Subscribe to John Mauldin's
FREE Publication:

Thoughts From the Frontline

Sign up for John’s free weekly letter and join 1 million of his closest friends.

We will never share your email with third parties

Thoughts from the Frontline

Whatever It Takes

February 20, 2013

Lord Melchett: “Farewell, Blackadder [hands him a parchment]. The foremost cartographers of the land have prepared this for you; it's a map of the area that you'll be traversing. [Blackadder opens it up and sees it is blank] They'll be very grateful if you could just fill it in as you go along. Bye-bye.”

– From the English comedy series Blackadder (Part 2, Episode 3)

Was it only a few years ago I visited the Emerald Isle of Ireland? So recently had this fair land come to such a sad state. The collapse of its largest banks foreshadowed the demise of many other European banks that had borrowed money from British, German, and other European banks to lend against homes and property. The Irish government had to guarantee deposits and bond holders in order to prevent a bank run. I think I am correct when I state that the Central Bank of Ireland was the first central bank to avail itself of large-scale use of the Emergency Liquidity Assistance (ELA) provision of the European Central Bank. This was before we became so familiar with the process in Greece.

The Irish banks had lost a combined €100 billion, borrowed largely from other European banks, which would also have incurred great losses had the Irish government not stepped in. You have to remember that this was before Greece and Spain needed assistance, although as Ireland stepped up to the table, the acronym “PIIGS” was coming into vogue; and some of us were writing about the debt problems that plagued Greece and other peripheral countries. The European Union compelled the Irish government to bail out its banks, and so the Central Bank of Ireland took on the debt (via the ELA) of the six main Irish banks that had failed because of the property bubble.

In the “bailout,” Ireland received €67.5 billion (and in addition borrowed another €17.5 billion from its pension and cash accounts), which it pledged with a promissory note to pay back. The public was quite upset, and the government was then overwhelmingly rejected at the polls, in a clear show of sentiment demonstrating that the Irish people did not view that bank debt as something that should be on the public balance sheet.

Government workers had to take large pay and pension cuts and government services were cut, as one of the conditions for getting the money was significant austerity. This was before “austerity” became a bad word in Europe. Meanwhile, unemployment rose from 4% to 14%.

I visited Ireland after the new government took over. I met with some two dozen business leaders, politicians of all persuasions, journalists, and economists. I remarked at the time that the only thing they agreed upon was that Ireland would never pay that bailout money back. A former prime minister told me that they would not have to openly repudiate the debt, but rather were expecting, after Greece and other countries were allowed to default, to be invited not to pay it.

A leading Irish economist who was at the negotiating table told me point-blank that the IMF negotiator told them they would not have to pay it back. But you have to remember that at the time there was true panic and no road map for dealing with such a crisis. Something had to be done. That something was the issuance of bailout funds (which conveniently minimized losses at said German, French, and British banks), which came with a private assurance to Irish leaders that whatever was done for other countries would be available to them as well. “But please, just work with us right now?”

So the Irish, as we say in Texas, took one for the European team. The blow left a rather ugly scar, as the national debt ballooned into impossible-to-manage territory, crippling the national government.

But there was one group in Ireland that was aghast – horrified – at the idea of not paying back that debt: those were the people I met at the Central Bank of Ireland. And they did have a point. The document that created the European Central Bank did not allow a national central bank to not pay its debts. Governments could default (as we learned with Greece), but not national central banks. Those were the rules that everyone who adopted the euro played by.

At the time, I wrote that the Irish would not pay that debt. I had listened to the 99% of the people who told me so. Silly me. Yet, the last two weeks have seen the Irish convert their promissory note into government debt and agree to sell bonds. So it looks like the Irish will pay after all. Except that when you read the details, the Irish (after a great deal of controversy ensues) will end up either not actually paying or not paying anything close to the value of what they borrowed. So how can they both pay and not pay? That is the topic for this week’s letter; and an instructive reading it is, not for what it tells us about Ireland but for what it tells us about the EU, the eurozone, and the future of the euro.

Who’s Got the Map?

Fans of British comedy will recall fondly the early-‘80s series Blackadder, originally about a self-serving courtier of Queen Elizabeth (played by Rowan Atkinson, who later became known in the US for his role as Mr. Bean). At one point, Blackadder is compelled to sail around the Cape of Good Hope in order to remain in the Queen’s good graces. The voyage seems, of course, like a death sentence,…

Discuss This


We welcome your comments. Please comply with our Community Rules.


Feb. 28, 2013, 3:51 a.m.

I wish to say a big thank you to John for this article.  We are ordinary taxpayers living in Ireland.  We are lucky living on a small pension with no mortgage debt. We hear austerity and feel its effects all the time. There is little break from the negatively that is all around us with the unemployment situation the way it is. Our daughter who is a lawyer and her husband - a senior executive have just lost their jobs due to cut backs. They have three small children To get John’s article with so much hope has brought huge relief to us He so clearly explained the changed emerging economy and the government policies that are being perused with respect to the banks and their massive debts.  The media with their confusing messages did not help in any way. People here do not know who or what to trust to get us out of the mess in which we find ourselves.
Regards   Maeve

EPual Jacobsen

Feb. 27, 2013, 12:48 p.m.

To me Cyprus is “key”

meaning if they [US and EU] bail out Cyprus then it is truely over

If the US and EU bail out Cyprus to bail out Russian tax haven to jump start Russian economy, when the Russians apparently already gave them money and said no more [Cyrpus previously went to Russian Gove for bailout $],

Well then this must be a bright line. You now have clear proof there is nothing
that will not be done and no limit regardless how improper or illegal.


Cyprus Connection


The report finds that Cyprus, a small island nation with a GDP of just US$23 billion, is both the largest source and destination of Russian foreign direct investment (FDI) from 2009-2011. Cyprus sent US$128.8 billion into Russia in 2011 alone, more than 5 times Cyprus’s GDP.

Dr. Kar notes that, “The recorded FDI positions merely reflect the round-tripping of prior illicit deposits from Russia into Cyprus,” making Cyprus a major money laundering machine for Russian criminals.



EPual Jacobsen

Feb. 25, 2013, 5:27 p.m.

have you seen what is planned for CYPRUS

You may want to take a peek at this, and if you find interesting I would enjoy your post about it.

Cyprus elections, people seem to have overlooked that.

Anastasiades faces bailout talks after victory in Cyprus elections , Monday February 25, 2013…

what Cyprus is claimed to be

Cyprus a channel for attracting investment to Russia , Friday March 16, 2012

In the last five years alone, the Russian economy has seen Cypriot investments of over $52 billion, of which $41.7 billion was invested in the 2007-10 period, or 2.7 times more than German investments in Russia in the same period.…

others say perhaps an illegal tax haven

Does the US and EU bail out Swiss banks holding “secret” accounts for rich US taxpayers? 
Does or will US and EU bail out Bahamas and other offshore banks holding “secret” accounts for rich US taxpayers? 

This could get interesting. Will the Germans agree to effectually bail out Russian wealthy ?
Will the rest of the EU ? Will US chime in through QE and IMF ?

Dawn Coit

Feb. 24, 2013, 2 p.m.

My grandfather was Irish.  He was kind, sweet, a tease, and HONEST.  The Irish may be many things(good and bad), but I believe they are basically a decent and honest people.

Ronald Nimmo

Feb. 23, 2013, 10:56 p.m.

With respect to this segment of the article:

“Let’s put that in context. Ireland issued €2.5 billion in 5-year bonds last month, which are now yielding 2.8%, less than Italy’s corresponding bonds. That is also less than the 5.9% the Irish paid last summer when they first came back to the market. (Someone made a rather large profit on those bonds!)

Didn’t John already tell us that it was the ICB which owned the bonds. So the Central Bank of Ireland must have made the profit! And they remitted the money to the Irish government so the Irish government made a fat profit on its own bonds!

Peter J Taylor

Feb. 22, 2013, 12:02 p.m.

John probably knows, but the average reader in the US and anywhere but the EU will probably not know this:

The cleverly humorous quotation entitled “Toxic Debt Scare” by Colm McCarthy actually refers to contamination with horsemeat, of down-market beef products sold mainly in the UK, first discovered by the Irish food standards authority. Horsemeat is a normal constituent of diet in much of Europe, but not in the UK where it is viewed with some revulsion. So many different products have now been discovered contaminated, in worst cases lasagne with a meat content up to 100% horse, labelled as beef, some of the meat coming from as far afield as Rumania.

Robert Watkins

Feb. 22, 2013, 3:33 a.m.

John, I know there are tax advantages with a mortgage, but if I had your money I would just pay cash and skip the hassle!

Jacques Hennessy

Feb. 20, 2013, 7:53 p.m.

Actualité, I would rather like plenty of 1973 dollars. They would buy 5$ worth of today’s stuff,.  It’t today’s dollar that is worth 19 1973 cents.

Apart from that thanks again for illuminating this mess.

Dallas Kennedy

Feb. 20, 2013, 11:21 a.m.

Nay, the hyperbole is what makes it so Irish! Time for another pint ....

EPual Jacobsen

Feb. 20, 2013, 9:44 a.m.

Thank you for the article.

Would you please, if you find the time, comment on this article (link below)

and the US participation in the bailout of EU banks.

How The Fed’s Latest QE Is Just Another European Bailout
Submitted by Tyler Durden on 02/02/2013

Given your fine article, I wonder how much is the US “on the hook” for,

and what is the likelyhood the US will receive that money back.

thanks again.