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why do people keep comparing debt backed by wealth (property) to Ireland's income? What sense does that make?

The government guaranteed all the debt of the banks. This means that the debt is ultimately owed by the Irish state. As the diary shows, the "wealth" backing that debt can easily oscillate up/down by 30+ percent. But the amount of the debt stays constant. Therefore, a chunk of the debt will have to be paid out of Ireland's GDP. Comparing to GDP gives a measure of how long it will take to pay down that debt.

Why a good bank/bad bank solution (i.e., saving retail banking and payment clearing and leaving the foreign creditors holding the bank) is not being pursued is beyond me. Except, possibly, that a Eurozone member cannot advantageously hang creditors in other Eurozone countries to dry, since they share a currency.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Sep 16th, 2009 at 04:28:29 PM EST
[ Parent ]
The other reason I use a comparison with GDP is simply to give a sense of the scale of what we are talking about in relation to the size of the Irish economy/tax take.  54 Billion in a US context isn't that big a deal.  In an Irish context, it is equivalent to everyone in Ireland betting a third of their annual income on the property market which we already know is distressed and still out of line with other EU countries.  

Some Charities I do work for have had their Government subvention cut by c. 25% - i.e sums of the order of 100K.  We are literally taking money from heroin treatment programs, special needs education, and restorative justice programs to fund this.  The planned further reduction in public expenditure of €5 Billion p.a. will decimate all manner of public services for those that need them most.

We are literally taking from the poor to give to the rich on an unprecedented scale.  It's all very well for wealthy investors to take a 30% haircut or to indulge in some speculative investment.  But we are taking this money from people who don't have a cent to spare to shore up a property/banking edifice they were excluded from in the first place.

Nobody talks about morality anymore, but this is just obscene.  Even if it made good economic sense - and even if Nama ultimately turns a profit - it is still obscene.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Sep 16th, 2009 at 07:11:15 PM EST
[ Parent ]
The 'crisis' has been turned into the financial equivalent of 9/11 - not because of crazy people with box cutters, but because of crazy people with derivatives solemnly intoning that the world is different now, and we're all going to have to live with the consequences.

Inexplicably, they don't seem to feel that the New Austerity applies to them.

It seems a waste of time discussing the economics of the situation, when the problem is really one of not-so petty white collar crime and institutionalised corruption.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Sep 16th, 2009 at 11:47:48 PM EST
[ Parent ]
But the charities aren't taking a cut because of NAMA, they're taking a cut because that's how the government wants to run things - taxes are bad, bad, bad - and because the government failed to reform a broken, pro-cyclical tax system when times were good.
by Colman (colman at eurotrib.com) on Thu Sep 17th, 2009 at 01:46:05 AM EST
[ Parent ]
In Spain the government is scared of the fact the economic stimulus has resulted in 10% deficit for the year and want to raise taxes now before the recovery starts, with the promise that the raise will be "temporary and targeted" - that is, pro-cyclical. We don't learn.

The (also Socialist) Catalan Conseller ("minister" to a regional government) for the Economy, Antoni Castells, has criticised Zapatero's handling of the crisis as indecisive and recommended waiting with the fiscal reform until the recovery starts.

Castells afirma que el Gobierno "no coge la crisis por los cuernos" · ELPAÍS.comCastells claims that the [Spanish] government "is not taking the crisis by the horns" - ElPaís.com
Preguntado por si cree que se está haciendo todo lo necesario para salir de la crisis, Castells respondió: "En parte, no", porque "no se acaba de coger el toro por los cuernos, sobre todo a nivel del Estado". Respecto a la subida de impuestos planeada por el Gobierno central, opinó que es un debate "mal planteado y a destiempo".Asked whether he believes all is being done that is needed to get out of the crisis, Castells answered: "partly, no", because "the are not finally taking the bull by the horns, especially at the State [i.e., Spain] level". Regarding the tax raise planned by the Central Government, his opinion was that it was a "badly presented and timed" debate.

The PSOE leadership is in a weak political position because of the crisis so internal criticism expressed in public is not taken well.

Montilla reprocha a Castells su desmarque en público de la política económica de Zapatero · ELPAÍS.com[Catalan President José] Montilla rebukes Castells for setting himself apart from Zapatero's economic policy - ElPaís.com
El primer secretario del PSC y presidente de la Generalitat, José Montilla, mostró ayer su malestar ante la ejecutiva del partido por las críticas públicas que la semana pasada vertió el consejero de Economía, Antoni Castells, a la política económica de José Luis Rodríguez Zapatero. Montilla deploró el desconcierto ocasionado por las palabras de Castells y pidió a todos los miembros del partido que eviten criticar a los compañeros en asuntos que afectan el Gobierno central que pueden dificultar las relaciones entre el PSC y el PSOE. Castells, presente en la reunión, no se disculpó, pero sí lamentó el alboroto causado por sus palabras. También añadió que en el futuro continuará hablando con libertad. La vicepresidenta del partido, Manuela de Madre, lamentó el revuelo que se creó al criticar ella el desmarque de Castells.The first secretary of the PSC and president of the Generalitat, José Montilla, showed yesterday in front of the party's executive his unease over the public criticism poured on of Zapatero's economic policy by the Economic Counselor Antoni Castells. Montilla lamented the confusion caused by Castell's words and asked all the [Catalan?] party members to avoid criticising comrades in matter which can make the relationship between the PSC and the PSOE difficult. Castells, present at the meeting, did not apologize, but he lamented about the ruckus caused by his words. He also added that in the future he'll continue to speak freely. The [Catalan] party's vice-president, Manuela de Madre, lamented the commotion caused when she criticised Castells' position.

Because Castells also mentioned the need for labour reform he was criticised by the unions. The right-wing opposition both in Spain (PP) and Catalonia (CiU) has supported Castells, taking advantage of the wedge.

(sorry for hijacking the thread with Spanish news)

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 04:32:30 AM EST
[ Parent ]
The PSC are Catalan socialist allies of the PSOE?  In Ireland, Fine Gael's alternative "Good Bank" proposal has been criticised by former Fie Gael leaders Garrett Fitzgerald and Alan Dukes causing a similar wedge within the opposition.  I suspect some Government figures will also come out against the 7 Billion bonus - and still have some hope the Greens will threaten to leave Government over the issue.... so there are parallels

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 04:40:19 AM EST
[ Parent ]
The PSOE is a "federal" party. The PSC is the Catalan party. You can see it as the PSOE's brand in Catalonia, or you can see it as analogous to the CDU/CSU.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 04:43:36 AM EST
[ Parent ]
Colman:
charities aren't taking a cut because of NAMA, they're taking a cut because that's how the government wants to run things
TBG's 9/11 analogy is apt.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 04:33:09 AM EST
[ Parent ]
It is simply a matter of priorities, and my point was that the marginalised don't even rate miniscule amounts of cash when compared to the banks and their investors.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 04:43:00 AM EST
[ Parent ]
No, but that's because, at this stage, the government (and all serious opinion) truly believe that bailing out the banks is essential for even the marginalised. The government is entirely bought into the Dublin consensus and "free-market" fictions. I mean, these are guys who lived through previous Irish recessions and think the banks are going to lend to "creditworthy" people during one. The Irish banks have long been famous for only wanting to lend money to people who didn't need it. There are no creditworthy businesses during a recession this deep, especially when the government is intent on deepening it by taking money out of the pockets of people who will spend it in order to put it in the pockets of people who are going to use it to pay down debt, much of it foreign.

Crazy, and most of the opposition is too close to that position for a new government to make much difference. It would be slightly better, because at least they'd be free from continuing precise policies, but it wouldn't be much better.

by Colman (colman at eurotrib.com) on Thu Sep 17th, 2009 at 05:00:49 AM EST
[ Parent ]
When was "intervention by the regulator and receivership" replaced with "bailout" in the policy toolkit? When did the Central Bankers and Finance ministers go insane?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:07:08 AM EST
[ Parent ]
It would damage our reputation abroad. Or something. Fucked if I know. Nationalisation of the utility functions and putting the rest into receivership looks like the sane way to do it to me, but I'm not serious.
by Colman (colman at eurotrib.com) on Thu Sep 17th, 2009 at 05:10:56 AM EST
[ Parent ]
Colman:
It would damage our reputation abroad.
I'm not talking just about the Irish. Also the regulators and policymakers abroad have gone insane or forgotten what they once knew.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:12:56 AM EST
[ Parent ]
Colman:
It would damage our reputation abroad.
as complete idiots?  Since when does "socialist" bailing out of private investors enhance anyone's reputation?  Even the investors themselves must be chuckling at the idiocy...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:19:11 AM EST
[ Parent ]
Frank Schnittger:
54 Billion in a US context isn't that big a deal.  In an Irish context, it is equivalent to everyone in Ireland betting a third of their annual income on the property market which we already know is distressed and still out of line with other EU countries.  
In principle the "bet" would just be the €7bn that is being overpaid, not the entire €54bn. So instead of €10k per person we're talking something like €1500. But the point stands.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 04:29:30 AM EST
[ Parent ]
I would argue that the other 47 Billion is also a bet that market values won't go down much further and that it represents real sustainable value and a revenue stream capable of funding borrowing costs.  As I have said elsewhere, if those properties were actually put on the market, they would create an almighty further price crash because they represent a huge multiple of the actual number of properties on the market today.  So what is "market value" if you can't actually put the properties on the market and sell them at that price?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 04:47:28 AM EST
[ Parent ]
Frank Schnittger:
So what is "market value" if you can't actually put the properties on the market and sell them at that price?
The classic liquidity problem: valuing the bulk at the margin price is a mistake but it is also the accounting convention. See my How much is $172 trillion worth? from March 25th, 2008.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 04:52:38 AM EST
[ Parent ]
Yea - as I commented at the time linear algebra breaks down when marginal prices are applied to the whole.  So the 54 Billion is a bet that the state can fund and hold on to the assets long enough to enable an orderly disposal over a long period of time.  But since everyone knows that the state is an unwilling owner, and wants to dispose of virtually all of the assets, what is to prevent investors from holding back buying those assets until prices reflect the entire overhang on the market?

The music has stopped, and the taxpayer has been dumped with all the crap property that no one else wants at current prices...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:12:36 AM EST
[ Parent ]
Frank Schnittger:
everyone knows that the state is an unwilling owner, and wants to dispose of virtually all of the assets
Why doesn't the state decide to make the best of the situation and actually do something with these assets? Because that would be State intervention in the economy and we can't have that. So instead, as you predict, the state will dump the property at a loss. Gah.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:17:20 AM EST
[ Parent ]
The state owns the loans on the assets, not the assets, as long as the loans are performing or they come to arrangements with the asset owners?
by Colman (colman at eurotrib.com) on Thu Sep 17th, 2009 at 05:19:02 AM EST
[ Parent ]
Actually, the thing I'm most afraid of is that NAMA will be used to punish asset holders by acting hyper-aggressively against business sense in order to make it look as if the nasty developers are being held to account and thus to make the government look better, despite that fact that this may not maximise the value of the loans for the state.
by Colman (colman at eurotrib.com) on Thu Sep 17th, 2009 at 05:21:41 AM EST
[ Parent ]
Wait, if the loans are performing and interest rates are down, how can the market value be down 30%

Are we talking about impaired loans, about impaired collateral, or about illiquid assets when we talk about the NAMA "assets"?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:24:08 AM EST
[ Parent ]
Only 40% of the loans are currently performing.  Watch this go down... - especially when owners know the Government is getting their money for 1.5% and they are paying 8% or whatever...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:27:49 AM EST
[ Parent ]
So when NAMA buys a "non-performing loan" from a bank, what are they  buying?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:30:27 AM EST
[ Parent ]
9 of the 54 Billion is actually interest due but not paid.  So it isn't buying any additional assets at all in those cases

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:32:12 AM EST
[ Parent ]
Yes, and so long as the asset owners have :
  1. the ability to pay the interest, and
  2. are not in negative equity
those asset guarantees will not be called in.

But it is the market perception that is important here.  As "market" prices continue to fall, more asset owners either can't or don't want to service debts on property now worth less than the loan - so they hand back the keys to the property.  And the more that do this, the further prices fall, and the more people hand back their keys...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:25:01 AM EST
[ Parent ]
Frank Schnittger:
As "market" prices continue to fall, more asset owners either can't or don't want to service debts on property now worth less than the loan - so they hand back the keys to the property.
Do you have Jingle Mail in Ireland, too? In Spain bankruptcy is a much more serious proposition than in the US - all your assets are on the line, a judge can seize your income and give you a living allowance while he pays your creditors from the rest.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:26:54 AM EST
[ Parent ]
Limited liability...unless personal guarantees have been given.. and personal assets haven't been transferred to the wife ... and the assets aren't located offshore... and the law takes its course... ten years later...when there will be a general amnesty...and the Govewrnment decides its has to re-invigoate the market by giving incentives to investors...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:30:53 AM EST
[ Parent ]
Oh, we're talking about loans to businesses, not to individuals?

Or have Irish banks been giving mortgages to "limited liability" wrappers around individuals?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:32:27 AM EST
[ Parent ]
This is all about a very few "developers" owing Billions.  We haven't even started on the private homeowners defaulting on mortgages bit...  They will be screwed by the banks which is why the government doesn't want to own the banks because then the government will be directly doing the screwing...

Didn't you know that financiers have "discovered" that most people are actually honest and want to pay their debts even at enormous sacrifice to themselves.

This is why it is always the little man who gets screwed...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 05:37:14 AM EST
[ Parent ]
See LQD: The Poor are Honest by ChrisCook on February 12th, 2009.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 05:39:43 AM EST
[ Parent ]
Thanks - I knew I'd read it somewhere but am terrible on remembering sources - we will have to appoint you ET librarian and links keeper

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 17th, 2009 at 06:00:52 AM EST
[ Parent ]
It's mostly about some really insane speculative lending, especially for unzoned landbanks and residential developments that may never be worth anything.
by Colman (colman at eurotrib.com) on Thu Sep 17th, 2009 at 05:44:51 AM EST
[ Parent ]
Frank Schnittger:
Even if it made good economic sense - and even if Nama ultimately turns a profit - it is still obscene.
It makes no economic sense, even if it turns a profit.

Gambling your shirt in a casino doesn't make economic sense. If you walk out with two shirts you mad a profit, but even then it wasn't a sound economic decision in hindsight.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Sep 17th, 2009 at 04:31:04 AM EST
[ Parent ]

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