All Firesales and Restructuring(Afar)

March 16, 2011

Joan Burton is no Proud Mary, she has comfortably rolled over for the LP hoping to take controversy out of her demotion. I guess we’ll have to await another Joan of Arc Irish Min for Finance sometime in the Irish distant far.

Might be appropriate requiem here:)

All of which rather than solve the crisis in Ireland, should ensure it will get worse. Meanwhile the question of Irish default on its loans is gradually gaining traction here in Ireland. Many are now asking can we really pay back the bank debt, the sovereign debt and now the EU/IMF ‘bailout’ debt, or realistically are we going to have to default on any one or a combination of these?

A discussion on this topic should examine in great detail the Ajai Chopra EU/IMF bailout loan of €85 bn.  The reason for this is that by logic and commonsense and basic accountancy standards we should be able to assume, a) it would only be given to Ireland if it could be paid back; b) the conditions and austerity measures it imposes are achievable and provide a strong structure to rebuild our economy. However, grave doubts exist that this is so.

We should also examine the question of who benefits the most from the EU/IMF bailout: the banks? The Irish financial class currently pouring over Nama? The Irish property and developer class? Business owners? Will this money give fertile release to economic development in Ireland, or will it siphon away opportunity for some. Will it impose unfair austerity and tax burdens on the general citizens and be redirected into the pockets of the rich?

The banking and financial and property owning class that brought @Ireland to its knees has targeted an even more reviled term than the D word DEFAULT in Ireland , it is the word FIRESALE.

Since 2008 our financial class led by the banks, stock brokers, commercial property owners, has thrown just about everything including the kitchen sink  to prevent both DEFAULT and FIRESALE.

Nama and the banks and their supporters have been intertwined in a dance of death to maintain the assets of developers and bankers and property owners at valuation levels that a) won’t create further losses for the banks b) erode further the losses of the Irish commercial property class.

The cost of doing this has been tremendous and most of it has been born by Irish citizens in terms of unemployment and emigration. Doesn’t matter if business owners cannot afford the high cost of artificially maintained upward only rent review based properties, they’ll be left lie empty as zombie, ghost hotels.

Never mind that A firesale of such properties could unleash an opportunity for business across the length and breath of Ireland. Instead, high property prices stifle growth and opportunity and are required by banks to offset further losses as loans would collapse further if the commercial value of loans and rent/lease full further. No, they’ll be kept cocooned  and shrouded and kept like the family silver to be brought out and sold in the far future of fantasy prices at taxpayer expenses!

So, let’s  reduce the question of Ireland’s bailout recovery, default and firesales to the question of bailout recovery of the Irish economy; or, bailout recovery of the financial and political class, that got us into the mess. Currently we have a tug of war going on to ensure that any recovery will accrue to the latter at whatever expense may accrue to the former.

Mostly every penny begged, borrowed from the EU/IMF/ECB and stolen from taxpayers so far has been poured into toxic banks and into the financial class that generated the crisis in the first place.

Its their assets that are being detoxified allegedly to save our economy. More and more Bailout money is being sucked into their black holes day by day. Still the costs of this are rising.

Businesses across Ireland are being forced out of business in order to maintain the impossible upward only review, penal rent extraction, that the banks require to maintain the integrity of their own liquidity and the liquidity of their ‘good loans’.

The cost of maintaining this artificial bailout bubble in a broken economy is enormous and its holding back recovery and making recovery more and more impossible and default more imminent.

Because our bailout is simply not working, we need urgently a properly restructured default that will burn bondholders, burst that artificial bailout bubble returning property to reasonable commercial rates, redirect bailout money away from the banks and financial class black holes into the real economy.

Green shoots and new business will soon arise unchoked by the NO DEFAULTERS worried about further falls in their asset class wealth. Default  will clean away the parisitic banks, bubble making Nama and those whose agenda is to target their private assets with recovery money.

In the history of IMF defaults its an interesting study to see just exactly who benefits in economic recovery following similar bailouts to ours. Perhaps the IMF has grown more efficient and sensitive to issues such as this over the past decade, but there have been many instances where bailout has meant the favouring of the rich elite at the expense of crippling the poor.

Evidence in Ireland is mounting that bailout is largely being interpreted as a bailout of the banks and the commercial landed class who at all costs want to protect their private commercial bubbles from loss, even at the expense of destruction of the whole economy.

So what do we mean by default:

One interpretation is that the target should be a write down of everything in the above chart apart from the Senior Bonds Guaranteed, a total target of €42 bn. So 20%, 30%, 40% and upwards to 100% write downs should be on the negotiation table. But this position ignores the support being given by the Irish Central Bank and the ECB by way of emergency funding to the Irish banking sector.

An article by Karl Whelan makes the following points:

“Back in November, the plan to fix the banks was to get the Irish State to put in up to €35 billion (half of this borrowed from the EU and IMF) to recapitalise the banks. It was hoped that this would restore market confidence, thus allowing the banks regain access to market funding and repay the fortune they owe the ECB.

The availability of these funds to recapitalise the banks has not had the desired effect. Large amounts of deposits have left the Irish banking system since November to be replaced by yet more Central Bank funding. The six banks guaranteed by the State now owe about €150 billion to central banks, with about €70 billion of this owed to the Irish Central Bank in the form of loans that were guaranteed by the former minister for finance (without, to my knowledge, any consultation of the Oireachtas).”

” However, if the €150 billion in funding from the ECB and Irish Central Bank is converted into equity, then these banks will immediately be solvent beyond even the doubts of the most pessimistic observers and, at that point, they could be sold into private ownership.

This equity conversion could work as follows. The European Financial Stability Facility could issue €80 billion in bonds, loaning these funds to the Irish banks, who would then pay off the ECB, allowing it walk away unscathed. The EFSF would then convert its €80 billion loan into an equity stake. Similarly, the Irish Central Bank would convert its ELA loans into equity with a legal promise from the Minister for Finance that any losses on the equity share would be covered by the State. The banks would then be owned by the EU and the Irish State but would be prepared for sale to private ownership.

The conversion of the €150 billion to equity would not represent a great investment for either the Irish or the European authorities. For example, suppose the true underlying value of the Irish banks turns out to be minus €30 billion. The equity stake would then turn out to be worth €120 billion, with losses shared between Ireland and the Europe. The Irish ELA loans of €70 billion would end up as €56 billion of equity and the ECB’s loans of €80 billion would end up as €64 billion in equity held by the EFSF.

This kind of proposal will hardly be popular with our European partners. However, it would achieve many common goals. It would restore the credibility of the ECB, who would hopefully learn a few lessons about lending to insolvent banks. It would restore the Irish banks to stability without seeing defaults on senior bank bonds, which has been a high priority for the European authorities. And it would give the State a chance to avoid a sovereign default, which should be in everyone’s interests. ”

The above proposal deserves all our support.

It avoids the inglorious write down of mark to market losses, it provides a buffer and safety valve to allow the Irish economy to breathe and provides security to the Irish banking system allowing the economy to grow again unencumbered with the risk of meltdown.

The potential costs of this factored into the costs of further bailouts from Portugal, Spain, Greece may give the EFSF(European Financial Services Fund) pause for thought, but as an alternative to a more uncontrolled, default leading to the need for this economy to leave the EZ,  its one that should be negotiated and implemented straight away.

We need firesales to clean out our commercial and residential property mess. We need a clean competitive base with an end to the Croke Park agreement and more modest wage agreements all round.

Firesales, an end to Nama,  lowering of commercial property rent rates, debt for equity ECB burden sharing, a redirection of financial supports away from bubble property maintenance, would mean a quick return to growth for this economy ready to adapt to expansion of tourism and agri business;  the end of a suffocating financial and property class that brought this country to its knees.


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