Dear Paul

We are both academics and have been trained to PhD level in economics. We should therefore understand the difference between good scholarship and bad scholarship whether the final outcome is a peer-reviewed journal article, published book or Op-Ed piece for a popular media publication (such as the New York Times).

and he finishes with

Conclusion

I am disappointed Paul that you would represent the progressive view with such poor scholarship.

If you want to represent MMT correctly you can always send me an E-mail and I will help you get the words right!

That is enough for today!

And there is an awful lot in between worth reading (link to full article)

As Smart Taxes has commented on before, Fine Gael proposes that the government should announce the wholesale guarantee on bank liabilities will not be renewed beyond September 2010.

The Minister for Finance strongly disagrees with the Fine Gael proposal. On The Week in Politics he said the following:

“Richard casually mentioned there the idea that investors should take some of the sacrifices as well. I went around Europe and raised a lot of money for Ireland in the last few weeks, and investors would be horrified to know that the main opposition party in this country wants us to default on payments to them in Autumn 2010.”

Bruton replied that these investors were bank investors, not state investors. At this point the Minister made the following points:

“These professional investors are the same international investors who invest in our government bonds … We need a lot of government bonds this year … If the idea is out there that Ireland, or its banks, are going to default on international investors, we as a country will not be able to fund ourselves … There is a direct link between the senior debt which is raised by the government and the senior debt that’s raised by the banks. If you start defaulting on one, inevitably it becomes harder to raise the other and your interest rates will go up and up and up.”

The Minister has followed up on his comments on this important issue yesterday. On Newstalk he referred to Fine Gael’s plan for bondholders to lose out as “nonsense policy” and dismissed the idea as something thought up by “theoretical economists”.

Whelan agrees with Burton in that bonds issued by Irish banks are not the same thing as bonds issued by the Irish government. He argues that a default by an Irish bank does not in any way have to imply that the Irish state will also default on its debt. Ultimately, sovereign default risk will depend on the fiscal solvency of the state and this will be improved by implementing a solution to the banking crisis that minimises the cost to the taxpayer.

Smart Taxes has argued for some time that bond holders share the pain of the rescue and is pleased that attention and debate is turning both locally and internationally to those who carry most culpability for the financial crisis.

Read Karl Whelan’s article in its entirety here.

It follows on from Masaharu Nakagawa, finance chief of the Democratic Party of Japan (DPJ), comments to the BBC that his country should not purchase any more US debt unless issued in yen as “Samurai” bonds. While China suspects that Washington is engineering a stealth default on America’s debt through quantitative easing.

Click here for Evans-Pritchard’s analysis of the consequences if “Asia’s leaders give free rein to frustrations and crater the US bond market”.

Speaking today, Fine Gael’s Richard Burton said that ordinary shareholders in the banks have lost nearly all of their investments, Fine Gael deputy leader:

“Under the NAMA approach there is no sharing of losses by the providers of other capital – subordinated debt and risky funding such as unsecured bonds who made good profits in the good years but who will walk away scot-free under this proposal.”

The NAMA plan will not work because the public will not trust that fair prices are paid for failed property loans, while NAMA will take years longer to deal with them after they have been bought.

Burton also rejected the nationalisation plan strongly pushed by Labour leader, Eamon Gilmore on the basis it “makes it almost certain” that the taxpayer will have to honour every one of the Irish banks’ debts, including bonds”.

“There is a moral hazard in capitalism. They can’t expect to be baled out. That is not healthy. Nor can we get into this notion that a bank is too big to fail,”.

But is this simply rhetoric as Burton acknowledges that if NAMA is up and running before the general election it will be here to stay as, speaking to the Irish Times, he said “Governments are legally liable for the decisions made by past governments. It would be too late to change anything then.”

“The first myth to dispel is that interest rates are currently low. Base rates may be low, but the rates that companies pay, as Warren Buffett has argued is at ‘record levels’.  He tells shareholders that “highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.  Though Berkshire’s credit is pristine – one of only seven AAA corporations in the country – (its) cost of borrowing is now far higher than competitors with shaky balance sheets but government backing.”

Graham Turner shows that ‘average yields on loans for non-investment grade companies in the UK rose to 31.66% on the 4th March, 2009.’ These are bankrupting rates.

The media is now ‘seriously’ talking about the Government setting up a ‘shamrock’ SFEF-styled bond (named after Societe de Financement de l’Economie Francaise guaranteed bonds issued by the French) for Ireland (see here).

The bonds peddlers – primary and secondary alike – have been enthused. The idea is that an already nearly-insolvent state will issue strong-guarantee senior, cash-redeemable only bonds covered by Ireland’s AAA rating for a large volume issuance, blah-blah-blah…

In reality there are serious and insurmountable problems with the idea of Ireland Inc issuing a SFEF to be disbursed across Irish banks in order to aid their capitalization and re-start lending.  Link to full article

Europe’s financial authorities have revealed the existence of a contingency plan to rescue eurozone states at risk of default, giving the first clear assurance that the EU will mount a defence if monetary union comes under speculative attack. oaquin Almunia, the economics commissioner, said EMU economies in distress can count on EU solidarity if they get into trouble, rather than having to go cap in hand to the International Monetary Fund.

“It is clear that there are serious problems in certain countries. If a crisis emerges in one eurozone country, there is a solution before visiting the IMF. We are equipped intellectually, politically and economically to face this crisis scenario. It’s not clever to tell you in public. But the solution exists,” he said.

Mr Almunia said the probability of a eurozone break-up is “zero”, despite the surge in interest spreads on Greek, Irish, Austrian, and Italian 10-year bonds above German Bunds. “Who is crazy enough to leave the euro area? Nobody. The number of candidates to join is growing,” he said. Link to article

The borrowing cost on the EIB’s 10-year bonds has risen to 90 basis points above the benchmark German Bunds. The yield is now closer to the borrowing costs of Spain and even Italy, suggesting that investors already suspect the bank will be used to issue “EU bonds” for rescue purposes – whatever its original mandate.

The EIB, the world’s biggest multilateral lender, was able to borrow for years at rates that were almost the same as the German government – or even lower – enabling the entire EU to take advantage of the Germany’s credit-rating for project finance. The change has been abrupt.  Link to article ]]> http://smarttaxes.org/2009/02/26/debt-markets-take-fright-at-eu-bond/feed/ 0 http://smarttaxes.org/2009/02/26/kranty-the-end-of-the-road-updated/ http://smarttaxes.org/2009/02/26/kranty-the-end-of-the-road-updated/#comments Thu, 26 Feb 2009 10:47:43 +0000 Emer http://smarttaxes.org/?p=422 Posted by Dr. Constantin Gurdgiev @ True Economics
Wednesday, February 25, 2009
Updated below

“Kranty” is a Russian slang for German “Kaput“, Italian “Finita la Comedia“, or in plain English “The end of the road”. You get the wind… So is the latest 3-year Irish bond issue of €4bn at 170bp over mid-swaps the end of the road for Irish Exchequer borrowing? The FT’s Alphaville blog seems rather pessimistic (here). FT’s blog musings aside, for a country which has seen CDS levels in excess of those paid on the senior debt of an embattled English retailer just a couple of weeks ago, the question is no longer of the extent of markets pessimism, but of fiscal survival.

And the latest bond offer is puzzling.

Borrow short to lend long?
First the 3-year term. It is equivalent to borrowing short to lend long, for even the DofF forecasts (rosy as they may be) imply that in 2012 – the bond will mature in the environment of a deficit of 4.75% of GDP and a General Gov Balance absent serial €16.5bn savings between now and then) of 12.25% of GDP. In other words, no one can seriously expect the Government to pay down the bond.

So why is this 3-year term? Is it because the NTMA could not place any new bonds on these terms with a longer maturity? Is it because the market pricing for a new 5-year bond would have implied an admission of a junk-level risk on Irish Government debt? The indications that an answer to these questions might be, sadly, a ‘Yes’ is in the details of the bond offer itself.

Costly, but small
This time around we are raising only 2/3rds of the volume of funds raised in January’s €6bn placement. Given that the Government, post January issue, was in the need to somehow raise ca €19bn of new funds to plug its deficit this year alone, €4bn today is peanuts. Why not go to the markets early and raise, say €10bn? We know we’ll have to do this at some time later in the year, by when many other countries would have gone to the markets and the spreads would have widened for all, including the Germans? In short, a miniscule placement today also suggests that quite possibly, NTMA could not place a sizable issue into the market.

Lastly, there are questions about the pricing of the bond. The FT blog outlines this problem perfectly: the latest bond “spread is almost five-times that of Barclays’ UK guaranteed 3-yr £3bn deal this week, which priced at 35bp over mid-swaps and Roche’s huge €5.25bn 4-yr deal at 225bp over”. Yes, it is pricey, but it is not priced to sell.

Getting under the radar?
What is even more dodgy is that the NTMA claimed that the bond was over-subscribed to the tune of €1.2bn over the placed €4bn amount. In other words, the NTMA decided not to take more money today under the present bond issue despite knowing that it will have to tap markets for much more than that in the near future (here). Why? I have nagging suspicion – and this is speculative at this moment in time – that the bonds were issued to be placed primarily with the banks who can now roll them over to the ECB’s lending window. Clearly, as a test case for the future, such a ‘roll-over’ had to be modest enough for the ECB (or other European states) not to smell a rat. Hence the €4bn ceiling.

Of course, there can be other possible explanations for the bizarre nature of the issue, but these are equally unflattering (see the update below). However a mere suspicion that something as problematic as the state issuing bonds for placement via the banks at the ECB would be a sign of desperation…

ECB’s blind eye to Ireland?
From ECB’s point of view, this might fly for only a short period of time. Here is why. The ECB is fully aware that the Irish Exchequer is bound to come knocking at its doors sooner, rather later. Yet, a publicly open and transparent loan from the ECB would have to carry serious policy prescriptions with it that would be matching those impose by the IMF on other countries: a 15-25% pay cut for the public sector, a 10-15% contraction in public expenditure across the board, a reform of public sector pensions and a significant divestment by the state out of its industrial shareholdings. These policies – necessary to keep cool other would be borrowers from ECB – will cost Brian-Brian-Mary their jobs and can potentially derail the Lisbon II ratification.

Hell, they might spell the end to the Euro itself, as a transparent rescue loan to Ireland will be followed by the demands for the similar lending from Italy, Greece, Spain, Portugal and possibly Austria.

So the ECB is absolutely desperately trying to find some face-saving formula to allow Ireland access to funds without opening the door for other Eurozone states and without imposing punishing conditions on our incompetent Government and overweight public sector.

Hmmmm… has anyone gave it a thought how are we going to squeeze out the remaining €15bn without anyone noticing, then?

Update I
It is now being rumored (hat tip to BL) that the NTMA was originally in the market for placing €6bn worth of bonds, got interest in €5.2bn, but due to extremely low offers (high yields) was forced to claw the issue back to €4bn. If correct, this implies that we have issued a bond with subscription rate of only 67% – by any reasonable measure constituting a failure by the state to finance less than 1/4 of its annual budgetary requirement. In other words – a failure of borrowing on a 3-year basis. Things can’t get much more embarrassing than this, folks. And yet, to this moment, I have not seen a single media article, actually recognizing this reality. Is our media going ‘soft’? or have we, engulfed in a rediculous charade of the Anglo Irish Banks scandals forgot about the reality of having to tap the markets for at least €15bn more in cash, having in effect failed to raise the mere €6bn last night?..

Government borrowing is not an immediate problem, but the extent of banks’ bad debts may prove catastrophic, writes Morgan Kelly.

Between collapsing house prices, bankrupt banks and spiralling unemployment, you might be forgiven for thinking that fate has already dealt Ireland every misfortune in its hand. However, there may be one more unpleasant surprise in store for us, the prospect that international investors unexpectedly stop lending to the Government.

Link to full article