Gurdgiev's big mistake - the losses on the banks' loans from the ECB and Central Bank

[LDFerguson]

I attended a function recently where Constantin Gurdgiev spoke. In the material that accompanied the function, he was described as "Dr. Constantin Gurdgiev, Head of Macroeconomics at Institute for Business Value, IBM" and

 

[darag]

Seamus Coffey is correct strictly speaking; of course the bank's liabilities to the ECB and the CBoI cannot be counted on as part of the national debt. However I'm not sure it's correct to claim that these loans do not represent a liability for the state. These liabilities are guaranteed by the government and if they are defaulted on (as a result of a deterioration of the banks' balance sheets), then the government is liable for filling the hole.

So they represent some sort of liability for the government.

However Gurdgiev is in error also; the first error is one of inconsistency; i.e. he includes these "off balance sheet" liabilities while excluding the huge number of government liabilities which are not represented by the instruments managed by the NTMA (e.g. future social welfare and public sector pension commitments). Many of the liabilities are practically unquantifiable.

The other error is to give a present value to these liabilities equal to the par value of the loans provided to the Irish banks. This is a bad mistake for an economist.

 

[Purple]

The other error is to give a present value to these liabilities equal to the par value of the loans provided to the Irish banks. This is a bad mistake for an economist.

Can you explain that point please?

 

[darag]

Can you explain that point please?

Sure. Even if the banks were liquidated tomorrow, the government wouldn't have to pay for all of their liabilities to the ECB and CBoI because their assets are worth something. If an insurance company sells a policy which pays out up to a million for fire damage to a building for example, it doesn't account for it as a liability of 1 million euro.

Actually Gurdgiev is quite careful with the way he expressed himself, now that I read it again. And in fact I don't see anything incorrect in the statement

But let’s not forget that there roughly €110 billion which the Irish banks owe to the ECB which is clearly also in some line a liability of the taxpayer. And there is a very direct liability of the taxpayer to the €50 billion that the Irish banks owe to the Irish Central Bank.

I don't think it's a Lucey moment; at the most he is being slightly disingenuous by throwing figures like that about knowing how they'll be interpreted

 

[Brendan Burgess]

Fair play to Gurdgiev. Apparently he has commented on Séamus Coffey's corrections via Twitter.

I have no prob with Seamus Coffey's post criticizing my numbers. I diasgree with his analysis, but it's good 2 see him tackling the issue.

The only thing I object in Coffey's post is his addition of risks I enlisted as attributed to my final debt estimate. All I said was - these are risks 1 has to consider if 1 were 2 push optimistic estimates on2 Nama liabilities