Posts By Donagh Brennan

Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken? Part 2

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This article follows on from Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken: Part 1.

It is five years since the Irish government announced on the 30th of September 2008 that Ireland was going to provide an unlimited bank guarantee to six covered financial institutions. It’s important to remind ourselves of the context of that event. On the 15th of September 2008 Lehman Brothers collapsed and the subsequent credit crunch ensured that the international banking system was soon struggling to obtain interbank credit. Soon significant problems at European banks came to a head. Towards the end of September France, the Netherlands and Belgium injected €11.2bn into Fortis, Belgium's biggest bank and then, a couple of days later on the fateful 29th of Sept, the Netherlands was forced to take over Fortis’ Netherland operation at a cost of €16.8bn. By the 6th of October the German government had authorised a €50 billion rescue package in its second, and this time ‘successful’ attempt to rescue Hypo Real Estate Holdings. The first attempt was a week previously, again on the 29th of September.

The problems for Irish banks trying to access liquidity in the interbank market were not unique, but Ireland’s solution to resolve it differed considerably to that of every other country in the EU. In the weeks prior to the full guarantee the Irish government had already taken the decision to guarantee deposits up to €100,000. Up to that point deposit guarantees in the majority of European countries was just €20,000 with only Italy providing a deposit guarantee of 100,000. As a result of the Irish extension 97% of all customer deposits in the Irish banking system were fully guaranteed (Carswell, IT Oct 2008, see image below). Yet this wasn’t enough to stem the banking crisis and the loss of liquidity. At this time Anglo Irish Bank that was losing significant deposits of between €50 million and €200 million each, amounting to losses of €1 billion a day, causing Anglo to breach its regulatory liquidity ratio. Most of these deposits were borrowed from the short term money markets.

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Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken?

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There seems to be a myth doing the rounds at the moment that the 2008 Blanket Bank Guarantee, which ran for 2 years from September 2008 until 2010, wasn’t put in place to simply stop both Anglo Irish Bank and Irish Nationwide from collapsing in order to protect, as far as possible, the considerable interests that a small group of Irish people had in those cauldrons of greed and corruption.

Rather, popular thinking now goes, the notorious guarantee was put in place because of pressure from the ECB who were eager to ensure that revenue from Irish taxes would be used to pay bondholders in the banks of Core EU countries in full.

Take this recent article published on the 27th of March last which has the headline: “Germany’s rethink on just where the blame lies for the Irish bank bailout”. The implication behind the headline is that the bailout was required because of the guarantee, but also suggests that the statement made by the German Finance Minister that the Irish guarantee was a solely Irish initiative is a ‘rethink’, that is, an attempt to change the narrative that the bailout, and the guarantee that made it inevitable, was dictated by interests of big German banks.

“It was the Irish government that imposed the farthest-reaching guarantee for its banking system at the start of the crisis – on its own initiative,” said German finance minister Wolfgang Schäuble.

The statement itself was prompted by comments made by Irish politicians while negotiating on bank debt. Such comments, of course, are tailored to an Irish audience who are increasingly convinced that the enormous and unsustainable burden of Irish bank debt which the residents of Ireland are being forced to finance is being imposed by the ECB and Germany in order to protect their own struggling banks. This particular framing of the story feeds into the tale told about Timothy Geithner’s phone call and the posthumous yarn about the letters Brian Lenihan received from Jean-Claude Triche.

These Irish politicians are entirely aware, however, that the decision to provide such a broad guarantee was made without the advanced knowledge of the ECB. It is a consequence of this decision which was only put in place to maintain access for Anglo Irish Bank and Irish Nationwide to the interbank market that the vast majority of bonds have been paid off in full.

We know this because on the 3rd of Oct 2008 the ECB published an opinion on the Irish bank guarantee. Here’s the relevant excerpt.

“As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.

2.5 A further point relates to the risks to the Government’s budgetary position arising from any financial support to Irish credit institutions. While the ECB appreciates that any guarantees provided by the Minister under the draft law would be contingent in nature, given that the financial exposure of the Irish State under such guarantees is potentially very large, the Irish Government could be obliged to make significant payments in case these guarantees are called over the next two years. At a point in time when the Irish budgetary position is deteriorating and may risk exceeding the 3 % of GDP reference value for public deficits, as specified under Community law12, this is a cause for concern, even when the provision of financial support would, under the draft law, as far as possible ultimately have to be recouped from the credit institution or subsidiary in question.”

More to follow.

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Attack on Wages is About Social Control: Marx, Kalecki, and Socialist Strategy

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In the April edition of the Monthly Review John Bellamy Foster has a piece called Marx, Kalecki, and Socialist Strategy on the Polish economist Michal Kaleck that is well worth getting stuck into – particularly given the outright assault on worker incomes ongoing in Ireland at the moment. It’s also struck me as worth reading in light of Ken Livingstone’s comment today which correctly contrasts the viciousness and failure of Thatcherism with the Post-World War 2 settlement.

Foster first refers to the profit-squeeze theory which is often used to explain why capitalists try to resist full employment, as rising wages hurts profits. He refers to a 1974 article by Raford Boddy and James Crotty’s “Class Conflict, Keynesian Policies, and the Business Cycle” which was developed counter to Kalecki’s suggestion that the pressure from capitalists to reduce wages stemmed not from a concern for profits, but as a form of social control. Writing in the 1940s Kalecki said that with full employment profits would ultimately not be affected. However, what was more important was removing the opportunity for workers to exercise any form of power.

“Kalecki’s views on the profit-squeeze argument, the political business cycle, and socialist economic strategy were rooted historically in his close observation of the French Popular Front government led by Leon Blum in 1936–1937. Kalecki had spent the summer of 1937 in Paris witnessing developments there. In what came to be known as the “Blum experiment,” a concerted attempt was made to implement a forty-hour working week, two weeks of paid vacation time for all workers, and collective bargaining rights. As part of these reforms the Popular Front initiated a substantial increase in the money wages of manual workers, which rose by about 60 percent over the course of a year. This increase in money wages did not, however, have a negative effect on overall output and employment, since wholesale prices were raised proportionately. However it did produce substantial net benefits both for manual workers and large capitalists, and for the industrial sector in general—at the expense of rentiers and other income groups. Yet, despite the fact that big capital had significantly gained from the redistribution toward industry that the wage increase had brought about, it allied itself with rentiers to resist the wage increase, complaining of a profit squeeze. The Blum government eventually succumbed to these pressures, leading to a fatal dampening of the aspirations of workers.

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Ireland is Hardwired into the Tax Evasion Network

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As reported today, “[Eamon Gilmore] did not believe that multinationals having headquarter operations in Ireland that used offshore locations as part of their tax avoidance strategies, put the country in a difficult position when it came to the subject of tax havens”.

The Tax Justice Network has made a point in recent years of replacing the term ‘offshore’ and tax haven with ‘secrecy jurisdictions’. This is their reason for creating the Financial Secrecy Index which lists Ireland at 31.

“The Tax Justice Network has estimated, conservatively, that about $250 billion is lost in taxes each year by governments worldwide, solely as a result of wealthy individuals holding their assets offshore. The revenue losses from corporate tax avoidance are greater. It’s not just developing countries that suffer: European countries like Greece, Italy and Portugal have been brought to their knees by decades of secrecy and tax evasion.

These staggering sums are encouraged and enabled by a common element: secrecy. Secrecy jurisdictions, a term we often prefer instead of the more widely used term tax havens, compete to attract illicit financial flows of all kinds, with secrecy as one of the most important lures. A global industry has developed where banks, law practices and accounting firms provide secretive offshore structures to their tax dodging clients. Secrecy is a central feature of global financial markets – but international financial institutions, economists and many others don’t confront it seriously”.

Irish politicians don’t take it seriously either, for the obvious reason that it remains good business for the Irish executives who operate the subsidiaries of foreign banks here, and who work in the law practices and accounting firms that advise large multinational firms on the international tax strategy. For a relatively small economy Ireland has a disproportionately large number of experts on international taxation.

So it’s unlikely, when talking about the need to attract foreign direct investment, or saying that that the Irish economy has to become more competitive to boost the export sector as a means of reducing the deficit that Eamon Gilmore or Enda Kenny would say that as a means of doing that we have to build on our excellent relationship with our largest trading partner: Bermuda, the off-shore the tax haven.

Taken from Mary Everett, The statistical implications of multinational companies’ Corporate Structures, Quarterly Bulletin, Central Bank of Ireland, April 2012

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The Veil of Deception over Money

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A very interesting paper from Norbert Häring, Economics correspondent of Handelsblatt, which has just been published in the Real World Economics Review. The veil of deception over money: how central bankers and textbooks distort the…

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Dave Lordan’s New Short Story Collection: First Book of Frags

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Dave Lordan has a new collection of stories coming out called First Book of Frags, published by Wurm Press. You can pre-order copies here.

A book of explosive short fiction from the author of The Boy in the Ring and Invitation to a Sacrifice. First Book of Frags is a projectile flung at convention, capital, and ultimately, civilisation itself.

Some early reactions….

“A new form brings a new kind of fury. Pitched somewhere between the short story and the narrative poem, Frags delivers fragments and stark narrative incisions knitted together by a darkly satirical and formally challenging twenty-first century tone of political urgency. Frags shows up the jaded politico-economic media excursus on the recession and its discontents for the white noise that it is. Whether it is the Orwellian “Street Party”, the vitriolic David Foster Wallace-like “Living in Ikea”, the Beckettian Irish stew of “A Bone”, or the Bolanoesque “Dr. Essler’s Cocaine” the crafted howl of Frags rarely lets up. Cathleen Ni Houlihan is a scavenging Kathleen who sleeps on a “rained on mattress in the woods surrounded by empty wine bottles,” the Iron Lady has been melted down, and Ireland’s Kafkaesque educated unemployed who ponder justice have been transformed into flies, not cockroaches. Dave Lordan’s surreal yet scathing sketches of suffering, violence and ear-splitting silence should capture the hungry imagination of a disillusioned majority.” — Michael O’Sullivan

“echoes of James Joyce and Angela Carter”–Nuala Ní Chonchuir

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50 Truths about Hugo Chavez and the Bolivarian Revolution

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This article by Salim Lamrani was published on Opera Mundi on March 9th 2013. This translated version by Tim Anderson was published on venezuelanalysis.com.

President Hugo Chavez, who died on March 5, 2013 of cancer at age 58, marked forever the history of Venezuela and Latin America.

1. Never in the history of Latin America, has a political leader had such incontestable democratic legitimacy. Since coming to power in 1999, there were 16 elections in Venezuela. Hugo Chavez won 15, the last on October 7, 2012. He defeated his rivals with a margin of 10-20 percentage points.

2. All international bodies, from the European Union to the Organization of American States, to the Union of South American Nations and the Carter Center, were unanimous in recognizing the transparency of the vote counts.

3. James Carter, former U.S. President, declared that Venezuela's electoral system was “the best in the world.”

4. Universal access to education introduced in 1998 had exceptional results. About 1.5 million Venezuelans learned to read and write thanks to the literacy campaign called Mission Robinson I.

5. In December 2005, UNESCO said that Venezuela had eradicated illiteracy.

6. The number of children attending school increased from 6 million in 1998 to 13 million in 2011 and the enrollment rate is now 93.2%.

7. Mission Robinson II was launched to bring the entire population up to secondary level. Thus, the rate of secondary school enrollment rose from 53.6% in 2000 to 73.3% in 2011.

8. Missions Ribas and Sucre allowed tens of thousands of young adults to undertake university studies. Thus, the number of tertiary students increased from 895,000 in 2000 to 2.3 million in 2011, assisted by the creation of new universities.

9. With regard to health, they created the National Public System to ensure free access to health care for all Venezuelans. Between 2005 and 2012, 7873 new medical centers were created in Venezuela.

10. The number of doctors increased from 20 per 100,000 population in 1999 to 80 per 100,000 in 2010, or an increase of 400%.

11. Mission Barrio Adentro I provided 534 million medical consultations. About 17 million people were attended, while in 1998 less than 3 million people had regular access to health. 1.7 million lives were saved, between 2003 and 2011.

12. The infant mortality rate fell from 19.1 per thousand in 1999 to 10 per thousand in 2012, a reduction of 49%.

13. Average life expectancy increased from 72.2 years in 1999 to 74.3 years in 2011.

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The Immiserizing Growth Principle

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John Weeks posted a good article yesterday on Social Europe Journal, which challenges the idea, repeated by an SPD candidate for the German Chancellorship that Ireland is the ‘star pupil’ of the Eurozone. Weeks challenges what he refers to as the ideology of mercantilism and “immiserizing growth” which lays the emphasis on increasing exports while also increasing poverty.

In effect, these externally-imposed, government-generated surpluses take goods and services from residents and transfer them to foreign governments, banks and corporations. This type of trade surplus falls into the category of what Jagdish Bhagwati, the famous Indian economist (now at Columbia University), termed “immiserizing growth”, economic growth that generates poverty not improvement for a population. To put it simply, the country exports and the population grows poorer.

Today, data illustrating the effects of this policy has been published by the CSO.

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A Tale of Two Anglo Borrowers and What it Tells Us About the Future

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“AN official of the former Anglo Irish Bank must swear a “yes or no answer” as to whether the bank was solvent in 2009 when it allegedly gave €88m in loans to a developer, a judge said today.

A solicitor for developer Kevin McNulty had sought court orders requiring that all documents be disclosed, or “discovered”, relating to Anglo's solvency after September 2008 as part of his client's defence to proceedings brought against him by a NAMA company which took over the Anglo loans.

One of the “fundamental defences” being advanced by Mr McNulty and his companies was that Anglo, which was nationalised in January 2009, was insolvent when it purported to make the alleged loans, solicitor John Larney said in an affidavit to the Commercial Court.

While there was “a wealth of evidence in the public arena” suggesting the bank was insolvent since 2008, such material woud not constitute the proof required by a court and that was why discovery was being sought, Mr Larney said.”

Meanwhile….

“Denis O'Brien, the telecoms entrepreneur, is listed as owing Anglo Irish Bank €833.8m on foot of personal and corporate loans just after the bank was nationalised in 2009, making him its then sixth largest borrower.

Denis O'Brien is the largest single shareholder in Independent News & Media, the publisher of the Sunday Independent. He has lost an estimated €500m on his 21.6 per cent stake in the media group.”

That €500m loss is the amount O’Brien borrowed from Anglo for the shares – is he going to pay back a loan for an asset he no longer has? If and when the loans are transferred to NAMA, there is a strong possibility that they will be rendered null and void. Of course, before that there is a chance that the loan will be sold on, probably at a very significant discount. Loans transferred to NAMA from AIB and Anglo had up to a 70% haircut. But with a 'quick sale' on the back of this rushed liquidation if someone is willing to offer to buy them at a 90% discount then the liquidator would sell them. All that someone in Denis O'Brien’s position has to do is ask someone else to offer to buy the loan for him. The Anglo loans that Denis O'Brien has includes the one that funded the €45m acquisition of Siteserv, the infrastructure and utilities support services business. As the Indo article reports:

“This purchase was controversial as the taxpayer took a €105m hit.”

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