As per usual in summer, the temperature difference between Dublin and London last Tuesday was significant. Strolling up Park Lane towards the Dorchester Hotel, past the swanky car showrooms selling all sorts of expensive stuff for lads in the bulge bracket banks, London felt more continental than British.
At Grosvenor Square, the heavy security outside the US embassy seemed over the top, as the sun blistered down on the lazy sunbathers sprawled out on the grass.
The Marriott hotel on the corner, bedecked with flags, had the air of a self-important hotel doing brisk business.
I was at the Marriott to give a keynote address at the annual BCA research conference. BCA is the world’s oldest financial research company, and its client list accounts for the vast majority of the significant fund managers in the world.
This is the market.
These fund managers are the people who invest in countries and companies, and these are the people who will decide whether Ireland can access funds in the future. In a word, this is where it’s ‘at’.
The packed hall of a few hundred of London’s top fund managers had just heard views on Greece, commodities and geopolitics, and they were as interested in Ireland as they were in all the above. I opened with the Varadkar test; asking for a show f hands on who thought Ireland would access the bond market again in the next two years.
Not one hand shot up. In fact, every single fund manager thought that there was no way that Ireland could go near the market – or, more to the point, the market would go near us.
However, as we began discussing the issues, a familiar conclusion was arrived at.
The consensus was that Ireland should renegotiate all the bank debt with he ECB, if we were to avoid a sovereign default. The market players suggested that the meltdown in Greece gave us a golden opportunity to put everything on the table.
They agreed that there was no way the ECB would cut off funding to Ireland in the event of a ‘burning of the bondholders’, because the ECB couldn’t afford another credibility disaster in peripheral Europe. Significantly, the consensus was that, after a bank default, the Irish balance sheet would be immeasurably stronger and the re-entry to the market much more likely.
This accords with my own view, which is that we are being excluded from the bond market not because we might default on bank debt but because we won’t! The more we pretend to have the money when everyone knows we don’t, the higher the risk premium and the more we are shut out. So we have a choice: do we want to be shut out from the world for the foreseeable future or not? It really is that simple.
Given that this is a political process, why doesn’t the government, which already has a weakness for referendums, bolster our negotiating position by having a referendum on the bank debt? This is a far more important referendum than something on judges’ pay. As for the judges, just don’t pay them. We are in a recession, so tough luck, my bewigged friend – get over it.
We could also begin a process of dealing with the debts democratically.
The way to do this is via what is termed a debt audit. This is a well-known process where debts of a country are split between ‘odious’ debts – the debts incurred by a government that the public should have to pay – and ‘sovereign’ debts, the normally understood concept of sovereign debt.
The debt audit would allow us to appeal to the market’s understanding of what should and shouldn’t be paid.
Once the government gets the people’s backing for a debt audit via a referendum, the process of easing the debt burden begins.
People always say: but what will happen to our so-called credibility?
In this case creditors will split between ‘normal’ creditors, who will do a deal, and ‘rogue’ creditors – normally hedge funds and other financial bottom-fishers – who will try to get all their money back.
We should treat the rogue creditors as we would rogue countries, like pariahs.
Years ago I worked in what were called distressed debt markets, and this split between reasonable creditors and rogue creditors always occurred.
Once the debt audit is done, the credit rating of Ireland will rise because we will be better able to afford the debts that we chose to pay – the debts we always expected to pay.
The banks’ debt of close to €64 billion can be dealt with by picking off the various different creditors at rates that we decide.
After all, there is no other buyer in town bar us, so getting 2 cent on the euro will be value to them.
In tandem with this move, we issue new licences for new banks.
New capital will come in, and who wouldn’t move their depositors into these new banks? In so doing we re-order our banking system and wind down the old names such as AIB and Bank of Ireland, and move on.
In fact we can protect taxpayers’ interests by stipulating that the money we put into the banks in the last two years as capital might be treated as discounted equity in the new banks.
This might make the banks slightly less attractive to new capital but given that the prize is owning a new banking system in Europe in an economy with a significant post-default growth potential, many investors would find this attractive.
At least that is what they told me at the Marriott last Tuesday.
We now have a chance, with Greece in such a mess and the ECB in such disarray, to make the next political moves on the banking industry.
A referendum would immeasurably strengthen the hand of our politicians, while the ‘debt audit’ would allow economic justice to be done.
Any policy that financially strengthens the balance sheet, while morally siding with the people and the average guy, is much more robust than something that is increasingly seen as a diktat from unelected central bankers in Frankfurt.
Interestingly, this is not the view of the left, but the view articulated by the capitalist right on a sunny afternoon in Grosvenor Square last Tuesday.
Pareto Inefficiency, or the ‘Witness of Jehovah’ ECB politics A common view in cost benefit analysis is that we are morally justified to be less concerned about effects in the further future, it is called the Social Discount Rate. Suppose we are considering how to dispose safely of the nuclear waste. If we believe in the Social Discount Rate, we shall be concerned with safety only on the nearer future. We shall not be troubled by the fact that some nuclear waster will be radio active for thousands of years. At a discount rate of five per cent, one death… Read more »
Surprisingly enough, I reckon that the IBEC/ICTU model of running the country, makes this completely impossible. Therefore the first step is to kick the unelected element of the political establishment (the lobbyists) out of the government process. Then we have the media – whose primary function is to supercede the interests of “our advertising sponsors” (including Anglo Bondholders) above the interests of the people. Our political establishment never calls referenda to find out what we think, but to instruct us to act in such a manner as to line up with their thinking – even if they are not doing… Read more »
Here is a prediction.
In the end, the ECB will do pursue a policy of “print-baby-print”.
So Varadkar was telling us the truth about the second bailout. I find the fact that Noonan is missing from a lot of EU ministerial meetings an indication that Ireland simply knows where it is not wanted. The part where Ireland borrows from the IMF, to fund the second big fat Greek Bailout, is instructive of the folly that we are embarking upon. But for the sake of maintaining the veneer, of playing the national game of pretence we will dip in and contribute. It would look shameful if we did not. Even if countries that can afford it like… Read more »
That’s a good article, opportunity identified; research required clarified and plan of action clearly set out. This momentary glimmer of hope was dampened after reading Namawinelake’s ‘Noddy and Big Ears and the First 100 Days of Governing Toytown’: a withering [my own opinion only, NWL is always objective] account of the risible performance or lack thereof of our new political leaders. It seems that they will never have the ability to instigate intelligent change requiring courage and action. It’s all over and Paul Sommerville sums it [Greek situation] up best with: ‘The wheel may be still turning but the hamster… Read more »
David,
This is all well and good. But do you not think that in the event of us restructuring our banks through receivership ect, that the same thing would have to happen across the entire EU banking system in a coordinated and synchronized fashion in order to avoid a domino style collapse.
I just have realise the PIGIS have put the entire Eurozone project in the PIGS***. In Ireland nobody has been jailed. In fact, I don’t think anybody anywhere in the PIGIS – has yet been jailed. If I were a responsible citizen of Germany, France, The Netherlands, Austria, Finland or Luxemburg – then I would be demanding that my politicians strung up the Irish political class, and that none of my representattives ever gave another penny of tax money until the Irish, Greeks and Spaniards reformed their corrupt, inefficient, inept state systems. Just think for a minute of the perspective… Read more »
David: The closest parallel to the present international economic situation, (in that it appears to defy rational discourse and has become totally intractable) is the Northern ireland situation during the 1980s. I racked my limited intelligence to try to conceive of an equitable solution, without success. Then John Hume came along, working behind the scenes, he shepherded the warring parties into talks that led to a solution. There seem to be parallels between Hume’s efforts and yours in the service of Ireland. Your discussion above articulates a practical consensus that seems to be emerging. Colm McCarthy said something similar this… Read more »
Bring on the referendum! We can email our TDs and let them know how we feel about it now. We can post their replies here. If the referendum isn’t passed for some reason, then Ireland really can go to hell.
David, any chance you can set out a brief referendum so the TDs know what you’re talking about?
David, I don’t agree that Ireland should default. However we should threaten to default in order to force a restructuring of the so-called “bail-out” loans. The only way this is going to work is if we stepped out of the EU. However our current and previous governments are more concerned with their credibility towards the paymasters in Brussels. The FG/Labour coalition do not have the balls to take the bold steps needed to rescue Ireland from total bankruptcy. The current EU/ECB/IMF policies are set on wholesale asset stripping with no consideration of what is, in their eyes, the health of… Read more »
When you suggest a referendum on the bank bailout what is the alternative?
If the Country says no to the bank bailout does that mean we have to immediately balance the budget? That will mean a correction of over €18 billion in one year. That is an awful lot of tax increases and spending cuts. I don’t think its possible to implement while holding society together. If there is a referendum the exact scale of tax increases and spending cuts should be offered to our citizens.
David this is dreadful stuff, the only default on bondholders the government are talking about is Anglo and INBS this amounts to 2 billion. What on earth is David going on about????? We have established that the sovereign must be paid, what is left is bondholders in AIB and BOI these too will be paid because they need to access the market at some stage. Then there is the ECB 156 billion , is David proposing that this is not repaid?? He doesnt spell it out. The Icelanders had a referendum but the debts are still owing , this is… Read more »
The article makes a lot of sense it is kinda like ‘this is where we are and this is what we need to move on’. There is one major problem. The Irish Government no longers administers the true state of affairs for Ireland that is run by the ECB and the FED. The ECB is dead set against default believing in austerity and the powers that be in the US don’t want to pick up the tab for the default. So they intend sweating this asset. We have new landlords Kenney Gilmore et al are just the rent collectors simple… Read more »
The following item appeared on Barry Ritholtz’s blog on June 19, 2011. Ritholtz is a New York based investment manager who has maintained all along that the so-called “bailout” for Ireland was unjust, simply a device for making Ireland bail out the European banks, and imposing terms that are impossible to make work (unless the Irish meekly accept the destruction of their economy). Posted: 19 Jun 2011 06:14 AM PDT Kiron Sarkar lives in London and Ireland where he works as a money manager. He occasionally attends the Scarsdales Equity idea lunches when he comes to New York, which is… Read more »
I think we should handover the running of the Country back to the UK. Clearly we are not capable of governing ourselves. We need to move fast as this window of opportunity will close within weeks.
Re David’s article I keep saying this since a few months, audit Ireland, establish odious debts, tell the fuckers to get lost with their demands and start from scratch. Instead, we pumped over 23 billion in to Anglo Irish bank, as his parting gift from Government, Ireland paid bondholders who got their bonds in 2006 the equivalent of an entire year of Irish social well fare requirements at current rates, in January 2011, close to 800 million if memory serves. In May this group here launched their campaign: http://www.debtireland.org/news/2011/05/04/citizens-debt-audit-for-ireland-launched/ As David said, there are good examples where countries got rid… Read more »
David – A question.
The *fund managers* are the very same lads who are the private bondholders demanding their risk investment back from the taxpayers in the PIIGS?
Is that correct?
Cos how laughable is it that the very same lads in the room decrying no access to funding on the markets are the very same gang of mugs who drowned Ireland in debt and then coerced governments to pay for their crooked lending.
??
I’m confused, please clarify, when available.
BTW David, isn’t an odious debt a debt the government are legally non-obliged to pay???
David.
Unless the *private banking system* is held to account and reformed we are all doomed to another *financial instrument pOnzi scam*.
The Walking Dead.
I wish Michael Noonan would read this, take note and ACT.
[…] We must act while Greece is hot (David McWilliams) […]
“As for the judges, just don’t pay them. We are in a recession, so tough luck, my bewigged friend — get over it.”
Dead right, who cares about the constitution, it’s stupid! And why bother with elections, lets have one big fella in charge, like David McWilliam’s or Sauron!
I’m afraid it seems like a growing effort to be all things to all people.
Such approaches end in disaster because they have no core, ‘values’ come to be superceded by ‘price’. Conversely, the person not bending at every turn to price but holds as much as possible to principle commands respect, something far more valuable than price.
In the coming struggle, one must chose a side. A person certainly cannot be on all sides, because that is dust and people tend to turn away from dust.
Just a thought…
In Greece you need to exchange the political class, all of them, with new blood, honest and competent people who wish to make a difference, you have to get rid of this generation old family business that runs Greece.
In Ireland it is much more complicated. You have to exchange the entire public.
;)
If the country wasn’t spending like a drunk teenager with Daddy’s credit card, it wouldn’t need to borrow so much money. All this talk about a punitive interest rate is irrelevant, if we get a handle on our spending. The audit can start with the documents contained here – http://www.budget.gov.ie. Go through it line by line, and see what your taxes are being spent on. How come we could live with 33 billion expenditure in 2003, was the country so bad then? In a way, the so-called punitive interest rate is a good thing, because if it was too lenient… Read more »
David says: “… we are being excluded from the bond market not because we might default on bank debt but because we won’t!”
That’s incredible, isn’t it?
When will the big boys learn that for Ireland and Greece to succeed financially, they must select the route chosen by Iceland.
For the sake of the world financial collapses we are about to experience (yes, including the so-called “strong” Australian economy) the term “the Icelandic option” should immediately graduate into common usage.
Great, the german banker association insists on incentives for a Greek rollover, essentially asking for government guarantees so that in case of – the inevitable -Greek default they can book it onto the taxpayer. Send an anti terror squad team into these Bankster and Insurance temples, arrest all of them and put in a temporary management forced by emergency legislation. What the Hell more do people need to know? Politicos are laughed at, the example of Lenihan and the monkey noises shouting at him was no exception, it is the rule. Banksters rule Europe, and the castrated politicos can say… Read more »
This goes for Ireland too
http://www.businessspectator.com.au/bs.nsf/Article/Drachma-will-oil-Greeces-GDP-pd20110620-HZ8MW?OpenDocument&src=rot
Morning, things are getting pretty messy! The hatred Anti Greece league of German Bildzeitung level, the lowest possible tabloid level, is now joined by the French press as well, pretending them to have wasted 30 years of EU subsidies. This is not the way this ‘UNION’ will be able to survive. Spear headed by a bickering and heel dragging Merkel who has not displayed any solidarity from day one, other than with german Banksters, both politicians, Sarkozy and Merkel are extremely polarising in the EU on this debt subject. Getting my daily ‘first coffee fix’ of international press, btw i… Read more »
The direct results of a EU/ECB/IMF neoliberal driven austerity Pol Pot dictate:
http://upload.wikimedia.org/wikipedia/commons/9/9c/Choeungek2.JPG
There will be massive privatization as a result of the Greek bailout. The practical point of the privatization is to presumably rebalance the balance sheets of the ECB, which is not in a vulnerable state. The hidden objective is slightly more sinister. I am still wondering why some taxpayers union in DE, NL, FL, does not decide to sue GSucks over their part in facilitating Greek entry into the Euro. If the ECB is appointing a former GSucks employee as it’s next head – then we can assume that the ECB will not do it. For real fun, Ireland should… Read more »
When Noonan spoke to investors in New York last week would he not have been given this very same feed back. He came out saying the message was ‘stick with the programme’ All vestive interests should not have say, this is why not only a referendum but a cerfully worded referendum should be held. Dont forget the trade unions have mud on their hands also and to hear them put their own survival and self interests before that of the country is wrenching! Bertie is not on the speed dial anymore, and you dont get your own key to policy… Read more »
The old boys and girls network of elites throughout europe and the world knew this would happen but came up with new or rigged financial structures to hide the debt if any and promote the massive profits turned out to be a massive financial book cooking exercise.Light touch thatcherite,reganomics of the 1980’s was held up as the model the world should follow.The promoters of this appraoach from USA,EU and other locations ignored historical precedents of the past believing that there new financial models they espoused broke away with the bust cycels forever.Boom profits and hihger saleries would be the norm.History… Read more »
David.
I am still confused on article.
Are the fund managers the same group of boyos who are the private banking bondholders?????????
Yes Wills Many of these guys who still hold Irish debt want to see a big event – a default – and then we move on. It is incredible really. As I have always said, there is always new money. Its just waiting for the event and then we move on the losers lose and the winners reinvest! In fact the losers reinvest too. For example, I’d wager that many of the people trying to buy Bank of Irland shares at low levels are the same people who lost hugely having bought BoI when the sahres were in the late… Read more »
We seem to be well on our way to emulating this. Closer to Boston, or so the failed mantra goes.
US man stages $1 bank robbery to get state healthcareUnemployed and without health insurance, man in North Carolina has himself arrested in order to receive treatment
http://www.guardian.co.uk/world/2011/jun/21/verone-one-dollar-robbery-healthcare
I am sure you all remember “Comical Ally” from the Iraq War, telling us all how the Iraq Army was having great success , how it’s strategy was working and basically how victory was just around the corner………meanwhile in the background the TV cameras were picking up the American Tanks as they rolled past and down the main road of Baghdad…… So Tull what has all this to do with Irelands plight I hear you ask, well it seems that we have a new Comical Ally here in Ireland…..except he might be better called Comical Ronan. Ronan Hickey “Economist” as… Read more »
Why Greece matters-If Greece Defaults, What Happens to Portugal and Ireland–and Spain?
http://gonzalolira.blogspot.com/2011/06/if-greece-defaults-what-happens-to.html
This morning’s poll result have indicated that Enda Kenny has an extremely good rating.
http://www.breakingnews.ie/ireland/satisfaction-rating-soars-for-taoiseach-509891.html
What did Kenny do to deserve this ?
Answer : nothing.
This is how bad things were under BIFFO and the “drinks cabinet”. Basically, a government that does nothing is seen as an improvement on a government that could do nothing right.
Kenny – wake up. Nothing has been solved yet. And the PR stunts that Gilmore is posturing could result in an almighty fall if there is no give on the interest rate.
Interesting article in the English Version of ‘Der Spiegel’:
http://www.spiegel.de/international/germany/0,1518,769703,00.html
Claims that Germany was the biggest debt sinner of the 20th century, experienced debt forgiveness by the US twice and is not really in a position to take the moral high ground with regards to Greece.
Commodity Scam update: Worldbank pushes Food for CDS hedging
http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22945434~pagePK:34370~piPK:34424~theSitePK:4607,00.html
Comment?
Fucking Hell!
David, Georg.
David mentioned on NEWSTALK the AIB default story, c here http://businessetc.thejournal.ie/aib-has-defaulted-the-official-verdict-of-a-global-banking-group-154911-Jun2011/
This means AIB have actually triggered for themselves losses as far as I can make out. This is precisely my point up above.
It is clear we are crap at government and referenda won’t change that. We substituted for government and democracy since independence a mix of cronyism to advance selected people and bureaucracy to control others. Surprise it does not work. So when it messes up can we fall back on government and democracy. No we replace some and only some of the cronies and increase the bureauracy.
Just back from France and we’re not in the news over there, Greece is. On CNN the arguments are familiar, why should we pay a penal coupon on our ‘bailout billions’, sell of billions of state assets at distressed prices, run the austerity gauntlet to cripple our economy more? I agree with DmcW view the reason we’re kept out of the markets is because we are not burning bondholders, not because we are burning bondholders. I disagree with the presumption that we need to renegotiate our bank debt with Frankfurt along the lines of debt audit to distinguish between odious… Read more »
The presidential race is a bit of a farce. Failure of the presidency was particularly poignant during these McUseless years when opportunity to defend taxpayers against government bailout of the banks and subsequent legislation on the banks was silently forfeit. Surely it is time to take the presidency away from political hacks like McUseless and give it to the judiciary where it should belong? Perhaps an election with candidates from a judicial non political background alone should go before the people. Citizens could rely more on people of the calibre of Justice Kelly or similar to protect them against the… Read more »
“A nod is as good as a wink to a blind horse”, phrase used by Noonan on News At One. Ireland had not been threatened by ECB re his recent statement on unsecured, unguaranteed, senior debt intention to burn. But Greece was recently threatened with having some of its bond paper burned if it adopted similar course! His approach is to await the Autumn when he will then open it as a subject for discussion with ECB. Also, correct this if wrong as there may have been an update to this, his position on renegotiation of the interest rate on… Read more »
It is interesting that the bondholders/fund managers have now jumped on board in calling for a credit event. Perhaps they have seen that losses are being imposed on bondholders of Greek debt very carefully without triggering a credit event. In the case of a credit event bondholders insurance payout is triggered. So the CDS seller, AIG, PIMCO, Bank of America, etc has to pay the bondholder back their money. I expect at this stage most bondolders of Irish bank debt have covered their position somehow and have already shipped losses. In any case the most interesting thing here is that… Read more »