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The 32% of GDP question

Stephanie Flanders | 17:39 UK time, Thursday, 30 September 2010

You might expect the international markets to be a bit concerned to hear that Ireland's budget deficit this year will be a record 32% of GDP. But you'd be wrong. Today the interest rate - yield - on Irish government debt went down, and the difference between Ireland's borrowing rate and Germany's also went down, by nearly a quarter of a percentage point.

The implication is that investors are now (slightly) more relaxed about Ireland's fiscal situation than they were yesterday, when its budget deficit for 2010 was 'only' around 11% of GDP. What gives?

One answer is that the news was already "priced in": Irish bond yields have been rising for months on the back of fears about the scale of the banking system's bad debts (see chart 2 below). Another, mentioned earlier, is that the government actually won't need to borrow money from the markets until next year.

10-Year Government Bond Yields

But it's also because that 32% of GDP deficit is, genuinely a one-off. If there were actually a 32% of GDP gap between what the Irish government takes in tax revenues and what it spends on public goods and services, trust me, Irish yields would be a lot higher than 6.75%. But it isn't. That gap is still roughly 12% of GDP (see chart 1 below). That's because the annual cost of running Ireland's government has not changed at all.

Government Budget Balance and Debt

As I have written in the past, Ireland has made enormous efforts to cut borrowing, with swingeing tax rises and spending cuts worth 5% of GDP in 2009 alone. Alas, with GDP still flat or falling, the deficit has remained high. As a result, the finance minister, Brian Lenihan, already knew he would have more bad news for Irish taxpayers in early November, when he announced his new four-year budget plan.

The news will be worse as a result of today's move. But, to be clear, he doesn't have to find tax rises or spending cuts worth an extra 20% of GDP. Assuming there is no equivalent bailout next year, the deficit in 2011 will come in close to the previous target of 10% of GDP.

In fact, Mr Lenihan insists that Ireland will still keep its promise to get borrowing down to 3% of GDP by 2014. Supposedly, it will also stabilise the stock of national debt, as a share of GDP, over the same period, albeit at a rather higher level than previously thought.

This is not going to be easy - or cheap. Ireland's citizens will ultimately pay for the bailout, as they pay the interest on a much higher stock of government debt. If there are more bank bailouts to come and the economy continues to disappoint, investors may yet conclude that the numbers, for Ireland, simply do not add up. But right now, they rather like the fact that Ireland is taking the bank losses on the chin.

The government is not assuming, as the UK and others have, that money injected into troubled banks will eventually be repaid. In Ireland's case, this is probably a realistic assumption. But realism always wins points with international investors - even if the reality in question involves a budget deficit of 32% of GDP.

Comments

  • Comment number 1.


    MsFlanders today you write:

    ..." Ireland has made enormous efforts to cut borrowing, with swinging tax rises ".....

    Sounds like a hangman's sentence ! SWINGEING pehaps Ma'am ?

  • Comment number 2.

    Looking at a graph is interesting but what are the underlying assumptions to this forecast?

    Ireland may be 'OK' macro economically for the next year or so if other variables, inputs and outputs do not deteriorate ... or may actually improve?

    The situation is dire for Ireland and for me the big question ... will Ireland's position also offend the new rules and regs being drawn up by the ECB for EU member states regarding 'good housekeeping'?

  • Comment number 3.

    The Irish love a "punt" you only have to go to Cheltenham each year to see this! The Euro was sold to them on the betting anology that it would be like going to Cheltenham and betting a 5/1 winner! For every Euro they put into the EEC they would get six back. So whats the surprise that the "spielers" that run the Anglo Irish bank just were carrying on in the Cheltenham tradition, except it was like putting alcholics in charge of the Guinness Brewery.

  • Comment number 4.

    Hi, Stephanie!


    On the basis that things surely can't get much worse in the land of saints and scholars - might now be a good time to consider investing in Irish stocks?

    Certainly I'd be up for a small flutter in either Guinness, Jamieson's or Hennessy's brandy shares - after today's announcement I'm after thinking that they'll sure need plenty of the stuff over there during the next few months, so they will!

    Dominic

  • Comment number 5.

    It appears that neither the governments nor the banks were honest about the extent of the losses. I am sure not many are surprised. The strategy appears to have been to release the numbers a couple of 100 billion at a time.
    The fundamental change in private sector risks has been made without any public input. There is very little defense of the private banking system when it continues to be funded with tax dollars. The double losses of the middle class, stolen retirement accounts and investments and the burden of higher taxes to bail out the banks are the primary cause of a stalled economy.
    The "invisible hand" of the market was busy picking everyone's pockets.
    What the central banks decide to do or not do has nothing to do with economics, this is all political now and they will all agree to whatever message they decide to sell the public.
    As this all plays out the news will continue to get worse. Wrong actions, for the wrong reasons, to benefit the wrong people.

  • Comment number 6.

    Would you be so kind as to tell us what the deficit/gdp was in the UK in the year in which Brown bailed out our banks (and saved the world, of course), Stephanie?

  • Comment number 7.

    The bailout is another astonishing crime against the Irish people. They are getting more brazen.

  • Comment number 8.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 9.

    Anyway seeing as we’re getting nearer to our ‘austerity measures’ lets remind ourselves of the moral hazard:

    •The banks have taken Government money to survive.
    •The Government increases tax and cuts public sector jobs to pay for this.
    •The extra tax and/or loss of your job means you can no longer keep up with your mortgage payments.
    •The bank in receipt of the government money then repossesses your house.

    Is it reasonable to encumber the younger generation with so much debt that their lives are suffocated by the same?

    Is it reasonable to ask the average working Joes and Janes to pay for the losses of the financial elite?

    For the likes of the UK, USA, Ireland, Spain, Portugal, Greece and anywhere else for that matter, I believe the people need their representatives to stand up and say:

    ‘THIS DEBT WAS NOT RACKED UP BY THE PEOPLE, BUT BY THOSE WHO FRAUDULENTLY MISUSED THE FRACTIONAL RESERVE BANKING SYSTEM, AND WE WILL NOT PAY IT’.

  • Comment number 10.

    @ #1. I saw that too, but assumed they must be taxing swinging now. You must admit, it would be an imaginative way to reduce the deficit? Difficult to enforce, though...

  • Comment number 11.

    "6. At 7:53pm on 30 Sep 2010, Aunty Rose wrote:

    Would you be so kind as to tell us what the deficit/gdp was in the UK in the year in which Brown bailed out our banks (and saved the world, of course), Stephanie?"

    I'm not sure looking things up for random strangers is part of the BBC's Charter. Do your own research!

  • Comment number 12.

    Question No. 1
    This latest colossal bail-out to Irish Banks -who exactly is the money owed to?
    One would think it should be paid to the depositors (the only innocents in all this), but I suspect not.
    If it is being paid to the shareholders, then why? Surely they understood the risks contained in any investment.
    If it is being paid to other banks, what do the Irish citizens owe them, and is it being paid in full? (i.e. no deal or haircut negotiated?)

    Question No. 2
    If these Banks would fail if they didn't get never-ending bailouts, specifically what would happen to the economy *, and how would it be worse than a decade of austerity for the citizens -and a continuing cosy life for the banking elite.

    * Apart from a few weeks of cash machine crisis until the Irish Post Office, or Credit Unions, or whoever could get their act together.

    Regards,

  • Comment number 13.

    Rather makes a mockery of the Basel rules.
    Banks get a bit close to their reserve ratio.
    No problem. Just get the taxpayers to put a load or two of capital in.
    What is the point of Basel?

    Are we really going to have a race to see which country can be the first to look ridiculously over drawn?

    Then what?

  • Comment number 14.

    "If there are more bank bailouts to come ..."

    I thought I had heard "no more bailout"? Ooops, sorry, wrong country.

    I wish Jonathan Swift were still among us to write on these topics ...

  • Comment number 15.

    "they ('investors') rather like the fact that Ireland is taking the bank losses on the chin." Well we will see just how much the Irish people are content to be the whipping boy for the banks and their cohorts. What we have to be grateful about is that they are conducting an experiment to test the social cohesion to destruction by incremental austerity to recover from the wanton recklessness of the well heeled few.
    It is difficult to believe that the Irish once taken it on the chin will not produce an explosive uppercut!

  • Comment number 16.

    I think the psychology of the markets is now more important than the reality. The Irish government is "doing the right thing" according to conventional finanical wisdom - they are making the cuts, bailing out the banks and making the irish people pick up the bill.

    Therefore the markets smile on Dublin - they like what they hear - but the truth is that there is a total contradiction underneath this all - that the Irish economy won't recover, that the cut in demand and the poor export prospects mean ireland is at best going to stagnate - at worst go deep into depression.

    An uncharitable person might think the lack of reaction is a deliberate ploy to seduce other countries into similar thinking - this is mirrored by those within Eire who hope that this will stave off meltdown and allow the country to avoid the deep six.

    If the Irish economy doesn't grow - and rapidly - the point of no return will be reached when the markets sober up and realise the risk they are running of sovereign debt default - the role of the EuroZone in protecting the Irish treasury from this is the only thing that will stop meltdown.

  • Comment number 17.

    #9

    ‘THIS DEBT WAS NOT RACKED UP BY THE PEOPLE, BUT BY THOSE WHO FRAUDULENTLY MISUSED THE FRACTIONAL RESERVE BANKING SYSTEM, AND WE WILL NOT PAY IT’.


    LOL

    A stuck caps lock key will not change things.

    The destruction of 'symmetry' by McDumb and chums was the most crass policy decision ever (can't think of a worse one, though Chamberlain almost giving in to blackmail in 1938 is close).

    Symmetry ? Nothing wrong with huge bank profits or big bonuses. What sticks in most people's craw is shielding bad banks from failure resulting from bad decisions which is exactly what the BAILOUT did.

    MORAL HAZARD.

    Been banging on about this for over 18 months.

    WAKE UP.

  • Comment number 18.

    If you cant laugh you would have to cry. As usual Clarke and Dawes have the handle on the problem
    http://www.youtube.com/watch?v=5D0VhS8qXT0&feature=related

  • Comment number 19.

    Aunty Rose wrote:

    Would you be so kind as to tell us what the deficit/gdp was in the UK in the year in which Brown bailed out our banks (and saved the world, of course), Stephanie?"
    .
    .
    .
    Our debt and deficit is not out of line with international or historical comparators. Back in high summer the coalition was highlighting the danger of gravely upsetting the markets and losing our credit rating. Cameron often recites about the fact that our debt is higher than Greece’s. So it should be. Total debt is an entirely pointless measure. Instead we need to look at deficit and total debt as a proportion of GDP

    But the markets still looks stable today despite the news from Ireland...

    Going back to your original question, Brown acted and it was probably around about the time Ireland started their austerity measures and at the time with them being locked into the Euro they had no facility for fiscal stimulus. Everything the coalition claims we should do

  • Comment number 20.

    Posts 6 & 11 Bobby P answered the question in his post re the Irish Banks & AIB wearlier today.

    "If you add together all the capital provided to Ireland's banks by various arms of the state, taxpayer support to those banks in the form of capital injections is around 30% of GDP.

    That would compare with around 6% of GDP in the UK for the equity injected into Royal Bank of Scotland, Lloyds and Northern Rock."

    The UK total figure is more in numerical terms (probably about treble) than in Ireland however with a population approximately 15 times the size of Ireland the pain in the UK is spread thinner.

  • Comment number 21.

    Dempster above would have us tell the banks to take a walk, in some cases perhaps we cannot but as the scale of the banks incompetence and greed becomes more and more clear and the cost to the rest of us worse and worse is there really no option to default on these debts? Russia did recently and is trading away with the world again as are a number of nations that have done this. it would be rough but short term rough

    Paying off fraudsters with my tax (who in many cases probably avoid paying tax themselves) seems worth avoiding

  • Comment number 22.

    I believe that we are currently passing to our younger generation a mountain of debt to climb, when they should be setting out on a level playing field.

    I know Banks have balance sheets, but Nations have balance sheets to, and long ones at that. A Nation’s ledger chronicles the deeds of its citizens. It records lives dutifully sacrificed, and the ceaseless toil of men and women over countless generations.

    Are we really expected to believe that their ledger is greater than ours, when everything that there is, has been created by us.

    Let’s be honest now, everything that there is, and everything that there ever will be, is due to our efforts, and the plain truth is, that these pitiful financial institutions owe their very existence to us.

    And I hope, selfishly I admit being a father of three, that one day the madness of the current uncontrolled debt based system of money creation will be ended.

  • Comment number 23.

    Realism? Sorry you don't appear to be living in the real worl. Confidence - that is an illusion.
    Since when was the interest or equivalent of 11% (in the case of Greece) what was the forecast say in 2006? No-one diid.
    Stephanie I am sorry but this appears to be an insider's apology for the current mess.
    What is the complete accrued debt for UK over next 20 years - I estimate 2trn based on 2% growth. I'm including things that no-one wants to talk about. What is your calculation?


  • Comment number 24.

    Evening Stephanie,
    the arrogance of the statement "investors may yet conclude that the numbers, for Ireland, simply do not add up. But right now, they rather like the fact that Ireland is taking the bank losses on the chin."
    is breathtaking!
    Who would make such a statement in the face of the misery being inflicted upon the Irish people?
    If I may draw parallels between the Irish and the UK situation, it seems to me that we are asking the wrong people to make decisions on our behalf.
    Politicians (even finance ministers) are not experts in the running of economies. So what do they do, they hire experts from banks to advise them on their possible courses of action. There may be a conflict of interest here! That nice Mr Brown and Mr Darling did the same in the UK and spent, I think about £70 million paying for these poor souls to work overtime to crunch the numbers.
    However, no matter what the numbers tell them, they insist on providing political solutions to intractable problems. We removed Mr Brown and Mr Darling from this heavy responsibility and maybe the Irish people will also voice their disapproval?
    I agree with a previous poster who said that the Irish people were being told about the bailouts bit by bit but isn't that being economical with the truth?
    We in the UK would never do that would we?
    http://news.bbc.co.uk/1/hi/8375969.stm
    Although all the attention is focussed on Anglo-Irish bank, it may be helpful to look at the situation in the other three large banks as I find it difficult to believe that they didn't make dodgy loans too which will come back to bite them.
    It strikes me that many, many companies in the UK and probably in Ireland too are declaring record profits and are holding large amounts of cash on the balance sheets for which they will get no return. The companies do not want to invest this cash in new equipment, nor return it to the shareholders, so the only use left for this cash is TAKEOVERS.
    Expect a lot of company consolidation over the next 18 months with associated job losses due to alleged synergies!
    Governments need to encourage businesses to invest but no-cost grants are neither necessary nor effective. Businesses will invest if they see stability of regulation and a guaranteed rate of return. I fear that we are at least 5-10 years away from these conditions being fulfilled by our elected representatives, so in the meantime it will all be about financial manipulation, preservation of capital, and robbing the taxpayer of what little they have.

  • Comment number 25.

    --they rather like the fact that Ireland is taking the bank losses on the chin.--

    lol

    Or to put it another way.
    The markets don't want to rock the boat because the entire european financial ballgame can still go tits up, and to have it starting with a wee economy like Ireland wouldn't be offy smart.

  • Comment number 26.

    So who is getting all this money from Ireland? It's going to SOMEONE.

    It would be nice if some specific names were supplied, that's the least the Irish people should be aware of.

    Someone will be living in luxury while an entire community fight to pay off this money.

    So who is getting all the loot?

  • Comment number 27.

    Wait a minute! Correct me if I am wrong, but is it not the case that the investors are not "liking the fact they are taking it on the chin", but, as in the case of Greece now, simply rendered impotent to short bonds to high interest rates because of the EU's massive bond-buying fund?

    As far as I understand it, the "markets" were shorting Greek bonds, hoping to induce a death spiral and then collect a return. This all went out the window because the EU quickly decided to set up a fund that:
    a) Could buy bonds cheaply from the state, thus short-circuiting any investor speculative pressure on bond rates
    b) Could sell on those bonds in the secondary markets to maintain liquidity and avoid EU-wide inflation

    I would have thought that with this mechanism it just no longer is simply possible or interesting for speculative attacks on bonds in the EU zone, unless they were funded by some huge cash-rich power in a deliberate attack.

  • Comment number 28.

    ady

    Commercial banks.

  • Comment number 29.

    We are in a vicious circle of ignorance and I believe the answer lies with Simon Cowell.

    This X-Factor generation and our 'democratic' system is incapable of electing any politicians with an intellectual capacity greater than that of a newt. (If some feel I am being unfair to newts, I am willing to compromise).

    Given this, the politicians are incapable of even understanding what is going on, never mind controlling those talented bankers.
    Unfortunately our press are little better and have come to believe that their raison d'etre is to fawn and provide commentary on the world events at a Dear Deirdre level so the X-Factor generation feel engaged.

    This then is the problem. What is the answer? Surely the only one who can save us now is Simon. He needs to educate us by producing shows that gradually lift us out of our ignorance, in his own inimitable style of course. He could start off by getting us up from newt level to Britany Spears, then to Kylie, then to Christine Bleakley, then to Gary Linekar level and so on until eventually we actually wake up and start to ask wtf is going on?

  • Comment number 30.

    Quite apart from the financial implications of these bailouts, the apparent absence of any punishment for individuals within the banking system for flagrant misuse of such vast amounts of money, is staggering! Who are these characters? What are their names, and why the hell are we handing more money to these same incompetents, so that they can repeat the process all over again? There is no talk of any retribution for these massive failures, but there should be! A severe pruning and regulation of the financial garden is the only way for this sector to operate, in a controlled, visible and honest manner.

  • Comment number 31.

    #18 Dliiers

    Thanks for the link - made me laugh. And then spurred the following train of thought.

    A number of posters on this, and Robert Peston's blog, are wont to say that there was no alternative to bailing out the banks because allowing them to collapse would have meant no money in the cash machines, blood on the streets etc.

    But surely, if this was the outcome of the banks failing then the alternative would have been to nationalise them and keep them going. The idea that Governments have no alternative doesn't stack up. Particularly as the current option appears to amount to Governments picking up the tab but exercising no control.

    Back to Clark and Dawes, in their piece they spoke about spain owing Italy billions and Italy owing Spain billions. A simplification, of course, but in principle if there are reciprocal debts then they can cancel each other out.

    The reason this doesn't happen, I guess, is that there are different parties to the debts: Governments and banks - but if the banks were nationalised then what?

    Just maybe, the debts could be written off/down without the wheels coming off and the system could be re-booted.

  • Comment number 32.

    The transfer of wealth from the majority to the minority continues apace and we're told its good for us.

    What happens when the majority have nothing left to steal?

  • Comment number 33.

    29. Morpheus. Great post, British ironic humour at it's best. However, you hit upon a key truth, when will people wake up and look in detail at wtf is going on?

    Economic growth underwrites all of the austerity plans being undertaken and planned by western governments at the moment. If as I believe, this growth can not occur because it has been achieved by the availability of cheap oil and other related commodities, and prolonged by unsustainable debt bubbles (collective and private), then these plans will prove totally inadequate.

    We are trying valiantly but mistakenly to make relatively small sacrifices in the belief that normal service will resume shortly.

    Wake up, wtf is going on?

    We have to fundamentally change our economy and invest our energies and time (at much reduced wages) into radically altering our infrastructure to cope with energy shortages that are coming down the line imminently.

    The old model, I believe, can not continue, and we need the best brains going into science and technology, not ponzi financial institutions.

    The cheapest commodity we will have going forward is human labour. we need to use it to start digging ourselves and our future out of the mire.

  • Comment number 34.

    Stephanie, We are currently hearing reports from the media and Brian Lenihan on the importance of Ireland not defaulting on its obligations. Whilst I can see the argument for this I still can't help thinking that it's the old boys club ensuring that they all support each other through this crisis at the expense of the normal working man who will be picking up the tab.
    Is now not the time for someone to report how Iceland is progressing as the approach there seemed to be somewhat more militant and finance solutions were not rubber stamped and had to be submitted to the populace for approval, which I believe were rejected.

    Is the working man any worse off in Iceland for this refusal to play ball with the old boy network of bankers and CEO's and would the working man of Ireland be any worse off?

  • Comment number 35.

    #31 raises an important question: what is the alternative to bailing out the banks and when would it be a good idea? Not bailing out a large retail bank would indeed involve widespread losses: savings and salaries would disappear, many businesses would lose their working capital, cash machines would stop working, widespread unemployment. Possibily the entire banking system in that country would seize, and civil unrest would not be far behind if critical systems such as supermarkets could not function. So it would not be a decision taken lightly, and it is clear that many politicians would be frightened to do so.

    However if the alternative is a slow-motion and long-term collapse of the economy, then maybe a short sharp shock of a bank default followed by clearing up the mess would be attractive. The losses would fall on the private sector, with maybe most on large investment institutions. Retail customers would be eventually refunded by the government scheme.

    The UK decision to prop up the banks appears to have been correct. The taxpayer has not so far lost any significant amount of money and may yet even gain on the entire transaction. The benefits to the public are clear. At no point did the government agree to guarantee all bank liabilities, so the maximum possible losses are strictly limited (correctly resisting foolish calls from Vince Cable and others to nationalise). The option to allow a major bank to default was kept, and remains.

    The Irish however got themselves into a mess. Early in the crisis they decided to guarantee all bank liabilities, so the effect of any bank collapse would have been to devastate the taxpayer finances. Therefore the government was forced to absorb mounting losses and the long-term damage to the economy is clear. Interestingly, it looks like the guarantee expired two days ago, so maybe the default option is back on the table. But for them, it looks like it is too late, The damage is done.

  • Comment number 36.

    You can not trust what an Irish government says any more than you can trust what a British or US government says. Why do people so quickly forget that it was these governments that created this problem through their encouragement of dodgy loans and almost criminal neglect of banking regulations? In the US for instance you only need a quick read through the wiki entry for Fannie Mae to see how deeply involved that Government-Sponsored Enterprise was in the whole debacle.

  • Comment number 37.

    16. At 10:00pm on 30 Sep 2010, richard bunning wrote:
    An uncharitable person might think the lack of reaction is a deliberate ploy to seduce other countries into similar thinking...
    -------------------------------------

    An uncharitable person might think that they are propping things up until someone else falls first, therefore being able to point the finger elsewhere as everything unravels.

  • Comment number 38.

    35. At 09:08am on 01 Oct 2010, goodthinkinggeorge
    'The UK decision to prop up the banks appears to have been correct. The taxpayer has not so far lost any significant amount of money and may yet even gain on the entire transaction.'

    Not if they do it again, which they will. They always do; this is hardly the first time is it? Seeing it coming was not difficult was it? Do you want to keep a system where it is intentionally built in?

    Where we lost money is in the damage to the real economy as a result of a dysfunctional financial model. Just focusing on the cost/benefit of the bail out is far to narrow. And, we still have a significant property asset bubble in place.

  • Comment number 39.

    What most people here are failing to note is that politics in Ireland is about the pork barrel. Dublin has been very capable in managing that pork barrel for some considerable while.

    However, the banks then came along and not only swallowed all the pork, the barrel and even the bacon hanging from the roof. The fact that Lenihan has been able to say that to all and sundry does show realism. Would that Britannia could show the same realism!

    The reality for the Irish people is that they revert to living on eggs and spuds until the pig is fat enough for the butcher. It will take them some time and things will be hard, the emigration of the young will return but this is nothing new and neither will the tears. Yet there will be better days to come; which is the optimism in being a small country with a stubborn people.

    However, what do we have on this side of the water? Realism, fantasy or the same old gang holding onto their tattered petticoats pretending to be decent. We have all of that bar the realism. The British banks have not only swallowed the pork barrel, they have even eaten all the pigs: there is nothing left. No wonder so many folk are investing in hens at the moment.

    Tomorrow we will all be Irish. Only where is the British Lenihan? Where is the realism?

    Time to invest in fig-leaf futures?

  • Comment number 40.

    30. At 07:47am on 01 Oct 2010, drek2 wrote:
    Quite apart from the financial implications of these bailouts, the apparent absence of any punishment for individuals within the banking system for flagrant misuse of such vast amounts of money, is staggering! Who are these characters? What are their names, and why the hell are we handing more money to these same incompetents........
    --------------------------------------------------------------

    I do not see them as incompetents, they are very clever and have achieved their aims.
    (Punishment still required.)

  • Comment number 41.

    The prime issue for Ireland is, how are they going to recover. On RTE news last night there was one sane voice from the finacail sector. He said that unless the markets return soon to trading, then Ireland will be dead in the water. He went on to say that he cant imagine that happening. So the conclusion the reporter came to was that Ireland's demise was a dun deal. They are now talking about recovery in terms of decades rather than years.

    There is also the fact that a large number of indigenous Irish are jumping ship and as I said in an earlier offering it is the ones you need to turn things around who are leaving. There is also the fact that a number are just abandoning their debts which will of course just compound the situation. I know at least three families who have up-routed themselves and moved away leaving the keys for their houses with the lender as they only had negative equity.

    As far as the private sector stepping up to the plate, the majority was only there for;
    The Grants
    Low Taxation
    There have been for several years now more companies leaving than comming and with taxation having to rise it is estimated that the exodus will continue.

    So how long before the vultures start to circle, and not just Ireland but the other PIIGS too. The open question is, who can step in to save these poor souls as Germany did for Greece. The ECB hasn't the where with all, has Germany enough left in the tanks and more importantly will the electorate allow this as many already thought it was a step too far to help Greece. So will it be down to the IMF, once again you would have to question their ability to fund multiple actions let alone man the teams to carryout such rescues.

    Or are we seeing the end of the Euro experiment, with contraction being the order of the day rather than wild expansion?

  • Comment number 42.

    Just a couple of thoughts:

    1. On the quality of the underlying assets.

    Stephanie wrote:

    "The government is not assuming, as the UK and others have, that money injected into troubled banks will eventually be repaid".

    Is the assumption in bold above realistic or reasonable?

    It is I think reasonable to make the assumption both Irish banks and UK banks made investments on the basis of being secured upon the same 'quality' of assets. Also given that the market is essentially all interlinked, why then is the UK assumption reasonable or rational? [ I don't think it is.]

    2. Punishment

    #40. Kit Green and #30. drek2 are convened about the lack of punishment for the wrongdoers - that they identify as the bankers themselves.

    I think that it is now widely accepted that the failure was in the main one of regulation and of basic economic understanding by the regulators. The same idiocy created the bubble all over the developed World. That idiocy was/is that house and property price inflation is OK.

    This was due to a combination of their totally defective economic education from the leading economics institutions that began to preach the flawed dogma that inflation of assets did not matter, and the lack of integrity of the regulators as from my conversations and discussions the regulators will admit that they should have clamped down on the house/property boom far far earlier - but even though they knew that this boom would bust, they did the exact opposite.

    Essentially, interest rates should have been considerably higher for all of the noughties and credit expansion should have been restricted by all possible means. The regulators now admit that 'they let it slip'[Mervyn King] and thus I contend they should be the ones who pay the primary price.

  • Comment number 43.

    Given that politics is the art of what is possible, the question to which we don't know the answer is how well the Irish people will tolerate the effects of the austerity measures. If I was a Irish resident I think that I would be incredulous at the folly of the banks.

    Moreover it's not easy at this stage to know how much long term damage has been done to the Irish economy.

    On this side of the Irish sea we can breathe a sigh of relief that we are not in Eurozone.

  • Comment number 44.

    #38 I agree totally the system has to change.

    Thatcher's neoliberal economics lead to an unstable economy and growing inequlities in wealth. The financial crash destroyed this consensus but we have yet to see what should replace it. The current government is still clinging to the ideological wreckage.

  • Comment number 45.

    212. At 11:13pm on 30 Sep 2010, stevenpalmer wrote:
    Two points - buying debt at 33% of face value sounds like a bargain, but if it really is a bargain, why didn't the private sector buy it?
    =========================================================================
    Good question and one I may be able to help answer very simply.

    The debt is set against in the most property and land although there were other transactions. But lets stick to land as the numbers are easier to understand.

    Developer A buys land at a €1,000,000 per acre as development land. This land is now taken off the developer at 33% the value, so at €330,000 by NAMA the goverment agency set up to take care of toxic loans. The developer still owes the balance but the company goes into liquidation and the debt has to be written off. So there is €670,000 of bad debt to start with. However it gets worse, the land is no longer development land but agricultural land and that land is worth only a fraction of development land and even agricultural land has devalued buy over 20% in the last year or so. Hence the land is now worth about €16,000. So the good deal does not look so good now as the Agency that owns the land is left with an asset that is worth €314,000 per acre less than they paid for it. Or put it another way €314,000 of bad debt. So out of a loan for €1,000,000 there is €984,000 bad or toxic debt.

    Now there is an up side, if you could hold onto the land it will eventually regain its value. However that is now forecast to be around the year 2035 or later and NAMA - the goverment agency has less than eight years left to clear its books.

    Unfortunately these figures are based on actual numbers and not just pulled out of thin air.

    I hope that this helps and answers your question.

  • Comment number 46.

    On the one hand the Bank of England is trying to shore up property prices through very low interest rates and QE. Assuming they are acting rationally this must be because a collapse in property prices would precipitate a second banking crisis – one which the Government could not afford to bail out.

    On the other hand, the Government is spending beyond its means; and borrowed so much for the first bail out that its scope for further borrowing is greatly curtailed. This is leading to “austerity” measures to maintain Governments’ ability to borrow.

    These policies are not irrational: but they may not work and, where they interact, things could get complicated. If we have to avoid a collapse in property prices, then an intermediate determinant of house prices is the willingness of lending institutions (banks) to lend. The ultimate determinant is peoples’ ability to pay. In this regard, wage inflation would be a better cure than consumer price inflation. At the moment real wages are falling and banks are tightening their lending criteria. Small wonder if house prices are still falling.

    Low interest rates and QE may sustain property/asset prices that would otherwise fall: but by the same token they will result in a devaluation of the currency and an increase in other prices. This increase in other prices will not make property more affordable: indeed, if food and fuel prices rise then people’s ability to service a mortgage could fall further.

    Meanwhile, the Government has to maintain credibility in the bonds market by cutting spending. [I recall a post on an earlier blog suggesting that this was OK because the money was still there and would go into the private sector. I’m not so sure. As I understand it (correct me if I’m wrong) a bank that lends to a Government is creating “fiat” money out of thin air and then using the acquired bond as capital while creating even more “fiat” money in loans to the private sector. Not that Government is going to be borrowing less any time soon – just less than it otherwise would have.]

    Unless the cuts could be made without job and/or wage cuts (inconceivable if they are on the scale foretold) the immediate effect will be to reduce the total amount of money that people have to live on.

    The Treasury and the Bank look like jugglers walking a tightrope: they’ve got their eyes fixed on the balls (house prices and Government debt) but the rope that supports them is made up of people’s ability to pay and that appears to be wearing thin.

  • Comment number 47.

    I, some time ago had the privilege of having dinner with the then Taoiseach. He joked with me saying "The Irish are all just thieves, liars and horse traders and then there are the bad ones".

  • Comment number 48.

    A good quote;
    "The worst threat to Irish farmers is not foot and mouth disease, but a postal strike."
    - Popular saying in rural Ireland, referring to Irish farmers' heavy dependence on government subsidy checks to survive.

  • Comment number 49.

    All this guff about ‘we can’t let banks fail’.

    The ‘fail’ bit is there to frighten savers, companies and wage earners, that they will ‘lose’ their money.

    But then if they’re going to ‘fail’ they clearly can’t meet their obligations, and have in fact already ‘failed’.

    And given that we are constantly reminded by these financial institutions when viewing the performance of our pensions, endowment policies and such like, that ‘investments can go down as well as up’, it would seem to me, that those that have loaned banks money, should be reminded of the same.

    Pre-packaged insolvency, an orderly wind down, with deposit accounts protected. These knowledgeable professional investors must surely understand that ‘investments can go down as well as up’.

    At the moment we are mortgaging a future generation’s income to save ‘professional investors’ from a loss.

  • Comment number 50.

    31. At 08:08am on 01 Oct 2010, tFoth wrote:
    Most arguments appear to be based on the conflict between Rationalism - "any view appealing to reason as a source of knowledge or justification" and empiricism - "a theory of knowledge that asserts that knowledge arises from evidence gathered via sense experience."

    No one is completely sure of the answer. The evidence from many central bankers state, that they are disappoint with their results so far and they are trying to stimulate the economy so it returns to where it was with apparently better regulation to prevent a "blow out" in the future.

    There appears to be acceptance on all sides that some form of "liquidation" of assets needs to occur, but to what new level?

    Some view that all this intervention will minimise that final re-evaluation of assets and prevent a believed massive collapse in economies. Others that this is just delaying the inevitable and will only make things worse in the long term and we should all take our medicine now.

    Economic collapses occur throughout history but peoples interpretations of cause and cure appear different.

    The Weimar Republic of the 1920s showed you could start again from scratch when it was forced into making change under horrendous social and economic conditions. Though it is not a route I would favour, it can be done.

    I am personally of the view that this experiment with fiat money has failed due to underlying flaws in its implementation and control. Greed is as natural force as gravity. The aeronautical industry has achieved amazing results despite gravity, things still go wrong usually because of human error. The existing money system increases the problems related to greed and perhaps we should treat greed in the same way that the aeronautical industry treats gravity. Empiricism over rationalism.

    From my poor but gradually improving understanding, a fiat money system can work - but not this one and too much smacks of shutting the gate after the horse has bolted.

    Perhaps a judicial review on economics and how we got here and where we should go from here, considering the diverse views of so many "experts," might help.

    It would be nice Steph if you asked the BoE what time scale are they looking at for their solutions to work. What indicators will they use to decide when plan b should be implemented and what plan b should be if they can not cap the leaking economy (or are we already onto to plan y with z being abandon ship?)

  • Comment number 51.

    33. At 08:32am on 01 Oct 2010, Sage_of_Cromerarrh wrote:
    The old model, I believe, can not continue, and we need the best brains going into science and technology, not ponzi financial institutions.

    please keep up! we have been told repeatedly that the people who work for banks are stupid and completely withou talent!

  • Comment number 52.

    People forget that Bank of Ireland, Irelands largest bank, has actually got it's house (capital levels) in order and did not require emergency bailing out yesterday. (Neither did EBS)

    It's time economic commentators & journalists distinguished between the Irish banks, instead of tarring them all with same brush.

    Once again, irresponsible reporting and stereotyping means that institutions that have taken vast steps to stabalise, amidst a torrent of media negativity, are punished further by investor sentiment that unfortuneately lump all the Irish banks together int this 'horrendous' bail out.

  • Comment number 53.

    52. At 12:33pm on 01 Oct 2010, BytheCringe wrote:
    People forget that Bank of Ireland, Irelands largest bank, has actually got it's house (capital levels) in order and did not require emergency bailing out yesterday. (Neither did EBS)
    ------------------------------------------

    I have not seen anyone ask whether the banks that are healthy (is that just a relative term?) would actually like the basket cases to be allowed to fail.
    Treat that as me asking the question.

  • Comment number 54.

    Dempster wrote:
    Anyway seeing as we’re getting nearer to our ‘austerity measures’ lets remind ourselves of the moral hazard:

    •The banks have taken Government money to survive.
    •The Government increases tax and cuts public sector jobs to pay for this.
    •The extra tax and/or loss of your job means you can no longer keep up with your mortgage payments.
    •The bank in receipt of the government money then repossesses your house.

    Very true Dempster. Substitute the word "Government" for "Our and We" and you have the picture.

    But doesn't that mean we will all end up effectively owning a piece of our own houses? Why not just cut out the middle man and give the cash to the population to spend as they like...or pay off their mortgage!

    Ah, but the banks wouldn't make their profit then and the fatcats wouldn't be able to cream off their bonuses.

    The poor old Irish are the latest punters to be mugged (again) by the so called "Masters of the Universe". I mean, they are injecting 40 billion Euros into their banking system. That's FORTY THOUSAND MILLION EUROS. And this in a country with a population of just 2 million! Go figure.

    And finally.......can anyone actually tell me where is all this money going?

  • Comment number 55.

    Reading a lot of the comments here there is clearly a deluge of bad feelings towards banks and bankers in general who have, and let's not mince words here, made some appalling lending decisions and lined their own pockets in the process.

    I have one pertinent question though: Who do you think the banks lent money to?

    It is very easy to pin the blame conveniently on a scapegoat, and at the present time that scapegoat appears to be the stereotypical pinstripe suit wearing corporate banker. Where do we draw the line here? Is the young girl on the tills, who has just been told that she faces either a pay freeze for the next 5 years or may lose her job to blame? What about the hedge fund manager who decides to play with bank stock, destroying thousands of lives in the process, because he can 'make a killing'? or the institutional investor who pulls all of his money out of bank stocks and buys up repossessed land instead because there is more profit in it?
    This is clearly a complicated moral maze.

    Back to my original question, and as we all seem to be keen to question the moral standing of banks who take taxpayers money in an attempt to repair their own balance sheets, it is an important question. Who did the banks lend money so recklessly to? In a lot of cases property developers took the cash very quickly and keenly, salivating at the the profits they could make in a quick turn. Builders suddenly became property magnates almost overnight because they had the right connections and could buy up land, with the help of their 'greedy' bank manager without putting a single penny into the deal themselves, and make eye watering profits on the sale after (or even before) development. The banks lent them the money, but who profited from it? Were these property developers forced to borrow? No I don't think so. Now that the bubble has well and truly burst the banks have been left holding the can, the properties they have as security won't sell because they are unfinished and nobody wants to spend the money to finish them. The developers by and large have not come out of this too badly. I don't know of any who have lost their homes, some of them very grand at that. What is the moral argument for taking the bank's money for a build project, then dropping it when the market turns sour and refusing to pay the bank back? Especially when this is now your money as tax payers?

    The greed doesn't stop at property developers.

    Look around you. Look at the house you live in, your neighbours, your friends. Can you honestly say that at no point in the last ten years neither you, nor anyone you know well has not 'stretched' the limits of credit available because you felt that at some point you could afford it more comfortably? Well guess what? You were wrong, but you can always conveniently blame the bank...

  • Comment number 56.

    54. At 1:37pm on 01 Oct 2010, James wrote:
    And finally.......can anyone actually tell me where is all this money going?
    I believe the problem is that it is not money it is debt. This is part of the liquidation/revaluation of assets and who you transfer remaining debt, toxic or otherwise to. Instead of thinking of lender of last resort -ie central banks - think of it as debt collecting of last resort (still central banks) - just like a stamp collector. Private banks can not print money but they can create debt ( I believe the fed is a private bank though - DOH!).

  • Comment number 57.

    May I say I'm thoroughly confused and close to giving up and tugging my forelock in grateful recognition of my elders and betters (in the widest sense of the term).

    I like this post though (substitute "steal" with "give" if you prefer):

    -----------
    32. At 08:18am on 01 Oct 2010, allan365 wrote:

    The transfer of wealth from the majority to the minority continues apace and we're told its good for us.

    What happens when the majority have nothing left to steal?

  • Comment number 58.

    55. At 2:20pm on 01 Oct 2010, THENINJABANKER wrote:
    Look around you. Look at the house you live in, your neighbours, your friends. Can you honestly say that at no point in the last ten years neither you, nor anyone you know well has not 'stretched' the limits of credit available because you felt that at some point you could afford it more comfortably? Well guess what? You were wrong, but you can always conveniently blame the bank...

    Ninja
    If you want to look at this from an individual moral perspective, no-one can doubt your conclusion but that's not the point here.

    If you follow that logic, that suggests that you are happy for the there to be no monetary or banking reform and that we leave the possibility of future crisis in the hands of individuals and whether or not they can resist someone throwing money at them. Thats no answer.

    If the banks are criticised then you may get your wish. Politicians will always go for the easy option.

    So let your anger out and aim it at the people who profited most. Believe me they deserve it.

  • Comment number 59.

    Steph, could you please explain the relevance of the July stress tests in these developments? At the time it was just german and spanish noddy banks that were the problem, clearly the stress tests were rubbish as far as irish banks where concerned, why so?

  • Comment number 60.

    Stephanie

    You said that the Irish government actually won't need to borrow money from the markets until next year. But what then? How will things be different then? Will the Irish economy be growing or will it still be in recession because of yet more cuts to come? And what be the total Irish Govt debt and what will be the cost of servicing it in 2011 and 2012 and the years after? Isn't it fanciful to think the Irish can reduce the deficit to 3% of GDP by 2014? They are having us on, aren't they?

    My view is that when the Irish Govt needs to borrow more money next year, the situation will be worse than it is now, and the Irish won't have any more cards to play. And as for the markets being satisifed now, since when have the markets been good at predicting the future? As I recall they take a short term view - just as you are Stephanie in looking only to next year - and that is why the markets continued to support the credit boom right up to the time of the credit crunch.

    Busby2

  • Comment number 61.

    59. At 8:07pm on 01 Oct 2010, dave1east wrote:
    Steph, could you please explain the relevance of the July stress tests in these developments? At the time it was just german and spanish noddy banks that were the problem, clearly the stress tests were rubbish as far as irish banks where concerned, why so?

    ----------------------------------------------------------------------
    Think they just didn't bother with the two big Irish banks because they knew they were bust outasight. Plus they were effectively nationalised - was the July test for independents?

    Testing Irish banks in 2005 might have been a good idea ...

    Hey! Let's be careful out there, today.

  • Comment number 62.

    A heartwarming good news story to cheer up the Irish, but the reality is that poor old ireland is well and truly up the creek without a paddle...

  • Comment number 63.

    I have worked in the Republic of Ireland in the recent past. A few examples of the taxation and benefits' systems :

    1. No property tax on most residential property . A token tax on Second Homes (200 Euros)

    2. 50% of the working population pay NO income tax and NO national insurance ( or PRSI as it is in ROI) e.g. someone on 18000 euros pays no tax , no national insurance . In the UK, that person would pay 3500(approx)

    3. A basic state pension of 220 Euros per week

    4. Children's allowance of betweem 150 Euros and 200 Euros per week .

    5. Unemployment benefit of 210 euros per week, even for school leavers .

    Room for changes ? I rest my case

  • Comment number 64.

    re my previous post ;

    Item 4 -- children's allowance -- this should read

    Children's allowance of betweem 150 Euros and 200 Euros per month .

    Apologies to everyone (anyone ??)

  • Comment number 65.

    spectator1969: those same policies were also in place when the economy was running surpluses. Eire's current problems are independent of policies you give.

  • Comment number 66.

    The problem seems, to me, to be the fallout of allowing Anglo-Irish to go the way of Lehman's; this is insufficently theorized. There is an assumption, by Lenihan, and others, that this would be catestrophic for the Irish economy. Anglo Irish is a private company that got it wrong and should be allowed to fail, thus, partly relieving the burden on the Irish taxpayer; bondholders and shareholders took a risk and they were wrong, they bet on the wrong horse, to reflect an earlier analogy. I predict a general election based on the principle of withdrawing support from Anglo Irish and that that view will prevail. While it is in the public interest to protect 'high street banks', it is not in Ireland's interest to protect the likes of Anglo Irish.
    Roll on a general election; the Icelanders have done it why should the Irish taxpayer suffer the greed and incompetance of private banking?

 

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