So the Government finally gave up the charade last weekend and asked for help from the IMF and EU. Following a week when everyone, save certain government ministers, seemed to know what was coming, it came as a great relief to the markets when Finance Minister Brian Lenihan made his announcement.
When markets opened on Monday, the crisis was over. Bank shares were up, our bond spreads moved to levels only slightly above German bunds and investors were tripping over themselves to throw money into the Irish economy.
Hang on, that’s not right, is it?
If anything, things in the market have gotten worse. If we ignore the political implosion here and look to the wider European situation for a moment, we can see how little all the ‘will we, won’t we’ agonising that happened here last week actually mattered.
The markets know Ireland’s economy is not going to recover any time soon, and that rolling over our debt is going to do nothing to solve our problems. Furthermore, whatever chance Ireland has of recovery will be extinguished by a four-year austerity plan.
Having made that assessment of our prospects, the market has moved on. Ireland to them is yesterday’s news. Today’s news is Portugal, which announced a worsening deficit yesterday — despite months of austerity measures. (Sound familiar?) Tomorrow’s news will be Spain, the ‘800-pound gorilla’ of the peripheral EU states — so-called because of its huge €1.1 trillion economy. Spain had an auction of short-term debt yesterday that failed to sell the expected amount even at higher yields, an exact mirror of Ireland’s experiences in the bond market in September.
But why do market reactions to developments in the Iberian Peninsula matter to us?
First, the problem with Spain is that it is probably too big to save. Neither the EU nor the IMF has the money to bail them out, and it is unlikely Germany would be willing to foot another reunification-sized bill to save their Spanish cousins. As Olli Rehn put it on Monday: “It is essential to stop the financial bushfire concerning Ireland before it becomes a European-wide forest fire.”
For Mr Rehn, it seems it might be too late. In fact, if there was ever a ‘sell’ signal to the markets, it was Olli’s comments.
Secondly, the EU-wide crisis is an opportunity for Ireland.
In ‘Follow the Money’ I explained the domino theory of international relations that led the US into Vietnam. The idea was to stop the spread of communism in Vietnam before the whole region became lost to US influence. That same theory is being applied to the EU’s actions in the peripheral states. They are fighting in Ireland to prevent a national bankruptcy in order for the whole euro project to avoid a similar fate.
How is this an opportunity for us? Let’s look at the numbers. Taking account of sovereign bond redemptions and deficits, Ireland needs about €74bn over the next four years. The banks are getting €90bn of funding from the ECB and another €35bn from the Irish Central Bank. So, to get everyone off the hook, €199bn is needed. We can add that number to the national debt (net of redemptions by 2014 and cash balances) of €76bn and come up with a total of €275bn. Or just over 200pc of GNP.
There is no hope of Ireland ever being able to repay this amount. Nominally, if there is a large growth of inflation in the European and Irish economy, it might be possible, but with tight monetary control from Frankfurt, that is not going to happen.
So we need burden sharing with bank bondholders to reduce the liability the State has encumbered itself with through the mishandling of the bank guarantee. The alternative being presented by the run on Spain is that sovereign default is not only more likely, but should be viewed as being in Ireland’s best interest. Loading up on IMF and EU debt right now — in order to bail out the banks — only makes sense for us if we have no intention of paying the money back.
The European-wide ‘forest fire’ referred to by Olli Rehn will burn through all sovereign debt as weakness in the unbailout-able Spain causes an existential crisis for the euro. We would default because we would have to. It would be chaotic, and it would probably spell the end of the euro.
It could easily be seen as dishonest for Ireland to take on this debt while aware of what is probably coming down the tracks, but considering how distracted our leaders are at the moment about saving their own skins in the upcoming election, there is a good chance they do not know how bad the situation is in southern Europe.
There is also a chance they have not yet figured out the gravity of the threat the Spanish situation poses to the euro project. But the ‘nobody saw this coming’ argument is tired by now, and cannot be allowed as an excuse any more. It is dishonest to fill our boots with IMF and EU money, but the IMF/EU are being equally dishonest about the situation by giving the money to us.
The honest thing to do is to realise what the problem is (the banks) and admit that pouring further cash into those black holes is theft — from either the Irish taxpayer if we pay the loans back or from the IMF/EU if we default on their loans. The honest thing to do is pass a bank resolution which swaps the debt for shares — a debt-equity swap in the banks — and get that €120bn liability off the national and international balance sheet.
Then we can start to sort out the real problems in the Irish economy, and show the IMF the madness that is contained in their latest spin on ‘expansionary fiscal contraction’ which they published on Monday.
David McWilliams performs ‘Outsiders’ at the Watergate Theatre, Kilkenny, on Saturday and at the Everyman Theatre, Cork, on Sunday.
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Touché David. Thank you. I have always loved a straigth talker. I know where I stand when a body says it as it is! Congrats.
So, David, why won’t they do it? Surely there is no face left to save any more?
Any commentators who know what they are talking about agree that a default (at least on bank debt) is inevitable.
Professor Brian Lucey & Paul Sommerville on Vincent Browne’s show last night came to the conclusion that the debt burden for Ireland is €343 billion, someway north of the €200 or €250 billion figure. But the basic premise is correct, there is no way this debt can be paid, so harder negotiations are needed, we either come to some settlement or we default. The plan today and the Budget are sideshows from a dying government, while talk of export led growth absurd. Politicially, they continue to disgace themselves by refusing to call an election, there current actions are an exercise… Read more »
Could this be a great day in spite of all the madness about the 4 year plan , and goverment spin. Could today be the day that the reality becomes more apparent that the Euro is doomed and that the return of the Deutchmark ,Peseta, Franc ,Guilder, Lira and most importantly THE PUNT is coming ? Has the Euro project fallen on to its own sword ?
We will have to default as we cannot even afford the minimum interest repayments of €14Billion annually. David mentioned on RTE this morning that we need a ‘bollix’ to negotiate with bond holders for us the people, a tough guy to ram home the idea that it is in their best interest to ‘take a hit’ on their bonds. In other words ‘sorry lads we ain’t gonna pay’.
No malone, we the Irish have created a plague that could spread throughout Europe just like the film ‘Dawn of the Dead’ but we are the zombies this time!
DAVID!!!
The crowd that wants us to sign up for this bailout, the only national interest they have in mind, is the next cheque in the post.
What about you and other economists alike, doing a big favour to the people of Ireland, and organise a big press conference in town for next week or so, where you’ll present your case to a bigger audience, that can be seen in national and international news around the world before is too late???
John Q Public , Maybe just maybe we started a chain reaction that has been gaining momentum for quite a long time and like a volcano could erupt very soon ??
Alright, finally after two years of dithering over the state finances, we have seen some effort to rectify the fact that we are borrowing 400 Million euro a week to run the state. And sure enough Gilmore says we are trying too hard to do it. And Jack O’Connor (Gilmore’s paymaster) has declared that it will send us to the stone age. The sudden realization by Cowen that the state needs to be cleaned up and made more efficient, is as a result of the IMF landing into town and saying -“this nonsense is unsustainable”. It is also the first… Read more »
David – you are correct. In the context of Spanish banks refusing to foreclose on properties in arrears, the Irish autorities have the ECB and Brussels over a barrel. The ECB is pulling out of funding for the Irish banking system, because Merkel needs to convince the German public that she is protecting the value of the Euro and not allowing it to become another Lira type currency devalued by continual debasement. Merkel is in a very tight corner. We should require a “right to re-negotiate” with the bondholders. It is clear that the IMF are in favour of this.… Read more »
I am thinking, perhaps Merkel is watching the Irish situation and realising that it is creating a very dangerous precedent for Spain. Basically, if the ECB has to provide over 1 Trillion Euros (which is where it will eventually end up) in order to prop up Spanish banks holding empty Spanish real estate, then this means that Merkel is politically finished in Germany. It also has ramifications in the Netherlands, where the current government takes a very dim view of the various means employed by the ECB for propping up the PIGS. We are now getting to the point that… Read more »
I understood everything up to the point in David’s article where we will default and that it is plain dishonest to be taking any money from anyone any more because payback is not an option. So…given we are all big boys even among the bondholders etc. does the warning of caveat emptor not apply? And furthermore, if the Euro goes up in smoke – which seems inevitable, might it not be a good idea for NTMA et al to get whatever billions they have lying around and convert it to Sterling or Dollars becasue when the Euro thing blows, they’ll… Read more »
Could it be that this was the leprechauns plan all along?
malone, if that is true that it will spread Europe-wide then I suggest a two-step strategy.
1:Send in David’s ‘bollix’ negotiator to stick it to the bond holders and just default.
2:Quantitative easing on a massive scale by the ECB to most if not all member states.
Economy is being controlled and directed from FF , the Irish banks, a croney financial services sector with support from ‘european partners’. We’re not independent and sovereign Iceland whose political call might actually take heed of good advice. Any abjurations regarding the pathway we are taking along the lines of DmcW above are simply ignored by our incumbent puppet government who still control the reins of power. Economy has been hijacked by a bunch of leprechauns from another age. They’re not about to stop making a bigger mess. The budget has been gambled on ‘lady luck’. The alien banks are… Read more »
The thought of Fine Gael taking over feels me with even less enthusiasm, they have already talked about selling off state assets for a song, frontloading cuts etc, the only hope is that Labour will hold them in check and have more human policies, but we are now truly entering unchartered territory, will the political system be able to hold the society together because with each passing day and each successive austerity Budget the rumblings from the street grows, it is getting ugly. Strikes me as totally absurd that a government would introduce a four year plan when they won’t… Read more »
Maybe everyone is underestimating Fianna Fail. Maybe for the first time, the self serving interests of Fianna Fail will end up benefiting us all. Perhaps they are actually planning the greatest bank robbery of all time. They know we can never pay it back so they rob as much as they can from the IMF/ECB before we default and the whole euro experiment comes crashing down. It’s equivalent to having a business and your accountant tells you it is insolvent so you go to your bank and get a massive loan from your bank manager knowing your about to shut… Read more »
Is this guy for real or what:
http://www.youtube.com/watch?v=uWQ6LXhKmaE
Great article David. I have a question though: this is all very fine for Ireland, even though its the worst of all the end-games that you and many contributers here have been warning about for the last three years, but I’m curious as to what you think the effect will be on the Euro. It seems likely that the far less accommodating citizens populations of Portugal and Spain will shortly find themselves facing similar cash flow problems, so I’m interested in the assertion that “tight monetary control from Frankfurt” will prevent hyperinflation in the Euro zone. Just how screwed are… Read more »
I would say the government did not request the EU-IMF bailout. The truth is probably that they were pressed to take it. This is really a bailout for the European banks that our banks owe money to. The purpose of it is to ensure our banks keep up their schedule of repayments; and do not default and thereby damage the European system. I heard David and Shane on Pat Kenny this morning and I agreed with and saw the rational sense of all they said…I even agreed with Constantine (which was a first; but that may be because all he… Read more »
The major weakness of political parties in Ireland is just that – they are political parties! They are either conciously or unconciously preconditioned. Their vision is either selective or blinkered. As one party herded us blindly to this disaster none of the others even saw the precipice! So how about an alternative emergency ruling council? Made up of the likes of McWilliam’s, Ross’s, Robinsons et al who could stand for election as a temporary ruling council for the next 4 years. If elected with over 50% of votes to steer us through this mess, then their mere election has already… Read more »
David has written a good article every Wednesday and Sunday/Monday for the past two years (almost), that I have been coming to this site.
Yet he is NEVER listened to, none of his suggestions ever get taken by the useless government and things just get worse and worse. Same goes for any advice given by the other capable economists in the nation – you all know who they are.
It really is a fruitless task.
Welcome to the Transfer Union of Debt Junkies….
Boycott Budget! General Elections NOW!
Sadly though…. what is on offer on the political stage is anything but providing me with hope, but one thing is for certain, this government should not be allowed to suggest or implement one more policy int this country!
Would love to see a graph over the last couple of years indicating the number of unique visitors to this website. I’m sure it’s rising all the time.
Can the webmaster faciliate this? It’s not covered by the official secrets act. Could be good publicity for the site.
Clock is ticking, convergence of our politicians FF /FG imposing IMF/ ECB “solution” on fearful shock doctrine population and the endgame of the euro experiment is imminent. Time for action, petition, march, press conference, revolution is now. Otherwise we will all be reading and commenting on how Dec 2010 was the final play for generations to come and all we did was twitter and blog. David McWillaims has said on radio this week that he has no interest in parish pump politics but he would step up to the plate and work for Ireland if asked. We the readers of… Read more »
Georg R. Baumann ‘Boycott Budget! General Elections NOW!’
It is irrelevant now who are in power or what cuts are made. What you saw from the two Brians today was just theatre, a PR job to shoe Europe that we are getting our act together. The cast of Monty Python may as well have made a speech for all the good it will do.
Hi David, Your article above reflects a post I made on the previous article which suggested that the politicians are playing along with the IMF and ECB to get them into the “kill zone” of default territory. Remember if a soldier is an honest man sent out to die for his country then a good politician is an honest man sent out to lie for his country. Perhaps the game is being played by the politicians in full knowledge that they will spring the bank bondholder default trap once the state has a line of credit in place to allow… Read more »
[…] source and full artical http://www.davidmcwilliams.ie/2010/11/24/pouring-more-cash-down-banking-black-hole-is-theft […]
That’s all very well, and David’s solution to the banking crisis might well work, if it were implemented! But where is the discussion on the longer-term vital issue? Ireland is, and has been for quite some time, living way beyond its means. The budget deficit is out of control! The plain fact is that you cannot spend more than you are taking in, yet this is what has been happening. The Irish people have come to expect higher remuneration and a higher standard of living than their counterparts in Germany, Britain, France, or Canada(where I live). How come? Where is… Read more »
http://www.youtube.com/watch?v=Fyq7WRr_GPg&feature=player_embedded#!
We as a nation are in shock. And we are vulnerable to all sorts of political machinations. And we can be controlled by the media, just look at the Lisbon 2.0 farce last year.
I actually have come to the conclusion that the IMF can be trusted better than the EU. Maybe it is the influence of the US, Canada, etc.. In addition we are getting a loan from the British without conditions.
And Michael Noonan more or less said the same thing tonight.
I was explaining to my 10 year old today that Brian Cowen was about to rob more from our family. He asked me why was I letting him, “he is just a little fat man”. I realised he was right, why am I letting him? To hell with this, see you on the streets.
Michaelcoughlan.
Great comment above.
Do you have any idea on why the EU regulatory agencies stood by and permitted the flooding of lending into Ireland by international money lenders?
If you do be very much appreciative to read anything of merit on this.
Events like this trigger political crisis. Anger of the Icelandic public – after the banking crash and during the arrival of IMF – against the government and the bankers was dominant, for a good reason. We were also shameful and guilt- ridden for ‘our’ recklessness. Needless to say confused… Here in Iceland the government opposition took advantage of the situation and used the climate to press for elections and so forth. But with the focus on protests and demands against the government, the focus on larger issues was lost. For example the IMF plan. Looking back to 2008 I wonder… Read more »
It’s good to talk, virally. In the UK after the property crash of the early 1990s, a big UK bank decided that it was going to launch an advertising campaign to improve it’s image after all the foreclosures etc.They developed a really big expensive campaign, and it ran on TV, radio, and in newspapers. Afterwards, they employed a market research company to evaluate how well it had done. To no one but the bank’s surprise, the answer was that it had made things worse. The adverts had started what we would now call a spontaneous viral counter-campaign, consisting of stories… Read more »
We are less than 10 years into the euro and nearly one third of the euro members are now bankrupt. What does this say about the euro project where interest rates are fixed to suit Germany, not looking good. We have to let the banks go bankrupt. I heard some economist in RTE saying that if we default on the private debt no one would ever give Ireland money again. He never backed up his reasoning with any evidence. In fact the evidence would show the opposite. The Asian crisis in 98, banks were let fail. Those nations recovered rapidly… Read more »
Can we not put a different angle on this ‘default’ thing? “You can have all your money back that you invested but we are going to deduct any interest we paid you before returning it.”
It works for me.
It is no longer relevant to talk about what Ireland might or might not do. Because of their particular irresponsiblity (in Ireland’s case especially with its banks) the PIGS have precipitated what was always going to be the real issue. That issue is whether the common currency, and more generally the achievement of real economic union, can be achieved and sustained without political union. Europe will attempt solutions, such as we are now seeing, which will not be successful and which will successively push reluctant governments to ever closer co-operation while they continue to deny the fundamental truth. There can… Read more »
The one thing that does amaze me, is that despite our fury at the basic rule of capitalism being entirely set aside in relation to our debt that is associated with our property crash, on a completely higher level, we are now starting to see that there will be no avoiding the reality that success is rewarded and failure is going to be punished, in a way that will be almost biblical in nature. When we default, we will be reminded in stark terms, that we didnt quite manage to accidently invent the economic version of the free energy/perpetual motion… Read more »
Tue 01 Jan 2009 Cowen says he will run country ‘as he sees fit’ ‘Taoiseach Brian Cowen says he will run the Government and the country as he sees fit and not according to Opposition demands. In a heated Dáil debate this evening in which Opposition parties repeatedly claimed the Government was “floundering” in the face of the economic crisis, Mr Cowen said the Government would discharge its responsibility on the basis of his philosophy.’ ‘The Irish people have been betrayed by their European “friends” as surely as was Britain during the fiasco of the ERM in the early 1990s.… Read more »
This is the last chance to do the right thing before Spanish “contagion” potentially mealts the Euro and disolves the European Union.
David’s economics ” MAKES CENTS” “a debt-equity swap in the banks” right now is an achievable and logical proposal.
At this stage, what have we to loose only precious time!!!
The following blog offers further insight regards the present and inevitable contagion happening in Spain.
http://gonzalolira.blogspot.com/2010/11/for-europes-future-spain-is-all-that.html
The only way is UP!
HAC
Hi David, This is an “interesting” week of developments for Ireland as we are coerced into negotiating some ‘bailout’ funding. You are right, the banks are a ‘black hole’ which people dont seem to be resolving. The problem is of course that there are many ‘counter-parties’ to the banks problems which if we ‘burn’ creates more problems. Converting debt to equity under normal levels of indebtedness at a distessed business or indeed a bank can be a normal course of action, but do you think any deposit holder would take shares in a bankrupt bank rather than take out their… Read more »
We need to wake up and realise that the IMF are a nasty organisation that should be avoided at all costs. But who will lead this revolution?
http://www.youtube.com/watch?v=Cl__su75HDA&feature=player_embedded
So If I understand well:
For America QE II stands for Quantitative Easing
For Irland QE II stands for Queen Elisabeth II
After all just going back to source ;) where is the a big deal?
As Plato said: “Those who are too smart to engage in politics are punished by being governed by those who are dumber” How much more punishment can you take, David, before you decide you’ve had enough? I just hope you’ve already decided this, because Ireland needs people like you to take over, not just talk about what to do, but to do it. Forgive me for being personal but, as someone says above, no one seems to listen to you. No one who has any control at least. You have great influence, and now you (and others like you) need… Read more »
Someone from Kazakistan must have been reading Davids articles cause they let the bondholders take thier losses on failed banks last year. By all accounts theyre doing much better since then. My vision for Ireland from this point is still as David and many other bloggers have been saying – have the banks pass their losses to their creditors. Reasons we have been given for not doing that 1. We have to ensure credit for our businesses and startups. As people realised this wasn’t happening, we went onto the next excuse. 2. Our government would have to pay more to… Read more »
Fellow debt slaves:
Signs of Hope At Last
http://wp.me/pBbF3-bj
The north east of England generates £55 billions in tax rev each year, it’s population is less than 4 million and doesn’t have a vibrant property market.Squaring the circle between income and spending has to start with costs @ the top, the ppp of the PRESENT Irish min wage is no better than the UK, yet busineses here are whining continually, it was introduced as a trade-off for limitles nos of eastern europeans coming here and pushing housing costs higher and squeezing salaries.Give and Take ?
http://bit.ly/gQdqY3 Under the changes introduced by the Bank of Spain in September, lenders must take account of a drop in value of at least 30 percent if they keep the assets for more than two years. They must also make provisions for bad loans after 12 months, rather than as long as 72 months. The new rules will lead to an average increase in provisions for 2010 of 2 percent, the central bank said in May. They will also knock off an average of 10 percent from the pretax profit that lenders generate from their Spanish businesses, the Bank of… Read more »