Kevin O’Rourke on the Irish crisis

So how have those bank bonds been handled? Are they indistinguishable from normal government debt at this point? Or are they still marked in some special vehicle carrying different rates than normal Irish debt? I understand at some point that if you guarantee the debt at any time there is no truly going back because it will deliver a huge kick to the value of that debt and allow the people who should be taking a haircut, to unload it on other suckers. But why no consideration at all of revisiting that decision and forcing those bondholders to accept some loss? Is anyone clear about the status of Irish bank bonds at this time?

mpowell – well from the firestorm piece, it seems that the bank bonds got put into something called NAMA (National Asset Management Agency). So that seems like one could revisit this part at least in theory.

Too big to nail.

IM: You really think all of that money is staying in Ireland?

No, when you borrow from a new creditor to pay off your other creditors, you don’t keep the money. Why should you ? And why do you blame the new creditor?

You keep the half-finished palace you never could afford anyway, though.

#11

Increasingly, yes. If an Irish bank in the morning decided on its own not to pay bondholders, the guarantee would get called and Irish government would have to pay. And they don’t have the money — they would have to borrow it at hostile yields of the moment. They can stave it off by pumping these NAMA bonds into the banks, which they then use as a collateral for ECB loan to keep servicing the bonds. But it’s unsustainable, which is why the loan was necessary.

The country got sandwiched. The ideal time to not pay the bonds was September, 2008. But that was when everyone said the lesson of Lehman was that you have to pay. As Tim says above, once the guarantee was put in place as a solution to that problem, the options dwindled ever since.

@ Roy Belmont

Oddly the “get Assange” push seems to have ramped simultaneously with his threat to release “the documents of one of the largest banks in America”.

Assange for Nobel Peace Prize next year? myself and some co-workers were talking about Wikileaks today (between the banksters and the weather, there’s nothing else to be cheery about in Ireland right now). Assange and his associates have blown the lid off what I’d call the “political black economy”, and the world ought to thank him for it.

The bulk of the benefit, in those terms, went to the people who borrowed for home loans

Hang on a second, here; let’s not forget that the banksters were lavishing money at the other side of the property transaction, namely the developers (where they weren’t ‘the developers’ themselves!).

I know little about Irish government structures, but how is it that the Irish government could assume such huge liabilities with (unless I misunderstand) no legislative authorization? In the U.S., committing the full faith and credit of the United States requires Congressional authorization, which could never have been obtained for–the mind boggles–a guaranty of absolutely all bank obligations. (The proportionately much smaller TARP was contentious enough.)

Is this score one for separation of powers? Alternatively, is it score one for the superior intelligence of Paulson and Bernanke over the lords of Ireland? Or is there another explanation?

In addition to elm’s list (of which the 2nd link is the infamous guarantee), another important item is the legislation making the National Pension Reserve Fund (previously a predominantly overseas investor) into the government’s investment vehicle for ailing banks. In addition to the parliamentary power to ram through whatever they want once they had a majority, it doesn’t help that Irish legislation is nearly always done as amending legislation, which makes it unintelligible, especially given the stakes involved in this case.

Hix makes a good point. If the house was worth €300k in the owner’s opinion when he bought it, there’s no reason it shouldn’t be worth exactly the same to him now (unless the roof has fallen in or the ground’s given way or the house next door is now inhabited by the infamous Molloy family, who play drums at 3 in the morning and keep a live walrus in the front garden). And lucky for him, interest rates might be even lower now than they were when he bought it.

The other shoe is going to be an election. Remember Ireland has a relatively small electorate and is capable of very rapid change (remember the collapse of the Home Rulers in 1919) and if Fianna Fail collapse (which seems likely) and if Sinn Fein run proposing a unilateral default (which they would be crazy not to), then they become the necessary element and Ireland will default. Leaving aside all the issues about whether or not this is a good idea the political reality seems to be that this deal will not be politically viable in Ireland. There will be an election next month so the options are narrowing to structured default or unstructured default. Any takers for an Atlantic Union (Ireland, Greenland, Iceland, Scotland, Nova Scotia)?

#24 reminds me – has anyone looked at the lower flexibility inherent in a society where most people own their own homes and there are costs associated with moving house to find work? In theory, moving to find work should be retarded by the extra costs and effort involved?

“People that bought a home to live in it couldnt care less if the market value. Only real estate gamblers care about market value.”

This is, of course, insane. People hate feeling like chumps. No wonder your country is going down by the bow with reasoning like this. How can you sit there like proles while they steal your pension fund. The mind boggles.

hix: “People that bought a home to live in it couldnt care less if the market value. Only real estate gamblers care about market value.”

Ivy Squash: “This assumes that you don’t have to leave the home in order to find employment elsewhere. Suddenly the home you bought “to live in” becomes a serious concern as far as its market value.”

Or need to sell the home and move to smaller quarters, for your retirement.

Many of us foresaw that the property bubble would burst. What I certainly didn’t foresee is that the banks’ risk management, auditors and regulators would fail so abysmally to prepare for that inevitability, nor that the state would guarantee their liabilities, thereby putting its own solvency at risk.

“People that bought a home to live in it couldnt care less if the market value. Only real estate gamblers care about market value.”

That’s quite ignorant on a number of points:
-Negative equity definitely stops labour moving to better jobmarkets.
-Negative equity preclude other consumer borrowing eg vehicles, hire purchase, credit cards. It creates a credit chokehold.
-Negative equity feeds up through financial institutions and instruments to pension funds etc, (US of all places know this!)
-Negative equity gets crystalised as wealth destruction in an economic environment such as Ireland where a huge store of wealth was thrown in on top of international credit in the market. Job losses, lower wages etc. mean the debt doesn’t get serviced. There’s a flood of defaults stored up I believe
Look at it from a macro POV: Mortgages can effectively be seen as way of leveraging future productivity in an economy. Right now the Eurozone periphery is going through a de-leveraging process. In Ireland the credit boom was stuffed into a housing market ultimately creating non-productive debt. The process of de-leveraging in Ireland is probably going to be more painful than countries where that credit generated corporate debt etc (a market which is infected by market uncertainty and lack of liquidity right now)
Another key aspect of negative equity in Ireland is that you cannot walk away from the debt here. It follows you, whether you dispose of the property etc. The equivalent of “jingle mail” in Ireland would mean leaving the jurisdiction. This may be acting as stop on a wave of defaults. The debt is currently totally embedded in the country. And Citigroup amongst many others consider Ireland insolvent as an entity, unsurprisingly. Taxes are going up to service debt taken on to maintain banks that are carrying deeply suspect mortgages and obligations to bond holders. It’s a dismal dismal sight

“-Negative equity preclude other consumer borrowing eg vehicles, hire purchase, credit cards. It creates a credit chokehold.”

This ones sounds particular problematic and non gamblerish .

“The equivalent of “jingle mail” in Ireland would mean leaving the jurisdiction.”

The Irish enjoy life in some third world country without extradition threaty so much?

The flip side is that the Irish fellow who owes €300,000 for a house that’s worth €150,000 actually got screwed/screwed up back when he bought into the bubble.

Here’s the interesting part (drum roll): somebody got paid those €300,000.

Let’s go back to ChrisB: “The bulk of the benefit, in those terms, went to the people who borrowed for home loans”. This is not quite right. The benefit dodn’t go to the borrower, at least not the one left holding the bag, but to the seller(s). It went to the people who profited from the real estate bubble, including but not limited to the banks. Where did all those billions go?

“has anyone looked at the lower flexibility inherent in a society where most people own their own homes and there are costs associated with moving house to find work? In theory, moving to find work should be retarded by the extra costs and effort involved?”

Yes: the usual outcome is that owner occupation above a certain level increases unemployment by some other amount. Usually thought that both the UK and Eire are above this point where unemployment is increased.

One of the sadnesses of the situation though is that this is sometimes used as an argument in favour of more social housing. If ownership makes labour immobile then a larger rental market should make labour more mobile.

Well, yes, but mobility within social housing (subsidsed, like council or housing association) in the UK is even lower than owner occupation. It’s more difficult and takes longer to move from one local authority to another in such subsidised housing than it is to sell and buy a house.

I agree with all the rest of your points, but how long will this one be true for? Presumably there will come a point in the not too distant future where people have to choose between mortgage repayments and true essentials like food, and how are the banks going to pursue litigation when they’re effectively insolvent?

Steve: Until last year, Ireland had the perfect solution for that debtor’s prisons. Sadly, that law was found unconstitutional, but presumably with a Constitutional amendment & some help from the ECB, that can be fixed.