Bailout Amounts to €85 Billion

Scofflaw · 24-11-2010 03:46AM

jank wrote: »

The facts may or may not be on the button... but and this is a big but there is now a FACT or at least a growing consensus that the Irish debt is so big that it cannot be paid back at all...
You can be Zen like all you want but this appears to be the state of play as of tonight.....

And it either is, or it isn't - what exactly are you going to do about it? And why will you do something about it - if you are going to - before you know whether it is or isn't?

Politics re-enters the picture when it comes to discussing the appropriate response to the facts. I appreciate that we're starved for facts at the moment, and so speculation and rumour has taken its place, but I don't see much point in trying to decide what I'd do about this speculation, then that speculation, then the next speculation.

However, courtesy of something from the archives, I can nail my colours to the mast in one particular at least. If the size of the bailout means our total national debt would require one-sixth of tax revenue just to service the interest, then anyone calling for a default on the basis that that's unaffordable is a mewling idiot - we paid quarter of our tax revenue to service debt interest in 1990. We did not default, and within five years of that we were starting a genuine, enterprise-investment-led boom.

cordially,
Scofflaw

thomasj · 24-11-2010 03:55AM

Anyone have any thoughts on if we would have been in a better position if anglo wasn't guaranteed or nationalised at the last minute?

Makes me wonder what happened there?

lucianot · 24-11-2010 04:17AM

People will take decisions either based on facts or rumours. We don't have facts at the moments, so we will act according to the rumours.
Why is not the Prime Minister addressing the nation? Why is nobody else taking any decision or opposing this?
I just would like to see some politicians behaving decently for once, working as people representatives and not just guardians.

Scofflaw · 24-11-2010 04:21AM

thomasj wrote: »

Anyone have any thoughts on if we would have been in a better position if anglo wasn't guaranteed or nationalised at the last minute?

Makes me wonder what happened there?

I honestly wish I knew, but short of an alternate universe to run that experiment in, we're not ever going to know for certain. Most likely there was a true element of risk to the rest of the Irish banking system, and most likely there was a true element of looking after the government's mates. On top of that, Anglo were rather less than entirely honest about their position:

SENIOR BANKERS were “likely to have been dishonest or disingenuous at least” in presenting the financial health of their institutions during the banking crisis, the head of the Department of Finance told a Dáil committee.

The department’s secretary general, Kevin Cardiff, told the Public Accounts Committee that Anglo was “extremely disingenuous” in presentations it made about the quality of its loans and its ability to raise capital in the months after the September 2008 guarantee.

Anglo made a presentation to the department on September 18th – 12 days before the guarantee – claiming it was in “old-fashioned banking” and had “no requirement for external equity capital”.

Such claims were never given “any real credit”, said Mr Cardiff.

cordially,
Scofflaw

Scofflaw · 24-11-2010 04:23AM

lucianot wrote: »

People will take decisions either based on facts or rumours. We don't have facts at the moments, so we will act according to the rumours.

Which is gambling - if the rumour is true, you come out ahead, if it isn't, you don't.

lucianot wrote: »

Why is not the Prime Minister addressing the nation? Why is nobody else taking any decision or opposing this?
I just would like to see some politicians behaving decently for once, working as people representatives and not just guardians.

Eh, at the moment what can they say except what they're already saying?

cordially,
Scofflaw

lucianot · 24-11-2010 04:30AM

Scofflaw wrote: »

Which is gambling - if the rumour is true, you come out ahead, if it isn't, you don't.

Eh, at the moment what can they say except what they're already saying?

cordially,
Scofflaw

Gambling is fine because in reality you don't know what is being cooked and when you know is too late. That is the reality for millions, always, to be kept in the dark until is too late.
What I am saying is that people will always act, and so far this has been handled as usual in many other countries, no information, lying, hiding facts, treating the electorate like children when the future of the nation is at risk.

K-9 · 24-11-2010 04:36AM

Scofflaw wrote: »

I honestly wish I knew, but short of an alternate universe to run that experiment in, we're not ever going to know for certain. Most likely there was a true element of risk to the rest of the Irish banking system, and most likely there was a true element of looking after the government's mates. On top of that, Anglo were rather less than entirely honest about their position:

cordially,
Scofflaw

They probably should have let it go, in hindsight. However, it was systemic 2 years ago and it would have had a knock on effect on other Irish banks whose share price had nose dived at that stage.

Ironically, the sort of scare mongering that we have now would have been nowhere near the chaos that would have occurred.

How it was let get to the current mess it is in, I don't know. NAMA probably should have just taken the thing over and dealt with it. Pretending it had some future damaged us in Europe when plans were sent there outlining its future.

K-9 · 24-11-2010 04:38AM

lucianot wrote: »

Gambling is fine because in reality you don't know what is being cooked and when you know is too late. That is the reality for millions, always, to be kept in the dark until is too late.
What I am saying is that people will always act, and so far this has been handled as usual in many other countries, no information, lying, hiding facts, treating the electorate like children when the future of the nation is at risk.

Unfortunately, it seems that we need the IMF/EU to go in and find out the truth.

Scofflaw · 24-11-2010 04:38AM

lucianot wrote: »

Gambling is fine because in reality you don't know what is being cooked and when you know is too late. That is the reality for millions, always, to be kept in the dark until is too late.
What I am saying is that people will always act, and so far this has been handled as usual in many other countries, no information, lying, hiding facts, treating the electorate like children when the future of the nation is at risk.

Sure - I'd like a world, or even a country, where anything that absolutely didn't have to kept secret wasn't, rather than the routine opacity of politics. I'd like a press that was dedicated to finding, and paid for providing, facts and truth.

Given that the situation in Ireland isn't that, that the Irish people have traditionally shown no interest in it becoming so, and that we're in the middle of delicate negotiations with the IMF while the bond markets have our head neatly in their sights, it's perhaps a little bit much to expect, if not to wish for.

cordially,
Scofflaw

jank · 24-11-2010 04:39AM

Scofflaw wrote: »

However, courtesy of something from the archives, I can nail my colours to the mast in one particular at least. If the size of the bailout means our total national debt would require one-sixth of tax revenue just to service the interest, then anyone calling for a default on the basis that that's unaffordable is a mewling idiot - we paid quarter of our tax revenue to service debt interest in 1990. We did not default, and within five years of that we were starting a genuine, enterprise-investment-led boom.

cordially,
Scofflaw

True but back then we had our own currency and could control our own interest rates. Now we have a strong euro and interest rates from the ECB.

I suppose the question is, default now and get the short pain over or just slog away for 10-15 years in the hope we get out of it. Even at the end of this a default may still be on the cards.

sceptre · 24-11-2010 04:43AM

jank wrote: »

True but back then we had our own currency and could control our own interest rates. Now we have a strong euro and interest rates from the ECB.

We could largely control our own internal interest rates, not the interest rates we paid on sovereign debt. The difference (or rather lack of it) is rather important.

Scofflaw · 24-11-2010 05:07AM

jank wrote: »

True but back then we had our own currency and could control our own interest rates. Now we have a strong euro and interest rates from the ECB.

I suppose the question is, default now and get the short pain over or just slog away for 10-15 years in the hope we get out of it. Even at the end of this a default may still be on the cards.

Default isn't a route that involves "short pain". It's a route that involves short-term pain, followed by a different type of long-term pain.

Take Argentina:

When the default was declared in 2002, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The Argentine government met severe challenges trying to refinance the debt. The state had no spare money at the time, and the central bank's foreign currency reserves were almost depleted.

The Argentine government kept a firm stance, and finally got a deal in 2005 by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. In 2008, President Cristina Fernandez de Kirchner announced she was studying a reopening of the 2005 swap to gain adhesion from the remaining 24% of the so-called "holdouts", and thereby fully exit the default with private investors.

So they still wind up paying off the debt in full, which is what default is supposed to prevent us having to do. We're in mid-crisis, and our bonds are at 8.3% - they're ten years down the road, and theirs are 9.82%. And they have a large internal market and a lot of commodity exports - we have a tiny internal market and our exports are based on FDI companies. People think FDI companies will flee the country if we raise our CT rate - do they think about what will happen to those same companies if we default?

cordially,
Scofflaw

lucianot · 24-11-2010 05:08AM

And people had limited options on toilet paper brands in supermarkets. That was painful indeed.
Believe me, no kidding.

Bob_Latchford · 24-11-2010 06:23AM

IMF funded Argentina for few years before it eventually defaulted on its sovereign debt.

That really would be the worst of both worlds, bailout then default. Lets hope they have learnt some of their lessons from how they handled that one.

http://www.imf.org/External/NP/ieo/2004/arg/eng/pdf/exesum.pdf

jank · 24-11-2010 06:32AM

Scofflaw wrote: »

Default isn't a route that involves "short pain". It's a route that involves short-term pain, followed by a different type of long-term pain.

Take Argentina:

So they still wind up paying off the debt in full, which is what default is supposed to prevent us having to do. We're in mid-crisis, and our bonds are at 8.3% - they're ten years down the road, and theirs are 9.82%. And they have a large internal market and a lot of commodity exports - we have a tiny internal market and our exports are based on FDI companies. People think FDI companies will flee the country if we raise our CT rate - do they think about what will happen to those same companies if we default?

cordially,
Scofflaw

I fairness i agree. Its like to be told to choose having your balls cut off with a rusty blunt knife with anesthetic or by a surgeons knife with no anesthetic.

maninasia · 24-11-2010 06:51AM

Scofflaw wrote: »

And it either is, or it isn't - what exactly are you going to do about it? And why will you do something about it - if you are going to - before you know whether it is or isn't?

Politics re-enters the picture when it comes to discussing the appropriate response to the facts. I appreciate that we're starved for facts at the moment, and so speculation and rumour has taken its place, but I don't see much point in trying to decide what I'd do about this speculation, then that speculation, then the next speculation.

However, courtesy of something from the archives, I can nail my colours to the mast in one particular at least. If the size of the bailout means our total national debt would require one-sixth of tax revenue just to service the interest, then anyone calling for a default on the basis that that's unaffordable is a mewling idiot - we paid quarter of our tax revenue to service debt interest in 1990. We did not default, and within five years of that we were starting a genuine, enterprise-investment-led boom.

cordially,
Scofflaw

Obviously it is not black and white, we should not go for a blanket bailout which covers all lossholders through Irish taxpayers, neither could we renege on all of our debts. The best solution is to combine the two situations...a debt for equity swap and bailout for the remainder. That's what any logical people would do.

maninasia · 24-11-2010 06:52AM

K-9 wrote: »

They probably should have let it go, in hindsight. However, it was systemic 2 years ago and it would have had a knock on effect on other Irish banks whose share price had nose dived at that stage.

Ironically, the sort of scare mongering that we have now would have been nowhere near the chaos that would have occurred.

How it was let get to the current mess it is in, I don't know. NAMA probably should have just taken the thing over and dealt with it. Pretending it had some future damaged us in Europe when plans were sent there outlining its future.

It was predictable then that this blanket bank guarantee would come back and bite us, we simply never had the money to cover such large debts. The reason why it went through so quickly with no oversight..FF and also the electorate who are quite sheepish and very conservative until pushed to the edge. People didn't want to get involved, to protest, to check the facts!

What's the point in complaining when most bondholders of the banks are paid back, the latest tranche in September...hello anybody awake at all? It's a bit late in the day to care about eating a dodgy breakfast.

Maj Malfunction · 24-11-2010 09:55AM

Default is not an option. Lets say you decided to take the money (thanks very much Mr. IMF) and then not pay the IMF (Foo u IMF)

The IMF won't be very happy with us. They won't lend to us anymore, neither will the EU. Trade sanctions will be imposed so nobody will trade with us, so no imports or exports. Companies won't want to invest in Ireland because we defaulted and are see as high risk, neither will foreign banks.

On a more day to day level if the banks have no money to lend and you go to your nice bank manager and ask for a car loan... you can't have a car because we have no money to lend you for that car.

If a company is having cash flow issues and needs an increased overdraft to cover your wages while they wait for an invoice to be paid and the banks have no money to lend, you don't get paid, your mortgage runs into arrears, the company ceases trading, you lose your job, your house gets seized by the banks. Unemployment will be an even greater issue and we would have successfully screwed things up ourselves even more royally.

Defaulting is not looking as such an attractive option anymore!

Might as well hand the country back to the Brits in 2016 and say "sorry..." and that's not an attractive option either!

We're screwed and IMF man is going to ask Ireland Inc. to assume the position.

Dr_Teeth · 24-11-2010 10:00AM

Scofflaw wrote: »

So they still wind up paying off the debt in full, which is what default is supposed to prevent us having to do. We're in mid-crisis, and our bonds are at 8.3% - they're ten years down the road, and theirs are 9.82%. And they have a large internal market and a lot of commodity exports - we have a tiny internal market and our exports are based on FDI companies. People think FDI companies will flee the country if we raise our CT rate - do they think about what will happen to those same companies if we default?

cordially,
Scofflaw

But isn't most of that 9.82% a result of the Argentinians having their own currency, and wasn't most of the capital flight and and lack of FDI also a result of their currency being so worthless?

If, turning back the clock, our banks had been dealt with as per Iceland or Washington Mutual, and the Government's balance sheet hadn't been touched, I don't see why FDI would leave. We have the euro, we're in the eurozone, we have low tax, the Government finances would be tight due to low tax income but we'd have hardly any debt. Why would there be capital flight?

As for for the effect on government borrowings into the future, would there really be such a massive effect? I have a hard time believing that the "Bond Market" is a single entity that takes things personally.

Sure, some actors would have gotten burnt lending to Irish banks, but the Irish government's balance sheet would be fairly healthy without having bailed out the banks, and our growth prospects as a low tax eurozone member that had cleaned up its banking mess by passing it off to someone else would be pretty good.

Personally I think when people talk about "confidence" and "sentiment" in markets they think too much in terms of human emotions. It's just business and there are a million actors out there. I think all that matters is having a good balance sheet. For every bond-holder that got screwed by us refusing to bailout our banks, there's ten more that would say "hah those guys got screwed, but look Ireland is a really good bet now!" in fact, the bond-holders that got screwed would probably be the first to hop back in to try and earn their money back.

Obviously this is helped immensely by the fact that we're in the eurozone, a South American country with its own shaky currency wouldn't be able to pull this off, but I think we would, it's probably too late now anyway.

Triangla · 24-11-2010 10:10AM

Maj Malfunction wrote: »

Default is not an option. Lets say you decided to take the money (thanks very much Mr. IMF) and then not pay the IMF (Foo u IMF)

The IMF won't be very happy with us. They won't lend to us anymore, neither will the EU. Trade sanctions will be imposed so nobody will trade with us, so no imports or exports. Companies won't want to invest in Ireland because we defaulted and are see as high risk, neither will foreign banks.

On a more day to day level if the banks have no money to lend and you go to your nice bank manager and ask for a car loan... you can't have a car because we have no money to lend you for that car.

If a company is having cash flow issues and needs an increased overdraft to cover your wages while they wait for an invoice to be paid and the banks have no money to lend, you don't get paid, your mortgage runs into arrears, the company ceases trading, you lose your job, your house gets seized by the banks. Unemployment will be an even greater issue and we would have successfully screwed things up ourselves even more royally.

Defaulting is not looking as such an attractive option anymore!

Might as well hand the country back to the Brits in 2016 and say "sorry..." and that's not an attractive option either!

We're screwed and IMF man is going to ask Ireland Inc. to assume the position.

If the banks need recapitalization that's fair enough but I can't see why public money should be used to shore up what is a private limited company.

We're being rushed at the moment to make the biggest choice this state will probably ever make.

I'd prefer for all angles to ne explored no matter how exotic and the bottom line needs to be that the best choice for Ireland must be taken.

I'd rather pay more taxes to fix a defaulted Ireland than give it to investors who in fairness have lost their investment.

If the banks fail, capitalism kicks in and the foreign owned banks already here pick up the new business.

Butch Cassidy · 24-11-2010 10:11AM

EFSF Charging 7%?

This post was written by Karl Whelan

During the discussion of the bailout on Prime Time tonight, the prospect was raised (and not denied by Minister Batt O’Keefe) of the EFSF charging 7% to Ireland for its loans.

It may be worth taking at look at the calculations that I did on this issue a few weeks ago. I worked out the formula for the interest rate at the time as

Effective Interest Rate = 1.2*(3-year swap rate + Margin + Annualised Cost of Once-Off Service Fee)

which worked out at the time as

Effective Interest Rate = 1.2*(1.57 + 3.0 + .167) = 1.2*4.737 = 5.68.

The three-year swap rate is now 1.9%, which would give

Effective Interest Rate = 1.2*(1.9 + 3.0 + .167) = 1.2*4.737 = 6.08.

The government’s most recent projections show the debt-GDP ratio peaking at 106%. This is prior to the admission that large amounts of additional money will be borrowed to recapitalise the banking sector. Piling on an interest rate of even 6.1% onto the likely debt levels would greatly reduce the prospect of Ireland avoiding sovereign default. An interest rate of 7% would be grossly unacceptable.

Put simply, if these reports are true, the government needs to refuse any deal based on such a high interest rate. Indeed, unless the government feel compelled to play their role in a morality play in which Ireland is used as cautionary tale, they should refuse any deal featuring a rate higher than the 5% rate that Greece obtained.

http://www.irisheconomy.ie/index.php/2010/11/23/efsf-charging-7/

How on earth could we afford 7% interest rate?

The guys that were advocating burning bondholders a few years ago are now the ones suggesting the default card be played to get a better interest rate.

Digitaljunkie · 24-11-2010 06:49PM

Scofflaw wrote: »

Why, though? I can speculate all I like, but I'd rather not waste the energy, because, again, the facts will happen anyway, and they're highly unlikely to be exactly as I predict.

The only prediction I can realistically make is that taxes will go up, services will go down, unemployment will go up, and that overall the good times are over for the moment. How much of each happens is open to the kind of speculation I regard as pretty pointless.

So I don't have any colours to nail to the mast - my objection to people panicking over rumours is only that they're panicking over rumours, not the sort of rumours (I'm as sceptical of bubble rumours as bust rumours). I'm opposed to treating rumours as fact, nothing more, and opposed to panic because it's an entirely pointless response.

cordially,
Scofflaw

Isn't that exactly what the government have been saying on matters over the last year?

Bailout Amounts to €85 Billion

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