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Posts tagged ‘Morgan Kelly’

Noonan to use Anglo promissory notes to deflect focus from Anglo bonds.

By Namawinelake

When Professor Morgan Kelly re-ignited the debate about debt forgiveness on 18th August, 2011 something strange happened in the aftermath. Out of nowhere came the announcement of a report being produced by a “mortgage expert group” by the end of September 2011. No-one seems to have previously heard of this group though the group’s title was practically the same as another group which had produced a report in 2010. But that 2010 group had done its job, delivered its recommendations and disbanded. This new “mortgage expert group” seems to have mushroomed up overnight and if you were cynical you might say it was a knee-jerk response to headlines on debt-forgiveness, and that the “end of September” report was an attempt to deflect focus away from politicianswho were, after all, still on the beach with their spades and buckets. Cynicism was only increased by the Government failing to give even the most sketchy of details about the work of the new group – its members and expertise, terms of reference, deliverables

full article at source: http://namawinelake.wordpress.com/2011/09/17/noonan-to-use-anglo-promissory-notes-to-deflect-focus-from-anglo-bonds-confused-maybe-that%e2%80%99s-the-idea/

Ireland is heading for bankruptcy!

OPINION: Ireland is heading for bankruptcy, which would be catastrophic for a country that trades on its reputation as a safe place to do business,

By MORGAN KELLY

WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.

Ireland is facing economic ruin.

While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

As a respected academic expert on banking crises, Honohan commanded the international authority to have announced that the guarantee had been made in haste and with poor information, and would be replaced by a restructuring where bonds in the banks would be swapped for shares.

Instead, Honohan seemed unperturbed by the possible scale of bank losses, repeatedly insisting that they were “manageable”. Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s.

Rising dismay at Honohan’s judgment crystallised into outright scepticism after an extraordinary interview with Bloomberg business news on May 28th last year. Having overseen the Central Bank’s “quite aggressive” stress tests of the Irish banks, he assured them that he would have “the two big banks, fixed by the end of the year. I think it’s quite good news The banks are floating away from dependence on the State and will be free standing”.

Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person. Armed with Honohan’s assurances that the bank losses were manageable, the Irish government confidently rode into the Little Bighorn and repaid the bank bondholders, even those who had not been guaranteed under the original scheme. This suicidal policy culminated in the repayment of most of the outstanding bonds last September.

Disaster followed within weeks. Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion. Despite aggressive cuts in government spending, the certainty that bank losses would far exceed Honohan’s estimates led financial markets to stop lending to Ireland.

On November 16th, European finance ministers urged Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.

At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.

Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.

Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.

In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.

The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy. Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.

Six months on, and with Irish government debt rated one notch above junk and the run on Irish banks starting to spread to household deposits, it might appear that the Irish bailout of last November has already ended in abject failure. On the contrary, as far as its ECB architects are concerned, the bailout has turned out to be an unqualified success.

The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

But why was it necessary, or at least expedient, for the EU to force an economic collapse on Ireland to frighten Spain? The answer goes back to a fundamental, and potentially fatal, flaw in the design of the euro zone: the lack of any means of dealing with large, insolvent banks.

Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans. Had the collapse been limited to Irish banks, some sort of rescue deal might have been cobbled together; but a suspicion lingers that many Spanish banks – which inflated a property bubble almost as exuberant as Ireland’s, but in the world’s ninth largest economy – are hiding losses as large as those that sank their Irish counterparts.

Uniquely in the world, the European Central Bank has no central government standing behind it that can levy taxes. To rescue a banking system as large as Spain’s would require a massive commitment of resources by European countries to a European Monetary Fund: something so politically complex and financially costly that it will only be considered in extremis, to avert the collapse of the euro zone. It is easiest for now for the ECB to keep its fingers crossed that Spain pulls through by itself, encouraged by the example made of the Irish.

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.

Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.

The ECB applauded and lent Ireland the money to ensure that the banks that lent to Anglo and Nationwide be repaid, and now finds itself in the situation where, as a consequence, the banks that lent to the Irish Government are at risk of losing most of what they lent. In other words, the Irish banking crisis has become part of the larger European sovereign debt crisis.

Given the political paralysis in the EU, and a European Central Bank that sees its main task as placating the editors of German tabloids, the most likely outcome of the European debt crisis is that, after two years or so to allow French and German banks to build up loss reserves, the insolvent economies will be forced into some sort of bankruptcy.

Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off.

Worse still, a bankruptcy can do nothing to repair Ireland’s finances. Given the other commitments of the Irish State (to the banks, Nama, EU, ECB and IMF), for a bankruptcy to return government debt to a sustainable level, the holders of regular government bonds will have to be more or less wiped out. Unfortunately, most Irish government bonds are held by Irish banks and insurance companies.

In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico.

Suppose that we did not want to follow our current path towards an ECB-directed bankruptcy and spiralling national ruin, is there anything we could do? While Prof Honohan sportingly threw away our best cards last September, there still is a way out that, while not painless, is considerably less painful than what Europe has in mind for us.

National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.

First the banks. While the ECB does not want to rescue the Irish banks, it cannot let them collapse either and start a wave of panic that sweeps across Europe. So, every time one of you expresses your approval of the Irish banks by moving your savings to a foreign-owned bank, the Irish bank goes and replaces your money with emergency borrowing from the ECB or the Irish Central Bank. Their current borrowings are €160 billion.

The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.

So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.

Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position. By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions. Just as importantly, it sends a signal to the rest of the world that Ireland – which 20 years ago showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers – is back and means business.

Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival. It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy.

The destruction wrought by the bankruptcy will not just be economic but political. Just as the Lenihan bailout destroyed Fianna Fáil, so the Noonan bankruptcy will destroy Fine Gael and Labour, leaving them as reviled and mistrusted as their predecessors. And that will leave Ireland in the interesting situation where the economic crisis has chewed up and spat out all of the State’s constitutional parties. The last election was reassuringly dull and predictable but the next, after the trauma and chaos of the bankruptcy, will be anything but.

source: http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html?via=rel

Comment:

I thought I would resurrect this article .It still holds true to-day

This is the real Ireland and the codgers in the Government are stupid enough to ignore this excellent piece of work. Morgan Kelly is the voice of sanity crying in the wilderness ,those of you who want to hear the truth listen to him !

Morgan Kelly: Right or Wrong???

Morgan Kelly‘s article in the Irish Times on Saturday last, was responsible for stirring up a hornets’ nest in Irish politics and in the zest pit that is the Irish financial world. Here is a summary of the main points he made of which I wholeheartedly agree with. Coming from an ordinary private citizen’s perspective I cannot understand how we the downtrodden taxpayers can still tolerate morons in Government and their stooges running the various financial institutions that have so miserable failed us and our nation state. Some of the people now uttering their pearls of wisdom to us were in fact cheerleaders of the disastrous policies and still enjoy lottery salaries whilst the rest of us struggle to put bread on the table .Until there pampered leaches start to feel the pain the ordinary citizens feel will they understand that the time for waffling is over and we must tackle the high prices for the basic needs like high ESB prices ,Petrol prices , and the various taxes that they now seem to be advocating to pay back debts we the people have nothing to do with ! We must default on this debt to do otherwise is just prolonging the inevitable, you don’t need to have a PHD to suss this one out ! 

– The bank guarantee of September 2008 was a mistake, but a much bigger one was failing to reverse it when it became clear that the bank losses were insupportable.

Patrick Honohan gave “an extraordinary interview” to Bloomberg on 28 May last year, giving assurances that “the two big banks, fixed by the end of the year. I think it’s quite good news the banks are floating away from dependence on the State and will be free standing”. Riiiiight…

– Honohan’s miscalculation of the bank losses is the costliest mistake ever made by an Irish person.

– With Ireland’s reserve fund enough to keep us funded until this summer, Brian Lenihan was in a strong negotiating position when he initially refused to countenance an EU/IMF bail-out last November – but that position was blown out of the water by Honohan’s admission on Morning Ireland on 18 November that Ireland would need a bailout of “tens of billions”.

– The IMF proposed reductions of €20bn on unguaranteed bonds totalling €30bn and Lenihan apparently told the IMF team: “You are Ireland’s salvation.”

– However, the pesky Yanks vetoed such reductions – US treasury secretary Timothy Geithner, the man who sanctioned €13bn of payments from State-owned AIG to Goldman Sachs, “believes that bankers take priority over taxpayers”.

– The EU/ECB were also insistent on all debts being repaid in full. The IMF wanted major haircuts. The Irish negotiating team sided with the EU/ECB – prompting one IMF staffer to describe the Irish as “displaying strong elements of Stockholm Syndrome”.

– The bailout was on a par with the Bank of England insisting that Northern Rock be rescued by Newcastle City Council.

– “The sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted … The ECB is keeping its fingers crossed that Spain pulls through by itself, encouraged by the example made of the Irish.”

– “Irish insolvency is now less a matter of economics than of arithmetic … The predictions for Ireland’s debt by 2014 range from €220bn to €250bn, but either way we are talking of a Government debt that is more than €120,000 per worker.” (To which we add: So, like, around 27 years of total income tax from someone earning the annual industrial average…)

– Ireland’s two main banks were “run by faintly dim former rugby players” – so nobody thought they could run up enough debts to bring down a continent.

– The European Central Bank sees its main task as placating the editors of German tabloids.

– Ireland, and Europe’s other small crisis countries, will eventually be forced into some sort of bankruptcy – which would be a disaster for us. Creditors could sell debt to so-called ‘vulture funds’, which could have “national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off”.
 

Compiled by LAURA SLATTERY and SUZANNE LYNCH

A compelling case for default and swift balancing of the national budget or a lethal injection for our economy and citizens? Twelve economists discuss 

SEÁN BARRETT 

Senior lecturer in economics Trinity College Dublin 

IRELAND’S CHANGE from a full employment economy and solvency to 14 per cent unemployment and a bailout invites a contrarian response so well led by Morgan Kelly. Widespread institutional failure caused the twin crises in banking and the public finances. These then spread their contagion over the entire economy.

Regulatory capture and institutional malaise have dominated our responses to date. We need the provocative advice of Morgan Kelly to walk away from the bank crisis and tackle the public finances quickly rather than over several years.

With so many of the institutions and personnel who caused the twin crises largely exempt from its consequences, and likely to remain exempt, we need Kelly to remind them and us how much they have harmed this country.

Under “measures to prevent a recurrence” Kelly merits the tag of “required reading”.

ALAN McQUAID 

Chief economist Bloxham Stockbrokers 

THE UNDERLYING theme of the Morgan Kelly article, apart from criticising individuals, is not saying anything new. What Joe Durkan and the ESRI are talking about is similar, in a way, to Kelly – they’re both talking about speeding up the budget correction. Enda Kenny has dismissed the idea and I’d be with Kenny on this. The economy is too fragile.

The [Kelly/Durkan] argument is that it’s the ECB’s problem: a lot of the money was lent to us by European banks that should have known better. I wouldn’t disagree with that. I think the ECB has to do a lot more before this crisis is over.

These are unprecedented times and my gut feeling is that I don’t think anybody did anything deliberately to mess the State up, I think it was all in good faith. It does look like it was the wrong thing to do. Patrick Honohan is obviously in a difficult position given he is on the ECB. I’m not sure anyone could have done any better.

RAY KINSELLA 

Economist UCD Michael Smurfit Graduate School of Business 

IRELAND SHOULD withdraw from the euro zone and inform the next finance council of its decision. This will require pegging either to the UK’s sterling, our largest trading partner, or to the “Deutsche” euro. Either way it will involve devaluation.

The transmission of the effects across the economy will involve negative, as well as positive, consequences. What can be said with near certainty is that it is the least worst option.

Domestic economic indicators and financial market data point to a terminal lack of credibility in the terms, scope and time-frame set out in the bailout. There is simply no way back from prevailing Irish bond yields and associated CBF spreads.

The recent euro zone policies have flown in the face of the markets’ dispassionate analysis of the adjustment policies imposed on the Irish economy. The EU’s €750 billion “shock and awe” initiative cobbled together in May 2010 singularly failed to firewall the periphery from contagion.

Recent proposals for a stabilisation mechanism by 2013(!) defy belief.

PAUL SWEENEY 

Chief economist Irish Congress of Trade Unions 

MORGAN KELLY’S article hit a real chord. He said it as it is. But his solutions would lead to chaos and impoverishment. He is correct about the immense stupidity of the bank guarantee and of the government continuing to repay these socialised private debts.

His most dangerous solution is to “bring the budget into balance immediately”.

This would mean that the deflationary path currently being pursued by government – where one quarter of domestic demand was wiped out in just three years – would look positively benign. It would eviscerate the economy and wipe out too many businesses and citizens. Besides, few governments run balanced budgets.

This idea smacks of that most dangerous tendency in academic economics – to deliver prescriptions with little thought as to their impact on people. Fine in theory, appalling in practice. Interestingly, in its latest report, it is a weakness to which the ESRI has also succumbed as it does a volte face on previous recommendations and demands huge and immediate cuts.

Kelly is right on “disengaging from the banks” but it has to be done with EU agreement. Call it a “managed default”.

TOM O’CONNOR 

Lecturer in economics and public policy Cork Institute of Technology 

I BELIEVE Morgan Kelly is correct in his assertion that Patrick Honohan was badly mistaken in going public on November 18th last, stating the Ireland would need a bailout. He is also totally correct that the bailout cannot be repaid and will have to be abandoned. Bondholder haircuts were rejected by the ECB also and the Irish negotiating team essentially rolled over for the ECB team subsequently.

The selfish motivations of the US and ECB, who were not concerned at all with the economic interest of Ireland, should alert policymakers immediately that the deal was never well intentioned and should never have been agreed.

Kelly’s solutions are not the ones I would favour, however. His assertion that we eliminate an €18 billion Government deficit immediately is neither possible nor socially acceptable.

I do think that his way of dealing with the banks and the ECB is somewhat ingenious: the Government leaves the bailout and leaves the banks by default to be supported by the ECB, who ultimately will have to swap their debt for share capital. The ECB picks up the €160 billion tab. However, this could create huge uncertainty and frighten international investors.

BRIAN LUCEY 

Associate professor in finance Trinity College Dublin 

PATRICK HONOHAN couldn’t change the guarantee – that’s a political decision. I’d be amazed if he didn’t argue strenuously for some change. In his previous existence, he had argued that we should be cautious with guarantees. Clearly, he lost the argument.

I don’t think Honohan could have said anything much more than what he said – he is constrained by his position. It’s important to remember that he is not the representative for Ireland on the ECB, he’s the representative from Ireland.

I do think the Government could do well to accelerate balancing the budget. But I would lean more towards the ESRI than Kelly .

I think it’s absolutely clear we have got to make our move very quickly. I don’t know why we are waiting. I’d be astonished if the governments of Greece, Portugal and Ireland weren’t working together in their common interest.

It’s very easy for politicians to be dismissive of articles by academics, but they should prove or dismiss those analyses on their own logic. What we really need to do is dig into the views of the Department of Finance.

FERGAL O’BRIEN 

Chief economist Ibec 

WE WOULD agree with some of what Morgan Kelly says and disagree with some of it. Overall there is considerable merit in doing a relatively fast fiscal balance. The quicker we do it, the stronger position we will be in in terms of our debt management options.

But it is not an exact science and, obviously, it cannot be done in a year.

Doing it in a single year would be far too brutal; there would be far too much damage to the economy and it would be far too much of a social challenge.

I think there’s no question but for Ireland to remain an attractive location for investment, we must work within the loan arrangements that are in place. If we isolate ourselves, we will be undermined. Europe hasn’t yet fully acknowledged the interconnectedness of sovereign and banking debt.

As it does so over the next few years, it will work in our favour.

There is a big difference between being a player with full information and being an observer and having partial information. There are certain people who have much more information than the rest of us.

STEPHEN KINSELLA 

Lecturer in economics University of Limerick 

MORGAN KELLY is a true social scientist. He takes data, looks at the economic and political realities in the economy, and makes a judgement which he communicates clearly. He has been spot on in his analysis to date, and while I was initially sceptical of his views, I’m now converted to the notion that Ireland has nothing but drastic options left to it.

I’ve tried to cost Kelly’s latest plan myself, and it isn’t pretty. Kelly’s views should be engaged with by policymakers, not because they are always right, but because they represent a challenge to the status quo that we need in a policy space filled with sycophants.

MOORE McDOWELL 

Senior lecturer University College Dublin 

MORGAN KELLY is definitely not a master of understatement and let’s just say his colourful way of expressing himself doesn’t do him any favours. Nonetheless I agree with about 80 per cent of what he says. He rightly says the decision to introduce the guarantee in 2008 was the wrong decision. But it’s very unfair to accuse Patrick Honohan of making the “costliest mistake ever made by an Irish person”. Messrs Cowen and Lenihan did that.

What Kelly is saying is that, while we have failed to burn the bondholders – the horse has bolted, as it were – we should now burn the ECB. The key problem in Kelly’s argument is the conclusion he reaches. Putting the entire budget deficit right this year would involve a 30 per cent cut in Government spending, which equates to 10-12 per cent of GDP. The effect that would have on aggregate demand and employment would be colossal.

Kelly’s figure of €250 billion in national debt is very much in the top-range estimates. Even the most pessimistic commentators say €230 billion. However, the question of whether the national debt is sustainable is the key issue.

TONY FOLEY 

Senior lecturer in economics Dublin City University 

I DO not agree that we are heading for economic ruin, although one could argue that large decline in GNP, 15 per cent unemployment and the likelihood that it will be 2017 or so before 2007 levels of economic activity will be resumed is already economic ruin.

I agree the Central Bank got its assessment of the scale of the bank bailout wrong and we only seemed to face reality when the EU-IMF required the involvement of the independent Blackrock assessment. Maybe if we had known much earlier the final scale, we would have had a stronger basis for an alternative approach.

In 2013, we will still be unacceptable to financial markets and there will have to be “Bailout Two” or a continuation of paying interest without repaying capital, with whatever additional money is needed to pay market bonds that are due. You could call this a default but it would be an agreed restructuring with the EU and IMF.

I do not agree we can walk away from the banks and presume the ECB will continue to operate them for our benefit as the new owners. It would be nice if the ECB did so.

JOHN McHALE 

Professor of economics NUI Galway – Speaking on RTÉ’s Morning Ireland , May 9th: 

CERTAINLY, EARLY in the crisis Morgan Kelly was very much ahead of everybody else in seeing it coming and I think his early analysis was incredibly valuable.

But I think in his recent articles, and particularly this one, he is really going off in the wrong direction.

I think he has been quite unfair to Patrick Honohan. Honohan wasn’t the one that gave the original blanket guarantee, but he inherited it.

Morgan puts a lot of emphasis on protecting Ireland’s reputation and says we shouldn’t default to protect that reputation, but reneging on the guarantee, which is what he calls on Patrick [Honohan] to have done, would have been reneging on a sovereign obligation and it would have done incredible reputational damage, and it would have really created a hornet’s nest of legal issues, so I think it’s just completely wrong to put the problems that have resulted from the guarantee on Patrick’s shoulders.

The proposals that Morgan Kelly is putting forward, which are essentially to wash our hands of the banking system and also to cut our borrowing to zero immediately, would actually have devastating effects for the economy.

It would essentially destroy the banking system, and would not only require cuts of about a third in public spending but it would put us into another very deep recession.

JOE DURKAN 

Economist Economic and Social Research Institute – Speaking on RTÉ’s Morning Ireland , May 11th: 

IF WE went bust, then banks in Europe would go bust. That means we are interdependent, and if that interdependence exists, then the right thing to do is to take an interdependent approach to it, which really means doing it at euro level.

Like everything else, you need to do it quickly, because the truth of the matter is while the debt is sustainable in a purely technical sense, it is by no means optimal.

If they don’t help us, then it impacts on others and there’s a possibility that we could just fail.

If you look at what’s happening in the other countries, it is stop-gap measures you have all the time, and I don’t think we need stop-gap measures, I think we need something new and innovative.

I don’t agree with debt figure of €250 billion. The most I can see is five to six years’ time is €195 billion, maybe €200 billion.

The second thing is, he had a point about when the debt goes over 100 per cent, you’re in trouble. In fact, that’s not strictly true.

Technically, we know that it’s possible. The real issue is whether you can get a primary budget surplus, which is your budget surplus excluding your interest payments, above a certain level. It’s a purely technical relationship, that the real interest rate minus the real growth rate times your debt-GDP ratio has to be less than your primary budget deficit.

WHAT THEY SAID: KELLY’S ARTICLE, HONOHAN’S RESPONSE 

Quotes from Morgan Kelly’s original article published in The Irish Times last Saturday: 

“With the Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable . . . While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable . . .

“The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy . . . Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person . . .

“National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.”

Excerpts from Central Bank governor Patrick Honohan’s response to the article on RTÉ radio last Sunday: 

“I took a lot of legal advice on this. There was no way of the Government walking away from that very formal guarantee, endorsed by the Oireachtas. The Government would have been treated as a bankrupt right away . . . The fact that we did not have precise numbers did not affect the honouring of the guarantee . . . All it would have done would have been to bring forward and accelerate the EU-IMF programme probably to May or June of last year . . .

“Everything was done by me and by colleagues on behalf of Ireland . . . It was not a final solution. I would regard it as a holding operation, something to offer a window of time in which to get what could be sorted out within our own competence in Ireland . . . It’s not the end of the story. Negotiations, discussions will continue with Europe for a long time to come as we know there are already discussions about the interest rate and so forth.”

source:http://irelandjailbreak.wordpress.com/

In the year 2009 Morgan Kelly wrote this report on the

“The Irish Credit Bubble” link here The Irish Credit Bubble

Related articles:

WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.read full article here http://www.marketoracle.co.uk/Article28018.html

article by By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.

Honohan defends decision to retain bank guarantee

 

 

SUZANNE LYNCH and ARTHUR BEESLEY

Governor of the Central Bank Patrick Honohan has strongly defended his decision not to reverse the bank guarantee when he took up office, arguing that a reversal would have led the country into immediate bankruptcy.

Prof Honohan was responding to an article by economist Morgan Kelly in Saturday’s Irish Times , which said the governor’s “miscalculation of the bank losses” was the “costliest mistake ever made by an Irish person”.

Prof Honohan said he had taken extensive legal advice on the issue of the bank guarantee.

“There was no way of the Government walking away from that very formal guarantee, endorsed by the Oireachtas,” he said, arguing that the Government would have been treated as “a bankrupt” immediately if the guarantee had been reversed.

Prof Honohan’s comments came as focus increasingly turned to Greece over the weekend.

Amid growing anxiety about the fiscal situation in Greece the EU is bracing itself for a new bailout for the country. Any revised plan for Greece is expected to inform further negotiations on the terms of Ireland’s EU-International Monetary Fund deal.

European officials are increasingly expecting the Government may reach a deal to cut the interest rate on Ireland’s bailout loans without raising corporate tax.

Although a well-placed European source said definitive agreement has not yet been reached, they said it was “not impossible” that ongoing talks could reach their conclusion at next Monday’s meeting of finance minister in Brussels.

The source said the EU institutions believe France is no longer directing its focus at Ireland’s 12.5 per cent corporate tax rate and has instead turned its attention to plans for a common consolidated corporate tax base (CCCTB). Such a position would bring France closer to that of Germany, which has indicated its willingness to accept any appreciable concession on corporate tax in return for a rate cut.

The Government has been steadfast in its refusal to yield to pressure to increase the rate, but Dublin is now expected to provide an unambiguous signal of its willingness to engage constructively in the development of EU legislation to create a CCCTB. However, any such signal would be in direct conflict with Taoiseach Enda Kenny’s view that the CCCTB is a “back door” route to tax harmonisation.

“From Dublin, what is expected – from France especially – is to show support for some opening on the common consolidated corporate tax base,” said a senior European source. The talks are said to be at a highly sensitive stage and the Government offered no insight into the current state of play.

Next Monday’s meeting of euro zone finance ministers is likely to be dominated by mounting concern about a possible new bailout deal for Greece if it is to restructure its debt.

The country’s precarious financial situation was discussed at a meeting of a select group of finance ministers on Friday night in Luxembourg.

Minister for Energy, Communications and Natural Resources Pat Rabbitte yesterday expressed his hope that any concessions given to Greece could lead to better terms for Ireland.

“I hope that the next meeting of Ecofin on the 16th and 17th of this month will be able to sign off on a reduced interest rate for Ireland.” He added that he believed that the debt should also be rescheduled.

British chancellor of the exchequer George Osborne said yesterday that, while Greece may receive additional euro-region funding, the UK is not willing to give direct support to the troubled economy.

Britain’s support for Ireland was “a special case” that won’t be repeated in Greece or Portugal, he said. “We certainly don’t want to be part of a second bailout of Greece.”

source :http://www.irishtimes.com/newspaper/breaking/2011/0509/breaking11.html

Comment:

This was the report in the Irish Times at the time for the first stress test on the banks in July 23, 2010.we can clearly see that the Central Bank supported the results along with Mr.Noonan (today’s Finance minister).see here http://www.irishtimes.com/newspaper/breaking/2010/0723/breaking13.html

 What surprised me at the time was the blind acceptance by the opposition politicians even when the markets clearly did not. This is what I wrote on this blog at the time.

 (see herehttp://thepressnet.com/2010/07/24/7759/)

Mr Honohan did exactly what he was asked to do he was put in this job to try and fool the international markets effectively sell a pig and a poke. His reputation is shot full of holes and I wouldn’t trust him with my weekly shopping list. Financial fundamentals were totally ignored and this man must accept his part in selling out country Shame on him and again I call on him to resign.Ireland would be better off taking anybody that is currently on the dole and giving them the job of running the central bank. They certainly would do a better job ,as everyone of them have a better grasp of the fundamentals of mathematics.  Patrick Honohan is a disgrace and should be promptly dispatched to the nearest prison cell for his part is this betrial of his own people. 

Ireland is heading for bankruptcy

From The Irish Times to-day

OPINION: Ireland is heading for bankruptcy, which would be catastrophic for a country that trades on its reputation as a safe place to do business, writes MORGAN KELLY 

WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.

Ireland is facing economic ruin.

While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

As a respected academic expert on banking crises, Honohan commanded the international authority to have announced that the guarantee had been made in haste and with poor information, and would be replaced by a restructuring where bonds in the banks would be swapped for shares.

Instead, Honohan seemed unperturbed by the possible scale of bank losses, repeatedly insisting that they were “manageable”. Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s.

Rising dismay at Honohan’s judgment crystallised into outright scepticism after an extraordinary interview with Bloomberg business news on May 28th last year. Having overseen the Central Bank’s “quite aggressive” stress tests of the Irish banks, he assured them that he would have “the two big banks, fixed by the end of the year. I think it’s quite good news The banks are floating away from dependence on the State and will be free standing”.

Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person. Armed with Honohan’s assurances that the bank losses were manageable, the Irish government confidently rode into the Little Bighorn and repaid the bank bondholders, even those who had not been guaranteed under the original scheme. This suicidal policy culminated in the repayment of most of the outstanding bonds last September.

Disaster followed within weeks. Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion. Despite aggressive cuts in government spending, the certainty that bank losses would far exceed Honohan’s estimates led financial markets to stop lending to Ireland.

On November 16th, European finance ministers urged Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.

At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.

Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.

Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.

In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.

The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy. Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.

Six months on, and with Irish government debt rated one notch above junk and the run on Irish banks starting to spread to household deposits, it might appear that the Irish bailout of last November has already ended in abject failure. On the contrary, as far as its ECB architects are concerned, the bailout has turned out to be an unqualified success.

The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

But why was it necessary, or at least expedient, for the EU to force an economic collapse on Ireland to frighten Spain? The answer goes back to a fundamental, and potentially fatal, flaw in the design of the euro zone: the lack of any means of dealing with large, insolvent banks.

Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans. Had the collapse been limited to Irish banks, some sort of rescue deal might have been cobbled together; but a suspicion lingers that many Spanish banks – which inflated a property bubble almost as exuberant as Ireland’s, but in the world’s ninth largest economy – are hiding losses as large as those that sank their Irish counterparts.

Uniquely in the world, the European Central Bank has no central government standing behind it that can levy taxes. To rescue a banking system as large as Spain’s would require a massive commitment of resources by European countries to a European Monetary Fund: something so politically complex and financially costly that it will only be considered in extremis, to avert the collapse of the euro zone. It is easiest for now for the ECB to keep its fingers crossed that Spain pulls through by itself, encouraged by the example made of the Irish.

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.

Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.

The ECB applauded and lent Ireland the money to ensure that the banks that lent to Anglo and Nationwide be repaid, and now finds itself in the situation where, as a consequence, the banks that lent to the Irish Government are at risk of losing most of what they lent. In other words, the Irish banking crisis has become part of the larger European sovereign debt crisis.

Given the political paralysis in the EU, and a European Central Bank that sees its main task as placating the editors of German tabloids, the most likely outcome of the European debt crisis is that, after two years or so to allow French and German banks to build up loss reserves, the insolvent economies will be forced into some sort of bankruptcy.

Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off.

Worse still, a bankruptcy can do nothing to repair Ireland’s finances. Given the other commitments of the Irish State (to the banks, Nama, EU, ECB and IMF), for a bankruptcy to return government debt to a sustainable level, the holders of regular government bonds will have to be more or less wiped out. Unfortunately, most Irish government bonds are held by Irish banks and insurance companies.

In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico.

Suppose that we did not want to follow our current path towards an ECB-directed bankruptcy and spiralling national ruin, is there anything we could do? While Prof Honohan sportingly threw away our best cards last September, there still is a way out that, while not painless, is considerably less painful than what Europe has in mind for us.

National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.

First the banks. While the ECB does not want to rescue the Irish banks, it cannot let them collapse either and start a wave of panic that sweeps across Europe. So, every time one of you expresses your approval of the Irish banks by moving your savings to a foreign-owned bank, the Irish bank goes and replaces your money with emergency borrowing from the ECB or the Irish Central Bank. Their current borrowings are €160 billion.

The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.

So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.

Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position. By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions. Just as importantly, it sends a signal to the rest of the world that Ireland – which 20 years ago showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers – is back and means business.

Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival. It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy.

The destruction wrought by the bankruptcy will not just be economic but political. Just as the Lenihan bailout destroyed Fianna Fáil, so the Noonan bankruptcy will destroy Fine Gael and Labour, leaving them as reviled and mistrusted as their predecessors. And that will leave Ireland in the interesting situation where the economic crisis has chewed up and spat out all of the State’s constitutional parties. The last election was reassuringly dull and predictable but the next, after the trauma and chaos of the bankruptcy, will be anything but.

source:http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html

Comment:

 “A picture is worth a thousand words

If you are in the lucky position as to having money in any of the Irish banks I would strongly recommend that you immediately take it out and put it into a German account or a French account.

There is every chance that if Greece leaves the Euro we in Ireland will have no choice but to go the same rout and all Irish account will revert back to the Irish pound and we will have to take a 40% hit on value  at least .Get out now and don’t wait Noonan and the boys in the Department of Finance will not give any notice as they do not want to lose any of the potential deposits they will do the exact opposite and declare that we do not intend  to default and we can continue to pay the penal interest rates been forced on us. We are bankrupt and there is no denying this .

Has the Left missed another opportunity to address the questions of equality and social justice in Ireland?

 sent is this afternoon

Author: Pirooz Daneshmandi of Irish Left Review

Published: February 21st, 2011

by Pirooz Daneshmandi

There is no doubt that the current crisis in Ireland, and internationally, has major implications not just for the economy but socially and politically as well. However, in Ireland at least, there are no signs that policy makers have grasped the full extent of the problem yet.

It appears that the main pre-occupation is still how to preserve the status quo, or as much of it as possible, rather than a serious look at the fundamental problems inherent in the system and their consequences for society. This is to be expected from those on the Right.

What is surprising is that some of the more radical alternative solutions on the economy are being proposed by sources considered on the Right. They include the Financial Times, The Wall Street Journal, and the International Monetary Fund.

Similarly, commentators such as David McWilliams, Peter Mathews, Paul Somerville, Jim Power, George Soros, Senator Shane Ross, Dr. Constantin Gurdgiev, Professor Patrick Honohan, Professor Morgan Kelly, Professor Karl Whelan and Professor Brian Lucy could hardly be described as the “raving, loony Left” and yet they have, during the last decade, repeatedly come up with analysis and alternatives that would go far beyond what the Irish Congress of Trade Unions or the Irish Labour Party have offered.

Indeed, the lack of any alternative proposals on the part of the bigger Trade Unions and Political Parties at a time of an unprecedented crisis in capitalism is conspicuous for its absence. The almost complete agreement, with minor differences, on the strategy forward from political parties on the Right and the Left is quite a remarkable accomplishment on the part of the establishment.

Despite ample research pointing to the fact that societies that address social inequality do better on almost every indicator, one would be hard pressed to find any mention of it in the political discourse of all the major parties, Left or Right. Instead, all the attention is focused on ensuring that there are no radical or fundamental changes offered.

The main pre-occupation of all the major political parties appears to be not to offend the wealthy and the powerful by suggesting that they pay their fair share of the cost of this fiasco caused by their rapacious behaviour.

The need to ensure a minimal corporation tax rate is considered sacrosanct, almost worth going to war with “friends” but no such consideration for protecting the poor, the weak and the vulnerable in society, they can be sacrificed with disdain. Of course, this is nothing new to any student of history, but that doesn’t make it any more palatable.

Furthermore, the lack of any proposals to avoid the same predicament in future is also lamentable. We are supposed to be satisfied with the fact that there is a different regulator and Governor of Central Bank, never mind that the policies and the guiding principles remain largely the same as those responsible for this crisis.

Indeed, any mention of the need for a significant change of mindset is ridiculed with scorn by “respected” commentators and “experts” as impractical, childish and generally not worthy of consideration. This is despite many serious problems with regard to equality and fairness and their impact on poverty, housing, healthcare, education, transport and energy over many decades and the need to address them as a matter of urgency.

It is often claimed that the majority of the population do not want radical and significant changes. If this is true, is it not due to the fact that any alternative is condemned to the margins and hardly ever discussed seriously? Is it not because the true costs of the existing situation are usually minimised and framed in a manner that distracts attention away from the root causes? Is it not because of the relentless promotion of a skewed set of values and the subliminal assumptions propping up the status quo?

It appears that far from playing a role in helping to bring about the required changes, the leadership of the Left is often a hindrance to it and any significant change is only possible as a result of popular action.

source: http://www.irishleftreview.org/2011/02/21/left-missed-opportunity-address-questions-equality-social-justice-ireland/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

Ronan Lyons spin on Housing stats

Nobody knows at this juncture the scale of the losses for bank balance sheets from mortgage write-downs. But the EU-IMF deal had to set aside a certain amount for contingencies relating to future losses – including those from mortgages – and chose €25bn. This post attempts to shed some light on the potential scale of mortgage write-downs. Given that purpose, it almost completely sidesteps the broader economic and social impact of negative equity, arrears and repossession, not because these are not important topics, but because they are worth their own research, not as sidepoints in a discussion about bank balance sheets.

The Morgan Kelly question: three types of bank assets

Morgan Kelly has been the most vociferous on the apparent “time bomb” for banks in Ireland’s mortgage arrears. His estimates stem from his “realistic loss” scenario, published on the Irish Economy website in May, where he estimated that of €370bn in all lending by Irish banks, a figure that includes loans abroad, €106bn would be lost. In truth, his estimate is driven almost entirely by Irish bank lending within Ireland, so he is predicting bank losses of €100bn off a loan book of €235bn.

Based on these figures, he then wrote an article in early November, entitled “If you thought the bank bailout was bad, wait until the mortgage defaults hit home“. One could legitimately assume from this that if losses from loans that went to NAMA were bad, those from mortgage foreclosures would be worse. Indeed, this was the general conclusion: this is an article that spooked markets around the world. I know, as I was out of the country at the time and saw the immediate reaction from a non-Irish perspective.

Given that Morgan has been right on so much over the last five years, including his prediction in that very article that Ireland would need an EU-led loan, is there nothing to do now but brace ourselves for the mortgage arrears time bomb that will surely make the bank bailout look like peanuts? To shed some light, it’s worth thinking about three main types of bank asset and therefore three main types of potential losses: NAMA, arrears and SMEs.

  • NAMA losses are losses from big property speculation. Irish banks lent out about €100bn in large chunks (i.e. typically more than €5m) for land and development which is now falling under NAMA’s remit.
  • Arrears losses will stem from residential properties that the banks have to foreclose and sell for less than the mortgage outstanding. Total residential mortgage lending in Ireland stands at about €115bn.
  • SME losses are where small businesses go under and banks have to take their place in the queue to get money out of the assets that are being liquidated. Corporate lending in Ireland stands at about another €100bn.

On the face of it then, it seems reasonable to say that if we’ve been focusing almost exclusively on the €100bn or so in NAMA-related lending, then the €100bn or so in mortgage lending is indeed an elephant in the room. (I will have to leave for the moment the issue of SME losses, both because I’m not an expert on that issue and because that was not the focus of Morgan’s article.) On NAMA losses, banks face somewhere in the region of €40bn of losses on NAMA-bound properties, in round numbers and allowing for past efforts at external recapitalisation.

Estimating the number of borrowers at risk

Is this €40bn in bank losses from land and development going to be small compared to the losses from bank balance sheets due to mortgage arrears? Suppose there are three types of people with mortgages: (1) new borrowers, with large debt which more than likely swamps their equity, (2) old borrowers, with small amounts of debt and (relatively) large amounts of equity in their homes, and (3) topper-uppers, who are probably in the main similar in profile to old borrowers. The risk category for banks is almost exclusively new borrowers, because it is unlikely that they will have to repossess the homes of old borrowers or of topper-uppers, and if they do, the equity in the house will very likely cover the debt.

So how many new borrowers are there? To be safe, we should assume that anyone who has borrowed since 2003 is at risk, whether they are first-time buyers or not, apart from topper-uppers. Why since 2003? If prices fall 55% by 2012 – which may just be enough to bring the rent-price ratio back to normality – prices will be back at levels seen in 2000, broadly speaking. This is about 20% below 2002 levels, so if someone who bought in 2002 had to sell in 2012, they could, as on average they will have paid off about 25% of the principal by then. By looking at quarterly IBF data, which go from 2005, and a similar Dept of the Environment series, it is possible to estimate there have been about 435,000 borrowers since 2003 who are either first-time buyers or mover-purchasers. This is out of a total of 800,000 mortgages.

In truth, given the loan-to-values and outstanding debt involved, it’s reasonable to think that 2003 and 2009 borrowers are of different types to their 2006 and 2007 counterparts. Using a combination of IBF, Dept of Environment and county-level Daft.ie data, it’s possible to estimate the number of households in negative equity. If house prices fall 55% from the peak, about 330,000 households would be in negative equity, compared to about 200,000 households now, including two thirds of all 2006-2007 borrowers and more than half of 2004, 2007 and 2008 borrowers.

But even then, we can’t just multiply 330,000 by, say, an average mortgage of €200,000 and assume that €65bn of the mortgage loan book is at risk. Many of those borrowers will remain employed and – perhaps grudgingly but consistently – pay off their mortgage each month. They may represent a threat to economic growth, as people feel less wealthy when their homes are worth less, but such households are not a threat to bank balance sheets.

Estimating how much of the loan book is at risk

Instead, we need to look at the proportion of negative equity households at risk of foreclosure, i.e. where circumstances such as unemployment lead not just to arrears and Court proceedings but ultimately foreclosure. The first step is to look at mortgages in arrears: there are currently 40,000, a figure that may rise to 100,000 in a pessimistic scenario. With an average mortgages of €200,000, this suggests that a maximum of €20bn of the mortgage loanbook is at risk.

(sorry Mr.Lyons even Brian Cowen acknowledges that 70,000 are currently in arrears and the average amount is more like 260,000 not 200,000)

Even then, the underlying asset, the house, will not have lost all its value. Very few properties would have only get half their loan-value back, the back of the envelope figure that Morgan uses. For this to be the case, the average borrower would have to have bought at the peak with a 100% interest-only mortgages. This is not the average – this is the upper bound. A more reasonable rule of thumb is that banks will recover two-thirds of loan value on average. So the upper bound in mortgage-related write-downs is now perhaps €7bn.

This figure still needs to be scaled down again, not just to reflect the fact that not everyone in arrears of less than 180 days progresses to deeper arrears, but also to reflect that not everyone  in six months or more of arrears has their home repossessed. At the moment, about one in four mortgages in arrears goes from the 90-180 days category to the 180-days-plus category. This may rise to one half over time, as people run out of outside options, but I’m not sure anyone is actually going to predict anything like 50,000 mortgages having Court Proceedings issued.

Currently, repossessions are running at a rate of about 300 a year. This will almost certainly rise as some of those currently scraping by fall victim to the ongoing recession and as the moratorium on repossession passes. But are we seriously expecting an average of 5,000 repossessions every year from 2011 to 2020? Suppose repossessions instead jump from 300 this year, to 1,500 next year, 5,000 in 2012 and 2013, and then falls back gradually to about 500 by 2020. That would be a calamitous scenario for all those affected. But what would it mean for the bank balance sheets? The graph below recaps the figures discussed in this post. The punchline is that repossession of 20,000 homes and their resale by banks for two-thirds of their loan value would mean balance sheet losses in the order of €1.3bn.

sorry again Mr.lyons but even the banks themselves expect multiples of this figure and we all know that the figures they themselves have given have always turned out the be to low ! 

stop trying to flog more overpriced houses !

Totals associated with mortgage lending and a scenario for mortgages Totals associated with mortgage lending and a scenario for mortgages

This is a far cry from claims that mortgage arrears will cast losses on banks that will make NAMA look like a sideshow. You could be three times as pessimistic about the number of repossessions and more cautious about final values and still struggle to get above €5bn in bank losses. You might even somehow be able to construct a case that I’m out by a factor of 10. But I struggle to see how someone could make the case that the figures above are out by a factor of 50, let alone 100.

Morgan’s article is full of depressing vistas: a “torrent of defaults”, a “social conflict on the scale of the Land War” and the rise of a “hard right, anti-Europe, anti-Traveller party”. Perhaps I am young and naive, or excessively fond of the Simpsons, but this reminds me of an exchange in the Simpsons, where TV host Kent Brockman asks his expert guest: “Hordes of panicky people seem to be evacuating the town for some unknown reason. Professor, without knowing precisely what the danger is, would you say it’s time for our viewers to crack each other’s heads open and feast on the goo inside?” To which the Professor responds: “Mmm, yes I would, Kent.”

That is perhaps the point. By basing his predictions for losses on the idea of 200,000 mortgages hitting the wall, Morgan is making a social prediction – i.e. that people will lose faith in society and all hell will break loose – not an economic one. He may yet be right, but if all social fabric is rent asunder, then probably most economic bets are off.

  

But wait a minute Finfacts don’t agree with your figures

Irish non-financial sector credit including residential mortgage lending outstanding continued to fall in April
By Finfacts Team
 
Source: Central Bank

Irish non-financial sector credit (NFC) credit, excluding valuation effects and the impact of transfers to the State toxic property loans agency NAMA, fell again in April, but at a slower pace than previous months so far in 2010. Residential mortgage lending outstanding (including securitised mortgages) declined by €348 million during April, bringing the annual rate of change in residential mortgage lending to minus 1.6 per cent.

The Central Bank said today that net flow of credit transactions during the month was just minus €109m (0.1 per cent), compared with minus €1.3bn (0.9 per cent) in March and minus €842mn (0.6 per cent) in February, implying repayments continue to exceed new lending. NFC credit outstanding on the aggregate balance sheet of Irish resident credit institutions was €134.2bn at end-April 2010, down from €139.5bn at end-March, with the transfer of loans to NAMA and an increase in impairment provisions accounting for almost the entire decline in outstanding amounts. The annual rate of change in NFC credit was minus 4.5 per cent in April, following a 4.6 per cent annual decline in March and a 3.6 per cent fall for the twelve months ending February 2010.

Residential mortgages (including securitised mortgages) declined by €348m during the month, and stood at €146.1bn at end-April 2010. The annual rate of change in mortgage lending fell to minus 1.6 per cent.

Then today we have this in the  Irish independent

By Emmet Oliver Deputy Business Editor

Tuesday December 14 2010

Ireland‘s economy will shrink again next year and unemployment will head toward 16pc, a gloomy report on the country’s prospects from Ernst & Young has said. Further austerity measures may be needed, it says.

While the Department of Finance expects growth of 1.75pc next year, the global accountancy company is forecasting a contraction of 2.3pc in terms of GDP.

The Government’s projections were “overly optimistic” and further austerity measures would be needed to rein in the deficit, the company claimed.

While the Government is expecting average growth of 2.75pc between 2011 and 2014, Ernst & Young estimated growth of just 0.8pc was more likely.

The company said it would be a challenge for the Government to fix the banks once and for all and to also control what it called “civil unrest”.

Early elections may delay the latest cuts and tax increases and a new government “may even back away from some of the announced measures”, claimed Ernst & Young.

“These factors increase the likelihood of some form of debt restructuring by the Government and banks,” claimed the company in an analysis included in its eurozone outlook.

It said the recent €85bn IMF/EU package does end uncertainty for Ireland, but final tests were needed to see what the banks required in terms of extra capital.

Challenges

Eventually Ireland should bounce back and become one of the fast-growing economies, but Ernst & Young sees major challenges before this happens.

“This seems a long way off and the Government and economy will have to overcome numerous hurdles,” it said.

The key plank of the company’s outlook is that consumer spending will not recover in the way the Government expects.

“The main drag on Irish GDP growth in the next two years will come from domestic demand,” it said.

Ernst & Young said this demand would be hit by a range of factors, including the austere budgets, but also by the scale of migration from the country and a likely rise in interest rates. The company pointed out that those leaving would be bringing with them skills and purchasing power.

“As such we do not expect the domestic economy to recover until a number of years into the fiscal adjustment cycle and until after the banking system is restored to health,” it said.

Ernst & Young wondered whether the €35bn of funding earmarked for the banks would be enough. “This will depend on the results of banking tests and stress analysis,” it said.

Extra austerity measures may be needed if the deficit reduction plan goes off track.

now look at figures from the USA

Cascading home values after an era when lenders let borrowers buy homes or refinance old loans with little or no downpayment has created a large class of property  powners with “negative equity” — a polite phrase for having a mortgage bigger than the home’s worth. (Less polite? “Under water” or “upside down” mortgages!)

According to number-crunching CoreLogic, 17.5% of Orange County homes with a mortgages — or 98,518 residences — were in a negative equity position in the third quarter. Yes, that means roughly 1-in-6 O.C. mortgages are bigger than the value of the real estate collateral behond the loan. Another 4.1% of homes with mortgages, or 22,942 residences, were “near” negative equity. (That’s within 5% of negative equity.)

So, all told, 21.6% are underwater or nearly upside-down locally. As bad as that sounds — and it’s not pretty — we offer some comparisons:

  • 22.5% of all U.S. homes with mortgages were in negative equity territory with an extra 5% of residences near negative equity. That’s 27.5% combined!
  • 32.8% of California residences are in negative equity; another 4.1% are near negative equity. Combined: 36.9%.

And the local trend itself is a tad encouraging:

  • In 2010’s second quarter, 18.1% of homes with mortgages were underwater; 4.1% were near negative equity. Combined: 22.2% — slight higher that Q3.
  • In Q1, negative equity rate was 19.2%; near negative equity was 4.1%. Combined: 23.3%.
  • In 2009’s fourth quarter, negative equity rate was 20%; near negative equity was 4.1%. Combined: 24.1%.

Mark Fleming, chief economist with CoreLogic, on the national scene: “Negative equity is a primary factor holding back the housing market and broader economy. The good news is that negative equity is slowly declining, but the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity.”

Last lets take a look at the UK

Home owners face repossession amid struggle to sell properties

Home owners are falling behind with their monthly mortgage payments at an alarming rate, charities warn, as estate agents reveal the struggle to sell properties.

Home owners face reposession amid struggle to sell properties
Home owners face reposession amid struggle to sell properties 
Myra Butterworth

By Myra Butterworth, Personal Finance Correspondent 7:00AM GMT 14 Dec 20101 Comment

Almost a million households are in arrears with their rent or mortgage, twice as many as a year ago, according to homeless charity Shelter.

Charities warned numbers would rise in the New Year and that those with children are most at risk of falling behind with their basic housing costs.

Campbell Robb, chief executive of Shelter, said: “Every two minutes someone faces the nightmare of losing their home and this research paint a disturbing picture of sharply rising numbers of people who face a daily struggle just to keep a roof over their head.

Conclusions 

So what does this all mean well I would be of the opinion that 4.5% impairment provisions by the banks are woefully inadequate and a provision of 12% would be more like what is needed?

In every other country the average impairment on mortgages is in the area of 10 – 15% why would Ireland be different?? I’m sticking with Morgan Kelly he has a better track record that you Mr.Lyons  

Machholz

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