shoulder attach to the wheel.
    This has not played out yet by a long shot but Macro stuff means jack to the survival of day to day Ireland.
    I was in Argentina too when it got rough and people still ate, drank and laughed. Because thats what people need to do.
    And they will. The difference is that authority will be disdained, even laughed at and their ridiculous rules and laws will be totally ignored.
    People will survive.
    I’ve been there.
    Unfortunately, through love of Nation, I’m here again.

    Going back to a previous discussion about the social destruction of this country.
    A 24 year old engineeer killed himself last night after seperating from his wife. His family were originally from round these parts.
    I’m angry about this.
    I don’t know what to do about this.
    This is wrong.
    This is happening all the time and all we do is talk in circles.
    There’s a collective attitude insofar as ” well, shure he couldn’t hack it”
    This is one feck-off selfish country. Mí agus Mise.
    Rant over. I respect the comments from overseas but I’ve chosen to stay here for my own reasons, and it’s getting rougher by the week.
    He was a good engineer and may God go with him.
    I’ll take no soft talk when my time comes.

  8. Fergal73

    @Furrylugs, I’ve spent some time in LatAm too – mostly Colombia, but also some in Mexico and Brazil. Yes, people still laugh and drink and enjoy themselves, life does go on. Those societies are deeply unequal. If you’re poor then the odds are even more stacked against you. What gets lost is public education, health and ultimately even security. The shrinking middle classes get concerned about kidnappings, estates become gated, private houses get razor wire around the walls, ground floor windows get bars, children don’t get to play on the street.

    This is where Ireland is going. It’s why I say the country needs a new party. Unless the path is radically changed, Ireland will look more like a second world country than a first. Given the apathy of the populace, I would say if you can, emigrate.


    I think this article is an excellent summation of where ireland is at. The opposition is a shambles, the ones in power (Frank Fahey) are so up to their neck in it that the advice they give is biased and plain wrong.
    Those with education, experience and lacking in self interest are ignored and the country goes marching on into the abyss.

  9. Deco

    Dermot Ahern’s dictum that Irish people (specifically those on PAYE we assume) are saving too much really is annoying people.


    And now we see that the government will “do something” about it. Specifically, they will introduce new taxes to stop you from saving.

    They need to money so that they can prop up more quangoes employing party activists, relatives, pals etc…

  10. [...] him, but he does point out a lot of very frightening information. Here’s a snippet from a recent post: The Live Register is at 444,900. The ESRI predicts that 120,000 will leave the country in the next [...]

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