Having handed the keys to Ireland’s silver to the ECB…

MOrgan Kelly is back in the Irish Times telling it like it is. And it’s not pretty. The question of why Fianna Fail/Green government chose to bail out high risk investors in Anglo (that notorious subordinated debt) to the tune of £9 billion is now a mere academic question for historians, or investigative journalists and/or restless bloggers. Ireland PLC no longer has that option. Kelly explains:

September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.

Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge.

Kelly reckons the winners were the French and German banks who (like they had in Greece) had massive exposure to the wave of irresponsible lending of the Irish banks. They are now saved, even as the Irish taxpayer now has to take the burden:

Between them, AIB and Bank of Ireland had the same exposure to developers as Anglo and, to the extent that they were scrambling to catch up with Anglo, probably lent to even worse turkeys than it did. AIB and Bank of Ireland did start with more capital to absorb losses than Anglo, but also face substantial mortgage losses, which it does not. It follows that AIB and Bank of Ireland together will cost the taxpayer at least as much as Anglo.

Once we accept, as the Government does, that Anglo will cost the taxpayer about €30 billion, we must accept that AIB and Bank of Ireland will cost at least €30 billion extra.

He makes mention of a spreadsheet he prepared last year which estimated the losses of Anglo at €38 Billion. Since, after all the shuffling of governmental feet that’s occurred it now comes in at €34 billion one wonders why the government could not have come up with a truer picture sooner.

Since Kelly had also AIB coming in with €37 billion last year, it does not augur well for the scale of future liabilities, and may be just one reason why the Irish government’s credit rating is now equivalent to that of Pakistan.

Scary stuff. But not as scary as the way he ends up pointing to the real demographic time bomb: the mortgage default tsunami amongst the under 35s:

The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.


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  • John Ó Néill

    I began my week by reading Morgan Kelly’s piece first thing this morning. I’m still traumatised. The only words he left our were armageddon and apocalypse.

  • Alanbrooke

    FF have pulled the roof down before they go.

    How does Ireland get out of this ?

  • pippakin

    The next GE is definitely not going to be the best one to win.

    I still say we should tell the banks to f—-.Oh well, too late. We gain independence, at enormous human cost, only to be sold for cash.

  • A.N.Other

    Clientelism; a tame and compliant media; a culture the chief characteristic of which is what Pierre Bourdieu “social silences.”

    There is little doubt that the country has been destroyed by a tiny minority, and that the majority have been neutered by the weight of their personal debt. They almost seem to believe the thesis that they lived the dream, and now they must pay the price.

    The absence of a metaphysical revolution is startling; the presence of people going around throwing hand grenades in the cause of a United Ireland, even more so. Although, perhaps it is, and always has been the case, that the Provos took the heat of the boys in power, when they had their fingers in the till.

    It should be remembered that Provo Inc lost an alleged 200m in the property crash; they were welcome players in the game.

  • Republic of Connaught

    Life will go on in little old Ireland as it always has. Hobbiton will remain ever blissful.

    Mass emigration, endless rain, mass whinging, mass drinking and lusty rebel songs calling for an end to the partition of our ancient lands will still be in full flow 20 years hence.

    Do not worry, Morgan Kelly. Ireland has been through a lot worse and survived.

  • Pete Baker


    Not to worry, Mick.

    The European Commission’s Internal Markets Commissioner, Michel Barnier, sees “light at the end of the tunnel…”

  • RepublicanStones

    Over at the WSJ, Oliver O’Connor seems to think we still have a ‘playable hand’. Seeing as it’s coming up to Xmas, surely we should live in hope…


  • Alias

    Morgan Kelly is an optimist. As some of us (realists) have been pointing out from Day One, the final cost to taxpayers of the the EU forcing Ireland to bail out the eurosystem will be in the hundreds of billions. And that is just the net cost, having no account of indirect costs.

  • Paddy Matthews

    Over at the WSJ, Oliver O’Connor seems to think we still have a ‘playable hand’. Seeing as it’s coming up to Xmas, surely we should live in hope…

    I will be my usual cynical self here, and point out two things:

    1. Until a month ago, Oliver O’Connor had been a political advisor to Mary Harney since 2001. Some of us might consider him to be one of the individuals who helped bring us to where we are at the moment.

    2. Oliver O’Connor has now decamped to London, where he will not have to live with the consequences of the policies pursued by the governments he advised.

  • pippakin

    RTE are reporting the Credit Unions will have to ‘adjust’ to the new reality…


  • RepublicanStones

    True Paddy, he could be simply applying lipstick to his own turd !

  • Itwas SammyMcNally whatdoneit

    Excellent piece. All very factual until

    “Why would the ECB impose such a punitive interest rate on us? The answer is that we are too small to matter: the ECB’s real concerns lie with Spain and Italy. Making an example of Ireland is an easy way to show that bailouts are not a soft option, and so frighten them into keeping their deficits under control.”

    This crucial paragrpah is clealry a matter of political opinion. It could have easily have read.

    “Why would the ECB not impose punitive interest rates on us? The answer is that we are too small to matter: the ECB’s real concerns lie with Spain and Italy. The last thing the ECB wishes to do is to allow a crack to appear in the Euro zone and encourage speculators and anti Europeanism”

    I suspect, as ever, the truth will lie somewhere in between.

  • Alias

    “You have read enough articles by economists by now to know that it is customary at this stage for me to propose, in 30 words or fewer, a simple policy that will solve all our problems. Unfortunately, this is where I have to hold up my hands and confess that I have no solutions, simple or otherwise.

    Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.” – Morgan Kelly

    It’s unusual for a professor of economics to think that Ireland had any “meaningful” sovereignty over economic policy after it signed the Maastricht Treaty.

    What does he think it means for a nation to transfer its sovereignty in its constitution from its national government to a supranational agency other than that the former no longer has the constitutional authority to exercise the transferred powers but must thereafter implement the policies of the latter (to whom the powers have been transferred)?

    Were the government to implement policies that are other than the policies determined by the supranational agency then the government would be acting unconstitutionally, and the Supreme Court could strike down any law or decision made by the government that was incompatible with the policy of the supranational agency.

    If you transfer your sovereignty to a supranational agency, and a conflict of interest later arises between your national interest and the supranational agency’s interest, then you shouldn’t be surprised when the supranational agency exercises your former sovereignty to resolve the conflict in its own interest. So while it isn’t in Ireland’s national interest that it should bail-out French and German (and, indeed, English) bondholders, it is in the EU’s interest that this should occur and so the government can’t do other than as it is directed to do by those who have the constitutional authority to exercise the applicable sovereignty.

    Even in areas of policy where the EU doesn’t have direct control, it nonetheless has “meaningful” sovereignty over other related areas of policy which means that the government must ensure that its other policies are consistent with the overall policy as determined by the supranational agency in pursuit of its own objectives. For example, if the monetary policy of the ECB is expansionist, then the government must ensure that its fiscal policies are consistent with that policy in order to ensure that the fiscal policy does not conflict with the monetary policy (as it would if the policy of the government was fiscally conservative or contractionist).

    That is why, for example, the Bank of England is nominally independent of the British government but is still legally obligated to follow the fiscal policy of the government. In contrast, the ECB has no legal obligation to ensure that its policies are consistent with the fiscal policies of the Irish government. That would be impossible anyway when there is one policy for all eurozone member states. What that means then is that the ECB tail wags the national dog, with the policies of the member states being indirectly controlled by the ECB even where there is no direct control in the treaty. Claiming that you have any “meaningful” sovereignty at all in that context is a deceitful exercise.

    However, there is a solution that will be considerably less painful than the one that out EU masters intend to impose on us: exit the EU. We can then return all sovereignty to the Irish state by removing the treaties from the Irish constitution, and introduce the emergency powers that would be needed to prevent short-term capital flight, reintroduce the Punt, re-denominate debts in euros into punts, default on nationalised eurosystem debts, etc.

    That would allow us to rebuild this state as a sovereign nation, creating Irish businesses and Irish exports that are not handicapped by an overvalued euro, etc. We would automatically save the billions every year that costly EU governance and over-regulation imposes on our economy, and we would also save the 6 billion in unprocessed fishing stock that the EU extracts from Irish territorial waters every year (with Ireland having lost over 300 billion to the EU since it joined it).

    As Churchill said to de Valera: “It’s now or never.”

  • Mick

    That last has been one of those things thats been coming since the start but Kelly has articulated clearly the mechanics of how it will be given effect.

    Put simply: as the baby boomers prospered their children’s apparently secure assets will effectively have been liquidised.

    Familial connections and the very scale of the problem might lessen any wider social effects.

  • Itwas SammyMcNally whatdoneit


    You may be right.

    ..if we didnt know you better you might be accused of dipping heavily into the SF’s little green economic book.

  • Mack

    Yep. It definitely erred on the side of pessimism.

    Default on a mortgage might allow lenders recourse to other assets (pensions and the like) in Florida as in Ireland, but bankruptcy laws are *very* harsh here – while I’m not familar with Florida, the US in general has much less harsh bankruptcy laws. I’d imagine we’d be more likely to see terms restructured than large scale jingle mail.

    Also, one of the central propositions of Reinhart and Rogoff’s ‘This time it’s different’ (http://www.amazon.co.uk/This-Time-Different-Centuries-Financial/dp/0691142165), is that countries don’t go bust like companies or individuals. And that countries being in default is nothing particularly unusual. One way to look at it is that the although the state can’t meet it’s obligations (either to it’s own citizens – pension, welfare liabilities, services, wages etc or to foreigners) the rest of the economy will remain operational. Once the outstanding liabilities have been defaulted on (i.e. reduced), the reduced debt burden doesn’t strangle the real economy. Debts that can’t be repaid, won’t be repaid. At the end of the day if we have to restructure outstanding debt (and remember even the USA did this in the early 1970’s when they abandoned the Gold Standard) it would make sense to just do that rather than strangle the economy as Morgan seems to suggest will happen.

    Anyway, given the recent performance of our current encumbants, I , for one, welcome our new European overlords. Willkommen to Greater Germany folks!

  • Seymour Major

    There is, of course, another piece of recent news, not mentioned in Kelly’s article which is extremely significant. At the weekend of Halloween, European leaders met to stitch up a deal for a new treaty, which will create permanent mechanisms for mutual financial support among all eurozone countries.

    Last May, following the crisis over Greece, a €750 bn fund was set up to bail out the indebted nations in the Eurozone. However, the scheme was never going to work unless there was some sort of permanent collective guarantee from the Germans. The Germans knew that if they did not make that commitment, they would, in turn, suffer as a result of overall financial instability in the Eurozone.

    However, the Germans were not going to just underwrite the indebted nations without taking control. Although the precise details and mechanisms have to be worked out for the proposed new treaty, it has been agreed that there will be controls over the tax, spending and borrowing of the nations within the Eurozone. In other words, the European Superstate is as good as being upon us.

    Ireland may be in dire straights. Yes, it may be insolvent but its economy is not going to collapse because Germany will allow it to. The Irish Government will effectively become administrators to their new masters in Europe. Irish people will be told to suffer in higher taxes and they will have no say in the matter. They may even have to forgo their jealously guarded low corporation tax. Ireland will be in permanent bondage. Smart people in Ireland will become fluent in German and buzz off abroad to look for a more prosperous life.

    That, of course, assumes that all sovereign states accept the proposed new treaty. It is understood that the UK will not block it or put the matter to a referendum because the new powers will only affect Eurozone Nations.

    I note that Alias, meanwhile, is making a case for leaving the EU. I suspect that as soon as the terms of this new future dawns on people, the voices that support it will become louder.

    “..we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America. Within five years, both Civil War parties are likely to have been brushed aside by a hard right, anti-Europe, anti-Traveller party that, inconceivable as it now seems, will leave us nostalgic for the, usually, harmless buffoonery of Biffo, Inda, and their chums.”

    This is an interesting prediction. I wonder who, amongst present politicians, are most likely to tap into these “upwellings” and lead this new political movement. Kelly’s prediction might look as though it is based upon what is happening in America but it looks more to me as though he is modelling his prediction upon the collapse of the German economy in the late 1920s. Perhaps Alias represents one of those “upwellings”

  • John Ó Néill

    The problem here, though, is that Kelly’s trickle of new mortgages somehow sustaining house prices is absolute nonsense. Most of those at risk of default have been too far into negative equity for too long that the position of the housing market is irrelevant to them – they can’t afford to sell if there were buyers. In a theoretical sense he is probably correct, but in reality there is no housing market, the banks are not lending in any meaningful way and the value of the property market to the overall economic picture is null.
    If significant default is on the horizon, society (and business) will end up adjusting to the reality and simply modify how it determines someone’s credit rating to ignore mortgage defaults. It is even hard to see how mass foreclosures will be of any value to the banks – if so many mortgages are not performing and they stop the tiny amount of lending they currently engage in – they will drive prices so low that they would not recover any meaningful price on the houses they have just foreclosed on anyway, so its a zero sum transaction for the banks. In that case the banks loan books will be so impaired that they will finally fail as neither the state nor the EU can bail them out.
    Perhaps Kelly, and others, might expend some energy on explaining how 70 billion euro has been lost – it is one thing to tell us that it was ‘reckless lending’ and speculation but for that amount of money a slightly more detailed breakdown would be of interest: e.g. Mr X borrowed Y amount from Anglo. He paid Z to Mr T for a property, P, and spent the remaining Y-Z on construction. He only sold Z/2 worth of property unit and the value of P is now (3/10) P and Mr X owes Y times the interest rate (R) minus Z/2 and 3/10P (presuming he can sell P).
    How come the Z paid to Mr T has disappeared from the financial system? And how come the remaining balances are being paid by the state (i.e. Mr X’s outstanding loan of {[Y x R] – [Z/2] – [0.30P, if he is lucky and sells]}) via NAMA – where have the numerous corresponding Zs gone? Basically, what percentage of the ’70 billion’ was paid onwards in property transactions and where did it all go?
    Alias is right – Euroscepticism will become a significant force in the near future if Kelly is remotely correct.

  • John Ó Néill

    For any pedants…

    [Y x R] – [Z/2] – [0.30P, if he is lucky and sells] should actually read [Y x R] – 0.8Z (since Z is the original value of P) – the mistake cropped at the end of the previous paragraph. I’ve not had any coffee yet.

  • Mack

    Seymour only a complete collapse of the Irish banking system could collapse the Irish economy as a whole. The ECB have thrown the kitch sink at the system to prevent any European / Eurozone bank collapsing and the government have transferred very many bank liabilities onto the national balance sheet (with a big chunk still outstanding by the looks of things).

    The Germans aren’t keeping the economy afloat (in fact as much of those dodgy bank loans are owed in the end to German banks there is a large degree of circularity here). They will set the terms for the debt repayment machine that the Irish state is fast becoming. Whether it’s fair that Irish taxpayers bear the brunt of the pain of ensuring that German banks don’t lose a cent on their Irish investments while Irish banks find their lending capacity to support the real economy severely reduced is another matter though..

  • Mick Fealty
  • Mack

    John –

    Asset values are notional, debt is real.

    The €70 billion is simply debt to banks in other European countires that can’t be repaid. It was borrowed using high property / land prices as collateral on the basis that development sales would enable the money to be paid back. Once one development was finished more money again was borrowed (classic Ponzi , Pryamid style) either to fund new developments or the mortgages for the buyers to purchase the newly completed ones (effectively vendor finance if you think of the banks as the vendors). They were borrowing more money from European banks every week to keep the pyramid scheme going. The difference, is just the outstanding debt at the end when the scheme bust.

    Most of the money that came into Ireland, left in repayments. Some of it will have wound up in other people’s pockets. We have property rights so they’re entitled to it now though. Including construction workers who enjoyed sky high wages for over a decade, workers in the financial services and public sectors as well as some lucky land owners of cashed out. Most of the developers simply doubled down on their gains.

  • Seymour Major

    Almost certainly, many of these repossessions will still leave a lot of people with unsecured debt. Perhaps something the Irish Government could tackle very easilty is the reform of Irish Bankruptcy law.

    Under that Law, a person who goes bankrupt remains undischarged for 12 years. In the UK, a bankrupt can be discharged after one year, depending on the circumstances.

    I know two people in ROI who have decided not to file for bankruptcy and instead, hope that their creditors dont sue them and become statute-barred.

    Surely the reform of Irish Bankruptcy law is urgent. If reform does not take place, far too many debtors will remain in a state of limbo and too many creditors will throw good money after bad for too long before finally writing off a debt. Too many people will not be able to move on with their life. That would be bad for the economy too.

  • Seymour Major

    They will set the terms for the debt repayment machine that the Irish state is fast becoming.

    Agreed. The question is how much money will the Germans commit to writing off Irish debt and how much will they expect the Irish taxpayer to bear the brunt?

    These are serious political questions. Ireland has to be given a path towards light at the end of the tunnell. If the strain on Irish taxpayers is too great, severe discontent and anti-Europeanism in Ireland will gather apace.

  • John Ó Néill

    That’s my question though – is this notional 70 billion (it is all only ever written down on paper) the net diferential between the amounts borrow and accumulated interest etc and the current real value of the assets (i.e. property).
    I have heard suggested, in some instances, that a developer paid X for some Dublin city centre property to an investment group who, via another arm of their operation, effectively bankrolled the loan via a bank. Not only did they get the principle from the sale but they are now being re-paid (more or less) the full loan amount plus interest by the taxpayers. I’m sure that is an unusual case, if it is true, but in wider terms I just don’t see detailed enough public accounting of what happened beyond sound-bytes. Given that the impaired transactions largely fall within a period of few years (maybe 2002-2008 at worst), a net write-down of a bout 10-12 billion euros per year just looks suspicious, even for the crooks involved. I think most economists have their eye more on the Christmas book market than providing some valuable analysis to the taxpayers.

  • SDLP Man

    Alias’s contribution is pie-in-the sky economics mixed with paranoid Serbian-style ‘the whole world’s agin us’ nationalism.

    There’s no use railing against the EU and its institutions. The mistakes the Irish made were their own: clientelist politics, cute hoor economics, electing clowns and crooks into government again and again and letting morons and criminals, as MK says, run the major financial institutions .

    We gorged ourselves silly on cheap money. We should be mature enough as a nation not to look for scapegoats outside ourselves. If we elected massively incompetent governments, we should shoulder the blame ourselves.

    Alias wants Ireland to leave the EU, something that has never been done before, completely unprecedented. How will that work? How will Foreign Direct Investment supporting around 100,000 jobs react? What happens if the EU reacts retaliatory tarrifs against Ireland?

    At present Ireland has one of the most open economies in the world, which has many advantages and some disadvantages. Using Alias’s “emergency powers” to “prevent short term capital flight” would remove the open
    economy advantages at a stroke and Ireland would fall into the category of Hoxha’s Albania or Castro’s Cuba.

    The hard truth is that in a globalised economy mad dog actions invite massive retaliatory actions and in economic terms Ireland is puny.

    Alias wants to reintroduce the Punt. Actually, it would be more sensible to restore the link with Sterling. The UK has, in fiscal terms, has had a reasonably good crisis, reflected in the exchange value of sterling.

    Would Alias care to suggest/predict what the value of the Punt would be against a basket of international currencies? The truth is that the markets would determine the rates, not the Irish government. Ireland’s liabilities are denominated in Euros, etc. and they will have to be re-paid on those currencies and neither Alias nor anyone else has the slightest clue as to what the Punt exchange rate will be.

    Finally, Alias wants Ireland to renege on its international debt (sky-high because of the stupid bank guarantee). If that happened, why would anyone lend a cent to us in the future. At present Ireland is borrowing €18.5 billion annually to fund current public spend. Where will that money come from?

  • John East Belfast


    You raise an interesting point about where the money went and something I ponder myself.

    If somebody paid £150m for something that is now worth a fraction of that then somebody else has trousered the difference.

    A lot of very canny/lucky people made a killing out of the property boom and are sitting on a pile of cash.
    A lot of them of probably fled the country.

    However what I would do is have the Rvenue Commissioners plough through all Individual and Corporate Capital Gains Tax Returns of the last 10 years and slap a big retrospective tax on it. It is clear the Gains were virtual and as the taxpayer is picking up the bill then the people who gained should cough up.

  • Driftwood


    A lot of countries are up the swanee and not all are going to come down it. The only way to achieve growth is to beat the competition. A hapless government and a bloated self serving public sector are in denial of the lack of a paddle.

  • Mack

    Not sure about that one JEB – a retrospective tax changes the attractiveness of the business proposition – but the person being taxed can’t back out of the transaction and get their land back. Each sale / contract was entered into on the basis of it’s profitability within the tax regime that applied at the time.

    Anyway, how to disaggregrate those who are still loaded, and those who blew the winnings (doubling down)? It would send more people into bankruptcy and would almost certainly be subject to legal challenges..

    We can’t change business rules after the fact, and if we did what signal would that send? That if a foreign multi-national is successful and we’re in trouble that we’ll retrospectively jack up their tax rates?

  • Neville Bagnall

    +1 for all that, SDLP Man.

    The only reason to reintroduce the Punt would be to allow a massive devaluation. However since our debts would remain denominated in Euros it is pointless. If we are going to default, its better to default inside the eurozone. As for the idea that we would do better outside a trading block – relying on WTO rules – than inside one, that is frankly mind boggling. The only reason to leave the EU is if the UK does. And even then, since UK trade has dropped to 1/3rd of all our trade and the rest of the EU also makes up 1/3rd, we have far less reason to follow the UK out now than 25 years ago.

    Ireland has spent most of its independence in a currency union. First with sterling until 1979, then with Europe from the mid 90’s. For most of the intervening period the value of the Punt dropped, either steadily or via devaluations. The idea that an independent currency was or would be the country’s economic saviour is a pipedream. Likewise the idea that protectionism in any of its forms will turn the current Irish economy around is completely counter-factual.

    This problem was not created abroad. We had a classic property bubble. Full stop. Particular factors exacerbated the impact of that on the wider economy, but they were almost all our own sovereign fiscal decisions. That property element of our problems will not be resolved until property prices return to realistic levels. I think (working from memory here) that the more reliable economists have estimated that level as 1/3rd of the peak level.

    That obviously has huge implications for existing mortgage holders.

    There have been economists warning for a couple of years now that the private debt problem was bigger than the public debt problem. Now that the bank problem has made the public debt problem moot (by bankrupting the country) we are now faced with the bigger issue.

    As I see it there are two options. Widespread restructuring or widespread bankruptcy. I’m not sure which are preferable.

    If bankruptcy is to be the route, we need a new bankruptcy law. The Financial Regulator has already called for it, but there is no sign of our do-nothing Oireachtas acting on it. Widespread bankruptcy will affect bank liquidity, requiring further investment in the banks, and upping our sovereign debt.

    The other alternative is hardly more appealing. In order to live on reduced incomes due to wage cuts and increased taxation, many, if not most, people who got a mortgage in the last decade will have to restructure their debt to reduce repayments. Most likely by switching to 50-60 year mortgages. Again this would lead to bank liquidity problems and require further sovereign debt backed investments in the banks, and a legal framework to encourage it.

    ‘I have been told that the Government’s reasoning runs as follows: “Europe will bail us out, just like they bailed out the Greeks. And does anyone expect the Greeks to repay?”’ – Morgan Kelly.

    The normal inter-bank market is being purged of the toxic Irish debt. The bondholder have been repaid and no new debt is being issued by market participants. The ECB is financing Ireland. So if the Irish debt is defaulted or restructured, it may not now have a domino effect on other eurozone banks. The ECB can afford to refinance Ireland, public and private. It couldn’t resolve a crisis where German and French banks were going bankrupt. Its worry is to stop the refinancing game before it gets to Spain or Italy. It can deal with Ireland. It could deal with Portugal. The Greek domino fell. Ireland has passed the tipping point but could take another 6 months to hit the floor. Will Ireland topple Portugal?
    Will Portugal topple Spain? Delay, delay, delay and hope.

    The bet the Irish Government seems to be making is that in return for purging the inter-bank market of Irish toxic debt, we will be able to get the ECB to write off the now sovereign bad debt when the crisis passes.

    Maybe it will work. If it doesn’t, and we only get a restructuring, our grandchildren will be making repayments for the profligacy of Champagne Charlie and Blundering Biffo, and all our arrogance and pride.

  • Seymour Major

    The only way to achieve growth is to beat the competition./em>

    I agree with the thrust of that Article which you have linked to. Beating competition is easier if your currency goes down. Unfortunately for Ireland, Sterling and the Dollar are going in the wrong direction.

    As the Article says, there is a limit to how much a Nation can import and if there are no importers left, the Exporting Country suffers violent economic downturn.

    The UK and Britain, hitherto, have been high net importers. It is also no co-incidence that they are also nations with a very high percentage of home ownership.

    Until recently, in the UK and US, it has been easy to obtain mortgages with a high loan to value ratio. The result is that more people are able to buy their property and prices go up. When prices go up, there is more equity in a property. The second phase of lending (the re-mortgage) then becomes the lightening conductor for consumer spending and thus imports. Many people use re-mortgages to pay off credit card debts as well.

    In Germany, only 39% of people own their own home. In the US it is 64% and in the UK 68%. The trouble is, those mortgages have to be paid off and it will take a long time for the gearing ratios to come down through mortgage re-payments.

    Since the end of the recession in the UK, net imports shot up. In the last four months, house prices have been falling in the UK again as that market experiences a double dip. Very soon, you will see net imports showing a decline again.

    The UK is now, for the first time in more than a generation going to require its export sector to drive growth in the economy.

  • Seymour Major

    Sorry I neglected the angle bracket <

  • DC

    Welcome back Mack.

    So Irish neutrality pays off after all – well sort of!