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Banks hoard while Families fall apart

Thu, 19 Apr 2012 10:05:00 GMT

Exasperated, Pat Kenny asked on Frontline Monday night, why the several billions we've put into the banks to buffer against consumer insolvency, hasn't yet been used? Nobody answered the question. Given that the IMF has been unequivocal in its view that no domestic economic recovery can occur without first tackling consumer insolvency, it remains the burning question of our time.

Four years into the crisis and why do we not have yet a non-judicial and modern insolvency process? The answer is simple and grubby; those at the top simply didn't care. Insolvency doesn't affect them, only the private sector and the low paid in the public sector. Instead they are snuggly quarantined within the ruling pale buttressed by the Croke Park Agreement. This lethargy and lack of urgency at the top is helped enormously when fear and ignorance is spread by the high priests of moral hazard, those who feel threatened by the scale of insolvency that includes banks and their right wing protectorate in the media.

But now that the Insolvency Bill, which is joined at the hip to the Troika bailout, has arrived, the objective of this hard right cluster is to render it toothless, a mere box ticking exercise that releases the minimum amount of funds into the maw of the consumer insolvency crisis. Let's hope they fail.

The key performance indicator for economic recovery will be the number of debt settlement and insolvency agreements that will be lodged with the proposed Insolvency Service attached to the Dept of Justice. But without robust Central Bank adjustment of the Code of Conduct for banks, compelling them to fairly engage with Insolvency Trustees and the creation of an Ombudsman to arbitrate on disputes between debtors and creditors, the Irish economy is directionless, propelled forward by exports but dragging, on the sea floor, a domestic economy deeply anchored in the silt of unresolved consumer debt. Getting it right isn't just about economic recovery, it's also about recovery from trauma.

Nobody is measuring it, but the impact of prolonged exposure to open-ended and overwhelming indebtedness is mauling Irish society by destroying family cohesion and happiness and, in many cases, leading to separation and suicides. Further delay is intolerable because, not only is it economically stupid but because it is inflicting horrendous wounds on thousands of Irish families.

- Eddie

Will Irish Scammed Irish Consumers be treated as fairly as British?

Thu, 19 Apr 2012 10:05:00 GMT

The Central Bank is poised to take enforcement action against most leading Irish lenders for duping vast numbers of Irish borrowers into paying for worthless Payment Protection Insurance (PPI). This cover can temporarily pay your loan and mortgage if you get sick or lose your job. Attaching it to a credit agreement reduces risk to the lender and pays lucrative commissions typically 40% of the premium, usually priced at 6% of annual mortgage repayments. The scam, which is set to cost the UK lending industry £8 billion, is the failure to disclose the sale of the insurance to borrowers many of whom simply don't know they are paying hundreds of Euro per year for it or where it has been disclosed, the failure to explain its exemptions, terms and costs.

But huge compensation payouts for PPI mis-sold in Ireland may be scuppered because the Central Bank cannot legally apply its enforcement powers before it first introduced a detailed Code of Conduct in 2007. That means a deluge of claims will fall to the Financial Services Ombudsman (FSO) when consumers twig they've been scammed.

But unless the FSO seeks a simple adjustment to its six year rule, any claims about PPI unknowingly entered into over six years ago will be repudiated by it. The six year rule can be changed by simple Ministerial order or by a High Court ruling to run the clock from the date that consumers recognise the loss, not from the inception of the mis-sold policy.

So will the FSO fall victim to the classic civil service crisis response of shrinking the scale of the problem to fit its resources or will it gear up and take on the big boys guaranteeing to rule on any PPI mis-selling within three years of consumer knowledge? The moment of truth has arrived for the Ombudsman. How it jumps will determine its legacy.

- Eddie

96 Years Later, We Remain Colonised

Thu, 12 Apr 2012 11:59:00 GMT

A 77 year old man takes the Luas to St Stephens Green, walks to the Dail gates and, in what his daughter would later describe as his final political act, commits a very public suicide. It could, but didn't happen in Dublin but, it did happen in Athens. Dimitris Christoulos suicide has lifted the lid on the excruciating disillusionment and hopelessness of extend and pretend policies that have failed to tackle the personal insolvency crisis. A week after Mr Christoulos finally ended his debt burden in front of the Greek parliament, the IMF singled out excessive personal debt as the brake preventing economic recovery.

Mr Christoulos, a retired pharmacist and anti-drugs activist is an anathema to the let-them-burn brigade, who’d prefer rigid adherence to the failed financial dogma of moral hazard, the policy of avoiding debt restructure and relief at all costs - especially costs to them. But by taking his own life Mr Christoulos has helped to strip away the detachment between those lightly bruised by this economic depression and those overwhelmed by it.

Rage and there has been much of it, has been focused on bankers, developers, bailout rescuers and better off neighbours but, strip away the rhetoric, look past the dumb decision to bail out banks with daft promissory notes and, Ireland ninety six years after The Easter Rising is a failed State, measured harshly by our savage annual deficit. Perhaps it is because of low self- esteem that we think don’t deserve higher standards or perhaps it is a hangover from colonisation where pulling strokes on authorities made some kind of sense but, whatever the cause, we accepted crony capitalism, cheered political corruption, voted Ahern back a third time chuckling at his Tribunal evidence, accepted zero accountability from a vastly expanded and grossly overpaid public service establishment, ignored cartels in the professions and impunity for political leaders - until we were burst. Then it became personal.

Broach this subject and even today, despite everything that has happened, many of us still don't want to consider that the enemy is within. Ireland is unreformed. We are still a society run for the benefit of cosseted insiders. Just look at the Croke Park Agreement and its political support. Look at the Household Charge, money collected to feed into an unreformed and bloated local services network where sickies run at multiples of what would be tolerated elsewhere.

This week we hear from teacher unions who, despite cuts, enjoy among the highest rates of pay and pensions in Europe, openly threatening us if their privileges are reduced. All these, report to a political elite whose own pay and pensions are vastly in excess of what we can afford as a broken State, summed up by the obscene fiction that we can pay over a hundred billion in pensions from an asset pot that's gone down the crapper into failed banks.

Meanwhile at least a quarter of a million Irish people, just like Dimitris Christolous, are behind on utilities and mortgages, practically all of them from the private sector, some from the low paid public sector and all excluded from the economy while the squeezed middle is bled for more money - rather than face the truth.

The truth is that even if we regain a foothold in bond markets next year, we continue to feed an economy that is run, primarily, to maintain the lifestyles to which the insiders have become accustomed in a democracy that maintains the delusion that its centre of power is its parliament.

You want to learn how this broken State operates, seek out the untouchables, those who get paid most for the least effort and decide the fate of the rest of us. That is real power. The rest is mere window dressing. When the Brits left we merely swapped an oppressive foreign occupier for an internal one and when the Trioka leaves, we will remain colonised.

- Eddie Hobbs

Open Letter to NAMA

Thu, 15 Mar 2012 17:29:00 GMT

NAMA, which isn’t covered by the Freedom of Information Act is in the news for its appearance at a Dail Committee briefing yesterday. I’ve written an open letter today March 15th in my column to Chairman Frank Daly giving NAMA a list of important questions it hasn’t been asked. These questions and, the answers to them, matter. You can read them here - use the magnify tool for clarity.

Eddie Hobbs

Why I'm suing the Irish Independent

Fri, 02 Mar 2012 12:48:00 GMT

Last Saturday the Irish Independent ran a front page story. Tellingly, that story was taken down from its website by lunchtime and no longer exists on line. Earlier, the Irish Independent failed to show up on The Marian Finucane Show to defend its lead story despite requests from the programme producers to do so. The serious allegations made by the Irish Independent are patently untrue and, unhappily, it's response to my request for a front page retraction has been unsatisfactory. Under the circumstances I have instructed my lawyers to issue proceedings on my behalf against the Irish Independent. I will not be making any further comment.

- Eddie Hobbs

Kenny needs his own Atlanta

Thu, 01 Mar 2012 14:11:00 GMT

1864, and after four years of epic struggle the Union was bone weary. Grant had lost a third of his army in a series of sidling battles with Lee in Northern Virginia while Lincoln, first elected in 1860, was desperately trying to become the first democratically elected president to seek a second term in the middle of a war. His chances looked doomed as a populist anti- war camp was gaining widespread support. Saying no to war, sundering the Union and abandoning millions of slaves was easier than continuing on. But Lincoln caught a break. Sherman took Atlanta, the commercial capital of the South, split the Confederacy in two and guaranteed Lincoln's second term.

If Kenny is to save himself and his Government he needs his own Atlanta. Despite Government attempts to restrict the debate to the substance of the Fiscal Compact we all know what this referendum is really about . As Atlanta fell for Lincoln, so too must Ireland's toxic national debt for Kenny, especially the €31bn created from dust by the Irish Central Bank. We are currently obliged to repay this perversity at a punishing interest rate and schedule. It will then be returned to the dust from whence it came on Dame Street - all to save a dead bank and a principle about not monetizing debt. The resultant debt / GDP is unsustainable at the rates of interest we are expected to pay. All Greece has done is to distract us from this inconvenient truth.

Kenny can win the referendum but only if the ECB board is first persuaded to turn a blind eye to Ireland not burning €31billions. Fear will drive the Yes campaign as assuredly as anger will drive the No one. Politically its that simple. But what of the economics? Pure horse sense tells us to stay out of this Fiscal Compact simply because it cannot work. Ireland's economy cannot carry the national debt, the internal debt like the Public Sector pension liability mountain and the vast scale of private indebtedness. How can increased taxes and further cuts ignite growth when both personal and Government spending are in decline?To believe that exports can carry the day anymore is delusional, not without domestic economic recovery. Austerity isn't designed to create growth, it is designed to bring the fiscal deficit back into balance. That is incompatible with growth. Still Eurozone policymakers talk the language of austerity, not growth and now wish us to vote for it.

The sooner that we collectively face reality the sooner we'll start thinking our way out of this mess. Without a Eurozone growth compact, debt relief is the only route we can take. Every other effort including carrying on the great extend and pretend game, is simply prolonging the agony. Despite rhetoric to the contrary the EU policymaking elite are bricking themselves over the Irish referendum because it threatens to unravel the illusion that Europe can adhere with Germanic discipline to a narrow set of rules. There is no chance of that working by first condemning large parts of the Eurozone to decades of punishing debt serfdom. A common currency cannot function without much closer political union and without surpluses passing freely to deficit economies. Just as the economic power of the Northern states helped to rebuild the South, rich Europe must invest liberally in struggling countries, starting with emancipating them from the yoke of the excess debt they simply cannot carry.

For that reason I find myself reluctantly in the No camp until Europe wakes up and finally gets the message.

- Eddie

Irish Cash Mountain Burns to Death

Thu, 23 Feb 2012 13:00:00 GMT

We’ve had a thirst for burning things that frighten us ever since putting to death upwards of 80,000 witches across Europe over 160 years to about 1660. Rome approved but that didn’t help much. The call to burn the bondholders is equally useless today, largely because they’ve taken their winnings and fled. That leaves us with the infamous €48bn bill we’re repaying on the €31bn ploughed into IBRC, the zombie bank that holds the mortal remains of Fitzpatrick’s and Fingleton’s handiwork. Designed by our BFs at the EU, the schedule is priced at a truly satanic interest rate of 5% and will cost us €3,100 million each year to 2023, €2,100 million in 2024, €900 million to 2030 and finally a cool €100m in 2031.

But since we’re still itching for the type of bonfire the Greeks were allowed, why can’t we burn that lot? Well, the Central Bank of Ireland will put a match to all that capital the instant we pass it over to them in a vanishing spell straight out of Harry Potter. Mind boggling huh? In a perverse summoning spell all those Euros were created out of thin air by wizards at The Central Bank on Dame Street by uttering the magic words, Emergency Liquidity Arrangement. It was quantitative easing by the back door - money printing to you and me and, represents about 0.3% of Eurozone money supply which stands at a gargantuan €10 trillion.

Surely then to help the Irish economy leap from years of listlessness to growth, to reduce our Debt / GDP from an estimated peak of 113% next year to closer to the European average and which would instantly bounce us out of the bailout programme, we should be permitted NOT burn this money? After all there’s no bondholders, no lenders and you’d hardly notice the extra cash in the undulations in Eurozone money supply.

Technically that would only require one third of the board at the ECB to agree and we can point to the effect of money printing in the US which is lifting its economy out of the mire and to the half a trillion created by the ECB itself just before Christmas which was lent to over 500 banks at 1%pa - practically free money.

Since the game has started with de facto money printing by the ECB, how can they hide behind precedent as an argument any longer? As for moral hazard, where’s the logic in forcing Irish taxpayers to own up to the responsibilities of the State by enforcing a policy that rewards speculative bondholders with zero risk investment? Where’s the logic in burning all that cash when there’s no lender just a principle against monetising debt?

How are write offs to the Greeks who’ve breached their covenants squared with continuing punishment for the cooperative Paddies? These are tough questions, but the toughest of all is to ask our European friends how they justify their implicit policy of piecemeal concessions to a country that’s sacrificed itself to save the Euro in light of their own covenant in Article 2 of the Maastricht Treaty? This says quite explicitly that an economic and monetary union is to be based on a harmonious and balanced development of economic activities whose objective is to raise standards of living, quality of life, social cohesion and solidarity among member states.

The tough question for Enda Kenny and his negotiation team is whether they are so enthralled by the prospect of been thrown minor concessions for good behaviour, that they are suffering from Stockholm Syndrome? Remember that’s where hostages are so empathetic with their captors that they end up defending them. Prove you’re not, Enda, take the Maastricht Treaty make them swear upon it. Publicly like in the old days

Eddie

Betrayal of Principle - why the EZ is failing Ireland

Mon, 20 Feb 2012 16:02:00 GMT

Like a shining beacon you know the truth when you stumble across it in through the storm of facts and reports that have marked our relationship with creditors since the crisis stated four years ago. To grasp precisely where we stand on the national debt, the aberration that is the loan for Anglo and how it is constructed, this report from Kevin Barrins of Acass Consulting (and which includes my highlights) is required reading for its sheer clarity of thinking and communication. It will help you understand how much of the media debate about burning bondholders is diametrically opposite to what we should do! I recommend it highly.

Click here to download the PDF

Life After Jaws

Wed, 15 Feb 2012 17:45:00 GMT

In 1975 Peter Benchley's book about a big fish was turned into a Spielberg blockbuster. It scared the living daylights out of audiences worldwide. Jaws stopped people swimming in the sea. Its dramatic technique was to build tension - by not showing the shark, just threatening us with it. By the time we'd caught a glimpse of the Great White munching its way through the middle classes we were simply too frightened to think rationally about taking a dip in the cold waters off Fountainstown, Salthill or Bundoran –every coastal village was Amity, Jaws lurked in shallow waters and we were dinner. But by the time Jaws II hit the screens we were hooting in derision at the burning rubber that marked its ending. The Jaws period had passed. So too is the Greek’s.

Last year Greek default was touted as the Great White, ready to eat our banking system alive and, with it, tear into the fleshy corpse of Europe. The narrative suited Eurozone policymakers, buying time before the fiscal compact and ECB quantitative easing that marked the end of the beginning of the Eurozone crisis. Now Eurozone policy script writers talk fearlessly about Greek default and exit.

The Greek economy has already shrunk -16% and is on track to exceed Argentina's -20% ten years ago. But unlike Argentina, the Greeks, within the Euro, have no positive incentive, merely more poverty for years to come. Greece continues to play chicken with its creditors, refusing to close a €325m gap after already announcing cuts to minimum wage of 22% and slashing 15,000 jobs from its obese public sector. But despite closing its annual deficit, Greece has continuously failed to hit targets, not least of all selling off up to €60bn in state assets. It will require budget surpluses for years to come just to hit its annual interest bill estimated to cost over 6% of GDP. The alternative is default, Euro exit, rapid devaluation of a new Drachma and inflation. The Greek banking system would be wiped and with it much of its citizen’s savings. The choice facing Greeks is either a prolonged series of muggings over many years or a truly savage once off beating in the ghetto. It’s a horrific choice but that is the price when the political elite cook the books and borrow excessively to finance unaffordable lifestyles for a public sector paid three times the private sector, while turning a blind eye to endemic tax evasion.

The tough line being taken with Greece by fellow EU members reflects a huge shift in emphasis. In the early days it seemed that only Greece, Portugal and, Ireland required structural reform through austerity. Since then austerity has clamped its jaws around Spain and Italy and to a lesser degree to most other member countries. The jury is out on how deep or shallow the 2012 economic dip across the Eurozone €9.5 trillion economy will be, but one thing is clear – the Eurozone needs a winner in the internal devaluation game.

That's where Ireland comes in. Ireland must be seen to succeed. Read from that an imminent soft restructuring of Ireland's debt with particular emphasis on the promissory notes for Anglo. But that will not prevent the inevitable ending. Greece has shown that it is the last few billion in cuts that cause the most precious blood to shed. That is precisely what union chiefs have written into the narrative of Irish social solidarity. By pulling the entire public sector to the safety of Croke Park the most vulnerable among the rest are to be offered up as the sacrifice.

Eddie

Tyranny of MARP

Fri, 10 Feb 2012 12:32:00 GMT

Banks are no longer being run by branch staff or local management but instead by faceless credit control tribunals through whom all credit restructuring and applications are being run. The result is a charade at branches desperate to maintain the fiction that somehow there is flexibility and agility. There is none. It has become a zombie banking machine that gives quarter to nothing outside of its narrow rules.

Instead the tyranny of MARP inquisition is being zealously applied to any borrower who dares to consider the heresy of rescheduling their home mortgage. Utter a word that you might like to explore stretching out the term or reverting to interest only loan and you'll be MARP'ed. Designed by a coterie of bankers and civil servants, the Mortgage Arrears Resolution Process, lauded as a consumer protection device, has been defiled into a process designed to give banks intrusive and powerful control over Irish mortgage holders. Each applicant is treated the same, regardless of their different circumstances in an endless stream of bi- annual financial confessionals.

You are required to outline in detail what you spend throughout your life and, in particular justify your family budget, to prove that you have properly sacrificed life's luxuries in your desperate bid to pay back the banks within the existing loan contract. You are then put in a dehumanising six month revolving review process that requires you to come back to the confessional to justify the whole thing all over again and again and again and again. Originally designed to provide a standardised protocol to deal with distressed home loans, MARP has become the standard for everything. Banking these days is no longer about submitting basic financial information to the bank but has warped into a demeaning, dehumanising and humiliating microscopic examination of lifestyle spending. Medieval Dominican friar, Tomas de Torquemada, the Grand Inquisitor would have heartily approved, reasoning that the purifying results of such cruelty justifies them.

Bank Serfdom or a Republic?

The new insolvency laws will be another test of just who is running Ireland, a Dept of Finance determined to enforce policy in favour of banks or her citizen's elected representatives? Under the new structure, guidelines are to be issued to insolvency trustees on what constitutes reasonable family budgets. Where the line is drawn will answer that haunting question. If MARP is anything to go by, the new insolvency process is going to be made as excruciatingly painful as possible to protect banks from losses regardless of the damage caused to families. Whether time already spent in MARP and other arrangements counts towards freedom day, when you'll have earned a fresh start, is another big test of whether we are to have a genuine breakthrough on our hands or just another charade designed to protect capital and not families.

Behind the scenes of the recent Insolvency Bill powerful forces are gathering with the objective of limiting, restricting and eliminating any tilting in the existing imbalance of power between creditors and debtors. Just how well these are fought against will be the crucial yardstick to gauge whether this Government is serious about introducing a modern, balanced and humane insolvency model that treats citizens in difficulty with dignity or whether, despite everything they've inflicted upon us, the banks still hold the Irish Government captive. Which way Cabinet Ministers lean on the new legislation will define them, not just as legislators, but as republicans.

Beginning of the end for Extend & Pretend

Thu, 26 Jan 2012 16:35:00 GMT

There is light at the end of the tunnel for tens of thousands of Irish families and young adults caught in the horrific vice grip of income collapse and runaway debts, left isolated and alone in hugely imbalanced relationships that exist between powerful Irish and International creditors and powerless Irish debtors. For over three years, consumer voices like FLAC, MABS and New Beginning have shouted and advocated while the State fudged and delayed dealing head on with consumer insolvency for fear of upsetting the banks and the let-them-burn brigade whose voices drowned out advocacy by spreading paranoia and fear about moral hazard. But, at last, the end of three years of phoney extend and pretend is in sight as much of the fine work of the Law Reform Commission bears fruit.

This venerable, strained and battered Republic is emerging from the delusion that something will turn up, that sweeping bad debts under the carpet in deals cooked up by bankers who stuffed Government committees for the sole purpose of artificially protecting their balance sheets, cannot and will not work. Ireland is to fast-track the introduction of a humane and modern insolvency process. Yesterday Minister for Finance Michael Noonan and Minister for Justice Alan Shatter delivered the first draft of Irish Personal Insolvency law. It’s still a work in progress and there’s much yet to fight for but damn it - they’ve done it and they’ve done it without capitulating to the banks.

Irish debtors, who’d previously been chased down the corridors of a Dickensian court system should shortly be able to deal with their indebtedness in dignity through licensed and regulated Personal Insolvency Trustees. There will be a choice of routes to a fresh start, none of which will involve a court process;

A simple debt relief certificate for NINAs ( people no income and no assets) for bad debt under twenty grand

Debt Settlement Arrangements for unsecured loans in distress, to be negotiated by Insolvency Trustees leading to a full discharge after five years

Personal Insolvency Arrangements administered by Insolvency Trustees that will include residential and investment mortgages where net repayable debt is cleared over six years

There’s much yet to unfold;

When will the infrastructure, regulations and systems be in place to support what is the birth of a new and diverse financial services industry?

Precisely how will the new profession of Insolvency Trustee be regulated to ensure its quality and integrity when handling the assets and incomes of tens of thousands of Irish borrowers

Is The Central Bank willing to compel the credit institutions it regulates to deal fairly with Insolvency Trustees and then to monitor and regulate their adherence to an adjusted Consumer Protection Code?

Why isn’t there to be an Insolvency Ombudsman to arbitrate on disputes and bind intransigent creditors to insolvency arrangements?

What will the guideline be to shelter modest lifestyle incomes from creditors?

What other schemes are being formulated to help distressed Irish debtors restructure without resorting to insolvency, like for example, long term shelving part of residential mortgage debt while awaiting income recovery?

How close are we to widespread availability of swapping mortgages for rental arrangements?

Bankruptcy discharge is to fall from 12 years to 3yrs, so why are their provisions to attach to income for 8yrs?

Yes, there are still lots of questions but today is a time for thanking all those who’ve committed time and passion into shaping Ireland’s nascent personal insolvency model, from civil servants to social agencies. The trick now is to back that ambition with the cash and resources needed to move at top speed to rescue as many distressed debtors as we can from the nowhereland economy in which we’ve left them.

Eddie

Outlook for 2012 as Cautious Optimism Returns

Wed, 18 Jan 2012 13:06:00 GMT

The year of terror is over and 2012 looks much more hopeful than could have been predicted just a short few weeks ago. Lost by the media focus on Christmas, the ECB, comforted by the European Summit’s fiscal compact which relieved it of its concerns about debt without discipline, finally intervened with a substantial dose of money printing, aka quantitative easing. Abracadabra and nearly a half a trillion Euros were created out of thin air and released across a European banking system tottering on the edge of collapse as overnight ECB deposits hit the roof and banks stopped having any faith in each other. The ultra-soft ECB loans at 1% pa for three years (contrasting sharply to Ireland's 6% on Anglo’s promissory notes), provide banks an irresistible margin to recycle much of the cash into European bonds at yields many notches above borrowing costs.

Is it enough? No is the short answer. The Euro crisis is far from resolved, especially Greece’s continuing toxicity but, as Europe finally finds some direction, the risk of an imminent banking system collapse has gone from DEFCON 1 ( nuclear war imminent) to DEFCON 3 (advanced readiness). As the crisis significantly escalated in the second half of last year following a peak in equity markets in May from their deep trough two years earlier, we issued a special alert to which many of our clients responded, reducing exposure in unprotected funds in favour of more defensive ones.

Although we enter 2012 with some cautious optimism, risk levels are still quite elevated and so, except for my own clients with higher risk appetites, I’m recommending everyone else to maintain defensive positions in funds, many of which give limited exposure to the upside, if, as is quite possible, 2012 results in strong returns on equity and commodity markets, excluding Europe due to the recessionary headwind facing it.

Elsewhere the USA economy is showing early but tentative signs in an election year that its private sector is exceeding the stimulus premium, in other words picking up from the effect of fading stimulus and driving under its own steam. Job growth is the indicator and its strong monthly pick up, is combining with better news from retail sales to hint towards a sustained recovery. That explains why US equity markets have held up well against the misery out of Europe. But US debt, which has exceeded US GDP for the first time since 1944, is unsustainable. Meanwhile fears of overheating and a burst in the Asian region has reduced as fiscal tightening by policymakers, especially the Chinese, appears to be doing the trick although swollen asset values, most particularly in property remain a concern.

EUROPEAN EMPIRE BUILDING AMID CRISIS

Recent downgrades of European sovereign debt including France losing its AAA status, as the USA and Japan has done, shouldn't surprise and has been well flagged. What markets are telling Governments is that they must engage in the reforms necessary to make their economies more competitive and thin out the cost of the State as a percentage of GDP over time, so that growth can return. It's a difficult message to absorb especially for entitlement cultures like the French which, in my view, may yet prove to be the most problematic economy in Europe.

Until the months roll by we simply can't tell how shallow or deep the European recession will be. Political wrangling among the big beasts on the European stage in the latter stages of last year, spikes in Italian and Spanish debt leading to fears of a too-big-to-fail event and, a continuation of the basket case that is Greece, inevitably hit consumer confidence. Better helming by policymakers, at least now rowing in the same direction towards deeper fiscal union, should mean that the recession is short but even if sluggish growth returns, austerity and structural reforms are unavoidable.

The conventional route out of a sovereign debt crisis is a combination of currency devaluation and large scale monetary easing by lowering interest rates and printing money, to trigger the economic lifting power to jump out of the hole with higher growth.

Europe, instead appears to be choosing the most difficult path out, little growth, no devaluation (although the Euro is weakening), structural reforms to improve competitiveness and austerity, while the ECB transforms into a repository for bad loans. The result, unquestionably is a slow recovery from recession and many years of rebuilding and reconstruction of Europe, pockmarked by political impasses as austerity reaps it's bitter historical harvest once again - strikes, riots and social unrest that will ultimately test the heart of the empire, its undemocratic, non-transparent and shadowy Brussels elite.

USA MIRED IN DEBT AND UNCERTAIN LEADERSHIP

As ever the US economy is defying sceptics with many indicators pointing up, manufacturing, consumer spending and reductions in loan default rates as US consumers repair balance sheets and corporates build up vast war chests of cash, estimated to exceed $2 trillion. Since the commencement of the crisis, the domestic US economy, despite very high consumer debt levels has heavily influenced by the spending behaviour of its wealthiest where the top 10% account for nearly 40% of spending. Unlike lower income and younger consumers this sector isn't debt burdened and far more influenced by the feel good factor of recovering equity markets.

But the impasse between the President and the Republican- dominated congress, manifesting itself in the failure of the Super Committee to agree a sustainable debt reduction programme, means that US debt continues to barrel in the wrong direction.

The US is vulnerable and far too reliant on its status as the world reserve currency as outsiders use the dollar as a store of value by buying US debt. This is the weak spot. A heave against the dollar is already underway as Governments like China opt for bi-lateral deals with resource rich countries rather than trade through the greenback and tentative discussions, are no longer the musings of academia and are underway between players on what a new world reserve currency might look like. Time as the reserve currency is not unlimited as the Spanish, Dutch, French and British can testify but, with the Euro in crisis, any short disruption to US plans looks unlikely especially if the next US administration robustly tackles the debt issue, and popular support rows in behind it.

ASIA POWERS AHEAD

Excluding Japan, the Asian region did well last year although this was not reflected in equity markets which were overpriced as fiscal tightening needed to cool down overheating economies and inflation, began to bite. The retreat of inflation and the continued surge in organic growth which should offset lower export revenues to recession-hit Europe, means that Asia, the bellwether of the newly industrialised world, remains the best growth story, built, as it is, on strong fundamental foundations and playing catch up with the developed world as its vast populations benefit from rising middle class wealth. Although growth is likely to be lower, Asia isn't without its own risks particularly the on-going risk of a credit-fuelled asset bubble like Chinese property, a weakness that will need careful handling by Beijing.

Ireland Handicapped.

The Irish economy cannot simply rely on job growth from exports and improved competitiveness. Without resurgence in the domestic economy, unemployment will remain at very high levels, straining public finances already puffing under the weight of rising debt/GDP. While the media and public focus has been on gaining a reduction in our overall borrowing costs, that is not the main challenge. Indeed a restructuring of our debt looks inevitable, if anything because Europe must have a winner in its internal devaluation policy to encourage the others.

The domestic economy is moribund with no chance of recovery without policy changes. Firstly a modern and human insolvency process must start working on the 200,000 inactive and insolvent Irish consumers through customised and phased workouts of excessive debt burdens. Secondly Government policy must shift much more towards cuts and desist from threatening consumers with higher taxes.

As tax revenues decline, which I think is inevitable; politicians will be forced down the road that must be taken, shrinking the State as percentage of economy, lightening the load on the prosperity generating other half. Meanwhile Irish property values and, with it the inverted wealth effect that comes from the devastation of middle Ireland balance sheets, will remain a huge drag on morale. Credit remains restricted, policy flips are destroying property as a leveraged investment asset, and wrong-headed attempts by the Dept of Finance to cocoon NAMA from rent adjustments despite the huge inventory overhang, all point to a prolong winter for Irish property. So despite falling prices, Irish rental yields are not yet at a point necessary to compensate for the extra costs and risks involved in becoming a peripheral player in a market macro-managed by the State to protect its own assets.

THEMES

Saving for increased productivity created by major technological breakthroughs, the developed world is on a low growth trajectory - despite structural reforms and austerity. Most of the fundamental economic growth on the planet looks likely to take place in newly industrialised economies over the decade ahead. The world is integrating at a rate of knots and unlikely to be blown off course by fumbling, politically- inspired attempts to raise trade barriers in a futile attempt to ring fence uncompetitive economies. That means that global top brands, major multinationals, that enjoy high revenue streams from faster developing regions, remain a sound investment concept.

In the short term Europe is to remain a problem as growth struggles against the headwinds of austerity and poor consumer morale while policymakers continue to scare us occasionally by playing chicken with markets. Ironically Europe's crisis is diverting attention from the US where the financial crisis that started with excessive leverage over a decade ago, must end. That end phase has yet to come and, with it, test US resolve and its capacity to hold on to the dollar as the world reserve currency.

I remain convinced that resource scarcity combined with quantitative easing will inevitably lead to higher inflation. That’s I continue to favour assets that are aligned to higher inflationary forces, including Global Inflation-Linked Government Bonds protected with a Euro hedge and benefitting not just from sovereign guarantees but likely Euro weakness until policy implementation catches up with intentions. In this environment and despite the sell off towards the back end of 2011 and continued short term vulnerability to Central Banks selling off reserves, gold is likely to trade higher in 2013 than today.

The historical premium paid for technology funds has substantially changed and is more in keeping with normal stock market valuations, which continue to remain relatively cheap compared to boom periods. So 2012, despite the continuing risks from Europe and rising geopolitical risks from the Iranian nuclear programme, may yet see a strong year for many equity markets, with Europe as the laggard. Commodities, led by oil, are likely to experience a strong year despite the weakness created by Europe and slightly lower growth in developing regions

So for younger, long horizon investors, the worst may be over and 2012 could contrast sharply with 2011 as equity markets price in stronger economic growth and corporate earnings into the future. But for others whose objectives are to maintain the value of their balance sheets in real money terms, the most appropriate tactics are to remain sceptical, sitting in largely defensive investments, biased to higher inflation into the future, with some scope to share in higher economic growth.

Despite the reduction in risk, the banking system still remains on life support from the ECB and vulnerable to a breakdown in European policy cohesion. Cash deposits are likely to continue to face negative real returns for some time to come despite a modest fall in inflation.

Conclusion

As ever with forecasts, you can only grapple to make sense of the known. Each forecast remains at risk to completely unexpected events of national, regional or global significance, so called black swans. These can be positive, such as technological leaps forward or negative, like a catastrophic earthquake. For the time being, except for those chasing high growth over the long term and happy to play the long game which involves reading downturns as buying opportunities, I recommend continued caution, but caution with guarded optimism especially for equities.

After the shock Lehmann collapse in Sept 2008 most investors were best advised to hold position, riding the up cycle from the deepest part of the trough some six months later. That proved the correct tactic as markets rebounded strongly to the summer of 2011, since which and, largely due to the elevated risks from the Euro crisis, switching to more defensive funds made better sense until the extreme risk period past. Staying defensive still looks like the right tactic until Europe follows up its new policy direction with the necessary actions on the ground across its nation states, actions that convince markets that the crisis is coming to an end. In the meantime real growth in asset values remains outside of Europe.

Eddie Hobbs

January, 2012

The People Front of Judea in Irish Poltics

Thu, 22 Dec 2011 08:47:00 GMT

As the year closes there are good reasons to be hopeful for 2012. Despite the white knuckle ride in Europe this year when cumbersome politics played a failed game of catch up with markets, the early signs are that some calm is returning. The Euro isn't going down without a fight and may yet end 2012 in better shape. Spanish borrowing costs have sharply fallen. German business confidence is defying the trend by rising and the US economy is adding jobs at a faster pace than most thought. But it's all very fragile and cannot yet be described as a sustainable trend. The last Summit, despite the massive gaps in policy such as ECB intervention and growth stimulus, has unnerved those betting against the Euro as the European banking system is being more robustly back stopped by the ECB, lessening the risk of a Lehmann-style event. It is a far cry from just a few weeks ago.

At home tactics are also becoming clear. Irish support for the new fiscal compact is contingent on restructuring our bank bailout debt. This is not forgiveness but restructuring that would lessen the burden by lengthening the loan repayments and lowering the borrowing costs. Once again we've learned that all the pre-election guff about unilaterally defaulting was the stuff pure fiction.

Which brings us to the paucity of some of the opposition. It's car crash radio and TV listening to the warped economics of the hard left where jobs can be created out of thin air by expropriating the assets of the wealthy and putting the unemployed to work in fixing the water system. Ten billion Euros a year are up for grabs in extra taxes we are solemnly told but a beginners guide to economics will quickly tell you that human beings adjust their behaviour. Income tax receipts are falling precisely because the top rate is already at a tipping point. Raise the rate and destroy the revenues further. The flight of mobile capital out of Ireland would dwarf many times over whatever could be collected in a crass wealth tax but you can’t tell that to those who simply can’t see or won’t see.

Still the ULA persist. Whenever challenged about how they intend funding state paid jobs, the answer always is to expropriate the assets of the rich. When asked how they intend to sustain new industries the answer never is about encouraging prosperity but rather instead about grabbing OPM – Other People’s Money. Most of us get it –the Irish hard left are pretty harmless but we don’t forget that Trotsky and Lenin understood that the only way their socialist policies could work is by brute force. You can only stop capital flight at the point of a gun and you can only enforce equality of prosperity by cracking down on opposition and suppressing the human instinct to achieve better for oneself and one’s family.

Thankfully our hard left are nothing like the Bolsheviks. The ULA and its leader’s Higgins, Daly and Boyd Barrett are much more like the People's Front of Judea (PFJ), the anti-Roman splinter group at the heart of Jewish resistance in The Life of Brian. They are against everything and seem to despise how the world works, sharing a particular disdain for the middle classes whom they feel, at best are unenlightened and, at worst, have sold out. They offer nothing other than protest as a workable alternative. The real left opposition will coalesce around Sinn Fein as it develops more informed and mature policies helped in no small way by the absurd theatrics from the nearby Dail benches.

Happy Christmas.

- Eddie Hobbs

The 4.00 am Euro Deal

Fri, 09 Dec 2011 17:13:00 GMT

By Friday lunchtime it is pretty clear that the imminent danger of a catastrophic Eurozone rupture before Xmas has greatly diminished. In agreeing the outline of a new Treaty in the early hours of Friday morning all seventeen Eurozone members and Euro wannabes have moved quite dramatically, shifting the entire centre of balance in the EU and leaving Britain in a perilous position.

I watched David Cameron’s body language and listened to his rhetoric before the Summit. His lack of experience of big politics shone through as he bristled with youthful vigour, listening only to the voices inside his head and failing to see the beyond. He has made a catastrophic error of judgement and, in my view, handed Ireland a vital new plank in our recovery if we smart enough to grasp it.

By insisting on ring-fencing The City to appease Conservative EU sceptics, Cameron may have greatly damaged Britain’s vital financial services industry, effectively shutting Britain out of the new EU that is emerging. It is an opportunity Ireland cannot afford to waste. We are within the same time zone, a short hop from London, speak the same lingo and have a highly skilled workforce ready to go at the IFSC. Many financial behemoths head quartered their Northern hemisphere and European operations in London, largely because it afforded full access to the single market.

But as Britain, no longer the reluctant European recasts itself as the non-participating European, the message to mobile financial firms couldn’t be any clearer – get yourself over to Dublin and Cork.

The deal itself however will not fix the crisis. Provided it passes Parliaments and the Irish electorate to which we must insist it is put to popular vote, the new sanctions which will be overseen by majority voting, tells markets that, in future, disciplinary measures will be in place. But two other vital planks are missing that guarantee that the crisis will rage into next year.

The first is the fire hose – there are no visible plans yet at the ECB is prepared to hose down sharply rising bond yields from the fragile Italian and Spanish economies with enough money creation, to calm markets. Too much confidence has been bled down the drains after past Summits for any type of quick normalisation.

But the ECB, under Mario Draghi may be playing a canny hand just sprinkling enough money on the secondary bond market to keep yields from going critical in order to stiffen Governments spines to force through deeply unpopular austerity, sign off the new treaty and buy time for the European Stability Mechanism to takeover next summer. The ECB has no difficulty in providing almost unlimited liquidity to banks who, on the eve of the Summit have been told to raise another €114bn in capital. That, I guess is hardly enough to bolster Spanish banks rocked by the implosion of a property bubble on a scale to our own. Much more cash will be needed before this is over.

The second missing plank, as I write, is that there is no strategy for growth. Austerity without growth cannot and will not succeed and the newly reconstructed Eurozone will eventually fail if, as I suspect, rich countries will refuse to transfer excesses to poor countries- the ultimate test of solidarity and of the currency union itself. So breathe a sigh of relief but be prepared for another year of drama, setbacks and high stakes poker as this new European baby emerges screaming and kicking from her birth with very big question marks still remaining over whether she will survive to maturity.

Eddie’s Letter to Santa

Fri, 09 Dec 2011 08:46:00 GMT

Dear Santa,

Here’s my explanation for the gift list I’m sending you this Christmas. Failure to diagnose problems always seems to lead to wrong policy choices by our betters and just makes matters worse. The problem, I think Santa is lack of growth leading to the debt crisis now afflicting Europe and threatening a banking system now at DEFCON 2. DEFCON 1 is nuclear war. That’s why the summit tomorrow has to work but it’s no panacea. I’ve learned Santa that economic growth can’t happen without increased productivity, generating more value per worker. That requires breakthroughs in technology, new mini-industrial revolutions that help workers grab new opportunities to earn more money. Faced with aging and declining populations, the liabilities that are off the national balance sheets in countries from the USA to France and don’t figure in crude Debt / GDP data are simply un-payable - without technology breakthroughs that drive up productivity.

That’s why, for the next decade aging OECD countries will be faced with the massive challenge of trimming back the State because the money won’t be there. The deal on the table tomorrow for automatic sanctions where Eurozone economies break fiscal rules, is only the beginning. Economic growth and parallel stock market recovery in the USA can be tracked directly to artificial money creation. That means there is little fundamental growth in my view. Growth is only happening in countries with young, growing populations that are following the right strategy at the right time, the Newly Industrialised Countries (NICS).

But, Santa arguably Ireland is a NIC! We are one of the few OECD countries that are poised to benefit provided we get it right. We have a young, agile, flexible and educated workforce with a very low population density. We’re also bloody good at what we do when it comes to building networks. Our long term future is very bright but we are in a vice grip, led by another group of politicians that don’t get it. They still talk the language of sixties campus ideology, of “creating jobs”. Course that’s utter tosh.

You create the environment that improves productivity, that generates prosperity and you engineer policies that distribute that prosperity fairly, most especially to the most vulnerable, without destroying the engine room. That is the private sector. The public sector is a cost upon it. The lighter, more efficient and effective you make the public sector, the more prosperity that can be created. In other words, back off and let the private sector do what it is designed to do; create prosperity and, with it, jobs but jobs that pay more not less.

That’s why I wrote this wish list in my letter to you Santa this Christmas;

Add at least three Cabinet Ministers contracted from the private sector, business leaders with the savvy to transform Irish policy to attract and build new technology hubs especially, in energy, healthcare and new urban city smart technologies
Replace the tired, visionless and Edwardian senior civil service elite with contracted CEO’s that have track records in transforming complex enterprises.
Invest immediately in the agency needed to tackle the mass consumer insolvency that is strangling any chance of a domestic economic recovery, returning at least 200,000 fellow citizens as active consumers to us.
Shrink The Croke Park Agreement to those earning under sixty grand a year and start chopping above because the half a billion pension fund theft in Sept has covered up a vast fall in income taxes and there is no way, no way, that the poor can take another Monday like they’ve just had. Based on 2009 data, there are 76,000 public sector workers earning over €60K of which 35,000 earn over €80k and 17,400 earn over €100k.
Position Ireland as the bottleneck to any Maastricht Treaty change by insisting on a popular vote to leverage more debt relief.

Thanks Santa

- Eddie Hobbs

The New Coalition’s Budget Part 2

Wed, 07 Dec 2011 15:14:00 GMT

Yesterday in putting the savage cuts in context I wrote that raising tax on work is just about the dumbest thing to do when in a recession. But that’s largely what we’ve been doing so far. We burst the country trying it for 12 years until 1987 and we were on track to do it again as tax receipts crashed. Minister Noonan, in his first budget grasps the nettle finally. No more income tax increases. Come January end your net payslip will be unaltered. By doing so he’s telling anyone who is squirreling cash, loud and clear, that it’s ok to come out spending again, even if VAT is going to 23% on non-essentials. If you save, DIRT is now 30% and 33% for Exit Tax on unit funds. Motor tax is going up, so too fags and booze though not from excise duty. Capital taxes rise to 30% and thresholds for inheritances from parents to kids collapses to €250k. This Minister is getting his €1billion from taxing our consumption. He has also increased the exemption from USC on those earning four grand to ten grand, about time.

For understanding the psychology of consumer economics in a depression, you have to give Minister Noonan credit but I’m not sure about his attempt to stimulate the deflated property market. It’s clear that NAMA and its €75 billion in our assets is being protected from the failure to deal with upward only rent reviews. Hiding behind property rights and the constitution doesn’t wash. In an emergency we can change anything including the constitution, just ask the next Judge you see about his “unconstitutional” pay cut. Minister Noonan proposes a review of hard cases, retailers ready to go burst, but any agency that is prepared to rewrite NAMA rent contracts must not be part of NAMA.

But there’s nothing here that will stimulate growth, just indirect supports for the domestic economy. He is working on hope, hope that someone else, FDI or savvy domestic entrepreneurs will appear like fairy godmothers and sprinkle some magic growth on the Irish economy. Noonan has a good grasp as a bean counter but he displays no grasp of how to encourage prosperity and generate jobs from it. No flair. Like Wilkins Micawber in David Copperfield, Mick Noonan’s growth plan is that something will turn up. This passive strategy is tied up with a successful outcome at Friday’s summit otherwise we’ll be back to square one and the Dept of Finance’s estimate of GDP growth of 1.3% will have as much validity as its gross miscalculation of GDP growth before the burst.

But the glaring chasm in both Minister Howlin’s and Noonan’s plan is that neither of them have provisions to deal with the cancer eating at the marrow of the economy – massive consumer insolvency. There are at least 200,000 Irish people stuck in the blight of distressed mortgages and other debts and their arrears keep growing. The economy cannot recover without a plan to implement a comprehensive and modern debt resolution process. That, according to one report, means at least 100 full time insolvency experts designing, customising and negotiating workouts for those who will otherwise remain in a standby economy, a ghetto, non-participants in any recovery. Although Minister Noonan made passing reference to Government concerns, we are four years into the mortgage and debt arrears crisis and not a single cent has been allocated to any new agency to tackle it. Until rhetoric is matched with clear cut action and backed by sufficient firepower to deal with the vast scale of the crisis, it’s impossible to read this as a budget for recovery.

- Eddie Hobbs

The New Coalition’s Budget – Part 1

Tue, 06 Dec 2011 14:31:00 GMT

The game, until Budget 2012 was to dream that there was a safer place, a better refuge from austerity. It’s now clear there is not. Vested interest groups shouted ideology across the divide at each other, in many cases devoid of any logic or an understanding that money is not an agricultural by-product of planting trees . Still we tried taxing the bejasus out of the economy but just look now at the result - collapsing tax receipts.

Nobody wants to hear this today when it’s popular to rage about cuts, but it’s the truth. The longer you try to raise taxes instead of cutting, the worse the economy becomes. Still the political instinct for self preservation never fails to try the economically impossible. In 1975 Ireland hit a deficit of -7.6% and spent the next 12 years getting it hopelessly wrong. Taxes as a percentage of GDP rose from 38% to 44% but spending was maintained, barely moving from 49% of GDP in 1975 to 48% in 1987. The politicians played politics while the economy died, growing at a paltry 1% pa. Ireland got increasingly poorer, our young left in droves. We weren’t the only country then led by chuckleheads. Austria spent 14 years getting back into balance and Spain 15 years by taxing instead of cutting.

By 1987 with debt to GDP at 123% Irish politicians simply had to cut, cut and cut. We couldn’t borrow another cent. Three years later after truly savage cuts, except on education, Irish GDP was roaring at 5%pa and the Celtic Tiger had started. We know how it ended. Public spending, much of it pay and pensions, gorged itself on once off property tax revenues. The power of public sector unions meant that yesterday’s cuts could not come from the inflated pay and numbers that characterised the tiger period. It is easy math. Social protection accounts for 38%, pay and pensions another 36%. Immunise one and you savage the other but predicting this inevitable juncture at the outset of the crisis was as about as popular as Jesuit support for Gallileo in Rome four hundred years ago.

Still despite the rhetoric, this Government’s first budget went after the lowest hanging fruit. Cutting capitation fees to schools is a community tax, meaning more cake sales, more mercy payments. Money to pay the heating is cut before pay. Reducing jobseekers benefit but not capping Bertie, Brian and Mary’s pension is cruelty. But it can’t last. The new coalition have simply bought twelve months at most. There is no way The Croke Park farce can stand against the cuts of Christmas future; €1.7bn 2013, €1.9bn 2014 and €1.5bn 2015. Yesterday is the smallest of the four at €1.45bn.

The announcement to move to multi-annual spending programmes and away from an annual budget circus that only encourages media leaks, backbencher histrionics, back room dealing and power plays by vested interests, is most welcome. But by next Monday it should be clear that all Minister Howlin is doing is fitting into the new model being prepared as part of the price of continuing Eurozone membership, a precursor to Treaty change.

You can forget all the guff about being back in markets and restoring economic sovereignty as Taoiseach Enda Kenny would have us believe is an achievable goal. Minister Howlin’s new template is being readied for the new Ministry for Finance in Brussels. The Dail and its annual budget will become to Brussels what Louth County Council is to us; of interest only to locals, an exercise in the illusion of self governance, ruthlessly controlled from the centre of power.

- Eddie Hobbs

An Alternative View - a guest blog from Brian Malloy

Thu, 01 Dec 2011 11:55:00 GMT

The following is an email I received from Brian Malloy a director of HC financial advisors, a large independent financial firm west of the Shannon! What struck me about Brian’s thinking is that he is taking a cynical optimist view, that large countries will, cynically act to preserve themselves. Anyway I so enjoyed receiving something well thought out and argued from another advisor I asked Brian’s permission to publish it on my own website;

1) The Euro is not breaking up - realistically it was never breaking up !! The costs in financial and political terms were always such that it was never going to be allowed to happen.

2) Muddling through (the policy todate) was actually the right policy - given the diverse structures within the EU and the Eurozone. Without it there would have been no means of forcing "regime change" in the most exposed countries (Greece, Ireland, Spain, Portugal, Italy). Muddling through without a single massive solution meant that the market (and the threat of bankruptcy) was used to bring these countries to the current position - new govt. full acceptance of the need to get their fiscal house in order. IF the ECB had jumped in during 2010 how likely would massive austerity measures have been in places like Italy? Spain? Would Greece have continued to play fast with the truth?

3) Merkel (and Trichet) was 100% right - the ECB should NOT simply print money.

4) The time is right now for a big solution - but it needs to have market controls. The market is a cruel master and that is what is needed to keep countries in line (for everyone's long term good). The idea that the market drives countries out to the arms of the IMF (using ECB funding) is actually quite a good one. It takes the normal politics off the table and uses the strength of the IMF to force countries to sort them selves out (fiscally) whilst at the same time using the ECB to fund this (without it becoming an easy source of unlimited funds.

5) In that context the EU17 can announce that they will (over time) implement a model of centralised debt management (eurobonds could be a part of this or cross guaranteed debt etc). There will be rules attaching which will include areas such as 3 and 5 year budgets being submitted and reviewed. It may require treaty change but actually a "cleverer" idea would be to keep it out of the overall EU treaty and limit it to an MoU between the 17 countries - this could be ratified by Governments outwith a full treaty referendum. There would be acceptance that this would take time and that in the interim countries would need to move to a position of fiscal balance etc (stability and growth pact for slow learners !!). Some countries will struggle to achieve market support during this period and an immediate solution will be available to these in conjunction with (and under the auspices of) the IMF.

6) This solution is attractive because it ticks the boxes for the big guys - the big guys get the Euro stabilised (they need that at least as much if not more than anyone else) without the ECB becoming a printing press for the profligate countries. The Germans don't mind the carrots of printing money or centralising debt issuance PROVIDED that there is a big stick to enforce austerity and keep the countries fiscal position in balance. They know that having the EU police that is pointless (thats what got us here) but the IMF is a different matter. The smaller guys get euro stability and access to funds. The politicians get cover for implementing austerity - "do it or the IMF will come in" or (as we have here) "we have no choice - the IMF said we have to".

Anyway - just my thoughts on it Eddie

Here is the link to HC if you’d like to contact Brian Molloy and for the record I have no financial or personal links to him or his firm; http://www.hcgroup.ie/index.htm.

Meeting the Senators

Fri, 25 Nov 2011 15:44:00 GMT

Tuesday last I addressed the Independent Senator group in Leinster House. Here’s some of the things I said to them;

Perhaps this time, as the anaconda from the depression wraps another coil around us in December’s budget, the scales will finally lift and public will more clearly see the direct connection between the cost of carrying the protected species of The Croke Park Agreement, to cuts to social welfare, child benefit and higher Vat. Just how many nightmares about lavish pension payouts and fantasies about reform are we prepared to swallow before roaring that enough is enough?

Well here's a few suggestions that maintain the promises given but lance the growing boil of injustice. Course I know some of them have all the attraction of a concrete kite to those tasked with formulating policy;

BIK Job Insurance

In a depression the most valuable perk is security of tenure aka job insurance, so tax it as a Benefit in Kind. Consider a rate of 20% on the excess gross income over €30 grand. That protects the low paid but means the average public earner on €52 grand pays about €1,500 a year for their job insurance policy to 2014 and higher still for bigger earners. This extension of BIK would bring in well over a billion Euros each year and gets progressively more from the large numbers earning over €80 grand a year.

Super Tax High Pensions

Apply the same rate of super tax to secure public sector pensions in excess of €40 grand a year as that which applies to risky private sector pension funds that might yield over €60 grand. That means taxing the excess over forty grand at a rate of at least 70%.This would not affect public sector workers on salaries under €80 grand a year but Brian Cowen and co would pay back €70 grand in tax on a hundred grand of pension.

Wealth Tax or Altruism

Introduce a wealth tax of 1% pa on global investable assets in excess of 200 times average wages that’s means no tax on the first €6.6m. Exclude homes and working assets that generate jobs and economic value like trading companies and farms but tax non-productive assets like financial investments, works of art,and multiple homes. To discourage asset flight and encourage integrity, allow for a full reduction if an amount equivalent to two thirds of the assessment is voluntarily paid into a fund administered and operated by Irish charities that finance vital social support services like Simon, Jack & Jill, St Vincent de Paul, The Samaritans and AWARE. This route alleviates strain on scarce State resources, is naturally administered more efficiently, gets the cash to the most vulnerable fast, satisfies the left, recognises that wealth tax is notoriously costly and difficult to implement and grows altruism.

Ready Plan B

Draw up Plan B to prepare for the worst case scenario, a Eurozone rupture, a return to the punt and a lock out from further borrowing that would instantly force spending within revenues greatly reduced by the chronic global recession that would inevitably accompany such an event. That means having a detailed plan ready to roll, one that applies triage to spending by beginning with a hefty cut in public sector pay, raises exchange controls to prevent capital flight and puts emergency plans in place to feed the most vulnerable. Plan B needs to consider a new economic strategy for an island no longer part of a functioning European Union and facesinto a new economic era.

- Eddie

ALERT - Will the Eurozone Rupture?

Fri, 11 Nov 2011 14:53:00 GMT

Hope for the Best but Plan for the Worst

On Friday the 11^th of the 11^th, 93 years after Armistice Day Italian bond yields declined below 7%, the failsafe level. Hopes ride high that Mario Monti will head an interim technical Government that will drive through badly needed reforms and austerity, but Italian yields will need to fall to at least 5% before Euro leaders can breathe a sigh of relief that the Eurozone came within inches of rupture before being saved. This script however also requires a German u-turn at the precipice and the ECB ramping up quantitative easing thus creating an unlimited supply of Euros to fill the hole being left from bank runs going on throughout the continent as investors flee banks they perceive as exposed to losses, not just from Greece but from Italy and any other diseased banks in the inter-bank market. Think of the ECB as a fire fighter hosing down the conflagration with money before passing over the hose to the newest recruit the EFSF. That’s the script with the drama AND a happy ending.

But should you bet the house on a happy ending?

Here’s the bad script. Reality returns. Markets look more closely at Italy and see another country strangled by inflexible labour markets, restrictive agreements designed to protect cosseted sectors from competition, the common currency of union and professional power. They will also see a country where confidence in Government incompetence and inefficiency is so high that an estimated 16% of GDP is black market. Hard to blame the Italians when they see 945 Senators and Deputies averaging €140,000 per year being driven around in a top Italian car fleet estimated to cost €2billion per year and involving 30,000 vehicles across the ruling establishment. Will Italians differ from the Greeks and swallow austerity with a shrug and will Italian austerity avoid depressing economic growth by creating a negative feedback loop into the bond market?

It’s an open question. But the most immediate question is how many Eurozone banks are tottering on the brink of collapse and how many will be deemed to be non-systemic if their Governments simply can’t save them? That’s the fault line. As you read this there is a pan European flight to safety occurring. Will it overwhelm the ECB? If it does and Ireland loses her source of daily liquidity to the banks what happens?

The Irish Government in the event of a failure of the Eurozone itself would be forced to revert to a local currency and raise exchange controls to prevent capital flight. All deposits held by all banks operating in Ireland including those in foreign currency would be declared in punts. That elevates cash deposits as the most vulnerable asset on a balance sheet until this period of extreme risk passes.

Locked out of bond markets but desperate for cash to avoid facing the protected species within the Croke Park Agreement with 50% pay cuts and slashing social protection rates, would private pensions be nationalised? Would the Government also begin to eye cash in the banks and life offices as another possible reserve? Could asset appropriation, the nirvana of the hard left who believe that everyone should be equally miserable, becomes the de facto mode of an overwhelmed Irish Government? This is at the most extreme end of outcomes for sure, but it is still a risk nonetheless.

What can you do?

Well you can just ignore it all and be patriotic betting that sense will prevail, that politicians can be trusted with sound economic decisions. Or you can plan for the worst on the basis that anything else is a bonus. In response to clients and recognising that, until the dust settles, the bank sector is unsafe, we are assisting them in moving some money out of Euro and out of the jurisdiction in three different ways;

Global Inflation Bond Fund with a Euro Hedge. Content; Government securities eg USA 42 %

UK 23%, Germany 7%, Australia 2%, Sweden 2%, France 11% and limited Italian exposure. Location; Luxembourg SICAV managed by Standard Life. No entry cost no exit cost, fund charge 1% pa. Min €50k. No retention tax. Exit Tax 30% on gains.

AAA Rated Australian Dollar Liquidity Fund. Fund manager JP Morgan. Location; Luxembourg.

Content Aussie Bank cash instruments, certificates of deposit etc. Australian base rate 4.5%. Fund charge 0.45%pa so net yield c.4%. No entry or exit costs. Foreign Exchange fluctuation between Euro and Aus Dollar may be positive or negative but we chose the Australian currency because it is commodity-backed and its principal trading partner is Asia, not Europe. Min €10k. No retention tax. Exit Tax 30% on gains.

Gold Certificates from the Perth Mint (Australia). Gold currently trading close to €1.3k or $1.8k per troy ounce is the ultimate reserve currency and a barometer of the loss of value in currencies from quantitative easing. It is also a barometer for fear and although quite volatile should remain strong over the medium term until the excess debt crisis gripping the USA and Europe is resolved. No fund fee but entry costs as follows; Min €7.5k to 20k 3.9%, 20k to 30k 3.6%, 30k to 40k 3.4%, 40k to 50k 3.2%, 50k to 75k 3%, 75k to 100k 2.5%, 100k to 1m 1%, 1m plus 0.75%. Gains subject to Capital Gains Tax.

If you wish to use any of the above to put some cash outside the Euro simply email; eddie@eddiehobbs.com. Specify which and how much. If I can’t reach you someone else will from our network firm the Mount Street Group

- Eddie

Rip Off Pension Charges

Tue, 01 Nov 2011 15:37:00 GMT

Rip Off Pension Charges
In the early 90s when life and pension products had all the translucency of mass concrete, when consumers had zero rights to lift the veil on charges and who was getting what, I took action under Competition law against the Irish Insurance Federation who operated a self regulatory cartel that had the full backing of a captive Government. The result, after a decade long battle was the implementation in 2001 of consumer rights to disclosure at point of sale. The most vile and excessive rip off products were taken off the shelves but their legacy remains for those who unwittingly contribute to schemes they took out in the 80s and 90s.

These are the kind that legally allow the pension industry to conceal the effect of swiping up to 60% of the first years contributions and all fresh increases upon it to retirement age. The rip off is hidden by using a highly controversial book keeping system that reports false values each year. It remains a very ugly business when a simple ban would have done it in.

Are there still excessive costs in parts of the pensions industry? You betcha. Wherever there is poor information access and restricted competition there is a rip off. But fee based advice, low cost products and fierce competition abound so there's lots of choice too. The real problem with modern products is the unfair disadvantage many consumers are at because of product complexity and lack of fluency in personal finance, hardly surprising given the deficit in the education system.

Biggest Pension Scheme is a Ponzi
But that's not the big issue of our time. If a cash strapped employer owes a million Euro in pension promises but has only fifty grand in assets, the scheme is patently insolvent and must be wound up. Nearly one Euro in ten of all our taxes will pay pensions this year to retired public servants. We already owe €116,000,000,0000 in promises to about a fifth of the workforce that's €116 billion and rising. The assets backing those promises are gone. By any sane measure it is a ponzi scheme but while the Government enforce the rules on insolvent pension schemes to protect workers, it continues treat public sector workers like mushrooms.

This week in what can only be described as some of the best examples of the dark arts of deflection and propaganda the Taoiseach Enda Kenny and Minister Joan Burton are busily striding into the debate on pension charges. This is a political campaign designed to combat their decision to rob private pensions of 2.4% of their capital.

But the big question is how can the Government continue with a patently insolvent public sector pension scheme? When are members going to be told the truth that these pensions are a classic ponzi scheme illusion? Where is the blue print to address the most basic truth - that the Irish pension model both private and public is broken? That's what Enda and Joan should be talking about but that means facing up to the fact that their own pensions , the most cherished asset of the mature big beasts in politics and the civil service, is a trick of the light.

ALERT – ACTION REQUIRED!

Thu, 08 Sep 2011 10:25:00 GMT

An August break from the fray which, for many of us, began in 2008 with the Lehmann collapse, allowed me valuable breathing space to reflect upon the turbulent events reshaping our world at a distance from the weekly deluge of analysis and reports. The result was Clarity.

Although I study analysis from many global sources much if it from unconventional thinkers or mavericks I’ve no special gift for insight myself. Instead throughout this latest crisis I’ve done my best to concisely interpret and report vastly conflicting analyses, giving you my best professional opinion. What follows is my conclusion as we enter the fourth year of the crisis on Sept 19th. It's a conclusion I’ve come to after a long travelled road and after the benefit of seeing quantitative easing in action for three years. It is one also shared by analysts and writers I rate.

You mightn’t like the conclusion but it has compelled me to issue this alert and suggest you take important action. You should talk to your advisor about what defensive steps you can take, otherwise you can talk to us. It may involve no new products, nothing arcane or complex just tactical switches within fund ranges;

Step 1 Defensive Switches to more protected funds and, later
Step 2 Opportunistic Switches back when perhaps all about are terrified to do so later in the cycle like in 2012 or 2013. But first the rationale;

Clarity
The underlying disease is too much debt and not enough lifting power from growth in developed economies in the grip of a rebalancing of global economic growth towards the newly industrialised countries (NICs). That means there appears to be insufficient growth to lift out of the debt trap in many economies. The destination is smaller Government, a widening of the tax net to include all citizens other than those in genuine poverty and a huge thinning of the welfare state – aka austerity against a backdrop of debt restructuring relief in large parts of the global economy.

Think about it - isn’t that what creditors are telling sovereigns and politicians? Those already on the long road like Ireland and The Baltic economies are being rewarded with falling bond yields and those moribund from political ineptitude to grasp the nettle, are being punished. Take the lead economy, the USA which recently lost its AAA status from a leading rating agency;

Uncle Sam - the World’s Largest Debtor
The annual US deficit is $1.6 trillion and the total deficit of $14.3 trillion is to be allowed swell further to $16.4 trillion shortly, on a path to $20 trillion by 2020. But add in the off balance sheet liabilities for healthcare and pensions and include the fact that the US Government guarantees half its home mortgages (nearly six million of which are in arrears) and, the economy that produces the world’s reserve currency, faces liabilities many times higher. That's why the risk that the USA is facing bankruptcy is now at an extremely high level despite its huge strengths in R&D, it's ownership of the dollar, the prevailing view that it's Treasuries are the world’s safest and it's military strength.

All these can be overwhelmed if markets come to the conclusion that the US is tottering on the edge of insolvency. There’s a thousand billion in a trillion and the big global bet is that the US can be financed by taxes on future economic growth. If that view changes, the impact will be severe.

Ireland has off balance sheet liabilities, just for the public sector pension liabilities alone, of over €100bn. You scratch any developed economy and you’ll find the same thing while, underneath, most developed societies are ageing rapidly. The biggest single risk, the event that dwarfs all other risks is that the USA becomes insolvent somewhere along the road as creditors desert US treasuries. That, I feel may be a lot closer than convention thinks.

Quantitative Easing - a Cure or Infection?
The policy response to sharp global economic downturn has been two rounds of massive quantitative easing, cutting interest rates and printing money. But has it worked? Signs are that growth is reversing in key economies. Inevitably there will be a third round as central banks and Governments will be forced to follow the same path to avoid the growing threat again of a double dip in the global economy. But even with economic contraction, inflation will be the legacy, not just because of flooding money into economies thus debasing currencies but also because of predicted shortages of oil on world markets caused by vociferous demand growth from NICs.

Is this being overly pessimistic? It’s not really in my nature to be pessimistic. In Feb 2009 I reckoned that a rebound in stock markets was imminent and would be led by commodities. Markets, forever forward looking are an accurate bellwether of the next economic cycle and were always going to love low interest rates and quantitative easing. The result was a run up of over 100% from the lowest points. But the steam appears to be running out again. It’s not a new story. From 1934 to 1937 the lead market index, the Dow Jones added 106% but fell heavily and didn’t fully recover for seven years.

So far the policy response, when you boil it down, is to borrow more money and print more money, adding further debt, thus weakening confidence in currencies that aren’t heavily backed by commodities like the dollar and pushing up gold prices even more. The pattern has also engulfed the Euro and is likely to lead to another period of extreme turbulence shortly for the nascent currency as European political leaders freeze in the headlights, fearful of jumping forward into deeper fiscal union or backwards into Eurozone downsizing.

The big bet globally is that muddling through with summits and half- baked action distilled from political compromise will buy more time for economic growth to kick in and for balance sheets to be repaired from a borrowing splurge which, arguably lasted twenty years. I'm no longer optimistic that it's going to work because the evidence so far is unconvincing.

Temporary Feel Good
These days, markets are, perversely, rallying on bad news because it increases the expectation of a third round of quantitative easing. Europe is likely to follow the US this time with vast money printing and recent ECB rate hikes look like they will reverse. That may boost stock markets for a spell but inevitably gravity is likely to take hold except that, next time, policymakers will be out of silver bullets. If markets, eventually, read the tea leaves the same way the result will be a severe stock market rout testing the lows following the Lehmann collapse.

Thereafter it could take several years for a sustained rally because it would rely upon politicians in developed countries finally swallowing the bitter pill Ireland has been forced to ingest and tackling the underlying causes of poor competitiveness to stimulate economic growth. That would require root and branch restructuring of economies, reform of uncompetitive practices and a gastric band around the fat in spending and welfare.

So when could such a precipitous fall happen?
Another severe downturn in equity markets is probably months if not weeks away which will force further global quantitative easing and interest rates cuts in Europe. Markets are likely to rally on the expectation of a boost from new programmes but as soon as weaker than expected economic data filters through after the next round, the game will be up and markets will reset expecting much lower corporate earnings from higher unemployment and spending cuts, meanwhile commodities, ever sensitive to a downturn in demand, will fall, hitting mining and energy companies.

This time things could get nasty last because of recession fatigue and the realisation that there isn’t a way out except a prolonged period of grinding austerity and poorer lifestyles.

What can you do?
Throughout this crisis and previous down cycles for the past twenty years, I’ve continuously advised playing the long game and not trying to trade cycles. This lessens the risk of miscalling not just the time to get out, but far more importantly when to get back in. During the latest crisis only a tiny handful of our clients bailed out to cash and missed out on the rapid recovery from the lowest point in March 2009, seven months after Lehmann’s.

You can continue to play the long game for pension investmentwhere the money is locked up for the next ten years and longer. A prolonged bear market is an opportunity for the long pension investor to buy good value through regular monthly and yearly contributions during bear markets.

But for everyone else my conclusion is that this time it is different. There will be no quick recovery after a few quarters of economic contraction. It’s going to be slow and painful.

It is a big call.
Holdings in equity funds and commodity funds should now fully or partially switch to defensive funds within fund ranges. You should exercise extreme caution in bailing to cash. Cash in banks will be unsafe until the next crisis reveals who remains. Despite the headlines, remember government bonds are a proxy for underlying banking weakness. The ability next time for a weak sovereign to bail out a bank of systemic importance will be compromised. That German banks have taken a hammering in recent weeks is telling you all you need to know about the continuation of the banking crisis and the cross linkages beneath the surface.

Strong sovereign bond funds and especially those offering inflation protection are much safer than bank deposits and come the next crisis; there will be a flight to their guarantees. In the large fund ranges used by Irish investors there are a range of defensive funds. You should be moving to these now. If your normal advisors have been largely silent for the past three years get in touch with us through the website to talk about switch options and other tactics.

- Eddie Hobbs

TOO MUCH DEBT IS THE DISEASE

Wed, 10 Aug 2011 09:19:00 GMT

The volatility in stock markets over the past two weeks needs to be read correctly to avoid making errors of judgment such as assuming this is a repeat of 2008. It is not. Neither do I believe it is a market rout, but it certainly is a repricing of the risks, that governments struggling with the debt crisis will not take the right steps to stimulate the economic growth necessary to grow their way out.

I have been expecting the floor to be hit early this week and some rally to occur as large amounts of cash on the side-lines comes in to buy cheaply. Companies throughout the developed world are enjoying cash levels on balance sheets that haven’t been seen for decades, corporate earnings have been strong, consumer debt has been declining over the past three years and the fiscal backdrop of very low interest rates would, ordinarily, be a nirvana for strong market growth.

It hasn’t happened because confidence is the issue. The disease is too much debt being carried by several OECD economies including the U.S. on the shoulders of tepid economic growth. The destiny is smaller government and the pain will be austerity where there is much larger emphasis on cutting spending fat rather than raising taxes. It is simply a statement of fact that in economies ranging from the U.S.A. to Ireland, there has not been enough net contributors to the tax pool to cover those dependent upon it – the welfare state and all of its attending quangos have simply gotten too big. And the tax base will have to be widened.

Ironically, Ireland is further down the road than most which is why Irish bond yields have been declining. Standard and Poors has downgraded U.S. treasuries from AAA to AA+ but the dollar still remains the world reserve currency. There isn’t another game in town at the moment, although it is possible, should Europe develop a much deeper fiscal union which will be needed to support the issuance of consolidated e-bonds, that the euro will eventually take over from a declining dollar as the world reserve currency. Italian and Spanish bond yields have also been falling as the ECB takes the unprecedented step of intervening in markets to buy these bonds. Europe is only another emergency summit away from e—bonds. Distil it all down and the end result, in my view, will be inflationary as Central Banks open up the printing presses to prevent a double dip recession.

In order for markets to grow strongly over the next number of years, confidence will first has to be restored that national governments are prepared to bite the bullet which is to shrink State spending, keep taxes modest and interest rates low, thereby helping improved tax revenues from economic growth to repair the historically high levels of debt to GDP which have been built up over the past couple of decades.

Markets will rise on a wall of worry or so the expression goes. It is as true today as it has been over many of the crises we have managed with our clients over the past two decades.

Throughout this period we have advised that holding good assets through thick and thin and avoiding the temptation to actively trade these type of very sharp movements, lowers the overall level of risk in a fund portfolio and produces better long-term results. Those who attempt to actively trade these type of sharp cycles typically sell close to the bottom and rarely recover their nerves in time to get back in to repair losses. This is not because of the first decision which is to get out (although the question these days is to get out to what?) but the decision about when to get back in again. There is also the secondary issue of the speed at which market events unfold in these days of software-driven trades which move so swiftly as to make a mockery of making effective counter-movements across fund ranges in time.

We are advising clients that there is not yet sufficient evidence to suggest a global double dip recession. There are mixed signals including strong U.S. job growth. Politicians and policy makers are behind the curve, to borrow that old expression and need to embark on cost cutting programmes that clearly convince markets and calm nerves. Expect this to happen since the alternative will be to see one’s national debt getting pummelled on bond markets. The great high borrowing game is now up including for national governments.

At the other side of this transition, economic growth after the pain of austerity should be steadier than what we have seen over the past number of years.

- Eddie Hobbs

There has been no rescue of the Euro debt crisis

Wed, 03 Aug 2011 17:00:00 GMT

There has been no rescue of the Euro debt crisis, just the beginning of one. Today we explain why and what it means to you.

What did the emergency summit change?

Contrary to expectations which were lowered before the summit, both Germany and France in a separate bi-lateral meeting u-turned on their failed hard line policies and agreed to increase the firepower and independence of the EFSF, simultaneously changing the front loaded nature of its rigid lending model which was strangling programme countries like Ireland and causing further market anxiety.

So does that mean we’re out of the woods?

Nope far from it but it does mean that, with a tailwind from reasonable economic growth, we’ve now got a real fighting chance of manoeuvring out. It also means that if we hit a brick wall as Greece did, further relief will be possible including bond buy backs, the voluntary selling back of Irish debt by bondholders to Government thereby relieving much of the excessive load.

So what did we get last week?

Firstly, we no longer face an impossible loan repayment schedule; it will now be stretched over 15 years. That means default is no longer a given. Secondly we are no longer being ludicrously fined with a punitive average interest rate in excess of 6% for money. It’s dropping to 3.5% relieving us of extra interest payments that are estimated to be between €800m and €1.2bn.

Does that mean lighter austerity?

You gotta be kidding. The gap between Government spending and our intake from tax revenues from a fragile, weak and shrunken economy is unchanged so the austerity period continues unabated despite lobbying from vested interest groups.

Can I safely bring my money home?

In my view – yes. The risk of a catastrophic move like a unilateral leaving of the Euro or appropriation of cash deposits by the Government has significantly abated. Furthermore, that private investors have piled into Bank of Ireland shares is a sign that the banking market, buffered with massive recapitalisation and having passed the latest EBA stress test, is making a comeback.

Will the economy grow this year?

There are no official economic indicators that yet give clear evidence of growth in the domestic economy but I think growth is returning slowly and probably started in March this year once consumers adjusted to the effects of the budget and rid themselves of the depressing sight of a beaten, demoralised and uninspiring Government.

What about all those hammered with debt?

It’s taken three horrendous years but the penny is dropping. Banks, boosted with fresh capital, part of it aimed at matching debt write offs, are finally getting around to forgiving debt where there is no other way out. The Government should now accelerate the implementation of the Law Reform Commission report to install a network of legally authorised insolvency trustees tasked with the job of mediating workouts between the over-indebted and creditors in a dignified system that affords honest people a fresh start in the near future.

So what’s next?

The last summit was the breakthrough where the Euro group got ahead of the problem but the problem of excessive debt in parts of the Eurozone hasn’t gone away. It’s going to take years to address the underlying causes, most particularly chronic uncompetitiveness and poor tax compliance. In the meantime I don’t think markets are finished testing the Eurozone’s defences.

It’s highly likely that we’ll see a series of these summits over the years ahead and witness some members peeling off the Euro but, at least now in an organised manner. Ireland’s more likely to stick with a reformed Eurozone, becoming its prodigal son.

All eyes now turn on the US political deadlock between the Republicans and Democrats split along the hoary old divide to raise taxes or shrink Government as the worlds largest economy strives to cut its yawning deficit.

Cold Turkey on Debt Addiction

Fri, 15 Jul 2011 08:46:00 GMT

Cold Turkey on Debt Addiction
Debt is the addiction facing the developed world as it grapples with going cold turkey following decades of excessive loan creation by banks and Governments. The result has left many governments carrying debt burdens that cannot be repaid – not without either default or inflation with currencies losing value as voters horrified by a double dose of severe spending cuts and tax increases scare politicians focused on re-election and who cannot deliver long term adjustments, into printing more money.

Smaller government, more self sufficiency and lower taxes is the destination, the trauma will be getting there as nations are forced to reinvent how they are arranged. Europe, the UK and the USA are in the same soup. Austerity is dragging the UK economy back into recession, meanwhile unless the Republicans who favour spending cuts and Obama’s Democrats who favour tax increases, break their logjam on the USA debt ceiling, federal social welfare cheques will be cut in half in early August. AAA rated US Treasuries, the storehouse of value throughout the post WW2 period is facing a potential downgrade marking another inflexion point as imbalances are tested by markets. If this occurs and I believe it is inevitable, the global economy will seek a replacement reserve currency but in the meantime commodity-backed currencies and especially gold will harden as the dollar sinks from its status as the premier global trading currency.

In the latest convulsion and faced with a fumbling response from the Eurozone which has failed to grasp that shrinking economies with overcooked austerity accelerates debt D-Days, Italian bonds were ditched by investors rattling the world’s third largest debtor nation with soaring borrowing costs, which, Tuesday touched 6%, that's a notch below the hair trigger for a bailout. In short order Italy has followed Spain into A&E with Greece, Portugal and Ireland already in ICU and deemed critical. The Italian austerity programme was fast-tracked through its parliament in a move that calmed yields for the moment.

Markets, those who lend money to national governments are out of patience with the piecemeal approach of the Eurozone and, now finally at the precipice, unless a big bang resolution is found, the Euro will eventually be torn apart by them. If widespread default is to be avoided a common E-Bond needs to be introduced rapidly that lifts the excessive debt off the weakest members into the centre to be shared across all Eurozone members.

Will Europe save itself? Logic suggests it has to and that too many other powerful players want it including China concerned about the dollar decline but it is still far from grasping the nettle which will mean much deeper fiscal union, effectively shifting the Dept for Finance to Brussels. Meanwhile, as expected, at the precipice those resolutely opposing debt relief and restructuring and now spooked by Italy and Spain are being forced to u- turn affording Ireland the scope for reduced interest rates, longer repayment schedules and a lower overall debt burden – breathing space to grow again. Ireland’s downgrade to junk status by one rating agency, ironically, could help lower the cost of buying Irish bonds back

Sarkozy’s Revealed
Sarkozy’s political histrionics over Irish corporation tax are now revealed for what they were -petty, insular and reckless marking the French President for historians as a lead player in Europe’s mismanagement of the crisis. What real leaders will step forward to adjust for Sarkozy's weakness to find a way through, will reveal itself presently – otherwise get ready for a different currency. Events are now rapidly accelerating to either resolution or fracture and it is inconceivable how the underlying issue of too much debt can be kicked down the road any further than September by political procrastinators. A firm resolution will be found in my view as a chaotic fracture is in nobody’s interests but it may require, over time, some economies peeling away from the Euro especially where public opinion is firmly opposed to giving up further fiscal independence to an EU finance ministry and where it is abundantly clear that the economy is deeply diverging from the German cycle. In this scenario and provided Ireland continues to tackle its fiscal deficit but under a lighter credit burden, it is more likely that Ireland will stick with a Northern European-dominated Euro

Sky High Energy Prices
Lost in the media swamp over Greece, the International Energy Agency, dumped 60 million barrels of oil on markets in a vain attempt to cool down rising energy costs. It can’t and neither can the ECB raising interests rates when the driver is red hot demand from newly industrialised countries. A few weeks later Irish consumers have been forewarned about horrific rises in energy prices. The age of scarcity prices is upon us and with it high inflation. If you haven’t already done so, do an energy audit, check out insulation, cavity injection, attics, draught exclusion, new boilers and if necessary ditch the second car.

Greek Nirvana in Chaos

Thu, 23 Jun 2011 14:53:00 GMT

Greece is nirvana for the megaphone left, you know the kind that get their jollies only when leading “ordinary workers” in a glorious street revolt, flags waving, drums beating and a whiff of tear gas in the air . Doesn’t matter if it’s an insane march to ever more chaos, because it’s the march that counts for these professionals, not the destination. Look beyond the rhetoric of most modern economies and the struggle isn’t the hoary old Victorian one of exploited factory workers against an ultra rich elite, but rather a much more subtle and nuanced struggle against special treatment and privilege often supported by a power system that sees the primary function of tax as maintaining the minority in the lifestyles to which they’ve become accustomed.

The average wage in the Greek private sector is twenty two grand a year. But Greece’s heavily unionised state-owned railway company pays out three times more at sixty six grand a year. The Greek Government must sell its state owned businesses for €60bn over the next few years to reduce its debts. They haven’t a prayer, expect a fire sale. Regardless of whether Greece remains within or without the Eurozone it’s an economy that will ultimately have to face up to the challenge of competing in a 21st century globalised market place that ruthlessly prices against the unfit, no matter how much the left protests.

Back home the great mirage of the Croke Park Agreement continues. There is no chance of voluntarily cutting €1.5 bn in real hard cash from the public sector bill. What we are already seeing is a contrived deceit where claims of savings nearly €290 million has come from a recruitment embargo and early retirement and not from efficiencies. That an employer imposed freeze on recruitment has been allowed translate into union claims on savings tells us all we need to know about a sham agreement that’s destined to be put to the sword by the IMF/ EU/ ECB as early as September. The facts are that our annual deficit is not closing and that relying on a bounce in domestic economic growth isn’t going to cut the mustard. Most revenues from tax reform and savings have been channelled into ballooning social protection costs and servicing the ever rising national debt.

If the Government sticks to its guns in not raising income tax or cutting social protection then it can only reach its targets by ruthlessly culling bloated parts of the state sector, that means nonessential agencies and pay and pension rates that are still excessively above competitor economies. That is the first real hurdle facing the new Government. Its first budget will tell us if it has the mettle for the task or if we will march after Greece and into the maw of default.

How to Spot an Insolvent Credit Union

Looking to see if your Credit Union is one of the 80 bordering insolvency? Ask for the accounts and here’s the heart monitor;

Its paying no dividends or a token dividend
Bad and Doubtful Debts have risen to over 10% of the loan book
The recovery rate on Bad Debts are less than 5%
New loans are suspiciously high like a quarter of the loan book, indicating massive restructuring.
There’s no note on loans to directors, staff and third parties
The auditors have changed

Should you worry? Not yet. The Government guarantees the first €100k in your savings and the sector is now being subject to long outstanding reform by the regulator.

- Eddie Hobbs

ECB to Spread Cost of Euro Bailout to all Taxpayers

Thu, 16 Jun 2011 10:42:00 GMT

The European Central Bank risks becoming the next big bank to face insolvency and recapitalisation if Greece fails. Quietly the ECB has broken its own house rules in staying arms length from EU politics and has taken on to its balance sheet, as collateral, highly questionable assets including loans on ghost housing estates in Ireland. It has also been lending against low grade bonds including those of Greece which was downgraded this week to the worst risk in the world - just a sliver above default.

The ECB which has capital reserves of €82 bn has morphed into Europes biggest bad bank and is today leveraged 24 times its capital against an increasingly large number of asset backed securities - packages of loans bundled together by banks seeking finance from national central banks that, together with the ECB, make up the Eurosystem. If that sounds vaguely familiar it should be, because it was toxic asset backed securities that caused the 2008 banking crisis. Lehmann’s, at the epicentre you'll recall was leveraged 30 times. By comparison the Swiss, Swedish and Norwegian lenders of last resort are leveraged between four and six times.

Last year European banks packaged to sell on €380 bn in existing loans 77% of which was designed purely as collateral to get national central bank funds. So does the ECB vet the quality of these as the lender of last resort? Well no, that’s a task it delegates to national central banks in a 37 page manual that covers over 28,000 potential securities valued at about €14trillion!

You’ve probably read that the ECB is vigorously resisting German Government plans that investors in Greek bonds should swallow a seven year delay as part of a second bailout. The ECB is horrified, not just because of the contagion it feels such a default could trigger but also the impact on its own solvency. According to the most recent studies the ECB is exposed to €444 bn of PIIGS assets, that’s Portugal, Ireland, Italy, Greece and Spain, but €190 billion of this are Greek. For example a write down of 50% on Greek collateral would all but wipe out the ECB’s precarious base of €82bn. The ECB is owed over €140bn by Ireland and €59bn by Portugal so a series of defaults and the ECB is toast.

So what happens then? The ECB could follow the USA lead and simply print money but that means debasing the Euro and runs contrary to its prime directive which is to fight inflation. It also horrifies Germans whose folk memory is of hyperinflation following World War One. Alternatively the ECB could pass the losses to national central banks but whatever formula would be used, the cost would ultimately be borne by Eurozone taxpayers, which is exactly what populations like the Germans are keen to avoid.

Germany would be on the hook for 28%, Sarkozy’s France for 21%, and Italy’s for 18%. Ireland would be well down the burden sharing list at 1.6% So despite popular resistence from national Governments hoping to lessen the cost of saving the Euro and with it the EU, the ECB, by shoring up potentially insolvent countries and their banks, is poised to spread the cost to taxpayers throughout the Eurozone. The price of solidarity will be to cough up the cash to prop up the ECB or pay the price with inflation.

Info; Open Europe; A house built on sand? Raoul Ruparel and Mats Persson www.openeurope.org.uk

Eddie Hobbs

Reply from The Department of Finance

Wed, 01 Jun 2011 07:40:00 GMT

Mr. Hobbs,

Apologies but I do not have an email address for you. I am the Press Officer for the Department of Finance. I have been informed that you claimed on the Right Hook Show that the Government may move to seize savings from people and this was likely on the basis that the Minister for Finance has refused to deny that this course of action could occur. Both of these claims are completely false as the Minister has stated on a number of occasions that the Government will not be seizing savings from people. I would ask that you stop making this claim immediately as it is false and misleading. For information, the Minister ruled out this course of action most recently in Dáil Eireann on 24th May 2011: "There has been some speculation that the Government will raid investment funds or deposit accounts. I assure the House that the Government has no plans in this regard. The Government’s top priority is to safeguard the security of savings. It would not wish to consider any step that would have a negative impact on such confidence. Other savings or investment products have not benefited from the generous tax reliefs that pension savings have historically been granted and continue to receive." The Minister also ruled out such a course of action at the Press Conference immediately after the Jobs Initiative and this was widely reported in the media. If you have any queries, please contact me at eoin.dorgan@finance.gov.ie .

Many thanks Eoin

Eddie’s response to DOF

Dear Mr. Dorgan,

Thank you for your email of the 28^th May. In announcing this ill-conceived appropriation of private savings in pension funds, the Government has accelerated the flight of private capital held at Irish credit institutions. The Minister's announcements in the Dail do not have the strength of legislation and come only after it was pointed out to the Government on the morning of May 12^th that this would be the public's interpretation of the event. The ideal situation would be not to proceed with this aspect of the Finance Bill (No. 2) 2011, or, in lieu, legislate for the protection from further appropriation, monies held in life insurance investments and in cash deposits, and ring fence and limit the 2.4% seizure of private pension funds.

Eddie Hobbs

Open Letter to President Mc Aleese – Finance Bill (no2) 2011

Thu, 26 May 2011 12:00:00 GMT

Dear President McAleese,

Last Sunday I returned from a trip to Dachau which opened outside Munich in 1933. Dachau was built as a concentration camp to house those who first objected to radical early departures by the Government of the National Socialists. Pastor Martin Niemöller, one of the lucky few who survived the deaths of 250,000 fellow prisoners in Dachau, left a warning note to free thinkers everywhere to try to explain the strange acquiescence of German intellectuals as their country was slowly subjugated.

First they came for the communists - and I didn't speak out because I wasn't a communist.

Then they came for the trade unionists- and I didn't speak out because I wasn't a trade unionist.

Then they came for the Jews-and I didn't speak out because I wasn't a Jew.

Then they came for me -and there was no one left to speak out for me.

To satisfy EU demands to protect powerful German and French banks from sharing in their responsibility for fuelling the Irish property bubble, the Finance Bill (no 2) 2011 has crossed a crucial first line. Sure, plain as day that the line the Irish Government is crossing in 2011 is nothing like very many lines the Nazi’s would cross - but it’s not too unlike their first radical departures.

This is the forced appropriation of savings from hundreds of thousands of ordinary men and women who’ve put money into retirement funds. This is not a tax on future profit - it is a rewriting of the past, a back tax on capital already saved from past income during years where those many conscientious savers who elsewhere contributed their legitimate requirement to the exchequer. There is no difference between the capital in a deposit account or the capital in a retirement fund, merely a set of operating rules and tax treatment. By crossing this line the Government is openly accelerating the loss of money overseas. That it is choosing to do so without clarifying its intentions with regards to future appropriation of capital from cash deposits at Irish banks, Credit Unions and An Post, is as telling as it is worrying.

In a chilling departure the proposed legislation openly targets trustees who hold pension assets by threatening them, for each day delayed, with a punitive daily interest rates of 0.0219% PLUS a fine of €380 per day. This is without precedent and is an open act of hostility and aggression to those who would, otherwise, question the right of the Government to appropriate savings by asking their trustees to seek the protection of the courts. That’s why the Finance Bill has been crafted this way - in the certain knowledge that this hammer will discourage any individual citizen from standing up for himself or herself.

The first tranche of savings is expected to be handed over on July 25^th next and if it’s delayed by just one month the loss to the saver is nearly €11,500 - a figure greater than the entire average value of retirement funds accumulated by those under 35. This is an abhorrent abuse of power by a privileges elite whose own pension scheme has been ring-fenced.

That’s why President McAleese, I am writing to ask you to call The Council of State and refer this abhorrent Bill to The Supreme Court. I feel sure many of my fellow citizens will follow suit by writing to you at Áras an Uachtaráin -and that the ghost of Martin Niemöller would concur.

Eddie Hobbs

Destiny beckons Obama

Mon, 23 May 2011 14:57:00 GMT

Lincoln, after facing crushing defeats at Fredericksburg and Chancellorsville when the Confederate army under Robert E Lee routed his much larger Army of the Potomac, then faced into a general election with defeat near certain as he plummeted dramatically in the polls. All seemed lost as the North grew increasingly war weary with draft riots gripping New York. The response Lincoln chose made the man. He emancipated the slaves, an unpopular move among many of his own, including Irish immigrants, refocused his military and found the means to crush the rebel army at Gettysburg and Vicksberg and invade the South taking Atlanta it's commercial hub, just in the nick of time to save his presidency. Lincoln would later die from an assassins bullet at the zenith of his power but after setting in motion the remarkable mood of reconciliation necessary to bind up the gaping wounds to the union and lay the foundations of the modern USA which would go on to play such a vital role in shaping our world during the 20th century. On the night Lee surrendered at Appomattox Lincoln ordered the White House musicians to strike up Dixie the rebel anthem- because he always liked the tune. That's what great leaders do, they simply know the way, show the way and go the way. It comes out their pores.

Great challenges turn ordinary men into remarkable leaders. Lincoln was one, so too Churchill but Obama I believe also may yet prove to be another - not because of the colour of his skin, his oratory or his charisma. What makes Obama stand out is his remarkably clear sense of the moment, his vision about what must be done and his willingness to act upon it. This is delved not just out of a deep intellect but a deep intellect allied to an instinctive grasp of the fast flowing undercurrents of what has become an increasingly more integrated , complex and interdependent world. The moment I got Obama was during his acceptance speech in Denver for the Democratic nomination. There Obama mapped out the direction the US must take, singling out energy independence as the top priority, a stunning objective akin to a new moon race.

No world leader had been prepared to call it as it was, that end oil was in sight, that the focus of the nation had to be to wean the worlds largest economy off middle east oil within ten years, at a time when it's military, the single largest user of oil on the planet had invaded Iraq, squeezed between Saudi Arabia and Iran and bubbling with the worlds most dense, transportable and efficient source of energy.

Obama knows that the US must undergo a rapid transformation, that it's military prowess and extraordinary strength in research and development will count for nought until it conquers the next long economic cycle springing out of twilight oil.

But before placing the US on this course he must first grapple with a vastly over-borrowed economy where the Federal Government owes $14.3 trillion to it's creditors. There's a thousand billion in a trillion and in the five minutes you take to read this article the US, printers of the world reserve currency, will add another $100 million to the pile if it hasn’t yet hit the new legal limit on the US defdicit. Thats why gold keeps rising.

The US is out of road. It cannot continue to borrow, doubling it's national debt over the past two presidential terms. That means austerity, US style. So how do you increase taxes in a country whose revolution sprang from a tax on tea, where the great American dream is founded on small Government and the freedom from high taxes? The opposing road would mean hurting the most vulnerable in the US by swinging cuts in Federal programmes for the jobless, low paid, infirm and in poor health.

It's not just the Americans who get it. One of the worlds leading credit rating agency recently put AAA rated US treasury debt on negative watch, that means an imminent downgrade unless action is taken.

The decline of the dollar as the worlds most traded currency and a diminution in the value of US treasuries as the worlds safest haven is a game changer. What happens after nobody knows.

But what Obama knows is that the key to maintaining US economic power in the shifting sands ahead as newly industrialised countries flex their combined economic muscle to challenge the US position as the powerhouse of the global economy, means first solving the energy puzzle. That means sparking a new race, this one not to the moon but to the breakthroughs in energy efficiency technologies and production that will drive the next industrial revolution that Obama senses is just forming.

Whether Obama can overcome these extraordinary challenges and set an entirely new direction for the US is, as yet unclear, but one thing is certain ; if he does prevail history will place him in the same corridor as Abraham Lincoln. That, I hope for all our sake, is his destiny.

- Eddie Hobbs