David McWilliams

[GaryMc]

Bailout will sink Ireland before we can even swim

Foreign banks and creditors should lose everything they gambled on the likes of Anglo, but instead, they have been saved by the taxpayer

Make no mistake about it, this ‘bailout’ will sink Ireland. We are witnessing a monumental struggle between the innocent average Irish person and the guilty creditors of the bust Irish banks.

Interestingly, the financial markets have seen through what the Government and the elite are trying to do and have reacted with ferocious negativity to the Irish deal.

The markets realise that the Irish State is not bust; rather the Irish banking system is bust. Therefore, rational people can see that any deal which is framed to give Ireland a chance has to sever the link between the bust banks and the solvent State.

However, far from severing the link, the deal solders the link between State and banks, making the Irish Republic itself little more than a bust bank. The rest of the world has twigged that what the elites are trying to do is preserve their system by giving the bill to the people, and this will not work. This is why, far from calming the financial markets, the IMF deal with Ireland has enraged them.

Extraordinarily, the people who were supposed to negotiate for the Irish people not only negotiated against us, but couldn’t see the backlash coming. Perhaps this is because few of them have any real financial market qualifications.

So, rather than force the ECB to account for its own monumental culpability in allowing out-of-control German and French banks to lend recklessly to Irish banks, the Irish negotiators turned sides and acted as debt collecting agents of foreign banks.

Think about what is happening in our country. Foreign banks and creditors should lose everything they gambled on the likes of Anglo, but instead, they have been saved by the Irish taxpayer, who had nothing to do with executive decisions at Anglo and the other banks. These same major international banks will now lend money to the EU who will lend it to us and the same banks will make more money on interest from us.

So the very banks that should be punished for their failures are being bailed out by the Irish citizens and, worse still, they will get paid more interest from us in the loans they are now extending to us, to save themselves!

Let that sink in for a minute. This is not capitalism, it is not European diplomacy; it is a stitch-up.

This is only the first part of the terrible fantasyland we have been led into.

In order to get to the bottom of what is happening, we have to clear up a few things. First, we have to stop calling it a bailout. This isn’t anything like a bailout. Rather it is the EU giving us enough rope to hang ourselves in the hope that we don’t hang all of them.

Of course, as soon as they gave us the rope, they started discussions on a mechanism that would ensure no other country would have to be beggared by a profligate out-of-control administration again.

Amazingly, our so-called negotiators signed a deal that will be the last of its kind ever signed by a European government and, in so doing, they have condemned their own people.

The EU leaders realised last weekend that the problem was bigger than Ireland, so they have committed to come up with a construction in the weeks ahead which will mean that in the future when banks get into trouble for lending too much, they and their creditors will pay. They will share the burden.

But Ireland will not be allowed to avail of such a deal because that would be retrospective. So rather than dig their heels in, our negotiation team signed and allowed the EU to treat Ireland differently to any other country. We can go hang.

So not only have they given us a rope, but the interest rate on the rope is nearly a death sentence in itself. It is reported that the “blended rate at current market prices will be 5.82pc”. As opaque phraseology goes, that one is pretty meaningless.

But let’s accept that at face value, and look to the costs of the financial noose our ‘friends’ in Europe have given us.

There are two sides to the story.

First, there is the cost side. If we borrow the entire €67.5bn and scrape the bottom of our own barrel to come up with €17.5bn, we can add €85bn to the current outstanding €90bn of debt. That will leave us with a national debt of €175bn by the end of 2014. The interest on this will come to about €8.5bn per annum. This, of course, is the optimistic scenario.

Anyone who has watched in horror as the cost of Anglo has risen from zero to €4bn to €12bn to €18bn to €24bn to €35bn over the past 26 months will know exactly what stock to put in government forecasts.

But the other side of the story is growth.

If this debt is not to drown us, we need the economy to grow at a pace that is greater than the interest we are paying on our debt.

With a debt/GNP ratio far above 100pc our growth will have to be in the order of 8-10pc by 2014 for the economy just to stand still. Anything less than that and the interest payments head off on an unsustainable tangent.

Without growth at these levels, the interest payments leaving the economy (a major problem when a country has all its debt owned offshore) will prove such a drain on the State that we will end in a debt-deflationary spiral. This is where our growth fails to meet the interest payments, making the following year’s growth lower as there is less investment, making that year’s interest payment more burdensome, leading to less growth etc, until a huge default becomes inevitable.

So where will this growth come from? Where can it come from?

The assumption underlying the four-year plan is that things will not get any worse. That is some assumption. But let’s allow it for a moment. Has there been any government policy recently that is aimed at improving opportunity for the future? Or have they all been about preserving the past, and the “insider” power nexus that got us here in the first place?

The bailout hits the sweet spot where the interests of our insiders and the European insiders meet. Luckily for us, the financial markets do not have the same interests. The markets want growth, not punishment, which is why they are sceptical.

Without a radical change in the way this country is governed, there is no hope of growth returning. Our only hope is that maybe there is a tide coming that will wash away the ‘insiders’ and take their policy decisions that will bankrupt the country with them.


http://www.davidmcwilliams.ie/2010/12/01/bailout-will-sink-ireland-before-we-can-even-swim

Would be interesting to go back over his programmes 'The Popes Children' and the 'The Generation Game' and see how many of his predictions came though. From what I can remember he seems to have been fairly on the ball.

[Shay]

Very good read

*************

Give employers a good reason to hire, not fire
February 2, 2011

Posted in Articles | Irish Independent by David McWilliams
5 Comments

Tonight all over Ireland, people who employ other people will go to bed and the last thought in their heads will be: “Who will I fire tomorrow?”

What can we do to change that thought so that the last thought in their heads becomes: “Who will I hire tomorrow?”

Can the change of government change this conversation? How might this shift come about whereby the people who employ others — the only people who can drag this economy upwards — look more favourably on the idea of hiring an extra worker?

What we do know about economics is that people react to incentives. If you make it cheaper or profitable for people to do something, they will do it. By extension, as taxes are rising, if you make it tax efficient for people to do something, they will do it too.

If you doubt this, think about why we have ghost estates. We have them because our State made it tax efficient for a developer to build in the middle of nowhere on all classes of tax avoidance schemes. The reason we have so many car parks is because they were designed to allow people with large tax bills to avoid paying tax.

Why are the US multinationals here? Because we make it cheaper for them to be here rather than elsewhere because we charge them less tax.

Think about housing in general: by giving mortgage interest tax relief, the State jaundiced people’s decisions about whether to rent or buy via a ‘tax sweetener’.

This, of course, benefited the banks and the builders enormously. As well as being a form of corporate welfare for the financial and construction sectors, the State might also have had as an ideology a notion to create a home-owning democracy where having a house meant you had a stake in society. Whatever the reason for it, making it tax efficient to own houses led more people to buy houses than would otherwise be the case.

So we know in economics that people act in response to incentives. We also know people do the opposite. If you tax something to make it more expensive, those who were going to buy that thing, buy something else — or don’t buy at all.

Let’s think about hiring a person. Who makes that decision? The person himself/herself who wants to be hired doesn’t. Obviously they might make the best of themselves by improving their qualifications, but the problem about being on the dole is that you can’t force people to value you.

But maybe we can do something else. Traditionally, many economists stress you can’t interfere in the markets. I don’t happen to believe that is the case, particularly when the market isn’t working. If our objective is to reduce the level of unemployment, then make it easy to hire. How do you make it easy? You give a tax credit to the guy who wants to hire or who might be thinking of it. This is what we did with houses — we gave a tax credit to build, so why not do it with our own people?

Why not give the prospective employer a personal or corporate tax credit to employ people? But where would we get the money to do this? Well here’s a suggestion.

It may have escaped your attention in the blizzard of economic and financial news over the past two years, but Ireland lent the three most delinquent and bust banks an astonishing figure of €31bn in 2010.

If you add the interest costs over the proposed 15-year work out of the banking plan, the total cost to the Exchequer is estimated to be €58.55bn — for more details on this see this link

Obviously, this is the worst sort of madness. But luckily there is an opportunity with a new government to change all this. A new government could decide to spend this money differently. Interestingly, for the main political parties who maintain that we stick to the EU/IMF plan, this borrowing has been given the green light by our ‘partners’. We have issued a large promissory note in order to cover these losses. We could simply tear this up and begin the process of bank debt default.

We have no moral obligation to pay for the gambling debts of these institutions and therefore we do not have to. And this week key global financial players, such as George Soros, said we would be mad to pay this bill.

Interestingly, instead of wasting €3.9bn a year on these institutions, which is what it would cost us per year to pay the debts of these bust banks, we could put that money to work helping employers. Close Anglo, Irish Nationwide and EBS. Take away their banking licences. Then they will no longer be the Central Bank’s problem; they will a problem for some liquidator somewhere.

Use the €3.9bn to give tax credits to employers to employ people. This sum would be worth €2,166 per employee in the country. If the money was ringfenced for smaller companies (that cannot engage in the accounting high jinks that the larger corporates can do to avoid tax) the figure per employee could be increased dramatically.

By doing this, we could increase the incentive to employ hugely. For every extra person an employer takes on, they get a tax credit. Surely this is better than giving the same employer a tax credit to build a car park?

In so doing, we change the game. The employer begins to ask the ‘who will I hire tomorrow’ question. This becomes a virtuous circle and the Government is simply transferring the incentive to invest away from buildings, car parks and houses and on to an incentive to invest in people.

We can therefore use the desperate situation of bailing out the banks to the advantage of the citizens and when potential employers go to bed, there will be a different, more optimistic thought on their mind.

[Jockser]

hi ideas are inline with most sane economists so he is not any kind of genius, but he is correct all the same and has good ideas on tax.

"until a huge default becomes inevitable."

defaulting is inevitable , its stunning to see how many people cant grasp this and stick their head in the sand.

Iceland Shows Ireland Did ‘Wrong Things’ Saving Banks http://www.bloomberg.com/news/2011-02-01/iceland-proves-ireland-did-wrong-things-saving-banks-instead-of-taxpayer.html

[Shay]

worth a look

7-cLDKl8XhI

[Shay]

Interesting if yet another depressing read......

Playing the relegation game
March 28, 2011

Posted in Articles | Banks | Debt | Sunday Business Post by David McWilliams
37 Comments

I belong to an oppressed sect.

Like every sect, we are bonded by strange rituals, unusual texts, strange chants and ferociously long memories. Past adventures gel us together, as do journeys made and risks taken.

We know that we are on the true path and that, unlike the other imitators, we are in possession of the truth. Like all sects, we believe that current difficulties are temporary and that all sacrifices are necessary.

We know that our day will come.

Our saviour will arrive, the messiah is on his way, and all we need to do is keep the faith.

I am a Leeds United fan. Following Leeds is the closest thing football has to a cult. And because Leeds have fallen so far, the sense of wrong is amplified each time I see smiling Manchester United fans glorying in another piece of silverware.

This weekend, Leeds play another club that was once top dog: Nottingham Forest.

It is a crucial match as both clubs are in play-off position for next year’s Premier League.

Both teams’ falls from grace have been spectacular, but the Leeds self destruction is the footballing equivalent of Ireland.

Forest are more like Portugal, hampered by structural problems. Leeds are a more straightforward boom/bust.

They borrowed loads of money, bought hugely expensive players and, while the team performed, all was manageable – but then the bubble burst and everything imploded.

Leeds went bust and were relegated.

After relegation, they sold all the expensive players. They got relegated again and had to start from scratch. But Leeds never stopped playing football, they just played football at a lower level.

The objective, when you are relegated, is to get promoted as soon as possible.

Ireland is the Leeds United of the European financial markets and, when we default, it will be just like relegation.

Being relegated doesn’t mean you stop playing football every Saturday – you just play against opposition you thought were beneath you. But you still play football.

Similarly, defaulting doesn’t mean that you stop being an economy which buys and sells, trades, employs and provides a living for your people. You simply play at a different level. Yes, your standard of living falls a bit. Your cost of living does, too.

But you still compete. You borrow from different people, get benchmarked against different countries, and then you ultimately focus on getting promoted again as your economy turns around. This is the way the world works.

Countries that mess up and can’t pay their way get relegated and countries that grow and do all the right things get promoted. We should know: we only got promoted recently.

The capitalist system works reasonably well and, like the football league, everyone understands the rules of the game. It is when you tamper with the rules that people get confused.

The eurozone and its treatment of weaker members are like the Premiership without relegation.

We are playing in a division which is too strong for us. The countries at the bottom – Ireland, Greece and Portugal – don’t get relegated despite being beaten week in, week out.

The authorities that run this bureaucratic Premier League won’t allow the weakest to play at the level that they should do.

But without relegation, the future is a purgatory of underachievement for the weak countries.

In turn, having no relegation – no default – doesn’t make the Premiership more credible, it makes it less credible. So everyone loses.

For some football clubs, relegation comes as a relief. It is a chance to rebuild, to see what is wrong and where, to give the fans hope of some upward progression. It allows a small club to return to its footballing academy without having to buy expensive mercenaries and it allows managers to try out systems without the mad pressure of fighting in the relegation zone.

Similarly, a default on bank debt gives breathing space. It allows a country to reorganise itself and to come up with a better model of how to run the place. The country never stops competing, it never ceases being an economy, it just joins a bunch of other countries which investors regard as a similar risk. And there are always investors.

The world is full of money with differing appetites for risk.

The key is that the country should be on the right track. It’s not the rating itself that counts, it’s which way the country is going. If you have a poor credit rating but are getting your act together, it is better than having a good credit rating while being in a pickle.

The problem for Ireland, Portugal and Greece is that the EU supports are preventing us from slipping down the credit rating chain, so we look like being a permanent default risk.

This is the worst place to be. It’s like being a team which gets beaten all the time with no hope of redemption. Relegation in this context is redemption, remember, so it just gets beaten and beaten.

In order to see what the world would look like if Ireland (and the other peripheral countries) were allowed to default as the numbers suggest, like a proper country, we must compare the interest rate that is being charged on Irish, Portuguese and Greek debt. We then must calculate the spread over Germany.

This spread is the risk premium – how much more an investor must be paid to hold these assets over German assets.

Armed with this risk spread, we can then calculate where Irish bonds would trade in a free market without the EU bailout and what would be our credit rating.

This will give us a true reflection of the situation but would also reveal the upside. It would tell us what sort of company we might have to keep in order to get financed in the free market. The following calculations were done by friends I used to work with at a trading house in London (www.exotix.co.uk).

According to these guys, who trade debt all the time, Portugal’s ten-year bond spread of 417 basis points (4.17 per cent above equivalent German bonds) delivers a credit rating of BB-.That is seven notches below the current average A rating.

Ireland’s spread of 637 delivers an implied credit rating of B, also seven notches below the current average BBB+ rating.

Greece’s spread of 897 delivers a credit rating of CCC+, six notches below the current average BB+ rating.

So if we were allowed to move up and down, get promoted and relegated according to the real risk that the markets accord to us, Ireland – at present rates of interest on ten-year government bonds – would be a similar risk to somewhere like the Seychelles. But we know that we are much richer than the Seychelles, so what is going on?

We are like a big club that has been relegated, being compared to a minnow.

The reason the market sees us as such a risk is that it knows we will not be allowed to be relegated by Trichet et al – even though we deserve that. As a result, our economy will be forced to pretend it is stronger than it actually is.

We will not be allowed to default and, therefore, our future is one of guaranteed deflation and deficits, emigration, high unemployment, generating surpluses to pay odious debts.

Therefore, we are in the worst of all worlds, a rich country getting poorer but still behaving like a rich country.

Leeds United sold their players, slimmed down and started again from scratch. If we want to get back up, we have to sink first and stop pretending to be a Premier League team when we are, at best, a Championship outfit.

[Garrett]

Wanna hear more from David McWilliams ?

... here you go:

http://www.davidmcwilliams.ie/2010/09/08/economics-without-boundaries-with-david-mcwilliams

€1,450 for 10 weeks' tuition ....
http://www.independentcolleges.ie/faculty-of-business/economics-without-boundaries


He's good, but he sure ain't cheap ;)