The Fianna Fáil plan to fix the systematic problems within the Irish banking system is… to mortgage the entire country in order to keep the system running the same way as before.
The contradiction inherent to that decision - to fix a broken system by ensuring it runs the same way as before - is too large to simply go away. And, as history shows us, it will not go away.
Irish banks are overvalued. They have on their books around €110 billion in loans to property developers. The banks and the financial regulator maintain that the property developers are good for the loans, and as such the loans form an asset for the banks.
If you want to see some of those “good” assets, it’s simple: those “assets” are the hundreds of thousands of empty houses and apartments that litter the Irish landscape. The houses and apartments that nobody is buying. That is where the banks’ collateral lies.
The government’s plan simply does not recognize that fact. And that fact, like Willie O’Dea’s mustache, is not going to go away.
The government needs to do two things.
The government needs to flush all the bad debts out of the system; and it needs to recapitalize in order to get capital flowing once again. There are variants on the theme, but, essentially, that is what the government has to do: flush out the bad debts, and recapitalize. And to do that, it needs to take control.
It needs to set up a system whereby it can take charge of the bad debts; and at the same time re-deposit funds into the banking system order to recapitalize it.
The government’s plan does not do either of these things. Instead of flushing the bad debts out of the system, it has decided to put up the Irish people as GUARANTOR for those bad debts, and by doing so ensuring that the bad debts STAY in the system. There is no special procedure in place to “flush” them out.
The financial regulator, when asked on PrimeTime last night, said that he does not want to “speculate” as to the extent and size of the bad debts in the Irish financial system. The bad debts, he said, will be dealt with as always, “in the normal course of events.”
These are not normal times.
The financial regulator does not have to “speculate” on the size of extent of the bad debts. He can find out by commencing an audit, but doesn’t want to do that, at least not in public. Apparently, knowing the size of the problem is a problem for the financial regulator: - but maybe, knowing that we might know the size of the problem is a problem for the financial regulator.
If there is a problem with the idea of flushing out the bad debts it is this: that those with the bad debts, as well as the shareholders in the banks, will take a hit for those bad debts. That is, those who have a vested interest in maintaining the system as it is are the ones who would lose out in any reform of that system.
In order to protect these interests - a tiny proportion of Irish society - the government and banks have taken the route of guaranteeing toxic debts instead of flushing them out.
As I said, the contradictions inherent in trying to fix a financial system by ensuring that it runs in the same way as before, are simply too big to go away.
Which means, they will not go away.
Sooner or later the government will have to do the above. Instead of doing it now, It has decided to buy time for the system as it stands today. It has decided to guarantee toxic debts, instead of flushing those debts out of the system.
The same “toxic debts” that are held by property developers: the kind of people who fund Fianna Fáil.
[…] I agree with this. Things won’t be the […]
1. The fact that some - OK, a lot - of the banks’ exposure to the property sector was unwise does not mean that the entire €110 million is now valueless.
2. I have seen no explanation, and can conceive of none, for the notion that guaranteeing those who *lend to* the Irish banks amounts, as you and so many others allege, to bailing out those who have *borrowed from* those banks.
Readers may be interested to know that I have just opened a new section on my website dedicated to the Bank Rescue.
Who said that it was entirely valueless? (And I take it you mean €110 billion, not €110 million.) Where have I said that?
I’m talking about flushing out the crippling debts that are there, not propping them up until a later date. and you cannot return to any form of equilibrium until that measure has been undertaken. That’s been the international experience. The Irish “unique” move has been to underwrite everything - deposits, good loans, bad debts, everything - which means that the billions in bad loans undertaken by property developers, for developments that are empty and will continue to remain empty, remain in the system. The developers and banks get to evade the fiscal consequences of their recklessness. That’s certainly akin to a bailout.
The banks who lend to Irish banks looked at the Irish situation and, quite frankly, didn’t believe the Irish banks when they said they were good for it. The reason being the extreme exposure (in European banking circles) of the Irish banks to property development loans, at a time when property development has, for all intents and purposes, crashed. The international banking world looked at Ireland and saw that there’s something else going on apart from the credit crunch: Irish banks have overreached themselves to a serious, indeed, fundamental, degree.
Until those bad debts are flushed out, it doesn’t matter what instruments the government undertakes to prop up the system, eventually it will have to deal with them. And the longer it takes, the worse it will get.
So, let’s say things settle down by next year (a completely hypothetical situation divorced from the complexities of reality - kind of like the ones economists make a living out of), what’s certain is that the (de fato) unregulated credit world we’ve had is gone. So, things settle down, and the Irish banks still cannot get the type of loans they need to mask the bad debts as the credit market has changed utterly, that still leaves the Irish economy exposed as the fundamentals have not been dealt with.
Meanwhile those bad debts just keep on soaking up capital because, one year later, they still haven’t been flushed out of the system as there’s no incentive to do so.
Dead investments, soaking up capital from the real economy, at a time of recession.
There’s your “unique” Irish plan.
1. Yes, I meant €110 billion
2. You said in your post “The houses and apartments that nobody is buying. That is where the banks’ collateral lies”. That can be read as meaning that their entire collateral is valueless
3. The Irish banks’ exposure to property is undeniably excessive, and does affect international sentiment. However, the consensus that this why the banks’ credit lines dried up this week is simplistic and even if true, which I doubt, does not appear to be based on rational analysis. The State of California’s credit lines dried up, too.
4. I will have to ask you to show me the provision in this week’s legislation which underwrites “bad debts”.
5. I will also have to ask you to explain how “flushing out” works what seems a rather peculiar magic. It sounds like the Paulson Plan, which would indeed tend to have the effects you fear if applied in Ireland at this point.
you can flush out and recapitalize, as with Sweden in the 1990s, or you can use gov. money to underwrite everything in order to keep the system as it is, as with Japan in the 1990s. Ireland’s gone for the Japanese model, and for much the same reason - to protect the powerful vested interests within the society. I explained what I mean by this in an earlier post. http://tinyurl.com/4aslrv.
That peculiar magic as you call it, has precedent - as with Sweden. So too, has the “underwrite everything to keep things as they are” approach, as with Japan.
I say “some of those assets” in my post. You have decided to read it as meaning the entire collateral is useless. If you want to get all Literary and Debating society or Sarah Palin on it, well, that’s your prerogative. I’ll meet you in St. Stephen’s Green for tuxedos at dawn.
The point is that the international banking system does not believe Irish banks when they say that they are not unduly exposed to bad debts due to the property crash in Ireland. The government plan does nothing to alleviate that at all. It simply means that the Irish taxpayer is now the collateral, not the banks holdings, and not the shareholders. The attraction of that setup we’ve seen only last week with the Irish Nationwide email. Until the Irish banking system addresses those bad debts. the fundamental problem lies untouched.
I cannot show you the detailed provisions in the Act which refer specifically to “bad debts” because there are no such details in the act! It’s an extremely bad piece of legislation - no surprise given the rushed nature of its authorship.
However, it does have these three pieces in it: http://tinyurl.com/4ehmxw
“4.—To the extent that the Minister incurs any expenditure not met
in accordance with section 6, the expenditure shall be paid out of the Central Fund or the growing produce thereof.
5.—(1) The Minister may, in respect of any difficulty that arises
in the operation of this Act during the period of 2 years beginning on the relevant date, make regulations to do anything that appears
necessary or expedient for bringing this Act into operation.
6.—(1) As and from the relevant date, the Minister may provide
financial support in respect of the borrowings, liabilities and obligations of any credit institution or subsidiary which the Minister may specify by order having regard to the matters set out in section 2, the extent and nature of the obligations (including the degree of control over possible abuse of the financial support) undertaken and which might be undertaken in the future and the resources available to him or her in that behalf.”
Apart from allowing the minister to do anything he wants, the act does say that it underwrites everything, credits, liabilities, and obligations. Were it to happen that the liabilities could not be covered by the banks and their shareholders, the minister has the power to provide “financial support”.
As regards the fine print, finance minister Lenihan said in the Dáil last week that as the contract between the government and the banks will be a commercial contract, it will be a confidential contract. We’ll know the general provisions, but the fine print, no.
So. We have a Fianna Fáil minister with enormous powers to provide “financial support” to Irish banks who have overexposed themselves with their property developer portfolio - the full details of which will take place behind closed doors, involving the same people who overexposed that system in the first place.
Nothing to worry about there.
While I would be more than happy to see those that have profitted horrendously at the expense of Joe-Soap hoause buyer over the last several years I would be loath to see the whole thing brought down around our ears. Ideally the sabilisation (and I agree the Swedish model is preferable) would take place followed by a serious ass kicking in the banks and developers. However as they are all cuddly with the establishment it might require a coup.
One week later and the government still hasn’t got a plan. It looks like the “details” will be known only after the budget. Cowen and Lenihan marched us up to the top of the hill…. and they’ve marched us down again. The markets, if or when they stabilize, are going to slaughter the Irish banks. The Irish government is weak. It is scared. It is indecisive. The exact opposite of what one needs to be in a crisis.
And it’s going to fuck up with next week’s budget. They’re going to cut spending on infastructure and social services (taking money out of the economy), while leaving the top 5% who control the majority of the wealth in this country completely alone (those who in the main invest abroad, i.e. they take the “trickle down” benefits and use it to “trickle out”). In other words, they’re going to keep with the “trickle-down” approach because that’s the line that most benefits Fianna Fáil’s financial backers.
Yep. Friedmanism. Bollox