Commenter MM highlighted this article from Saturday’s Irish Times by John Kelly and Eunan King as an interesting argument in favour of the government’s current approach towards the banks and against nationalising banks. The Kelly-King duo wrote that an
advantage of the proposed Nama model is that keeping most of the banks as stock market entities enables the ECB to fund part of the Irish Government’s deficit, in a manner that provides the veneer that the central bank is not buying government bonds directly.
This is a practice prohibited under the rules governing the establishment of the ECB, because it amounts to the central bank simply printing money to finance Government spending.
I do not believe that this argument is correct. The clause in the European Treaty prohibiting monetary financing is Article 101 of the Consolidated Treaty of European Union (link here). This has two paragraphs and they read as follows:
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions.
So while Paragraph 1 rules out the ECB giving loan facilities to, or purchasing bonds from, national governments, Paragraph 2 explicitly states that this does not apply to publicly owned credit institutions. As such, lending to nationalised banks does not break the prohibition on monetary financing.
Furthermore, even under the NAMA plan no central bank is “buying govenment bonds directly”. Rather, what is being proposed—whether we have a stand-alone NAMA or a NAMA used in conjunction with nationalisation of some banks—is using these bonds as collateral for loans from the ECB.