The Irish Economy

The report of the US Financial Crisis Inquiry Commission was released last week to controversy and criticism.   The report contains a wealth of information and is interesting reading even for those whose interest is mainly in our own financial crisis.  Much of the story has been about the partisan squabbling since the report’s release, with the Commission failing to agree on the final product.   Republican commissioners issued two separate dissents to the “majority” report (see here for the dissent of Hennessy et al.).    This just underlines how politicised the narrative of the crisis has become.   Strangely enough, though, I find the duelling perspectives actually add a useful analytical edge – otherwise lacking – to the report.  (Update: See here for an interesting discussion at the NYT.)

Anger at our government is probably too raw to have a much of a productive debate until after the election.  But to draw the proper institutional and policy reform lessons, it will be useful to similarly consider the competing extremes of the “rotten institutions” and “blameless bubble” explanations for the crisis, and to explore where the truth lies.  

Some short extracts follow after the break to give a flavour of both the majority report and the dissent. (more…)

The new Central Bank Quarterly Bulletin is available here.  In addition to the new economic forecasts, the Bulletin carries some very interesting special articles on:

• Large-Value Payment System Design and Risk Management
• Firms’ Financing During the Crisis: A Regional Analysis
• Irish Money and Banking Statistics: A New Approach

The recent Ernst and Young report commissioned by the Department of Finance on the economic and budgetary impact of the proposed CCCTB is available here.

Anousha Sakoui has written a very interesting Analysis article in today’s FT on the experiences of some top European officials during various Emerging Market debt crises during the last 30 years: you can read it here.

Tommaso Padoa-Schioppa was a major figure in the creation of the euro; he died just before Christmas.

Lorenzo Bini-Smaghi provides a very interesting overview of his career in this speech.

Here is a link to the article by Gary O’Callaghan that Colm McCarthy referred to in a previous post but for which there was a problem with the link.

Failures by the Irish fiscal authorities have been blamed, in recent newspaper and TV interviews, by ECB Executuve Board member Bini-Smaghi for precipitating the October crisis and Ireland’s resort to bail-out.

Gary O’Callaghan of Dubrovnik International University thinks the culprits were ECB Executive Board members.  

https://imap.ucd.ie/uwc/webmail/attach/Did%20the%20ECB%20Cause%20a%20Run%20on%20Irish%20Banks.doc?sid=&mbox=INBOX&charset=escaped_unicode&uid=22418&number=4&filename=Did%20the%20ECB%20Cause%20a%20Run%20on%20Irish%20Banks.doc

There have been some comments on this blog this morning on the popular subject of bank bonds.

Let me point out some facts and then some questions for debate.

The facts:  On Monday, January 31^st, Anglo Irish Bank are going to pay out on a maturing bond worth €750 million. (For reference, the total cut in this year’s welfare budget will be €873 million.) The investors who purchased this bond invested their money with Anglo on the 17^th of January 2006. The bond is senior unsecured debt and is not covered by a state guarantee.

The questions: Should the government have passed legislation this month to allow the Minister for Finance to intervene so that the bank did not pay this bond back? And if so, should the next government pass such a bill in relation to the remaining €4 billion or so in outstanding unguaranteed bonds owed by Anglo and INBS?

In answering the question, it’s worth noting that the logic of the section of the recent Credit Institutions (Stabilisation) Bill relating to subordinated debt suggests that a government can change the terms and conditions of bonds to apply haircuts if the bank owes its continued existence to significant amounts of public money being injected.

It is unclear whether this power can simply be extended to senior bonds but it seems to me that it can. Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits. Mechanically, of course, one could achieve the same outcome by haircutting both senior bonds and depositors and then compensating depositors via a separate piece of legislation, but this would be more complicated.

The other issue is the implications of a default on a senior bond for the Irish and European banking sectors. My belief is that how this plays depends on what investors believe is the precedent being set. If the precedent is that investors can lose out if they place their money with banks with flawed business models, who engaged in shady business practices and then become grossly insolvent—then surely this is a precedent that must form part of new proposals for dealing with failed institutions?

On the other hand, one could argue that at such a sensitive time for the Irish banking sector, defaults of this type would send the wrong message and worsen an already extremely serious liquidity problem. This is the argument put forward by our new best friend, Mr. Bini-Smaghi.

I’m open to considering all sides of this argument. On balance, however, I’m inclined to the position that it is in the interests of both Irish citizens and those in the wider EU to set a precedent with the Anglo and INBS bonds that there need to be limits on how much support European taxpayers will provide to insolvent banks.

A useful explanation of QE is available here.

A reader has written to me about an important item missing from my briefing paper on the IMF-EU loans. I noted in the report that the amount of money that Ireland can borrow at cheap rates is three times our IMF quota and that this quota was about to increase. However, I did not mention that a much larger increase in Ireland’s quota is likely to occur over the next year or so.

On November 5^th, the IMF concluded its 14th General Review of Quotas with the Executive Board recommending that the Fund’s Board of Governors adopt the proposed quotas. The proposals include a doubling of the total amount of quotas and review of each county’s share of the total. Ireland’s share is proposed to increase further from 0.528% to 0.724%). This means that Ireland’s IMF quota will increase to around SDR 3.45 billion, which at current exchange rates would translate to a quota for almost €4 billion.

If implemented, these proposals would allow Ireland to borrow almost €12 billion at IMF’s low interest rate (currently 1.38%) with the remaining €10.5 billion at the higher rate (3.38% for the first three years, 4.38% thereafter). Over a seven and a half year period, this would translate into a loan that had an average margin over the variable SDR base rate of 228 basis points, down from the 326 basis point margin associated with the IMF lending terms that prevailed at the time the bailout deal was increased.

To come into effect, the proposals must be approved by 85% of the IMF’s voting share and 113 member countries. It’s unclear how long this will take but it may take a year or so.

I think this adjustment of the IMF lending terms is an important point to keep in mind when considering the lending terms on the EU loans. The EU lending authorities have been keen to point out that, once compared in the appropriate fashion, their loans can be viewed as having equivalent cost to the loan that the IMF offered the Irish government in November. This is true. However, when compared against the terms that the IMF is going to offer Ireland in the near future, the European loans are a good deal more expensive.