Morgan Kelly’s latest prescription – a walk on the wild side.

The impact of Morgan Kelly’s ruminations in the Irish Times has been very big. The Sunday Independent more or less reproduced the article virtually in its entirety.

Brief summary of the numbers and prescription.

Ireland’s debt will likely be €190 billion with €45 billion in NAMA and €35 billion in bank recapitalisation for a total of €270 billion plus losses Irish Central Bank to the Irish banks. Namawinelake reckons the final debt will be €220 billion but Kelly reckons that €250 billion will be nearer the mark.

This will be €120,000 per worker or 60% greater than GDP

Once national debt exceeds national income, there is a serious danger of default.

Quotes from Kelly “Suppose we did not want to follow our current path towards an ECB-directed bankruptcy and national ruin, is there anything we can do? ….

National survival requires Ireland to walk away from the bailout…… This in turn requires the government to do two things: disengage from the banks, and bring its budget into balance immediately.

The ECB has lent €160 billion to the Irish Banks to prevent them closing after the run on them. “The ECB can learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer the creditor,: you are the owner.” The ECB will be the capital owner of the Irish banks.

He says that NAMA assets should be returned to the banks and the government should withdraw the promissory notes to the banks. This leaves the ECB owning the banks in effect. (debt for equity swap).

“At a stroke, the Irish government can halve its debt to a survivable €110 billion. The ECB can’t do anything in retaliation because it would light a fire in Spain and across Europe.

2. Cut the government budget deficit immediately into balance. “ …is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us.”

Comments – What would the immediate repudiation of the bailout do to the life of the average person here in the short-term? I think a serious and unnecessary amount of misery.

With the special meeting on Greece in Germany and with the Portuguese problems, we can wait for a few months to see what happens. The impossibility of the Greek situation will force the Eurozone to make up a solution including some type of debt recasting – write off, extending the time period to maturity and reducing the interest rates.

The Kelly gambit is in the locker but it can be leaked in discussions privately and used a lever. I’m sure that Michael Noonan is quite capable of this. Meanwhile we must lower the budget deficit.

On the 9th November last I quoted Morgan Kelly as writing:-

“You have read enough articles by economists by now to know that it is customary at this stage for me to propose, in 30 words or fewer, a simple policy that will solve all our problems. Unfortunately, this is where I have to hold up my hands and confess that I have no solutions, simple or otherwise.
Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.
From here on, for better or worse, we can only rely on the kindness of strangers.”
Comment – From no solutions to bugger the bailout! Some boy!