In a crisis, what seems initially radical and impossible to contemplate can quickly become consensus and mainstream.
The sands are shifting so quickly under our feet, a thought that can seem fanciful at breakfast can be plausible by lunchtime and become government policy by night.
Think about the economy and how we have moved. A few years ago, suggesting house prices would crash violently was dismissed by the mainstream as radical – the currency of ‘‘self promoters’’ and ‘‘cranks’’.
Similarly, in 2007/06 anyone who questioned the banks and their robustness was slammed as unpatriotic or naive. In September 2007 in The Generation Game, I described Anglo Irish as ‘‘an out of control hedge fund’’ that would ‘‘go bust’’.
The mainstream guffawed and rubbished this notion. Even late last year, questioning the wisdom of the euro as constituted at present for Ireland and Greece was equally looked on as radical.
The Economist magazine described my suggestion that the euro was not appropriate for every European country, Ireland included, as ‘‘plain potty’’. Guess what? This same magazine has spent the past few months questioning the wisdom of the euro, the very article of faith that was supposed to be its doctrine last November.
Now we can all be wrong and only an eejit thinks that he has any monopoly on the truth, but time and again in a crisis, the only rule seems to be that there are no rules. And, if we adopt an almost childlike curiosity and flexibility to problem solving, we can sometimes get closer to the outcome than if we dismiss the unthinkable because our adult mind has told us that this is not possible.
Another way to look at this is – as the Prussian military genius Von Clausewitz stated – ‘‘the best laid military plans never survive the impact of the enemy’’.
Therefore, we would be wise to embrace the notion that everything is unpredictable and what is ‘‘outside the box’’ today can be ‘‘inside the tent’’ tomorrow.
Interestingly, once an idea gains credence the opposition to it falls away, which may have more to do with human nature and that thing about success having many fathers while failure is an orphan. As a result, there can be contagion in ideas as well as in financial markets.
New ideas, like new paradigms in markets, can spread rapidly to become conventional wisdom.
Armed with these few observations, let’s consider why banks or nations default on their obligations. Defaulting sounds off the wall, but it happens regularly. Until recently there was no real suggestion that Greece might do such a thing.
However, Greek bonds are now trading at an interest rate of above 7 per cent. This is higher than Icelandic bonds, implying that the financial markets believe a country in the euro, which has met every debt interest payment so far, is a greater risk than a country outside the euro, which has defaulted on everything. By the way, it is also higher than Colombia – a country with a history of defaulting.
A recent book called ‘This Time Is Different: Eight Centuries of Financial Crisis, by Ken Rogoff and Carmen Reinhardt, two famous US economic professors, evidences that since 1945, the average time between a serious financial crisis and the default is three years.
There is a pattern in all crises and defaults, which is more or less the same in every country.
In the immediate aftermath of the financial crisis, the government believes that the national bond market can be used as a giant skip into which the sins of the past can be thrown. Debt begins to rise and if there is a banking crisis, the debts of the banks are transferred to the taxpayer.
This pushes up the debt to income ratio rapidly. But for awhile there is calm.
However, bubbling under the surface are doubts and these doubts trigger changes in what the authors call the ‘‘tolerance of debt’’.
The authors argue that once the debt to income ratio goes above 60 per cent of GNP, both the citizens’ tolerance of more taxes to pay the interest and the markets’ tolerance of politicians’ soothing words, begins to atrophy.
Greece is in this position now. For the Greeks the two alternative routes are whether to default now or wait for the German and IMF led bailout and contemplate what is called ‘‘internal devaluation’’, which means letting rising unemployment and falling wages bear the brunt of the economic pain.
We face the same choice. For the political elite these are just words, but for ordinary people unemployment and wage cuts are real.
My suspicion is that Greece will default. By this, I mean it will repudiate debt by renegotiating the terms of the debt simply because the population won’t tolerate the hardship associated with unemployment and rising prices. Greece also realises that the financial markets are forgiving. They are forward-looking.
What happens if this occurs? Well, it changes the game. If Greece defaults in the euro, the precedent is set. Ireland is likely to be next because we are now firmly in the danger zone where debt to income is above 60 per cent and exploding. Examine these figures: In 2008 our debt cost €1.5 billion to service. This figure had jumped to €2.5 billion in 2009 – an increase of €1 billion, or 66 per cent.
But if you look at our debt servicing costs as a percentage of our tax revenues, the picture is much more worrying. In 2008 we spent 3.8 per cent of tax income on debt servicing. In 2009 that figure was 7.7 per cent, an increase of over 100 per cent year on year.
This trajectory gets worse. As a government’s income is reduced, it borrows more money to close the gap, which in turn, means a greater amount of tax will have to go on interest payments the following year, which will lead to a greater deficit.
Also, as the government is forced to use more and more of our money to pay off its debt, it becomes unable to invest in productive things that would increase the growth rate of the economy.
Today, our national debt stands at 57 per cent of our GNP. But after the bank bailout (€54 billion for Nama and €18 billion for Anglo) debt rises to 108 per cent of GNP. This is not counting the money for Bank of Ireland and AIB.
So quite apart from the deteriorating situation due to the gap between spending and revenues, 50 per cent of GNP is being spent on the banks.
The problem is that none of this spending increases the productive capacity of the nation. The government, by keeping the banks afloat with our money, is in fact investing in land. But land has no productive value. So all the money is spent and all the debt is amassed, but unlike other countries who have debts, we have no infrastructure to show in return. All we have is fields in Athlone, revamped golf courses and zombie hotels.
So are we headed for default?
I know this sounds like heresy now, just like property collapses, bank failures and problems in the euro sounded heretical in the recent past. But they happened. Again, events – once they move in a certain direction – tend to follow a similar path.
Take the following example, from my own experience in Russia in 1998. In June 1998, the IMF announced a bailout for Russia. At the time, the newspapers said that the crisis was over and the IMF had saved the day.
The main banks and brokers announced it was an opportunity to buy Russian bonds again.
However, a wily old investor called me and whispered: ‘‘Now is your last opportunity to sell’’. We did.
I sense that smart bond investors will use any putative EU bailout as the last opportunity to sell. The clumsy ones will buy, believing the government and brokers’ spin.
But as they realise that Greece’s problems haven’t gone away, the positive euphoria accompanying the EU bailout of Greece will dissipate.
When the bond market panic ensues, contagion will take hold and Ireland will be next.
—- WELCOME TO THE CAYMAN ISLAND—- or…. Ugland what? Ladies and gentlemen, this is your captian speaking, welcome to the cayman islands, the weather forecast for the next few days is fantastic, outside Temperature is currently 31 degrees celsius or 87 degrees fahrenheit, the capatin and his crew would like to thank you for flying with ….. Yeah, that would be something now, wouldn’t it? I know, but I am not taking you to the caymans for a pleasure trip, well, I’d love to, but for now I rather continue my quest for Anglo’s subordinated and senior bondholders. So, it… Read more »
Lenihan & Cowen is chasing the crisis precisely because he and others will not consider every eventuality. To consider the best course of action it is necessary to put every different option on the table and debate the merits, risks, benefits and dangers associated with each. This has not happened in Ireland and what is happening is taking too long. Regardless of what this government do, no one is going to support their actions. The current elected government and permanent government (ie. civil servants in various departments) have proven themselves to be unable to govern effectively and should stop digging… Read more »
Clearly this is a fantasy article, given that we are now lending money to Greece…
I’ve decided the only thing that matters is the destruction of Fianna Fail. If we cannot accomplish this, nothing else matters.
Hi David, Yes, thinking the unthinkable can indeed help. But these are reactions to not preventing the unthinkable from happening in the first place with proper structures and regimes in place to prevemnt excessive credit form flowing through our property sector and businesses, etc. Perhaps by NOT thinking properly is how we got into this mess. DavidMcW> The authors argue that once the debt to income ratio goes above 60 per cent of GNP, both the citizens’ tolerance of more taxes to pay the interest and the markets’ tolerance of politicians’ soothing words, begins to atrophy. But the thing about… Read more »
“Today, our national debt stands at 57 per cent of our GNP. But after the bank bailout (€54 billion for NAMA and €18 billion for Anglo) debt rises to 108 per cent of GNP. This is not counting the money for Bank of Ireland and AIB” David this is not the full picture, I was at a meeting last Wednesday in Bray, the meeting was hosted by the labor party, and Pat Rabbet was the speaker on the subject of NAMA. He stated that the entire cost for the bail out of Anglo Irish Bank would be in the order… Read more »
I read this article yesterday, and the first thing that hit me was the parallels with Nicholas Taleb’s concept of ramdomness (the Black Swan event). And that when a completely unpredicaable event occurs, we get massive gyrations economically. The West is going through a repeat of what happened in 1998 in emerging markets. Except the West is making a dogs dinner of solving it. In fact the West bailed out the emerging markets for the sake of expansion of influence in 1998, and in the process created the dot-com bubble. But that analysis is not part of the official history.… Read more »
Jody Corcoran, Sunday Independent, April 11, turns the spotlight on the 700 people in Department of Finance and the following internal review. Does it get to grips with how DoF got it wrong bigtime between 2004-2008? Does it provoke the accusation DoF is in major need of systemic redesign from the ground up, that it is in need of major reform. No, http://www.finance.gov.ie/documents/publications/reports/2009/Dfincapacityreview09.pdf No, things are fine, clap us on the back… “Dept Finance Capacity Review Financial Services — While a significant upgrading of knowledge and expertise has been achieved through close working and engagement with the Central Bank, Financial… Read more »
I wonder if all we are witnessing is the natural progression to the end of the existing structures are we know them. Being internet driven it just looks a lot faster and more dramatic and our real-time communications creates tactics that drive info flooding and coordinated tactics between governments that want to keep the status quo. Can you blame them? I mean, what is the alternative? Did someone say hit the RESTART? 150 years ago and even before the ticker tape and the telegraph, collapses were never big becasue they were never coordinated. If you wnat to get out of… Read more »
There’s a good dose of reality in that article – I find it difficult to see how we’re going to get our deficit down to 3% by 2014, unless the economy is put on steroids and that’s not going to happen.
It looks very likely that eviction is going to be our destiny.
[…] Embrace the unpredictable,By David Mc Williams Embrace the unpredictable […]
Sorry if I’m going off topic but I just have to get this off of my chest. If I owned a company and needed someone to run it for me.. and if that someone after 4 or 5 years trying.. ran my company into the ground, sending my workforce onto the dole and leaving them with the very real danger of not being able to pay their rent or feed their children… should I get rid of that incompetent asshole or give him another chance? Thats the dilemma that we face shortly up here in the north. In 5 years,… Read more »
[…] mcwilliams, greek bonds, simon johnson by John P. Muldoon I usually read David McWilliam’s column in the Sunday Business Post. They are informative and easily understood. I also read articles by […]
The Market Oracle 10th April. Casey Stengel, manager of the hapless 1962 New York Mets, once famously asked, after an especially dismal outing, “Can’t anybody here play this game?” This week I ask, after months of worse than no progress, “Can’t anybody here even spell financial reform, let alone get it done?” We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big… Read more »
Nollaig was recently nominated by international peers as one of only three Irish lawyers to be included in the International Financial Law Review’s ‘Guide to the World’s Leading Capital Markets Lawyers’.
Who are the other 2 as they are clearly knee-deep in the shit?
Iceland Meltdown Report
http://abcnews.go.com/Business/wireStory?id=10352456
David. The point of article then is that ‘insiders’ are gaming the national bond issuance to self serving interests above the welfare of the country and the ‘outsiders’. Nothing surprises. If Anglo can secure 22 billion euros out of sovereign state of Ireland to receive a get out of debtors prison free card. If ireland s citizens can be put on the hook in responsibility for 55 billion euros in order to bail out predatory lending private banks inflating property price bubbles and putting people into misery en masse, anything is possible, right! Check this out. ‘Earlier this month, Czech… Read more »
Well….there I was thinking that the Irish government have no more money….what with NAMA…..and Anglo…..and maybe Quinn Insurance….and the Duopoly are not finished yet….they will need a few billion each….AGAIN…..and then we have the scheme (I chose that word deliberately) whereby Irish Life will dump Permo (before Permo becomes the Irish WaMu) into a “3rd force in banking” along with such entities of “systemic imporance” (quoting official documetation) as INBS and the EBS…. And now we are going to try and turn the car industry also… http://www.marketwatch.com/story/ireland-to-provide-6815-grant-for-electric-cars-2010-04-12 Oh, yeah and I forgot…in addition to paying excessive salaries for wasters like… Read more »
Ireland will be the next Greece no doubt, Greece has a debt of 300 billion for 11 million people we have a debt of 140 billion for 4 million people. My confidence in this country to correct itself is non existant. The only way to correct the economy is to drastically cut public spending. Cut public sector pay futher, cut social welfare, cut the HSE, cut education. This economy needs some serious surgery. Raising taxes is not an option. Our borrowing costs are going to go through the roof raising money on the bond market next year will be comparable… Read more »
Poland has lost many great leaders, intellectuals, planners, and true servants of the Polish nation in the terrible tragedy in Smolensk. These are the people who provided intelligent and unfaltering leadership to Poland before for decades, including the oppressive period under communism, and even during the brutal Nazi occupation. For Poland this is a tragedy, in human terms and in terms of cost to the society. However, over the coming months, we will see the Polish people come together again to help one another, and to rebuild again, just like occurred many times in the past. Because Poland has a… Read more »
David, Great article but I can’t help but wonder how any of this helps us. At least, not with the immediate problem of FF still being in power. I don’t doubt that a great deal of thought and nuanced fine tuning goes in to these articles and no doubt you will have reflected upon the advice you dispense here and how it can be applied in a host of contexts. So with that in mind, perhaps its about time for you to embrace the chaos yourself? Mention has been made here of the night of Sep 29 and the institution… Read more »
Gurdgiev:
“Given the systemic nature of distortions, subsequent exits and scaling back of foreign banks presence in the country, the lack of transparency and fairness in the property markets, it is now virtually assured that post-crisis interventions Irish banks and property markets will remain in their zombie state. Japan-styled recession is a looming threat for Ireland Inc.”
http://trueeconomics.blogspot.com/2010/04/economics-12042010-namas-economic.html
The latest update concerning Greece.
http://www.rte.ie/business/2010/0412/greece.html
As I indicated already, this morning it was a case of Greece got the bailout that the Greek government was seeking. Again. This is a routine.
“This trajectory gets worse. As a government’s income is reduced, it borrows more money to close the gap, which in turn, means a greater amount of tax will have to go on interest payments the following year, which will lead to a greater deficit.” Bleak as this sounds, I think David has even been too generous. Watch as the EU starts to criticize Ireland for taking action which it encouraged. Truth be known there are many to blame outside of Ireland for this fiasco. One thing is sure though, the economic illiterate politicians and their greedy cronies will be the… Read more »
Ref cbweb says @5 macholz, My apologies for the non functional link and getting back so late! here it is in black, white & red PRIVATE INVESTORS will be able to participate through the asset managers of the State’s largest banks and Aviva in investing in a majority stake in the special purpose vehicle (SPV) behind the National Asset Management Agency (Nama). The structure and shareholding of the SPV is expected to be announced shortly by Nama. A group of fund managers, including the asset management units(another name for derivative traders) of AIB, Bank of Ireland and Irish Life &… Read more »
Posters.
Wide open comments tonight and alot to ponder.
We cannot escape the basic fact though the banks knew it made a property bubble and knew it would pop and knew they would call in the ECB fire men to put the fire out with lorry loads of freshly minted cash.
We can never get away from those facts.
And the rest of it is incidental.
Liam 18
I am getting tired of writing and not seeing any changes ,so I am with you on this one!
Iam ready to leave the PC and head for the streets!
Friends,
yes writing here can be frustrating….but let’s be very careful about taking to the streets. Agents provocateurs might be amongst us. Let’s not get distracted from our goal of a PEACEFUL change in this country.
We’re not Ireland INC. we’re a sovereign country of men women and children…we have a soul not just a bank balance.
Oiche mhaith
Gerald Celente of trends research;
http://www.youtube.com/user/GeraldCelenteChannel
German economist:
http://www.youtube.com/user/jberni1
This guy NOLLAIG MURPHY is a traitor to our country. SCUM BAG
@ Alf (21)
How typically Irish. Blame everyone but ourselves. Our mess was certainly not caused by Germany.
—- BLOODHOUNDS —- 2006: Maples & Calder opens office in Ireland or, Briefing Jack Bauer! …Is the Satellite in position Cloe? Give me 15 seconds Jack! Ok, but hurry up they are approaching form NE… The hugely successful 24 series is an interesting, nearly religious phenomenon, and offers enough for an entire essay on the ways this series is presented and why the public is so fascinated. NAMA’s own projections estimate 2,600 million Euros to be spend on legal fees, accountancy professionals and property valuations. They estimate 260 million of fees to be needed per annum over 10 years time.… Read more »
with Greece taken care of for now,
we’re down to PIIS.
NAMA LIVE
The heads of the National Assets Management Agency (NAMA) and the National Treasury Management Agency (NTMA) will appear before the Oireachtas Joint Committee on Finance and Public Service at 2pm today, Tuesday, 13th April in Committee Room 2, Leinster House.
This Committee can be viewed on-line at: Oireachtas Live
—-ARE YOU NOT SCARED? —- or, shoot out in South Dakota I had a lengthy conversation with a colleague in germany last night, and he was asking me, ‘Are you not scared?’ referring to my activities. Well, I was shot at by racists in South Dakota in a town where a Sign Post was attached to the entery of a Saloon stating NO PRAIRIE NIGGERS, reffering to native americans. I picked up a 357 magnum Marlin (level action) and shot at racist activists that were trying to hurt young horses in the fields by driving golf balls to thier heads… Read more »
I think the Cowen, Lenihan + rest of the drinks cabinet know very well that Ireland will default eventually. They are bluffing.. A bit like the bank guarantee to buy time. They are simply buying time. They have been busy coming up with schemes to allow the “masters of the universe” / “friends of fianna fail” a means of extracting whatever they can from the fine mess they created together. They are grabbing all the money they can get their hands on now before everything goes completely titsup I wonder how many of friends of fianna fail have moved money… Read more »
Ireland is a bit like Xanadu!!
These are not purely economic decisions, they are massively informed by political considerations, the direction to bailout out Anglo and those associated came from elsewhere……remember Thucydides’ quote “large states do what they want, small states do what they must!”
Citizen Kane – Opening scene
http://www.youtube.com/watch?v=AczT1Cp-m7A
Subcomandante Marcos on Neoliberalism and the Media
http://www.youtube.com/watch?v=5OTy3aLBSMw&feature=related
Here is an appraisal of Morgan Kelly from the IT. Some biting commentary at the bottom of the page by means of some of his quotations.
http://www.irishtimes.com/newspaper/education/2010/0413/1224268218570.html?via=mr
He has very serious things to say about the social fall-out from the Boom-Bust, Asset Prices Crack up. Even if you heeded his advice and David McW’s advice, you might still not want to live in a society that has cities that are becomming more like Cardiff, Glasgow and Liverpool by the week.
This is a commentary from the IT concerning the Icelandic report on the banking meltdown there. Here is something I find really amatuerish. { In Ireland, the board of the Financial Regulator has nine members, six of whom were politically appointed by the then minister for finance, Charlie McCreevy, in 2003. Despite the shortcomings of this body, all of these individuals still sit on the board of the Financial Regulator. McCreevy’s appointments included barrister Gerard Danaher, who incidentally donated €1,500 to Eoin Ryan in 2004 and continues to serve in an overlapping role as a director on the Central Bank… Read more »
Posters. Round my way there are skips all over the place. Teams of 2/3 builders carpenters etc beavering away doing nixers a plenty. It is a sight to behold and it sparked off 2 weeks ago. People are spending on fixing up their property. And they are all doing it in a domino like effect and spending in the same numbers. The NAMA effect. The NAMA cash is rolling in from the ECB on the QT. Today in dail (thanks for link bear) the NAMA CEO said the gov have issued 3.5 Billion NAMA bonds to banks and he did… Read more »
@David McWilliams,
If I recall that correct, on RTE’s prime time tonight you said that knocking down the houses, technically would contribute to ‘growth’, did I get that right? – I might have been distracted at this part, as my dig is in pain. –
Why is that? Because people are employed to perform the job?
David – you made a good job on Prime Time persisting with the point about propping up NAMA. Minister Ryan was embarrassingly evasive on both this point, and later on the electric cars issue, which I’m sure you’re glad you missed. HOWEVER … we’ve got to stop talking about the 22 billion being “wasted” on Anglo as if we could get away with it scot free. By the best estimates, we can at best save a couple of billion by letting Anglo’s subordinated creditors go swing. Not to be sneezed at, but it is mischievous to suggest that there are… Read more »
Some great stuff here on this post.
I saw DMcW on the Vincent Browne programme via the web.
I saw Tony Blair turn into an old man in 5 years.
You can’t solve it all on your own David.
This rot has gone on for longer than we’re about.
You won’t solve it all on your own and this life is not a rehearsal.
Bi curamach a mhic.
I havent been able to post here so often lately which may have met with a sigh of relief from some quarters. The site remains one of the best sources of analytical analysis and an historical record of events which will lead to God knows where. In filling my fridge, to survive, and to protect my marriage, I can’t spend the amount of time here that I spent before. With the greatest regret. Henceforth I have to confine my comments to brevity and in particular, when I agree with a pert comment, I will reply thus; WHALOAB. Not too difficult… Read more »
Yesterdays link to the IT commentary concerning Iceland, the investigation carried out into the Icelandic banking crisis and the muppets who are placed in charge of regulation of Financial Services Regulation in Ireland. http://www.irishtimes.com/newspaper/opinion/2010/0413/1224268226037.html There are remarkable similarities between the route to the meltdown in both Ireland and Iceland. Except Iceland is trying to find some accountability. And Iceland is trying to be honest about the crisis and stop covering everything up. And lastly, Iceland has got rid of the incompetent clowns who created the problem. In Ireland they are mostly still employed, and no doubt looking forward to nice… Read more »
The current cover of Phoenix Magazine (for those who wonder what is the current feeling in Ireland)…
A picture that says it all.
http://www.thephoenix.ie/phoenix/welcome.do
Highly relevant cartoon commentary also…
@furrylogs
Best of luck,
Volunteering comments here on Ireland Inc debacle at the moment of its crisis is well worth while.
Keep up the good work!
cheers
Colm
actually i’ll let the man elaborate himself, just replace the word Americans with Irish
http://www.youtube.com/watch?v=xIraCchPDhk&feature=related
I read the book David mentions (“This Time is Different: Eight Centuries of Financial Folly”). It shows that virtually all countries in crisis eventually choose some form of default — either real or effective (for example by currency devaluation). It only gives one example of a country going to extremes to pay back all its debts in real terms — Romania in the 1980s under Ceausescu. This resulted in abject misery for the population [1]. Neither ‘Total default’ (Russia/Brazil/Argentina) or ‘Total payment’ (Romania/Ireland) seem like appealing options. So what can we do since we can’t devalue our currency? I would… Read more »