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.
The Irish Solution is being hailed as an example of how to get out of this crisis by the IMF, the ECB and all the other usual suspects with skin in the game but if this Totem Pole falls, wherefore Europe?
David has just written the epitaph to the Euro experiment methinks.
When Mao was travelling by train through China on his ‘inspection tours’, local party functionaries (not too dissimilar to FF hacks) would ‘transplant’ corn from the surrounding countryside and plant to the left and right of the railway track for as far as the eye could see. Like extras from a Hollywood film, ‘peasents’ in brightly coloured clothing (reds of course, yellows, blue silk clothing), smiling and working were dotted amongst the apparent plenty. Mao would then be led to the window where his advisors would proclaim the leader’s vision and extoll the virtues of the Revolution. Mao would return… Read more »
http://www.independent.ie
Seanie is really taking the piss.
David, what can they do but keep the bullshit train on its tracks for as long as possible. This is going to be like an organised crash ,no forewarning ,but the emergency services will be already in place before the impact..
Great article: From above: “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.” Also “From Shakespeare’s The Merchant of Venice, 1596: LAUNCELOT: Nay, indeed, if you had your eyes, you might fail of the knowing me: it is a wise father that knows his own child. Well, old man, I will tell you news of your son: give me your blessing: truth will come to light; murder cannot be hid long; a man’s son may, but at the length truth will out.” Pravda… Read more »
Yesterday, Dermot Ahern (a lawyer) declared that the problem was that the level of saving in the economy was ‘needs to be reduced’. I reckon that IBEC must be pleased. Because IBEC made an announcement at the beginning of theweek concerning the economy. Basically, IBEC said that Ireland’s export sector was growing – but that the problem was that this money was not getting to other sectors. (By this they mean sectors where they predominate with their price rigging arrangements – nod, wink). So there you have it. IBEC wants export growth, and then wants the money to sick into… Read more »
Once FF have finished their Viking-like plunder and NAMA truly kicks in……………….
http://www.youtube.com/watch?v=hbLgszfXTAY
So will someone tell me, if I can’t leave cash in the Irish banks, what is the most reliable alternative?
The latest batch of property developers to have bequeathed their enormous personal gambling debts to generations of taxpaying citizens of this State to service, through NAMA, reportedly included a well-known philanthropist in their number. Philanthropy is variously described as, alms-giving, altruism, benevolence, munificence and public-spiritedness. The Nobel Prize winning economist Joseph Stiglitz has blasted NAMA as ‘highway robbery’ and has said that the bank bailouts represented “a simple transfer from taxpayer to bondholder which would saddle generations to come.” Rather like the ideology of free-market capitalism which held that the obscene rewards which property developers enjoyed were justified in light… Read more »
I think the entire NAMA debate confuses me. The larger the discount (‘look we’re being real hard on the Banks aren’t we great’) means we (via the Government) pump more in to improve capital directly or mortgage holders pay more. The smaller the discount, the less we pump in directly but NAMA picks up the tab. The discount debate is a distraction right? For NAMA to work we need property to improve, for property to improve we need an economic miracle. For an economic miracle to happen we need leaders. So we can rule that one out.
David Murphy on Pravda RTE with the bespoke FF line re the guarantee that banks were falling all over Europe so they had to ignore Merrill Lynch advice e.g €20 bn fund for AIB/BOI, nationalise Anglo/Nationwide. Crap, should have been an alert not to guarantee everything. Plus propaganda that all this happened overnight. No, Neary, who is safe now out of the way with his big pension fund, is the fallguy/scapegoat, who didn’t tell them about the property bubble! More bullshit. In fact, they knew for a whole year the exposure of the banks. Neary supported the €7bn Green jersey… Read more »
I get the impression that few bloggers here are following the webcast discussions at the MacGill summer school linked at http://www.donegalcoco.ie. This is a pity as they are very relevant tto the themes discussed by DMcW over the past year. This morning within the overall title “Reforming the republic” the theme was “Parliamentary reform is long overdue” . There was a particularly poignant moment when Elaine Byrne a young politics lecturer at TCD responded to the ancient Popeye figure of Pat Carey who earlier in the session had patronised younger politicians and droned on about the wisdom only attainable with… Read more »
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http://www.youtube.com/watch?v=wNFbl525fkM
It’s beyond pathetic or tragic it’s now just funny .
Does anybody really expect Frank to sort out the mess ? He does not even understand the basics .
Agreed. OT: I cannot resist asking in this forum… Why is Bertie Ahern getting so little heat about all of this? All I keep seeing was how clever he was to have “left at the right time” – what?! He was the Taoiseach for the entire period during which this mess was created. He was even caught-out receiving funds for property himself and started crying in a television interview (the shame to be Irish that day) in order to wriggle out of it. The boom years did not see any significant improvements in Dublin city and our countryside has been… Read more »
Yes I agree with everything David says, but I still blame David for the Bank guarantee. We would not have a bank guarantee if it were not for David advising Brian Lenihan to give the guarantee on that night. I just heard today that the Civil Servants of this Country were briefed on the day of the guarantee and told that Anglo and Irish Nationwide were going to be Nationalised, it all changed at around 7:00pm when someone or something changed the Finance Ministers mind and I am told, that person was David. Apparently the Finance Minister was in Davids… Read more »
Hi David, If you haven’t already done so, would it be possible for you to explain the “astonishing” means by which money is created in the economy. I have carried out a little research into “Central Banks” and “Fractional Reserve Banking” and am truly frightened for the future. When the broader populace learn how money is created and multiplied through “Fractional Reserve Banking” then It highlights how banking fraud has been billed to the ordinary people. Just to whet your lips, research “Jerome Daly’s” legal fight against bank foreclosure in the US in 1969 (I think that the chairman of… Read more »
David, Please excuse the somewhat off topic, but… I have just conducted a little experimental research into the country of origin of our euros. I withdrew €5000 in cash yesterday from my account in Bank of Ireland. I examined the code on the back of each of the 100 €50 notes. The letter at the start of the code indicates the country in which the note was printed. A bit like the Eurovision, Ireland did not fare too well despite this contest being held “at home”. Here are the results from the Bank of Ireland con-jury. 79 €50 or 3950… Read more »
Maire,
That’s been explained before. The Guarantee was mooted as a stop gap to prevent imminent meltdown at the time, not as a long term recuperation ward for afflicted insiders.
But I’m sure David will explain this in his own inimitable way.
Looks like the fire sale of the Crown Jewels is on. This is frightenly like Thatcherism on the march again. I’m back at groundhog day but with different accents.
http://www.businessworld.ie/bworld/livenews.htm?a=2637269
Watch all the insiders scoop up former semi states at bargain basement prices, pay a “windfall” to the Government and then plunder the booty.
The McGill Summer school has been used to float all sorts of ideas into the public domain. But as far as I know the number of economists present is low. The rest of the line-up is a series of non-economists talking economics. Listened to Prime Time last night. Paul Gogarty was advocating a new mayor, above the existing four local authority mayors in Dublin. He had no real concrete idea why. But he was seriously in favour of it. He told us that it would not cost extra. But again he could not provide details. He didn’tknow if this was… Read more »
Today we see proposals to sell RTE, CIE and the ESB. This would raise 10 Billion. More critically it would turn RTE against any political party in favour of selling RTE. And also the large unions. It could be an effort to turn unions against FG, back to FF, and to undermine ILP efforts to increase the voter appeal in the private sector. We can still retain the critical parts of these organizations. TG4 could be transferred out of RTE, and given to local authorities in the West. To be honest, we do not need a public broadcasting organization in… Read more »
We are finding out, what we suspected all along – that the banks were lying through their teeth when asking for the bank gaurantee.
I am also suspicious that the real purpose of the bailout of ANIB/INBS/EBS is to prevent a collapse of the AIB/BOI behemoth. That the DoF regards 25 Billion as cheap compared to stump up money for a deposit run.
But we still face a fundamental problem in this country. Ireland does not mean business. And this needs to be fixed very urgently.
Nama are an African ethnic group which have mostly disappeared due to the discovery of diamonds at the mouth of the Orange River.
Are we the new NAMA about to disappear under our bank debt
Presumably there will be a couple of sacrificial lambs in the banking fraternity to prove the rest are fit to continue digging an even bigger debt hole? This may divert attention away from sovereign debt and an intergovernmental stress test which might inconveniently reveal the insolvency of a continent. This surreal situation surely cannot escape the attention of the so-called “Markets”. I can’t believe my brother-in-law is that thick. This surely has nothing to do with debt at all but is a concerted effort to maintain the credibility of a failed monetary system, i.e fuelled by credit, so the illusion… Read more »
I think it’s worth posting Dr Gurgievs stress test assessment in full here for anyone not familiar with him. Economics 22/7/10: EU stress tests – what do they tell us, really? Posted by Dr. Constantin Gurdgiev The EU stress tests of the banks confirm the worst fears of all analysts — including myself. The tests were simply a PR exercise, so poorly conducted that no one can have any credibility in their outcomes. Worse than that, the whole circus: * The difficulty with which the EU member states appeared to be willing to release information about the tests; * The… Read more »
I cannot help feeling that Ireland is merely a mirror of what is happening in the rest of the global. The bailout – any bailout is merely an exercise of pulling savings and working capital out of a nation to prop up financial recklessness (mind you, are they really reckless if they knew propping up was inevitable).
Ireland and smaller economies are feeling the hit now merely becasue they are smaller. But I believe it is mushrooming. http://socioecohistory.wordpress.com/2009/01/17/geab-systemic-economic-crisis-the-sequence-of-global-insolvency-begins/
Somewhere along the line we failed as a society. Vincent Browne made an interesting comment that private schools produce sociopaths. William Golding highlighted this in his book ‘Lord of the Flies’ and the importance of rules and civilisation to keep in check the activities of a certain group of people (with particular characteristics and response to certain situations). We have to wonder how and why it is we have produced the kinds of people that have led the country to ruin, those who display sociopathic tendancies in feeling no guilt for their actions, continue their old ways regardless of the… Read more »
Would suggest that people check out The Automatic Earth website, & also the visit to Europe – in particular Ireland – by Stoneleigh aka Nicole Foss. She is speaking in 3 venues nationwide – Cork, Mayo & Castlebar – details on Transition Towns Ireland website. This is one savvy lady, with some interesting thoughts on how we got to this situation, worldwide, & what we may be able to do.
A few minutes ago, Reuters http://bit.ly/9VkiZE “(Reuters) – Seven European banks would not be strong enough to withstand another recession and would face a capital shortfall of 3.5 billion euros ($4.5 billion), tests run in an attempt to revive investor confidence showed on Friday. Five of Spain’s smaller regional lenders, known as cajas, failed the test and their recapitalization is likely to speed a restructuring of the troubled sector. Banks in Germany and Greece were also seen as weak spots and in need of restructuring, but state-owned Hypo Real Estate was the only German lender to flunk and state-controlled ATEbank… Read more »
I wish to withdraw a comment I made concerning Irish Times economics correspondent Dan O’Brien a couple of weeks ago, having listened to his excellent address to MacGill SS this afternoon. Speaking after Peter Sutherland and Michael Summers, his analysis of Ireland’s governance problems was as clear and incisive as anything I have heard. At least O’Brien took the trouble to travel up to Donegal for this important meeting of minds. Apparently DMcW declined an invitation to attend, possibly because of holiday arrangements but there was some suggestion that the venue couldn’t afford his speaking fees. Did his economist’s economics… Read more »
The proposal to have tolls on N routes has been floated. http://www.independent.ie/national-news/plan-to-introduce-national-route-tolls-branded-absurd-2270548.html Actually the biggest losers out of this is the unfortunate commuter living in Carlow, Portloaise, who has to live there because of the absurd housing density that exist (Los Angeles style) in suburban Dublin. The next biggest category of losers is rural business who transport/export their produce. Where does this urge come from to tax everybody repeatedly ? Why can’t they stop wasting all that they are wasting ? What about the quangoes ? What about the overmanning on local authorities ? What about the HSE farce, with… Read more »
LONDON/MADRID (Reuters) – Just seven European banks failed a health check and were ordered to raise their capital by 3.5 billion euros (£2.9 billion), much less than expected, confirming fears the continent’s long-awaited stress test was too soft.
Ho Ho.
Dr Gurdgiev will enjoy the cornflakes tomorrow as will our host.
Strange how a Basque bank was the only one to fail in Spain? Quite odd given young Gurdgievs analysis.
Repositioning?
Or neolithic preservation?
The Irish banks must owe the Germans big time.
Fair play to Min Linehan if he can keep this show on the road and I hope there’s some end game but I give way to our host.
The last of the bobs now heading for Canadian Dollars unless otherwise advised.
David, I’ve been an admirer of your work for many years now and listened to what you’ve had to say, even while most of my suburban neighbours who thought they had jobs for life, working for big American multinationals; were remortgaging their houses to buy Chrome fridges and SUVs to fill their driveways. They told me I was crazy and regarded you as ‘Chicken Little’ with your prophecies of doom. I guess they couldn’t face up to what Lord Denning would have called the ‘Appalling Vista’. Funny side story from 17th century Dublin history: After James II abdicated the English… Read more »
Deco
Jim Power has managed to reposition himself as though he called the boom for what it was (revisionism at its best) whereas he was one of the touts who kept the boom fueled. (See his debate with Morgan Kelly circa 2007 for example). That said he’s entitled to
change his position however I wouldn’t mention him in the same sentence with Kelly, et al…
Morning, thanks again for all the comments. Regarding the bank stress tests they remind me of the Flann O Brien proposal to give everyone in the country a degree at birth and thereby do away with the need for universities. This stress test is a version of financial “grade inflation”. i expect the markets to sell off as a result. David thanks for the stuff on “the Dublin Debaser”! Malcolm, regarding me and the McGill School – I am not in the country at the moment which might explain my not speaking more easily than any reference to fees etc.… Read more »
I have to agree with Mediator on that last comment. I could cite all sorts of examples with Mr Power over the boom but – it would be ungenerous. One last point Malcolm, as far as I know I am the only economist in the country who truly works for himself – no university, no institute, no bank, no financial consultancy, no government quango – pays my wages. I have chosen this path for a reason, believe me, I would have had an easier life had I stayed in investment banking ten years ago. In fact, I could have taken… Read more »
DavidMcWilliams – timely spoken and it clears the air among most of us .It would be nice if sometime you might consider a special day somewhere for a Forum Tea Party so that we might all have a cup of tea and a biscuit and a chat .I think furrylugs will not be short of ideas and just might have a nice place in Co. Cork for that special moment.
{ Tell me how many who preach the free market actually live the free market? } Correct. Most of them are institutional yes-men. The most glaring episode was Dan McLaughlin’s outburst on the wage levels and Irish Ferries a few years ago. Dan is now technically a state employee. And when the next election comes, I will demand that all candidates tell me if they want to let him loose into the private sector of which he is continually talking about. I can tell you, his ‘analysis’ is something nobody would be willing to pay for if they have a… Read more »
Had a look @ http://www.bankofireland.ie
Not even 1 vacancy in their careers section!.Shows how completely screwed they/we are.www.bankermathews.ie has added some excellent new recent material.
http://www.bankermathews.com
There is nothing ‘free’ about the ‘free market’, just like there is nothing ‘common’ about the ‘commonwealth’ nor democratic about the current Irish Republic, they are just words designed to deceive. We know from our economic history that Britain and the US built their economic might on protectionism, forcing there way into markets using the bayonet and battleship, destroying any competition (the destruction of Indian industrial and maritime might being an excellent case study), and this protectionism still exists, there is no such thing as free trade or the free market, it is Orwellian double-think and I wish people would… Read more »
Hi all, Please correct me if I’m incorrect here. If Irelands money creation mechanism is the same as the US then here’s how money is created. 1. F.O.M.C. approves purchase of US bonds on open market 2. Fed Bank purchases bonds from whoever offers bonds for sale on open market. 3. Fed bank pays for bonds with electronics credits to sellers bank, these credits are based on nothing. 4. These credits are used as bank reserves by the banks, the trick is that, because of “Fractional Reserve” banking rules, the bank can loan out 10x the reserve to borrowers at… Read more »
Another golden parachute spotted over Dublin.David Doyle of the Dept of Finance it seems bailed himself out of the firing line, after they bailed the Banks out of course. Why the big payout? maybe its like the add say’s “because I’m worth it”. YEA RIGHT.
http://www.independent.ie/national-news/bailout-mandarin-gets-euro725k-topup-2271781.html
Fair play to DMW who keeps the topic of the banks in the public eye. If nothing else comes out from this crisis it will be the education of wider public to keep a watchful eye on them. Can I propose this to be taught to everybody in schools so that our mistakes wont be made in future. There would be a very useful project – and could provide gainful employment!
I have a question which might seem strange at this point in “de proceeeedins” as the ditherer from Drumcondra use to say and it is this.
If Cowen and Linehan approved the payment of some 18million Euros to thwe likes of Merrill Lynch, KPMG etc. for advice that they did not take or use during the Guarantee deliberations, then what the hell do they owe David Mc Williams for his advice which they did take and use i.e the 2year blanket guarantee. My advice to Daithi is to submit an invoice to the Dept. of Finance for 30 million Euro’s.
Maybe Flann OBrien was only half right when he suggested giving everyone a degree at birth so that we could do away with the Universities. Maybe everyone should be given a “bailout voucher” at birth also and not just Roddy Molloy, David Doyle, Goggin , Sheehy, Fitzpatrick, Drumm(1) and Drumm(2) and on it goes…. What annoys the hell out of me Furrylugs is these clowns in the DOF who were happy to sit back and watch this property porn, and dish out the proceeds to every class of an un- accountable whore who stepped up with every class of a… Read more »
There’s a classic one here this morning, even better than the mixers. There’s a call by someone or other to create 5000 jobs in renewable fuels such as hydro and biomass. Cork County Council is cited as a potential winner from energy savings. All good stuff you might say but here’s the rub. A local energy company designed a pair if hydroelectric schemes which would be more efficient than the Carrigadrochid and Inishcarra dams, generating oodles of green power, construction jobs locally and ongoing maintenance roles. Cork County Council refused planning permission. Whatever about the banks and high finance, until… Read more »
Furrylugs, and Tull made some comments that are very relevant. Furrylugs – the applicants were not sufficiently well connected. Same crap, different scenario. This is how Ireland has been operating for along time. I don’t know how to dismantle it. But the poll from today’s Sunday Indo suggests that something like 95% of those in a poll of those who bothered to make a point, are now against bailing out Anglo. Was talking last night. Heard a story about a solicitor working in a busy law firm. Has been in the family law/marital breakup area for the last five years.… Read more »