Morgan Kelly writes from Ireland

The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.

In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.

Here is much more, interesting throughout, essential reading I would say. By the way, here is the game theory if Ireland simply bails on some previous commitments to bank creditors:

At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.

Are you seeing a pattern emerge?  I thank a loyal MR reader for the pointer.

Addendum: Good update on the euro gossip here.


"Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s."

The pattern that I see emerging is that Anglo-Saxon universities who thrive off their reputation in business and economics have educated a generation of people who are driving their respective coutries into ruin.

The Irish 'representatives' siding with the ECB should be considered treason. And how for Christ's sake can an US Treasury Sec. decide over Irish fiscal policy for years, if not decades, to come by simply raming through his decision?
Ireland or Greece, who's gonna go first?

And how for Christ’s sake can an US Treasury Sec. decide over Irish fiscal policy for years, if not decades, to come by simply ram[m]ing through his decision?

The Irish didn't have to agree- they could have walked away from the IMF funds. As I understand it, the IMF wanted the haircuts before they would fund Ireland, but Geithner vetoed this condition, allowing IMF funds for the bailout without the haircuts.

I wonder if "Creditors Must Take Responsibility for their Choices" is a message that can gain political traction in the years to come, both in Europe and in the US. "No illusions of risk-free investing" is hardly a catchy political slogan, I realize.

Gambling with Other People's Money, by Russ Roberts, becomes even more relevant. The US is now exporting its policy to almost always prevent creditors from taking a loss. It seemed that it was always less painful to bail out creditors to prevent contagion. However, that does not a long term policy make, and I wonder if at some point continuing the bailouts is going to be the more painful choice. What a painful time that will be (is?).

Once creditors start taking losses it will increase rates for everyone. I think Geithner knows that the US can't sustain it's defecits in that climate.

Tim Geithner may or may not believe that "bankers take priority over taxpayers" (I'm not in his mind), but AIG is a particularly poor example to prove the point. Creditors of AIG would always have recovered 100% of the debt, since the assets of AIG far outweighed the liabilities, even after having written down the enormous securities lending and CDS portfolio losses. The only argument one could make is that creditors may have accepted a haircut to get out early, and the government-sponsored alternative bankruptcy process did not force them to make that choice. Still, that cost wasn't borne by taxpayers; it was borne by AIG stockholders (which is who should have borne the cost).

Also, everyone who has money deposited with a bank is a creditor of a bank. Who has money in banks? Taxpayers! So payment by taxpayers to creditors of banks is payment to other taxpayers. Who wins, who loses? Who the f*^# knows? The slippage comes from foreigners who aren't subject to US taxes and the fact that not all people have the same amount of money in the bank or pay the same amount of tax. An educated guess is that the net winners of the US government's extraordinary actions since 2008 are foreigners.

"An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are." Look, Goldman Sachs are doing God's work, whereas the Irish are just the Limeys' country cousins. No contest.

The British stance is interesting. Can they and are they willing to bail the Irish out? One admittedly eccentric blogger has been advocating that in return for undoing the republic.

Britain would not want to bail out Ireland in return for its sovereignty, and the average Irish person would much, much, much rather default (aka not socialize private losses) than re-enter the UK. The suggestion is about as supremely naive.

Is anyone confident that forcing the Irish bank bondholders to take a two-thirds hair cut will end the debt crisis?

If a significant number of banks in another nation become insolvent and their bondholders are forced to take a 50% hair cut will that end the crisis?

It that triggers another round of bank insolvencies and bond holders are forced to take a 40% hair cut, will that end the crisis?

If BofA, Citi, et al become insolvent, we know the FDIC will make the depositors under the insurance limit whole, but only after the Federal resolution authority splits them up at below the long run value and then pours in billions of loans to FDIC which will hike in FDIC insurance rate on deposits, cutting interest rates for decades. And the credit card operations, and other non-depository functions shed in haste by bankruptcy will shoot up in market cap to three times the fire sale price.

Maybe BofA,Citi, et al should be broken up, but that should happen the Republican Teddy Roosevelt trust buster way.

The slippage comes from foreigners who aren’t subject to US taxes and the fact that not all people have the same amount of money in the bank or pay the same amount of tax.

In an update from Reuters, Mr. Honohan repeatedly uses cards as a metaphor, with Greece as a key player in the game:

Speaking of metaphors, did you notice how many American-based ones Morgan Kelly uses in his article? "Little Bighorn", "Last Stand", "in the Hudson", "Europe's answer to Puerto Rico". I guess we really do know who our friends are :-)

What happened to the IMF? I thought their purpose was to squeeze the lifeblood out of the citizens of debt-ridden countries.

Iceland seems marching to a different drummer.

Iceland Rejects Europe's Bank Bailout
By Hannes H. Gissurarson
12 April 2011
The Wall Street Journal

In national referendum Icelanders voted, second time, against government plan to pay losses of foreign bank customers - 60% voting "no." For those who believe capitalists ought to operate at risk . . .

Late 2008 Icelandic Insurance Fund for Depositors could not pay all liabilities of foreign branches of Landsbanki. British and Dutch governments paid their sovereign depositors.

B and N sent a bill to Iceland government for GBP 3.5 billion. For Iceland’s 320,000 citizens this is half of annual GDP.

Iceland had complied with European law with the Icelandic Insurance Fund for Depositors, financed by a levy on the banks.

Threats from Brit and Dutch gov, the (EU) and the International Monetary Fund, 2009 Iceland reluctantly signed a treaty to pay the sum, plus stiff interest.

President Grimsson refused to ratify the treaty. First vote: March 2010: 94% voted against it. Brits and Dutch offered better deal pay the sum, at lower interest and longer repayment period. Grimsson again refused to ratify, another referendum needed.

It seems the Icelandic voters believe Brit and Dutch “payables” are not obligations of Icelandic voters. No explicit or implicit government guarantee of IIFD. Brit and the Dutch governments reimbursed depositors on their own for their own reasons.

The no vote will probably improve Iceland's credit ratings, not taking on the additional debt.

The only argument one could make is that creditors may have accepted a haircut to get out early,British and Dutch governments paid their sovereign depositors.

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