Wednesday, November 17, 2010

What's wrong with the Irish economy?

A lot.  I have condensed this from Robert Peston's piece here.

Let us start with an adaptation of an old rhyme:

Small fleas have bigger fleas 
Upon their backs to bite 'em,
And bigger fleas have bigger fleas

And so ad infinitum.

In Ireland's case, the small fleas are the mortgages on the new properties that Ireland built in the Celtic Tiger years. Rising house prices were a Ponzi scheme, sustained by its own expansion, which duly collapsed when the expansion stopped. The biggest fleas are the derivatives.

The collapse of the property markets has left Ireland with a lot of debt.
Its total debt - banks + public + private - amounts to 700% of Ireland's GDP.

Politicians like Osborne are fond of (falsely) comparing the budget of countries with the budget of households. When a household has debts 7x greater than net income, the householder is inclined to look at what is involved in declaring bankruptcy. And so it is with Ireland.

So what happens if, say, the two weakest Irish banks should be declared bankrupt?

They are the Anglo Irish Bank and the Allied Irish Banks. 

First, this would annihilate the monies that the good-hearted taxpayers of Ireland put into those banks to shore them up. I gather that 23.8 bn Euros have been put into Anglo Irish, and about 7bn Euros into Allied Irish. Say 30,000,000,000 Euros in all. Gone. Poof! Annihilated. Finito! Kaput! Tax payers money. The same taxpayers that have been screwed by the savage Irish cutbacks.

But wait! Banks are insured! They have Credit Default Swaps which are derivatives that bet on banks not going bust. If they go bust, Ireland can claim on the CDS's can they not?

Well, apparently not. CDS's are not like your average insurance where you have an insurance company that actually pays out when your house collapses. No. Instead, the risk has been bundled up and resold (at a profit) then rebundled and resold (at a profit again) innumerable times. There is a multiplier effect each time it is sold. The total effect of this multiplier is such that the value of the total derivatives market before the Credit Crisis in 2008 was 10 times the global GDP. 10x. 1000%.

So if the Irish banks go bust, it is going to create lucrative job-creation schemes for bean-counters world wide as they try to work out who owes whom what. Many of these CDS's will be held by pension funds and high street banks (except cool banks like Co-op and Triodos), so it is not just the hedge fund managers who have to sell their Ferraris, but old Mrs Groggins who will have to keep warm by burning the furniture.

And not just that.

There are direct creditors of Irish banks at risk for $170 billion.
  • $46 bn in Germany
  • $41 bn in UK
  • $25 bn in USA
  • $21 bn in France
Individual banks are at risk:
  • Danske bank has 92% of its net assets in Irish loans
  • RBS has 90%
  • Lloyd's 60%
  • Barclays 16%
So if the Irish banks go pop, it is not just a little local difficulty for the Irish. Finance, like ecology, is a system of mutually interdependent parts. There are other strings of interconnectedness which have not been mentioned here. 

The conclusion is that Irish banks cannot be allowed to go bust.

Therefore a bailout is indicated, which will come from the EU and/or Eurozone, and or the IMF.

Ireland is delaying this bailout, because it does not want to be the first to go whimpering to the Big Boys. It would rather that Portugal, Spain or Greece should be first.

But a bailout there will be, for sure. And then another one for Portugal Spain and Greece.

All of which calls into question the nature of money.  And the best thing you can do to get your head around that little conundrum is to watch the Money as Debt videos here.

A last word. I am not an economist, just a jobbing GP and green party blogger. What gets up my nose, apart from the arrogance of "The Markets" who have buggered the economic system, and have the insufferable audacity not just to not be grateful for the bailouts, but to require that the people should be punished for the crimes of the market, is that professional economists (a) did not spot this coming, and (b) are not reporting clearly on what is happening - apart from a few like Robert Peston and (c) have not created a computer model that can describe and predict macroeconomic developments, as the climate scientists have done.

I am going to stop now, because this is a very long blog post, and you must be getting tired. Before I go, a very mild summing up of my feelings about the banking system.


Update: further helpful suggestion here.
Update: Guardian letter from Greg Quiery adds corruption, tax evasion by the super rich, whistle-blowers ignored, offshore investigations abandoned,  and other all-too-familiar failings.


Frugal Life UK said...

Hi Richard, please blog about the cost of the stupid forthcoming wedding. I feel alone in thinking, they should have it at Windsor castle, not fly in every dignitary from around the world, but invite members of the British public. I am a republican and wouldn't have them at all! Go on....what do you think it will cost the environment and the country?

Glenn Vowles MSc, PGCE, BA said...

In my view no public money should be spent on any royal wedding - and particularly this one because of the economic situation. However, given that a Cabinet Committee is already being set up by the Govt, given that PM David Cameron has already promised to help things go smoothly, given that security will cost us and given that the BBC will go crazy - is already going crazy - spending public money on their huge coverage, there is little hope at all of no public money being spent. It wont be a lot of money proportionately but every penny counts and 'we are all in this together'!!

Imagine proposing that all couples should get Govt help with wedding arrangements...

DocRichard said...

Hi Frugal and Glenn
I was aiming to have this blog a Royal Wedding Free Zone, in order to try to attract customers who have allergies.

Having said that, I do have pleasant memories of Charles and Di's wedding. I used the day to go hang gliding, and spent a happy hour above Ubley, watching the street parties below.

I have nothing against the Windsors, except they should pay their taxes and stop pretending to the throne.

There. Will that do? No?

Then here is my Royal Pome:


Why did Princess Di die?
Was it because of Dodi?
Did the Duke of Ed
want them to be dead
rather than alive?
Did he brief MI5?
Or was it just the paparazzi
doing their usual nasty?
Or was the driver pie-eyed?
Was his autopsy falsified?
These questions swirling to and fro.
One thing’s for sure: we’ll never know.

© Richard Lawson