Travelling on the 11am Aircoach from Cork to Dublin, wi-fi working fine, hurtling down a new motorway, it’s difficult to imagine that the International Monetary Fund (IMF) is already here.
At a certain level, the place seems almost prosperous.
Granted, over the past year the type of person on the bus has changed, but apart from that, not much else screams ‘bankrupt country’.
Last year, the bus was full of students, immigrants and the elderly. Last Friday, there was a significant increase in the proportion of swankier commuters, many well-heeled types, with quite posh luggage, heading to Dublin Airport.
This proves the point that, in a recession, it’s not that the middle classes don’t go on holiday, it’s just that they take the bus and fly Ryanair. It also suggests that, for some people, austerity hasn’t begun to bite.
But it will be felt, and the IMF will make sure of that.
The question we need to ask is will they – the EU and the IMF – make things better or worse.
Let me paint a picture of how they could make things immeasurably better. In order for this to happen, we, the Irish people, must show our government that we support the option which applies the basic rules of capitalism in such away as to strengthen Ireland as fast as possible.
Again, the solution begins and ends with the banks and the nature of the bank bailout.
If the IMF/EU simply follow the course of action that the present shambolic government is pursuing, we are doomed.
That policy of paying every creditor in full is flawed and will lead to a further crisis down the road.
The only way out of this banking mess is to have a bank resolution or law passed which turns the existing creditors of the banks into shareholders, whether they like it or not.
At a stroke, the huge debts of banks disappear and are borne by the creditors – which they should be – and we start again.
The Irish taxpayer is no longer on the hook and we do what the US did in the savings and loans debacle in the early 1990s: we apply a market solution to a market problem.
This will not be pretty, but it will work.
Are we too far down the ‘pay all bondholders’ road to do this?
No, we are not; in fact, the arrival of the IMF makes a reversal of the financially suicidal policy easier.
Why might that be?
There are four reasons: one based on law, a second on the reality of the bond market, the third based in the reality of corporate finance and the fourth based on personal vanity and ambition.
First, we have no bank resolution law in Ireland, so we can do what we want from here. We could now pass a law that says the Irish approach to bank resolutions will be based on debt/equity swaps, where shareholders and subordinated debt holders take the first hit.
Anyone who knows anything about banks will know that the only things of value in a bank are core deposits.
The reason is very simple: core deposits are what makes a bank a bank.
And when all the fancy stuff is done, the only things a bank will buy from another bank are deposits, because deposits are the type of capital you want: steady, cheap and largely sticky.
A bank with a good deposit base has strong foundations.
This is why Anglo Irish Bank was a boiler house: it had little by way of a real deposit base, at least as we traditionally understand the term deposit.
So the resolution law protects depositors with an ECB-backed deposit insurance scheme.
Once the law is passed, expect some legal challenges, but as these challenges will be in Irish courts, it will be difficult for us to lose.
Creditors will then split into realistic creditors, who take the deal constituting the new reality and get on with the business of forward-looking capital, and rogue creditors, who will try to drag us to court threatening all sorts of sanctions.
Well, frankly, let them at it.
This will not matter after awhile.
The second reason we can do this under the umbrella of the IMF is that the IMF’s involvement here means we don’t have to go back to the bond market for at least three years. So it gives us time to sort out our house, without having to worry about bond traders determining our next move.
Don’t forget that the markets are not wise, they are bullies, and the way to stand up to a bully is to threaten him.
We threaten him with a new debt/ equity-based bank resolution law and he will be brought to heel.
In addition, after the debt/equity swap, the overall financial position of Ireland becomes immeasurably stronger.
Our balance sheet becomes much more attractive and the consequent risk of investing here diminishes.
This means that the bond yields will fall rapidly, not rise. The third reason that there might be a way out for us relates to corporate finance. Think about what is happening.
The IMF/EU are injecting fresh capital into Ireland. The rules of capitalism say that new capital always takes precedence over old capital.
This means that IMF money will be ‘senior’ to all the other money invested by anyone up to now. As a consequence, the process of dilution of old creditors is already under way.
So the ECB and the bondholders who are already in the game now realise that they are ‘junior’ to the new capital and this means in plain English that they won’t get their money back on the terms they originally thought they would.
Not pretty, but no one said lending to a bankrupt country would be pretty.
Finally, there is the issue of vanity and ambitions.
The president of the IMF is Dominique Strauss-Kahn and guess what job Domo wants next? Yes, you got it: he wants to be president of France.
Now wouldn’t it be great for Domo if he saved Ireland and in the process saved the euro with a sensible debt/equity deal which allowed Ireland to grow, penalised hedge funds in the subordinated debt market and made bondholders realise that there are risks in reckless lending?
By saving the euro and Spain from contagion, Dominique could appear to be what all French presidential hopefuls want to be: a great international statesman.
We could facilitate this for him, if only he’d see the wisdom of a large IMF and EU sponsored debt/equity swap.
The course of action outlined above is one way the humiliation of the IMF can be turned to our advantage. Can we do it?
Yes we can. But it can only be executed by people who have the interest of Ireland at heart, who can see clearly in the crisis and who understand that, in these negotiations, everyone needs away out. We need a way out, the EU needs away out, the ECB needs away out and the IMF needs a way out.
The above is one such way.
By the way, government ministers reading this, you can have the advice for free. It won’t cost you tens of millions in fees.
Yours, a concerned citizen
David McWilliams starts the Outsiders national tour in Kilkenny on Saturday and in Cork on Sunday.
Debt/equity swap? Can we do it? No we can’t. Not if WE means Ireland operating as a sovereign nation. The penny hasn’t dropped yet, David?
Hi, It remains to be seen whether the idiots in the Dail will take the above advice once the ECB is on the hook. Then it will become an ECB problem as opposed to an individual German, French or English bank problem. It seems so simple: the markets won’t lend to Irish banks because they don’t feel they will get their money back. Why do the IMF and ECB think it will? And we are supposed to pick up the pieces. If we continue to pay these ridiculous debts then worse our problem will get not better. The deficit will… Read more »
WATCH THEM IGNORE YOUR ADVICE.
NOT BECAUSE ITS WRONG.
BECAUSE IT WOULD COST THEIR FRIENDS IN HIGH PLACES.
THIS IS THE REASON THEY IGNORE LOGIC
THIS IS WHY WE ARE “where we are”!
AND THEY WILL CONTINUE TO IGNORE….
…AND MAKE THE LITTLE PEOPLE PAY…
…MORE AND MORE!
THE IMF AND ECB WILL BE HAPPY ONCE THEY GET MONEY
WITH INTEREST! WONT ROCK THE CRONY BOAT…
WHY ARE U IGNORED????!! HMMMMMMMMMM….
Unfortunately Ireland is stuck with idiots like Brian Lenihan and the Department of Finance officials negotiating with the EU/IMF who will take us on another unpleasant ride like the Banks took us.
The EU are just offering us a lifeline to save themselves, they are only buying time for themselves until they figure out how to cut us loose from the Euro and our dumb Government is being led up another painful path.
Don’t think the government will break the tradition, they are determined not to do the right thing. At least Vincent Browne got to put it straight to Cowen. Got to go.
As for trying to block the emergence of dynastic politics (which plays a role in making a mockery of the Dail), seems some in Labour are getting it, but long way to go.
Frankly, I really do not care about the nature of the meachanics of the bailout if the net result does not allow the typical business to have credit. It seems to me that we are owing a lot more, the banks will be paying a hell of a lot more which will decrease their ability to fund business growth in Ireland. And bear in mind that all we are doing is stopping a run on the banks so that foreign banks do not get roasted too much. You see, the IMF are playing the same game as the ECB and… Read more »
Hi David Really nice idea. Only one problem it will not work. The reasons are simple. Firstly look at the track record of the Irish Government that should say enough and no need for me to rehash. Secondly this is all about those who lent wrecklessly to Irish banks getting their money back and have leveraged the means to do such firstly securing sovereignty to private commercial transactions then orchestrating the top up loan to take out that which they originally lent. Thirdly the guys who are running this show have all in hand and they intend executing their pay… Read more »
Citizen of the Ireland here are a few quotes from John F. Kennedy Who was shot on this day – November 22, 1963 “The great French Marshall Lyautey once asked his gardener to plant a tree. The gardener objected that the tree was slow growing and would not reach maturity for 100 years. The Marshall replied, ‘In that case, there is no time to lose; plant it this afternoon!’ “Change is the law of life. And those who look only to the past or present are certain to miss the future.” “We need men who can dream of things that… Read more »
Any chance you could give Brian a call this morning and ask him to step down so that we can get on with this?
Asda carpark in Enniskillen was packed with southern cars yeaterday, since the nominal value of the punt broke through nortward parity with Â£ in Spring 08, the economy has collapsed, quit the euro, or elase a permanent depression will be in place.Honahan is overrated-supports euro membership, said bailout was affordable, no better than the rest of the unsackable clowns in the C Bank.
David’s suggestion requires collaboration! Where is it? Morning Folks, I am with David on DSK’s vanity aspect, but I fail to see how this would play a part for our decision making, I understand David’s line but I do not think that this places any form of leverage into our hands. Concerning debt/equity swap, I am less hopeful here, and I am not aware that there is any precedence where the involvement of the IMF would have caused debt for equity swap of bondholders. Am I wrong here? However, only because this would be a first, of course this is… Read more »
On another note….
This government has NO RIGHT to decide on a budget or 4 years plan anymore, days before they are reduced to nothing, imposing foreigners interests on irish citizens for decades.
Oh… these slime bags of Greens are trying to pull a stunt now? Yet, supporting the budget!
I suggest we lock up Gormley and Healy Rae in a 25 m2 flat for the rest of their lives.
Oh and while we are at it, put Harney together with Ryan on the second floor.
David, it’s all very well in theory but shouldn’t the question be: Why are we allowing FF to conduct the negotiations with ECB/IMF, in secret, when they have no credibility, mandate or moral authority to do so? Given that they have not acted in the best interests of the citizens thus far, they cannot be trusted, even a little, to do the right thing for the people of Ireland. I say: Suspend the IMF talks for two weeks and hold a snap election. That way, the austerity and hardships imposed on us will at least have some democratic authority. Failing… Read more »
Well game on it seems, Gormley has called for a General Election to be held in the second half of January 2011. He has explained the position of the Green party to Cowen. All over. Some two weeks in Ireland politically, socially, economically. If Bruton had got rid of Kenny…..Gilmore may get majority, Gerry Adams in the Dail, possible return of Joe Higgins, goodbye 40-50 FF’ers, including Mary Coughlan, Lenihan lucky to hold his seat…… Everything that once seemed permanent is falling away, the centre cannot hold and thank God for that…. John Gormley calls for election date to be… Read more »
News just in. The GP have called for a General Election. http://www.independent.ie/national-news/government-in-crisis-as-green-party-calls-for-general-election-2430417.html Unfortunately, the options available for forming a new government are not great. No single party or block has given us any clear policy framework. In essence, any new government will give us another series of fudges. So it is highly possible that we will go from one quagmire to another. This is possibly a bad time to make such a move, considering the IMF deal has yet to be finalised. An election will also make it highly possible that FF backbenchers will refuse to support the budget, so… Read more »
Great to see the flexibility on RTE-PRAVDA, easy listening music now playing on the radio in the midst of one of the biggest political events in recent history.
Newstalk right on the money.
RTE-PRAVDA never heard of “we interrupt our regular broadcast to bring you……………”
We could form a new political entity and step into the arena. It would require a lot of work. But I would have more faith in my ability and that of those who blog here as to that already in the forum. Nation building is not easy but at least the electorate would have a choice. No more talk and a little action. Do it ourselves or team up with others who have started to enter the field to deliver the change Ireland wants and needs. Ask this simple question Do the Irish people really want more of the ff… Read more »
Article sets out step by step solution.
Question though, how is it that it s not been carried out?
Slightly off topic (in a way), but very well worth a read:
David, “If the IMF/EU simply follow the course of action that the present shambolic government is pursuing, we are doomed. … will lead to a further crisis down the road.” This is the actual plan. This is an engineered crisis. Surely you cannot believe that Cowan and Lenihan are so stupid that they thought we could afford to pay the bondholders. The only explanation that fits the facts is that they are following orders.If either loses their seat (highly unlikely given our peasant like respect for out betters) they will land a nice sinecure with some Bank or supranational organisation… Read more »
Would be great but means we have the cut our losses. Government is not prepared to cut its losses. They can’t write off the billions they put in the banks already. It should be done, but they can’t!
New government please.
Mediator A very good point actually in that the goverment were following orders. But the question is whose orders? The EU bosses ? If you go back to an article some weeks ago by Mr McWilliams in which he mentioned about the goverment could be protecting some big fish I think it is the big fish that are behind this giving those orders but who are not necessarily EU bosses . I thing it is the very wealthy who have big stakes in the banks not in Ireland but right across the EU who stand to lose a right packet… Read more »
CONVERSATION WITH BIRGITTA JONSDOTTIR – MEMBER OF PARLIAMENT ICELAND Message to the Irish people….Remember where you come from!
Let me know if it works.
With Birgittas consent I am posting this here, it is an excerpt from a private long conversation with Birgitta in early May this year.
I also want to repeat my call for whistleblowers in Ireland with special knowledge on Anglo Irish or any other Bank to publish their knowledge on Wikileaks.
BOYCOTT THE BUDGET, SHOW EU/IMF AND GOVERNMENT THE WAY OUT!
The Reform Group supports your economic analysis and solution to this national crisis, but as Eoghan Harris tells us:
“For far too long that green flag has been a convenient cover for gangsters of all hues. From the Famine to FitzPatrick, the most noxious class of exploiters were and are the nationalist bourgeoisie. And if any of their successors are standing on a platform outside the GPO in 2016, they should have ropes around their necks.”
Can anyone please tell me what effect this bailout will have on mortgage interest rates.
i.e. the banks were funded by the ECB @ 1%, this will now be switched off – the bailout funding will be @ 5% provided by the irish govt.
The difference of 4% will have to made up somewhere.
Is this an over simplification of what will happen to funding arrangements for the banks?
John ALLEN: Maybe there’s no point in worrying. St Columba prophesied that ‘Seven years before the last day Ireland will be submerged beneath the sea.’
Nobody imagined that it would be a sea of debt. …Roll on 2012.
sorry to quote from Pravda but it goes to show that you canÂ´ t believe a word from the politicans
Ireland no longer a ‘low tax economy’ – Rehn
Fellow debt slaves, I agree with David’s position as he outlines it presuming though he means to include senior bondholders taking write down. Subordinated debt is already being targeted at around 85% markdown, so its already part of the plan. In the political chaos unfolding, we shouldn’t lose sight of the principle focus of IMF negotiations currently taking place. This is that ‘rescue’ is targeting bank restructuring. But from reports this morning, in spite of Noonan arguing the IMF are in favour of senior bondholders taking a hit in delinquent banks, appears the ECB position, again in spite of recent… Read more »
I can’t believe this. I am here thinking – after all that we have been through as a result of various property booms, and gambling and speculating – Have we learned anything from the various Ponzi schemes over the past fifteen years ? And then there were all the allegations about bad planning, and about money being the main influencing factor. Have we learned anything ? And now you have Michael Lowry delivers for Two Mile Borris. http://www.michaellowry.ie/planning-permission-granted-for-e460-million-tipperary-venue/ Something very fishy about this. From the politician who was going to clean up CIE until we found out he was getting… Read more »
Default and some kind of debt forgiveness is the only way out of this fiasco. A severly indebted country taking on â‚¬80 to â‚¬90 billion in more debt at 5% is hardly a solution, the soon to be departed government is merely kicking the can down the road. The societal pressures can only increase, a bit like Germany after the Versailles Treaty (1919), we are entering our own Weimar Republic, high unemployment, savings etc wiped out, age of austerity, emigration, social unrest with no Bauhaus period. Game is up for Europe, euro looks in doubt as does the entire European… Read more »
My mother always said it, “you always get caught out when you lie so best to shame the Devil and speak the truth, because when you are caught no one will ever believe you again, even when you tell the truth” 4.17pm: George Osborne has just stood up in parliament to give the statement on financial support for Ireland. The chancllor starts by explaining that it is in the UK’s national interest for Ireland to have a stable economy and banking system: The current Ireland situation had become unsustainable Osborne also reveals that the UK government has been working behind… Read more »
My advice to anyone who is in Government now, or in the future is “DO NOT UNDER ANY CIRCUMSTANCES TAKE ONE TO ONE ADVICE FROM David Mc Williams” after all it was he who gave the Finance Minister Brian Lenihan advice on the Bank Guarantee in his front room. Lenihan took his advice and here we are. I can not get away from that fact. I do not like FF and I blame them for everything but I also blame David for sticking his nose in, he should have minded his own business and we might not be in this… Read more »
[…] McWilliams again says There Is Another Way – as I’ve said here before. IMF/EU intervention is a blessing, not a curse. It will […]
David’s advice has been spot on all along and I think we should follow it again. At this stage people have got to realise that now we are activating the rescue fund, whats the difference for us if the senior bonholders pay up? The market rates will go up, so what? I actually sent an email to my local TD, Minister for Finance, and Taoiseach earlier today suggesting the same ideas as David, though not as eloquently or in such detail. Clearly the Irish people are being asked to sacrifice themselves for the well being of Europe. Thats all well… Read more »
“It is time for Fine Gael and Labour to show that they are ready to take power, that they can exercise responsible leadership.”
What is Lowry playing at ? Trying to swap sides, trying to pass comment on Cowen’s “leadership”, or making a sneer of Kennylite and GimmeMore ?
Probably, only trying to feather his own nest…
So royal bank of scotland are in deep too in ireland, or in too deep.
UK (ltd) bung an additional few bob into the package and twitter (not in a social networking way) on about Ireland being “neighbours”, “valued export market” etc.
What cost to Ireland this “neighbourly” gesture???
Answers please to J. Healy Rae, c/o any funeral parlour in Kerry where he spends most evenings attempting to look mournful over the coffin of some one he neither knew or ever met. Nor their family.
Maire says: November 22, 2010 at 5:26 pm “My advice to anyone who is in Government now, or in the future is “DO NOT UNDER ANY CIRCUMSTANCES TAKE ONE TO ONE ADVICE FROM David Mc Williams” after all it was he who gave the Finance Minister Brian Lenihan advice on the Bank Guarantee in his front room. Lenihan took his advice and here we are. I can not get away from that fact. I do not like FF and I blame them for everything but I also blame David for sticking his nose in, he should have minded his own… Read more »
Cowen is making a statement on Radio One and has just said, “We have entered into discussions with European partners ,,,on basis of â‚¬ 6bn cuts……..this is the context of the budget.” Look, this FF shipwreck has no authority to negotiate with any ‘partners’ in Europe on behalf of the Irish people. The arrival of the IMF took away any credibility remains they had. FF do not have any authority except Gombeen arrogance to try to impose their budgetary will on the Irish people. Least of all a FF 4yr plan? WTF. They should just step aside and allow others… Read more »
Easily the worse government statement in the history of government statements.
Appalling acoustics, old wooden looking podium, beaten looking ministers including Coughlan who liked she was at a funeral, a Taoiseach barely visible behind the microphone, a late and absurdly short statement. Absolutely humiliating.
In the name of God what does it take for these people to go!
A debt for debt swap.
Basically, some anglo bondholders have already settled for an 80% haircut. It is not 100%, and I am not sure if legally we could have got 100% of a cut.
Currently AIB bonds are 50% off face value.
It looks like the DoF are finally starting to use their brains.
Just regarding competitiveness, a lot of people in Ireland regard themselves are good at construction.
Maybe we might need to learn how to get better ?
RTE-PRAVDA finally comes out
Deco, I *think* we don’t really need more hotels knocked up every 6 days but maybe we could all chip in and get the Chinese to stick up a nice big lunatic asylum, say in northern Greenland. :-) I know a couple of political parties and their apologists who could be relocated there, basically detained at the pleasure of all the thinking individuals of Ireland. (ie for a very, very long time) I’m all for occupational therapy, so maybe they could break rocks by day and spend the night listening to their own spin and waffle at ear splitting volumes… Read more »
Hi, I have read the article above several times now and I am convinced that what is going on in Ireland is not an exercise in saving even bank bondholders it is an exercise in saving the Euro. It is the only possible explanation and of course the citizens of Ireland are going to be massacred by the maxim guns of the IMF and ECB. I just can’t believe what is happening. I really feel that the commentators on this website are like the group led by Morpheus in the Matrix trilogy where only a handful of us have the… Read more »
Great article David…you say it like it is. Now how do we put it into action? And how do we get rid of all the politians? And why are we still paying Brian Cowen and his cronies more than Barack Obama???
I don’t think that any of those involved believe for one moment that Ireland will ever have to pay off this loan. Cast your minds back to 2007/8. We know now that there was absolute panic in all departments of finance, as the financial system fell apart around them. On the surface, of course, we were told that it was all sort of OK, the problems had been contained, and that $750bn (TARP) wasn’t really a large amount of money anyway. Underneath, there was real panic. They keep on launching bailouts, giveaways, and heaven knows what, trying to keep the… Read more »
Default will happen. It’s either that or debt forgiveness, but there will have to be some suffering to prevent “moral hazard” from encouraging other states in the future from taking the Irish road of “Spend, spend spend, shure someone’ll bail us out”. Without either debt forgiveness or default, Ireland will never recover. The tax burden will be so high that people will simply emigrate as soon as they can. Ireland will be left with the oldest population on earth as every school-leaver college leaver simply packs their bags and goes. Why stay in Ireland earning say $27K and paying 60%… Read more »
THE WEIMAR REPUBLIC Population – 1925  est. 62,411,000 http://preparingyourfamily.com/economy-anatomy-economic-collapse-weimar-republic/ “As part of the Treaty of Versailles that ended World War I, Germany was required to make reparation payments to the Allies to compensate them for costs and losses incurred during the war. In today’s dollars they were expected to pay just short of $400 Billion, and would have been making payments until 1984. This was a significant debt owed to foreign countries.” $400 billion = â‚¬293 billion ****************** It is not beyond the bounds of possibility that Ireland today with just 7% of the population of the Weimar Republic… Read more »