The Irish Banks and the ECB

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On Friday, the Central Bank reported (in Table A.2 of its Credit, Money and Banking statistics) that its lending to euro area credit institutions as part of the ECB’s monetary policy operations jumped from €95 billion in August to €119 billion in September. This represents one-fifth of the total amount of ECB lending that took place in September.

I have put together some charts here that illustrate what is going on with Irish bank borrowing from the ECB. First, some technicalities. The release reports (on Table A.2) how much ECB-related lending the Irish Central Bank did. It also reports (on Table A.4) how much ECB-related borrowing our banks did but these tables are a month behind. The first chart, however, shows that the two series are pretty much the same most of the time and they have been very similar lately. (I’m not sure what makes up the difference. It may be a statistical discrepancy or it may be due to different reporting periods.)

The second chart shows ECB borrowing by Irish banks broken down into the Domestic Banking Group (taken from Table A.4.1.) and the rest (essentially meaning IFSC institutions.) Non-domestic bank borrowing from the ECB has been pretty stable lately. Also, there’s little secret as to why the domestic banks needed to borrow more from the ECB during September: Many of the bonds issued under the September 2008 guarantee matured last month when the original guarantee expired. The banks were not able to issue new bonds to roll over the maturing bonds and so much of the funding to pay off September’s maturing bonds came from ECB borrowing.

The final chart shows the total share of Eurosystem lending accounted for by the Irish Central Bank and also shows the fraction of Eurosystem borrowing accounted for by the domestic banks. I have assumed in this chart that the €24 billion increase in September’s ECB lending from the Irish Central Bank all went to the domestic banks, so I’m issuing a health warning about the last point on the green line: This is not data, but rather my guess as to what this series will show when released next month. Health warning issued, it looks as though the fraction of Eurosystem borrowing accounted for by the Irish banks probably reached about 14% as of September. This would be the highest fraction yet accounted for by these banks.

What happens now? Unfortunately for the Irish banks, there are signs that the ECB is considering taking steps to end the dependence on its liquidity operations of banks that can’t get bond market funding. The last month has seen a plethora of newspaper articles prompted by the ECB insiders briefing journalists using the phrase “addict banks” to describe those banks still dependent on Eurosystem operations.

Now, this weekend, the ECB has issued a statement that would be barely understandable to most people but that the Financial Times have interpreted, probably correctly and based on briefings, as opening up the possibility of taking action against the “addict banks.”

Digging into the announcement, one can see why there may be cause for concern among the ECB-dependent banks. The relevant document that has been approved is Guideline ECB/2010/13, which is amending Guideline ECB/2000/7. Checking out what exactly is being changed requires a tedious checking over and back between the two documents and I can’t claim to have spent all of my Sunday on this. However, a couple of changes stand out as being potentially very serious for ECB-dependent banks.

Section 2.4 of the original 2000 guidelines could already be invoked as a reason to cut off funding for certain banks because it says that “the Eurosystem may suspend or exclude counterparties’ access to monetary policy instruments on the grounds of prudence.” (Counterparties means banks borrowing from the ECB.) The new guidelines supplement this with the potentially ominous “Finally, on the grounds of prudence, the Eurosystem may also reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties.”

A bit more clarity about the prudence business is provided later on in the new guidelines. Box 7, under the heading “Risk Control Measures” previously contained the line “The Eurosystem may exclude certain assets from use in its monetary policy operations.” This has now been augmented to include “Such exclusion may also be applied to specific counterparties, in particular if the credit quality of the counterparties appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.”

Since the Irish banks are submitting NAMA bonds as collateral to the ECB, as well as securitised loan books formed from turning large amounts of Irish loans into marketable securities, it could be argued that they fit the bill for being counterparties who are offering up collateral whose credit risk is highly correlated with the credit risk of the counterparty itself. As such, they could be forced to reduce their borrowings from ECB if it is decided to exclude some of the collateral that they are offering up to get access to ECB funds.

This may just be tough talk from the ECB. But if it’s not, then it raises the very serious question of what exactly needs to be done to allow the Irish banks to access funds on the international bond markets.

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73 Responses to “The Irish Banks and the ECB”

  1. Al Says:

    History may judge that the banks were unsalvagable,
    and possibly recognisably so from early on…

  2. GTC Says:

    Karl, do we know if Irish banks’ subsidiaries in the IFSC count into IFSC borrowings or are recorded in the Domestic Banking Group alone?

  3. David O'Donnell Says:

    @KW

    You’re earning your tax Euros (-;

    neat graphs, aesthetically pleasing if horrendously frightening …. rigour within the aesthetic turn as it were …

    14% will certainly focus minds of mandarins in ECB ….. must say I admire their patience with the ‘solidarity bond’ ……. but now looking at limits to those ‘green lines’ in your graphs ……… questionable nama bonds further stress …

    looks like paddydesovereign overleveraged himself with doze banks – and now neither can sell any ‘ol bond at the mo …. the celtic conflationist fallacy … and we still left with the elephant of the deficit … one elephant manage_able, two too much …….. s’pose there’s no chance of a bit of sovereign debt forgiveness from the ECB for the serfs? or instead of borrowing dosh can we simply borrow a functioning bleed!n bank from somewhere [ecb, pls advise] or we are definitely done?

    @Al
    had anyone bin lookin think it should have been obvious to a high-infants graduate in early 2007 -

  4. john Says:

    The ECB note reads to me (non-economist) as a slight tightening of the reins.
    IIRC there was progressive loosening of restictions of which assets were eligible to be posted as collateral, back in ’07/’08, to include MBS etc.

    This is a light tightening, restricting to assets related to EEA (prevents currency
    games) and ‘prudence’, to prevent piss-taking.

    A close eye is clearly being held on hows-and-whys of distressed borrowings.

    Maybe they read THIS http://www.businessinsider.com/henry-blodget-how-to-make-the-worlds-easiest-10-billion-2009-12 .. and ‘did the math’..

  5. Eoin Says:

    @ Karl

    thinks it more a shot across the bows for the “new regime” thats eventually going to come in, but reckon it won’t be until 2013 (at least) before we see any meaningful change. Although our banks are all facing massive funding difficulties, if you stripped out the “good” parts of the German and Spanish banking sectors, you’d have a massive “bad” banking sector in each country with similar “addiction” problems. No way the ECB can or will bring matters to a head anytime soon when its clearly a problem which will take a few years yet to remedy.

  6. simpleton Says:

    John McManus in this morning’s ITimes points out, gently, that the geniuses that gave us the blanket guarantee and NAMA are the same ones who are now arguing we should inflict Total Deflation on the economy. He suggests that there were unintended consequences of both the guarantee and NAMA. To put it mildly.
    Which all raises a question, relevant to this thread: given the impact of Total Deflation on the economy over the next 4 years, where will this leave the banks? Those banks, or what remains of them, are now totally dependent on the Irish economy. They have no diversified earnings streams.
    I know this blog cannot speak the name Colm McCarthy without genuflecting, but, also in this morning’s paper of record, he argues there is no alternative to deflation. Our reputation in the bond markets is more important than anything. There is always an alternative: it just requires some serious thinking about tough choices. I do wonder what wrecking the economy and destroying what’s left of the banks will ultimately do to our reputation?

  7. christy Says:

    @simpleton

    Would you venture an alternative?

  8. Con Says:

    To be fair to Colm, his point is that the borrowing spigot is going to be turned off whatever choice we make. He just argues that we’ll be better off if we keep some control over the process.

    There’s a good case to be made that deflation is just what we need to restore the economy, but he has stayed away from this topic.

  9. Hugh Sheehy Says:

    @simpleton
    Unfortunately, the economy was mostly wrecked by the boom and the current crash and deflation is merely that wreck becoming visible. Similarly, the banks were destroyed by the boom and their current state is only the full extent of their folly becoming finally visible. Finally, the guarantee was a govt betting on black and believing in good banks, but the ball landing on red and the banks being maggot ridden carcasses.

    Now, unless we refuse to pay, their debts are ours. What should have been decapitation for them becomes a kneecapping for us….but this has already happened. Most of the damage cannot be undone and the previous economy cannot be repaired.

    A new economy and new businesses must be created from scratch. Deflation is ugly but it may even help this process.

  10. simpleton Says:

    @Christy
    Yes we have to do what we have to do: close the deficit. We have to find a way of doing it credibly, but more slowly and paying heed to the cyclical state of the global economy. I think the IMF/ECB would do it more slowly, and more intelligently, than we would. And I don’t think calling them in would add to our loss of reputation.
    Back in 1992/3 we were told, repeatedly, that devaluation would destroy our reputation in the international markets. Sutherland and Fitgerald were in the vanguard; they, and others, both explicitly forecast we would be pariahs of the international money markets. After we devalued the markets loudly applauded our sudden attack of common sense.
    Unlike our domestic commentariat and body politic, markets are not emotional and, most importantly, don’t bear grudges. Reputation is based on doing the right thing rather than winning the biggest cute hoor in town contest.

  11. Michael Burke Says:

    Karl,

    you have done a valuable service in highlighting this.

    The FT report almost certainly follows an ECB briefing. The determination of the ECB to wean banks off their ‘addiction’ is an unknown- but given that it is apparently founded on the belief that an ‘exit strategy’ is currently required and that measures are need to be taken to curb lending, then a prudent course would be to take them at their word.

    It would be herocially optimistic to assume that this will not exacerbate the banking crisis. But in, a best-case scenario, the banks will muddle through as the ECB reduces its funding, presumably from a combination of renewed input of wholesale funding and balance sheet-reduction.

    This would accelerate the decline in bank lending; but loans to the non-financial corporate sector are still in free fall, down 30% in the year to August, a fall of €47bn, even as recapitalisations multiply.

    The obvious question is, What good is all this taxpayer capital supposed to produce?

  12. LorcanRK Says:

    FT’s Alphaville plays a bit of ‘spot the difference’ too, here http://ftalphaville.ft.com/blog/2010/10/11/365461/some-ecb-refinements/#comments

  13. Bart Says:

    Very interesting, Karl.

    Looking at Table A2 of the central bank’s monetary statistics, I realize that not only did lending related to monetary policy operations increase, but other assets of the central bank increased substantially as well (from 14 to 21 bn). Does anyone know what is behind this increase?

  14. Enda F Says:

    Of course the ECB wants to reduce banks reliance on Central Bank funding. However wanting to do something and being able to do something is very different. As Eoin says, Spanish and German banks are also very dependent on ECB funding and money markets are still stressed.

    If anyone wants an idea about how hard it is for the Irish banks and the true funding cost they face, have a look at the CP market and check the rates offered by the Housing Finance Agency. They are paying more than 40bps over Euribor for 3 month money. The banks can’t compete with that.

  15. christy Says:

    Could we have a thread on the relevance of the fact that Ireland is not running a significant current account deficit?

    As far as I understand it this implies that our net borrowing from the rest of the world is approx zero.

    We know the Irish state is borrowing massively form abroad. We also know that our financial system has particularly worrying loan to deposit rate and I think I’m right in thinking that the net difference is funded from abroad.

    Does the above imply that the Irish, private, non financial sector is a substantial lender to the rest of the world? If so, what form does this lending take?

  16. Con Says:

    @Christy,
    It would appear to reflect the fact that “the Irish, private, non financial sector” is gradually repaying some of its debt mountain.

  17. Brian Woods Says:

    @ “There is always an alternative: it just requires some serious thinking”.

    Serious thinking? Now that would be what ? The dopes who allowed this financial and economic disaster to develop have a specific ‘Default Framing’ for their meaningful intellectual engagement with a substantial and complex issue. Simply put, “We is right, the rest of youze is wrong. “Now get lost!”

    @ HS: “A new economy and new businesses must be created from scratch.”

    I should not hold my breath on this one. If you mean a new economic paradigm (ie. an alternative to Permagrowth), then you are correct. My informed guess is that our economy, and others in the developed world, are not in recession or depression as per a short(ish) cyclical downturn in an otherwise permanent upward aggregate economic trendline. We are in the first phase of a permanent Regression to a lower aggregate economic level of activity – my guess would be on the the mid to late 1990s.

    My rationale: The current levels of personal, corporate and state debt are too extreme to be paid down with current incomes. Any impairment of future income will only make the situation worse. I expect a combo of money inflation, increased taxation and creeping defaults will be used.

    Brian P

  18. Paul Hunt Says:

    @Karl W,

    I’m inclined to go with Eoin on this one. We may be falling for the perception of the naughty child who does something off the wall (the blanket guarantee) and thinks “Everyone is going to be looking at me from now on; and everything they do will be aimed at me”. The problems in other EZ national banking systems, though relatively smaller than Ireland’s, are absolutely much bigger. The ECB has been pushed out of its comfort zone – and is at the margins of the statutes that govern it – and it is simply signalling that it needs to retreat; and also signalling that the various players who are ‘addicted’ need to start their own ‘cold turkey’ regimes as the supply of the happy pills will taper off eventually.

    As for Colm McCarthy’s IT op-ed piece (worthy of a separate thread, perhaps?) I think I can see the need to separate the required fiscal adjustment from the on-going costs to taxpayers of crystallising the costs of the banking fiasco, but the latter still increases the demand for borrowing to throw into the Anglo/INBS black hole.

  19. christy Says:

    @con

    So is it the case that Irish households and businesses are paying down debt to the banks who are in turn paying down debt to their foreign creditors and thereby improving their balance sheet at approximately the same rate that the Irish state is increasing its borrowing and damaging its balance sheet so that the net external financial position of the country is staying the same?

  20. Eoin Says:

    @ Paul Hunt (and Karl)

    i’ve actually read relatively good research which suggests that German banking losses will end up being close to a trillion Euro (on current market values), which would represent 35% of GDP, so much bigger than ours. The difference is that they have explicitly, though very very quietly, kicked the can a decade down the road by parking the assets in much less transperent State structures like KfW and the new bad banking framework. A huge amount of the losses will come via the destroyed “equity” in the Landesbanks, which will never be publicly understood or realised by the taxpayer.

    Also, EUR/USD is around $1.40 this morning. If we see this head towards $1.50, the “exit strategy” will be much more of a 2013-2014 discussion subject, not a 2011-2012 one.

  21. hoganmahew Says:

    @Christy
    Could we have a thread on the relevance of the fact that Ireland is not running a significant current account deficit?
    Where does foreign borrowing fit into this picture? Is the current account balanced because the state (and the banks) are borrowing from international markets?

    Or is it not included at all?

    It it is included, then interest payments in future years will count against us and have to be made up in exports. It makes logical sense, anyway, even if the accounting works differently.

    @simpleton
    So we are to have a slower deflation, but not kowtow to the bond markets. Magic fairy money to make the difference?

    In any case, what deflation? As Dreaded_Estate has point out, the state had hardly cut spending, in real terms it is way above 2007 levels. The state now accounts for 53% of GNP as Hugh’s charts show us. As Paul Hunt has banged on about for what seems like an age now, the protected sector are getting more government spend (through NAMA and the like) not less and still no action.

    There is plenty of fat to be cut from non-essential, even non-routine government spending. I hesitate to call much of it even services. And all available without cutting PS pay, even if some numbers in the quangos might go.

    And the latest measure to save us all? New PS entrants will have an average-salary pension… savings expected in 2050 or so…

  22. simpleton Says:

    @Hogan
    Who do you think is more likely to dliver the following policy mix: lots of new taxes, vague promises of future reform of the public sector. Lenihan or the IMF?
    Who do you think is likely to deliver fundamental reform of the public sector and a rational tax system. Lenihan or the IMF?
    Perhaps this is unfair on Lenny. I’ll reframe the question: us or the IMF?

  23. Aidan C Says:

    @ simpleton

    You make a lot of sense.

    “We have to find a way of doing it (i.e. reducing the deficit) credibly, but more slowly and paying heed to the cyclical state of the global economy.”

    The state is in a mess thanks to some reckless banks, some greedy developers/investors, deliberately blinkered regulators and feckless governments from 2000 onwards.

    Sorting this mess will take a long time and is highly dependent on when the global economy recovers.

    Ireland’ banks, the Irish state, many Irish businesses and the many Irish households are in the midst of a severe balance sheet recession.

    All these components of Irish society need to deal with a massive overhang of debt. This will take time – many years. Paying back these debts will require continuing economic growth – this is where we need the ongoing financial support of a helping Europe not the armtwisting of an impatient Europe.

  24. hoganmahew Says:

    @simpleton
    Neither. It is a false dichotomy. The IMF works through the current government, look at the other countries that have called in the IMF. Did the IMF pull out of Latvia because Latvia refused to abandon ERM II?

    The IMF sets the targets, the governments make the decisions, the IMF gets the blame.

  25. hoganmahew Says:

    PS. I disagree that we should reduce the deficit more slowly. We should initially reduce it more quickly by taking all the cheap gains. Once that has been done, we can reduce it almost at our leisure and dependant on growth. While the deficit remains large, though, the pressure will be on from all sides.

  26. simpleton Says:

    @Hogan
    Do you think we are capable, in terms of practical Irish politics, of making the right decisions?

  27. tull mcadoo Says:

    Simpleton
    “I think the IMF/ECB would do it more slowly, and more intelligently, than we would. And I don’t think calling them in would add to our loss of reputation.”

    I disagree that it would be more slowly. All the evidence points to a “request for a faster implementation” of the consolidation. The size of the bank losses escalates and the adjustment whisper number goes from 3bn to 4.5bn. That is Dublin channeling Brussels. Left to its own devices, this govt would like to proceed slowly but they are not in control of the situation.

    Would it be more intelligent?-perhaps. I doubt the Croker deal would last the first morning of the review session.

    As regards loss of reputation…well you have to have one before losing it.

  28. Paul Hunt Says:

    @Eoin,

    Thanks for that. I didn’t realise that German bank losses, potentially, bulked so large as a percentage of GDP. I expect the key difference is that the losses are diffused throughout a much more opaque system and, as a result, they have been able to keep them, officially, off the state balance sheet. It is a tad ironic that our dear leaders – who would pride themselves as purveying global excellence in cure hoordom – have been forced to highlight these losses in glorious technicolour in the government accounts.

    @Hogan,

    I realise my banging on is starting to grate, but every day I see more evidence that the current ‘one club’ approach is a recipe for disaster.

    We are at the point now where the dysfunctionality of Irish political factionalism (though charming and entertaining on occasion) and the extreme executive dominance of government is colliding forcefully with a brutal economic reality and an equally brutal political and institutional desire the sustain the EU project.

    Something will have to give. It is fundamentally undemocratic to expect the opposition parties to support the policies of the government, thereby depriving voters of the opportunity to express their judgement on the fruits of successive FF-dominated governments. But the likely alternative is even more scary – with two parties each on one side of the major divide in conventional national political systems in the EU and in the European Parliament. The markets may not retain the memory of the ineptitude of the FG/Lab ’82-’87 government in the area of deficit reduction, but I would be surprised if they would not perceive a ‘Gilmore premium’ on the cost of debt – perhaps a ‘Stickie Surcharge’ – and maybe a ‘Mayo Margin’.

  29. tull mcadoo Says:

    Paul

    We need an election now. Let every party put its adjustment plan to the people. This could run from Leo Veradkar’s call for a front loaded plan to Simpleton (& ICTUs) back end loaded adjustment. It could also include the Shinner’s “no plan neccessary” plan.

    then having vented our frustration we could go ahead and implement whatever the EU/IMF wants us to implement.

  30. hoganmahew Says:

    @simpleton
    “Do you think we are capable, in terms of practical Irish politics, of making the right decisions?”
    As I say, it is not relevant. We will be making the decisions. For what it’s worth, I think they will be the wrong ones, at least with the current government. There are desperate attempts to try and make ‘worthy’ the plethora of patronage bodies that the Taoiseach formerly known as deBert set up. Many of these serve no useful purpose that couldn’t otherwise be served by their lowest level staff as part of their sponsoring department.

  31. hoganmahew Says:

    @Paul Hunt
    “I realise my banging on is starting to grate, but every day I see more evidence that the current ‘one club’ approach is a recipe for disaster.”
    Apologies – you, me and others saying it doesn’t grate at all; it is the lack of movement on the issue that grates…

  32. Paul Hunt Says:

    @tull,

    So you are at one with Karl W and his earlier post calling for an election now?

    But, as Colm McCarthy points out in his IT piece today “The laws of arithmetic would survive an election.” The opinion polls indicate that the three main parties could end up with roughly equal representation. Yet a government will have to be formed. Many in Labour would prefer a suitably chastened (and decapitated FF) to FG. Deep-seated tribalism would prevent the obvious FG/FF combo, so we would be back to Labour in government and the Stickie Surcharge on the cost of debt the next time the NTMA has to enter the market.

    It would be far better to sort out the economic mess using the IMF rule-book directly and deal with the dysfunctional politics separately.

  33. tull mcadoo Says:

    @ Paul,

    I am but it is a weak arguement. It is probably desireable than not that the full time pols sketch out what needs to be done & secure a mandate to do it. It does have to be line item stuff. Yet it has to be better than Enda’s no taxation, no capex cuts, abolish waste/quangos programme. It also has to be superior to Gilmore’s use of the magic bank to borrow 20bn to fund capex. Similarly, FF should be made tell us what they propose to do.

    What is wrong with asking the people to decide who should measure us for the hair shirt?

  34. Hugh Sheehy Says:

    On the subject of reducing the deficit more slowly…any slower deficit reduction means that there is a higher debt to pay back out of taxation on the productive economy. Unless prolonging the deficit means that there is a larger productive economy then slower debt reduction is mostly a bad idea. I doubt that a longer deficit will help build up Ireland’s productive economy.

    Even though classically you can’t view a national economy like a business, Ireland is so open that we must be closer to that intellectually simpler place than a larger economy or a country with its own currency. Stimulating increased “velocity” internally in the economy can only help Ireland a little.

    Again, and this will sound cruel so I hope people forgive me for using such a brutish example, retired people will continue to be retired even if their pay is cut (please imagine me lengthily listing all the appropriate compassionate caveats). No damage is done to the country’s productive capacity and the impact of their spending power is not large. However, if maintaining their pay requires that taxes stay higher for longer then that causes real economic damage by causing jobs and business not to exist that otherwise would have existed. That damage causes increased and lengthened emigration, unemployment, families unable to buy family homes, and ultimately less funding for pensioners in the future too.

    Conversely, if you’re positive about Irish people’s ability to make their way in the world, then getting the deficit down quickly allows you to minimise the duration and weight of the tax burden on Irish people. This allows them to build a better future without having to pay even more for the mistakes of the recent past.

  35. Georg R. Baumann Says:

    @Paul & tull mcadoo

    What I feel would be of much greater benefit is a public consultation on policies and ways out of this crisis.

    By public consultation I mean the injection of higher levels of democracy and use of existing broadcasting platforms for this purpose.

    In my opinion, the public is sidelined on all these issues, drowned in propaganda war’s, hence misinformed, and is in a somewhat submissive state towards the events unfolding.

  36. Paul Hunt Says:

    @tull,

    “What is wrong with asking the people to decide who should measure us for the hair shirt?”

    I would be the last person to deny voters this opportunity – as all power and authority flow from the people, but the problem of cobbling together a credible programme of government from two out of three programmes remains.

    It is almost 90 years since the end of the Civil War and it is probably time for the supporters of FG and FF to realise there are hardly any real differences between the parties apart from the latter being less priggish and more adept at securing and retianing political power.

    If the two parties can’t make the necessary adjustments (the replacement of Messrs Cowen and Kenny with Messrs Lenihan and Bruton resp.) and present a coherent programme of government in advance to the voters, it is time to call the EFSF and let the EC/ECB/IMF in. The alternatives of the current government struggling on or Labour in power with either FF or FG after an election is merely prolonging the pain and postponing the inevitable.

  37. Brian Woods Says:

    @ GrB: “In my opinion, the public is sidelined on all these issues, drowned in propaganda war’s, hence misinformed, and is in a somewhat submissive state towards the events unfolding.”

    Yep! Spot on! Submissive, but very angry!

    @ HS: Re: Retirees consumption … “No damage is done to the country’s productive capacity and the impact of their spending power is not large.”

    Hmmm – I wonder. I’m retired, and so are many of my friends. Our spending has INCREASED (and our pensions have decreased) – I am part-supporting two adult children who have lost their jobs. I hope your conclusion is correct. Else … …???

    Do I detect a level of un-reality in many of the above comments:’this economic and financial disaster is ‘manageable” – ‘we will somehow, magically recover?’ I fear not.

    Energy costs, hence food and transport costs are continually rising, not declining. Housing assests are declining, and will continue to do so for several years to come.

    Correcting our fiscal ‘imbalance’ cannot be achieved using the historic methods. The debt situation has gone too far. Its a semi-global problem (US + UK + developed economies). Resumed growth, which will save us, will be at whose expense? We (the developed economies) cannot all grow out of this financial and economic predicament at the same time. That’s impossible. So, someone has a very large piece of explaning – as opposed to hype, spin and political waffle – to do.

    We are Regressing economically. If you dis-agree with this conclusion, and can adduce the evidence, then please disprove it. Thanks.

    Brian P

  38. christy Says:

    @hoganmahew

    “where does foreign borrowing fit into this picture? Is the current account balanced because the state (and the banks) are borrowing from international markets?

    Or is it not included at all?

    It it is included, then interest payments in future years will count against us and have to be made up in exports. It makes logical sense, anyway, even if the accounting works differently.”

    I suppose our net external international financial position is staying the same – we are neither running down nor accumulating assets/liabilities.

    Did Philip Lane estimate our net external position position in that external wealth of nations paper he did?

    It seems strange that Ireland, taken as whole, is not experiencing a increase in its net liabilities while at the same time it is facing a funding / solvency crisis. Moreover, its not like we ran massive current account deficits in the past

  39. Ahura Mazda Says:

    @ Karl Whelan,

    It really makes me wonder what did the guarantee achieve? It looks as though the guarantee ensured the safe passage of funds and bonds from Ireland and pass losses to the taxpayer. The ‘value’ of the guarantee is questionnable at this point (in the sense that the bluff as been called).

    This links suggests one more international commentator will be removed from the MoF’s x-mas card list.

    http://www.eurointelligence.com/index.php?id=581&tx_ttnewstt_news=2915&tx_ttnewsbackPid=901&cHash=5fc6365df5

    Wolfgang Münchau – “That came on Tuesday, 30 September 2008, when Brian Cowen, the Irish prime minister, gave a blanket guarantee for the entire banking sector. His decision bounded the other eurozone leaders into following suit. The rest is history.

    I would go as far as to classify the decision as one of the most catastrophic political decision taken in post-war Europe. This not so much because of the decision itself – it was necessary to stop the rot at the time – but because of a lack of action to embed the decision into a strategy to solve the problems of the banking sector – lack of capitalisation, abundance of toxic assets, poor management, and of course, excessive size. ” and “Last week, the Irish government took only the minimalist step to participate the holders of subordinated debt. My explanation is that the banks must have succeeded in scaring the politicians into believing that forced bond-to-equity conversions would signify the end of civilisation as we know it.

    Why not just default? History has shown that countries recover from default relatively quickly. “

  40. Joseph Ryan Says:

    The ECB should make up its mind. Is it a central bank or isn’t it. If it is not a central bank i.e. a lender of last resort, then let us know. In that case the Irish banks are bust beyond recognition. If that is the case then the following steps are immediatel necessary.

    1. Nationalise all domestic banks immediately.
    2. Immediate stop to repayment of all bonds to safeguard cash.
    3. Immediate talks with ECB to exit Euro.
    or
    A. Tell the ECB to stuff the perjorative addict insults and do its job.

  41. zhou_enlai Says:

    @Karl Whelan

    I am confused as to where, in theory, losses (if any) would be incurred by the Irish Central Bank and/or the ECB if Irish banks defaulted on their obligations to the Irish Central Bank and/or the ECB (leaving aside for a moment the issue of the blanket guarantee the the eligible liabilities guarantee scheeme).

    I would have presumed that the Irish Central Bank’s capacity to “print money” is controlled by the ECB and ultimately the state/and the exchequer is liable to the ECB for any excesses in the printing of money? However, I think the system may be more complicated than that with the ECB itself being fettered by law and the national central banks.

    I am further unclear about the assumed mechanics in the oft-expressed sentiment that there is no Keynesian free lunch and that future generations must bear the losses if QE/helicopter money is deployed now.

    If you have time, perhap you would point me to a section in your notes on international money markets which deals with this. I have looked at the bit on central banks but I am still unclear.

  42. hoganmahew Says:

    @Joseph Ryan
    I agree with you, but I would replace 3 with “The ECB to provide a long-term low/no interest vehicle for the state to park bad bank assets”
    and add:
    4. The ECB to implement a eurozone-wide bank resolution scheme and for it to impose losses on bond-holders in banks that are unfit for purposes.

  43. Frank Galton Says:

    Off-topic, but how long before DoF is giving us the “nothing to see here move along folks” on the EU Commission looking at the EBS recap?

  44. grumpy Says:

    Maybe the ECB is simply making the point that Zombies can be expensive pets and they don’t want States collecting them unless they can afford them.

    On the retiree point, there do seem to be some quite generous tax free allowances for those in receipt of significant pensions. I note the timid tone, above wrt to this sector and suspect it may be as off-limits as the corporation tax rate. Is that appropriate?

  45. anonym Says:

    One thing to consider here is the “chicken-match” metaphor (cheers Wim! ;) ). Perhaps the ECB doesn’t actually want to see the PIIGSybanks lose their government lifeline, but it does want that lifeline to flow from the Commission rather than the Eurosystem in future. The EFSF may be intended for sovereigns rather than private-sector (har har) banks, but I seem to recall European figures floating the idea of using it for bank bailouts before.

  46. Brian Woods Says:

    @Grumpy: “On the retiree point, there do seem to be some quite generous tax free allowances for those in receipt of significant pensions. I note the timid tone, above wrt to this sector and suspect it may be as off-limits as the corporation tax rate. Is that appropriate?”

    Off-limits? Maybe. Pols are VERY nervous about scaring the sheeple!

    I have no objection to a complete, across-the-board cancellation of all tax rebates, credits, allowances and other scams for individuals. No deductions of any nature. Pay a flat rate on all your earned income, irrespective of source, and this includes all tax exiles as well. Pay up or hand back your passport.

    I would also recommend a three-year emergency tax rate of 100%, set at a level of six times the national Industrial wage. If you no-likee: emigrate. there are gadzillions of well paid jobs in … Antartica I believe.

    @Ahura Mazda: The banksters scared the s**t out of the pols. Fantastic con job. Worth Oscars and Nobel Laureats.

    Brian P

  47. Ciaran O'Hagan Says:

    @ Karl, well done on yet another service in highlighting the topic and doing some good analysis
    Longer term, it makes eminent sense to cut the drip to the “addict banks”. This would make them sharply reduce their lending, on forced balance sheet-reduction. The reasons for further injections of taxpayer capital into bad banks would then at least become transparent, and we might even see less cash flowing in. That would be excellent for sovereign credit, including Irish government bonds.
    I’ve been told from Ireland for 2 years now that the economy can’t function without banks. I agree, but I don’t see why they have to be all Irish. Maybe the penny is finally dropping that the State (and its taxpayers) above all needs to be protected. And that aid is serving to lengthen the pain. That aid is posing an ever greater risk for the taxpayer, and not just the Irish taxpayer. Hence a needed dose of realism at the ECB.
    Such actions however would be eminently political. The ECB has given governments plenty of latitude to protect their black sheep against competition till now. A change is well merited, but will the ECB have the courage? I doubt the ECB has the wherewithal just now to take strong action anytime soon. But hopefully my fear can be proved wrong.

  48. Enda F Says:

    @Ciaran

    I agree with you about cutting the drip but what do you expect the ECB to do with regards to strong action? Money markets are functioning but are far from healthy. Euribor is creeping back up over the past couple of weeks. This is not just an Irish bank problem. It’s still a European one. Although we are at the bottom of the class as usual these days!
    I can’t see how they can withdraw the steps they have taken other than through a softly softly medium to long term approach.

  49. Hugh Sheehy Says:

    @Ciaran
    Ireland needs banks but many on here have said we don’t necessarily need the Irish banks, or that the Irish banks are Irish owned.

    Not surprisingly, a consequence of Irish govt policy has been to give the foreign owned banks every reason to believe that they’ll be discriminated against if they operate here.

    This was commented on almost a year ago, both on this site and in the national and international press. Of course no-one in the national press paid any attention.

    http://www.irisheconomy.ie/index.php/2009/12/30/the-irish-economy-in-2010/#comment-30031

  50. anonym Says:

    @Frank Galton

    An interesting question is if there actually are “third parties, including competitors” waiting to complain about EBS’ bailout. None of the existing Irish banks would have quite enough neck to do so. Rabo? RBS – surely not? Danske Bank, present owners of NIB? Other foreign banks, not currently in the Irish market? I assume there may well be European banks which are looking for bargains in the Irish market: yes, the outlook for the economy is poor, but how easy to grab market share from the now feeble incumbents! They almost certainly wouldn’t be keen enough on Ireland to take the full loan books of AIB, even if their regulators would let them. But perhaps EBS’ losses look like a manageable price for a brand name and a going concern with a fairly wide distribution of branches? Viewed through the lens of a hungry outside bank rather than a fearful Irish person, the Irish bank bailouts must seem like an episode of under-the-table protectionism as much as anything else, and I presume such a bank would have a good chance of getting its doting home government to see things that way too.

    And it might well be on to something there, actually. My suspicion is that the Green Jersey Agenda has played a significant role at every stage in our banking debacle, a role which still isn’t fully appreciated. I remember the second episode of Freefall, where someone tells us that the Central Bank allowed the Big Two to dangerously expand their lending because it wanted to prevent HBOS from gaining market share.The program breezes over this as if it was an obviously fine and worthy motivation, however bad the consequences. (I also remember Enda Kenny’s lunatic decision to denounce the government for allowing foreign investors to consider taking AIB off our hands.) And at this point I’d be willing to guess that the State is more determined than ever to defend its sickly darlings from all competitors, foreign and domestic. (On the other hand, I wouldn’t be too surprised if some of the hopeful noises from Lenihan and Elderfield about negotiating with senior bondholders turn out to have something to do with foreign banks which are willing to consider a deal – obviously not too bad a deal – in return for becoming an equity player in Irish banking.)

  51. Sporthog Says:

    @ Brian Woods,

    I find it a bit ironic in relation to tax exiles. There are hundreds of thousands of Irish people living in other countries all over the world, perhaps even millions. They live and work in these other countries and contribute to society there.

    Our 20 Billion gap in what we take in and spend is due to the people who live and work in Ireland, not the people who live and work outside Ireland.

    We have to pay those who live and work as well as those who live but don’t work in Ireland. This is why we have a 20B problem.

    I find it very puzzling how we can blame those who don’t live or work in Ireland for the shortfall in our finances.

    Blaming those people whose profession has taken them to other countries is a popular theme at the moment, this blame is largly based on ignorance and begrudgery. There also appears to be a bitter battle going on between the Union leadership and some prominent foreign based business people. If Ireland cannot offer employment and proper social services due to mismanagement then I would never begrudge anybody for upping sticks and getting out. If things keep going the way they are we might all have to become exiles.

    The Irish people are going to have to learn to start taking responsibility for themselves, and stop looking for others to blame.

  52. Brian Woods II Says:

    @Christy

    I have been struggling with a similar problem. Apparently our banks are net foreign borrowers to the tune of €200bn. The €200bn must have then gone abroad either in the purchase of assets/investments or in foreign holidays/Mercs etc. The latter is our current account deficit and has not amounted to anything like €200bn so that suggests that Irish people have filled their boots with the former, much of which may currently be considerably devalued.

  53. podubhlain Says:

    “We had a big contraction last year. We contracted by 10 per cent in GNP terms in one year. We got it back to zero again this year. That’s quite a turnaround,” he said.” -Brian Lenihan as reported by IT.

    Is he telling porkies?

  54. Brian Woods II Says:

    @pod

    Even if he was telling the truth, his observation is off the wall. It would be like me saying “I got a 10% pay cut last year, this year no change, what a rurnaround!!”

  55. anonym Says:

    Funny you should mention that! Presenting COM/2010/0254 final from the radicals at the European Commission. I’d quote “BOX 1″ from the Communication in full, with added highlighting, but the webserver seems to choke at the sight of it. Anyhow, the BoE is making similar
    noises
    at this point. Though obviously this is all still at the
    level of brave talk about how we just weren’t properly prepared for
    the bear, and next time we’ll be ready and so we absolutely
    won’t run away.

  56. christy Says:

    @BWII

    So we bought loads of property abroad, financed by foreigners through our banks during the boom and it ain’t worth much now but the debt still is.

    (Moreover we were leveraged up to the nines so all the equity is gone? does that make sense?)

    Surely the lower payments from our crap assets abroad should come through the current account

    The gov is borrowing internationally – what is offseting this in the capital account?

  57. anonym Says:

    (My last comment was meant to be @hoganmahew .)

  58. Brian Woods II Says:

    @ christy

    I’m way outa my depth here. But my take is that the banking sector plus the government owe foreigners c.€300bn. This must be balanced by the non (banking/government) sector having either invested or spent €300bn abroad. It doesn’t seem as if they did much net spending abroad so that points to investment. Is it therefore that Ireland Inc. has a massive negative equity with the outside world. It has borrowed €300bn, maybe spent €50bn and invested the rest in foreign assets now worth a fraction of what we paid for them. Now that’s scary, Ireland Inc. sitting on massive negative equity.

  59. christy Says:

    @BWII

    But spending goes through the current account – the capital account deals with sale and purchase of assets – and it’s still in approximate balance – i think the flow of income from the asset sales and purchases goes through the current and the value of the asset sale/purchase goes through the capital

  60. Paul M Says:

    Does the scale of net foreign borrowing by the banks also reflect a significant flight of capital ?Anecdotally a lot of money gone and going from deposits here into stronger foreign banks or bunds.

  61. Brian Woods II Says:

    @Christy

    Yes it all balances out in the accounting sense. But 300Bn borrowed abroad must be balanced by the combination of net spending abroad (current account) and net investing in foreign assets. The former seems relatively small suggesting there has been massive investment aboad. Do the national accounts show investment abroad?

  62. hoganmahew Says:

    @anonym
    “Funny you should mention that!”
    Wow. Thanks for that. Food for thought.

    Supposing you didn’t have such a scheme in place. But you knew you would. And it would have an unlimited line of credit from the ECB initially (based on the highly successful Irish promissory note). And you had a load of zombie banks that really should be shot.

    What would you do?
    A. Shoot the zombies and cope with the consequences…
    B. Delay until the cavalry arrives…

  63. tull mcadoo Says:

    Hogie,

    B?

  64. hoganmahew Says:

    @tull
    Indeed.

    So, is it likely?

  65. tull mcadoo Says:

    hogie,

    This is the aspiration for the next crisis. There is no fund there yet. But what happens if the next crisis is but an echo of the current one.

    I can see the headlines “the luck of the Irish”

  66. Eamonn Moran Says:

    Any IMF experts out there?

    Just a simple question.
    Do the IMF have a reputation for tackling the insider class issue when brought in to rescue oligarchies/ corporate capitalist surfdoms?

    I mean I know that they make huge cuts on the welfare state but do they have a reputation for tearing down tax breaks, cartels, monopolies, going after high net worth individuals/companies to make larger contributions?

    If they do then the Plebs are right and we are better off with them than any combination of the Irish political parties.

    If not then the same insider power base in the country will survive and we will be back to the same stuff again after the crises, so my preference would be for a LABOUR/fine geal coalition.

  67. Matthias Brendel Says:

    After going through ECB/2010/1, Annex II (that will come into force 1 January 2011): Could it be that the ECB has just implemented a legal framework that will indirectly make it easier to finally expediate not only monetary institutions, but also ECB-members such as the CBI out of the Eurosystem?
    You may find that exotic. To me, as a German, it simply looks like this.

    Would certain German banks also have to face dire consequences due to the new eligible assets regime?
    Please, keep in mind that most of these assets that will face at least starkly increased valuation haircuts by then and that German banks were dealing with are currently transferred to the so-called “Bad Banks” and will soon disappear from their balance sheets.

  68. Matthias Brendel Says:

    Correction: My comment was on ECB/2010/13, not ECB/2010/1

  69. con o leary Says:

    Are Irish Taxpayers About To Bail Out Goldman? Is Peter Sutherland Stealing From His Own People To Give To The Vampire Squid?
    Submitted by Tyler Durden on 10/17/2010 00:07 -0500

    AIG American International Group Anglo Irish European Central Bank Failed Auction Goldman Sachs Goldman Sachs Asset Management Hank Paulson Ireland Lehman Mark To Market Meltdown Nationalization RBS Royal Bank of Scotland TARP United Kingdom

    It is deja vu all over again. To little media fanfare the dire financial situation in Ireland is nothing less than a repeat of the Lehman collapse in those dark days of September 2008. With the recent nationalization of half of the country’s six big banks, and the blanket guarantee over the rest of them, the Irish government has effectively made sure that bondholders in all banks, even those which such as long insolvent Anglo Irish bank will be made whole by the long-suffering Irish taxpayers. And despite rumors of haircuts for at least sub debtholders, actual facts validating this possibility remain unseen. Which begs the question why is everyone in the world so terrified of taking mark to market losses on even a few billion in debt? Simple: as all of the world’s banks, but Europe more so than anyone else, are now caught in the biggest circle jerk ever imaginable, with one entity’s liabilities making up another’s assets, which in turn are someone else’s liabilities, and so forth in a MC Escher (or is that HR Giger?)-esque flow chart of the surreal (as can be seen here), even one dollar of write downs can spiral and affect tens if not hundreds of billions of downstream assets (and thus liabilities). Which explains why the ECB and everyone else in Europe is so intent on preventing a failed auction in Ireland (we previously disclosed that virtually every September auction of Irish bonds was purchased by the ECB, either directly and indirectly): should the banks that are on the hook actually validate their impairment, Europe is one step away from activating its own $1 trillion TARP package. Yet what is amusing is that inbetween the cracks of exclusively European-bank based senior and subordinated bondholders in such bankrupt banks as Anglo-Irish, a familiar name emerges: Goldman Sachs.

    Yes, nested quietly inbetween the €4,034,756,880 in face value of Anglo Irish bondholders is the name that managed to pull the strings (via its puppet Hank Paulson) and get bailed out when AIG threatened to make Goldman management and investors insolvent. Is Goldman, via its UK-based Goldman Sachs Asset Management Intl. subsidiary, currently petitioning Brian Lenihan to be the only US-based bank to receive a direct bailout on its Anglo bond position? Or is it, as always behind the scenes, negotiating on behalf of 80 other European banks, among which Lombard Odier, Rothschild, and Deutsche, and achieve what it always succeeds in: escaping scott free, and stuffing taxpayers with the bill? We are confident Irish taxpayers, and drivers of cement trucks, would be fascinated in getting the correct answer.

    Guido Fawkes, who managed to obtain the Anglo Irish bondholder list, shares the following commentary:

    Anglo-Irish Bank did not represent a systemic risk to the Irish economy, it wasn’t a high street bank like AIB or the Bank of Ireland. If it had been allowed to go the way of Lehmans the only losers would have been shareholders and bondholders. The Irish state stepped in and nationalised a bank that was basically run by crooks lending to property speculators. The Irish people are taking losses that should rightly have been shouldered by bondholders.

    Every child in Ireland is being bequeathed a huge debt at birth to protect the interests of foreign, mainly German, bondholders – why? Guido was once a bond trader, it was always understood that sometimes the bond issuer defaults. That is the risk investors take.

    So why is Dublin’s political establishment so keen to protect foreign investors at the expense of future generations? Guido has obtained the list of foreign Anglo-Irish bondholders as at the close of business tonight. These are the people whom Dublin’s politicians really seem to care about.

    Between them they hold Anglo-Irish bonds with a face-value of €4,034,756,880. Shouldn’t they take the hit rather than future generations of Irish taxpayers? Capitalism is a system of profit and loss, they took the risk of investing in Anglo-Irish Bank. Is the Irish government under pressure from the European Central Bank in Frankfurt to protect German investors?
    Spot on question. And as the highlighted area in the chart below demonstrates, we would like to add Goldman Sachs to the list of bailoutees. Surely, few firms in the world deserve to be redeemed as much as god’s little helpers.

    Little else that can be added here… except for this amusing anecdote of another Goldman Sachs International Chairman, one Peter Sutherland, former Ireland attorney general and EU commissioner who just so happens was a chairman of British Petroleum (remember those guys?) previously. To wit from the Irish Times:

    [Sutherland] and [recently heckled] Lenihan have remained in contact through the financial crisis. On one occasion, Sutherland visited Lenihan to tell him what a great job he thought he was doing and to say that Lenihan had the potential to be one of the great taoisigh of the 21st century. Lenihan was taken aback, he says.
    Surely, this great son of Ireland, who obviously has Lenihan in his back pocket, is in active negotiation on behalf of his current employer, Goldman Sachs. Yet something tells us Mr. Sutherland will be the last person to share light on Goldman’s twilight relationship vis-a-vis the Irish government.

    One look-back Sutherland opposes is the banking inquiry. This is hardly surprising from a former chairman of AIB who appeared at the 1999 public inquiry into the Dirt tax evasion scandal.

    “It would have been better not to have an inquiry at this time because we have limited resources and a diversion of those limited human resources into an ex post facto analysis of the past is far less important than remedying the immediate problem that we have now,” he says.

    “It is a very difficult subject and to have all of these civil servants sitting in listening to bloody evidence on the past when they all know broadly what happened. We know what happened – we know it all. A political football is not what we need. We need to look to the future to get it right.”
    Lack of revisionism is not too surprising coming from a person whose personal, and future, fortune, is based on the past generosity of American, and now Irish taxpayers. Because his wealth is certainly not due to his skill at anything related to his actual career:

    Sutherland was also a board member at Royal Bank of Scotland (RBS) during the financial meltdown when the UK bank collapsed into state arms after a frenetic, debt-fuelled growth. Of the bank’s 2007 role in the €71 billion acquisition of Dutch bank ABN Amro, the biggest ever banking takeover, Sutherland says it made “the mistake of buying at precisely the wrong time when the world was falling off the back of a bus”.
    Perhaps instead of driving trucks full of cement into Parliament, Irish taxpayers can be a little more proactive, and ask one of their most respected “leaders” just on whose behalf he is working on in this latest bailout, which could easily be Ireland’s last.

    h/t Niall

    For more from Tyler Durkan go to his Zero Hedge web site

  70. con o leary Says:

    The list is here

    http://www.zerohedge.com/article/are-irish-taxpayers-about-bail-out-goldman-peter-sutherland-stealing-his-own-people-give-vam

  71. hoganmahew Says:

    Oh for goodness sake con, this is a list of brokerage companies. I would be astonished if, for example, Goldman Sachs holds Irish bonds on its own account. They are far more likely to be short and to be driving down the price while acting as a broker to sell for the NTMA. Any evidence of this would be news…

  72. The ECB and Bankia | Karl Whelan Says:

    [...] to use) when threatening to cut off credit to the Irish banks. Indeed, I discussed the framework here in a post written the month before the ECB shoved Ireland into an EU-IMF bailout.  From the [...]

  73. The Secret Tool Draghi Uses to Run Europe | Karl Whelan Says:

    [...] should apply for program funds to sort out the banks.  So, after clearing their throats by revising the risk control framework with Ireland in mind, the framework was put to devastating use.  Faced [...]

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