New Twist In The European Bailouts: AAA Countries Want Some Collateral

thebman

AAA states in Europe want liens on the assets of the states they are bailing out, according to Irish finance minister Michael Noonan (via Bloomberg) (via Forexlive).


That means that Germany and France want the ability to takeover government owned assets from Greece, Ireland, and Portugal in return for the cash they are giving them in bailouts, if those states don't pay them back.

It's a bit like getting a loan from the bank and putting up collateral. Except no one trusts the sovereign debt of Greece, Ireland, and Portugal anymore, so they would rather have something real as collateral, like an island or a power company.

http://www.businessinsider.com/noonan-aaa-states-liens-2011-6

Thought this would have made its way over here at this stage from another irish politics website.

So should this really is the time to consider if our default is inevitable before we put up state assets to back what we say.

Are we willing to put our assets where out mouth is? Are we that confident we won't default?

It seems like maybe people getting are getting sick of the huffing and puffing of our government (and of the other peripherals) that we are cutting our deficit.

Personally I disagree with putting up state assets to back loans. Sell some of the more useless maybe and start actually cutting our costs in the areas costing us most so that we can survive on our own would be a smarter way to go about this.

Some are saying Morgan Kelly is right on the other politics website so lets see if boards users think.

pog it

thebman wrote: »

http://www.businessinsider.com/noonan-aaa-states-liens-2011-6

Thought this would have made its way over here at this stage from another irish politics website.

So should this really is the time to consider if our default is inevitable before we put up state assets to back what we say.

Are we willing to put our assets where out mouth is? Are we that confident we won't default?

It seems like maybe people getting are getting sick of the huffing and puffing of our government (and of the other peripherals) that we are cutting our deficit.

Personally I disagree with putting up state assets to back loans. Sell some of the more useless maybe and start actually cutting our costs in the areas costing us most so that we can survive on our own would be a smarter way to go about this.

Some are saying Morgan Kelly is right on the other politics website so lets see if boards users think.

We should have done exactly what Morgan Kelly said to do. Only 10% of Irish people said they were in favour of that and of course the Government wouldn't do what he advised.

We have no protests worth talking about and Irish people seem content to have a come what may attitude and take their chances. It's a lost cause when the Irish people are the way they are.

mrm

Ok, we'll put up FAS and Roscommon!

Duffy the Vampire Slayer

mrm wrote: »

Ok, we'll put up FAS and Roscommon!

We'd have to pay them to take Roscommon.

Prakari

If Germany and France attempted to buy up Irish state assets it would be considered financial imperialism and there would be huge political unrest. It will fail to pay out debts to these countries then people just accept it as deserving. This is the beauty of debt as a financial weapon; it transfers guilt to the victim.

Atilathehun

Give them our turf bogs:D Shure they cant cut any turf there, and two wet days in them, their holes will be so opened, the will be on the first flight out of Knock.

bbam

Apathy is a serious problem in Ireland (self included I suppose)
We will allow the current government to keep going down this line and they will put up the family silver to show just how committed to Europe they really are..

Will we do anything...no, I don't suppose we will

IF and I think it will all go wrong the government will throw up their hands blaming everyone/thing but themselves and then go on to draw down their pensions..

Will we do anything then...no, I don't suppose we will..


I don't see why we should have to put up state assets, the IMF & co helped formulate this plan, if the plan is crap it's as much their fault.

I really don't know what would bring people out to the streets, personally maybe if they foreclose on deposits I would sit up and look round..

Atilathehun

Billions of euros transferred by trusting Irish people to banks in Germany and France, for "safe keeping", lest Mr Noonan, decides to rob them at home, like he has robbed our pension funds.
Well, we need to realise if Noonan can do it, so too could the Germans and the French seize Irish deposits in their banks, if the organic matter were to become entangled in the fan:o

Chris_5339762

Give them Eircom.

z0oT

Article wrote:

The idea that Greece needs to pay its debt back to Germany, or face a takeover of one of its islands, seems a little too close to real empire building for anyone to be comfortable with it.

It's hard not to agree with that I think.

sollar

The germans obviously haven't given up on their quest for lebensraum.

Scofflaw

Can we manage serious answers, people? The AH stuff is what AH is there for - and it's a serious enough subject.

moderately,
Scofflaw

later12

Is there really a serious argument against such a move?

Why should any state - friend or not - expose itself to the level of debt that our European partners are exposed to, without asking for security on the back of such exposures? One cannot liquidate a state, and considering that gunboat diplomacy is not an option in the 21st century, this appears like a pretty reasonable request.

The only argument that would have any weight against such a move, in my opinion, would be that the sale or the breaking up of some of these assets might be impeded.

thebman

later10 wrote: »

Is there really a serious argument against such a move?

Why should any state - friend or not - expose itself to the level of debt that our European partners are exposed to, without asking for security on the back of such exposures? One cannot liquidate a state, and considering that gunboat diplomacy is not an option in the 21st century, this appears like a pretty reasonable request.

The only argument that would have any weight against such a move, in my opinion, would be that the sale or the breaking up of some of these assets might be impeded.

There is more than one argument really.

First would be that we will struggle to pay back the loans we have let alone loans that actually require security.

Also depending the security it is very risky especially given some of the messages from our "friends" in the EU such as France.

For instance, the sale of the ESB could cause major problems for future investment in this country if bought by the wrong company or controlled by the wrong states.

It requires serious consideration as to whether we should say no more IMO and make the major cuts necessary to get our budget back in order sooner to try to stop such a scenario.

I'm not against the sale of state assets where we can control who they are sold to but to use them as security on loans by countries saying we can't even consider rate reductions unless we change our corporation tax to harm ourselves is heading toward risky territory.

The people/states we previously believed to be our allies in the EU are showing we shouldn't place such trust in them at present so I think putting up state assets as securities on future loans would be a bad move.

later12

thebman wrote: »

There is more than one argument really.

First would be that we will struggle to pay back the loans we have let alone loans that actually require security.

First of all, we have no business raising capital that we do not genuinely believe that we can sustain, service and roll over. Four years after the celtic tiger, this should have sank in.

For instance, the sale of the ESB could cause major problems for future investment in this country if bought by the wrong company or controlled by the wrong states.

The ESB would not be controlled by these foreign governments, they would just exercise the lien to sell the asset.

I'm not against the sale of state assets where we can control who they are sold to

If we were to offload semi states we would not necessarily be able to control who bought them.

Scofflaw

thebman wrote: »

There is more than one argument really.

First would be that we will struggle to pay back the loans we have let alone loans that actually require security.

Usually, states don't pay back debt - not unless they're really rolling in cash. Even during the boom, Ireland paid down none of the debt that was crippling it in the late Eighties. Instead, the debt is rolled over into new debt.

thebman wrote: »

Also depending the security it is very risky especially given some of the messages from our "friends" in the EU such as France.

For instance, the sale of the ESB could cause major problems for future investment in this country if bought by the wrong company or controlled by the wrong states.

For all of Sarkozy's posturing, I think that's not really a major worry. I wouldn't expect the French to threaten to cut off the electricity, if that's what you're suggesting.

thebman wrote: »

It requires serious consideration as to whether we should say no more IMO and make the major cuts necessary to get our budget back in order sooner to try to stop such a scenario.

If it were that easy...

thebman wrote: »

I'm not against the sale of state assets where we can control who they are sold to but to use them as security on loans by countries saying we can't even consider rate reductions unless we change our corporation tax to harm ourselves is heading toward risky territory.

The people/states we previously believed to be our allies in the EU are showing we shouldn't place such trust in them at present so I think putting up state assets as securities on future loans would be a bad move.

Yet France still is our ally when our interests coincide, as in anything agricultural, where the British are usually our opponents. They've nearly always been our opponent (and the British our allies) on financial matters.

It's not a non-issue, certainly, but the problem with your arguments against it is that they only work for Ireland, and as such, they're not persuasive given the position we're in, because they're not an argument as to why the lending countries don't need securities. It's not as if we haven't made a lot of noise about default, and others have done so on our behalf - why would the lenders not look for securities? And if we don't default, the issue is effectively irrelevant.

Obviously, I've made it clear elsewhere that I don't think we'll default, so there's no reason for these securities to be called in . If we were really in a position where we were likely to default, we would find ourselves being pressed to take another bailout, I think, just as Greece has been.

cordially,
Scofflaw

beeftotheheels

I think, as with all things financial, it will come down to pricing. The general rule is that asset backed debt is cheaper, because it offers the lender more security, and thus less risk. What then also comes into play is the ability of the securitized asset to service its own debt repayments.

If our lenders were to lend against the current value of our assets, depressed as they are by the potential global financial crisis mark II, and the risks the hugely illiquid bond markets are appearing to price into our debts then it might not be a great idea.

However, could our lenders be persuaded to take a longer term view of the prices of our assets, then it could be a good thing. Let's assume that ESB would have been valued at €2bn in the summer of 2008 but is now valued at €1bn because of all this intangible risk. If we could borrow €1bn backed by ESB it would not be a great thing since we could expect to realize about €1bn by selling ESB tomorrow (even though we would believe we were selling it cheap).

The amount a rationale creditor will lend against an asset does not simply reflect the inherent value of that asset (since most financial investments would struggle to prove their inherent value) but rather reflects the ability to service and ultimately repay the debt.

If we could borrow €2bn tomorrow against ESB, and the ESB profits could be expected to service the debt on that borrowing, then it could be a good thing for both Ireland and our creditors.

It stops us having to sell ESB on the cheap in a weak market while still allowing us realize the value of ESB, it gives our creditors more security in their lending which should be reflected in the interest rate.

P. Breathnach

beeftotheheels wrote: »

I think, as with all things financial, it will come down to pricing. The general rule is that asset backed debt is cheaper, because it offers the lender more security, and thus less risk. What then also comes into play is the ability of the securitized asset to service its own debt repayments.

If our lenders were to lend against the current value of our assets, depressed as they are by the potential global financial crisis mark II, and the risks the hugely illiquid bond markets are appearing to price into our debts then it might not be a great idea.

However, could our lenders be persuaded to take a longer term view of the prices of our assets, then it could be a good thing. Let's assume that ESB would have been valued at €2bn in the summer of 2008 but is now valued at €1bn because of all this intangible risk. If we could borrow €1bn backed by ESB it would not be a great thing since we could expect to realize about €1bn by selling ESB tomorrow (even though we would believe we were selling it cheap).

The amount a rationale creditor will lend against an asset does not simply reflect the inherent value of that asset (since most financial investments would struggle to prove their inherent value) but rather reflects the ability to service and ultimately repay the debt.

If we could borrow €2bn tomorrow against ESB, and the ESB profits could be expected to service the debt on that borrowing, then it could be a good thing for both Ireland and our creditors.

It stops us having to sell ESB on the cheap in a weak market while still allowing us realize the value of ESB, it gives our creditors more security in their lending which should be reflected in the interest rate.

A bit NAMA-ish, don't you think? Depending on long-term economic value.

beeftotheheels

P. Breathnach wrote: »

A bit NAMA-ish, don't you think? Depending on long-term economic value.

But nothing financial has an intrinsic value. At its most basic a piece of paper is worth what €0.02 to print?

An asset only has a value that the market can be expected to attribute to it. Let's look at the ultimate, crazy, top of the market, largest European take private ever - Alliance Boots.

SP believed that the markets undervalue his group, he believed that the markets were pricing AB as being fundamentally Boots with a retailer's margins, rather than as being fundamentally Alliance Unichem with a distributor's margins. AB was the definitive cov-light deal in Europe http://www.ft.com/cms/s/0/546904e4-0ed6-11dc-b444-000b5df10621.html

So with a few pre-trading raids SP and KKR took AB private, at the top of that market and on some of the loosest possible creditor terms.

Yet AB continues releasing public accounts which they are not obliged to publish, I suspect because SP wants to thumb his nose at the markets to reitterate how much they had under priced his baby. No one knows what AB is worth until it goes public again, but it looks like AB is having no problem servicing its debt, indeed it has deleveraged.

Financial assets are only worth what someone believes them to be worth, and in the case of AB what the executive deputy chairman could convince a private equity firm, but could not convince the markets it was/is worth.

P. Breathnach

beeftotheheels wrote: »

But nothing financial has an intrinsic value.
...
Financial assets are only worth what someone believes them to be worth, and in the case of AB what the executive deputy chairman could convince a private equity firm, but could not convince the markets it was/is worth.

So you do not believe unconditionally in the wisdom of the markets? You accept that the values of the net assets represented by market instruments might be misjudged in the short or the longer term by those who buy and sell financial instruments?

Some purists here will be terribly shocked by your economic heresy.

dan_d

P. Breathnach wrote: »

So you do not believe unconditionally in the wisdom of the markets? You accept that the values of the net assets represented by market instruments might be misjudged in the short or the longer term by those who buy and sell financial instruments?

Some purists here will be terribly shocked by your economic heresy.

??

Everything's relative (yes, I'm repetitive). Things have a perceived worth...relative to market conditions, economic conditions and a whole raft of other things.

Seems like a funny thing to demand collateral against bailout loans. I cannot, to be honest, see how it would work to put up state assets against loans. Tell you this much, if the French or the Germans were being asked to do it themselves, they'd tell whoever was asking where to put that suggestion. It seems extremely wrong on so many levels - and I've nothing to base that on other than gut instinct. It doesn't seem likely that the worth of our state assets would balance out against the loan amount. Nor the Greeks or the Portuguese.

D'you reckon this article has anything to do with it??
http://www.irishtimes.com/newspaper/finance/2011/0610/1224298690992.html
I'm probably reading too much into it, but might "other suggestions" mean something along the lines of collateral? Or am I way off in my thinking?

beeftotheheels

dan_d wrote: »

??

Everything's relative (yes, I'm repetitive). Things have a perceived worth...relative to market conditions, economic conditions and a whole raft of other things.

Seems like a funny thing to demand collateral against bailout loans. I cannot, to be honest, see how it would work to put up state assets against loans. Tell you this much, if the French or the Germans were being asked to do it themselves, they'd tell whoever was asking where to put that suggestion. It seems extremely wrong on so many levels - and I've nothing to base that on other than gut instinct. It doesn't seem likely that the worth of our state assets would balance out against the loan amount. Nor the Greeks or the Portuguese.

D'you reckon this article has anything to do with it??
http://www.irishtimes.com/newspaper/finance/2011/0610/1224298690992.html
I'm probably reading too much into it, but might "other suggestions" mean something along the lines of collateral? Or am I way off in my thinking?

2 points.

1. Risky borrowers often have to borrow against security when less risky borrowers do not hence the French and Germans don't have to. It is all about risk.

2. I think that there is a lot of chatter about the JLCs and the prospect of a back bench revolt is upsetting the Troika so my reading of it was that the JLCs could be the issue. We couldn't be asked to put up collateral for debt already agreed unless we got something in return which would have to be a significant reduction in the cost of finance for adding security.

It is also clear from Lagarde's recent pronouncements on "credit events" that she's blindingly aware that the purpose of the bailout is not primarily to protect the bailed out country but to protect the wider European economy and as such having a punitive interest rate on a bailout is self defeating. I suspect Soc Gen's exposure to Greece may be concentrating French minds on this, perhaps even Sarkozy will grasp it in the end.

Amhran Nua

Couple of interesting posts from Karl Whelan over on the Irish economy blog...

Let’s be clear about this. There is no reason whatsoever why the EU could not grant Ireland a one percent reduction on all its borrowings (not just those yet to be drawn down) as was previously granted to Greece. The EU has decided to add a particular margin on to its borrowing costs. The EU can decide to reduce it. The lowered ambitions appear to be a combination of preparation for a deal barely worth accepting and (more relevantly) an attempt to use a fake argument (”can’t change the interest rate on funds already withdrawn”) to present the “feasible” rate reduction as not that big a deal.

One thought that I should have put in my, em, original Sinn post is the following.
Sinn and others believe that the Target 2 balances show that ECB operations have created a big risk for the German taxpayer, channelling lots of funds from Germany to Ireland. In fact, the truth is exactly the opposite.
The big change in Target 2 balances in recent years shows that German banks were huge beneficiaries of ECB operations. Without the intervention of the ECB, there is no way that the Irish banks or the government that backed them would have been able to pay back the huge amounts they owed German banks.
So the ECB operations allowed the German banks to turn hugely risky loans to Irish banks into completely safe deposits with the Bundesbank (the Bundesbank’s Target 2 balances are the mirror image of these deposits). Now, of course, Germany will share 28% of the credit risk stemming from these operations. But the rest of the Eurosystem has taken on 72% of the risk of operations that have hugely benefited German banks and the taxpayers that would have had to recapitalise them in the absence of the ECB operations.

That these jokers are actually asking for Irish state assets to be held to ransom for their highly profitable loan is gall beyond belief. Wars have started over less.

Scofflaw

Amhran Nua wrote: »

Couple of interesting posts from Karl Whelan over on the Irish economy blog...

That these jokers are actually asking for Irish state assets to be held to ransom for their highly profitable loan is gall beyond belief. Wars have started over less.

And wars have also certainly been started with as little attention being paid to the facts. There were no "huge amounts ... owed [to] German banks" by the Irish covered banks. The amounts owed by Irish banks to eurozone banks as recorded in the Central Bank figures have never been huge, so your claim that the German banks are using the Irish bailout to pay themselves - and Whelan's claim to the same effect, that German banks have turned "hugely risky loans to Irish banks into completely safe deposits with the Bundesbank" are both wrong, because those loans were neither large in the first place, nor have they been paid down by any large amount.

The Target 2 figures reflect the fact that the German banks are lending to the ECB, while the Irish banks are borrowing - but they do not in any sense imply that there was any previous lending that this replaces, and Whelan does not offer any evidence to prove that part of his contention.

correctively,
Scofflaw

Amhran Nua

Scofflaw wrote: »

And wars have also certainly been started with as little attention being paid to the facts. There were no "huge amounts ... owed [to] German banks" by the Irish covered banks. The amounts owed by Irish banks to eurozone banks as recorded in the Central Bank figures have never been huge, so your claim that the German banks are using the Irish bailout to pay themselves - and Whelan's claim to the same effect, that German banks have turned "hugely risky loans to Irish banks into completely safe deposits with the Bundesbank" are both wrong, because those loans were neither large in the first place, nor have they been paid down by any large amount.

The Target 2 figures reflect the fact that the German banks are lending to the ECB, while the Irish banks are borrowing - but they do not in any sense imply that there was any previous lending that this replaces, and Whelan does not offer any evidence to prove that part of his contention.

correctively,
Scofflaw

Hmm. Professor Karl Whelan:

Prof. Karl Whelan obtained his PhD from MIT in 1997. He worked for over ten years in central banks, first at the Federal Reserve Board in Washington and then at the Central Bank of Ireland. His research is generally concentrated in applied macroeconomics and has been published in leading journals such as the American Economic Review, Review of Economics and Statistics, Journal of Monetary Economics, and Journal of Money, Credit, and Banking.

You can pop on over there to discuss it with him if he's still taking questions yourself, if you like, the comments are right under the post.

Scofflaw

Amhran Nua wrote: »

Hmm. Professor Karl Whelan:

Prof. Karl Whelan obtained his PhD from MIT in 1997. He worked for over ten years in central banks, first at the Federal Reserve Board in Washington and then at the Central Bank of Ireland. His research is generally concentrated in applied macroeconomics and has been published in leading journals such as the American Economic Review, Review of Economics and Statistics, Journal of Monetary Economics, and Journal of Money, Credit, and Banking.

You can pop on over there to discuss it with him if he's still taking questions yourself, if you like, the comments are right under the post.

I have already done so - and I've added that I'm a little surprised that professional academics should choose to publicly make sweeping comments without offering any evidence for them, particularly when they so deeply inform the narrative of his piece. If German banks have in fact not swapped existing risky Irish bank debt for safe ECB debt, then they have, by increasing the level of their lending to the ECB - and in turn to Ireland, significantly increased the level of their exposure to an Irish default, exactly as Sinn says, not reduced it as Whelan claims.

I have also checked the question of which set of stats (Central Bank vs Basel) provides a better picture of the amounts owed by the Irish covered banks to eurozone banks, and have had it confirmed to me by the Irish Banking Federation that the Central Bank tables are the correct ones. So I'm happy enough that Whelan has committed himself to a factual error here.

(I have to point out, I'm afraid, that since I'm of an age and background where my younger brother and some of my oldest friends are now at the professorial level at serious universities, I'm not terribly impressed by recitations of academic pedigree. Academic credentials do not prevent - even slightly - the making of basic errors of assumption, since it's very easy to assume that claims made by others can safely be taken as a starting point. I suspect that's what has happened here, since so many people cite the Basel figures.)

cordially,
Scofflaw

Amhran Nua

Scofflaw wrote: »

I have already done so -

Is that the one where he responded
"I agree the wording above is open for misinterpretation if you’re inclined to believe that I don’t know how the Eurosystem operations work. There are lots of things I don’t know about but this isn’t one of them. Anyway I’m happy to stand by “the changes in Target 2 balances do show very large movements of funds from peripheral to German banks which were facilitated by the ECB.”"
..?

Scofflaw wrote: »

So I'm happy enough that Whelan has committed himself to a factual error here.

And yet that's a comment I don't see in the blog?

Scofflaw wrote: »

(I have to point out, I'm afraid, that since I'm of an age and background where my younger brother and some of my oldest friends are now at the professorial level at serious universities, I'm not terribly impressed by recitations of academic pedigree. Academic credentials do not prevent - even slightly - the making of basic errors of assumption, since it's very easy to assume that claims made by others can safely be taken as a starting point. I suspect that's what has happened here, since so many people cite the Basel figures.)

Sure, but when it comes to areas where I might have a decent overall grasp without having the time to commit to the minutae, it does not seem to me to be a wise move to take the word of a Scofflaw over the word of an MIT PhD who has spent his life working in this field in Central Banks. If there is anything the man should know about, it should be this, as he himself stated.

beeftotheheels

Amhran Nua wrote: »

And yet that's a comment I don't see in the blog?

You're on the wrong site

http://www.iiea.com/blogosphere/professor-sinn-misses-the-target

Scofflaw

Amhran Nua wrote: »

Is that the one where he responded
"I agree the wording above is open for misinterpretation if you’re inclined to believe that I don’t know how the Eurosystem operations work. There are lots of things I don’t know about but this isn’t one of them. Anyway I’m happy to stand by “the changes in Target 2 balances do show very large movements of funds from peripheral to German banks which were facilitated by the ECB.”"
..?

And yet that's a comment I don't see in the blog?

As beeftotheheels says - I commented on the IIEA site. More polite version is now on the Irish Economy site, where no doubt Prof Whelan will tell me off in good academic style.

Amhran Nua wrote: »

Sure, but when it comes to areas where I might have a decent overall grasp without having the time to commit to the minutae, it does not seem to me to be a wise move to take the word of a Scofflaw over the word of an MIT PhD who has spent his life working in this field in Central Banks. If there is anything the man should know about, it should be this, as he himself stated.

Indeed he should, but I'm happy enough that I've checked the figures, and they cannot be made to say what Whelan has stated to be the case. At the end of the day, it doesn't matter who says something - if it's in conflict with the facts, they have to be wrong. If they have facts that are not available to the general public, they should show them, and nobody should assume they have them if they don't - down that road lies reliance on the government's statements as truth!

I can't square Whelan's claims with either what is claimed in respect of German money originally in the covered banks - for which there is no evidence - nor with the Target 2 balance changes. A positive change in Germany's balance (lending more to the ECB) plus a negative change in Ireland's (borrowing more from the ECB) does not necessarily imply a flow of money from Germany to Ireland unless those are the only two parts of the system (which they're not, obviously). In this case I'd agree it probably does, but that's not the same thing. And it certainly cannot imply a flow of German money out of Irish banks being replaced by ECB money, because there is nowhere near enough constraint on the system to take that as a conclusion - you have to assume it, and then say that the target 2 balances show what might be expected in such a case. That is something that is true, but in a (unsurprisingly?) similar fashion to several other economic commentators, that requires Whelan to start with his conclusion and ignore other possible explanations.

Is this something that's standard for economics, or is it simply the outcome of academics making rebuttals on the fly? That latter is something which has managed to get many an academic into hot water before, because one tends to be defending a previously established position - which does tend to make one show how any set of facts support one's previous conclusions without properly considering alternative explanations, or whether the set of facts in question are sufficiently constrained to allow the proper drawing of such a conclusion.

cordially,
Scofflaw

Amhran Nua

Scofflaw wrote: »

As beeftotheheels says - I commented on the IIEA site. More polite version is now on the Irish Economy site, where no doubt Prof Whelan will tell me off in good academic style.

Good stuff, this is exactly the kind of interaction I like to see. Needless to say we'll have to wait and see what he has to say for himself.

How and ever, getting back on topic, there are no circumstances under which it would be supportable for lending countries to demand any state assets in the event of default, especially when they have specifically gone out of their way to make it harder for us to repay the loans, thus increasing the chance of default.

I mean is it not clear what that is - loan sharking, plain and simple. Watch the movie "Lock, stock and two smoking barrels" for a graphic depiction of this process.

Scofflaw

Amhran Nua wrote: »

Good stuff, this is exactly the kind of interaction I like to see. Needless to say we'll have to wait and see what he has to say for himself.

How and ever, getting back on topic, there are no circumstances under which it would be supportable for lending countries to demand any state assets in the event of default, especially when they have specifically gone out of their way to make it harder for us to repay the loans, thus increasing the chance of default.

I mean is it not clear what that is - loan sharking, plain and simple. Watch the movie "Lock, stock and two smoking barrels" for a graphic depiction of this process.

A 7-year loan with an interest rate of 5.8% isn't in any sense loan-sharking, security or not. I couldn't currently get a deal that good from a bank.

Whatever one thinks of the reasons we wound up with a bailout, those who are lending the money are undeniably taking a risk lending to us, and there's nothing unreasonable under those circumstances in asking for security. There is not a zero risk of an Irish default - instead, estimates are about 50:50 - and €67.5bn* is a lot of money to stake at those odds, when you could simply not have staked it at all.

cordially,
Scofflaw

*that's just the direct stake, rather than the additional money on the table by way of the ECB.

Amhran Nua

Scofflaw wrote: »

A 7-year loan with an interest rate of 5.8% isn't in any sense loan-sharking, security or not. I couldn't currently get a deal that good from a bank.

You aren't a country, in the same way that a country is not a company, with assets up for grabs in the event of default. Attempts to do so usually result in civil insurrection at best, at worst the consequences are considerably more bloody. Loan sharking is finding someone in financial distress and offering them loans at an unneccessarily high rate, then taking their car, house, or threatening their family if repayments are not made, so yes, this is unequivocally loan sharking.

Scofflaw wrote: »

Whatever one thinks of the reasons we wound up with a bailout, those who are lending the money are undeniably taking a risk lending to us

So why would they increase the risk of default in the name of profit that makes little enough difference to the bottom line of any of these large countries? If the very eurozone itself is at stake, why risk it for the sake of posturing? Or is there something even more idiotic at play here?

Scofflaw wrote: »

and there's nothing unreasonable under those circumstances in asking for security. There is not a zero risk of an Irish default - instead, estimates are about 50:50 - and €67.5bn* is a lot of money to stake at those odds, when you could simply not have staked it at all.

First of all, this is a country, not a company or an individual. The rules are quite different. Ireland is in no danger of vanishing across state lines into a debtors haven. Second of all, this is a country, not a company or an individual. You get your security in long term repayment plans, not in seizing the organs of state.

beeftotheheels

It strikes me that people of a private sector persuasion are missing a key benefit to securing the loans (subject to the price being right of course).

The semi-states are heavily unionized, perhaps too "public sector" in their mentalities when compared with private industry.

If we secure them against the debt, for a discount on the interest rate, then any sale of those semi-states is fundamentally controlled by the secured bondholders and not by us. The ability of the unions to politically interfere with a sale is diminished. This fact alone could render them more attractive.

By pledging them as security we are, in essence, semi-privatizing the semi-states by stealth

Amhran Nua

beeftotheheels wrote: »

The ability of the unions to politically interfere with a sale is diminished.

Do you think they will go any more meekly into privatisation at the behest of European countries than at the command of Fine Gael?

Scofflaw

Amhran Nua wrote: »

You aren't a country, in the same way that a country is not a company, with assets up for grabs in the event of default. Attempts to do so usually result in civil insurrection at best, at worst the consequences are considerably more bloody. Loan sharking is finding someone in financial distress and offering them loans at an unneccessarily high rate, then taking their car, house, or threatening their family if repayments are not made, so yes, this is unequivocally loan sharking.

Despite the dramatics, no, it isn't. It's a loan at only a slightly higher rate than we were paying in the markets. The margin may be considered odious, but was agreed to in advance by Ireland as one of originators of the fund (when we thought we wouldn't be using it, as far as I can see), so there isn't even that aspect of 'predatory lending' involved.

Amhran Nua wrote: »

So why would they increase the risk of default in the name of profit that makes little enough difference to the bottom line of any of these large countries? If the very eurozone itself is at stake, why risk it for the sake of posturing? Or is there something even more idiotic at play here?

Stop for a moment and consider that 1% difference in the interest rate - which would take us down to our pre-bailout market interest rate for Irish debt - makes practically no difference to the risk of an Irish default.

Amhran Nua wrote: »

First of all, this is a country, not a company or an individual. The rules are quite different. Ireland is in no danger of vanishing across state lines into a debtors haven. Second of all, this is a country, not a company or an individual. You get your security in long term repayment plans, not in seizing the organs of state.

Semi-state companies aren't "organs of state", although I suspect most people would be perfectly willing to consider offering a lien on the Seanad, which is. The sort of State assets we're likely to consider are exactly the same ones we're considering privatising in order to save money. They are therefore self-evidently not strategic assets, and similarly self-evidently are things that can be disposed of to foreign companies at a profit to the State. I don't see any material difference between selling the ESB to a foreign company and standing it as security to a foreign creditor - the only difference is how much the State can expect to make by that use of the asset. It's not, as far as I can see, something to get our tricolours bunched up about.

cordially,
Scofflaw

Amhran Nua

Scofflaw wrote: »

Despite the dramatics, no, it isn't. It's a loan at only a slightly higher rate than we were paying in the markets. The margin may be considered odious, but was agreed to in advance by Ireland as one of originators of the fund (when we thought we wouldn't be using it, as far as I can see), so there isn't even that aspect of 'predatory lending' involved.

Sure there is. Why tack on a 2.8% average profit margin? Predatory lending is exactly what it is, the fact that Ireland agreed to it means nothing.

Scofflaw wrote: »

Stop for a moment and consider that 1% difference in the interest rate - which would take us down to our pre-bailout market interest rate for Irish debt - makes practically no difference to the risk of an Irish default.

I don't know about you, but I can think of many better uses that several hundred million euros annually could be put to than lining the coffers of our European "partners".

Scofflaw wrote: »

I don't see any material difference between selling the ESB to a foreign company and standing it as security to a foreign creditor - the only difference is how much the State can expect to make by that use of the asset.

This is the problem of course, a failure to recognise the difference between private interests purchasing state assets and other countries controlling state assets. If that sentence doesn't make it obvious, there's not much else that will, especially when you take it in the context of a distressed borrower. I don't think we should be in the position of a distressed borrower mind you, I think we should cut the deficit via, well, cuts, and then go back to the table.

The Euro two are treading on very dangerous ground by even hinting that extraterritorial control might conceivably be on the cards, enough so that an education in political influence might be of value.

Perhaps the best solution would be for Ireland to work for the breakup of the larger countries and, as a consequence, increase the number of smaller countries. Ireland should work not only for the reunification of the thirty two counties of Ireland as soon as possible (which would also increase our voting power in the EU), but also work actively for Scottish and Welsh independence.

Perhaps we should then form an Atlantic Council, similar to the Nordic Council, with an independent Scotland and Wales, and act in alliance with them when any are pressured by the larger EU countries. In addition, Ireland should also support Basque independence, Catalan independence, Breton independence, Corsican independence, the break-up of Italy and Belgium, and so on. Most of the larger countries in Europe are artificial creations, ready to split apart. Ireland should perhaps encourage this process. A Europe of forty or fifty smaller nations, with the larger ones reduced in size, is much less likely to be dominated by those larger ones.

Never underestimate the power of a sovereign, even an angry little one buzzing at the corners of your sphere of influence.

beeftotheheels

Amhran Nua wrote: »

Do you think they will go any more meekly into privatisation at the behest of European countries than at the command of Fine Gael?

Play it out. The government, under instruction from their now securitized lenders, decide to alter pay/ conditions/ pensions at a semi-state.

The workforce strike. The matter looks like going before the labor court. The securitized lenders either take the case to the labor court, or get an injunction against the case being heard by the labor court. They can now legally threaten redundancy against any workers who continue to picket. They can advertise in Ireland (and lets face it unemployment is high enough that they could actually recruit in the current market), or they can look at bringing workers in.

Especially if France decided to take on the lending securitized against the utilities assets since French semi-states pretty much run this market worldwide. One could pretend that EDF is a public company, but the risk associated with their nuclear facilities might be seen to suggest that their relationship with the French State is otherwise.

Amhran Nua

beeftotheheels wrote: »

Play it out. The government, under instruction from their now securitized lenders, decide to alter pay/ conditions/ pensions at a semi-state.

The workforce strike. The matter looks like going before the labor court. The securitized lenders either take the case to the labor court, or get an injunction against the case being heard by the labor court. They can now legally threaten redundancy against any workers who continue to picket. They can advertise in Ireland (and lets face it unemployment is high enough that they could actually recruit in the current market), or they can look at bringing workers in.

There's no reason why you couldn't do any of the above in the absence of foreign national ownership, simply not being able to pay them is ample reason. By introducing foreign national ownership, you create a lot of very serious problems that plain old privatisation doesn't.

beeftotheheels

Amhran Nua wrote: »

Sure there is. Why tack on a 2.8% average profit margin? Predatory lending is exactly what it is, the fact that Ireland agreed to it means nothing.

Given our perceived risk profile this is nothing. The markets, absent any liquidity I'll grant you, think that no one should be lending to us at less than **Bloomberg check** http://www.bloomberg.com/apps/quote?ticker=GIGB10YR:IND in excess of 11%.

Amhran Nua wrote: »

I don't know about you, but I can think of many better uses that several hundred million euros annually could be put to than lining the coffers of our European "partners".

And while I agree with the sentiment I do struggle with the notion that there might also be

Amhran Nua wrote: »

many better uses

of German taxpayer funds, at least as far as the average German taxpayer is aware.

Amhran Nua wrote: »

This is the problem of course, a failure to recognise the difference between private interests purchasing state assets and other countries controlling state assets. If that sentence doesn't make it obvious, there's not much else that will, especially when you take it in the context of a distressed borrower. I don't think we should be in the position of a distressed borrower mind you, I think we should cut the deficit via, well, cuts, and then go back to the table.

We are a distressed borrower, but we are doing our bit for the wider interest.

Those last 10 words are the reason why we should get a reduction in our "bailout" terms, not the first 5. Makes no sense if you look only at the first 5 words of that sentence, not for us, not for German taxpayers, not for the commission, not for the ECB. Makes a whole world of sense if you look at the last 10.

Amhran Nua

beeftotheheels wrote: »

Given our perceived risk profile this is nothing. The markets, absent any liquidity I'll grant you, think that no one should be lending to us at less than **Bloomberg check** http://www.bloomberg.com/apps/quote?ticker=GIGB10YR:IND in excess of 11%.

From the experiences of Iceland, the markets would be considerably happier if we ditched the banking debt entirely. So lets do that! As for the profit margin, in the European context since our position is demonstrably different to that of Iceland, all it does is increase the chances of our default in the name of... what?

beeftotheheels wrote: »

And while I agree with the sentiment I do struggle with the notion that there might also be of German taxpayer funds, at least as far as the average German taxpayer is aware.

Cutting 2% off the interest rates costs the German taxpayer nothing, they still make a profit.

beeftotheheels wrote: »

Those last 10 words are the reason why we should get a reduction in our "bailout" terms, not the first 5. Makes no sense if you look only at the first 5 words of that sentence, not for us, not for German taxpayers, not for the commission, not for the ECB. Makes a whole world of sense if you look at the last 10.

Exactly my point, or one of them anyway.

beeftotheheels

Amhran Nua wrote: »

From the experiences of Iceland, the markets would be considerably happier if we ditched the banking debt entirely. So lets do that! As for the profit margin, in the European context since our position is demonstrably different to that of Iceland, all it does is increase the chances of our default in the name of... what?

No, from the experiences of Iceland the markets would be considerably happier if... we were Iceland. But we're not. Iceland is a tiny country. Hence their delinquent banks were generally over exposed to property outside Iceland and that property has generally held its own. Our banks were over exposed to over priced property in Ireland which has not. So lets stop comparing apples with pears. The Landsbanki estate looks like being able to meet the calls of the creditors of Icesave. The estate of Anglo.......

Amhran Nua wrote: »

Cutting 2% off the interest rates costs the German taxpayer nothing, they still make a profit.

The cost of risk is nothing??? Try taking business 101 - profits follow risk.

Amhran Nua

beeftotheheels wrote: »

So lets stop comparing apples with pears.

I did say that our position was demonstrably different to Iceland, in as many words.

beeftotheheels wrote: »

The cost of risk is nothing??? Try taking business 101 - profits follow risk.

Lots of people take risks disproportionate to the potential profit, and vice-versa, especially when you have a distressed buyer. This is why we have predatory lending legislation. Sadly it is not enforceable when it comes to international relations. The most ironic thing about this whole affair for me is the risk of contagion which is bandied about over and over and over. If the risk of Ireland collapsing the eurozone is so serious, why increase the risk of Ireland collapsing the eurozone with punitive interest rates? I couldn't really give a damn what the markets feel our risk is, we aren't buying from them, we are buying from other European countries, and they are to all intents and purposes doing it for the good of their health.

So why jeopardise that for a few percentage points?

beeftotheheels

Amhran Nua wrote: »

The most ironic thing about this whole affair for me is the risk of contagion which is bandied about over and over and over. If the risk of Ireland collapsing the eurozone is so serious, why increase the risk of Ireland collapsing the eurozone with punitive interest rates? I couldn't really give a damn what the markets feel our risk is, we aren't buying from them, we are buying from other European countries, and they are to all intents and purposes doing it for the good of their health.

You see, on this I agree with you 100%, but I'm not the one providing the cash. So either the German taxpayer needs to get this, or the German taxpayer will demand a premium which the German politician will insist upon.

Providing security might help both the German taxpayer, and the German politician along on this, while actually helping us out (if the price is right!).

Scofflaw

Amhran Nua wrote: »

Sure there is. Why tack on a 2.8% average profit margin? Predatory lending is exactly what it is, the fact that Ireland agreed to it means nothing.

Ireland agreed to it at a time when we weren't in any immediate need of it - which says that, to the Irish government at least, the terms weren't predatory. Dissuasive, yes, but not predatory. And while one can disagree that the whole 2.8% is necessary, it's not simply there for laffs. It's there in order to provide the lenders with the safeguards necessary to given them an AAA rating, and to provide some security - albeit much less security than the market would demand - against default. And since you believe that we'll default (as far as I can see, that is) then you're arguing that a risk margin of that kind is necessary.

The IMF rate and the European rates wind up being remarkably similar, despite that margin.

Amhran Nua wrote: »

I don't know about you, but I can think of many better uses that several hundred million euros annually could be put to than lining the coffers of our European "partners".

Which simply avoids the point - which is that the extra 1% over pre-bailout market rates doesn't make any significant difference to Ireland's chance of default. It would be nice to have that money, certainly - it would be nice to have even more than that, too, but it's not what stands between us and default.

Amhran Nua wrote: »

This is the problem of course, a failure to recognise the difference between private interests purchasing state assets and other countries controlling state assets. If that sentence doesn't make it obvious, there's not much else that will, especially when you take it in the context of a distressed borrower. I don't think we should be in the position of a distressed borrower mind you, I think we should cut the deficit via, well, cuts, and then go back to the table.

Pardon me if I suspect that someone saying "that sentence should make it obvious" simply can't find a better explanation. I can see you believe there's a difference - now you need to make it clear what it is.

Amhran Nua wrote: »

The Euro two are treading on very dangerous ground by even hinting that extraterritorial control might conceivably be on the cards, enough so that an education in political influence might be of value.

"The EU" aren't hinting that at all - a lesson in the difference between the EU and countries which are Member States of the EU would evidently also be valuable. I don't think the EU has any legal basis on which it could acquire liens on member state assets.

Amhran Nua wrote: »

Perhaps the best solution would be for Ireland to work for the breakup of the larger countries and, as a consequence, increase the number of smaller countries. Ireland should work not only for the reunification of the thirty two counties of Ireland as soon as possible (which would also increase our voting power in the EU), but also work actively for Scottish and Welsh independence.

Perhaps we should then form an Atlantic Council, similar to the Nordic Council, with an independent Scotland and Wales, and act in alliance with them when any are pressured by the larger EU countries. In addition, Ireland should also support Basque independence, Catalan independence, Breton independence, Corsican independence, the break-up of Italy and Belgium, and so on. Most of the larger countries in Europe are artificial creations, ready to split apart. Ireland should perhaps encourage this process. A Europe of forty or fifty smaller nations, with the larger ones reduced in size, is much less likely to be dominated by those larger ones.

Never underestimate the power of a sovereign, even an angry little one buzzing at the corners of your sphere of influence.

An idea which, while probably neither relevant nor possible right now, is one that has always appealed to me - if it comes to it, I'd like to see the rebirth of the city-state.

However, the point of having the EU, and the "European method" of consensus and weighted voting, is exactly that - it blunts the power of the bigger states. I'm not sure everybody follows the logic that without the EU, we're exposed to the full weight of Germany and France - something which, as we can see, is very uncomfortable.

cordially,
Scofflaw

Scofflaw

beeftotheheels wrote: »

You see, on this I agree with you 100%, but I'm not the one providing the cash. So either the German taxpayer needs to get this, or the German taxpayer will demand a premium which the German politician will insist upon.

Providing security might help both the German taxpayer, and the German politician along on this, while actually helping us out (if the price is right!).

This seems to be the nub of the issue. The other eurozone countries borrow the money that's then loaned to Ireland. Lending to Ireland isn't risk-free, so why is requiring a risk premium or security so outrageous? If people believe we're going to default - that it's inevitable we're going to default - then it's inevitable that the eurozone countries lending to us won't get all their money back. What on earth is supposed to be in it for them?

That's where the narrative about the German banks having stuffed ours with cash comes in - it allows people to pretend that the only reason for the bailout is so that German banks can get their money back. Never mind that our government deficit is larger than the bank bailout, and needs to be funded. Never mind that only a minor part of the bailout funds are for the banks. Never mind that there's no actual evidence for the story in the first place! It allows us to pretend that we didn't really need the bailout, and that it's all their fault anyway, so they should stump up the money for free and be damned glad we're letting them do so.

meh,
Scofflaw

dan_d

IS there a situation in any European country at present whereby their state or semi state companies are owned and controlled by another country?
(I'm on a phone and can't link to articles or search properly....it's a crap phone!)

beeftotheheels

Karl Whelan has posted a rather "interesting" reply to Scofflaw. I've decided that I am clearly too ignorant to understand his rebuttal, seeing as how it doesn't appear to address any point raised, so if anyone could enlighten me that would be much appreciated.

My ignorant summary would be that Sinn said that the cake got bigger, Whelan said that the cake got smaller, Scofflaw asked why, with no evidence, should we assume that the cake got smaller rather than bigger, and Whelan responded that a slice of the cake is still a slice of cake.

http://www.irisheconomy.ie/index.php/2011/06/08/germany-a-huge-beneficiary-from-ecb-operations/

p.s. I wonder if he read the iiea version of the post.

beeftotheheels

dan_d wrote: »

IS there a situation in any European country at present whereby their state or semi state companies are owned and controlled by another country?
(I'm on a phone and can't link to articles or search properly....it's a crap phone!)

Not if they are semi states, but yes in terms of former state companies. Many UK former semi-states are foreign owned, BAA is owned by Ferrovial of Spain, London electricity is owned by EdF, Thames Water is owned by Macquari (of Eircom fame) funds.

The list is almost endless in jurisdictions where privatization happened, in the utilities sectors the French utilities tended to gobble up many of the others, especially in water. And the French former semi-states don't always have an arms length relationship with the French State.

Amhran Nua

Scofflaw wrote: »

Ireland agreed to it at a time when we weren't in any immediate need of it - which says that, to the Irish government at least, the terms weren't predatory.

According to the late Brian Lenihan, Ireland was in no uncertain terms forced to take the bailout money. So yes, classic back alley predatory lending. Now perhaps a dying man had some incentive to lie about this matter, but I can't imagine what that might be.

Scofflaw wrote: »

Dissuasive, yes, but not predatory. And while one can disagree that the whole 2.8% is necessary, it's not simply there for laffs. It's there in order to provide the lenders with the safeguards necessary to given them an AAA rating, and to provide some security - albeit much less security than the market would demand - against default. And since you believe that we'll default (as far as I can see, that is) then you're arguing that a risk margin of that kind is necessary.

All the higher rate does is increase the risk of default. It's the exact opposite of security.

Scofflaw wrote: »

Which simply avoids the point - which is that the extra 1% over pre-bailout market rates doesn't make any significant difference to Ireland's chance of default. It would be nice to have that money, certainly - it would be nice to have even more than that, too, but it's not what stands between us and default.

Several hundred million doesn't make a difference? All these billions start to add up you know, and pretty soon you're talking about real money! And it most certainly is a contributory factor on the wrong side of the balance sheet. Why even apply it? The point of the bailout is less to help Ireland than to help the Eurozone as a whole, and applying predatory lending practices and punitive interest rates isn't furthering that goal.

Scofflaw wrote: »

Pardon me if I suspect that someone saying "that sentence should make it obvious" simply can't find a better explanation. I can see you believe there's a difference - now you need to make it clear what it is.

I don't, really. If you haven't figured it out, there's not point in trying to explain it to you.

Scofflaw wrote: »

"The EU" aren't hinting that at all - a lesson in the difference between the EU and countries which are Member States of the EU would evidently also be valuable. I don't think the EU has any legal basis on which it could acquire liens on member state assets.

Well that's good to hear. It doesn't detract from the condemnation which should be heaped liberally upon those states that have been hinting.

Scofflaw wrote: »

An idea which, while probably neither relevant nor possible right now, is one that has always appealed to me - if it comes to it, I'd like to see the rebirth of the city-state.

While I wouldn't go quite that far, for wasteful duplication of services as much as anything else, I would hope to have illustrated that even a small state can cause disproportionate problems for much larger states which do not have the option of physically invading. Indeed, history is replete with such states.

Scofflaw wrote: »

However, the point of having the EU, and the "European method" of consensus and weighted voting, is exactly that - it blunts the power of the bigger states. I'm not sure everybody follows the logic that without the EU, we're exposed to the full weight of Germany and France - something which, as we can see, is very uncomfortable.

It could also be argued that without the EU, Germany and France would not be nearly as powerful. The EU is an enabler that these states are trying to turn into a sock puppet.

Scofflaw wrote: »

Never mind that our government deficit is larger than the bank bailout, and needs to be funded. Never mind that only a minor part of the bailout funds are for the banks. Never mind that there's no actual evidence for the story in the first place! It allows us to pretend that we didn't really need the bailout, and that it's all their fault anyway, so they should stump up the money for free and be damned glad we're letting them do so.

To be honest, I'd be quite happy to let them keep their money, we get rid of the banks, and they can figure out some other way to keep the eurozone intact while we cut our costs down to size.

However it just so happens that these loans aren't being given out of the goodness of their hearts, and any attempt to represent them as such is deliberately misleading.

Amhran Nua

beeftotheheels wrote: »

Not if they are semi states, but yes in terms of former state companies. Many UK former semi-states are foreign owned, BAA is owned by Ferrovial of Spain, London electricity is owned by EdF, Thames Water is owned by Macquari (of Eircom fame) funds.

The list is almost endless in jurisdictions where privatization happened, in the utilities sectors the French utilities tended to gobble up many of the others, especially in water. And the French former semi-states don't always have an arms length relationship with the French State.

Not foriegn owned, owned by a foreign country.

beeftotheheels

Amhran Nua wrote: »

Not foriegn owned, owned by a foreign country.

Well EdF is still majority owned by the French Government so I would think it could be seen as nitpicking to maintain that British Energy is owned by a French utility rather than the French government.