Last week, we had the tale of two countries.
One country, Iceland, apparently did ‘everything wrong’ by defaulting on its bank debt and increasing government spending as the people of Iceland saved. Iceland told the International Monetary Fund (IMF) to back off until it was ready to do a deal. It also put the bank deal to a referendum.
The other country, Ireland, allegedly did ‘everything right’ by promising to pay everyone every red cent and imposing huge austerity measures on its people.
We handed over the keys to the IMF without even taking a vote on the details of the plan.
When the vote is taken this week, we have already been told we can’t renegotiate any of it, so the next election – from a macroeconomic point of view – is academic.
What is the result of these different paths? Last week, Iceland cut its interest rates to 4 per cent. Its crisis is over.
The deal with the creditors is ready and it will be done in Iceland’s favour. Money is flowing back into Iceland. Unemployment peaked at 8 per cent and is falling. National income is rising robustly again.
Ireland, on the other hand, is getting deeper and deeper into a hole. Last Friday, the Central Bank confirmed what many have suspected for some time now.
There is an ongoing, relentless run on the Irish banks. It hasn’t manifested itself in queues at the ATMs yet, but that’s the way it is going.
In November, the Central Bank said it Injected more than €10 billion into the Irish banking system. This is to replace the money going the other way: leaving the country.
This brings total Central Bank Support of the Irish banks to €44.76 billion.
But that’s not all because, when added to the support of the European Central Bank (ECB),a total of €181 billion is being lent to the Irish banks by the ECB and its vassal on Dame Street.
In medical terms, the Irish banking system – and by extension, the Irish economy – is an anaemic patient losing blood and being kept alive by huge transfusions.
Unless we stop the haemorrhaging, the situation will never stabilise.
The only way that Ireland can stop haemorrhaging is to separate our banks’ debts from our country’s debt.
The reason money is leaving the banks is that the population doesn’t trust the banks; it also doesn’t trust the ability of the government to deal with the crisis.
We realise that Ireland has a debt problem and we also know that the way to deal with too much debt is by having less debt, not more debt.
So the more debt the government takes on, the less credible it becomes and the more we rush to protect our savings by taking them out of the banking system that has proved to be the single greatest destroyer of wealth in this country since Cromwell.
So how do we get to a position of less debt? First, we reiterate that the bank debt is not Irish sovereign debt and it never was; it must be treated as commercial debt.
A commercial default is quite commonplace.
The implication of the ECB’s funding hole in the banks is that they are bust, so they must default or force debt-for-equity swaps, whereby the bondholders and other creditors become shareholders and we move on.
We can only do that with those banks that might survive in the future. As for Anglo, we simply default on it. The debt wasn’t ours to pay in the first place and, secondly, it will simply be a waste of billions of euro, which have to be earned.
Throwing real money into a financial cesspit never made you credible, it made you look stupid.
What’s more, it scared proper investors because they knew, the more money you wasted in Anglo, the less you understood about the value of money and how difficult it was to make the stuff you are so readily squandering.
So what happens when we restructure our debts? Normally after a deal is done, investors flood back into the country.
This has happened in every country where the default was accompanied by a change in the way the country does business.
The most conspicuous examples of this are the US in the 1930s, Brazil in the 2000s, all the Asian tigers in the late 1990s and Mexico in the late 1980s – not to mention all the countries of eastern Europe which defaulted on their debts.
The reason these countries recovered and grew was that they had a mechanism to regain access to markets quickly. It was called the Brady Bond.
I worked in this market for a number of years in the late 1990s and it was the way in which countries that defaulted made their peace with creditors and both the countries and the creditors stayed in the game.
When the emerging-market countries defaulted en masse in the 1980s, the banks – particularly American banks – took huge hits because most of their loans had to be written off.
The market froze until Nicholas Brady, Ronald Reagan’s finance adviser, came up with an ingenious rescue plan.
Brady is an Irish-American. His great grandfather, Anthony Brady, left Ireland, became a friend of Thomas Edison and subsequently made a fortune in the US.
Nicholas Brady had worked in banking for two decades before Reagan appointed him. Brady understood that the American banks needed away to get back into the countries to do business and get some of their money back.
He also understood that the countries needed away out, otherwise they would do business with non American banks and the Americans would have lost everything.
So he came up with a pragmatic deal.
All the old loans were re-examined. Much of the banks’ original principal would be written off and the remainder would be paid by the issue of new 30-year bonds called Brady Bonds.
The new lower principal was guaranteed by the US Treasury.
The countries would have a five year grace period to get back on their feet, but would be allowed to borrow again. Initially, because of the risk associated with former defaulters, the interest on the bonds was high.
However, as the country adopted proper economic policies, the risk fell and consequently so did the interest rate. The price of the bonds would rise accordingly.
Investors bought these new bonds.
This solved the banks’ dilemma because, despite losing huge amounts on their initial loans, at least the books were now clean and the developing world’s debts became someone else’s problem.
The Investors were happy as long as the countries behaved themselves and changed their ways, and the countries were happy because they now had access to new finance.
The Brady Bond solution shows the triumph of common sense over dogma. It is clear that the present strategy of four more years of austerity without any debt forgiveness will not work.
Do you think there is a reason that this policy has never been tried in any other country, anywhere ever?
It’s time to snap out of it and do a deal. Maybe Nicholas Brady – the great grandson of an Irish emigrant – has offered us a workable blueprint.
The Icelanders are certainly better off after following their own path, so why don’t we?
As we are likely to default anyway, why not have a plan up our sleeve for that eventuality?
Economists and their role Much of the public attention these days is given to economists by the media landscape. Some of them are well established, others on their way up. In Ireland, some of them are publishing papers that are nothing but a reflection of governments policy and/or generally accepted knowledge, adding nothing or very little new, and never missing to dish out at those who are critical of government policies and proposing alternative views and options. They can be seen to use Internet fora, Irish Times etc. for a frequent publishing bombardment, creating a Halo of faked expertise. May… Read more »
David, THE most important question you ask is this, “Do you think there is a reason that this policy has never been tried in any other country, anywhere ever?” Why then are the Irish Government implementing this policy? My guess, they’ve sold us out a long time ago and can not now renegue on what ever deal they did! I think with regard to Anglo and a few other banks, there are scandals in these banks that they need to hide! The Irish Government are scared sugarless that the truth will out! The fact is, the Brady Bunch, would have… Read more »
We tried it their way. The banking policy followed has proved to be a potentially fatal mistake. Dukes has now announced even the €35 bn for Anglo might be small change and will probably not cover the potential tsunami of mortgage debt ready to roll in on our zombie economy. I’ve had enough rubbish from Tricky Trichet: http://bit.ly/fFd62a “Asked if he feared a domino effect in light of the debt crisis, he said that this would not happen, adding that Ireland and Greece were both solvent and therefore debt restructuring was not an issue.” He’s trying to use Ireland as… Read more »
[…] full article at source http://www.davidmcwilliams.ie/2010/12/13/time-to-play-the-brady-hunch […]
Spot on David as usual. We have to realise one simple thing. There is not a teaspoonful of common sense in government. Any rational plan is overlooked because the imbeciles that got us here, and run Ireland, simply don`t know how to do the job. Vincent Browne said it very comprehensively-there are 15 state of the art dunderheads making ministerial decisions. Even with new “government” what hope is there? They are already backtracking saying they cannot reverse decisions. They are all a bunch of weak, useless, plonkers. Difficult to see a bit of backbone amongst them. Any real leader would… Read more »
Hi David
Great article. Have the government or opposition ever commented on your ideas regarding how to deal with the situation?
Regards
Kerry O’Sullivan
All the 2008 bank guarantee (which was designed to save Ireland from a systemic failure) has achieved is a banking system failure in slow motion. In effect the collapse has already happened but we just haven’t recognised it yet. There is a craziness in the Irish financial system that is symtomised by the following huge anomaly: 1) The interest rate on an AIB 20 year mortgage, fixed for five years, is 3.85% APR. 2) Five year Irish Government bond yields are in excess of 7%. Any rational AIB loan officer would / should not issue any mortgages at 3.85% when… Read more »
Extract from http://theautomaticearth.blogspot.com/ “This system, unlike its strictly industrial predecessor, is endogenously prone to over-extension in the short-term. The large economic rents extracted by speculative financiers lead to severe debt deflations, which then leave significant segments of the underlying population in economic despair, including the industrial capitalists. The rapid growth enabled by financial discipline sparks a crisis of legitimacy, in which previously self-disciplined financial consumers begin to question the wisdom of their shackles. For the most part, this questioning is simply a result of there being no other option, as financial expectations and promises have evaporated as quickly as they… Read more »
I thought Iceland recently agreed to repay it’s debt?
http://www.guardian.co.uk/business/2010/dec/09/britain-in-repayment-deal-with-iceland
As per usual, David, has ‘hit the nail on the head’. If I were to put a fine point on things this idiotic government of ours should be thrown into jail and serve a lifetime of hard labour. What a complete and utter shower of dickheads!!! Anyone who goes away and votes for FF in the upcoming General election would want to be completely off their heads altogether!!! NO HOPE stated in his comment that there’s not a teaspoonful of common sense in Government or in the mandarins that run the Civil Service, well, never a truer word could have… Read more »
Re the zero coupon Brady bonds, given the likelihood these bonds will not be issued to Ireland by the ECB, should we be looking to leave the euro and join the dollar, or better still, return to a punt following the dollar. This would be even a better deal than the icelandic one above!
David.
The common sense econ 101 you write on is addressing the *problem* from a perspective of clear non skulldugerry intelligent thinking.
The insiders in power who are making the choices are for the most part a bunch of crooks, so, they are going to implement choices that work for them and that is what they are doing and what we are seeing.
So, lets record it all and climb into the shoes of the crooks and get into their world of thinking and get ahead of their curve and do a sherlock holmes on ’em!!
I agree with michaelcoughlan. This whole debt default argument is irrelevant as default is a mathematical certainty.
The problem that no one is looking at is that of what happens afterwards. There’s a massive structural government deficit. What’s going to be done about that?
An interesting interview with Sanjayit Das, an Australian economist, covering much of current goings on. (You can listen to it from the site by paging down a bit).
http://www.thedisciplinedinvestor.com/blog/2010/12/05/tdi-podcast-190-das-on-a-potential-eurozone-failure/
Bringing the country into disrepute – bankrupting our kid’s future – condemning future generations of Irish people to emigration and/or high taxes – taxing the poor to pay for the mistakes of the rich – bailing out your cronies at the expense of Ireland’s hard fought independence ….
This is high treason – it’s a pity we did away with hanging. We should also think about changing the first line of the National Anthem.
David
Yes, the patient continues haemorrhaging,it is time to apply the tourniquet – to all limbs.
On Marion Finucane yesterday, 12.12., you did not say no when she asked if you would ‘consider running’.
Now, drains and all of that aside: would you?
Also: please do!
How about something like this. Take the 85bn from the IMF, buy silver, gold, and every other precious metal. Bring it in and have our own fort knox. Start printing our own currency. Tell the IMF/EU/UK/UK to go a jump, do a deal on the debts and tell them they will be paid back in the new currency on our timeline. The new currency would not suffer a run backed with precious metals. We would have 85bn of gold standard currency swishing around in our own economy, more than enough and as the dollar/pound/euro devalue due to their own print-baby-print… Read more »
subscribe.
I admire your perseverence David, banging your head on a brick wall comes to mind! What amazes me is 1. is the people in charge this Thick! with their present strategy or 2. are they hiding something?? Either way the biggest dissapointment is the apparent apathy of the Irish People, (it seems if you got a problem in Ireland you ring Joe Duffy!! for f…. sake! In my opinion if the people of this country had a backbone instead of a streak of yellow there would be mass demonstrations outside Leinster house demanding the resignations of Government at least. Even… Read more »
Folks, great to see David’s show “Outsiders” is repeatedly sold out in Theatres. More light being shone into dark places for ever-more people. He is educationg the people of the country regarding the behaviour of the gambling bankers, bondholders, EU and DoF mandarins and politicians of most parties and some of none.
“Education, education, education” to replace the old mantra of “Location, location, location”.
Let’s keep at it!
Remember Radio Caroline? Yep the ship that broadcast Rock and Roll to young people craving for self expression in a grey regime. I joined this forum some time ago and quite frankly am more than impressed by most subscribers observations and thought processes. This kind of stuff is just not available in the mainstream. Georg R Baumann opens this discussion board with a fascinating article bringing us on an economic journey from the 1700’s to present day.It effectively illustrates human frailty which at the upper levels of society still hasn’t been properly regulated. Brian C continues and ultimately lays bare… Read more »
Sarkozy recently:
“Experience has shown us that uncontrolled financial liberalisation can expose our countries to systemic financial crises…We need clear international rules of the game and institutions to make them respected.”
Merkel is saying similar things.
This is the direction global political thinking needs to go. We need to realise that the myth of the market as promoted predominantly by the financial sector – ie those who most benefit from economic instability – has been shown to be false. Even the arch-free-marketeer and midwife to the current global meltdown, Greenspan, has admitted as much.
DMcW is becoming even more desperate in his default/debt for equity rantings. Thats his only solution….thats his only input. Our debts are mainly ECB and soon to be ECB/EU/IMF they will not allow a default, they are the lenders of last resort. That is where we are there is no way out. We must live with debt, lump it or like it. The truth of the matter is that austerity will be the main thrust of economic policy for the next decade. The Irish government are seeking to set down the terms of any loans as seen in the letter… Read more »
Georg and BrianC,
Great read up top.
This is my take on the system.
Its rigged to steal from people.
The world can offer all a roof over head and food and utilities without debt.
The system in place is designed to stop this outcome.
Adam Smiths free free market and invisible hand would bring this prosperity for all outcome.
Its been hijacked in order to make inequality to feed an egomaniacal culture.
The balls on this guy! Why doesn’t he write a letter to the bondholders in Europe while he is at it!
http://www.irishtimes.com/newspaper/breaking/2010/1213/breaking35.html
But it is so obvious he is chasing votes.
Lennie is putting it up to the AIB corporate finance ‘banksters’ and their bonuses to deflect from all he ‘blinked on all’ for the taxpayer to keep the me feiners custy the lack of proper governance decisions done on the ‘me feiners’ watch.
Worried that Rabbite in the headlights and Brutal Robin Brutal are also still at the same sh1t.
we need to move on……
Am I right in thinking that ony physically preventing some of those FFers showing up to vote is all that’s between us and a world of sheyte?
REMINDER
LENIHAN “ECONOMICAL” WITH THE TRUTH
LENIHAN said legislation brought in on foot of the bank guarantee already prohibits the payment of any performance bonuses to senior bank executives. No bonuses have been paid to bankers for 2009 or for this year, he said.
THE REALITY: Executives at the two main banks are receiving “supplements” of at least 6 figures in the form of pension top-ups plus other benefits, contrary to the recommendations of CIROC, the Covered Institutions Remuneration Oversight Committee. READ AT LINK BELOW:
http://www.independent.ie/national-news/bank-chiefs-still-getting-topup-cash-for-pensions-2182660.html
Another enlightening and interesting option from David. There are many international commentators expecting Ireland to default, and actually the ECB/EU and IMF expect that, just they want to get their own financial systems protected as much as possible from any shock before that. They have even said as much if you read between the lines.
So what to do then is a good question for Ireland, these bonds are certainly a good option.
How in God’s name can an orderly retreat occur for any country from the Euro?
There would be chaos and capital flight after the first hint of it.
Perhaps this is already happening in the PIIGS countries?
I for one are keeping German denominated Euro notes in my safe-just to buy the tinned food and shotgun cartridges when the rainy day finally comes.
There will surely be absolute chaos.
Has David any suggestions for an orderly separation of the PIIGS nations from Deutschland & France?
Aine Brady junior minister with responsibility for older people, will you PLEASE resign today????
Aine Brady will you please consider a career doing something else?????
Aine Brady you should be ashamed of yourself!!!!!
Excellent article from Eichengreen on the same topic here:
http://www.project-syndicate.org/commentary/eichengreen25/English
He makes the point that it should be done in a co-ordinated EU-wide way and will require EU (German) leadership. Maybe Ireland could somehow force the change?
Interesting discussion here on another possible approach, debt buyback at a discount:
http://www.irisheconomy.ie/index.php/2010/12/09/debt-buybacks/
This is more technical and ‘underhand’, or so it seems to me. Coming clean with an open debt restructure as in David’s and Eichengreen’s articles seems to be the way forward, however.
Also, David says:
“This [investors flooding back] has happened in every country where the default was accompanied by a change in the way the country does business.”
and
“… as the country adopted proper economic policies, the risk fell…”
Bit of a problem there?
On a hopeful note folks :)
Humanity has a collective consciousness that we are all connected to and affected by – the noosphere. As more and more people wake up to the insanity of what is unfolding; the insanity of a civilisation and a monetary system based on debt and competition and greed, the tide will turn against the current elites who have clearly lost the run of themselves. It’s just a matter of time before the ‘hundredth monkey’ gets it…then a whole new age begins for humanity and the Earth.
BIS REPORT Greetings, Just a quick note: The latest report from Bank of International Settlement is quite interesting, here: http://www.bis.org/publ/qtrpdf/r_qt1012.pdf 1. One in eight Euros of German banks lending went to Ireland, Greece, Portugal and Spain. 2. This adds up to a sum that equals the German Budget figure of Euro 318 billion. 3. However, only adding private lending paints the full picture of German exposure to only these four countries, which adds up to Euro 512.7 billion. I think these numbers speak for themselves, and the thought has crossed my mind on the Maastricht treaty that rules member states… Read more »
Letter from the Minister for Finance to the Ballsbridge clique…
http://www.irishtimes.com/newspaper/ireland/2010/1214/1224285490442.html
Of course this is only one small part of the job of disciplining Ireland’s most persistent corporate offender….a series of mishaps, misadventures, and mistakes…costly mistakes.
Everytime that there is a recession, it seems that the Ballsbridge Bankcentre are in need of a taxpayer bailout. The fools never learn. Time for BA Baracus to introduce his friend “PAIN” to them clowns.
A heartfelt note of commiserations to any Italian readers of this site. Looks like you can only get rid of Berlusconi through old age and severe dementia, the latter being at an advanced stage already, the former disguised by the wonders of organic chemistry and surgeons.
Chi pò, non vò; chi vò, non pò; chi sà , non fà ; chi fà , non sà ; e così, male il mondo va.
Who can do, don’t want to; Who wants to, can’t do; Who knows how to do, won’t do it; Who does it, doesn’t know how to; and, so, badly goes the world.
Anybody picked up on the rather odd exchange between Sean O Rourke (I believe it was him) on Morning Ireland when O Rourke questioned Lenny regarding Dukes remarks on the possible coming down the line exposure of Anglo to hitherto unreported mortgage debt? Lenny said Honahan had taken this into account in his stress account of Anglo and that the set aside of €10 bn with €25 bn bailout collateral would cover it. The odd bit was Lenny remarked that Anglo was not in the business of residential mortgages in any case! So what’s that about? Has Anglo been doing… Read more »
Hello all. I have spent the best part of 2 years out of Ireland looking for work, backpacking, the usual story for one of Irelands 21st century nomads. It is so frustrating to follow the mess in Ireland and feel embarassed when I have to tell someone that i am from Ireland. Especially embarassing considering I now live in Berlin! I must tell you now that I know next to nothing about economics (which probably puts me ahead of Leninhan). All I know about economics is whatever I read in David’s articles or in these blogs. I try to watch… Read more »
9pm RTE news that ‘the bailout’ for Ireland included a surcharge of 2.9% amounting to approx €5bn extra charges!!!!
Why did negotiating team not walkout in protest?
This was never levied on any other bailout and is unprecedented, anyone got further details on this extra penal rent extraction?
Posters. Bottom line maths. Paper money is no longer sound. The insiders know this cos they are all to well aware oh how much of it they’ve created in the last 5 years. An insider class has literally printed the paper money into oblivion and if one looks at it from a scammers perspective the insiders cannot believe their luck in how much of it they are printing and getting away with. This is how all the other stuff id going on. It all adds together when one sees it from the perspective of the money printing machine and where… Read more »
Posters.
The dollar —————— the euro ————————-> paper scam robbing real wealth from average worker.
Posters.
The economy ———- rigged ————–> to hide the paper scam behind a curtain.
Posters.
How much time left in paper scam ———> till enough people see the truth that the paper money is been funneled off the printing presses and into an inner circle.
Posters.
There is no limit to the paper and the ink available to keep printing.
I’m going to like this guy if he keeps going down this track! He really is growing balls!
http://www.irishtimes.com/newspaper/breaking/2010/1214/breaking26.html
Just imagine what could happen with a little bit of unified coercion from us. The collective will, if organised and directed properly could catapult us through this mess.
http://www.politics.ie/current-affairs/145932-jacke-healy-raes-daughter-appointed-criminal-injuries-board-2.html http://www.sbpost.ie/news/ireland/victims-of-violent-crime-paid-over-17m-by-state-53002.html Rosemary Healy Rae daughter of that bastion of democracy Jackie Healy Rae has been appointed to the criminal injuries board.Her appointment was one of the final political acts of man so crippled with arthritis he will be forced to retire at the next election (whenever that is….) http://www.thejournal.ie/we-pay-e1300-every-time-michael-healy-rae-comes-to-dublin-2010-09/ Micheal Healy Rae appointed a member of the Citizens information board. Appointed by Mary Hanfin. Taking 2000 years of inflation into account, would it be fair to say that in todays money 30 pieces of silver is roughy equal to the political appointments of family members, a hospital and more… Read more »
EU Citizen Initiative
A citizens initiative can be brought forward to the EU commission which then is required to react within 3 months. This is new and could be used to renegotiate the loan shark agreement forced upon us.
Requirements are 1 million signatures from 7 countries.
Beyond any doubts, we have friends in Greece, Spain, Italy, Portugal, Belgium, Germany and Ireland.
Just an idea….
“As for Anglo we simply default on it. The debt wasn’t ours in the first place” I must say David you have got a brass neck, Anglo would be long gone if you had not convinced Brian Lenihan to guarantee that same Bank. How can you write lines like the above. Have you done what the Government have done, buried your head in the sand, do you think if you keep writing such things that the people of Ireland will just forget that it was you who was the cause of saving the bond holders in Anglo in the first… Read more »
December 15th 2010 – Ireland sold to the lowest bidder?