Where do you think the financial markets assess Irish risk? What countries are we compared against? Surely we are still regarded as a European developed nation when it comes to risk?
Think again. After – or more likely because of – our recapitalisations and bailouts, the world regards us as a bigger default risk than Uruguay, Peru, Columbia, Tunisia, Kazakhstan or Guatemala.
Just look at the graph here to see the company we keep. It shows what is called the interest rate ‘spread’.
This is the difference between what either Germany or the US pay to borrow money compared to what other countries have to pay to borrow money.
All the eurozone countries are benchmarked against Germany. The others are benchmarked against the US.
It is comparing like with like, because most of the world benchmarks itself against US Treasuries, except those of us in the eurozone.
The chart reveals perceptions of default risk. The higher the borrowing cost, the higher the risk is that we will default. It tells us how much the people who might lend to us are demanding as compensation for the risk that we will default.
It also reveals that euro countries such as Ireland,
Greece and Portugal are not being downgraded enough by the ratings agencies. This is possibly because we are in the euro, when it is the straightjacket of the euro that is causing the risk to rise in the first place.
If you look at the thick line in the chart it reveals that there is a relationship between the market interest rate and a country’s credit rating.
The higher the interest rate, the lower the credit rating should be.
The markets now think that Ireland is much riskier than Jamaica, Belize or Senegal, yet the credit rating agencies can’t bring themselves to reflect this in their ratings.
This is because they believe that ultimately the Germans will pay the bill, or because they believe that the euro will blow apart and the ability of the likes of Ireland to pay future debt will improve after a default and devaluation.
Therefore, the markets are now mispriced.
Whatever the rating agencies’ reasons, the chart is extraordinary and it impales on the altar of reality the Irish establishment or consensus view that ‘we are doing the right thing’.
Not only are we not doing the right thing, but we could hardly be doing the more wrong thing (if that makes grammatical sense).
There was a lot of talk about the ‘group think’ of the boom last week.
Well let’s consider the same ‘group think’ in the bust. The same lads who told you there would be a soft landing are now telling you we must pay all the banks’ debts.
As a result, these stalwarts of the discredited Irish establishment insist that everything we are doing now will diminish the risk of default. Unfortunately, no one in the real world – outside the Irish insiders’ peculiar bubble – believes these so-called ‘serious people’.
With the publication of the latest McCarthy report, our self-delusion has become more pronounced.
When you stand back and look at the big picture, the idea of selling state assets now while at the same time buying all the banks’ toxic debt amounts to financial suicide.
We are buying toxic bank loans – which are worthless – at a premium, while we are going to sell state assets – which are worth something – at a discount.
How insane is that?
We are not making our balance sheet better; we are making it worse. Any fool can see that if you overpay for something that has no value and you cheaply sell something that has value, you are destroying your balance sheet.
Yet it seems that Irish economic consensus – the ‘soft landing’ group – is suggesting that unless we pay everything, including the bank debt, we will be seen as a risky place to do business.
In fact the evidence from the markets tells us that the opposite is the case. Examine what the figures in the chart are saying about the impeccable logic of reneging on bank debt, which isn’t ours anyway, drawing a line in the sand and moving on.
Today, because we are entertaining selling good assets cheaply and buying bad liabilities expensively, the market regards Ireland as a considerably bigger risk than Uruguay, a country that defaulted on its sovereign debt in 2002.
We are regarded as a bigger risk than Kazakhstan, a country which ‘burnt the bondholders’ in 2009.We are seen as a bigger risk than Tunisia, which has just had a revolution, and a bigger risk than Peru, which is about to elect a populist politician as president.
We are worse than the narco-trafficking centre of the world, Colombia, and worse than Guatemala, a country where 67 per cent of the population are under the poverty line.
How much more evidence do we need? We need to change tack immediately and see that this IMF/EU deal is destroying the country – and by destroying the country, it has the potential to destroy the euro.
Maybe we should be thinking of another way, which might get us out of this mess. Obviously, the IMF has traditionally insisted on privatisations as away to fiscal probity. Let’s for a moment accept this hypothesis (although it is full of holes).
Why not say to the IMF that privatisation is conditional on revisiting the bank debt issue?
This week, our banks were downgraded to junk.
Well, junk never pays its debts, which is why it’s junk. So let’s make a deal with the IMF/EU, which is that we will privatise only if we restructure the banks’ debts along the lines outlined in the table above. According to the Financial Regulator, there are €63.38 billion of bank bonds out there.
Why don’t we apply an escalating ‘haircut’ to all bank bonds, with the biggest haircut to the riskiest bonds – the subordinated bonds – and move up from there.
According to the table, we could save €30 billion this way, making the €5 billion we raise through privatisation meaningful. We could make our balance sheet better by making the privatisation ‘conditional’ on imposing on the lenders to the Irish banks the reality of their own stupidity.
This would make Ireland less risky and, by doing this, it will make the euro less risky. This is still our trump card. If we and the other countries in trouble, Greece and Portugal, together hinted that maybe we’d have to leave the currency, the Germans and French would panic and come to the table with a better deal.
We know this, they know this and the rest of the world knows this, so why not hint at it? They will claim we have no alternative, but clearly the chart above shows that we have. In fact, not only do we have an alternative but being in the euro is actually increasing our risk premium, not decreasing it.
In a game of poker, you have two minutes to figure out who the fool is. If you haven’t figured out who the fool is after two minutes, the fool is you.
As our American cousins might say: ‘‘Go figure.”
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Genghis Khan I have tried to ‘Group Think ‘ in Senegal a few years ago with displaced people who are leaderless , have no rights , in poverty , hungry, no hope , no future,no voice ,suffering diseases , and I can go on . The Irish cannot group think because for the same reasons . Since the EU decides everything and the confidence to be able to make a change from the grassroot seems more distance than had it not been that case.There is no leal mechanism to liberate ourselves again and our children will leave. Logic in Finance… Read more »
I jave it on good accord that Germany is string a few trillion marks in Frankfurt as a contingency to the euro paper fiat money fraud exploding.
Salvage Saliviating Puppets :
I somehow sense in this article the desperation to scrape the bottom of the barrell to take some crumbs from the stocks we have lost as though we are to see them through magnifying glasses to appear bigger than they are .
Get Real .
David.
‘We are buying toxic bank loans — which are worthless — at a premium, while we are going to sell state assets — which are worth something — at a discount.
How insane is that?’
Bullseye.
David.
Now one asks, the insiders are NOT insane.
So, they know this.
So, its engineered down the wire to the selling off of out natural resources is complete.
David.
The banking crisis is NOT what it appears.
It is well run exercise in manufacture of debt servitude to use to plunder real wealth.
Real wealth like a country’s natural resources.
The private banks are a front operation to plunder real wealth.
David.
The euro is a POnzi scam.
The insider technocrats know the euro is a fiat toilet paper money Ponzi scam.
They are milking and creaming the euro till it evaporates and will wheel out the next medium of exchange.
Its all a game of empire.
Fiat paper money is one of the greatest scams the insider empire elites invented.
Its genius.
They grow rich beyond their wildest wet dreams for sitting on their arses in luxury dreaming up ways to con the dumbed down masses.
Good article again, thanks!
Interesting, the topic of foolery was on my mind this Bank Holiday Monday afternoon, which took me to look at the foolery of our banking inquiries, and made me pen this:
Irish Gibberish!
http://wp.me/pBbF3-eI
“The fool doth think he is wise, but the wise man knows himself to be a fool!…” As Sh wrote.
Constantin Gurdgiev using the analogy on V Brown compared us to being the Titanic in the vertical position. Lifeboats gone ,capital gone nothing left but the fools. And still the majority protected in a fog of borrowed state subsidies cannot see we are the fools being played in an social financial experiment that is about to end in disaster.
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Makes sense, but unfortunately beyond the comprehension of those who should comprehend, our government. They are playing poker with their cards turned the wrong way around!
Trust David to put his finger on the prime cause of our problems –Groupthink. Irving Janis devised eight symptoms indicative of groupthink (1977). Illusions of invulnerability creating excessive optimism and encouraging risk taking. (FF during boom) Rationalizing warnings that might challenge the group’s assumptions. (Green Jersey and Old Pal’s Act) Unquestioned belief in the morality of the group, causing members to ignore the consequences of their actions. (FF backed by majesty of the law and constitution) Stereotyping those who are opposed to the group as weak, evil, biased, spiteful, impotent, or stupid. (Pity DMcW and several others) Direct pressure to… Read more »
Rather off topic but still related, anyone else news the virtual news black out on Japan:
I was curious about the Fujushima and tsunami effect on the Japanese economy, production, and world trade, particularly export of electronic components.
There were some coverage on automotive industry closure of manufacturing plants in the US and UK because of a lack of critical components, but can’t find any informed analysis of this topic anywhere?
I know Libya has taken centre stage, but thousands have died in Japan and the above topics should be crucially of interest to all.
Interesting Max echoing DmcW on the more bankers dug out, the bigger the fiscal risk, in this case for the US
http://www.youtube.com/watch?v=ID9D2zTTjYA&feature=player_embedded#at=210
There is a lot more to Guatemala than poverty and the drug trafficking label, it is a remarkable country with astonishing people who are working hard to build a better society against some serious odds. It is run by a tiny Western backed elite with European/Spanish origins, not too dissimilar to many central American countries. Guatemala’s democractically elected and progressive President, Jacobo Arbenz was overthrown by a CIA backed coup (along with assistance from Western Mulitnationals). A military dictatorship, again supported by the West, ran the country into the ground and killed about 200,000 people (mostly indigenous). Discrimination against the… Read more »
Beginning to despair of people ever copping on to what’s being done to us by the ECB, in collaboration with our own government.
Hi, Wasn’t it very revealing when the former Minister for finance went on radio and said he was betrayed by the ECB/IMF. Betrayed? I don’t think so Brian. They have remained true to their objective to f*ck us for the sake of the Euro. As for you, you were, as McWilliams says PLAYED FOR A FOOL. As for the 3 million settlement for the guy in AIB who retired recently well we know he had an iron cast contract but let’s ask him to explain why he feels he is morally entitled to the money and when he laughs at… Read more »
Before the crisis, our average debt per person was in the region of 10-13,000 euro per person. Similarly, Greece and Portugal had low levels of debt when the UK and Germany had higher debt per capita (approx 25,000 per person). We were deliberately put into debt by the ECB as we were getting away from their grasp. The only problem is they went too far!! Now the problem is the continued availability of fiat money. Consider this – it takes 6 pounds of pure silver to pay the monthly wages for a nurse or teacher. Imagine the government driving around… Read more »
On Guatemala, very interesting and chilling piece in the Economist this week on the rise of the narco-oligarchs using the country as a launch pad to the USA. This accords with chats I had with local people when I went to Copan on the Honduras/Guatemala border to film Addicted to Money two years ago.
Best David
[…] emailed  link this afternoon to David McWilliams in his ‘Sunday Business Post’ column only confirmed the figures from the NTMA on Thursday and the FT on Saturday.  ’We’re […]
It’s all very well at this stage rehashing the same line that we re on the road to doom and disaster. We all voted in february, we picked the mob that were supppsedly heading to Europe with a ‘mandate from the Irish people’. We re still in this unbelievable situation two months on and not one of us have the power to change any of it no matter how much intelligent debate is bandied about amongst us. Ruari Quinn gave into the same message of doom as the last lot were giving, practically word for word.. Joan Burton wants to… Read more »
Intelligent debate is wasted if it’s pointless, so where is everyone going with all this? I agree with Julie, not one of us has the power to change any of it, but all of us have. A group of us in Ballyhea have been marching now for eight weeks, our ninth march coming up this Sunday morning, 10.30am. Our numbers have increased to a steady 70 or so – not huge, but significant in such a small parish; others have also now started marching, in Fermoy, Cork, Ennis, Cahir, Galway. Not rocking the world yet, but we’re acting, and will… Read more »
William, two points (I am an economic refugee living in Asia, so apologies if I am not as well-informed as I should be). 1. There is a lot of talk in Ireland about “toxic debts” and this applies to the mortgage or lending accounts when dealing with “corporate” borrowings and various ridiculous government policies (such as NTMA or more accurately, NAMA) are methods for “rehabilitating” these debts so that actual resources in Ireland can be normalised and “real” capital values can be applied to these resources (usually property; little industrial base in Ireland but we appear to be experts in… Read more »
apologies, I meant to open with “Mr McWIlliams”.
One of the reasons contributing to Irelands debt being so expensive is ‘shorting’. For example People take out a loan of Irish bonds at full price and sell them immediatly. Later when the price has gone down they buy them back, and give the bonds back to the lender. They made a profit of the change in price. More info here http://www.project-syndicate.org/commentary/skidelsky40/English It is often a strtegy of hedge funds to limit their risk by for example buying up risky bonds in a company and then shorting their shares. If the company goes bankrupt they lose the bonds and premiums… Read more »
Actually its my opinion that shorting goverment debt should be illeagal, however its obvious that the G20 or the worlds governments cannot get their acts together to rein in the multinationals in general and the large Financial multinationals in particular. We have banks like Goldman Sachs who are almost bigger than the U.S. economy just going around the world doing what they like with noone holding them accountable. An ex Goldman Sachs man Draghi is about to be next president of the ECB. Can Ireland really tell Goldman Sachs that its going to have to pay out on the credit… Read more »
It is clear that Ireland should pull out of the Euro currency. We can say we are protesting against the behaviour and make up of the ECB as it in no ways represents the people of Europe. It represents the interests of the Financial Industry in the 4 largest countries Germany, Italy, France and Spain. There are no representitives of workers sitting on the board of governers. Just un-elected ex finance industry old men. Especially Irish workers interests are not represented at all there. Simply put they raise interest rates when we want them lower and lower interest rates when… Read more »
Hi,
Gold over 1500 us an oz and rising. For those citzens who have read and acted on my pronouncements regarding gold good luck to you. The ONLY way we are going to save ourselves is one citzen helping another.
regards,
Michael.
The same lads who told you there would be a soft landing are now telling you we must pay all the banks’ debts. I think this sentence should be nailed onto the Nations virtual forehead. Brian Lucey stated on VB to Max Keiser….’Yes, Max, but we are a deeply conservative country…’ This has got to be the understatement of the year, Ireland reactionary to it’s core! However, this is not about THE Irish, rather THE INSIDERS who rule this country, still rule it Folks. Every months Bondholders are paid back, services cut, more austerity implemented, prices hike, jobs lost and… Read more »
State assets. What are they? The word ‘asset’ implies that a citizen’s so-called part-ownership of an airport, or a state forest, has some kind of benefit to that citizen. So let’s see. Does a guy from Coillte arrive at my door with a lorry load of free wood for the fire every winter? No. If I book a flight, do I get a discount on airport charges because I am Irish, and supposedly a stakeholder in this airport? No. What I get instead is an exorbitant airport charge to pay our over-paid, over-indebted, obese airport authorities, that have choked inward… Read more »
David – the “groupthink” is relevant to the estaablishment, and also to the herds of lemmings who followed the instructions they we given by Pravda-RTE and the Irish Independent.
To those of us, who have learnt that scepticism is the most important defense against being used by the establishment, we are free to opt out of the group think.
[…] You may view the full article and add your own comments at http://www.davidmcwilliams.ie/2011/04/25/we%e2%80%99re-being-played-for-fools […]
While everyone here is working themselves into a fine lather and threatening all sorts of things to the IMF/EU/ECB, please note that as a matter of law Ireland can only leave the Euro if it leaves the EU. The treaty of Lisbon introduced a procedure for leaving the EU: there is absolutely no procedure for leaving the Euro while remaining a member of the EU and any attempt by Ireland to do so would be a clear breach of its obligations under the EU treaties. Ireland is in no position to threaten anyone with anything and no individual member state… Read more »
Actually, I am think everybody in Europe is being played for fools. This has been the case since the European movement crossed the Rubicon towards greater centralization. In other words, since things went imperial. http://www.rte.ie/news/2011/0426/ecb-business.html Sarkozy wants a “safe pair of hands” to run the ECB. Sarkozy has got everything he wants from the ECB, including the ECB bullying us into providing socialism for his the Paris Bancassurers who dabbled in bonds in Anglo, Nepoto, and AIB. And this is what happens when these meglamaniacs get their way, they want more. And the best news of all…..this new proponent to… Read more »
I have said it before and I will say it again. We must renounce the ECB / IMF loan. We have been targetted with a view to crippling our economy in order to make us totally dependent upon finance from the ECB / IMF and therefore totally subservient to them. Already all of our economic and fiscal decisions must be agreed by the ECB / IMF. Our government is also continuing to facilitate the theft of our vast oil and gas resources. Just two week ago Pat Rabbitte stated that our vast oil and gas resources are nothing more than… Read more »
We don’t need more airy fairy crap.Keep the chinese away , they don’t like paying tax just ask yourself when did i get a receipt for my takeaway curry ? The biggest problem we have is GREED. The government failed to regulate it and the monster it created is the civil service and semi-state .Every last employee should be made redundant on a Friday and re hired on Monday at a 50% LOWER SALARY .If they dont’t like this employ new staff to fill the gaps.We may have a little discomfort for a while but otherwise we continue with the… Read more »
Group Think
Do we know what group we are anymore? Have we diluted our blood , our technical allegiances and our mindsets? Who are we now?
A group is a memory stick and a click .
We are anything but a group .
If anything we are fodder to markets and political spin.
Fintins definition of Group in todays Indo :
‘I now realise that our ruling class has a brilliance that borders on genius. The only problem is that all of its ingenuity has gone, not into creating a decent and sustainable society, but into self-preservation’.
Folks, Thanks to Noonan, Irish taxpayer cd be exposed to lawsuits after putting own AIB shares ahead of bonds:
http://bit.ly/hCjPqS HT
David McWilliams is probably the best-known and most widely respected voices in the country, in matters economic, yet what impact is he having on government policy, how much heed do they pay to what David has to say? So what impact do ye think all our comments here will have? DO something, dammit, DO something! We’ve started our online petition to go with our regular Sunday march (it’s at http://www.petitiononline.com/mod_perl/signed.cgi?isntbb11), but even if you think that’s all nonsense, going to get nowhere, start something yourself. But act; all these comments, pertinent and perceptive as they are, we may as well… Read more »
Fellow Posters, You, probably same as me, enjoy the opinions and various interactions on this site. At times I even thought we could positively affect things? We had the suggestion for a new party to compete in upcoming elections? But alas even that proved to be bluster. But we cannot change things at all? It’s futile to even think so. Why? Because nobody plays by the rules! In fact there are no rules! No fairness nor decency nor honesty! And what’s most dangerous about all that is there are no limits to which the establishment will go to preserve itself!… Read more »
Richard Portes of the CEPR has an excellent piece about the need for Ireland to default (sorry restructure, sorry reprofile) – see here http://www.voxeu.org/index.php?q=node/6380
Roubini, on Ireland, dollar, yen and Japan
http://www.bloomberg.com/news/2011-04-26/dollar-falls-to-16-month-low-against-euro-amid-speculation-of-fed-support.html
http://www.bloomberg.com/video/67533886/
@doflynn: Do what now? Let me start with saying that I deeply sympathize with the statements you made above, and the few words here are not to be understood as criticism on your activities, not at all! I hope you find the below somewhat useful. See, start of April 2010 I tried the very same and it failed to make any considerable impact whatsoever. http://www.thepetitionsite.com/1/close-anglo-irish-bank-now–no-bank-guarantee-extension/ Within a few weeks no more than 250 signatures came together, however, some interesting names contributed there, Deirdre de Burca and others signed it. Looking back now, I asked myself why it failed to produce… Read more »
I am sure somebody has mentioned this before with regard to the presidential election but would David McWilliams agree to go forward as an Independent candidate? This is somebody who has spoken with a true voice untainted by Irish politics consistently since the crisis unfolded and has a public profile and more importantly could actually win. This is an election (but more than that an opportunity fortuitous by its timing) that transcends the parish pump and would allow the Irish electorate to speak for the common good. The next Irish presidential election is due to take place in October 2011,… Read more »
Mr doflynn You have answered your own question regarding the inactivity of the Irish public’s protest. “Have never taken the remotest interest in political activity, happy to do my day’s work, collect my few bob, relax into the bosom of friends and family, and let our leaders — elected (politics) and unelected (civil service, banking etc.) — get on with running the country.” You have had your belated Road to Damascus epiphany. I suppose better later than never. The reality is that the ‘dormant crowd’ subscribe to your former-self description. Do yourself a favour and return to the crowd. “You… Read more »
Discussion of Richard Portes on default here:
http://www.irisheconomy.ie/index.php/2011/04/26/richard-portes-on-irelands-debt/#comments
VB 26th April, a Lady named Noonan:
Just saw it, and I also saw this Lady Noonan appear again, what is that all about?
Her undereducated conformist blows are an insult to intelligence, but it seems they are keen to keep a reactionary pet in store.
…shrugs again….
{
In a game of poker, you have two minutes to figure out who the fool is. If you haven’t figured out who the fool is after two minutes, the fool is you.
}
We had Brian Cowen playing poker for Ireland. Hence we are the fool.