Author Archives: P O Neill

About P O Neill

is Irish and lives in America.

NHS in “worse than unlimited budget for single patient” shock

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The Wall Street Journal Europe uncorks an instant classic in explaining the longevity of Lockerbie bomber Abdel Baset al-Megrahi:

Karol Sikora, a leading cancer specialist who examined Megrahi shortly before his release, explains that predicting how long a patient with end-stage prostate cancer has to live is “a value judgment of probability,” not an exact science. But Dr. Sikora also writes that his initial three-month prognosis was “based on his treatment as an NHS patient in Glasgow at the time, when not even standard docetaxel chemotherapy was offered.” By contrast, “Mr. Megrahi almost certainly had excellent care in Tripoli.” Think about that one: Get treated for cancer by the U.K.’s National Health Service, and you’ll be dead by Christmas. But get treated for the same cancer in Libya, and you may have years to live. No wonder Americans are terrified of government-run medicine and rationing boards.

It’s painfully obvious but apparently nonetheless necessary to point that Mr al-Megrahi was in this case receiving care as a political trophy in a petro-state with an open-ended government budget available to embarrass his former hosts. So Yes, his care was probably better than  the NHS standard available to him in Glasgow, but as Dr Sikora also explains, there was a lot of variability around the now-notorious “3 months to live” prognosis even at the time it was issued. His care was also a lot better than someone without health insurance in the USA would receive, but who wants to descend to cheap health system point scoring based on a single case. Besides the Wall Street Journal.

My own view is that there’s no big conspiracy theory or undiscovered files behind Mr al-Megrahi’s release. Instead, the issue played into the self-righteousness of the SNP government. Up against that, geopolitics didn’t stand a chance.

Irish Central Bank highlights costs of delayed adjustment

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Central Bank of Ireland governor Patrick Honohan delivered a short speech at the annual meeting of the Irish Economic Association a few hours ago. In Ireland’s strange political dynamic, what initially made news was that he endorsed the fiscal compact, because the Irish judicial class has prescribed a narrow role for the government of the day in advocating for constitutional questions that it puts to the people. Anyway, a few paragraphs after telling people that they are too focused on the costs of Ireland’s infamous blanket bank liability guarantee (on the grounds that our “partners” would have insisted on all senior unsecured bank debt being serviced anyway), he drops in this bit of historical interpretation:

Restructuring of the banks as long as the guarantee was in effect was inhibited by the fact that any significant restructuring was likely to trigger an immediate entitlement for immediate payment in cash of all bondholders under the terms of the guarantee. This reason alone can explain why steps to deal definitively with even the two weakest banks were deferred to the end of the guarantee period.

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Every unhappy family is unhappy in its own way

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From an interview of ECB board member Jörg Asmussen with the Wall Street Journal ($):

WSJ: Until last December you dealt with the debt crisis from the German finance ministry. Since January you are with the ECB. How has this change affected how you look at the debt crisis?

Asmussen: You have a more limited mandate (at the ECB), which is price stability and contributing to financial stability. On the other hand you have a broader, namely European, perspective. We see media reports every morning from Cyprus to Ireland and from Estonia to Portugal. This is amazing sometimes. You have topics that cross the whole euro zone. But sometimes you have topics like Target2 balances that we only see in German newspapers. Sometimes you have issues that are lively debated in Ireland that are not issues in the rest of the euro zone. You have clearly a European perspective at the Euro Tower.

The highlighted remark seems to reflect Frankfurt’s bemusement with their very own Irish Question, which has crystallized in a debate about why Ireland is still servicing the legacy unsecured senior debt of insolvent banks. Indeed, Mr Asmussen’s visit to Dublin last week seems to have poured fuel on the fire, as Colm McCarthy and Guido Fawkes explain. On the other hand, Germans may not be happy to see Target2 presented as a purely German obsession, since whatever the technicalities, it gets to the balance of payments aspect of the Eurozone crisis. At what point does every country fuming about its own particular hand get seen as evidence of a systemic problem?

 

Ireland to conduct referendum on the Eurozone fiscal compact

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Irish Prime Minister Enda Kenny has told the Irish parliament today that the government has decided to subject the Eurozone fiscal compact to a popular vote. Although the government was clearly tempted to bypass a popular vote, and there were indications that the wording of the compact had been designed to facilitate this, the calculation clearly was that if they were forced into a referendum by legal action they would definitely lose it, whereas a pro-active campaign can avoid the distractions of legalities and move directly to the big Yes/No question on the compact itself.  In fact, various comments ranging from David Cameron’s initial opposition to the compact to Mario Draghi’s interview with the Wall Street Journal last week had made it clear that many people outside Ireland see sovereignty issues with the compact, and these views would have inevitably informed the debate in Ireland. Having now upped the ante, the government will find it hard to resist the temptation to say the vote is essentially in/out of the Euro and indeed in/out on EFSF support — but the mentality of an already under-water investment banker (go even deeper!) is not necessarily good politics. [Note: the fiscal compact does not need Irish ratification to take effect].  Nevertheless, as with Greece, parties outside the EU consensus will relish the opportunity of the debate.  One thing still to be seen is whether the government has lined up some sweeteners from the troika especially as regards the debt burden from support to the insolvent banks.

Ireland’s small bazooka

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The Wall Street Journal’s Marketbeat blog discusses an interesting flow chart prepared by BNP  Paribas which shows the various scenarios that could play out following the imminent Greek bond offer to its private bondholders. Among the apparent paradoxes brought out by the chart is that Greece could be better off from a debt reduction perspective if a small majority rather than large majority of bondholders accept the offer, because then it will have the latitude to, er, screw the holdouts, including the possibility of giving them nothing. Whereas with a very high majority, there will be a strong incentive to keep everything consensual and the holdouts escape at par.

Anyway, the chart refers to the scenario where Greece is able to impose a punitive scheme on the holdouts as “Anglo Irish.”  This is because of the bank’s 2010 offering to subordinated debt holders, who were offered new bonds with 20 percent of the face value of the old ones, and by accepting they were voting to impose essentially a complete wipeout of anyone who didn’t accept. FT Alphaville discussed the strategy in detail at the time.

It’s a perfectly good label, but if you come away from the chart thinking that Ireland came up with a hardball (or is that “fair shoulder”?) solution to its problem of bank debt, you’d be wrong. That particular offer only dealt with a tiny proportion of Anglo’s overall debt, and it was the easiest target. In fact, far larger public sums have been spent paying at par the legacy unsecured and unguaranteed senior debt in Anglo Irish — claims that would have only residual value had Anglo been allowed to go to the wall as an insolvent bank.  The closer analogy is with the wheeze that the ECB just pulled to make sure its own holdings of Greek bonds get paid at par, despite having paid heavily discounted market prices for them.

So good luck to Greece with the Anglo Irish scenario. It would have been nice had it been tried on any larger scale in Ireland.

It’s not dead, it’s resting

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Financial Times 22 November 2011:
In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.
Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010. In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010.

Irish Times 19 November 2011 processology on the 2010 Irish IMF/EU program  —
Tension surfaced as [Brian] Lenihan [Finance Minister] sought to raise the possibility of imposing losses on senior bank bondholders, to ease the burden on the State, which the ECB opposed but the IMF believed would be feasible. Fearing an outburst of contagion in wider bank markets, the ECB insisted that a “relatively small amount of money” was at stake against the risk of destabilising the total stock of European banking debt. But the IMF refused to yield, saying the question should not be ruled out. “The idea smouldered in the background,” says a source. The ECB kept seeking to have the notion taken off the table entirely while the IMF and the government sought the opposite. Legal advice was taken, yet there was no end to the stalemate.

So the ECB is requiring Ireland to make payment in full to legacy bondholders in Irish banks with the rationale of not scaring the market for senior unsecured bank debt … a market that is now, of its own accord, dead.

More energetic remedies

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“We [Eurozone] all have to become more competitive” — Jens Weidmann, Bundesbank President, in a FT interview.

Alice in Wonderland, Chapter III:

‘But she must have a prize herself, you know,’ said the Mouse.
‘Of course,’ the Dodo replied very gravely. ‘What else have you got in your pocket?’ he went on, turning to Alice.
‘Only a thimble,’ said Alice sadly.
‘Hand it over here,’ said the Dodo.
Then they all crowded round her once more, while the Dodo solemnly presented the thimble, saying ‘We beg your acceptance of this elegant thimble’; and, when it had finished this short speech, they all cheered.

Maggie Thatcher, Hard ECUs, and the Eurozone shambles

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House of Commons, 30 October 1990 —

Mr. Terence Higgins (Worthing)  Will my right hon. Friend [the PM, Mrs Thatcher] take time between now and the conference in December to explain to her European colleagues what any first-year economic student could tell them, which is that the imposition of a single currency, as opposed to a common currency, would rule out for all time the most effective means of adjusting for national differences in costs and prices? Will she explain that that in turn would cause widespread unemployment, which would probably exist on a perpetual basis, and very serious financial imbalances?

The Prime Minister Yes, I agree entirely with my right hon. Friend. It would do just that. It would also mean that there would have to be enormous transfers of money from one country to another. It would cost us a great deal of money. One reason why some of the poorer countries want it is that they would get those big transfers of money. We are trying to contest that. If we have a single currency or a locked currency, the differences come out substantially in unemployment or vast movements of people from one country to another. Many people who talk about a single currency have never considered its full implications.

But wait, there’s more.

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Les grandes vacances and the financial crisis

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As the European policy elite prepares for their normal practice of taking August off — because, after all, nothing big ever happens in August or September that you’d need to be ready for — there are conflicting messages about whether this is actually a good idea.  First, a nice quote via a Reuters story arguing that it helped when everyone decamped from their offices last year:

“Last summer, the crisis cooled partly because euro zone politicians went to the beaches and stopped contradicting each other in public every day,” one senior EU official involved in the Greek rescue negotiations said. “That moment can’t come soon enough this year.”

On the other hand, we’re coming up on the 1 year anniversary of the disastrous absence of Official Ireland from its desk (on what was actually a July-September inclusive getaway for the then-government), a problem later noted by outgoing ECB board member Lorenzo Bini Smaghi

Whereas [PM Brian] Cowen and his ministers had responded swiftly during 2009 as fiscal conditions worsened, Bini Smaghi says there was no comparable action to reassure markets when the heat came on last year. Ireland was listing from the summer, its position worsening all the time as investors took fright.

“Markets waited and waited and since they saw no policy reactions they started to lose confidence in the course of the summer. Remember there was a downgrade – in August – but there was no policy reaction, no announcement that a tough budget was in preparation and no announcement of the measures. The loss of confidence also affected the banking system and this created a spiral which led to the crisis and in the end the request for financial assistance.”

Splitting the difference between these positions is currency strategist Stephen Jen —

With signs of anxiety resurfacing late Friday — a rally by Spanish bonds fizzled at the market’s close — the idea that investors would wait patiently for two months for Europe’s leaders to provide the fine print on their grand proposal was met with disbelief in some quarters.  “I would suggest that if the eurocrats want to go on vacation that they bring their cellphones,” added Mr. Jen.

Back when Nicolas Sarkozy was popular, one of his catchy slogans for reaching target voters was “the France that wakes up early.”  Could we get a similar chic in Brussels, Frankfurt, and the national capitals around “the Europe that works during August?”

Debt restructuring in Greece and Dubai

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It’s useful to compare and contrast the terms of the Greece debt restructuring as outlined by the Institute of International Finance and the Dubai World debt restructuring of last year.  In both cases there is a mix of options for the new debt with varying coupon structures and levels of government guarantee.  The Greece case is a little more blunt about the discounted nature of the new debt, but there are enough options so that outright haircuts to principal can be avoided if a creditor so wishes — the impact is being achieved in net present value terms.

Thus there is a sense in which Dubai and its bailout partner Abu Dhabi were ahead of the EU curve.  This is despite considerable differences in circumstances: Dubai was restructuring corporate debt of state owned companies that were perceived as having a government guarantee but in fact did not, whereas Greece is restructuring sovereign debt.  The government of Dubai succeeded in walling off its own sovereign debt burden from its kinda-sorta-maybe legacy guaranteed liabilities — Ireland, take note — and was even able to issue new sovereign debt this year, without a credit rating!

Also in Dubai, the commercial banks grumbled but ultimately took the offer.  Which brings up another issue.  When the government of Dubai needed to restructure debt to commercial banks, it brought in restructuring specialists who came up with the offer to the commercial banks.  When the EU needed to restructure the Greek debt owed to commercial banks, they brought in, er, the commercial banks.  There must be synergy in having poacher and gamekeeper as the same person.