Ashokum Mody and the Magic 3%…

April 11, 2013

Support for some of the major themes of this blog has come from a surprising source, one of the inner circle of the IMF responsible for the original bailout terms negotiated by the troika forchart

Ireland. Ashokum Mody interviewed on Morning Ireland, 11/04/13 approx 08:25 – 08:25 (RTE’s I player) has come out and clearly stated austerity has been a mistake, bondholders should have been burned, drizzling small alterations to Ireland’s bailout terms, is merely prolonging the agony of Ireland’s silent tragedy.

Proponents of our bailout terms with Ireland languishing close to the cliff of 120% debt to GDP ratio have used 3% economic growth to justify the setting up of NAMA and our bailout terms demanding our creditors be paid in full notwithstanding their bad investments.

According to Ashokum Mody our bailout terms were mistaken. History shows that rather than increasing risk to the financial system a fair distribution of losses among stakeholders including bondholders leads to a shortening of time required for recovery.

A combination of austerity and the shouldering of creditor debt of bondholders on the shoulders of taxpayers is not working. Ireland is being lured onto the rocks by Greek sirens who claim otherwise.

Ireland is an economic patient etherised upon a table of debt at best the beneficiary of life support aid to prevent economic death that will not take Ireland out of its economic coma(my words). Ireland is being dragged into the gutter.

The problem is the magical 3% growth to grow recovery and sustainability was never achievable unless gold mines or oil was discovered and we magically became Norway.

Since 2008 economic slowdown in the world economy has been inevitable. Evidence for this has been accumulating across the world from the USA to Japan and the EMU. World trade under current economic conditions in spite of massive quantitive easing in the USA and Japan is set to contract further.

An open economy such as Ireland’s dependent on favorable world trading conditions is more at risk than most of economic downturn because of negative growth in world trade. Ireland is caught in a wedge of negative downturn because of deteriorating world trade conditions combined with austerity and its  massive damage to the local economy.

The only relief for Ireland is some form of official relief from our massive debt obligations.

Currently being explored is the ‘seven year itch'(my term) proposal before European Finance ministers of extending Ireland’s debt maturities by seven years. Massive increases in taxation, emigration, rising unemployment and falling standards in state services should leave Ireland itching to get out of its cage of debt custom-built for it by the troika; should it even gain this debt relief. Ireland’s silent tragedy is set to continue.

Declaration of a default based on the burning of bondholders, most of the bank bondholders having been paid already, our biggest sovereign bondholder is the ECB, should be seriously considered.

This would mean an exit for Ireland from the EMU. Not a great loss when one considers the EMU itself is being riven apart by austerity, with Germany and the the inner core countries of the EMU unwilling to pay for bailouts of the outer core; now that the outer core is being tubed up to suck all to the inner core led by German banks.

The bailout transfusions offered to countries such as Portugal, I(O)reland, Cyprus have been inequitable in the extreme.

No template exists for such bailouts with the debt extraction principle of a tailored solution, ‘grab what you can’ offered to each country.

Some countries odious with weak leadership such as Ireland more compliant and easily manipulated than others gave in early to bondholders with deals ransacking and plundering taxpayers .

We were made to suffer banking debt as concessionary sovereign debt.Ireland is Europe’s sacrificial lamb and is currently being roasted on Germany’s table of debt.

This is a long way from the EU concept of sovereign, independent members of the EU joined together to protect the democratic nature of Europe. Europe’s new EMU template is a Russian equivalent of the old USSR with Russia as vending machine for its satellites.

Germany is veering into a prototype of Russia of old. depositors in Cyprus have seen their savings stolen.


In “Financial crises and the multilateral response:What the historical record shows” Ashokum Mody calls for a review of the bond system particularly in regard to sovereign bonds.

I propose extending his suggestion re ‘sovereign cocos’ to Irelands sovereign debt.

Instead of the absurd extension of odious Irish sovereign debt by seven years, as odious as that leveled on Germany in the Treaty of Versailles, sovereign cocos could return Ireland’s debt to stable levels.

“Lobbying by bondholders who stand to take haircuts
may prevent officials from moving. Insofar as sovereign debt restructuring
has up-front political and economic costs but deferred benefits,
elected officials with finite political lives and higher discount rates
than society as a whole may put it off excessively.
One way of addressing this would be for future bond covenants to
include provisions that trigger restructurings automatically. These
would be “sovereign cocos,” contingent debt securities that automatically
convert when pre-specified levels of indebtedness are breached.
The idea is that if adequate incentive to restructure is not present
once a crisis starts, it should be built in ex ante.
The concept is taken from the debate over bank debt, where there
is a similar reluctance to restructure. Because of the difficulty of putting
banks through a bankruptcy-like procedure, which among other
things can create difficulties for bank counterparties, there is an incentive,
analogous to that which arises in the context of sovereign
debt, to provide a bailout and hope that good news will turn up rather
than proceed with the delicate process of bailing in bondholders. Contingent
convertible bonds (cocos) have been suggested as a solution
to this problem. When Tier 1 capital falls below a pre-specified
limit, these bonds automatically convert to equity, bailing in the
bondholders and helping to recapitalize the bank.15
A number of banks have issued these instruments. In 2010 Lloyds
Banking Group Plc exchanged some of its subordinated bonds for enhanced
capital notes that become equity if the lender’s core Tier 1
ratio falls below 5% of assets. Rabobank Groep NV sold senior notes
that will be written down to a quarter of their face value if its capital
ratio slips below 7%. Credit Suisse issued more than $2 billion of cocos
in February 2011. The Bank of Cyprus received subscriptions for more
than $1.2 billion of cocos in May.
Extending this idea to the sovereign-debt domain, government
bond contracts could provide that if a sovereign’s debt/GDP ratio exceeds
a specified threshold, there will be an automatic reduction in
principal and interest payments. One could also imagine making the
trigger a function of the debt service/government revenue ratio, or
of a convex combination of the two ratios.”

Part 11

Transcript of a Conference Call on the Ninth Review under Extended Fund Facility Arrangement for Ireland

with Craig Beaumont, Mission Chief for Ireland, European Department, and
Olga Stankova, Senior Press Officer, External Relations Department

Washington, D.C.
April 3, 2012

“Our baseline economic outlook is for a gradual economic recovery with growth remaining low at just over 1 percent in 2013, and rising to just over 2 percent in 2014. But we continue to see a range of risks to that baseline, both to the trading partner recovery expected to strengthen exports from 2014 and also to the revival of domestic demand. One of those risks to domestic demand is that lending remains very low, owing to both the slow rate of progress in resolving loans in arrears to households and SMEs and also due to the broader weakness in the profitability of the banks.

If these factors hindered the gradual pickup in growth we have in the baseline, Ireland’s debt outlook would be significantly affected. Rather than peaking at just over 122 percent of GDP this year and then declining, debt would continue rising which could eventually undermine Ireland’s access to market funding.”

Leaving aside the dodgy reliance on GDP figures whose method of analysis should be given in depth explanation, the risks alluded to above are economic markers that deserve more than the label ‘risk’. The risk we are talking about is the risk that an apple falling from a tree will risk hitting the ground.

Inevitable economic disaster for Ireland beckons.

Our banks require approx €16bn further recapitalisation, deposits are at risk, further damage is being done to the Irish economy by the troika and current Black Adder princes in Fine Gael, Labour and FF preach ‘confidence’ urging private investment when none exists and banks refuse to lend;  a ‘confidence’ mantra fed to them by puppet masters in the ECB and the EMU.

Meanwhile Micheal Noonan, on foot of a miserable extension of 7 years to our unpayable debt maturities lectures the rating agency Moody’s, it should upgrade Ireland from junk bond status. Such delusionary politics lies close to the heart of Ireland’s silent tragedy. It would be polite to state ‘out of his depth’.

A young Irish woman at an EU Citizen’s Initiative in Ghent, Belgium yesterday responded to the EU Commissioner for Trade’s claim that Ireland is out of a recession – and got a round of applause while doing so, Made Flemish news!



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