Let’s be clear about what happened last Thursday and the implications of the deal. In the short run, it’s positive, but maybe not so later on.
For the record, let me put my hands up and say I never expected the ECB to acquiesce to such extended maturities, which are very positive for the cashflow of the country over the next few years. So, in terms of cashflow management, this was an excellent move. I very much underestimated how much the EU would move on this.
We have negotiated what is called in finance a ‘balloon payment’. There are no payments, bar interest, for the first while, and then all the payments are due in a balloon payment at the end. This is when the once-sick country has left intensive care, has recovered and is strong again.
This type of arrangement should actually be called life-support financing. It is not that rare. When a bankrupt company is being kept alive, it is normally for the benefit of creditors who refinance and accept something back tomorrow, rather than nothing today.
The odd thing about the deal is that Ireland was both debtor and creditor. Therefore, we kept ourselves alive to prove to others, such as the ECB, that we are indeed alive. We are stretching out payment to ourselves from ourselves.
We are celebrating a deal with ourselves, and will pay ourselves from our own pockets to prove to others – who are neither creditors nor debtors in this deal – that we are still alive. It’s like being put on life support where the drip goes from one arm to the other. Unusual, don’t you think?
Let’s gain a bit of altitude above the din of backslapping to see what is happening. The article will be split three ways. First, what exactly happened and why? Secondly, what does it mean right now? And thirdly, what might it mean in the years ahead if growth is lower than is considered normal?
Usually, when a company is liquidated, the assets and the liabilities are added up. If the liabilities are greater than the assets, the company doesn’t try to borrow from someone else to pay the difference. It folds. The assets are sold and the money is divvied up among all the creditors. That’s it.
The spoils are governed by well-understood corporate finance rules where there is a hierarchy of most-deserving creditors. In the case of a bank, depositors might be termed ‘trust creditors’ or ‘creditors in trust’ because they trusted the institution and the system. They could get ‘special’ status and get first dibs on the money. Thereafter, various other creditors get paid out of what’s left.
In the case of the Anglo deal the other day, all creditors get paid, irrespective of the fact that the assets amount to a fraction of the debts. But in this case, the creditor and debtor were one and same outfit, the Irish state.
The Irish Central Bank was the main creditor. It gave money to Anglo and was promised the money back from the state under the promissory note. Had the government not repaid the promissory note, the Central Bank would have had a large loss on its balance sheet.
Would that have mattered to anyone? Actually, no. It would have been lodged as negative Central Bank capital on the asset side of the balance sheet, and there it would stay. The money printed was used to pay Anglo’s bondholders and that was where the story would have ended. This is what a normal central bank would have done. It is the same when a central bank extends money against a security and that security falls in value – the central bank has a dodgy asset on its balance sheet. But who cares?
The ECB cares because the ECB is dominated by the German view of money. This contrasts with other perceptions of what money is. For many, me included, money is a ‘tool’ to be used to move the economy onto a different growth path, to be used to solve problems and to be used to get the real economy – the production and sale of goods and services – going. It is a tool to be used by our Central Bank.
To the Germans, money is not a tool but a ‘public good’, a bit like fresh air or the environment. It must be preserved and protected by laws and rules, which are unbreakable. It can’t be used as a tool to move the economy or to rescue the economy from a slump. This is a deep philosophical difference between the Germans and others.
It is not surprising the Germans think this way. After all, this is a population that suffered hyperinflation and was brought to catastrophe by a man who regarded treaties and laws as little more than pieces of paper. We hear that they are scarred by hyperinflation which, according to the narrative, led to the rise of Hitler.
But frankly, that’s their history, not ours. Yet Irish people are hostage to the monetary consequences of German history, rather than the economic prerogative of the Irish present. It seems hard to understand why the population of one country should be hostage to the historical echo of another country’s experiences.
This unusual Germanic export explains the strangeness of Ireland taking a year to negotiate a deal, stretching out payments to herself, from herself. This is why the ECB is only telling half-truths when it says it ‘took note’. It took note and our lads ‘took fright’.
Now, the short term. In the years ahead, the deal will improve our national cashflow in the same way as financing a kitchen extension or a car on an interest-only loan would improve your weekly cashflow. You hope that your house will rise in value in the meantime, made more attractive by the kitchen, and you hope that there will be no calls on other loans that you might have taken out. After all, you elected to go for ‘interest only’, not just to improve your cashflow, but in order to let you borrow more.
More borrowing is what ‘getting back into the market’ means in plain English.
So Ireland hopes that, over the next few years, there will be no more euro bond/credit problems because we have loaded more debt on ourselves. If there is another shock to the system, the high-yield risky countries with lots of debts – like Ireland, Spain or Italy – will suffer speculative attack, default will threaten, money will flow out and yields will rise. As night follows day, another crisis will occur.
Now, let’s briefly look at the long-term wisdom of debt build up when interest rates are low. We assume that, if we take on debt now, we will be able to pay it and, when the economy settles, it will return to around a 3 per cent annual growth rate. Many regard 3 per cent as being ‘normal’. But what if the new ‘normal’ is 1 per cent, not 3 per cent?
Growth rates are based on labour force growth and productivity growth. According to Forfás, “labour force growth will continue to make a contribution to overall economic growth over the period to 2020, but thereafter there will be a higher reliance on productivity growth”. So where will the productivity come from?
Normally, productivity comes from manufacturing. Productivity in services tends to be lower. Compare a factory worker with lots of machines to a barman. But, in Ireland, manufacturing is shrinking as services are rising.
Services already account for 72 per cent of the economy. This is stuff we tend to trade with ourselves. I buy small stuff from you and you buy small stuff from me. Last year, services accounted for 44 per cent of total exports from Ireland. By 2025, the ESRI projects that “market services will account for 60 per cent of value-added in the Irish economy and in excess of 70 per cent of all Irish exports”.
So, as the economy moves to more services and less manufacturing, productivity will fall, not rise. Another thing which will drag down growth will be the cost of energy. Ireland is now the most oil-dependent economy in the EU and one of the countries most dependent on fossil fuels for electricity generation. Fossil fuel availability will continue to diminish in the future and its cost will rise, dragging down growth.
If the new normal growth rate is not 3 per cent but 1 per cent, and the average rate of interest over the terms of all these loans is 3 per cent, not 1 per cent, what then?
I could be wrong. I was wrong on the maturities of the deal. We might stumble on a productivity miracle. We may have a transformative oil find off the coast. We may receive a million clever immigrants from somewhere, but it’s worth seeing last week’s events in their totality before cracking open the Gewürztraminer.
David McWilliams’ new book The Good Room is out now.
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good news at last!!
Surely you mean productivity GROWTH will fall, not productivity itself. And how does population growth (or decline) impact?
I’m Irish, and I agree with the so called ‘German’ view of money.
Does that make me a German?
Maybe you should revisit your label of the ‘German view of money’ David.
Really, the only fair statement, is that you have your view of money, and others have theirs.
Subscribe – read later.
When Anglo collapsed, the liabilities owed to depositors was twice what was owed to bondholders. The deposit liability was 65.8 billion. 30 billion was owed in debt securities, as well as 5.6 billion in subordinated debt. There is a perception that the depositors were Irish, and that the bondholders were foreign – hence the clamour in Ireland to burn the bondholders. But who knows if this assumption is correct? Were there any foreign depositors in Anglo for example? Would it be possible that there were any domestic purchasers of debt securities? This type of insular thinking was absent when the… Read more »
Nice to see someone with an economic background admit to the uncertainty of the whole business. An unusual expression of humility amidst all the self-congratulations. Hoping you’re wrong, of course, but the logic is sound and that 3% figure is more than worrying. But then sure we’ll all be in our dotage by then anyway.
My take on this article is summarised when David said :
‘I very much underestimated how much the EU would move on this’.
I believe there are a lot more surprises to come and a greater power and mindset exerts that influence that now is beyond our capabilities as civic citizens on this blog . Economists are now redundant henceforth .
A new Age of the Power of Civil Servants at the Top has emerged that are faceless , untraceable and unaccountable .
“The odd thing about the deal is that Ireland was both debtor and creditor. Therefore, we kept ourselves alive to prove to others, such as the ECB, that we are indeed alive. We are stretching out payment to ourselves from ourselves.” i have seen an analysis that that says the promissory note was written at 8% interest. but this interest is paid to the ICB. The Irish central Bank makes a profit on this but profits are returned to treasury (the government) and so the effective rate of interest id 0.75% effectively per annum. The bond exchanged for the note… Read more »
I just have to laugh at the “kitchen” analogy! I mean if you borrowed for a kitchen or a car, at least you have a tangible asset on the other side of the balance sheet, to show for the debt, so say for example you have a house viewing to sell your house (in the case of a kitchen!), the buyers can look at the nice shiny modern kitchen and see a bit of value in it! To bring the analogy back to the current subject matter, it would be like borrowing 20K from the Credit Union, for the purposes… Read more »
David, What choice did the ECB have, really! Ireland is not the problem, Spain, Italy etc..are We are the posterchild. My biggest fear is that Ireland will begin to recover with any significant changes to the financial sector, it will become business as usual and we will commit the same errors again. Fractional Reserve Banking is bad enough but as anybody who knows me will agree, my big bugbear is Securitisation, this source of Bank funding is the absolute, most insidious, corrupt and downright wrong method of capital raising by Banks which has ever be devised, removing the risk in… Read more »
Delphic Draghi
Draghi is an Alchemist and an adherent to Code Napoleon and the Jesuit Order of Things .
He is a Perfection in his art and prophetic is his disciplines .
Introduction of Parallel Currencies There has been a lot made about the ‘cashless society’ in media, but this cannot fully happen until there is a cashless currency. Every revolution needs a good crisis in order to germinate its seed. The cashless revolution is no different. It should be abundantly clear by now that the global financial meltdown has been engineered at every juncture of its unfolding by the very private central banks who expand and contract the money supply. A dollar or euro collapse will trigger a global economic crisis, which is a prime opportunity to introduce the next phase.… Read more »
Whats a “Gewürztraminer.”
As a German I’ve never herad of this word??
David you taking my comments into your intelligent head. I will sign off for awhile.
Hope you make it to the 2yr Birthday Party you got invited to..
” Ireland is now the most oil-dependent economy in the EU and one of the countries most dependent on fossil fuels for electricity generation. Fossil fuel availability will continue to diminish in the future and its cost will rise, dragging down growth.”
Very nice one Tony.
If the government knows that sound money(s) is better and more beneficial to the economy they will introduce it. And this is the problem as it is against the government interest to control everything.
So, how to break that vicious circle. How ?
I dont care anymore what happens in ten years. I want cash in my pocket now so I can pay my mortgage and raise my kids. Thats the bottom line . We are all fed up with austerity and debt and most people want to get on with their lives. For example your article on Mammils last week. I am a budding Mammil and I notice that it is a frame of mind as much as everything else. It comes from the hard lesson of wathching investments and shares disappear into some ass*oles bonus from shorting shares etc. People have… Read more »
Abraham Golden Calf
He destroyed it with Stone . Same is likely to happen again .
Stone is The New Law ……….Ethics etc.
Price of Gold has begun to FALL .
In another world Tulips …withered .
David, the weakness in the your view of money as a tool is that it is ONLY ok to borrow to invest PROVIDED the resulting growth exceeds the interest. This is the very basis for buying shares, equities and bonds – the return. Could Germany’s view (for whatever reason it happened) have averted this crisis, had it been adopted more widely throughout in the EU and the US. It is interesting that the more Teutonic of the EU (NL, Austria, Denmark and Scandinavian countries) seem far less affected – I refer of course to another more plausible effect if Calvinist… Read more »
A Quick Question: are the Irish local authorities / county councils / state bodies registered as Public Companies? They appear to be so in the UK.
My friend is fighting the legality of a fine. Sorry for the tangient.
David, reference your personal view concerning the nature of money as a tool. I interpret that such an unconventional view is purely personal. Common theories of money describe specific qualities: store of value, fungible units, medium of exchange and so forth. A new interpretation includes “debt as money”. I’ve thought of this as anti-money and nega-money. The debt load of the western world is now the basis of the money supply, which we understand to be manufactured from thin air (maybe why the Germans feel it is a public good). A problem seems to have emerged with the very idea… Read more »
The main aim of this country should be to generate 100% of our energy needs through renewable, non-fossil fuel sources and export any excess. We should be world leaders in this industry. We should also be producing way more food. Take a train ride west and just look at all the agricultural land lying idle. Of course, ideas such as these require vision and strategy, whereas the parasites that run this country can’t see past the next election and the lining of their own pockets. Therefore nothing progressive will actually happen and we’ll carry on in mediocrity for the next… Read more »
Ireland is not being thrown a lifeline. Rather Ireland has been given a prop to keep the PAYE taxpayers paying the bill for the rich. The objective of this is not to Ireland. The objective of this is to maintain the pretence that all is well in the sovereign debt market in indebted, inefficient, badly governed, wasteful state systems in Western Europe. If this pretence is maintained, the the policy of the working people bailing out the rich, will continue. This is merely the latest chapter in a game called “kicking the can down the road”. The only hope in… Read more »
Bonds are a form of gambling they normally offer a good return for your money something like putting money on a horse ,not to eat just to win.
If I put money on a horse and it does not win do I get my money back plus xtra I don’t think so,I get nothing.
Now why do bond holders get there money back plus there promised win fall,it’s so farcical is almost funny.
Who’s fooling who ,how this is allowed to happen is unreal.
Gewürztraminer with Shergar’s sounds nice maybe with some fava beans- sautéed of course with a little bit-butter. I will try to be a little prophetic and predict that the cost of meat (meat other than the equine verity) will gallop up in price rapidly in the coming weeks. The lack of horse meat in our food chain will cause the price of the weeks shopping to escalate exponentially. We already know that this is happening and even “Da Deal” (code named ‘Project Red’ I hear) will not offset a massive jump in the already increasing costs of the weekly food… Read more »
Did anyone watch the Irish Nationwide programme. Now that IBRC is liquidated certain people will never be in the witness stand to testify as to who know what in government circles. How could kpmg which wrote a report in 2000 about bad practices in Irish nationwide continue as external auditors while the loan book multiplied using the same bad practices without blowing ten whistles, Their reward the liquidation of IBRC which incorporates Irish Nationwide. You couldn’t make it up. Then the revelation of the Ernest and Young Report into the Nationwides practices as if it was news when the dogs… Read more »
From LeMetropoleCafe “Ireland gets reprieve on promissory notes: While somewhat overshadowed by the ECB meeting on Thursday, Ireland did manage to finally strike a deal to replace the €31B it pledged in promissory notes for defunct lenders Anglo Irish and Irish Nationwide during the height of the debt crisis. Under the terms of the deal, the government will exchange the existing promissory notes that have an average duration of between seven and eight years with new bonds that have an average duration of 34 years. The first principal payment on the new bonds will not occur until 2038 (the last… Read more »
“For many, me included, money is a ‘tool’ to be used to move the economy onto a different growth path, to be used to solve problems and to be used to get the real economy — the production and sale of goods and services — going. It is a tool to be used by our Central Bank.” Well at least you have the courage to nail your colours to the mast , David. You are an operator of the greater fool theory. You wish to inflate the money supply one more time on the basis that finally it will work… Read more »
But frankly, that’s their history, not ours. Yet Irish people are hostage to the monetary consequences of German history, rather than the economic prerogative of the Irish present. It seems hard to understand why the population of one country should be hostage to the historical echo of another country’s experiences.
What do you expect when you hitch your wagon to the German wagontrain. You will follow the directions and rules of the wagon train master. Like going to a public school or signing up in the armed forces. You do as they tell you or else.
This is an absolute must read for anyone wishing to see the result of inflation on our standard of living. Also the result of globalism over the last 40 years.
It will also provide you with an idea of what is to be done to recover.
http://www.gold-eagle.com/editorials_12/nielson021113.html
It is our governments we need to fear
http://www.paulcraigroberts.org/
http://www.zerohedge.com/news/2013-02-09/goodbye-fourth-amendment-homeland-security-affirms-suspicionless-confiscation-device
First they came for your I-pad, and nobody complained…
Note reference to use of a parallel currency used locally. Also reference to 13 other areas doing the same. Ireland could monetize silver as a parallel currency to the euro. Report on Lemetropolecafe.com Italy: Berlusconi ally may seek local currency for use alongside euro: Bloomberg reported that Silvio Berlusconi’s biggest political ally said he may support a plan to create a local currency that could be used alongside the euro in the region on Lombardy. Roberto Maroni, head of the Northern League, pointed out 13 examples in Europe of regional and business groups that have adopted an internal currency. The… Read more »
Pearse Doherty’s devastating dissection of Government’s sham “debt deal”
It is not a lifeline.
It is a mirage.
And the indications are that Cyprus is about to get a “bailout” that will expose Ireland’s establishment (“garrison 2.0”) as a collection of gombeens/quislings.
Remember Ireland invented gombeens before Norway invented quislings. But they exhibit many of the same features.
Out of the jurisdiction ATM but did I hear right. Renault offering finance to buy a new car now and another new one in six months. This definitely smells of the good old noughtys and the balloon payment scam that ran in Ireland in the height of the credit bubble. Did they clear this offer with the ECB too. Probably rolled up in a few CDSs. Wonder would they throw in a years insurance, road tax and a years petrol too. All I’d need then was a drive way to park it in and a job to drive it to.
This government wants you and me to pay for water and property and gods knows what else in tax ,well I suggest they rush a bill through the dail to stop paying tax payers money into big pension pots for people who helped destroy this country.
If this government can rush a bill through to close Anglo over night ,why can’t they rush through a bill to stop paying Blood suckers,unless there is a reason as to why they won’t ,is there something in the past that certain people want to stay in the past .
its not a good deal,its a terrible deal.this debt had nothing to do with the people of Ireland,it is private gambling debts ,ran up by Bankers using their banks as private Kingdoms. Analysis overcomes the elephant in the room,Bankers continue to do as they will,when they want & how they want.This was and continues to be criminal behavior by rogue Bankers through out the World. This will happen again because they continue to get away with it..How many times has A.I.B been bailed out ..anyone ? Google it…….. Apart from a scattering of lay people volunteers across Ireland,the powers that… Read more »
Ireland could not pay this years promissory note installment for two reasons.
Firstly it would have been political suicide for the government to pay this Promissory note installment.
Secondly the money is not there to pay this installment.
So this arrangement was put inplace. Just after the ruling on the Hall case and hours before Shanes Ross motion on paying the promissory note in the Dail.
Some lifeline.
http://stephendonnelly.ie/converting-bank-debt-to-sovereign-debt/ “On Thursday, February 14, at 1.30pm, the Dail will vote for the first, and possibly last time on converting Ireland’s bank debt into sovereign debt. This is the proposed restructuring of the promissory notes. I am urging everyone to get in touch with their local TD to tell them whether they are in favour of converting debts from failed banks into the debts of the people of Ireland, and to urge them to vote for the people they represent rather than according to any party diktat.” Donnelly, one of the very very few TDs of any worth, is also… Read more »
Simple Solution..?
Pay no bills,loans,rates,banks for six months.hoard cash..look after your neighbor & protect ourselves..
Simple, anonymous & highly effective..would it happen..?
not in our lifetime
I state the AIB plc as registered on the 21st of May 1997 in the companies office and holding themselves as conducting or being willing to conduct the business of banking in the Irish state subject to the statute law and regulations imposed by Central Bank of Ireland Acts of 1941-1989 and Company laws of 1963-2010 and the laws of this Irish state operated a Financial Institution for the periods between 2006- 2007-2008-2009 in contravention of the said laws. I state the AIB plc operated without a perfected Banking Licence in contravention of the Central Bank Acts of 1941-1989 and… Read more »
The Irish Constitution may be one of only few protections left for EU citizens and it may scare some in the EU that one man can attempt to challenge the legality of the promissory note and more.
Of course even ‘Project Red’ or the so called’Deal’ legality is questionable not just here but in EU.
ViVa La Republique?
“Ireland thrown a lifeline” more like clutching a straws it would have be better if we had drew ourselves into the deep end and learned to swim.
“Ireland thrown a lifeline” more like clutching at straws it would have been better if we had thrown ourselves into the deep end and learned to swim.
No one is happy about this “Deal” except a disproportionate amount of journalist writing for newspapers at least 90% of bloggers don’t like this “deal”, is it the bloggers or the journalist that are a misrepresentation of the public opinion. In less than 22 hours there was nearly 400 comments on the only negative opinion to this “Deal” in IT and at least 90% agreed with Fintan O’Toole opinion he was writing in the so called professional news media. Prior to his assessment there was at least five maybe more parachute journalists in the IT that said that this “deal”… Read more »
Failing a revolution its time to address the stampede of rhinos in dole office…
The Deficit Jobs Jobs Jobs…
800,000 Jobs needed I don’t think a perfectly worded CV will do it but Fas will run courses on CV skills, yep its a skill.
18 months unemployed
44 years old,married ,two children
my wife is on invalid pension
home & business gone
unable to get gainful employment
excellent 27 year work history
told by recruiters to “lie”on cv as I have too much experience.
paid tax,vat & social contributions all my life
trying to “survive” on €366 per week total.
Is 44 the new retired age ?
fuck it,should gotta a job in a bank…….
BTW,not looking for sympathy,these are just the facts for over 300,000 people today.
somebody told me once if your looking for sympathy ..its between syphilis & shit in the dictionary…….
Although I am not as Armour-plated as I used to be…..
Have a great day,put you & your family first
http://youtu.be/EZMwZbYvJzw
check it out ..opinion please ?.debt bubble,currency wars,humanity bubble…10 minutes long