Anglo armageddon is a myth- McWilliams

Tim Robbins

I'm not a big McWilliams fan but this seems a reasonably argued piece to let Anglo go...

http://www.thepost.ie/commentandanalysis/anglo-armageddon-is-a-myth-48370.html

David McWilliams wrote:

The reason Anglo Irish Bank should be let go is simple: defaulting now will make no difference whatsoever to Ireland’s economic performance in the future. In contrast, keeping it on life support will cost us dearly. So shut it down and repudiate the debts.

The reason I am so sure that this will work is that, unlike most people making the decisions in Ireland, I worked in the defaulted debt market in the 1990s. I was the economist in a trading team at French bank BNP, which restructured defaulted debts, found new buyers for these debts and, in so doing, opened the door to those defaulting countries so they could come back into the international fold.

As far as I am aware, none of the people who are maintaining that we cannot default and must write a cheque to pay for Anglo’s misadventure have any such experience of working in defaulted debt markets.

The lesson is that the financial markets always forgive countries that default. There is always a deal to be done and, while it is not pleasant and negotiations can get heated, deals are done.

I worked in what was called the Brady bond market, which was a scheme hatched by US treasury secretary Nicholas Brady.

The Brady bond market was an enormous multibillion dollar market which financed and nursed back to health countries that defaulted in the 1980s and 1990s.This market flowed from deals done by defaulting debtors and their creditors.

For all the warnings of disaster, the banks realised that it was not in their interest to shut out Russia, Brazil and Mexico indefinitely. Banks always finance opportunity, so while they might not like being defaulted on, they see this as part and parcel of the game of capitalism.

This is why the idea of co-responsibility is so fundamental to a market, the lenders are as culpable as the borrowers and the taxpayer has no business getting involved.

This is why we should let the guarantee lapse and do a deal with all the creditors of AIB and, in the case of Anglo, simply default and force the creditors to come up with a ‘take it or leave it’ deal. We can also sell the deposits of Anglo to one of the bigger banks to protect depositors.

If you are worried about such a course of action and are persuaded by the rhetoric of the government, let me show you how debt default is not the end of the world. Let me show you how things can change and how yesterday’s defaulter becomes tomorrow’s star.

Goldman Sachs - the most powerful bank in the world - says that four countries will dominate the next 20 years: Brazil, Russia, India and China. Known as the BRICs, they are the stars of tomorrow. This is now received wisdom in much of the financial markets. But it wasn’t always like that.

Ten years ago ,two of these countries were regarded as basket cases that would never fulfil their potential after they defaulted. Brazil and Russia were regarded momentarily as pariahs. What if I told you that just over a decade ago, the team I worked with bought Russian bonds that were trading at 7 cents on the dollar.

What if I told you that we traded Brazilian bonds at less than 30 cents in the dollar? What if I told you that within four years these bonds had been redeemed at par?

All this happened and no one thought of what was said before or during the defaulting crisis when prices started to rise again.

Before the default prices collapsed but once the countries actually defaulted, the markets concluded that phase was over.

The ‘event’ had happened and then money flowed back into the countries enabling the countries to recover.

Now, ten years later, these two former pariahs are stars and destined to inherit the future. And what happened to the investors who lost money in Russia and Brazil? Many of them licked their wounds, wrote off the losses and got back in for the new ride, hoping to make money in the upswing to cancel out the losses they made in the downturn. That’s how capitalism works.

Financial markets are forward-looking. For the investor, it is always about tomorrow and there is always new money for the right investment. The idea that the world will shut the door on a country in trouble is so false as to be laughable. This is not how the financial markets work. Unfortunately, the people warning us of armageddon if we let Anglo go have no experience of the defaulted debt markets and, thus, really don’t know what they are talking about.

What is particularly galling is that in many cases the people saying there is no alternative to bailing out Anglo are the same establishment and financial markets figures who reassured us that the property market would achieve a soft landing and that the Irish banks had been ‘stress tested’ against a property collapse anyway.

They hadn’t a clue then and it would be the height of stupidity to believe them now.

When President Franklin Delano Roosevelt, in the middle of the Great Depression, took the US off the gold standard and defaulted, the warnings were that this would bring the entire American economy down. Roosevelt was aware of the arguments, but defaulted anyway. By taking the US off gold, he was saying to the creditors: ‘‘you will no longer be paid in gold but in dollars."

At the time, the lawyers, civil servants and bankers forecast chaos and mass panic in the US. In the event, the opposite happened. The day the US default was made legal, the financial markets rallied, the Dow soared and the bond market rallied.

Why did this happen? It happened because forward-looking investors realised that the US would be bankrupt if it tried to pay all the bad loans on the banks’ balance sheet and therefore, it was better for everyone that it took the pain now and lived to fight another day. Guess what? The US recovered and no one mentioned the default again.

The same will happen here. The financial markets want to see that Ireland is going to grow again. They want to invest in us, in our real abilities, the abilities of the people. Therefore, they want to see a strategy for growth. What they are seeing now is an illegitimate strategy, with no public support, which will turn Ireland into a large debt-servicing agency.

The problem with this is that so much debt undermines the potential of the people and risks yet another debt crisis. As a result, the money that could be invested in Ireland will stay away because the risk in Ireland has been heightened - not reduced - by Nama and the government’s banking policy.

The markets want to see the government giving the people of Ireland a chance. If that chance is facilitated by a default, the markets will support us. Investing is, like a second marriage ‘‘the triumph of hope over experience’’; we quickly forget the messy divorce and move on, armed with the hope that next time it will be better.

The history of bank defaults, repudiation and renegotiation reveals that human nature doesn’t really change. We march into the future full of confidence despite recent experience, because that is what humans do.

Discuss...

AlekSmart

Discuss...

Like Tim Robbin`s I see a great degree of common sense in D Mac W`s opinion

However any real discussion of currrent Government policy on Anglo Irish particularly is stymied by the continued refusal of the Brian`s and their Senior Civil Servants to reveal the path of reasoning which led us to the current impasse.

The continuing obsession with keeping the contents of the late-night Banker/Minister meeting secret is only feeding the furnace of suspicion that dodgy-dealings are afoot....well,dodgier dealings then....:mad:

Zynks

The bottom line is quite simple. Debtors know that if we have too much debt our economy will suffocate and they will have less or no business from us. If we have space to breath, then we are more interesting customers.

Another angle is that investor that lend to the banks are grown up people who knew there were inherent risks. Does anyone really believe that the only reason why they lent the money was because they were counting on the Irish economy taking the bill if things went wrong? I don't think that was part of the deal, and truly don't get it at what point that became our problem.

conorhal

More guff and nonsense from McWilliams as he once more compares apples and oranges, "which is loike a TOTALLY valid comparison loike because I once worked on an apple stall outside a London bank during the 1980's loike".

"The lesson is that the financial markets always forgive countries that default. There is always a deal to be done and, while it is not pleasant and negotiations can get heated, deals are done."

Not in this current climate Dave or have you not been paying attention to Greece lately? We are not Sweden in the 90's (one failing nation with a very specific and quantifiable structural weakness, exposure to the collapse of the USSR). These are unprecedented times, with risks and pitfalls for bond holders not just in this market, with this one bank, but broadly across the entire economic system. Bond holders are not intrested in risk at the moment, only returns from solid investments.
That means if Ireland were to default it would deal a terrible blow to our ability to raise capital if we were to destroy any confidence in our economy that the markets currently have.

"For all the warnings of disaster, the banks realized that it was not in their interest to shut out Russia, Brazil and Mexico indefinitely. Banks always finance opportunity, so while they might not like being defaulted on, they see this as part and parcel of the game of capitalism."

Pointing out the blindingly obvious here, but we are not Russia, Brazil or Mexico, we are not a large market place with cheap labor and vast natural resources, we are simply too small in the scale of things to expect leniency. Unlike the BRICKS mentioned, nobody ever has, or ever will, refer to Ireland as a future economic power house driving the world economy. There are certian bets that a punter is willing to take if the rewards are high enough and others that are just not worth it. Default would put us firmly into the 'just not worth it' category.
Ireland is like the small business owner as compared to, say, the United States bankrupt builder. The bankrupt builder that owes billions, is the banks problem. Ireland however, as the small business owner will get squeezed mercilessly by the same bankers simply because stripping us of everything we own is far less problematic to them. Nobody HAS to do business here and we are not systemically important and thus we would be fools to think that we might be treated as if we were.


"Financial markets are forward-looking. For the investor, it is always about tomorrow and there is always new money for the right investment. The idea that the world will shut the door on a country in trouble is so false as to be laughable. This is not how the financial markets work. Unfortunately, the people warning us of Armageddon if we let Anglo go have no experience of the defaulted debt markets and, thus, really don’t know what they are talking about."

Now I really am pissing myself laughing. If financial markets were so 'forward looking' then you would think that they might have spotted this crash coming. No, the markets it seems behaved like drunken gamblers in Vegas displaying such short term, fast buck thinking and weak stratigic planning that they almost wrecked the world economy, so it's McWilliams really doesn't know what he is talking about. For example, he talks about the US defaulting during the depression and suggests we do the same as if our economies were comparable, which is nonsense, or the economic failures at the time were similar, which they are not. And who would take a risk with Ireland if we did? We don't have the potential for growth, or the scale of growth, that the US had at the time.
McWilliams is an economic snake oil salesman flogging his 'miracle tonic' to the people as a magical cure all, telling people what they want to hear. He's the Eamonn Gilmore of economics. Expedient, populist, prone to crap analogies and really bad puns ....oh, and he's frequently wrong.

Zynks

@conorhal, I think your view underestimates the proportion and broadness of defaults that will hit the investment community in coming years. I don't think they are, or should be, immune to the crisis. Their business is lending after all, and that has inherent risks.

If my assumption that several countries will be defaulting at some stage, I don't see why Ireland would come out worse off, in spite of being a small country.

The biggest problem in my view is that global economy has suffered from excessive availability of capital, and these defaults is one of the ways how this issue will be corrected.

The question in my mind is if we (Lenihan & co) will see that soon and try to renegotiate debts/ pay cents per euro now, or will we waste a large amount of funds before we accept that a full repayment of the debts of the failed banks is not a realistic proposition.

By the way, since you seem to know the market so well, would you mind enlightening us on a question that has been brought up many times here: who are these investors?

Dannyboy83

There were a few good explanatory posts recently by NESF on this topic.

Basically McWilliams forgot to factor in 2/3 of the liabilities iirc.
will try to dig it up.

EDIT: Here you go:
http://www.boards.ie/vbulletin/showthread.php?p=65241007#post65241007

nesf wrote: »

http://www.boards.ie/vbulletin/showpost.php?p=65258547&postcount=4
McWilliams is talking about defaulting on bonds. He doesn't deal with at all the other liabilities that must be paid and the amount of cash needed on hand to deal with this. He's be right if all or nearly all Anglo's liablilities were bonds owed to professional investors, but this is not the case.

jackcee

conorhal wrote: »

More guff and nonsense from McWilliams as he once more compares apples and oranges, "which is loike a TOTALLY valid comparison loike because I once worked on an apple stall outside a London bank during the 1980's loike".

"The lesson is that the financial markets always forgive countries that default. There is always a deal to be done and, while it is not pleasant and negotiations can get heated, deals are done."

Not in this current climate Dave or have you not been paying attention to Greece lately? We are not Sweden in the 90's (one failing nation with a very specific and quantifiable structural weakness, exposure to the collapse of the USSR). These are unprecedented times, with risks and pitfalls for bond holders not just in this market, with this one bank, but broadly across the entire economic system. Bond holders are not intrested in risk at the moment, only returns from solid investments.
That means if Ireland were to default it would deal a terrible blow to our ability to raise capital if we were to destroy any confidence in our economy that the markets currently have.

"For all the warnings of disaster, the banks realized that it was not in their interest to shut out Russia, Brazil and Mexico indefinitely. Banks always finance opportunity, so while they might not like being defaulted on, they see this as part and parcel of the game of capitalism."

Pointing out the blindingly obvious here, but we are not Russia, Brazil or Mexico, we are not a large market place with cheap labor and vast natural resources, we are simply too small in the scale of things to expect leniency. Unlike the BRICKS mentioned, nobody ever has, or ever will, refer to Ireland as a future economic power house driving the world economy. There are certian bets that a punter is willing to take if the rewards are high enough and others that are just not worth it. Default would put us firmly into the 'just not worth it' category.
Ireland is like the small business owner as compared to, say, the United States bankrupt builder. The bankrupt builder that owes billions, is the banks problem. Ireland however, as the small business owner will get squeezed mercilessly by the same bankers simply because stripping us of everything we own is far less problematic to them. Nobody HAS to do business here and we are not systemically important and thus we would be fools to think that we might be treated as if we were.


"Financial markets are forward-looking. For the investor, it is always about tomorrow and there is always new money for the right investment. The idea that the world will shut the door on a country in trouble is so false as to be laughable. This is not how the financial markets work. Unfortunately, the people warning us of Armageddon if we let Anglo go have no experience of the defaulted debt markets and, thus, really don’t know what they are talking about."

Now I really am pissing myself laughing. If financial markets were so 'forward looking' then you would think that they might have spotted this crash coming. No, the markets it seems behaved like drunken gamblers in Vegas displaying such short term, fast buck thinking and weak stratigic planning that they almost wrecked the world economy, so it's McWilliams really doesn't know what he is talking about. For example, he talks about the US defaulting during the depression and suggests we do the same as if our economies were comparable, which is nonsense, or the economic failures at the time were similar, which they are not. And who would take a risk with Ireland if we did? We don't have the potential for growth, or the scale of growth, that the US had at the time.
McWilliams is an economic snake oil salesman flogging his 'miracle tonic' to the people as a magical cure all, telling people what they want to hear. He's the Eamonn Gilmore of economics. Expedient, populist, prone to crap analogies and really bad puns ....oh, and he's frequently wrong.

+1.

You saved me a load of typing.

McWilliams forgot to tell us, whether we would default on the same day as we left the Euro.

It is hard for him to keep track of all the "solutions" he keeps proferring.

In fairness to him, he is not shy.

Of course, the people in out in Montrose will keep describing him as an "economist".

Byron85

jackcee wrote: »

+1.

You saved me a load of typing.

McWilliams forgot to tell us, whether we would default on the same day as we left the Euro.

It is hard for him to keep track of all the "solutions" he keeps proferring.

In fairness to him, he is not shy.

Of course, the people in out in Montrose will keep describing him as an "economist".

He's obviously a dentist with credentials such as the following:

Education

McWilliams attended Blackrock College in Dublin. He then graduated from Trinity College, Dublin, with a degree in economics, as well as from the College of Europe, Belgium (late 1980s).
URL="http://en.wikipedia.org/w/index.php?title=David_McWilliams&action=edit&section=3"]edit[/URL 1990 through 2002

Between 1990 and 1993 he worked as an economist at the Central Bank of Ireland.[6] At 27, McWilliams moved to London to work at UBS in emerging markets analysis.[7] [8] At the ages of 30-31, still in London, McWilliams worked for Banque Nationale de Paris.[9] From 1999 to 2002, he was an emerging markets strategist with a New York-based hedge fund, Rockwest Capital.[10]

I assume your own credentials are up to scratch or superior than his? He may not be right all the time and he may have some "whacky" ideas, but at least he's doing something and putting forward some ideas and thoughts. At least give him some credit.

conorhal

T.W.H Byron wrote: »

He's obviously a dentist with credentials such as the following:

I assume your own credentials are up to scratch or superior than his? He may not be right all the time and he may have some "whacky" ideas, but at least he's doing something and putting forward some ideas and thoughts. At least give him some credit.

These would be very same 'expert', 'insider' credentials possessed by the very muppets that created this ruinous mess in the first place. I for one would take financial advice from my dentist before I'd take it from those greedy, coked-up gamblers. He at least has held on to his yacht.

Personally I have no time for Mc Williams and no inclination to give him credit for putting forward his 'ideas' which consist mostly of McWilliams postulating some daft strawman argument and then falling in love with the sound of his own voice.

BANZAI_RUNNER

in my opinion, Lenihan and co are following their gut instinct on this , but the problem with that is when you follow your gut you make any evidence / opinions fit your plan and disregard everything else

Liam Byrne

jackcee wrote: »

Of course, the people in out in Montrose will keep describing him as an "economist".

At least he's more deserving of the title than Lenihan & Cowen.

problemchimp

Just a question on "saving the bond holders investment" by pumping more into Anglo Irish. Most of the bond holders are hedge funds in the U.S. So why should we tax payers have to save their investment? After all they are the ones who took a chance on this horse and lost. But now it seems they are getting their money back. A free bet on a horse that's good for glue?It just doesn't make sense, they must be laughing their arses off and guzzling champagne.