ECB Opinion on Bank Guarantee Extension

Writing in today’s Irish Independent, Emmet Oliver notes an important story. The ECB has released an opinion on the government’s proposed extension of its bank liability guarantee.

The ECB is unhappy that the guarantee continues to cover interbank deposits:

The extension of a guarantee to cover interbank deposits should be avoided as this could entail a substantial distortion in the various national segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States and impairing the implementation of the single monetary policy, which is a unique competence of the Eurosystem under Article 105(2) of the Treaty.

They also appear to be unhappy that the guarantee does not have a minimum  maturity:

In the same vein, the ECB’s recommendations on government guarantees state that ‘Government guarantees on shortterm bank debt with maturity of three to 12 months could be provided so as to help revitalise the short-term bank debt market.’ Moreover, it is noticeable that under the draft scheme there is no stated minimum maturity for any guaranteed liabilities which means that liabilities with a maturity of less than three months may be guaranteed in practice.

The ECB’s concerns about national guarantees interfering with the normal operations of interbank money markets are not restricted to Ireland. Here’s a similar opinion offered on an Austrian extension of interbank guarantees.

The ECB also notes about the Irish guaratee scheme that

for the sake of transparency, a more precise indication should be given on the method to be used to calculate the fees.

These opinions are consistent with various earlier warnings from the ECB Executive Board members about their plans to remove their exceptional extension of credit and to return to their normal operational framework. Unfortunately, we are now being repeatedly reminded that those who told us that the ECB would be lending €54 billion to Irish banks were not at all accurate.

20 thoughts on “ECB Opinion on Bank Guarantee Extension”

  1. “These opinions are consistent with various earlier warnings from the ECB Executive Board members about their plans to remove their exceptional extension of credit and to return to their normal operational framework. Unfortunately, we are now being repeatedly reminded that those who told us that the ECB would be lending €54 billion to Irish banks were not at all accurate.”
    I don’t quite understand this last paragraph?

    Is the implication that if interbank repo is not covered under the new guarantee that:
    a) the NAMA bonds will be unrepoable
    b) that the only recourse to default on the NAMA bonds will be the NAMA bonds themselves
    c) both of the above

    Is this what you are getting at?

    Or is it just a general stab at the atrocious level of basic understanding among politicians of many colours (but predominantly of the government parties) as they parrot some sound bite about:
    – ECB lending to NAMA
    – NAMA bonds will get lending moving
    – cheapest guarantee evah
    – bailout the envy of the world[‘s bankers]
    – blah, blah, blah, knowledge economy, blah, blah, blah, credit to creditworthy housbuilders, eh, I mean developers, blah, blah, blah, NAMA will make a profit, blah, blah, blah, long term political value…

  2. @ yoganmahew

    Quick answer: the latter.

    However, there are very substantial questions about what exactly will happen to the NAMA bonds. If they are not going to be repo’d at ECB, will they be held to maturity or repo’d in private markets. Alternatively, will they simply be sold? Back in September, I wrote the following and I haven’t been convinced yet that this won’t come to pass:

    “This has very substantial implications for how the Irish state is going to funds itself over the coming years. NAMA bonds being tradable will in effect make the Irish banks competitors for the issuance of Irish sovereign debt with the NTMA. Indeed, it may be necessary for the banks and the NTMA to co-ordinate sales of NAMA bonds on the secondary market with issuance of new bonds by the NTMA.”

    http://www.irisheconomy.ie/index.php/2009/09/07/ecb-nama-bonds-and-the-irish-banks-as-issuers-of-sovereign-debt/

  3. The only parts of the article the government will read:

    The Government was … complimented

    The bank also welcomed the Government’s commitment

    The decision to charge banks for use of the scheme was also praised

    A press release welcoming the clap on the back from Frankfurt is no doubt imminent…

  4. @D_E
    I can’t see how they won’t be. This is a yellow card. The next step would be to say that it does distort competition and to refuse it. But I believe that would be up to the EU competition authorities? And they have already approved the scheme:
    http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1787
    although they haven’t released the text of the decision as yet:
    http://ec.europa.eu/competition/state_aid/register/ii/by_case_nr_n2009_0330.html#349

  5. @Karl W
    “Alternatively, will they simply be sold?”
    Jeepers, don’t say that.

    We still, as far as I can see, don’t know the size, shape or colour of the NAMA bonds. But if they are six month rollovers, that would mean a sovereign debt crisis pretty much every six months until NAMA has paid back a significant proportion of the debt.

    Let us hope that they are ten year duration, callable, with six month rate resets… course, that would imply a steeper margin to euribor than + 50 bp, no?

  6. @ YM/KW

    private repo seems the most plausible outcome, cos they dont want to increase their exposure to ECB, and there’s no way in hell that they’ll be selling them on the open market. Collateralised cash lending is the way forward for interbanking lending outside of government guarantees anyway. However, there’s a danger that counterparty banks seek chunky haircuts on the bonds as they are essentially unsaleable in theory (in practice the Irish govt might be willing to exchange)

    Alternatively the Irish banks could sell off their substantial holdings of the more liquid Irish general government debt, and replace them with the NAMA bonds in the ECB repo operations. As such, lots of cash from the bond sales, and keep all the liquidity from the ECB. That could be a drip-drip occurance over the next year or so, and im assuming the ECB would be ok with that.

  7. @Eoin Bond
    What is the difference between the banks selling their existing Irish bonds and the NAMA bonds. Both actions will push up the yields on Irish government bonds.

  8. I suppose another alternative would be to use the NAMA bonds as ‘cash on deposit at central bank’, ‘reserve requirements’, ‘securities available for sale’, ‘derivative collateral’ and all the other pesky things that banks normally have to use good quality assets for. This would let the banks pay some of their bills with normal sovereigns, or use them for repo or whatever?

  9. @ DE

    NAMA bonds (so far as we know) have 6 month rollovers. GGD has an average maturity of say 5 years or so (and rising given the current policy of the NTMA). The Irish banks (lets assume) will agree to continually roll the NAMA bonds over for the duration of the project, no matter (within reason) how long that lasts, while the GGD will need to be redeemed at maturity. If the NAMA bonds are sold in the open market, they could be redeemed in 6 months time. Hence it wont be allowed happen.

    The current situation between NAMA and the Irish banks will essentially lead to the Irish banking sector being a forced buyer/owner of at least €54bn in Irish govt debt for the next decade via NAMA.

  10. @ YM

    yes, there’s lot of potential uses for them. Regardless of their “saleability”, the NAMA bonds are far more useful on their books than the dodgy loans they are replacing.

  11. @Bond. Eoin Bond…
    “The current situation between NAMA and the Irish banks will essentially lead to the Irish banking sector being a forced buyer/owner of at least €54bn in Irish govt debt for the next decade via NAMA.”
    The corrolary of this is that the Irish government will also be beholden to the Irish banks for the next decade. They are not just to big to fail, financially systemic or too stupid to die, they are too intertwined to be put down.

    If a bank which has NAMA bonds were to fail, what would happen? The unsecured bondholders would get the unencumbered assets, assuming the NAMA bonds are still unencumbered by then. Would they really want them? No, not if they were getting 5% before and now they are getting 1.8% So they would look for their money at the next rollover.

    Therefore, the state, if it gives short-duration bonds to the banks, is willingly entering into a parasitic relationship that could kill it. It is taking up smoking at the age of 88 and lighting its tabs with petrol bombs. Depite this risk, it is not at all clear that the parasites, the banks, are going to benefit from this much, as you point out…

  12. @ YM

    i agree for the most part, but as someone else said, the banks and the government (and so us) are basically all in this sh1tty rickety boat together for the next 3 or 4 years at a minimum. If one falls we’re all probably goosed.

    I was talking to some foreign bankers about NAMA. They said, in short: “Obviously the government doesnt want to be giving the banks an easy time with this”, and i just said “Well……”, and then they said “And obviously the banks dont want to be giving the developers/borrowers an easy time with this”, and i just said “Well……”. Like it or not, we’re all in this sh1t together, for better or worse. There’s elements of cronyism in this, but there’s also elements of simply clinging on to the guy beside you when the ship hits particularly troubled waters.

  13. @Bond. Eoin Bond
    “i agree for the most part, but as someone else said, the banks and the government (and so us) are basically all in this sh1tty rickety boat together for the next 3 or 4 years at a minimum. If one falls we’re all probably goosed.”

    But it need not be so. We could easily have acted differently, and probably still could, to not but ourselves in this position.

    Linking the countries futures to banks that are hopelessly insolvent and will remain so for quite some time is a crazy plan!

  14. …and impairing the implementation of the single monetary policy, which is a unique competence of the Eurosystem under Article 105(2) of the Treaty.

    This may be a stupid question. How will the issuance of short term debt across member states inpair the implementation fo the single monetary policy? If this the equivalent of the distortion which Fingleton Jr. sought to cause when he went touting for deposits after the original guarantee was put in place?

  15. @zhou
    That is what I got from it. By guaranteeing very short-term accounts, there could be tremendous slosh to/from Ireland in times of stress.

  16. I think, gentlemen, that the EU/ECB will get tougher with Ireland on these matters – particularly if the NAMA escapade, continued support for the covered banks and the implicit exclusion of non-national banks are seen to interfere with the functioning of the single monetary policy. The Government went way off-piste with the blanket guarantee, but the EU/ECB had to use kid gloves in the run-up to Lisbon II. Allowing the Paddies to play in the slush was probably seen as an acceptable trade-off to secure the Lisbon Treaty.

  17. @ Paul Hunt

    i think the govt (a) owning up to the losses of the banking sector and (b) making fairly deep cuts in the budget, has bought an awful lot of wiggle room from the EU and ECB on a lot of this stuff. At the same time our banks are starting to wean themselves off of ECB funding (albeit its still at fairly high levels).

    In contrast Greece hasn’t actually doe anything ‘real’ with their budget deficit as of yet (if they indeed even know how big it really is) and their banks still appear to be as reliant as ever on the ECB (this being more of a liquidity issue than an immediate solvency issue). In comparison to Greece, there’s a lot of goodwill towards our situation as it stands. So long as we dont row back on any of our committments and continue to move forward, i think that will remain the case.

    By the by, talking of things Greek, they had their first debt auction since they got into this mess this morning. Issued a billion or so in both 6mth and 12mth t-bills, yielding 1.38% and 2.20% each respectively. Very expensive for such short duration, though the bid to cover ratio was pretty healthy at 4.87 and 3.05 for each of them again respectively. The yield indicates its going to be an expensive and tricky year for the Greek DMO.

  18. @Eoin,

    I’m not disagreeing with your two contentions and not being seen as the worst of the PIIGSs may be viewed as progress, but is it enough? On the broader economic front the price level of final consumption for private households is still more than 20% above the Eurozone average. This is a measure of the internal devaluation which Philip Lane (and other qualified commentators) believes is required. Our approach to resolving the bank problem is doing nothing to shrink this gap – and is probably increasing it as the banks gouge higher margins. The Government decided to show forbearance to the banks and developers and to whack public sector workers (and some SW recipients). It has neither the energy nor the stomach to tackle those who are unjustifiably and undeservedly profitting from this gap in price levels.

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