Ireland should join the emerging core EU union for the future

We will not recover economically within the timelines agreed by the government with the Commission. Ray Kinsella writes in the Irish Examiner:- “What we are seeing at present is not recovery….When an economy falls as far and as fast as the Irish economy, a technical upward adjustment is inevitable. That is not recovery.

It would do great and lasting damage to the Irish Economy for any such argument to be used to justify a continuation of the regressive and damaging budgetary cuts of the last two years. There is n o obvious source of growth within the domestic economy.”

Professor Kinsella believes that the Euro will sunder into a hard currency Euro area and a free ranging outer track which will contain the British.

The future choice for us in Ireland is to join a real political union of economic policy with Germany and France at the core or leave the current euro and jog along in a different trajectory. Kinsella writes “The attraction to Ireland of socialising its massive indebtedness problem within a larger European pool is seductive. On the other hand the transfer of fiscal sovereignty and the European oversight of Ireland’s budget can be seen as a profound lack of confidence in its ability to rectify and rebuild its economy and to make a free and informed choice on how Europe should develop.”

The Euro core will involve fiscal and economic union which will be reinforced by oversight and control of member countries’ budgetary policies alongside the power to determine the key parameters prior to their being seen or approved by national parliaments.” This, I guess, will involve another treaty and possibly a new referendum which with nationalists banging the drum, will be unlikely to pass.

Also today in the Irish Times, the propaganda put out by government that they have pursued a perfect economic course since 30th September 2008 is undermined by Professor Honohan’s report which is parsed and dissected by Professor Karl Whelan in the Irish Times. The misuse and overuse of the state guarantee landed the debts of Anglo Irish and Irish Nationwide upon the taxpayer and all our citizens. Whelan writes “The guarantee for existing debts made it almost impossible to reduce the costs to the taxpayer associated with failed financial institutions such as Anglo Irish Bank and Irish Nationwide”. He quotes Honohan “the inclusion of existing long-term bonds and some subordinated debt….was not necessary in order to protect the immediate liquidity position. There investments were in effect t locked-in.”

So the decision to guarantee all long term debt was not necessary.

Anglo is a basket case – The state will “invest” €22 billion, virtually all of which is going to disappear and a further €18 billion through NAMA for book assets of €36 billion leaving an investment of €40 billion on Anglo Irish Bank —-MADNESS.

State banking guarantee may have costly legacy

KARL WHELAN Irish Times Monday 21 June 2010

ANALYSIS: A sluggish bond market could cause problems later this year for the Government.

THE DECISION on September 30th, 2008, to provide an almost blanket government guarantee for the liabilities of the Irish banks was perhaps the most momentous economic policy decision in the history of the State.
The decision has been the source of much controversy ever since with many economic commentators critical of the extent to which it made the taxpayer directly responsible for the mess made by our bankers.
I suspect that many people will have been surprised to hear the media report, time and again recently, that Central Bank governor Patrick Honohan, an international expert in banking matters, gave an almost complete endorsement to the bank guarantee, with his only quibble being the inclusion of subordinated debt.
In fact, this reporting has not been at all accurate. While the report does conclude that some kind of guarantee was required, it raises serious questions about the essential nature of the type of guarantee that was introduced.
The Irish banks faced a liquidity crisis in September 2008, prompted by worries about their solvency. Concerns about preventing a run on the banks certainly justified a blanket guarantee for deposits.
However, Honohan’s report strongly questions the decision to guarantee all existing bond debt.
At the time, the banks were having difficulty raising new funds to pay off existing debts as they matured.
A Government backing for new borrowing helped to deal with this problem and this approach was followed by many governments during this crisis period.
However, the Irish guarantee differed from the approach followed by almost every other country in also guaranteeing the full stock of existing debts for two years.
This part of the guarantee did not help deal with the crisis at hand.
Honohan’s report notes that the “inclusion of existing long-term bonds and some subordinated debt . . . was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in.”
So the decision to guarantee all existing debt was unnecessary.
However, it had huge consequences for the State.
Overnight, the amount of debt backed by the Government surged and the cost of sovereign borrowing rose significantly as a result.
More importantly, the guarantee for existing debt made it almost impossible to reduce the costs to the taxpayer associated with failed financial institutions such as Anglo Irish Bank and Irish Nationwide.
Consider an alternative decision in September 2008 to guarantee new issues out to some maximum maturity, with the policy being reviewed every three or six months. Such a policy would have allowed for a review in early 2009 that could have deemed Anglo and INBS to be no longer covered by the guarantee.
The full stock of bond debt that these banks had run up would not have been the official responsibility of the Irish state.
One can argue that there may have been knock-on effects from a policy of having the bond holders of these banks lose all their investments. However, the approach taken went to the opposite extreme in completely ruling out the idea of these professional investors losing any money.
As Honohan’s report noted in a low-key but nevertheless damning passage:
“In contrast to most of the interventions by other countries, in which more or less complicated risk-sharing mechanisms of one sort or another were introduced, the blanket cover offered by the Irish guarantee pre-judged that all losses in any bank becoming insolvent during the guarantee period – beyond those absorbed by some of the providers of capital – would fall on the State.”
The report also notes that “the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State’s potential share of the losses”. These passages will be worth keeping in mind in the coming years as the costs of bailing out Anglo Irish Bank rise to ever more sickening levels (€22 billion and counting as we speak – almost €5,000 a head for every person in the Republic.) The bottom line of Honohan’s report in relation to the guarantee is that it wasn’t necessary to guarantee all outstanding debt and the decision to do so played a crucial role in maximising the cost of the banking crisis for the taxpayer.
One problem not discussed in Honohan’s report is that the manner in which the guarantee was implemented is directly responsible for the serious risks that currently face the Irish banks and the State.
The Government were slow to introduce a new scheme that focused on guaranteeing new issues out to maturity.
The so-called ELG scheme was not passed until December 2009. In the meantime, the existing guarantee for all debt applied only up to September 2010.
For this reason, the banks issued very large amounts of debt after October
2008 that all mature before October of this year: €58 billion in senior debt falls due before that date and €16 billion in inter-bank deposits.
The assumption in passing the guarantee may have been that by 2010, international bond markets would have settled down and these debts would be easily rolled over.
Far from settling down, there is at present almost no bond issuance taking place.
If this situation does not improve, the final legacy of the guarantee may be a full-blown crisis later this year as banks struggle to pay off their maturing debts and the State struggles to honour its ill-starred guarantee.
– Karl Whelan is professor of economics at University College Dublin

Bill on Ireland’s future

The British are in a serious economic straight jacket through the extent of their budget deficit. They have devalued their currency sterling by >20%. I believe that we should stay with the French and Germans and do a financial deal to refinance our debts by some slight of hand write-off through the sale of Irish Government Bonds to the ECB. As I have already written, these can be stored in the basement and forgotten about but we will never again be able to carry on like Ahern, Cowen, Harney, McCreevey and company. Brian Lenihan is not reckless just makes huge mistakes and then claims a perfect game. Such is life. It’s the old cliché about telling lies – tell a big one and keep repeating it and it will be believed and become “fact”.
David McWilliams would come out of the Euro and take the consequences.
Ireland may be forced out of the euro in the intermediate term but we should be ready to negotiate our position.

Meanwhile the dark arts of propaganda (Spin) flood the airways. Notice how Fianna Fail are repeating that it is somehow the fault of FG and Labour that we are in this mess quoting extracts from policies from the last general election. Their failure to regulate the financial system, to take notice of reports from the OECD, the Economist Intelligence Unit and the ESRI are ignored. I hope the people have the cop-on to recognise this outrageous misrepresentation and take appropriate action.