March 9, 2015

AIB: a mirror on the Irish economy

Posted in Sunday Business Post · 74 comments ·

AIB emerged from the “Munster & Leinster Bank” and for years it was dominated by men from Cork. There can hardly be a better place to write about AIB than from a small café in the pretty area of Cork known as Sunday’s Well. The unique Victorian and Georgian architecture echoes the mercantile past of the city, dominated as it was by the famous “Merchant Prince” families. Below me, the fast flowing river Lee is swollen by a few days of rain. Let’s hope the city’s river defences have improved since a few years ago, when the Lee broke its banks and flooded the Mardyke.

AIB recorded profits of over €1 billion in the past 12 months. This is a big number. To put it in context, it is just over half the profit that the bank was making at the top of the boom. Back then, AIB’s management was busy blowing the entire balance sheet by lending to everyone and anyone.

For a time, until these loans go bad, they are profitable and drive up the share price of the bank. To be making such high profits so early in the economic recovery suggests something else is going on. Understanding that “something else” is critical to appreciating what is happening in the broader economy.

What does the balance sheet of the bank with the biggest branch network in the country tell us about the state of the general economy?

More than anything, the AIB results reveal what a rising property market can do to the national balance sheet. This is both good and bad. AIB is a microcosm of the Irish economy.

In the period 2006-2011, like AIB, Ireland suffered massive destruction of its over-leveraged balance sheet – eviscerating much of the wealth of the middle classes.

On the “assets” side of the Irish balance sheet was property, houses and apartments, which collapsed in value. In contrast, on the “liability” side of the balance sheet, the debt that people incurred to buy these assets remained. Not only did this debt not fall as the value of assets fell, but the burden of this debt rose because interest rates were positive.

The impact of both these developments – falling assets and rising liabilities – caused the national balance sheet to implode.

Worse still, those people with savings were petrified and they began to save more. And people with debts were equally petrified, and tried to pay back the debts as quickly as they could. These twin processes sucked money out of circulation and demand collapsed, causing unemployment to rise dramatically and incomes to fall further.

This type of recession is termed a “balance sheet recession” and it is different to other recessions because it can only be cured by fixing the national balance sheet.

The only way to fix a balance sheet is either (1) to reduce liabilities – the outstanding level of debts – by introducing some debt forgiveness or doing debt deals, or (2) to increase assets – and that means making property prices go up again.

Ireland has chosen the second option. Although this is never stated, the objective of Irish macro-economic policy is once again to push up house prices. This will repair the finances of the property-owning middle classes, making them feel richer and therefore coaxing them to spend more either by spending savings or taking on more debt.

It is working. Consumer spending and consumer confidence are unambiguously related to house prices.

As house prices have risen, so too has spending, which drives income and job opportunities. We see this in tax revenue, retail sales, car sales and, of course, rents. Rising house prices have reduced negative equity and, as we see in AIB’s numbers, hugely reduced the amount of money the banks have to set aside for bad loans. In short, all over the country, to use a “Bertieism”, bad loans are getting gooder!

Therefore, what is happening to AIB’s balance sheet is a reflection of what is happening to the country’s balance sheet: it is being gradually repaired.

Where do things go from here?

This is where Europe comes in.

On the same day that AIB announced its results, the ECB gave details of its latest money printing venture – quantitative easing. For the next two years, the ECB will make €1,000,000,000,000 (yes, 12 zeros) available to the banks to lend out. That’s a lot of money.

But what will it do to the economy?

This money will drive up asset prices as it has done in the US. European stocks and property prices will rise because of the simple mechanics of too much money looking for a home. In political terms this could be described as hyper-trickle down economics because who wins when asset prices rise? Rich people of course! They own the assets.

In Ireland, all this new money will cascade into the banks and they will do what banks do, which is to lend the cash out. We already see AIB’s new lending in the last year is up 30 per cent.

Now here’s where we might learn the lessons from the past. Hyper trickle-down economics needs a hyper-vigilant regulator to police the banks. As well as regulating what the banks lend, we need to regulate what they borrow so that we never again get into the situation where “hot-money” (short-term foreign loans) finances bank lending. In the boom, the banks borrowed from foreigners to lend to us. This must never happen again.

This is where the regulator must step in. We all say it could never happen again, but it does because we have short memories and we convince ourselves that this time it will be different. But it never is.

As I look out over river dams shepherding the fast-flowing river at the Mardyke in Cork (named in the 18th century after the Meer Dyke in Amsterdam that protected the low-lying Dutch capital from the sea), I wonder how many times this river has flooded.

After every flood, the people say it can never happen again. The city council reacts and talks about new dams and sluices and yet every decade it happens again.

Could the same thing happen with the deluge of cheap cash flooding into our banks from Europe?

What do you think?


    I see the champagne tower at the tacky wedding starting to fill once again,……..

  2. It seems that it is inevitable to happen again, but not in the short term. There will be some sort of regulation, which will eventually get eroded as we forget and get greedy, and an economist like Milton Friedman comes along and tells us that the market reigns supreme.

    • Deco

      Milton Friedman believed in the market up to a point.

      Unfortunately, that point involved the entire monetary system itself.

      Just like Keynes is the preferred economist to those in the state system, Friedman is the preferred economist to those in the FIRE economy (Finance, Investment, Real Estate).

      Because he suits their agenda.

      And that is centre right and centre left.

      The bond market is carrying massive state debts. Heading towards unsustainability. Just observe Japan. A bug in search of a windshield.

      • Deco

        Friedman had no hesitation interfering in the market to prop up the banking system.

        We need a different economics approach to Monetarism.

        Monetarism is not always pro-market. At it’s roots it is a compromise along the lines of “let those who work be in a market, and let those speculate be provided with a cushion – so that they do not have to worry about the market”

        Monetarism is a running the economy like a Ponzi-racket.

        And it is running out of road.

  3. michaelcoughlan


    “In Ireland, all this new money will cascade into the banks and they will do what banks do, which is to lend the cash out. We already see AIB’s new lending in the last year is up 30 per cent.”

    I am not sure this tells the whole story:

    To answer the question you ask at the end I think they will sit on the majority of the money they get through buying bonds of some description or other.



    It would be interesting to see how much of the 30% is simply rolling over new mortgages to existing customers trading up.


  4. douglaskastle

    It’s interesting that you use Cork and rivers as an analogy and miss the great irony of Cork city, it is a river. Virtually all the main streets in Cork used to be rivers, Patrick St, Grand Parade, South Mall. At some point in the past it was decided to build over them, but they are still there, this is one of the reasons why most of the old buildings on the South Mall have steps up to the first floor. When I was going to school there on days of high tides you could see the water bubbling up through the cracks in the pavements. Cork has to live with the “debt” of that decision and will always flood, it was a bad decision that won’t go away, ever! No amount of drainage schemes or dam releases can change this fact.

    • Bamboo

      Very. Interesting info doughlask, thanks

    • Gearoid O Dubhain

      Indeed, at high tide and with the wind blowing in the right direction, the upper section of Cork City will always flood. It is a rare winter when Upper Oliver Plunkett st etc are not covered in water at least once or twice.

    • Gearoid O Dubhain

      Indeed, at high tide and with the wind blowing in the right direction, the upper section of Cork City will always flood. It is a rare winter when Upper Oliver Plunkett st etc are not covered in water at least once or twice.

  5. Mike Lucey

    Are we now seeing northern Europe’s” first Lehman moment? Bix Weir reckons that the ‘dominoes’ have started to tumble in Europe. The ‘bail-in’ plan is ready and sitting on the shelf ready for implementation and it looks like its only a matter of time before the mega grab gets under way.

    DOMINO #1 – “In Austria whereby the “bad bank” of failed Hypo Alpe Adria – the Heta Asset Resolution AG – itself went from good to bad, with its creditors forced into an involuntary “bail-in” following the “discovery” of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.”

    DOMINO #2 – “This shocking announcement promptly sent the price of Heta’s bonds crashing as creditors, no longer enjoying the explicit guarantee of the state, scrambled to get out of “northern Europe’s” first Lehman moment.”

    etc, etc …

    A Black Swan Lands in Southern Austria: The Ripple Effects…Mini-Greece

  6. Colin

    ‘Ireland has chosen the second option. Although this is never stated, the objective of Irish macro-economic policy is once again to push up house prices.’

    There we have it folks, that’s all you need to know. Ponzinomics 101. Together with the courts who are hell bent on not repossessing properties who have not made repayments in years, ghost estates left largely untouched from re-development, the meeja cheerleading house price rises in Dublin and property porn everywhere, the public sector clammering for pay increases etc… the situation is being engineered to take young people for a ride, again.

    • EugeneN

      Yes, it is sickening alright.

    • Deco

      Ireland has been a Ponzi-scheme since we joined the Eurozone.

      Monetarism as a policy instrument to be implemented at EU level.

      Q. What is the result of Moneratism ?

      A. Boom and bust. Massive debts. Overleveraging. Massaged inflation statistics.

    • Deco

      Correct, Colin.

      And these various cheerleaders all ignore where the debt is moving, and where it is building.

      Like any Ponzi-racket, they lie to get their cut.

      The national debt is climbing. The state is un-reformable. And the entire racket is relying on the Irish state taxing companies that are good at the pretence of “corporate citizenship” and not much else.

      The whole thing is a mountain of lies.

      Just like the last time.

  7. Bamboo

    I hope that at least the young innocent families can maybe get a loan to give themself a jumpstart again. This loan can then be spent on plane tickets out of ireland. Once abroad they can get themselves sorted with accomodation, a job, transport etc. You have to get yourself out of there, less talk, less moaning and more action.

  8. Deco

    AIB is a “mirror to the Irish economy”.

    I would say that it is also a mirror to Irish society.

    Well connected plutocrats at the top, with mega pensions, telling the politicians how to run the country (and it is not the benefit of it’s people that is on their mind).

    The obsession with nonsense.

    The scandals.

    The corruption.

    The close connections with IBEC (whom nobody ever voted into power, but who influence state policy).

    The former big boys in AIB positioning themselves for roles in the EU.

    The CJH connections.

    Rugby and GAA sponsorship.

    Boarding school boys in charge.


    Ruairi Quinn’s brother.

    Be with AIB ? No thanks. I left them years ago. And I want nothing to do with AIB or their even more arrogant twin BoI.

    Giving the Pillar banks a miss. Of course AIB are making a profit. The entire state’s economic policy, and taxation system, and ECB monetary policy has been shifted to make sure that AIB make a profit.

    What next ? Maybe we can send our youngsters to fight on the steppe for the Eurozone banking system ? John Bruton (IFSC lobbyist in chief) implored the public to provide more EU patriots. Think of all those cheap hyrdocarbons.

    It is about the only thing that the leadership has not yet thought about doing for AIB.

    Reforming AIB is completely out of the question.

  9. silverbullet

    Just a viewpoint from a working class guy quoting Edmund Burke:Those who don’t know history are destined to repeat it.

    I used this quote at the Engineers Ireland ball 2015, with the likes of IW contractors whooping it up.

    • Deco

      Concerning IW, the Irish state is proven as utterly un-reformable.

      In fact, the injection of increased quantities of failed politicians into the state system (as a result of more frequent political meltdowns) ensures that the state performance culture will get even worse.

      Much worse. It is the last 12 months of the Irish Labour Party in power. There is massive pressure building concerning the issue of filling state appointments. Enormous pressure. Party members and supporters are wondering if they will get such an opportunity for at least another generation.

      • Deco

        And there are more of them to be pleased than was the case with the PDs and the Greens.

        FF have been looked after years ago. FG are confident of being in power after the next general election. All they need to do is find helpers. But in the ILP concerns are increasing.

    • rcly123

      Quote is from Spanish Philosopher George Santayana I think:

  10. “This must never happen again.
    This is where the regulator must step in. ”

    This is a typical statist attitude. Pile regulation on regulation.

    Many existing regulations are not being enforced.
    Even if they were they react to events after the fact so do not prevent the “event”!

    I seem to remember all the banks were bailed out last time.
    This time the “regulations” have been past and the resolution of the G20 is to “bail in” all the depositors.

    My solution is to be as much as possible out of the banking system altogether.
    The shysters can’t be trusted and neither can the governments.

  11. michaelcoughlan

    @ Tony Brogan

    Don’t shoot the messenger Tony.

    The following video is as good a counter argument I have listened to why gold isn’t going to save anyone. 3:30 to 10:00.

    It’s an interview with a swiss billionaire Carlo Civelli.

    Let us know what you think.


    • To each his own Michael.
      Government can confiscate anything they feel like.
      There are not enough gold investors in the west to make any difference to government holdings. As the gentleman said, all the gold is going to the rest of the world. Not any left in the west, or what there is may be loaned , leased, or otherwise hypothecated.
      As he says there is no way out for the central banks as all currencies will bust.
      gold is the only money that is not simultaneously a debt. It is very unlikely to reduce to zero value like all paper money not backed by gold.

      So simply put, I do not agree with the gentleman. Of course there is rampant illegal manipulation of the precious metals. That is to continue until the physical market overpowers the paper market.
      At the moment paper wins but even then has to give ground to the pressures of a world market place.

      I am betting that China, India Russia et al win this battle. The only concern is that I may not live long enough to see it. It is all in the timing.


      • Reputable analysis pus Chinese consumption of gold at well over 2000 tonnes a year. Other sources speculate that it may be closer to 3-4000 tonnes as gold had been leaving London at a rate in excess of 700 tonnes pa and sent to Switzerland where it is refined again to .99999 purity in kilo measurement bars and then shipped to China.

        I suppose the Chinese like all that gold adornment for their Dragon festivals!!!??

        No of the above counts the gold saved by the Chinese citizen for personal savings.

        Perhaps has not noted this insatiable demand. Or he thinks all governments will act the same way as US governments.

  12. Posted on minutes ago

    to carole from trader rog

    hi carole,
    we are invested 100% in silver except for some portable gold.
    we’ve been True Believers for 20 years when silver was normally
    the futures are merely a sideline. yes, i’m short futures, but
    buying physical this week. that sounds contradictory, but isn’t.
    futures are very short term. i will never trade futures again
    after silver goes up. this is only because i believe in silver
    so strongly- the most undervalued asset on earth.
    the big question is whether $15 silver will hold? will 150 HUI
    hold? friday was terrible obviously, but that could lead to
    further damage or indicate a bottom is forming. only the
    future will tell us. i’d like to get out at $15.50 and not
    be greedy. you’ll never go broke taking a profit.
    the rothschilds are the richest family on earth. they got
    that way by buying when there is blood in the streets.
    you can believe the rothschilds are buying silver and
    gold. just like the russians, chinese, iranians, indians,
    and other people who know only gold and silver are
    real money. every currency on earth is worthless.
    my best to you,
    roger in wilmington, nc
    cc: bill

  13. Interesting blog posting on the above

    Paul March 9, 2015 at 4:45 pm
    Let’s think about this. Just in the last week we had 4 events.

    1. Apple announces the iWatch and says that they will be requiring 1/3 of the amount of Gold mined annually to keep up with demand.
    2. 2. China supplies a billboard outside of Bangkok airport. One of the busiest airports in the World showing the RNB as the next World’s Reserve currency. And the “O” in World shows a Gold Coin.
    3. HSBC the custodian for the largest Gold ETF ( GLD ) on the planet announces that they are closing all 7 of their Gold Vaults.
    4. We find out that last week over 260 tons of Gold was removed from the Shanghai Gold exchange. That run rate equates to over 13,000 tons per year in a 2,800 ton market.

    Now I’m not a rocket scientist but does anything seem strange to you ? I suspect our friends in Washington and London are planning something terrible in the near future.

    • also from the above link

      Instead of seeing Friday’s obvious attack on gold – and today’s anti-gold propaganda attack – as a sign of a market that’s in trouble, perhaps these blatant attacks on gold should be seen as the west’s last gasp of breath in its effort to keep a dying system from collapsing.

      • StephenKenny

        I don’t think it’s a dying system, at least not yet.
        The difficulty we have is that there is no credible opposition to current system, at least in terms media coverage.
        I was in London the other day, and I picked up a copies of the FT, Daily Telegraph, and Guardian newspapers. I haven’t read the press as a source of real information, in terms of current affairs and business, for many years – almost a couple of decades, now I come to think about it. But I look at them as a view on the ‘zeitgeist’, so to speak. What, I assume, is popular ‘knowledge’.
        Over the last 15 years I’ve come to expect to increasing amounts of distortion, misinformation, glaringly missing information, and just plain lies, but these three publications took me way way back, to when I used to read the Soviet era Russian press – just for fun, to see what crazy things they were saying about the west.
        These three publications were, in total, just simply propaganda pieces. The misinformation, the distortions, and the just the plain nonsense, was quite breathtaking. All very British media, very sincere, very well written, very seemingly even handed, and leaving you with a view that was just the most unutterable nonsense. The BBC is, of course, so much worse that it’s not really worth paying any attention to at all – except for the sport and costume dramas.
        Given this daily bombardment, and no real source of any counter views, it’s unlikely that anything like enough people are going to have the information wherewithal to produce any counter balance to their rush towards oblivion.
        The British people are increasingly confused, and so increasingly angry. The feeling of cognitive dissonance is in every conversation, but nowhere to be found in their media.

        Take property, for example. The UK property market is booming, at least in some areas. To enable this to continue, recent governments have repealed a number of key anti-slum laws – some of them going back over 100 years. For example, there is no longer any minimum space that a person is required to have in a their abode. This was critical to get rid of entire families living in one room – six to a bed, and all that Dickensian stuff. Similarly, there is no longer any maximum population density, so whereas high rise blocks were previously required to have a large area of open land between them, they no longer do.
        I noticed that a housing charity had recently reported that it was no longer possible for two people, on average wages, to afford to live in one room (given a benchmark % of pay spent on accommodation). This means that they’ll start to see three people living in a room, or just ever greater subdivisions, giving ‘micro’ living accommodation.

        So prices are going up, which makes people happy, but, at the same time, there’s a sense that something is very wrong. But what? Any mention of it results in an immediate wave of accusations of ‘hate crimes’, or conspiracy theorism. A barber who’s chair I sat in, chattily informed me that everyone who sat in that chair said the same thing: There’s something very wrong, but they feel like they are the only person who thinks so.

        For a while, these changes, along with the now established direct property subsidies, will enable rents, and therefore prices, to continue to rise.

        But economically, it’s not really different to supporting an economy by finding every more ways, and ever more people, to go into ever increasing debt. One day, the lenders will need their money back, just to live – forget all the Apple Watches and organic, artisan, apricot truffles.

        When this sense reaches the surface and becomes part of the zeitgeist, the system will change. Until then, western governments will carry on sacrificing their populations on the alters of short term economic benefits, and ever more criminal and destructive military aggression.

        Well, tha twas a bit more than I meant to write.

        • McGoo

          Nicely put Stephen. Something is certainly wrong. It’s hard to know if it’s a temporary thing, which will eventually be corrected in a dramatic event/crash, or a permanent thing which will lead to a permanently different society. I tend to think the latter – UK workers are competing directly against Chinese workers, so it’s reasonable to expect that both will end up with a similar standard of living. That means a dramatic, and permanent, drop in UK workers living standards.

    • Deco


      The Apple iWatch is all hype. For starters the battery is useless.

      Maybe iWatch 5, or iWatch 6 might see it eventually fixed. In other words nothing will happen soon there.

      • Well there might be a certain amount of gold value in the watch and one can play with the toy as time goes by. It’ll need to be plugged in every night or you’ll be back to the past

  14. Still want Euros in hand, or gold, Michael.
    Maybe the price of property is not going up so much in Ireland as the values of the currency is depreciating. The definition of inflation is the expansion of the money supply. A debt based currency as is the Euro will generate a bust.

    What do you think David?

  15. AIB never would have been in in or become a problem if the world had not become corrupted by dishonest money but rather had been relatively uncorrupted by the use of honest money.

  16. “At the end of the day, the collectivist’s claims lead to nothing but political nooses around the necks of the citizenry with the end of the ropes in the hands of the political charlatans and psychopathic power lusters who want to break the spirit of the free individual and make him the implicit slave to self-selected “demigods” wishing to rule over mankind.”

    – See more at:

    • johndoe

      for me,personally,the author appears to have done some serious prep work, but his article is choked of what’s really going
      on. toe tagged in fact. accept it. i do. et toi Tony?

      i wish DECO would throw some light on what’s really going on.No offense Tony,you know i respect you ‘n all,but DECO’s the reason i mainly read this blog.He’s not Mr.Safe and his comments are never the same ol’ geriatric coffee table dog-shit like that cowboy’s spurs jinglin’ and janglin’.


    “More galling and worrisome, though, is the failure of anyone even remotely in authority to stand up and publicaly object to the tidal wave of lies washing over this dying polity, actually killing it softly with truthinesslessness.”

    “The more central bankers intervene in price discovery mechanisms, the more unable to reflect reality all markets will become. ”

    What do think of this, David?


    HSBC is also the custodian for the largest gold ETF called GLD. They are also the largest bare naked shorts, of gold, in the world.

  19. “Greece is not the first to feel the noose tightening on its neck. As The Economist notes, in 2013 the ECB announced that it would cut off Emergency Lending Assistance to Cypriot banks within days, unless the government agreed to its bailout terms. Similar threats were used to get agreement from the Irish government in 2010.”

  20. “Beware of Masters of the Universe dispensing smiles. Draghi and the . . . ECB goons may dispense all the smiles in the world, but what they are graphically demonstrating once again is how toxic central banking is now enshrined as a mortal enemy of democracy.”

  21. For countries with a bit more room to maneuver than Greece has, one option is to withdraw public and private deposits and put them in publicly-owned banks. The megabanks are deemed too big to fail only because the people’s money is tied up in them. They could be allowed to fail if public funds were not at risk.

  22. Mike Lucey

    Things could get very nasty if what Panos Kammenos, Greek Defence Minister says will be carried out.

    “If they try to strike Greece, they should know that we will suspend the Dublin II treaty immediately and immigrants can take their documents and ID cards and go to Berlin”

  23. coldblow

    Excellent article. It’s a simple point, dealing with a balance sheet recession by reinflating the value of the assets rather than dealing with the debt, but I didn’t have it clear in my mind.

  24. “Well, what I just want to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets…perhaps most important, there’s been–the Fed in 1989 created what is called a plunge protection team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there–they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have, in the past, acted more formally” … former Clinton adviser George Stephanopoulos, September 17, 2001 on ABC Good Morning America

    Just another reminder of how manipulated the markets, all markets, are.
    It is worth repeating “There is no such thing as a free market”. This is a result of the “guidance” of central bankers on the political process.

    Your thoughts on this please, David. Is it not the primary cause of all the financial woes percolating around the world. The primary cause of all the misallocations of capital that is destroying the worlds economy? Meddling and interference gone rampant.

  25. Could the same thing happen with the deluge of cheap cash flooding into our banks from Europe?
    What do you think?

    Just how cheap is this cash?
    It is not given but comes with a price.
    It is constructed as a loan so must be repaid (Unless one expects to default and never repay)
    It comes with an interest charge.(Usury)
    All central bank money is the same in this regard.(that is 98% of all currency flooding into or swirling around anywhere it happens to be.)

    If 2000 years ago someone invested a dollar at 1% interest compounded annually the accumulation of that cash would now far exceed the gross domestic product GDP of the entire world. In order for that person to receive all that largess another would have to pay.

    It is self evident that one is in control of the other, and the other is a slave of the one. In this regard there is no such thing as cheap cash when offered at interest.
    It is one of the reasons Mises stated that a credit based boom will be followed by an equally big bust. The induced building boom from “cheap” cash will likewise bust.

    What do you think, David.

You must log in to post a comment.
× Hide comments