The reason Anglo Irish Bank should be let go is simple: defaulting now will make no difference whatsoever to Ireland’s economic performance in the future. In contrast, keeping it on life support will cost us dearly. So shut it down and repudiate the debts.
The reason I am so sure that this will work is that, unlike most people making the decisions in Ireland, I worked in the defaulted debt market in the 1990s. I was the economist in a trading team at French bank BNP, which restructured defaulted debts, found new buyers for these debts and, in so doing, opened the door to those defaulting countries so they could come back into the international fold.
As far as I am aware, none of the people who are maintaining that we cannot default and must write a cheque to pay for Anglo’s misadventure have any such experience of working in defaulted debt markets.
The lesson is that the financial markets always forgive countries that default. There is always a deal to be done and, while it is not pleasant and negotiations can get heated, deals are done.
I worked in what was called the Brady bond market, which was a scheme hatched by US treasury secretary Nicholas Brady.
The Brady bond market was an enormous multibillion dollar market which financed and nursed back to health countries that defaulted in the 1980s and 1990s.This market flowed from deals done by defaulting debtors and their creditors.
For all the warnings of disaster, the banks realised that it was not in their interest to shut out Russia, Brazil and Mexico indefinitely. Banks always finance opportunity, so while they might not like being defaulted on, they see this as part and parcel of the game of capitalism.
This is why the idea of co-responsibility is so fundamental to a market, the lenders are as culpable as the borrowers and the taxpayer has no business getting involved.
This is why we should let the guarantee lapse and do a deal with all the creditors of AIB and, in the case of Anglo, simply default and force the creditors to come up with a ‘take it or leave it’ deal. We can also sell the deposits of Anglo to one of the bigger banks to protect depositors.
If you are worried about such a course of action and are persuaded by the rhetoric of the government, let me show you how debt default is not the end of the world. Let me show you how things can change and how yesterday’s defaulter becomes tomorrow’s star.
Goldman Sachs – the most powerful bank in the world – says that four countries will dominate the next 20 years: Brazil, Russia, India and China. Known as the BRICs, they are the stars of tomorrow. This is now received wisdom in much of the financial markets. But it wasn’t always like that.
Ten years ago ,two of these countries were regarded as basket cases that would never fulfil their potential after they defaulted. Brazil and Russia were regarded momentarily as pariahs. What if I told you that just over a decade ago, the team I worked with bought Russian bonds that were trading at 7 cents on the dollar.
What if I told you that we traded Brazilian bonds at less than 30 cents in the dollar? What if I told you that within four years these bonds had been redeemed at par?
All this happened and no one thought of what was said before or during the defaulting crisis when prices started to rise again.
Before the default prices collapsed but once the countries actually defaulted, the markets concluded that phase was over.
The ‘event’ had happened and then money flowed back into the countries enabling the countries to recover.
Now, ten years later, these two former pariahs are stars and destined to inherit the future. And what happened to the investors who lost money in Russia and Brazil? Many of them licked their wounds, wrote off the losses and got back in for the new ride, hoping to make money in the upswing to cancel out the losses they made in the downturn. That’s how capitalism works.
Financial markets are forward-looking. For the investor, it is always about tomorrow and there is always new money for the right investment. The idea that the world will shut the door on a country in trouble is so false as to be laughable. This is not how the financial markets work. Unfortunately, the people warning us of armageddon if we let Anglo go have no experience of the defaulted debt markets and, thus, really don’t know what they are talking about.
What is particularly galling is that in many cases the people saying there is no alternative to bailing out Anglo are the same establishment and financial markets figures who reassured us that the property market would achieve a soft landing and that the Irish banks had been ‘stress tested’ against a property collapse anyway.
They hadn’t a clue then and it would be the height of stupidity to believe them now.
When President Franklin Delano Roosevelt, in the middle of the Great Depression, took the US off the gold standard and defaulted, the warnings were that this would bring the entire American economy down. Roosevelt was aware of the arguments, but defaulted anyway. By taking the US off gold, he was saying to the creditors: ‘‘you will no longer be paid in gold but in dollars.”
At the time, the lawyers, civil servants and bankers forecast chaos and mass panic in the US. In the event, the opposite happened. The day the US default was made legal, the financial markets rallied, the Dow soared and the bond market rallied.
Why did this happen? It happened because forward-looking investors realised that the US would be bankrupt if it tried to pay all the bad loans on the banks’ balance sheet and therefore, it was better for everyone that it took the pain now and lived to fight another day. Guess what? The US recovered and no one mentioned the default again.
The same will happen here. The financial markets want to see that Ireland is going to grow again. They want to invest in us, in our real abilities, the abilities of the people. Therefore, they want to see a strategy for growth. What they are seeing now is an illegitimate strategy, with no public support, which will turn Ireland into a large debt-servicing agency.
The problem with this is that so much debt undermines the potential of the people and risks yet another debt crisis. As a result, the money that could be invested in Ireland will stay away because the risk in Ireland has been heightened – not reduced – by Nama and the government’s banking policy.
The markets want to see the government giving the people of Ireland a chance. If that chance is facilitated by a default, the markets will support us. Investing is, like a second marriage ‘‘the triumph of hope over experience’’; we quickly forget the messy divorce and move on, armed with the hope that next time it will be better.
The history of bank defaults, repudiation and renegotiation reveals that human nature doesn’t really change. We march into the future full of confidence despite recent experience, because that is what humans do.
If I had never read one of David’s articles or read his books or even heard of him . I could read this article and say ‘ here is an economist who has worked in the defaulted bond market so he must have some idea of what he is talking about ‘
So my question is . ‘ Why are they taking this action ? ‘
Don’t say its all based on a myth . It must be something more than that .
So True David!
It would be better for the Irish Public / Taxpayer- for them to fold the bank, and hold ALL present management & past responsible for the mess. Many have been over paid for bad advice /service – & money should be retrieved through all necessary actions whether it is chasing all the Seans ! Michaels , Declans . Paddys! etc etc etc etc etc
There is no doubt that the only correct course to take is as suggested above by DmcW. However we are not the masters of the course currently chosen but puppets to our true masters in Europe. Nobody outside of here would give a shit if the punt was our currency. This direction has been forced on us by Europe out of a deep fear that the Euro could be seriously undermined by a collapse of one or all of the PIIGS. This statement is in no way attempting to support our government but I believe we have been coralled by… Read more »
Also it’s probably worth repeating: defaulting on Anglo debt is not a sovereign default, whether it’s nationalised or not. The markets will see it for what it is. I’d see Ireland as a more attractive investment if Anglo had nothing to do with the state balance sheet. I mean is this not obvious? When Lenny says ‘the markets will be shut to is if we let Anglo go’, surely this is naked scaremongering? Wouldn’t the markets be shut to Anglo, but sovereign borrowing should actually get easier, as there isn’t that bloody millstone hanging about! There is no reason I… Read more »
David, using your experience which as you say is probably thin on the ground at decision making level (though I don’t believe for a moment that Brian Lenihan didn’t at least consult senior current debt expertise across a wide spectrum), what would you estimate the cost to Irish banking in particular and the Irish economy more generally if we let Anglo go bust? Nil? €10bn over 5 years? What? Secondly we have already spent €12.3bn on Anglo – the shareholder funds last Thursday after paying in the latest €8.3bn were at €4bn so we’ve lost most of it already and… Read more »
[…] So all eyes will be on NAMA as the first Anglo tranche is crystallised. There are widespread calls for at least full disclosure of information on the liquidation option at Anglo if not summary calls to liquidate now, as for example by David McWilliams today. […]
One overlloked detail about Anglo is that Sean F and co invested in projects in a private capacity and the resulting dividend from such projects accrues to individuals rather than Anglo.If a person leaves their car in to be serviced in a garage, it isn’t possible for the mechanic to do the work in a private capacity and pocket the proceeds!.
Here’s another historical example. Uruguay (sometimes referred to as the “Switzerland” of South America) experienced a severe banking crisis in 2002. They extracted themselves from this crisis in a way that has been described as “virtuous” and “orthodox” by The Economist [1]. It is often feted as an example of a country extracting itself from crisis in a “market friendly” manner. There were several steps taken to rescue the country’s economy, but the one I’d like to draw attention to here is their liquidation of four banks [2] which between them had 33 percent of total bank assets. The effect… Read more »
It;s good to see DMcW providing the basis for optimism. The article would be more hard hitting if it illustrated his argument with reference to the figures published in IT today: Payments to Date State investment €12,300,000,000 (investment in Anglo Irish to date) €3,500,000,000 (investment in AIB to date; more may be needed) €3,500,000,000 (investment in Bank of Ireland to date) €100,000,000 (investment in Irish Nationwide to date) €8,500,000,000 (Nama’s purchase of first loans) Probable future costs (up to) €10,000,000,000 (future Anglo costs) €2,600,000,000 (future Irish Nationwide costs) €875,000,000 (future EBS costs) (up to) €41,500,000,000(further projected upfront Nama spend) Grand… Read more »
PETITION ON IMMEDIATE CLOSURE OF ANGLO, REPUDIATION OF IT’S DEBTS AND NO EXTENSION OF BANKING GUARANTEE:
http://www.thepetitionsite.com/1/close-anglo-irish-bank-now–no-bank-guarantee-extension
Agree wholeheartedly with this well argued and well rounded article from D. I believe international markets want Anglo to go though we have not had full information published from KPMG and others auditors who, on face value, we have been told, advise the contrary. KPMG and the other auditors who’ve examined Anglo need to publish their findings so we can chart the best path to navigate through the wind down. Winding up Anglo would send a message to the international markets that badly run, corrupt banks such as Anglo, cannot be tolerated and won’t be saved, that we are serious… Read more »
Nailed it David.
’nuff said.
Now, can anyone tell me why the ‘insiders’ are not carrying the above out and fixing the problem as outlined in D’s article?
European Central Bank in Frankfurt.
Their bondholder pals in Frankfurt.
Any idea as to why they insist on Irish banks keeping repayments going to bondholders ;-)
http://www.youtube.com/watch?v=PButumaug7w
More food for thought.
@David McWilliams McWilliams: Can you please run for government!
Hi David, What you propose makes perfect sense to anyone with an ounce of experience in the markets. It is simply how things have always been done so why are we being lied to in this situation? I think we have to accept the true nature of the problem; It is that there are now vested interests who are opposed to and actively working against the truth. They are interests related to bondholders, creditors and shareholders. Some have even bought into the banks shares and bonds at very low bankruptcy price. All of them are willing to sacrifice the the… Read more »
This is not a purely economics decision.
The decision on Anglo and the rest is a political decision – they have their reasons for what they do, just like they had their reasons for firing a major torpedo at Quinn.
There is stuff going on that we have no idea about – these issues are determinants of policy, it is the only thing that ‘makes’ sense……….got to factor in the ‘politics’ and the agendas of which there are many.
David hits the nail on the head with this article… The only rule of capitalism that really matters is that failure is punished, success is rewarded. All capitalism depends upon it…
I met up with Tim there this evening in Galway, just to put a face to a name. Nobody else came. Now we have 33 paltry responses to a good article where once the blog at this point would have run to 3 pages. Are we bored? Stale? Fed up of circular arguments? Dunno. Many asked about what we could practically do. We started a simple Facebook page to educate people and we’ve 700 joined up in just over a month. By all means, sit here and analyse Davids articles but getting off the proverbial might change something. Actually pinning… Read more »
WE NEED A COUP D’ETAT.
I am retiring from this site pour sejourn ~ conge sur soleil – I need a break from the negativity and apathy .I do not think DMc W can say anything more that he already has .I might bump into AMooney at the Casino .
Troops, Comrades …
Focus on the next battle, not the last one.
The guarantee must lapse. (Anglo delenda est).
@Furrylugs 17 Cheer up FurryLugs, change may come slower than you wish, darkest time of night is just before the dawn and all that. Some journeys take longer than others, that’s life. We’re living in a time of profound change politically and every other way here in Ireland. And voices like yours are rare enough and need to be heard more. http://www.online-literature.com/donne/780/ “And what rough beast, its hour come round at last, Slouches towards Bethlehem to be born? ” Have your say now. Doing something is better than nothing. Cronies of emperor Biffo and co still need to be told… Read more »
I see where David is coming from and I can also see a major contagion of bankruptcy spreading throughout our elite and many of our TDs – which in turn would collapse the current government and indeed ban many from standing for re-election. Also, if we drop Anglo, do we not effectively hit the Sovereign Default button as well and in the process start the topple of the Euro project. 2 major points of resistance to David’s article which are aided by very powerful forces both from inside and outside this little Island. A 3rd point is that we are… Read more »
A figure of 300 bill euro was quoted earlier in the comments as being Ireland’s GDP, the figure is about 160 bill euro and falling.
Furrylugs .
JohnALLEN turned up and saw nobody as arranged there.
I never heard anything and I was on Skype and cell phone for two hours and 30 mins waiting for the phone to ring and it did not.
Also, I do NOT consider my post paltry and you are WRONG to characterize it so.
Expect an explanation from tim or you why my phone and skype was not followed through on like I was told it would be.
Death and rebirth are part of the cycle of life. Closing Anglo headquarters on Stephen’s Green for example could allow for its conversion into a suitable apartment complex for non-city resident TDs. The Norwegian Parliament has such a complex (140 apartments) for its MPs who are paid a standard 1.5 times the national average earnings (or 2 times for a minister) and do not need to claim the extraordinary living expenses of our TDs. Our most extravagant TDs are claiming up to 80,000 euros per annum tax free, on top of their salaries of over 90,000 euros. FF has been… Read more »
Folks, just read Fintan O’ Toole’s article in today’s Irish Times. http://www.irishtimes.com/newspaper/opinion/2010/0406/1224267752939.html The sad and unavoidable reality of the situation I believe is this… The government could come out and announce tomorrow that they are taking the deposits out of the banks, as what happened in Argentina. You go to take your cash out of your account and it isn’t there, you’re savings have been taken by the government. Even if that were to happen, people in this country would still not be motivated to do anything about it. They have already reached into the pocket of every citizen in… Read more »
Folks,
concerning the greens, and I fully agree on that part, conicidently, Deirdra de Burca has just signed the peition that I started yesterday. NICE!
http://www.thepetitionsite.com/1/close-anglo-irish-bank-now–no-bank-guarantee-extension
@namawinelake Agree with you there. Me too asked for similar alternative costings/scenarios to be published. The figures should be based on the audited KPMG accounts for Anglo, according to Dukes a number of companies were cross commissioned to work up figures. I don’t know if they are publicly available or can be got via Freedom of Information. I do agree with you it is very surprising economists especially, but also journalists e.g Times, Indo, have not made an attempt to flesh out some figures to give a general overview. The other thing is, if you show your hand before negotiating,… Read more »
Hi David, Yup, I agree with you that winding down AnIB and having a partial and negotiated default is what is needed for Ireland Teo. I think the ‘powers that be’ are ctually afraid of the word default. As you correctly point out, they do not know anything about the subject matter, nor in many cases do their advisors. The blind leading the blind as it were. We are however at a distinct disadvantage as we do not have the details. Whats needed is a ‘crack team’ of ‘corporate dismantlers’ to forensically find out the status of every single scintilla… Read more »
An example of how Lenihans gross exaggerations and lack of definition and figures are going to get us into deeper trouble:
( last paragraph )
http://www.rigzone.com/news/article.asp?a_id=90561
Now we have the OPEC Secretary mixing up a banking problem with our sovereign debt. FFS!!
This is one of David’s clearer articles, and I notice that the number of respondents has gone down.
Have people in Ireland just given up? Is NAMA unstoppable now? I’ve already emigrated (2004, priced out by the property bubble) and with NAMA have decided that returning is not a preferred option. NAMA will burden the Irish people for generations, not just because the taxpayer will have to pay it, but because of NAMA, growth will be limited.
If NAMA can’t be stopped, get a passport and emigrate. Oh, are the Public Service “workers” still striking?
Labour day (1st May) is Saturday this year.Surely this is the day for all the disenfrancised to congregate in Dublin to protest.
—- Document Recommendation —-
Most of us are in the constant quest of educating ourselves on matters concerning this mess. I take the liberty to post some documents once in while that I come across and find worth your time.
Just in case it might have slipped under your Radar.
http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf
[…] continues to question the sanity of the government’s approach to the banking crisis. His latest column, in yesterday’s Sunday Business Post, draws on his experience as a trader in the […]