IT is quite surreal to see the opening days of the campaign have been dominated by arguments about whether party leaders will appear on TV programmes.
This doesn’t seem to be the sort of thing that will determine the future of the country. Arguably, the next seven weeks will shape what kind of country we are going to live in. I say next seven weeks because although the election is crucial, it is not the end of the project. The EU summit four weeks after the election is likely to be just as important for us. This summit could be the battleground between European countries like Ireland, Spain, Portugal and Greece — the debtor nations — and Germany and France, the creditor nations.
The script is being written. The conversation is being set and the parameters of the debate are being framed. The problem for Ireland and Europe — a continent deeply divided between creditor and debtor nations — is that the pen is in the hands of the creditors, who have as their key objectives the protection of their banks.
What is going on at the moment is nothing more than a titanic struggle between the interests of the citizens of Europe and the interests of the finance industry in Europe.
It is one the citizens must win. Otherwise Europe will be turned from a democracy — where, broadly speaking, economic policy is framed with the interests of the average citizen in mind — to a bankocracy, where economic policy is driven exclusively by the interests of the banks.
Germany and France want to introduce a common corporate tax rate and rules about government spending. They are trying to make Europe look more and more like Germany. But these are the concerns of creditor countries, with old populations who are in the business of wealth preservation. Countries like this need slow steady growth and low or no inflation — both designed to make savers richer.
This is all very well if you are owed money.
In contrast, if you owe money these policies will make your predicament untenable. Ireland owes money, lots of money. If we sign up to these rules we will simply ensure that the economy implodes under the strain of low inflation and enormous debt payments. In its simplest form, once your total debts reach 100pc of your income, which is the case in Ireland with the bank debt soldered on to the country’s debt, your economy has to grow at a rate faster than the rate of interest for you to keep your head above water.
But the EU rate of interest at 5.7pc is well above the growth rate that our economy can muster. So the debt dynamics of such a situation imply that the debt will explode.
What does this mean for us as a nation? It means that we are well on the way towards a sovereign default, where the debt mountain simply gets too big and we do an Argentina and default in chaos. When this happens, the credibility of Ireland as a place to do business evaporates and multinationals will not consider us a safe place. Equally, and maybe more significantly, as the situation deteriorates, the locals will pull their cash out of the banking system, ahead of an expected default.
So the new government has to face this with the utmost urgency.
What can we do? Are we going to do nothing and hope for the cavalry to emerge over the horizon? Are we going to risk everything for the bankrupt banks, which are not even functioning as providers of credit to the system? Is there an alternative way out?
Let’s look at some numbers. The total unsecured bank debt of the banks in Ireland is â‚¬21.4bn — â‚¬15.4bn senior and â‚¬6bn subordinated.
We can take the Anglo and the INBS debt out of that equation, as those banks are being wound up at the moment and presumably the bondholders will have to wait in line and pick up the scraps.
That gives us senior debt of â‚¬11,623m and unsecured debt of â‚¬5,743m.
Savings on this would be quite easy. First, wipe out the subordinated debt thus saving â‚¬5.7bn. This is what happens to subordinated debt in a crisis: it goes.
THE senior debt that remains (about â‚¬5bn each for AIB and BoI) can then be restructured. Those senior creditors should be offered a debt for equity swap. This will allow them to take over large portions of the ownership of the banks and these former creditors, who are now owners, will have an interest in the recovery of the relevant bank.
But won’t this cause panic?
Well no, not at all. In fact, the opposite is the case: not doing anything causes panic. Last weekend we got an example from Denmark of what happens.
A small Danish bank called Amagerbanken was put into administration by the Danish financial authorities on Saturday. The bank had assets of â‚¬2bn and liabilities of â‚¬3.3bn. Instead of the Danish government making up the difference, they are forcing losses on senior bondholders of 41pc.
The Danish authorities said to the bondholders: ‘You invested in the bank, so you can share the assets amongst yourselves, don’t come crying to us when there is a shortfall.’
And guess what? Did the sky fall down? No. The Danish banking system hasn’t collapsed. In fact, Danish 10-year bonds — the bellwether for risk in a country — hardly moved. They were at 3.3pc on Friday and they are still 3.3pc today. Nobody cared. Capitalism works.
Unfortunately for us, the Danes are not in the euro. They chose to stay out and keep their currency in 2001. This means they do not come under the diktat of Germany and France.
However, the Danes have shown us that when you do the right thing — let capitalism work — the market moves on. The losers take losses and get on with it. That’s how it works.
The new government needs to go to Europe and make this case for us. It’s not a choice but an imperative. Forget the TV debates, this is what the election is all about.
David McWilliams will teach a new economics diploma at the Independent Colleges Dublin beginning next Monday.
Surely the reason the interest rate is so high (5.7%) is because the creditor nations (and financial institutions) know we are good for it.
And because we will continue to have a strong trade balance because of low corporation tax, are the creditor countries not actually skimming off some of that tax forgone. In other words, what could be better: we have a low rate of tax and they enjoy the benefit of our interest payments, into perpetuity if David’s prognosis is correct.
Speaking to Irish relatives over the past few weeks, they all say that nobody has a clue, what can be done?
One word: Iceland.
Ireland should be fronting up to the obnoxious bank bastards – and I’m not talking about the government.
The PEOPLE, who are being forced to mortgage their futures for the sake of the international slimeballs, can stand up and force a better deal. Even if it means renouncing the â‚¬.
Better than the Cairo protests – because it worked!
[…] This post was mentioned on Twitter by David McWilliams, Al, Hannah Rushe, Sinead Power, Michael Kelleher and others. Michael Kelleher said: RT @davidmcw: New on the site: Forget the TV sideshow — we must focus on Europe http://dlvr.it/GBkpY […]
The major issues facing our country, such as bank debt, are not being discussed in main stream media or by the main stream political parties.
Thanks to David for providing informed opinion backed up with facts and figures.
Here is an article of interest from Wall street Journal linked from irisheconomy.ie –
What Ireland has to learn from Kazakhstan about dealing with a banking crisis…
David, What you say makes sense. I am in Toronto where it is estimated that over 2,000 Irish have arrived in January alone and who will not have a say in the forthcoming election which you rightly say is crucial for the future of our country which seems to be slowly but surely imploding. We have to prevent this implosion from happening. We have to stand-up to the interests of the Franco-German alliance and their banking associates. You’re right, we shouldn’t allow our nation anod others like it to haemorrhage so that the interests of the few are sustained. Our… Read more »
Substitute ‘the world’ for ‘Europe’ and you are closer to the mark.
Hi David, Thanks for another article which attempts to educate the public about the reality of our economic situation. You write: “once your total debts reach 100pc of your income, which is the case in Ireland with the bank debt soldered on to the country’s debt…the debt dynamics of such a situation imply that the debt will explode.” Sorry to ask a simplistic question but What would happen if we tried to stop borrowing completely and live within our means? I know it would be hard, but isn’t that what households up and down the country do when a job… Read more »
Even if an debt for equity arrangement was made, and the government managed to avoid that 11+ billion euro bill, that still leaves a lot of debt still to deal with. We are so deep in this hole, unless we find a lot of oil and gas off the west coast, I believe a sovereign default in inevitable.
The delusion called democracy continues. The claim that voters are offered an alternative with any of the established parties is false. The ridiculous idea of ‘tax harmonization’ can not be laughed at loud enough, take two or three dysfunctional tax systems, through them in a pot and you get what? Exactly, another dysfunctional tax system. Until the public understands that we are in a war of vested interests, where workers and low income parts of european societies are abused to maintain status quo, lowering wages and at the same time necessities such as food, water and energy will climb sky… Read more »
The article makes pure sense. Sadly our politicians are infected with impure minds thus unable to accept the sense of forcing an equity swap. They are too removed from reality and not practical minded. They are of a deferential mind set and will do as told by the ECB who implements the will of Axel Weber and his cohorts. Yes this is a battle between the focused financial aristocracy and the leaderless rabble plebs. So the financiers have the upper hand dictate the terms imposing their arguement of austerity to force deleveraging and demise of capital value transfering the wealth… Read more »
They are at it again, to fusion Deutsche Boerse with NYSE with majority of germans. building the largest Ponzi scheme stock market construct to date.
I am no financial expert but I have been following things as closely as a person possible can for the last 9 years. I think this article from start to finish not only lays out the current reality politically and economically but also shows the way to go, think this prescription will be followed because it has to be followed, it is the only game in town, we have seen these scenarios before, Weimar Germany, Argentina, Bolivia etc, they all had unsustainable external debt which caused a societal implosion, in the case of the former it contributed to the rise… Read more »
I agree with some of your points – especially the madness of the high rate of interest on the ‘bail out’. But I think every option should be explored prior to any sovereign default and great caution when it comes to bank default. Even a managed default will have very significant and very negative consequences. I know the Danish bank in question and I can tell you that it is a very different case. It is a tiny monline bank with many of it’s creditors being local and deposit holders. Also as you say it is not in the euro.… Read more »
HI David IT IS TIME THAT THE IRISH PEOPLE SHOUTED STOP! Is this of any use to you? http://europa.eu/lisbon_treaty/glance/democracy/index_en.htm More participatory democracy There are already many ways in which European citizens can find out about and take part in the political process of the EU. The newest of these is the citizens’ initiative, whereby one million citizens, from any number of member countries, will be able to ask the Commission to present a proposal in any of the EU’s areas of responsibility. The practical details of this initiative will be worked out once the Treaty of Lisbon takes effect. GOOD… Read more »
@JohnD15 I agree we should avoid hitting the nuclear switch on default the impact would be even more devastating except for the US hedge funds who are betting big time on a euro default and using ireland as a proxy. I think many media economists are oversimplifying the cinsequences of a sovereign default. There are other options as you point out, including the bond repurchase schemes. But we need to put the pressure back on Frankfurt and Berlin, as they stand to lose as much as us and even more, when you consider the domino effect to Greece, Portugal and… Read more »
As they used to say in the UK, the Irish banks were the craziest lenders they had ever seen. Except the capital the Irish banks were using came from crazy German, UK and French banks. Perhaps the German bankstook the risks because they knew that their government would protect them at the expense of of non-Germans, and they also knew that the lapdog Irish government would also protect the German banks at the expense of the Irish people.
Martyrdom is ennobling, is it not?
Apparently 85% of Irish people want to tell the banks to get stuffed while right wing political parties consisting of yes men will get the lions share of the votes at the coming ‘election’ This is a glaring contadiction and proves that Germany and France and not our enemies because the real enemies are living right here in Ireland. Sadly this includes a large section of the Irish people who clearly don’t have a clue what is good for them. Warped When the politicians bleat on about negotiating they make Chamberlain look like Ghengis Khan and I feel like slapping… Read more »
It was interesting today that the the propaganda machine mentioned about the Bank of Scotland which said that they would start to restructure some mortgages in cases where the mortgage holder could not pay the money back and had very big debts outstanding Now we know that debt restructuring is the only way forward . Is it possible that somebody has seen the light at last ? Now what we dont hear at all in the press is what is going on in the backround of the global finincial players and also of Europe. These are the people who with… Read more »
I always thought we had passed Denial now I believe we have not and that we are stuck in a Limbo of NOTHINGNESS .How much more can we take? What baggage are we holding that keeps us Down .How do we Let Go?How many more Children must leave before its too late?
This IMPLOSION is self inflicted……and Fatal.
We have Enemies around our Isle who are Angry and Greedy and are counting their Meal ~Take to Rob Us and we continue to Lie Low.Is this a Mind War between us ?
The World continues to Watch US.
We may like to believe we are a Nation of People .If we remain obnoxious long more we will become a Nation of Factions .We all saw what happened in Lebenon .
Nice anaylsis. David and most the bloggers here who agree with him have been proven right by time over the banking and public debt sitaution. Basically that Ireland can not afford to pay for it banks debts.
Unfortunatly the message was not spread out enough and believed at the time. People chose to believe Mr. Lenihan/RTE/ random economists.
Folks, David will do his own thing; he has a plan. The rest of us have a chance to support him and vote for an independent.
Take that chance, please!
We all know that FF/FG/LAB will not change politics in our country.
Vote for your independent candidate and David will help him/her.
Witches to be jailed for inaccurate soothsaying
….this is in the Independent this morning .
Why have the Gov not jailed the Bank Auditors in Ireland not only for wrong reporting of facts but also wrong projections too?
For any young person who has the determination to walk the globe maybe this man can give you inspiration.
Shane Ross should go public and say that presuming he is elected it is his intention to invite all elected Independent candidates to a meeting to form a group that on the national stage will stand for David’s policies and employ David to be an advisor with regard to negotiations with one or two of the other parties that would have the numbers to form a Government.
Vote Independent is the message to get out there.!
We are being spammed on TV and radio constantly with the main parties and Independents are by and large not getting a look in
The Pre’s : Twinky and her cohorts are all doing the ‘Preees’ this week in Laurell Hill and todays ‘SCRIPT’ is ‘To Be or Not To Be’ ( sub – titled – Sovereign Default ) This is the question we have been discussing so long and so far the jury has not returned. Our energies seem to focus on the Elections for what is really a national council forum without a mandate that is relevant to do anything we need them to do because it is no longer within their remit . Where are our EU representatives now ? What… Read more »
According to a report in today’s Irish Times in relation to FF canvassing, Minister Peter Carey TD, when asked why the bondholders couldn’t be burned answered ‘because there were credit unions among them’.
I sat there watching the Debate on TV-Drivel on Tuesday night. And the obvious thought hit me. The debate consisted of three millionaire pretenders, talking about the problems and hardships of everybody else, and trying to make a better living out of it. One who was a Minister long enough to become a millionaire out of it. His opponent benefitted from a TD for almost thrity years, and whose wife sold a site to a school in the middle of nowhere, and who got half a million for it-from the same department where she works – the same department that… Read more »
Just been told that GSucks have a massive amount of money in cash. Not sure how true it is. Does this mean that suds and his chums are waiting for another stock market crash ?
Will Suds Junior tell the EU Commision ?
David, Agree with all of your sentiments. On Newstalk, Alan Dukes this morning in his position as our appointed representative in Anglo, without reservation states that â‚¬50 billion is a more accurate bank loss figure. Now does that number sound familiar? The “merchants of doom and gloom” have stated this for a long time but were rubbished by the establishment. The same establishment in the guise of Brian Lenihan also on Newstalk this morning has again rubbished Dukes’ prognosis. BL who appointed Dukes in the first instance is stating that all is ok as Patrick Honohan is on top of… Read more »
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Whats the difference between a Danish Bank and a Danish Pastry ?
A Danish Bank has balls and a Danish Pastry has cherries.
This explains why Irish Banks only have cherries in the Boardroom
Hi all’ David says “..we are well on the way towards a sovereign default, where the debt mountain simply gets too big…” Brian Lenihan recently said on TV,that when he was negotiating with the IMF/EU, they (IMF/EU) said that defaulting on bondholders was not an acceptable option. When it comes time to default, will our government have the power to make that decision for itself or will the EU/IMF force our government to spend almost everything it has on interest payments? During the famine, our people were not allowed to renege on financial commitments and our produce was exported to… Read more »
I think the time as come to form a new political party called the “Rubber stamp Party”. Basically, it will be an endorsement of what is going on, but with no pretence. The Rubber stamp party will offer the people business as usual, but an end to the pretence, that they are actually getting somewhere. This will enable ordinary citizens to make their decisions in a less deceitful environment. This will imprve decision making, and thereby performance for the citizens. Basically, when you vote for the rubber stamp party, you get whatever IBEC and ICTU agree as a compromise/payoff/fudge as… Read more »
Take this article and doorstep your FG / Lab TD with it. Don’t wait for her/him. Knock on his door, hand it to him and ask for a referendum on the separation of private banking debt and sovereign debt. I’m off to see James Reilly FG.
DMcW really and truly has a lot to answer for. Listen to this podcast from NPR, and in particular listen to the German academic explain how shocking it was for the German public when they realised the Irish government had unilaterally guaranteed the Irish banks. This threatened to suck deposits out of banks elsewhere in the eurozone, and could had collapsed banks all over Europe. In reaction, bank deposit guarantees were extended by both the British state and the German state. Yeah, thanks a lot Brian Lenihan and David McWilliams. Your little stunt to pull a fast one on our… Read more »
David, It would be useful some day to do a comparative study on Irish banks versus European parents or counterparts.
For example, National Irish Bank is only 4% of the scale of operations of DANSKE bank; and today we learn that, for the year 2010, NIB was responsible for nearly 35% of the impairment charges for the entire organisation.
It is inevitable also that Ulster Bank will have a disproportionally negative effect on the results of RBS.
THE WORST BANKS IN EUROPE MUST BE ALLOWED TO FAIL.
Dear Eireannach, I have to reply to your suggestion that I told anyone to do anything. I was asked by the Minister what would I do. I told him the only two countries that had stopped a run on the banks in its tracks were Sweden and Switzerland and they both did so by issuing a blanket guarantee (but as i told him not sub debt which is share capital ). I also pointed out – as I did the week after the guarantee on Questions and Answers, that both countries swiftly followed the guaranatee by a root and branch… Read more »
ireland depends on the ecb to keep the banks funded with people withdrawing their deposits, i think the total figure is now 150 billion, that is much bigger than what is owed to the bond holders. So the ecb cannot cut ireland loose, if problems hit the other euro countries as they will everything is up in the air again, the deal done with ecb and imf is basically a holding solution for now, i think the only option the government had was to go along with it, the big mistake was made in 1992 in joining the euro without… Read more »
More stuff that is not being covered by PRavda-RTE. And no mention of this by the Old Schitzo on D’Oliers Street. This is the type of critique of the current administration of US Finance that is virtually banned in the mainstream Irish media. It is relevant. “Print-Baby-Print” policies are causing problems everywhere. But discussion here is forbidden. The knowitalls don’t want you to know.
The Euro is in dire trouble because the European banks think they can keep kicking the can down the road at the peripheral debtor county’s expense. All politicians are subject to their immediate voter concerns. Merkel indicated a burn the bondholders approach originally, only to modify her statement later that maybe said burning happen around 2013. Now Sarko and Merky are taking more crap about tax harmonisation etc to keep their electorate happy because they know their relative competitiveness is dropping. The banks have us all by the balls because they control the utility system for making day to day… Read more »
ECB was and is our Central bank. The local CB guys were just caretakers and still are. Brussels, the commission, the ECB and the rest of the bureacracy are incompetent bejowled layabouts on fat salaries. The bankers are breaking their asses laughing.
The system is broken. Maybe it needs to fall to bits before we see a proper solution. Then again…
“we are well on the way towards a sovereign default, where the debt mountain simply gets too big and we do an Argentina and default in chaos”
What will the consequences of this be for the ordinary citizen?
How can we best prepare for this scenario?
Potential part solution to housing crisis Given this current disaster zone and how it is sucking money out of our working economy, here is an idea I just had. The housing crisis to me comes under 3 fault parts. -Mortgages -disrepair/ghost estates -future values 1.Mortgages – Using all banks now state owned All mortgages with state banks need to be renegotiated so that people do not suffer unduly because of the stupid decisions made in the boom. The government/banks should renegotiate all mortgages currently in excess of 30k, and take a write down of 40% on what is left to… Read more »
Dunne and Dunner……
It looks like the Dunner has given the Missus a present for Valentine’s Day…..How romantic…
I’m currently trying to figure out who to vote for in the election. (I have it well narrowed down)
This seems to be the only real way that I can influence what is going on at the moment.
Who has the best policy in relation to the banking/EU/IMF mess?
Are any of the main parties heading in a credible direction?
Coillte are rumoured to be getting ready to sell forest. http://www.independent.ie/opinion/letters/land-sale-will-rob-next-generation-2535767.html This is the best investment that there is in the Irish state sector. It is the type of investment that will be handed over to a big outside investment fund, with the locals being sidestepped. So that the proceeds can bailout out the Irish establishment. This will be a case of Rossport 2.0. And the establishment has made great efforts to learn nothing from that !! We already had this debacle over Hydrocarbons off the Atlantic coast. And it looks as if the Publican Party/satelitte branch of the European… Read more »