"The Irish Credit Bubble" by Morgan Kelly

Sand

Posted the below earlier, but this paper by Morgan Kelly does deserve its own thread. Id think Kellys paper should be required reading as it clearly lays out the causes and impact of the credit bubble on our property market.

Over on Irisheconomy.ie theres a link to a piece by Morgan Kelly of Cassandra fame ( one of the economists who consistently called the bubble for what it was and got ignored) where he explores the Irish credit bubble.

Havent finished reading it yet, but two consistent points Ive seen so far:

1 - The property bubble was fuelled by banks out of control lending: their lending went from 80% of GNP (1997) to 200% (2008) of GNP in a few short years, flooding the market with money and thus inflating prices. By 2008, Irish banks were lending 40% more in real terms to developers alone, than they had lent to the *entire* economy in 1997

This percentage of lending was almost double what would be seen in other European economies - even the UK of Northern Rock fame was far less profligate. These figures underline how sleepy our Financial Regulator was.

2 - More worrisome, the problems of the banks extend beyond dodgy developer loans: far from being "too big to fail", the Irish banks may be "too big to save". NAMA is stretching the state to its limits and beyond, and there will be nothing left in the tank to save the banks from the wave of mortgage defaults coming down the tracks when interest rates go up as they certainly will do as France and Germany exit recession.

In short:

The banks are screwed, their stakeholders are screwed, and if the state persists trying to prop them up then we will all be screwed too when they fall over on top of us.

Its gone past the point where we can try to save the banks, we cant. They are in such trouble its beyond Irelands fiscal capabilities to run a massive deficit *and* underwrite the immense losses on Irish banks balance sheets.

So we return to the only alternative: forcing bank stakeholders to accept *their* losses: shareholders, debt holders, and yes, deposit holders to some degree. Govt policy ought to move to managing the inevitable as sensibly and pragmatically as can be done to minimise the losses for the smaller stakeholders.

ei.sdraob

nice paper, half way thru now, reads like an obituary to the Irish Economy

great respect for mr. Kelly unlike a certain other "economist" , this guy should be our finance minister

edit: this is well worth noting in the context of NAMA

Should lending criteria return to their late 1990s standards, our results indicate that
the prices of new houses and commercial property will return to an equilibrium two thirds
below their peak levels, with larger falls possible for secondhand property. This means that,
supposing residential prices have already fallen 40 per cent from peak, prices still have to fall
by about half from their present levels. Were prices then to grow in line with real incomes,
at around 2 per cent per year, it will take about 50 years for real prices to return to their
2006 peaks.

oO

Mr.Micro

Will it matter to FF/Greens, as by the time it happens there will be a new Government, maybe FG/Lab? In the meantime the FF "party boys" have bailed out their friends the bankers and developers with our money and future. Tomorrow it will be the problem of another Government, job done. Do not expect aforethought from FF or any form of cogitation from that lot. Its pure stop gap, the hole in the dyke is plugged for now.

BrownianMotion

It's worth noting that this is not a sensationalist attention-seeking piece the likes of which we have seen recently from David McWilliams. It is a paper which lays out its findings in a clear and simple manner and comes to a perfectly logical conclusion, ie that we're fcuked.

It can be argued that the conclusion Morgan Kelly came to is incorrect, but the simple fact that there is a credible argument that his conclusion is correct really should be setting off the alarm bells here.

ei.sdraob

BrownianMotion wrote: »

It's worth noting that this is not a sensationalist attention-seeking piece the likes of which we have seen recently from David McWilliams. It is a paper which lays out its findings in a clear and simple manner and comes to a perfectly logical conclusion, ie that we're fcuked.

It can be argued that the conclusion Morgan Kelly came to is incorrect, but the simple fact that there is a credible argument that his conclusion is correct really should be setting off the alarm bells here.

morgan does backup his reasoning with data and references, the whole thing is a proper paper

unlike the other populist journalist who tries to dumb down everything and just pulls **** out of arse in order to gain more publicity

Sand

Finished reading this. Its pretty compelling stuff, though perhaps Orwell was right in saying the best books are the ones that tell you what you already believe.

I have to admit I didnt think my opinion of the regulators could go lower, but if Morgan Kelly has access to stats showing credit in Ireland going from 60% GNP to 200% of GNP in 2008, and accelerating wildly ahead of deposits then surely the Financial Regulator or Central Bank had access to the same stats? Or better given the FR has the right to arrive up in any financial institution in the state at any time and demand the books straight away.

Either they didnt bother collecting such "strategic" level information, they didnt know how to use such information, they didnt care about the implications of the information, or most probably: they accepted the banks assurances that everything was fine at face value and didnt worry their little heads about it anymore.

Maybe they were scared of the implications and were glad to accept the banks reassurances. Because if the banks were wrong, then we were totally screwed...

Other point worth noting is that entry to the Euro and loss of interest rate controls is often cited as a cause of Irelands economic misfortune: Kelly notes the minimal impact of interest rates on property prices (and thus the bubble) versus the flooding of the Irish economy with credit by Irish banks.

The lift off point to wild unsustainability appears to have occured between 2004 and 2008, The Cowen Years. Total lending was 100% of GNP in 2004, in line with other developed economies, which Ireland had caught up with in the 90s. It then accelerated to 200% by 2008, double the level of lending in other developed economies. Interestingly, state fiscal spending accelerated by a similar order of magnitude: from 28 billion in 2003 to 60 billion in 2009, I think it can be assumed it demonstrates that state spending in the Cowen years was derived almost entirely as a cut of the credit tidal wave the banks flooded the country with over the same period.

Probably the most depressing aspect of the paper is this:

Once committed to guarantee all senior debt as well as deposits of all six Irish banks, the Irish government found itself in the position of not being able to change direction to share losses with bank bond holders without being forced to admit that it had made a mistake in its initial guarantee

The paper also underlines the futility of NAMA or other such attempts by the state to rescue the banks from their mess: the mismanagement of the banks, and the losses coming due are of such a scale that they dwarf the resources of the Irish state to meet. Even very modest losses mortgage loans, or bussiness loans will outstrip the states ability to keep the banks capitalised and maintain its fiscal credibility, especially given the ECBs rollback of extraordinary support and the increasing fear of sovereign defaults being priced into borrowing costs.

Its time to kick the banks out of the lifeboat. Its us or them, and I choose us.

ardmacha

Should lending criteria return to their late 1990s standards, our results indicate that the prices of new houses and commercial property will return to an equilibrium two thirds below their peak levels, with larger falls possible for secondhand property. This means that, supposing residential prices have already fallen 40 per cent from peak, prices still have to fall by about half from their present levels. Were prices then to grow in line with real incomes,
at around 2 per cent per year, it will take about 50 years for real prices to return to their 2006 peaks.

It could be argued that membership of the Euro means that interest rates are lower than historically in Ireland and so house prices might be closer to one half rather than one third of peak values. The return to nominal values is perhaps more important than the real values, with inflation of 2-3% per year the nominal values would return in about 15 years (from half).

But clearly houses are not going to return to peak values anytime soon, whatever some in the property industry would have you believe.

nesf

Sand wrote: »

I have to admit I didnt think my opinion of the regulators could go lower, but if Morgan Kelly has access to stats showing credit in Ireland going from 60% GNP to 200% of GNP in 2008, and accelerating wildly ahead of deposits then surely the Financial Regulator or Central Bank had access to the same stats? Or better given the FR has the right to arrive up in any financial institution in the state at any time and demand the books straight away.

They did have the information as has been made pretty clear lately the reason why they didn't do anything was because the top guys thought that if a bank had a credit boards and other things set up to regulate its own lending that it wouldn't expand lending recklessly.

It's a bit like saying that you don't need to go pull a family out of a burning house because you know they've a smoke alarm installed and if the house really was burning down they'd have left already because their smoke alarm would have gone off because if they bought a smoke alarm then they must have checked its batteries each week.

nesf

One thing that leaps out to me about his paper is his assertion that Irish banks will be forced to go back to a deposit funded model. This is quite an extreme view in that it assumes that the wholesale funds markets for banks will refuse point blank to loan money to Irish banks at "normal" interest rates. This involves extrapolating current conditions out as the new de facto norm yet we've not even yet exited the year with the worst part of the recession to date in it so we could very easily be seeing a temporary period of overly negative market sentiment coupled with a lot of risk aversion. The thing is markets tend to bounce back and don't stay depressed in perpetuity.

Flamed Diving

Am I right in reading that a UK bank attempted a takeover of an Irish bank? I never heard about that.

Anyway, let's say the scenario he lays out comes to fruition, where:

In these circumstances, the Irish banks must shrink their balance sheets, by reducing
lending and repaying debt. It seems likely that Irish credit levels will return to average
international levels in the region of 100% of national income. However, because €110 Bn of
their lending (equal to 80 per cent of GNP) is tied up in recently issued mortgages of 35
years or longer, it seems unlikely that there will be very much new lending to any sector of
the Irish economy for the foreseeable future.

p19

This would lead to a situation where the banks with the largest market share are unable to lend in a market with demand for credit. So, what is a possible outcome of this? Think about it.

BrownianMotion

nesf wrote: »

One thing that leaps out to me about his paper is his assertion that Irish banks will be forced to go back to a deposit funded model. This is quite an extreme view in that it assumes that the wholesale funds markets for banks will refuse point blank to loan money to Irish banks at "normal" interest rates. This involves extrapolating current conditions out as the new de facto norm yet we've not even yet exited the year with the worst part of the recession to date in it so we could very easily be seeing a temporary period of overly negative market sentiment coupled with a lot of risk aversion. The thing is markets tend to bounce back and don't stay depressed in perpetuity.

Why is it such an extreme view that Irish banks will not have access to the same amount of money at the same rate? I would have thought it inevitable that there will be a significant risk premium attached to any future lending to them. They would have defaulted already if not for the taxpayer, and still might do so.

RedPlanet

Flamed Diving wrote: »

This would lead to a situation where the banks with the largest market share are unable to lend in a market with demand for credit. So, what is a possible outcome of this? Think about it.

A new bank?
A foreign bank setting up shop here?

ei.sdraob

Flamed Diving wrote: »

Am I right in reading that a UK bank attempted a takeover of an Irish bank? I never heard about that.

hm maybe hes talking about Ulster Bank which is owned by RBS, which in turn is owned by UK taxpayer now

anyways its interesting that he mentions that low interest rates have **** all to do with rising house prices, the increased lending was the culprit (p11)

that should put a nail into many people's argument about the euro and ECB causing this

gurramok

Between 2003 and 2006, houses prices doubled everywhere with no fundamental underpinning. He is right.

There was a piece on the RTE news about ACCbank/Rabobank. The head of Rabo was asked why their deposits here were not lent back into the Irish economy. He quite frankly said along these lines.."half our deposit base don't want that to happen and the other half do".
If half do not, what does that say for those with deposits still in Irish banks? People just don't trust Irish banks especially the masses now know what they were up to. Those with deposits still in them are too lazy to move them away.(have friends who are like this, inertia is the banks best friend)
The Irish banks will have to start building a deposit base and restore confidence as the markets will penalise high debt Irish banks as too risky as they are effectively on their knees.
But the banks can't afford high deposit rates to attract those deposits and they are losing on countless mortgage trackers. Something has to give as its not sustainable.

Flamed Diving

RedPlanet wrote: »

A new bank?
A foreign bank setting up shop here?

Bingo, although more of the latter, really. Morgan seems to be treating the Irish financial market as if it is a closed economy, in this section. Of course arguments could be made as to why foreign banks wouldn't invest here to vacuum up the loan demand, but he hasn't provided them here. Please bear in mind that an important element of his argument is that the ECB will be raising rates in reaction to European recovery. Therefore, it must be of the opinion that banks from these countries are also recovering.

Anyway, if banks did come in here to take customers away from AIB/BOI, that would surely make the current scenario even worse.

Flamed Diving

ei.sdraob wrote: »

anyways its interesting that he mentions that low interest rates have **** all to do with rising house prices, the increased lending was the culprit (p11)

that should put a nail into many people's argument about the euro and ECB causing this

No. His paper translates as: he performed a regression which suggests that interest rates have **** all to do with rising house prices, which may cast doubt on the Euro/ECB determinant argument.

Learn the difference.

Sand

@nesf

One thing that leaps out to me about his paper is his assertion that Irish banks will be forced to go back to a deposit funded model. This is quite an extreme view in that it assumes that the wholesale funds markets for banks will refuse point blank to loan money to Irish banks at "normal" interest rates. This involves extrapolating current conditions out as the new de facto norm yet we've not even yet exited the year with the worst part of the recession to date in it so we could very easily be seeing a temporary period of overly negative market sentiment coupled with a lot of risk aversion. The thing is markets tend to bounce back and don't stay depressed in perpetuity.

I wouldnt say it will be impossible for Irish banks to borrow, but it is not unreasonable to expect it will be at a high risk premium; there will be credit looking for opportunities to invest as the global economy recovers, but Irish banks will not be high on the list of attractive opportunities: there are healthier economies looking for credit, there are healthier banks with better records, and there are more credible state guarantees of bad banks than the Irish guarantee. The banks are going to have to rely on the least risk adverse lenders, with interest rates demanded to match. That just wont be attractive to the banks.

@Flamed Diving

This would lead to a situation where the banks with the largest market share are unable to lend in a market with demand for credit. So, what is a possible outcome of this? Think about it.

I believe the demand for credit is overstated: People with mortgages/large loans are less secure about them, and are looking to pay down their debts, not expand them. People without mortgages/loans would be wary about taking out large loans in the current atmosphere.

Business with good prospects will find credit from somewhere, either Ireland or abroad if needed. Business without good prospectus probably shouldnt be competing for credit at this point.

Flamed Diving

Sand wrote: »

I believe the demand for credit is overstated: People with mortgages/large loans are less secure about them, and are looking to pay down their debts, not expand them. People without mortgages/loans would be wary about taking out large loans in the current atmosphere.

If you believe it is overstated, that is good enough for you. However, your personal belief is insufficient, outside of your cranium. I merely said their would be demand for credit, which there always is, save for war or something. If you provide something interesting to back your point, I will be all ears.

Sand wrote: »

Business with good prospects will find credit from somewhere, either Ireland or abroad if needed. Business without good prospectus probably shouldnt be competing for credit at this point.

What about a business that had decent prospects but had its premises destroyed by the flooding? It's possible that his insurance will cover it, but this could take several months and he needs his shop open soon as he still has orders but has no means to delivering them. This is where a bank comes in, remember? According to what I have been hearing, this credit is not available. Many shops in my hometown of Cork have not been able to reopen because of this.*

This is just one example of where credit demand is present, and credit supply is not. You say that this is overstated, maybe it is. Please provide non-newspaper references.


*Yes, I am sure many of these businesses had poor prospects, but remember the first sentence of the paragraph.

nesf

Sand wrote: »

I wouldnt say it will be impossible for Irish banks to borrow, but it is not unreasonable to expect it will be at a high risk premium; there will be credit looking for opportunities to invest as the global economy recovers, but Irish banks will not be high on the list of attractive opportunities: there are healthier economies looking for credit, there are healthier banks with better records, and there are more credible state guarantees of bad banks than the Irish guarantee. The banks are going to have to rely on the least risk adverse lenders, with interest rates demanded to match. That just wont be attractive to the banks.

Yes, but this risk premium will decrease as time passes and Irish banks don't collapse similar to how risk premiums decreased for Latin American and Southeast Asian countries after their far worse recessions/currency crises. Expecting it to stay permanently high over the medium to long term is unrealistic for all but the most basket case countries with the poorest property right enforcement and corrupt Governments.

ashleey

Without wanting to be a doomsayer, read back your last sentence and repeat after me 'Bob Geldof was wrong, this is not a banana republic.'

nesf

ashleey wrote: »

Without wanting to be a doomsayer, read back your last sentence and repeat after me 'Bob Geldof was wrong, this is not a banana republic.'

Aimed at me?

AlekSmart

Expecting it to stay permanently high over the medium to long term is unrealistic for all but the most basket case countries with the poorest property right enforcement and corrupt Governments.

Yea Ashleey,I thought that too....but as yet this Republic is,in the fashion of it`s Taoiseach,sitting on the fence as it peers directly down into an abyss....what happens next ????

nesf

AlekSmart wrote: »

Yea Ashleey,I thought that too....but as yet this Republic is,in the fashion of it`s Taoiseach,sitting on the fence as it peers directly down into an abyss....what happens next ????

The countries I'm think of a) defaulted on their debt, b) don't respect foreign property rights (i.e. we'd have to seize the Intel and Pfizer factories to be on the same level) c) had major currency crises and d) had dictatorships or populist Governments that seized private property so it could be "redistributed".

Ireland has major problems but we're nowhere close to the above.

Sand

@Flamed Diving

If you believe it is overstated, that is good enough for you. However, your personal belief is insufficient, outside of your cranium. I merely said their would be demand for credit, which there always is, save for war or something. If you provide something interesting to back your point, I will be all ears.

The sum of your contribution is that there is always demand for credit? Amazing.

You stated this:

"This would lead to a situation where the banks with the largest market share are unable to lend in a market with demand for credit. So, what is a possible outcome of this? Think about it. "

Ireland can be defined economically in a number of ways I suppose, but Id very much doubt a plausible definition would be as a market with a demand for credit ( by the credit worthy anyway) when consumer confidence, job security and economic prospects have withered away. Banks might be perfectly sound, and there would still be limited demand for credit in this economy with peoples appetite for risk completely deflated. Few ( Maybe Frank Fahey?) are willing to believe property prices can only rise anymore.

You might dispute that, but I imagine if I claimed the earth orbited the sun you would demand sources. Some things are self evident, and I am not that bothered if you dispute them. Not until you can present evidence that Ireland can reasonably be described as "a market with demand for credit".

What about a business that had decent prospects but had its premises destroyed by the flooding? It's possible that his insurance will cover it, but this could take several months and he needs his shop open soon as he still has orders but has no means to delivering them. This is where a bank comes in, remember? According to what I have been hearing, this credit is not available.

If its a business that has good prospects and the bank can be persuaded the insurance will pay out then the bank will lend the money at the suitable level of interest to reflect their risk. If it doesnt have good prospects, or the insurance will not pay out then they will not. This is prudent banking, which we ought to welcome to return of.

Business owners with poor prospects might moan when they cant get credit, but if the bank objectively looks at the chances and say no then they are doing the owners a favour - if there business is going to fail, at least they wont owe even more money to the bank when it does. And if a business owner goes from bank to bank and cannot convince any of them that he has good prospects of repaying them, then its probably a fair view of his prospects. There are exceptions, but thats what they are: exceptions.

Also, I have to laugh. You're very quick to jump up on your high horse any time someone offers a view you judge insufficiently supported and your whole assertion regarding demand for credit in Ireland is "According to what I have been hearing"? Jesus wept.

According to what I have been hearing I am the raj of India. Its about as soundly argued as your own case, so it must be true. Right?

This is just one example of where credit demand is present, and credit supply is not. You say that this is overstated, maybe it is. Please provide non-newspaper references.

Why? I can just say "According to what I have been hearing". Its all you need to support a well argued and thought out position apparently. Far more reliable than a newspaper article.

Lead by example and back your personal belief up with more than hearsay first.

Sand

@nesf

Yes, but this risk premium will decrease as time passes and Irish banks don't collapse similar to how risk premiums decreased for Latin American and Southeast Asian countries after their far worse recessions/currency crises. Expecting it to stay permanently high over the medium to long term is unrealistic for all but the most basket case countries with the poorest property right enforcement and corrupt Governments.

You are assuming the Irish banks wont collapse, or that the Irish state has the resources to prevent them from collapsing. Even with NAMA they are going to require capitalisation from the Irish state in 2010, which has it own critical fiscal problems, and which is going to have to absorb the losses on NAMA, plus Anglo Irish.

Even with all that, nobody is sure yet what sort of losses are going to hit when the people who lost their jobs last year can no longer maintain the fiction of keeping up their mortgages or credit card debts. This will require further capitalisation, and will the taxpayer have anything left by then? Right now, the only thing making us look like a good bet to the markets is that Greece is worse. And the only thing making the Irish banks look good is the Irish guarantee which is of dubious credibility. Or the assumption that the ECB simply wouldnt let a small peripheral member state collapse. Which is even more dubious.

Obviously no one has a crystal ball, but it would seem safest to assume that it will be a long time before the Irish banking system is seen as being as safe or sound as any other banking system within the EU or the developed world, and Irish banks will continue to pay a penalty until the unknowns above are resolved.

nesf

Sand wrote: »

@nesf


You are assuming the Irish banks wont collapse, or that the Irish state has the resources to prevent them from collapsing. Even with NAMA they are going to require capitalisation from the Irish state in 2010, which has it own critical fiscal problems, and which is going to have to absorb the losses on NAMA, plus Anglo Irish.

Even with all that, nobody is sure yet what sort of losses are going to hit when the people who lost their jobs last year can no longer maintain the fiction of keeping up their mortgages or credit card debts. This will require further capitalisation, and will the taxpayer have anything left by then? Right now, the only thing making us look like a good bet to the markets is that Greece is worse. And the only thing making the Irish banks look good is the Irish guarantee which is of dubious credibility. Or the assumption that the ECB simply wouldnt let a small peripheral member state collapse. Which is even more dubious..

Why is the ECB not leaving a small member state collapse dubious? There have been no noises out of the ECB or the EU for that matter, mooting it as a possibility. Why is the Irish guarantee dubious? Is the Irish Government not committed to addressing the banks' balance sheet problems?

If the Irish Government wasn't willing to recapitalise the banks and wasn't willing to try and fix their balance sheets then yes the Guarantee would be very dubious because the Government would be literally encouraging the banks to fail on them but so long as the Government is taking action to improve our banking system that Guarantee does not look so dubious since it becomes less likely each passing month that the banks will need to call on it.

Sand

Why is the ECB not leaving a small member state collapse dubious? There have been no noises out of the ECB or the EU for that matter, mooting it as a possibility.

Bailouts are specifically banned. Articles 100 - 103 of the Consolidated European Treaty rule out bail outs of member states both in spirit and letter. Germany I believe demanded such clauses because they wanted to inspire fiscal discipline as they knew where the money for any bailout would be coming from.

There is an argument that theres wiggle room in the treaty to find a way to do a bailout without ripping the whole thing up, but it relies on a very generous interpretation of a fiscal crisis brought about by events beyond a member states control. Natural disaster, default by a third party and so on maybe - populist spending binge & feckless bankers? Beyond our control?

The ECB will want to maintain its credibility: it will weight heavily the benefits of Ireland being saved, versus its own loss of credibilty and the impact that will have on the entire EU, the signals it will send to other EU memberstates about the necessity to maintain fiscal discipline. There will be an argument for stringing us up and leaving us for dead pour encourager les autres. The Greeks are certainly at risk of this. 2010 and their efforts to borrow will be make or break.

Id say we are doing a better job of giving the ECB and the Germans reasons to save us whilst retaining some face than the Greeks are. But its the Greeks who are making us look good, not the fact we sleepwalked into a 26 billion euro annual deficit.

About the only commitment we have, is an informal off the cuff remark by the German finance minister a year back that the EU would find a way to help out its members - this did more to steady the markets view of Ireland than anything Lenihan has done. Obviously, the German Finance minister has some clout but its a long way from an informal remark to German or EU policy.

Is the Irish Government not committed to addressing the banks' balance sheet problems?

I dont question that Lenihan is 100% committed to throwing the taxpayer under a bus to save the bank stakeholders. Its clear the interests of the bank shareholders and executives have always taken priority over any other consideration for him.

But I doubt that they have the capability to save the bank stakeholders from the mess they are in *and* to save the state from the mess it is in. The guarantee in and of itself was a disastrous policy, in that we cant actually cover it should it be called upon, and it has introduced a requirement to proceed down an even more disastrous path of terrible policies to try prevent the original bad decision from being shown up for what it was. Its worth noting the decision to issue the guarantee on a solo run deeply angered our EU partners, the same ones the state itself is relying on for leniency and shelter.

All in all, its a house of cards holding up our banks right now. We are just left praying no one disturbs it.

nesf

Sand wrote: »

Bailouts are specifically banned. Articles 100 - 103 of the Consolidated European Treaty rule out bail outs of member states both in spirit and letter. Germany I believe demanded such clauses because they wanted to inspire fiscal discipline as they knew where the money for any bailout would be coming from.

There is an argument that theres wiggle room in the treaty to find a way to do a bailout without ripping the whole thing up, but it relies on a very generous interpretation of a fiscal crisis brought about by events beyond a member states control. Natural disaster, default by a third party and so on maybe - populist spending binge & feckless bankers? Beyond our control?

The ECB will want to maintain its credibility: it will weight heavily the benefits of Ireland being saved, versus its own loss of credibilty and the impact that will have on the entire EU, the signals it will send to other EU memberstates about the necessity to maintain fiscal discipline. There will be an argument for stringing us up and leaving us for dead pour encourager les autres. The Greeks are certainly at risk of this. 2010 and their efforts to borrow will be make or break.

Id say we are doing a better job of giving the ECB and the Germans reasons to save us whilst retaining some face than the Greeks are. But its the Greeks who are making us look good, not the fact we sleepwalked into a 26 billion euro annual deficit.

About the only commitment we have, is an informal off the cuff remark by the German finance minister a year back that the EU would find a way to help out its members - this did more to steady the markets view of Ireland than anything Lenihan has done. Obviously, the German Finance minister has some clout but its a long way from an informal remark to German or EU policy.

Ok, but none of the above indicates the EU is happy to let a country fail. The deal they worked out with Ireland was a tacit acknowledgement that rules would be bent so long as the country receiving the benefit was willing to show they were willing to enact changes to solve the problem in the medium term (i.e. in the short term Ireland is allowed to go outside the normal budgetary limits so long as the Irish Government is seen to be making real cuts in the size of the Budget to try and bring the deficit under control).

Sand wrote: »

I dont question that Lenihan is 100% committed to throwing the taxpayer under a bus to save the bank stakeholders. Its clear the interests of the bank shareholders and executives have always taken priority over any other consideration for him.

But I doubt that they have the capability to save the bank stakeholders from the mess they are in *and* to save the state from the mess it is in. The guarantee in and of itself was a disastrous policy, in that we cant actually cover it should it be called upon, and it has introduced a requirement to proceed down an even more disastrous path of terrible policies to try prevent the original bad decision from being shown up for what it was. Its worth noting the decision to issue the guarantee on a solo run deeply angered our EU partners, the same ones the state itself is relying on for leniency and shelter.

All in all, its a house of cards holding up our banks right now. We are just left praying no one disturbs it.

See, the thing is that the taxpayers are major stakeholders in the financial system. We rely on it for our savings, for receiving our wages and for running the finances of the companies we work for. If the banks fail we take the hit because we have to ensure creditors receive their money! It's all well and good to say the taxpayer is bailing out the banks but it's disingenuous to ignore that the taxpayers don't suffer from banking failure.

Count Dooku

nesf wrote: »

Ok, but none of the above indicates the EU is happy to let a country fail.

We owe to Europe 400 Bn,
EU cannot do anything until all debt from private banks will be transferred into state debt and will be guaranteed by taxpayers

Sand

@nesf

Ok, but none of the above indicates the EU is happy to let a country fail. The deal they worked out with Ireland was a tacit acknowledgement that rules would be bent so long as the country receiving the benefit was willing to show they were willing to enact changes to solve the problem in the medium term (i.e. in the short term Ireland is allowed to go outside the normal budgetary limits so long as the Irish Government is seen to be making real cuts in the size of the Budget to try and bring the deficit under control).

Agreed: the government is doing better than Greece in looking repentful, but there will be a constant argument within the ECB between those who consider Ireland worth saving at the expense of the ECBs credibility, and those who consider the need to maintain credibility and provide examples of the punishment of fiscal fecklessness more important. If and when Greece get shoved to the wolves, whose next in line to walk the plank?

There are limits to what the ECB and the EU can do for us. We cant assume the state has limitless backing from them. The ECB has already made negative comments regarding open ended support of the banking system round about the time Fianna Fail TDs were proclaiming that the whole NAMA deal was a secret deal with the ECB for free money from the EU.

See, the thing is that the taxpayers are major stakeholders in the financial system. We rely on it for our savings, for receiving our wages and for running the finances of the companies we work for. If the banks fail we take the hit because we have to ensure creditors receive their money! It's all well and good to say the taxpayer is bailing out the banks but it's disingenuous to ignore that the taxpayers don't suffer from banking failure.

We need a banking system and we need to protect depositors as much as is possible. I do not dispute this.

However, the current government policy is not aimed at preserving a banking system. It is aimed at preserving AIB and BoI stakeholders. There is a difference. How much does the average Irish person have in AIB or BoI as savings? 10K? More? Less? There are roughly 2 million "people at work" in Ireland, about half of whom pay taxes. Given the cost of NAMA alone (ignoring any recapitalisation) the govt is borrowing 32K per person at work, 64K per taxpayer to do what? Protected deposits of 10K for the average depositor? Cure is worse than the disease if you ask me.

Regardless, the important statement is we need to protect small depositors as much as is possible. The important qualification being that the state can only credibly prop up the banks and their losses if it has the resources to do so. It doesnt.

Its not really decisvely a debate of if we should or shouldnt prop up the bank stakeholders or not. I believe we shouldnt, but even if we should do so for whatever reason, what is questionable is that the Irish state can absorb the losses of the the entire Irish banking sector (which accelerated lending to 200% of GNP by 2008, where loans of 19 million euro were advanced on the basis of 100 Euro deposits - no typo, one hundred euros.) *and* absorb annual defits of 26 billion per year, with difficult cuts to make in future. Even assuming the government can maintain its current discipline in imposing such cuts - already there are reports high paid civil servants have forced a U turn on the paycuts announced for them in the budget, and if/when Labour get into power the chances of real fiscal discipline fade even further.

Even if the case for the current course of action was compelling, and it was merely annoying but necessary to bail out Seanie and Co, there is real doubt that the Irish state has the ability to bail out the banks.

Thats the bottom line on Morgan Kelly's analysis - the Irish state might not have the resources to do it, regardless of if it should or shouldnt.

EDIT - Also, we only have responsibility for the banks bondholders until September 2010. 9 months. At that point we are free to chart our own course once more. In fact, we could end the guarantee any time we choose, it wouldnt be any worse than the decision to issue it in the first place.

Flamed Diving

Sand wrote: »

I am not that bothered if you dispute them. Not until you can present evidence that Ireland can reasonably be described as "a market with demand for credit"

I stopped reading here.

You seem to be really struggling here. Let me help you get back on track, shall I?


When I said:

"This would lead to a situation where the banks with the largest market share are unable to lend in a market with demand for credit. So, what is a possible outcome of this? Think about it. "

I was referring to Morgan's quote where he said:

"In these circumstances, the Irish banks must shrink their balance sheets, by reducing lending and repaying debt. It seems likely that Irish credit levels will return to average international levels in the region of 100% of national income. However, because €110 Bn of their lending (equal to 80 per cent of GNP) is tied up in recently issued mortgages of 35 years or longer, it seems unlikely that there will be very much new lending to any sector of the Irish economy for the foreseeable future."

this describes a scenario where Irish banks will be unable to lend very much over the next few years? decade? more? He doesn't say, but I reckon he is aiming at several years. Now, since you have been paying such close attention to my posts so far, you may recall that I have been using the term Small Open Economy a lot. But we are more than that. We are a SMOE within an giant economic union. As you surely already know, with adequate capital flows SMOEs tend to bob about in the global economic tide, with the ebbs and flows of capital sweeping in and out.

So, one may argue that the Irish financial system may not recover to normal functioning for several years, as Morgan seems to suggest. But this is not an argument for the global financial system, and by association, the Eurozone financial system. Ireland's economy, held in isolation, may not be expected to recover for several years. But this is not an argument against the recovery of the global economy, or the EU economy, by association. Now, given that Ireland is a SMOE, and the high level of MNCs in this country, a global economic recovery will be a positive determinant in a Irish recovery. (Some are moving East, you say? Never! :eek:) Global demand for Irish goods should increase with a global recovery.

I'm sure you get the idea by now. We are sufficiently tied to the global economy to be shifted by its movements. Whether you like it or not, the mere talk of GDP growth in the news and fewer/no layoffs at MNCs will shift consumer confidence. During this time period (24 months?) we are still in Morgans scenario, where our banks are crippled and cannot lend. So where do we stand? Do our consumers/firms still not require credit? Are we now stuck in some Japan-style trap where people are "hoarding cash"? Of course, we are well into the hypothetical here. But so is Morgans regression analysis. It's just that most of you cannot tell.

Finally, we arrive back at my original point, which you, Sand, dragged off course by saying:

"I believe the demand for credit is overstated"

which was not what I was talking about when I said:

"This would lead to a situation where the banks with the largest market share are unable to lend in a market with demand for credit. So, what is a possible outcome of this? Think about it."

referring to Morgan's hypothetical scenario for the future, and not what you assumed it to be. I wish I realised this before responding to your last post.


Sand, you seem to be one of those people who drag people into circular arguments because of constant misinterpretation. I would like to state that I am not interested, if this is your aim.