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Burning the Bank Bondholders. ECB Changes Position.

Hands up all those who said you can’t burn senior bondholders.

Anyone?  No?  You’re all very quiet over there.

When even the Financial Times was saying Ireland should impose burden-sharing on the failed banks’ bondholders by insisting on a debt-for-equity swap, there was a clamour, not only from European politicians and from the European Central Bank, but also from our own domestic doomsayers, predicting the end of the world if we didn’t bail out these mega-rich investors and save them from the consequences of having made a bad business decision.

And so we duly went and put Irish citizens into hock for generations to come so that unimaginably wealthy business people might not suffer any loss when their bet went bad.  I’ll keep repeating this until they physically hold me down and gag me.  The money poured into Anglo and Irish Nationwide was not a bank bailout.  Why?  Because those banks were dead and had no hope of ever trading again.  It was the rescue of gigantic hedge funds and private investors all over the world and it was heaped on the shoulders of the Irish people by two idiots, Brian Cowen and the late Brian Lenihan.

As a result of bailing out these speculators, our country is on its knees.  Imagine it.   These two buffoons took it on themselves to turn private-sector losses into public debt.  Did you ever hear the like of that?

B&B invented a new political ideology that was the very opposite of capitalism.  It was more like a demented form of communism in which the State took over not the means of production, but the means of making a loss.  Where it came closer to Soviet-style communism was in the fact  that the private citizen mattered not one iota.  Lenihan even had the effrontery to tell us that this was our patriotic duty.

Our patriotic duty, to subject ourselves to penury so that no gambler in the betting shop of the markets might lose a wager.

And if B&B were inept, they were enthusiastically egged on by Jean-Claude Trichet in the ECB.  When Trichet issued his instructions, his two bumbling marionettes in Dublin danced to his tune.  Even when the Danish government inflicted losses on bondholders, the mantra went on: you can’t burn the bondholders.

Well guess what?  You can.  Suddenly, since Spain and Italy ran into trouble, since Francois Hollande ascended to power in France and since Mario Draghi took over from Trichet at the ECB, it now becomes possible to do what the FT, Joseph Stiglitz and every other person of sanity has been saying.  Suddenly, it’s possible to stand back and let investors take their losses in true capitalist style.  That’s what Spain will be doing, with the blessing of the ECB.  No bank guarantee for them.  They’ll be saying this is a private-sector problem, with private-sector companies failing and it has nothing to do with the sovereign government.

Great news for Ireland, you’re probably thinking.

Eh — no, Ted.  Unfortunately, all the Anglo and Nationwide bondholders have already been paid off.  They’re gone and so is the money.  Gone, including Abramovich who bought Anglo bonds at ten or 20% of face value on the secondary market and insisted on getting the full price from our government.  How many Chelsea players did the Irish taxpayer fund with that handout?

Abramovich threatened to sue the government for going back on its commitments.  The threat was hollow, since the government was never obliged to stick with a unilateral guarantee that carried no reciprocal benefit for the Irish State and which was based on false information provided by the banks.  More on that another time as we begin to peel back the onion-layers on the night of the incorporeal cabinet meeting.  A virtual cock-up in every sense.

So where are we going with this?  What’s the end-game?

Well, we still have the issue of the promissory notes.  If you remember, these are debts owed by our government to the Irish central bank.  You see, in order to pay off the bondholders, the central bank created money out of thin air, as it’s fully entitled to do.  But our government must then pay yearly sums into the CB to write down that funny money.  Now here, as I see it, is where there might be scope for manoeuvre.  Because the ECB has accepted the principle of burden-sharing for Spain and Italy, Ireland is the only country left swinging in the breeze.  Up to now, at the insistence of the Germans who have a pathological fear of inflation following their experience with the Weimar Republic, there has been no possibility of quantitative easing, which is a nice way of saying printing money.  But Ireland’s money is gone and our government is on the hook to pay it back, so what I would do in Baldy Noonan’s shoes, is look for a derogation.

Let us be the exception in two ways.  First, we’re already the exception in having guaranteed the failed banks 100% at the insistence of the ECB, which now agrees that such a policy is insane.  Therefore, for a quid pro quo, let us also be the exception by permitting cancellation of the promissory notes, effectively increasing the Eurozone money supply.  The fig-leaf can be that it’s a once-off deal involving a piddling sum in European terms, to acknowledge that Ireland went far beyond what Spain or Italy are prepared to do and to recompense us for the pain caused by the obduracy and stupidity of Trichet’s policies.

That’s what I’d be looking for, but then again, I’m not an economist and I’m not a politician.

Maybe smarter people than I am might be able to explain it better.


Economy Favourites

Irish Fiscal Madness for Dummies

I’d like to introduce the latest member of the Bock Collective.

Brian Lucey is Professor of Finance at the School of Business, Trinity College Dublin, which means he knows a lot more than I do about the state of our economy.  I asked him to contribute an article for BTR and, after he stopped laughing, he said, Why not?

So here we go.  This is a piece on the insane Anglo bailout and a brief explanation of how the central bank is burning your money.



This recession has been a mixed blessing.  There has been some sense of recovery of a realisation of what’s importan , the gaudy lustre of the boom having faded.  Family, friends, light, heat, carbohydrates, that sort of thing. At another level it is a blight on the landscape, what with emigration returning like a nasty social disease we though we were too posh to suffer from, the persistent sucking sound that is the national wealth being siphoned off to the banks, the realisation that we overspent massivly in the boom and, banks aside, would STILL be broke. And then there is the explosion in social meeja.. We have seen the veritable good, bad and ugly of twitterati, bloggerati etc emerge, each vying for our spare time.

Among the more evolved blogs to emerge is this very site. For years now Bock, bless his black blood pumping organ, has been publicly, vocally, eloquently and occasionally accurately, analysing the mess we find ourselves in.  Schloss Bockstein must be a veritable hive of activity daily as minions scurry, henchmen worry and sycophants curry favour with The Bock, all to create what is a unique if somewhat dyspeptic view on the world. Has it been only 6 years since he sashayed onto the virtual stage? It seems much much longer….

One of the things that our genial host has been concerned about is the Anglo Irish Promissory Notes.  These are quare things that the 2008 geni loci, the cabinet of curiosities that was then our government, issued to Anglo, late of solvency. The point in doing so was to allow Anglo to ruck up to the discount window (second floor location ) of the central bank and swap them for money. This was because Anglo had run out of everything else to swap: normally and quite reasonably banks swap illiquid assets for liquid assets, pledging say a billion in commercial loans repayable in 4 years for 0.997b in cold hard cash to be repaid in a weeks time. If this sounds like pawning your coat, be assured that it is almost totally not.  The ECB does not have three balls.  Anglo had, in 2009, run out of everything to swap. Even the fairly liberal acceptance policies of the ECB had baulked when they turned up with crayoned letters issued as documentation for a loan on a soggy field in north Leitrim inhabited by rabid geese. So, they were in danger of going bust, and that we are told is A Bad Thing. So, to keep the show on the road and repay the bondholders the then government gave these PromNotes to Anglo, who swapped them for money at the Central Bank of Ireland.

Now, central banks create money out of thin air. That’s what they do and that is what my colleague Patrick Honohan did.  The problem is, what if everybody did that? It’s one thing a chap in Dame Street creating €30 billion and therefore allowing the repayment of bondholders. What if someone in Madrid did it? Or a fella in Rome? Sure we could find ourselves in Europe with a couple of trillion (remember when we used to care about millions) in extra euro floating about. This would make the Bundesbank, the core of the ECB, angry, as Germans have had … unfortunate… experiences with inflation what with the collapse of the Weimar republic, the rise of Hitler, genocide, the obliteration of Dresden, invading Russia and all that.  And inflation is a function of too much money chasing too few goods. So, no, to stop this dreadful spectre, the ECB demands that the Irish central bank gradually destroy the money it has created. The accounting treatment of this is enough to make an angel weep, but in essence this is the central bank each year getting 3.1b from Anglo (who haven’t got it so it comes from the State, you dear reader, having been borrowed from the Troika) and then offsetting that against the same amount of real money they earlier created.  Its borrowing money to destroy it. Which makes as much sense as wearing a dead badger round your neck to keep from getting toothache. In the context of a maximum of a couple of trillion (2) in a Europe that has about ten (10) trillion of money already sloshing around it may make even less.  And when you consider that the ECB has already in effect injected the thick end of two trillion into banks through a device called LTRO , allowing them to rebuild their shattered balance sheets, it may make even less sense. Europe, never mind Germany, is not on the verge of hyperinflation, so one sees here how culture beats strategy every single time.

So, we find ourselves caught. We have no friends in the Eurozone, only creditors. Our best friend in this crisis (because we are so intertwined economically that our mess is theirs) has been what my granny called Pagan England, who have created money hand over grubby fist to keep the show on the road. Meanwhile, in Frankfurt the ECB look with fearful eyes at the experience of the Weimar republic in the 1920’s (too much much too much waaaayyyy too much money) rather than the USA in the 1930s (too little, system seizing up due to too little money).

Lets do the time warp again ….




Previously on Bock

Economy Favourites

Morgan Kelly Predicts Irish Bankruptcy

I’d like to say that Morgan Kelly is an idiot.  I’d like to tell you that he has been consistently wrong in all his predictions about the Irish economy.  I’d like to inform you that this man has no idea what  he’s talking about.

But I’m afraid I can’t.

Morgan Kelly is far from a fool.  He has been consistently correct in his predictions and he knows precisely what he’s talking about.

The man who foresaw the banking crisis long before almost everyone else, who was ridiculed and dismissed by Bertie Ahern’s legion of halfwits, has written an article in today’s Irish Times that should scare the living daylights out of any thinking Irish person.

In Kelly’s own words, Ireland is facing economic ruin.

Tracing the source of the economic disaster back to Brian Lenihan’s absurd banking bailout in 2008, Kelly describes how Professor Patrick Honohan, the incoming governor of the Central Bank, could have used his international stature to reverse Lenihan’s original act of stupidity, but instead compounded the error by taking the ECB’s side and insisting that the banks’ losses were manageable.

A fool’s pardon might be available for Brian Lenihan, a man who manifestly failed to understand the fundamentals of the brief he held, but Kelly leaves no such room for Honohan.  Accusing his fellow academic of the costliest mistake ever made by an Irish person, Kelly has laid responsibility for the unfolding Irish disaster at Honohan’s door.

This is a very grave charge to make against the man everyone hoped would rid the Central Bank of its complacency and incompetence, but Kelly doesn’t stop there.  He goes on to accuse Honohan of undermining Lenihan when, for once, he was doing something right in resisting the so-called “bailout”.  As Kelly puts it, Lenihan was deftly sliced off at the ankles by his central bank governor.

He goes on to provide an interesting insight into who Ireland’s real friends were among the powerful nations.  The IMF’s plan to impose a savage haircut on bondholders was shot down by none other than the United States, in the form of treasury secretary Timothy Geithner, while the only voice in our defence came from the old enemy in the person of UK chancellor George Osborne, though of course, a word of caution is in order here.  Sir Humphrey might well have advised the chancellor to speak up in Ireland’s defence knowing that his position would be defeated.

But still.  A topsy-turvy world indeed when  some of our citizens will shortly turn out to protest against the visit of the English Queen, while others will flock by the thousand to fawn over the leader of the country that consigned us to our doom, and to prance about like leipreacháns while he holds up an embarrassing half pint of Guinness for the cameras.

That’s Ireland for you.  Never mind the reality.  Stick with the illusion.

In the end, Ireland’s bankruptcy was guaranteed by the European Central Bank, which had no thoughts of rescuing this country.  Ireland will be destroyed in order to frighten Spain into behaving as Trichet wishes it to, and it seems his strategy is working.  The bailout could never work, because the sums don’t add up.  We will shortly be facing debts of €250 Billion (with a B).  As Kelly says, try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

An apt analogy indeed, since the citizens of Newcastle had about as much responsibility for the recklessness of Northern Rock as the average Irish person had for the six private banks that killed our economy through their greed and stupidity.

While it’s too late to make the bondholders carry their share, since Lenihan rushed to pay them all off last year, Kelly offers a solution that he concedes wouldn’t be painless but might at least avoid the coming disaster.  First, withdraw the bank guarantee immediately, and force the ECB to deal with the  issue of insolvent banks.  Second, cut government borrowing to zero, right now.

Does he think the politicians will have the guts to confront the ECB?

No.  He doesn’t.

I wish Morgan Kelly didn’t have such a way with words, but unfortunately, he’s on the button with his brutal analysis of the political reality.

It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy.

Brace yourself for the drop.   It will be short and unpleasant, but its consequences will be permanent.


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I thought GW Bush had imposed an extreme burden on US citizens when I wrote this.  Little did I think that our government would soon go on to impose a far bigger burden on the Irish people, perhaps three or four times as large.





Brian Lenihan Rewrites History : I Resisted Bailout

Isn’t it amazing what a difference new software makes?

You just can’t compare the 21st-century political Lie-Bots with the equipment we had to use back in the 1960s.

Brian Lenihan Senior ran on Liar 1.3 and he got by pretty well, but his mature-reflection processor was slow and clunky.  It could take him years to invent a new version of the truth that made him look good.

The next-generation Lenihan-3000 unit from Lie-Tech not only has a blazing fast reality-distortion processor, but it also runs Mendacity, the latest lie-generating software beamed from the preserved brain of Steve Jobs directly into the microchip.  It’s the first true man-machine symbiosis, where all of Lenihan’s fantasies are stored on a vast Apple starship orbiting a far-distant nebula.

Cloud lying.

The Lenihan-3000 is not the final product, and Jobs’s brain has indicated it probably won’t go to mass production.  An even more devious version is planned to roll out in the new year.  Codenamed Bartholomew, the iBert, running on a super-devious Nebula Nine processor, will be able to distort the facts before they even happen.  Governments across the world have placed pre-production contracts and a military version is also planned, with an enhanced atrocity-denial module.

Consumers should be able to buy early hand-held versions of the iBert some time in mid-2012.