There is no alternative?

Ciarán O’Hagan a bond expert at Société Générale, Paris has a guest post on Irish Economy. It’s an illuminating read, from the perspective of a bond market practitioner critical of NAMA. One of the pro-NAMA arguments he explodes is the notion that the bond market won’t tolerate a default by the banks on their obligations to their bond holders. Ciarán highlights the difference in the interests of the banks’ bondholders and investors in Irish government debt –

Foreign investors *in Irish sovereign debt* share much the same interest as the Irish taxpayer. They want to see the government extricate itself from liability for the banks, rapidly. At the same time, they need to see sharp cuts in the public deficit, and a banking system that works (even if that means, inter alia, flogging off the branch networks).
So if it is credibility of the sovereign you are talking about (the proponent of NAMA love to fudge this notion by the way) then we need more penny pinching policies. Policies more on the lines of what Fine Gael propose go in this direction.

If instead you want to be everybody’s best friend (the quintessential trait of the Irishman in foreign company), and you want to try to keep everybody happy (somewhat), at the risk of sinking the whole boat, … than sure, dole out money like there is no tomorrow (or as if on tap from the ECB ad vitam eternam).
These notions are hardly very difficult to understand, are they? Even for those outside the ivory tower? Even for non-economists?
And yet the press – mostly – assure the public there is no alternative.

International Credibility does not need NAMA, it needs determination

  • George Church

    Because, the press, mostly, is controlled, by the same people….it’s simply that most people forget to check!

  • Itwas SammyMcNally whatdoneit

    Mack,

    reasonable point – but surely the C word will come into play if one of the banks went under – it would not send out a very good message to investors and a further fall off in the magic ingredient confidence will only lead to further difficulties.

    I cant help thinking that if FF had argued against NAMA FG would have argued in its favour – and I’m not sure how many economists are in favour of NAMA to line up to confront the 46 who argued against it last week.

    Perhaps the government should rent out Croker for the afternoon and have a public economic debate followed by a few hours of questions from the stands.

  • Glensman

    That is a brilliant idea Sammy!!

    But seriously, I’ll never fathom why they didn’t just let a couple of banks go bust, surely the only people that would lose out would be shareholders and creditors?

  • Dewi

    A bond expert eh….let’s just listen to them shall we – like they got it right….

  • There are two interesting quotes to compare here. The first is one included in the article:

    “Alan Ahearne in Sep 2007 put it eloquently, “Japan’s biggest problem was that they attempted to sweep the consequences of the housing bust under the carpet”, adding “The Japanese wasted a decade-and-a-half arguing over how to allocate the losses, and their economy stagnated in the meantime. Let’s hope we don’t do that.” ”

    The second is:

    “Foreign investors *in Irish sovereign debt* share much the same interest as the Irish taxpayer. They want to see the government extricate itself from liability for the banks, rapidly. At the same time, they need to see sharp cuts in the public deficit, and a banking system that works”

    These show what may respond in some way to the author’s concern. Ireland, like the rest of the world, has had Japan’s experience to draw on – not only in financial, but equally in political, terms.

    The role of any governing party is twofold, and all believe both to be complimentary:

    1. To serve the nation’s best interests economically.
    2. To serve the party’s long-term interest.

    The problem with an honest, open approach at the beginning is that it may have shaken market ocnfidence even more than in the event. This has not stopped. And neither SG nor any other bank has provided a solution to this question. NAMA may not be concise or drastic enough for its critics, but they have to show that another option would be politically interesting.

    Which brings me back to “foreign investors *in Irish sovereign debt* share much the same interest as the Irish taxpayer.” Those foreign investors are not paid by the state, do not use the hospitals or schools. If you consider your children’s education to be a negligible factor, this statement stands up. To those who don’t you would have to provide a more convincing short-term answer, if you wanted to be the one actually deciding on the future of the deficit.

    The line on the press seems somewhat throwaway; I would be surprised if the competing interests were unified enough to present a single voice and have it carried.

  • Mack

    Ireland, like the rest of the world, has had Japan’s experience to draw on – not only in financial, but equally in political, terms.

    True. But there are big differences, Japan had / has huge foreign currency reserves, it had a low birth rate and therefore didn’t require economic growth to find large numbers of new jobs for it’s young, it was wealthy enough and highly innovative exporter enabling it to pay for it’s greying population. Unemployment in Japan is at new highs today at 5.7% (after 20 years!) we’re already over 12 (3 years after the property peak). They may indeed have figured out how to live well in a no-growth economy –
    http://newmatilda.com/2009/08/24/value-japanese-inefficiency

    Or – the elephant in the room – Japan isn’t out of the mire yet & after 20 years of struggling they’re in a worse condition than they were (debt-to-gdp ratio has skyrocketed, dependency ratio has significantly worsened reducing their ability to pay back that debt). So all they may have done is delay their day of reckoning – or rather unfairly passed the pain unto their children.

    The role of any governing party is twofold, and all believe both to be complimentary:

    1. To serve the nation’s best interests economically.
    2. To serve the party’s long-term interest.

    True, but they often become confused as to what is in the nation’s best interest. Booms offer powerful validation to those who preside over them, leaders may become psychologically attached to particular industrial sectors and believe the best interests of the sector is synomous with best interest of the country.

    http://sluggerotoole.com/index.php/weblog/comments/the-quiet-coup/

    http://sluggerotoole.com/index.php/weblog/comments/rent-seeking-financial-instituitions-crippling-the-west

    Those foreign investors are not paid by the state, do not use the hospitals or schools. If you consider your children’s education to be a negligible factor, this statement stands up

    Again, true. But they do pay for/ invest in those hospitals and schools, and they do pay the wages of those who work for the state. If the bond vigilantes refuse to lend, services will have to be cut drastically. If they demand a higher yield to assume what they see as risky government behaviour a greater portion of that borrowed money will be spent meeting interest payments and not going to investment in schools and hospitals.

    The problem in Ireland is that the taxpayer is being asked to pay for huge mistakes made by private entities, those entities should be rights be bankrupt with their shareholders and creditors wiped out. If investors in sovereign debt have the same interests as taxpayers, then surely what we should be aiming to minimise the cost to the taxpayer (and risk to sovereign debt investors) at the expense of those who purchased the bonds of insolvent private entities?

  • “But they do pay for/ invest in those hospitals and schools, and they do pay the wages of those who work for the state. If the bond vigilantes refuse to lend, services will have to be cut drastically.”

    True, but they have have no vested interest in the long-term results produced by those institutions. The dichotomy can be viewed through this axis of conflicting interest, which in terms of maintaining momentum is similar to the exercise in timing of bad news that is NAMA.

    The nub of my point was, your long-term plan is useless if you can’t sell it to a worried electorate in the short-term. That will cost money. The more we realise spending cuts (alongside regulation reform) are crucial, the less time the politicos will have to waste.