Indo: David McWilliams: Irish Deposits could be hit Argentinan Style

[Lightning]

In a week that Irish sovereign debt has hit a record breaking 9.4% and 5 year credit default swaps hit an implicit default probability of 90% (from very low probabilities just a few years ago), I think it is important to look what could happen in a worst case scenario.

David McWilliams believes that there are strong parallels between what happened in Argentina and here. Obviously, all Argentinian deposits where wiped out when Argentina defaulted.

David McWilliams presents his thoughts here: [broken link removed]

In Latin America, just before a bankrupt state entirely runs out of money, it is traditional to try one last smashand- grab for the savings of the private citizen. We have seen this trend not just in South America’s recent financial history but down through the ages.

Could it happen here? Could the savings of the private citizen be expropriated by the State to pay the last of the Croke Park promises? Or worse, could the remaining wealth of the private citizens be used to pay the odious debt of the banks? The answer is yes, and you have to be aware of this because this is often the way things end when a state goes bust.

When the likes of Argentina ran out of options, it swiped its people’s savings in various elaborate stitch-ups. We may be going down the same route. In Argentina this led a friend of mine to describe Argentinian compatriots as “great patriots and terrible citizens”. When they play football they are the most passionate supporters but ask them to keep their money at home and they will laugh, citing the last time patriotism was used to rob them. No gracias, amigo. Could it happen here? Cinnte!

Is David correct in his assertions? or is he overstating the risk of an Argentinian style sequence of events here?

 

[bluemac]

Very interesting so he saying basically the goverment are giving bonds to pension funds who are buying them as they are desperate for higher returns at the moment. so if the state goes bust those bonds wont be paid back so all the pension that are invested in them will be gone... hence picking the pocket of the irish people...

I still dont really believe it will come to that and buying bonds at 9.7% will seem like a great deal in a few years time... we may all wish we had done it? We all live here do we really think Europe will allow us to lose our pensions, savings and futures now we have the IMF deal...

 

[TomPetty]

Thanks Ciaran - Very worrying article indeed. I assume if it came to Gov dipping into our savings, that even deposits that we have in UK / South African / Dutch banks, that are resident here in Ireland, are not safe from their grabbing hands ?

 

[Marion]

Thanks CiaranT

I love reading your posts. They give a fresh dimension to what is available in the print media.

Regards

Marion

 

[horusd]

I very much hope I don't live to eat these words, but I cannot see this happening. Expropriating depositors cash in IRL would be a Lehmans moment in the Eurozone and would result in capital flight across the continent. I think McWilliams is beginning to believe his own doom-laden theatrics and sounds more and more like a modern day Nostradamus. The alternative is he doesn't believe it ( more than possible in my humble opinion) but enjoys the centre stage too much to let the facts get in the way of a good horror story.

 

[Marion]

Could the savings of the private citizen be expropriated by the State to pay the last of the Croke Park promises?

What does he mean by this?

Are there promises in place to increase public sector pay in return for new work practices and increased working hours outlined in the Croke Park agreement?


Marion

 

[horusd]

Thanks Ciaran - Very worrying article indeed. I assume if it came to Gov dipping into our savings, that even deposits that we have in UK / South African / Dutch banks, that are resident here in Ireland, are not safe from their grabbing hands ?

I can't see how the gov't could do this as money would be beyond the jurisdiction. Hence the flight of deposits to various other countries already taking place.

 

[horusd]

What does he mean by this?

Marion

I assume it means tapping the depositors/pension funds to pay for it. On reading the article it seems to mainly relate mostly to pension funds rather than depositors per se. The comparison with Argentina is fallacious as it was a single sovereign country without the backup of a huge single currency zone. It could do this (perhaps it had to, without impacting on other countries). The ramifications of such a move here would reverberate around Europe and the world. We are not Argentina.

When the likes of Argentina ran out of options, it swiped its people’s savings in various elaborate stitch-ups. We may be going down the same route.

This is typical McWilliams bluster and scaremongering. Que bono? He does because its attention-grabbing, self-promoting guff. The more I read him, the less I value him.

 

[Marion]

I don't discount David McWilliams at all.

I am just wondering what he meant by the statement that I quoted.

Could the savings of the private citizen be expropriated by the State to pay the last of the Croke Park promises?

What does he mean by this?

Are there promises in place to increase public sector pay in return for new work practices and increased working hours outlined in the Croke Park agreement?

If there are I am not aware of them.

I am somebody who will, possibly, be affected by the Croke Park agreement.


Marion

 

[horusd]

Not that I'm aware of. I think he is making a more general point about tapping savings/pensions to fund the promises already contained in Croke park and which the new gov't has committed itself to maintaining.

 

[Marion]

Horusd: "committed itself to maintaining" might be too strong


"endeavour" is the word used in the programme.

Marion

 

[TomPetty]

I can't see how the gov't could do this as money would be beyond the jurisdiction. Hence the flight of deposits to various other countries already taking place.

No, I'm referring to those banks that are resident in this Country - ie Investec / Rabo / Nationwide UK. Would Irish Gov have ability to reach into peoples deposits on these instutions also ?

 

[Chris]

Obviously, all Argentinian deposits where wiped out when Argentina defaulted.

No, this is not what happened. Depositors were restricted from withdrawing more than a certain amount of money per month, but their deposits were not wiped out. The default was on $130bn of foreign debt, which ultimately was restructured at about 30c on the $.

I still dont really believe it will come to that and buying bonds at 9.7% will seem like a great deal in a few years time... we may all wish we had done it? We all live here do we really think Europe will allow us to lose our pensions, savings and futures now we have the IMF deal...

I have had this discussion with many people in the past year and have heard your argument several times. Could I ask you why you personally think that current bond yields are too high and why the market's default risk is too high? Is it just because someone is willing to fill the gap, i.e. IMF/EU?
By 2014 Ireland will have debt of €200bn or more with an annual interest bill of about €12bn. That is a fiscal problem far worse than what countries that have defaulted had encountered.

Are there promises in place to increase public sector pay in return for new work practices and increased working hours outlined in the Croke Park agreement?

I think what he means is that given the current budget deficit the state is borrowing in order to pay for current expenditure. Current expenditure includes the public wage bill which under the Croke Park agreement cannot be touched. Now what would happen if the state could no longer borrow money to cover the existing public wage bill? Would the state start appropriating personal deposits?

No, I'm referring to those banks that are resident in this Country - ie Investec / Rabo / Nationwide UK. Would Irish Gov have ability to reach into peoples deposits on these instutions also ?

I would imagine that the state would be able to restrict access and/or tax out funds, just like they can force foreign banks to subtract DIRT from any interest paid at present.

 

[Godfather]

I am in a state of shock for such article as I am starting to think that David likes the role of catastrophist who gains attention this way...

In an European Community environment could Ireland expropriate money from Nationwide UK, Rabo, Northern Rock, etc?

That would break lots of balances... I'm starting to think about moving the remaining 5% of my savings away...

 

[bluemac]

I have had this discussion with many people in the past year and have heard your argument several times. Could I ask you why you personally think that current bond yields are too high and why the market's default risk is too high? Is it just because someone is willing to fill the gap, i.e. IMF/EU?
B

Personally as bad as it is, we have our fall back the EU, hence why I dont think it will end up being as bad as everyone makes out, at some point they will step in and the reality is its not that much money to the whole of the EU to save us. Having said that would I buy bonds at 9.7% Yes if I could afford to lose the money.

 

[Chris]

In an European Community environment could Ireland expropriate money from Nationwide UK, Rabo, Northern Rock, etc?

They wouldn't be appropriating the money of the banks, but rather the money of the depositors. The banks merely hold and invest the money.
My dad indoctrinated two things in me regarding government and politicians:
1) Don't believe anything until it has been officially denied.
2) Desperate politicians will always do very desperate things.

The first one has proven extremely valuable in the last 2 1/2 years (we are not in a recessions; we are the first in a recession so we will be the first out, we do not need a bailout, we are not talking to the IMF, the list goes on); I'm waiting for something spectacular for the second.

 

[frankmac]

I don't discount David McWilliams at all.

I am just wondering what he meant by the statement that I quoted.

What does he mean by this?

Are there promises in place to increase public sector pay in return for new work practices and increased working hours outlined in the Croke Park agreement?

If there are I am not aware of them.

I am somebody who will, possibly, be affected by the Croke Park agreement.


Marion

Marion Im afraid that all of us are people who will, without doubt, be affected by the Croke Park Agreement.

 

[Sunny]

There is so much rubbish written about Argentina. Argentina froze deposits when the crisis hit to prevent a bank run. Initially they froze all deposits which was a disaster but eventually in 2002, they only froze term deposits. (Same would happen here if we left the Euro). They were not wiped out though. Also in 2008, the Government seized control of private pension funds (basically closed the private pension system and did an asset grab). Despite what people inlcluding David McWilliams claim, we are nearly 10 years after the Argentinian crisis and they still don't have access to capital markets. And yet people still hold them up as an example to follow.

 

[Chris]

Personally as bad as it is, we have our fall back the EU, hence why I dont think it will end up being as bad as everyone makes out, at some point they will step in and the reality is its not that much money to the whole of the EU to save us. Having said that would I buy bonds at 9.7% Yes if I could afford to lose the money.

But simply having someone supply us with more money to plug the deficit does not solve the problem, it merely alleviates the symptom. The problem Ireland is facing is that there is too much debt; adding to the debt is only making things worse, not better.
Personally, if I could afford a full bond futures contract I would be shorting.

Despite what people inlcluding David McWilliams claim, we are nearly 10 years after the Argentinian crisis and they still don't have access to capital markets.

But how is having limited access to debt a bad thing when debt has just forced you to default? Countries that are faced with default because of debt problems should not want to get access to more debt. Just like a drug addict is better off by not having any access to drugs.
In Ireland, just as in Argentina, excessive debt is the problem. The idea of default is to bring debt to a manageable level and then start paying it off, not to be able to borrow more money.
While I am no fan of McWilliams, and I agree with previous comments on him being an attention seeker, I do believe that Ireland is now in a situation where default is going to be inevitable. The earlier this is accepted and dealt with, the better.

 

[Godfather]

Guys, I believe that with the internet and google advent there are much more interconnections than 10 years ago... A freeze of Irish deposits would result on a domino-effect that would strongly impact other economies...

I still don't believe this can happen... Noone would allow that to happen...

Has anyone watched "Inside Job" which won an oscar as best documentary? Pls watch it and then let me know... We need to keep dancing on the economy rules which history has created... If we stop it's going to be a real catastrophe...

But this said I have to admit I've 40% of my savings in Germany, 55% in Italy and 5% in Ireland...