Here's a talk I gave to Dublin City Council on Thursday, here are the slides. Thanks to Cllrs Forde and Quinn for the invitation to come and speak to the Strategic Policy Committee on Finance. The discussion was excellent, with hopefully more to come. As usual, any comments on these ideas are more than welcome.
Stephen Kinsella
Economist at the University of Limerick
List
Hi Stephen, this is off topic so apologies but I like to know your opinion on Morgan Kelly's peice in the Irish Times?
http://www.irishtimes.com/newspaper/opinion/2010/0522/1224270888132.html
BTW, do you not think he looks a bit like Sideshow Bob? Lols.
Hi Mossy, I was going to blog about this anyway, but I'm largely with Morgan on this one, though he really has to say where that 65bn is coming from/going. The question of sovereignty isn't for headbangers, it's a real problem for us right now, and in a moment when the loss of a bank guarantee might just cost us that sovereignty, it might be the only question worth answering.
Am I correct in saying that:
1. A significant portion of the 3 Irish Bank's current funding/debt is senior debt owned by ECB & Irish Central Bank?
2. Aside from a few billion of subordinated debt here or there the vast majority of the Irish bank's debt is senior debt.
3. Theres no acceptable way to repay some senior creditors before others.
4. The banks therefore can't renegotiate the vast majority of their debt without defaulting on their obligations to ECB & Irish Central Bank?
Possibly some of the ECB funds were secured on the basis (behind the scenes) that the Irish government would ensure repayment? Is it possible this is why Lenihan is so adamantly advocating full repayment?
Hi Mossy, On 1, you are, here are the figures from 2009 (from Irisheconomy.ie)
BOI: Senior, 18.5; Subordinated, 5.3; Total, 23.8
AIB: Senior, 8.5; Subordinated, 4.6; Total, 13.1
Anglo: Senior, 4.1; Subordinated, 2.7; Total, 6.8
INBS: Senior, 1.2; Subordinated, 0.2; Total, 1.4
ILP: Senior, 5.1; Subordinated, 1.6; Total, 6.7
Totals: Senior, 37.4; Subordinated, 14.4; Total, 51.8
So for 1, 2, and 3, you're dead on. On point 4, that's a huge issue-if these guys can sit around a table and have that type of conversation at all, we'd be in much better shape, because for all intents and purposes, that conversation would result in some class of a Kelly-style debt equity swop.
The way I understand the banking crisis is to try and think holistically: yes, you have the banking disaster, but it isn't even the biggest problem in Sept 2008. First and foremost, you have to plug the fiscal hole as Minister for finance. The day he guaranteed the banks' liabilities, a NAMA-type operation was inevitable, but when you have to keep markets sweet to keep the fiscal show on the road, partial or total nationalisation of most of the banks in Ireland is also the best option in the short term.
Kelly's argument is that in the medium term, say up to 2016, the decision to keep the banks alive at the public's expense will cripple the state. I've checked Kelly's article carefully, because a version of it will be published in a book I'm editing, so I'm pretty sure his figures are good.
Cheers for the comments!
Interesting, I had underestimated how much subordinated debt is out there. Is Kelly assuming those investors will be totally wiped out in his 50 billion loss figure?
I'd love to hear a discussion of the practicalities of a debt for equity swap for the bonds held by ECB. I presume Germany etc would be adamantly against this, perhaps it would cost Ireland a lot of eurozone political capital?
Also there seems to be very little criticism of the European banks who facilitated this crisis by lending so much money to Anglo, to Greece etc.
Hi Curious,
Yes, I'd say those guys are the first wave of 'shaftees' the moment any guarantee gets withdrawn. There's no agreed set of procedures for this type of discussion at the level of a country within a monetary union, and don't forget we wouldn't act in isolation: Greece, Spain, Portugal, perhaps Italy would follow suit, were we to do this kind of thing. On the EU banks, these guys were just chasing easy money with less than perfect information, IMHO.
Delighted to see a blog entry about this. I have been trying to trace the progress of this form of financing for public works projects for the last year or so. I am glad to see the issue is still provoking a discussion.
Stephen,
On the subject of building infrastructure to support a knowledge based economy, do you know anyone using a virtual server at the moment? In Ireland at the moment our broadband infrastructure is still lagging far behind worldwide benchmarks, and requires colossal investment in the coming years. I clicked on a banner ad today, to get get an idea what price points are like. An Irish based virtual server service offers something like this.
http://hosting.digiweb.ie/virtual-servers/
But I imagine this price/value ratio is going to improve and improve over time. When you have the broadband infrastructure, I am sure it would make it worthwhile to consider all kinds of virtual offices, virtual project servers and all kinds of applications that one can start think about. In turn, that would attract significantly more numbers of foreign companies to set up a base in Ireland, and quickly establish an eco-system of knowledge-based production.
The institute of International and European Affairs website featured some web/pod casts on the whole subject at this link.
http://www.iiea.com/events/creativity-and-innovation-the-european-perspective
I have put together some thoughts, as they came to me for the guys over at CG Architecture. Here is a link.
http://forums.cgarchitect.com/41163-remember-email.html
I touched on examples of 'e-mail overload', and old instances of network based collaboration such as 'Lotus Notes'. I must compose it all into a proper blog entry at some stage.
Stephen,
My biggest worry would be that people get all carried away in the talk about 'how to set up municipal bonds'. And we would forget to look at our incentive to do so in the first place. I.e. To finance the roll out of worthwhile endeavours which could support a lot more employment and business opportunity, than is currently the case in Ireland.