The Floating Man

Johan Lorbeer is a German street performer. He became famous in the past few years because of his “Still-Life” Performances, which took place in public areas. Several of these performances feature Lorbeer in an apparently impossible position.
With his still-life performances, this German artist seems to unhinge the laws of gravity. For hours on time, he remains, as a living work of art.
Below his latest performance in Cork, Ireland.

How to leave the Euro for dummies

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The following memo is a draft of advice to the new Irish Minister for Finance from a British colleague who has a wealth of expertise on how to handle economic crises. He prefers to remain anonymous for professional reasons.









Dear Minister,

Congratulations on your new appointment. As you read the civil service briefings on the present crisis, you will come to appreciate that Ireland's problems would be much easier to manage if your administration could choose the country's own exchange rate and interest rate. However, your officials and your colleagues may believe that there is no practical way to leave the present European monetary union and so achieve this flexibility.

In fact, there is. Leaving the euro is politically tricky and economically costly in the short-term. But it is far from impossible. The long-term advantages clearly outweigh the short-term costs, and the politics can be managed. The following outlines how it can be done:

1. Announce on a Sunday morning that Ireland is “temporarily suspending” its euro area membership.

It is obviously vital that this announcement come as a surprise to markets. So you cannot discuss it with many people in advance. The Taoiseach and the Governor of the Banc Ceannais na hÉireann must obviously be informed and agree. However, even discussing the idea in a wider circle is likely to lead to leaks; in turn, this will cause a run on Irish banks and a complete collapse of deposits, destroying what is left of the economy.

2. As of L Day (Leaving Day), all Irish assets and liabilities are denominated in the ‘Irish euro’, initially at the exchange rate 1:1.

This means that there is limited disruption of cash. People will continue to use euro coins with the Irish national side and euro banknotes with the letter ‘T’ (for Ireland) in the serial number. You thus avoid having to change ATMs or any other machines that take cash. For the initial period of a fixed exchange rate (see below), Gresham’s Law will operate and ‘non-Irish euros’ will disappear from circulation in Ireland. You may later wish to take a leaf from the successor states of the Austro-Hungarian Empire and stamp ‘Irish euros’ to highlight their national character further.

3. Announce that there will be temporary exchange controls pending a resolution of outstanding issues such as Irish euro-denominated debt.

On this, you have a choice. You can announce that Ireland will honour its euro-denominated debt until roll-over. This puts the exchange-rate risk on you. Since a main reason for Ireland to leave the euro area would be to devalue, this move would increase your debt, but would facilitate any negotiations with your euro area partners. However, it is an expensive route.

You may therefore prefer to announce that as of L Day (Leaving Day) all external Irish euro-denominated debts are also denominated in the ‘Irish euro’. That puts the exchange rate risk on your creditors. It is cheaper, though it leaves you open to substantial lawsuits.

The exchange rate will of course not remain fixed for long. Nor would you want it to. But until the transition period is over, you may have to rely on the black market (which you will, of course, criticise) to provide you with accurate information about the appropriate Irish/euro are exchange rate.

4. You should in any case now go for a default – which of course you will describe as “a renegotiation of public debt”. Since you will in any case devalue (which is a form of default) you might as well get everything out of the way at the same time. Offer creditors a (say) 50% haircut on any debt that is maturing over the next few years; or a new bond maturing (say) 15 years down the line. With any luck, they will take the 50% and run.

You will no doubt be told that if you do this, Ireland will be shut out of capital markets for years, perhaps decades to come. Perhaps. But if you have a primary budget surplus you will not need to borrow much anyway. Moreover, history clearly shows that when the only threat your creditors hold over you is that, should you default, they won’t lend you any more money, then you should default at once. In any case, knowing international markets, they will realise that the combination of default, devaluation and a return to being able to set a monetary policy suitable for Irish needs, will actually give a boost to the economy. They will therefore be eager to lend.

5. One last thing. You will eventually want to move away from ‘Irish euros’ to a proper national currency (you can still keep notes and coins looking the same to ensure that cash machines will work). When you do, I suggest that you do not tie your currency to any other currency – the whole point of this exercise is to be able to conduct an independent monetary policy in the interests of Ireland.

Merrill Lynch covered the Irish Banks disaster!

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It just makes you wonder how many more concealed bubbles are ready to pop all over the world:







Merrill’s analyst Philip Ingram warned about the Irish Bank problems in advance and he was fired for ringing the alarm bell:

“The bank analyst who had been most prescient and interesting about the Irish banks worked for Merrill Lynch. His name was Philip Ingram. In his late 20s, and a bit quirky—at the University of Cambridge he had studied zoology—Ingram had done something original and useful: he’d shined a new light on the way Irish banks lent against commercial real estate.

The commercial-real-estate loan market is generally less transparent than the market for home loans. Deals between bankers and property developers are one-offs, on terms unknown to all but a few insiders. The parties to any loan always claim it is prudent: a bank analyst has little choice but to take them at their word. But Ingram was skeptical of the Irish banks. He had read Morgan Kelly’s newspaper articles and even paid Kelly a visit in his university office. To Ingram’s eyes, there undoubtedly appeared to be a vast difference between what the Irish banks were saying and what was really happening. To get at it he ignored what they were saying and went looking for knowledgeable insiders in the commercial-property market. He interviewed them, as a journalist might. On March 13, 2008, six months before the Irish real-estate Ponzi scheme collapsed, Ingram published a report, in which he simply quoted verbatim what British market insiders had told him about various banks’ lending to commercial real estate. The Irish banks were making far riskier loans in Ireland than they were in Britain, but even in Britain, the report revealed, they were the nuttiest lenders around: in that category, Anglo Irish, Bank of Ireland, and A.I.B. came, in that order, first, second, and third.

For a few hours the Merrill Lynch report was the hottest read in the London financial markets, until Merrill Lynch retracted it. Merrill had been a lead underwriter of Anglo Irish’s bonds and the corporate broker to A.I.B.: they’d earned huge sums of money off the growth of Irish banking. Moments after Phil Ingram hit the Send button on his report, the Irish banks called their Merrill Lynch bankers and threatened to take their business elsewhere. The same executive from Anglo Irish who had called to scream at Morgan Kelly called a Merrill research analyst to scream some more. Ingram’s superiors at Merrill Lynch hauled him into meetings with in-house lawyers, who toned down the report’s pointed language and purged it of its damning quotes from market insiders, including its many references to Irish banks. And from that moment everything Ingram wrote about Irish banks was edited, and bowdlerized by Merrill Lynch’s lawyers. At the end of 2008, Merrill fired him. One of Ingram’s colleagues, a fellow named Ed Allchin, was also made to apologize to Merrill’s investment bankers individually for the trouble he’d caused them by suggesting there was still money to be made on shorting Irish banks.

It would have been difficult for Merrill Lynch’s investment bankers not to know, at some level, that in a reckless market the Irish banks had acted with a recklessness all their own. But in the seven-page memo to Brian Lenihan—for which the Irish taxpayer forked over to Merrill Lynch seven million euros—they kept whatever reservations they may have had to themselves. “All of the Irish banks are profitable and well capitalised,” wrote the Merrill Lynch advisers, who then went on to suggest that the banks’ problem wasn’t at all the bad loans they had made but the panic in the market. The Merrill Lynch memo listed a number of possible responses the Irish government might have to any run on Irish banks. It refrained from explicitly recommending one course of action over another, but its analysis of the problem implied that the most sensible thing to do was guarantee the banks. After all, the banks were fundamentally sound. Promise to eat all losses, and markets would quickly settle down—and the Irish banks would go back to being in perfectly good shape. As there would be no losses, the promise would be free.”

So Merrill Lynch’s coverage of Irish banking, before the crisis, was dead on. And they threw their analyst under the bus to save their banking fees.