Ireland fact of the day

Irish Life and Permanent is expected to require more than €3 billion – about 30 times its market value – to meet worst-case mortgage losses estimated in the tests.

Here is more.  Once the Irish government takes majority ownership in this company, virtually the entire Irish banking system will have been nationalized, with no prospect of re-privatization in sight.  Some of the stress tests, by the way, are based on data taken from Nevada.

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"Ireland already has shown that tax cuts are a recipe for prosperity. Thanks to Reagan-style tax-rate reductions, including a corporate income tax rate of just 10 percent, Ireland has become the “Celtic Tiger” and is now the European Union’s second richest country." -Dan Mitchell (Heritage Foundation, Cato Institute)

"While economic success over the past 15 years can be ascribed to a range of domestic and international factors, it was not a fluke. Ireland has long had, and intends to sustain, low tax rates to attract investment." -Sean Dorgan (Heritage Foundation)

We went from quotes like, "The real credit belongs to Irish fiscal policy. Beginning in the late 1980s, successive Irish governments pursued vital spending cuts and tax relief." ( American Enterprise Institute) to "There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending." (Cato)

Michael, note that the aforementioned €3 billion will be going into a bank. The Irish problem is an enormous banking crisis that will cost, including the latest estimate, over $50,000 per taxpayer.

Cato completely miss the point. Ireland's low corporation tax/high government expenditure is irrelevant. It's the $50,000 per taxpayer bailout that's the problem.

Tyler, nobody here is thinking about re-privatisation immediately; that'd be just dumb. The long-run plan is to sell parts of the banking system to foreign banks. Arguably this is what should have happened when the Euro and single market were introduced, but potential investors correctly thought that the price of buying an Irish bank was too high.

Michael, look past the crisis and you see a country which was as rich as Portugal becoming as rich as Germany, but with more debts to eventually pay off. We tried high taxes. They failed and the result is lots of Irish people about to celebrate 25th and 30th anniversaries of their arrivals in America. Note that the government prioritised low taxes on corporate income over interest rate reductions at lending facility negotiations, and the Irish people supported them. Stop arguing about domestic American fiscal politics - your party is bad at economics and so is the other one. Consider Ireland for what it was: a poor country made rich, like many others, by the neoliberal revolution.

Irish Life and Permanent (IL&P) is two companies. A pensions division (Irish Life) and a banking division (Permanent TSB). The losses are isolated to the banking division. Irish Life and Pensions is likely to be sold and could generate something of the region of €2 billion. The banking division will be nationalised.

This was the one bank that avoided developer loans that have ruined the other banks. Permanent TSB focused on the residential mortgage side of the property market. One of the big problems they face is a funding gap between the price of loans they issued and the cost of funding to finance them. PTSB offered very attractive 'tracker' rate mortgages that were at rates of ECB + 1.0% or even lower. With the ECB rate at 1% this means many of their customers are paying a rate of 2.0%. Irish banks, when they can get it, cannot get money on interbank markets for much less than 5%. Money from the ECB is available at 1% but Trichet and Co. are looking at ways to reduce the Irish banks' reliance on this supposed short-term funding source.

Millian: going from "poor" to "rich but with a lot of debt" isn't wealth creation, it's simply borrowing a lot of money. If I take out a £1m mortgage and buy a mansion with it that doesn't make me a millionaire.

But you are living in a mansion, or if a German bank evicts you, living next door to someone who can afford a million dollar mansion.

I see the hint of a plan here. Ireland should default.

The end result is you both lose your mansions. That other guy lent you his money.

Those mansions are in Ireland. The government can just say, "Come and get them, German bank."

Who is really surprised at this? Ireland has to maintain control of its currency in some way or another - now it has to deal with the Euro, so it may as well try to maintain control of its local banking system.

"[Fill in the blank] were convinced that they were experiencing a new era/paradigm in [fill in the blank] that would continue indefinitely."

Is any economist studying/tracking Iceland's actions/experiences as that may presage what could happen with Greece, Ireland, Portugal, Spain . . . ?

"It is what it is." Yogi Berra should have said it.

Ireland have a good life

Another €24 billion needed to recapitalise the banks. All six will now be nationalised. Two will be closes (Anglo, INBS), two will be merged (AIB,EBS), one will standalone (BOI) with the outcome for the last still uncertain (PTSB).

The State has pumped €46 billion into the banks (with €35 billion of this borrowed). Uncertain how much of the additional €24 billion will come from the State. IL&P is going to sell off its profitable Irish Life pension and insurance business and might raise (€2 billion). But it could be that the State will need to put up another €20 billion.

Of this €10 billion will come from the National Pension Reserve Fund, a one-time €25 billion soverign wealth fund that was built up during the boom times. Already €11 billion has been raided from this so it will be virtually wiped out. The remainder may come from the EU/IMF rescue package. This means a banking debt burden of around €45 billion.

This is nearly 30% of GDP but is sustainable and will not push the country to default.

Now we need to find a solution to the €153 billion owed to the ECB. This is 100% of GDP.

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