Michael Noonan in the Sunday Independent

Michael Noonan puts forward some ideas for amending the bailout deal in an opinion piece for the Sunday Independent.   His focus is on ways to reduce the expected cost/risk to the State of cleaning up the banking mess.  

He suggests four main options: (i) have the EFSF put capital directly into systemically important European banks; (ii) have the EU provide insurance against bank losses beyond some specified level (an idea already suggested by Patrick Honohan); (iii) the fast-tracking of an EU-wide of a bank resolution regime (that presumably would not be limited to future bank creditors); and (iv) an ECB-funded special purpose vehicle for bank assets to avoid the alternative of firesales with losses rebounding on the State.

34 thoughts on “Michael Noonan in the Sunday Independent”

  1. Quoting myself out of laziness:

    Presumably [a bank senior or sov. debt buyback] could be made more effective if some of the European banks sitting on “untouchable” debt marked as par could be induced to participate, through collective action or whatever. The problem is that this solution lies on the far side of Europe’s bank-restructuring pons asinorum, just as restructuring of the “untouchable” debt does. Similarly, all the buyback schemes that involve the ECB or the Commission or etc. buying the “untouchable” debt at face value (or whatever value) and then writing it down lie on the far side of the fiscal-transfer pons asinorum alongside EU grants for Irish bank restructuring. When one or both of these bridges is crossed, then the matter of grants versus Eurobond swaps or buybacks versus restructuring and so on is just detail. Until one of those bridges is crossed, Europe’s position is “What part of ‘No’ don’t you understand?”

    This country’s problem is not that no-one has thought up a sufficiently clever mechanism by which the cost of the bank bailouts could be shifted onto the rest of the EU or put back on the creditors. And while the EU may at some point come around to one or both of those options, I don’t think that we can count on changing the EU’s mind by electing a new government which will ask the EU more politely, or more persistently, or more eloquently to change its mind. Until we get some indication of what FG and Labour are willing to do if the EU continues to refuse all senior restructuring or centralisation of bailout costs, then this is all harmless stuff.

  2. “to avoid a the alternative of fire-sales with losses rebounding on the State”

    Erm, it is now more than two years after the blanket bank guarantee and three and a half years since the general borrow short / lend long securitised SPV idea crashed.

    WHEN, is the country going to stop deluding itself that the fall in property values and the impairment of loans is some sort of temporary thing that you just have to wait out for another six months, then another, then, another.

    Why can nothing be sold because the world just doesn’t understand how much these assets are really worth – the investing world being so much more stupid than the official Irish investment “experts”.

    What was that rubbish about NAMA not engaging in speculative hoarding…..?

    Just ban the expression “firesales”.

  3. See emphasis (mine):

    “A Fine Gael Government will not make Irish taxpayers borrow at penal interest rates to pay for a fire-sale of Irish bank assets. We will SEEK A MANDATE FROM THE IRISH PEOPLE TO RENEGOTIATE a more credible, fairer package that is better for Ireland and Europe.”

    “These options are not just a matter of technical negotiations between Irish and other EU officials, or even for EU Finance Ministers. They require political commitment at the highest EU levels to resolve the crisis that is now engulfing Europe. ”

    They don’t just require political commitment at the highest EU levels. They – more importantly require political commitment amongst ordinary Irish voters.

    There is no point in electing Noonan to go to the EU and “negotiate” on the basis that if there is no more favourable deal forthcoming then Ireland will…….er…….continue to draw down the credit line previously agreed and in return for continued access to it, retain all the bank liabilities on the Irish state as previously agreed.

    If the mandate above – in capitals – does not include the message that the government has the political capital domestically to cut current spending enough to go into something approaching surplus, then that MANDATE is nothing more than a mandate to ASK for a different deal. That is not a negotiation.

  4. Too little, too late. Banks bonds are maturing daily and being paid off daily to private investors with the ECB and the Irish Central Bank providing the shortfall in liquidity. I note that it is now mostly the Irish Central Bank as the ECB has washed its hands of the country.

    Only an immediate order from a new government to stop all bond repayments will prevent the Irish State and people being swamped in sea of unpayable debt.
    At that stage we will have to default on the ECB because there will be nobody else left to default on. One could take the view that it will serve them just right. Sakrozy and Merkel and their ECB hounddogs have sought to enslave the Irish to pay off their own banks.
    Forget insurance scheme or renegotiation etc. Just refuse to pay them back. Let the German and French bank bondholders fold the Irish banks and let them see what they can get.

  5. @joseph ryan
    Absolutely right. If we are serious about a renogiation and or a debt restructuring we need to have a plan whereby we can cut spending and/or increase taxes to a point where we can run the country on actual tax revenue after using all our cash reserves.
    If we continue as is we just end up with a huge debt to the ECB/EU/IMF and the Irish banks continue to haemorage money and use what they have to continue to pay off bondholders and interbank loans. And money continues to flow out of Ireland and economic activity declines month by month.
    Only other alternative is for some combination of ECB/EU/IMF debt forgiveness,currency devaluation,massive asset sales or cash injections from new friends in the Middle or Far East.

  6. As grumpy already said, unless we can live without borrowing then we’re in no position to negotiate. Are fine gael going to run on that platform? I think not.

    Other than that, it’s long been too late for the “burn the bondholder” moment. I have heard no plausible route to burning the ECB without consequences.

  7. Hugh,

    Quite correct. Any threat of default has to be credible. So, you would have to cut the primary deficit to close to zero to have a change of standing up to the “bondholders”. Moreover, defaulting on bondholders probably requires a default on both the ECB and the CBofI at this stage.

    That said the longer we remain reliant on credit from the EU/IMF the more vulnerable we are to their increasingly “imperialist” dicktat. Logic would seem to demand that we cut our cloth quickly to cut a deal,

    A you say FG are not showing much sign of appetite to go down this route. Even if the were, the electorats is not willing to even consider it and would much rather go for softer options presented by other parties.

  8. @ Hugh

    Of course it has consequences. As does doing what we’re doing. What was it Krugman, quoted ‘Tacitus’ as saying, ‘they make a desert and call it peace’. As the heat in this desert becomes unbearable anything can happen.

    As Kevin O’Rouke pointed out, our best hope is for a bigger bang involving as many countries as possible.

  9. Wolfgang Munchau has a nice piece on solutions to the European debt crisis in today’s FT (article here). He argues that there really are just two broad solutions to the crisis: messy restructurings somewhere down the road or bailouts from the stronger countries that make real ex ante fiscal transfers to the weaker countries. The latter would most likely involve “joint and several” guarantees of debt issues – an effective European bond. Unfortunately, he ends on a pessimistic note: political constraints in Germany are leading to an approach that prioritises “limited liability”.

    This is not a debate that we can watch as spectators now that we are enmeshed in a bailout ourselves. It is in no one’s interests to have a bailout with a design that almost guarantees it cannot work.

  10. As the Irish Central Bank seems to have lent over €50bn to Irish banks, where did this money come from? Is it acting as an intermediary with the ECB as the ultimate source of funds? A printing press in a secret underground bunker in Dame St? Some other source? I didn’t think the Central Bank can create money ex nihilo.

  11. Bryan,

    Isn’t it the case that the Irish Central Bank can create liabilities (with the agreement of the Governing Council), but that any losses must be made good by the State?

  12. John,

    Thanks – I did not realize that. So would it be correct to say that in effect the Central Bank is creating money ex nihilo, to pay off the depositors that are fleeing? Does this State-backed bank liability bubble up to the national accounts and increase the gross government debt? There seems to be an element of magic here to me with different arms of the State lending to and guaranteeing debts to each other (given nationalized banks). I guess if I just assume the Irish taxpayer is ultimately on the hook then that would be a reasonable assumption!

  13. @ tull

    ‘So, you would have to cut the primary deficit to close to zero to have a change of standing up to the “bondholders”’

    That cut is likely to be forced upon the administration in any case, as the bailout fund runs out, capital is pulled from the country, state assets are sold off at distress prices, and the economic impasse becomes more and more acute.

    Of course things are not standing still in the EZ or globally, and new political forces will enter the scene. Whatever entity stands up to the bondholders will have to stand up in many other ways too.

  14. @paul quigley
    “That cut is likely to be forced upon the administration in any case, as the bailout fund runs out, capital is pulled from the country, state assets are sold off at distress prices, and the economic impasse becomes more and more acute. ”
    Well, that is the plan… the difference is between doing it immediately and doing it over four years…

  15. @John McHale,

    “This is not a debate that we can watch as spectators now that we are enmeshed in a bailout ourselves.”

    Agreed. But we have been spectators for so long that the chances of getting on to the pitch and influencing play in our favour are slim to non-existent. Yes, the EU is a union of equals where major decisions have to be made with some degree of unanimity, but, for far too long, Irish goverenance has been inept and, while they were tender of the Government’s constitutional legitimacy for an extended period, the EU’s Grand Panjandrums finally had enough and were compelled to intervene.

    It is out of our hands now and, yes, while a new government with a solid popular mandate may be able to speak more clearly and persuasively to and for Irish citizens and to our EU partners, its voice will be drowned by ever-increasing pressure imposed by the sovereign bond market and the political and institutional imperatives of the EU’s Grand Panjandrums.

    The most pressing problem is an unemployment crisis and it would be far better to focus on alleviating this using the economic tools that remain within Ireland’s control rather than this posturing and empty noise about pulling strokes and doing deals in the corrdors of power in Brussels, Frankfurt, Paris or Berlin.

  16. @ Paul Hunt
    All very well but jobs will not be created without money and confidence so we are just going round in circles. We can just muddle on in a downward spiral or take the iniative to reduce our borrowings and get control back over our economy.

  17. @ Bryan G/John

    yes, losses from ECB repo are shared by the Eurosystem as a whole, whereas losses by the CBI ELA are solely on the CBI. Don’t think the debts add to the national debt though, think its treated more like what would occur at a semi-state.

  18. @Thomas Paine,

    I have made the point previously that the EU/IMF deal is economically damaging, but politically unavoidable. (Those who advocate default or withdrawal from the Euro have simply not thought through the full implications of these decisions.) Rather than railing about the economic burdens it imposes – and making wild claims about what we would, and could, do if these burdens were alleviated – I am simply making the case that it would be far better to make the most of what we have within these constraints. While the prospect of doing a deal or pulling a stroke exists it allows those who capture rents and impose deadweight costs to defend their ill-gotten gains and to avoid the reform and restructuring that is required to lift the performance of the domestic economy. This is where our focus should be.

    And we must also recognise that, in the eyes of our peers, Ireland has lost the ability to govern itself responsibly. Through-going political reform is a sine qua non if we are to regain the exercise of national sovereignty that is consistent with responsible membership of the EU.

  19. @Eoin,

    Agree. But the state is the back-stop for the semi-states and sovereign bond investors would take account of this potential impairment of the state’s ability to service its debt.

  20. @Bryan G/ John McHale.
    re.
    As the Irish Central Bank seems to have lent over €50bn to Irish banks, where did this money come from? Is it acting as an intermediary with the ECB as the ultimate source of funds? A printing press in a secret underground bunker in Dame St? Some other source? I didn’t think the Central Bank can create money ex nihilo.
    From your discussion I take it that the liquidity now being provided to the Irish banks is not from the ECB but from The Irish Central bank, with the Irish Central bank and ergo the Irish taxpayer on the hook for all of it. In effect the continuing deposit flight is forcing the Irish State to make good the insane bank guarantee.
    Why is the Irish Central bank acting as a lender of last resort in a currency that it does not control?
    If the ECB does not want Irish banks to fail surely it is the ECB that should provide liquidity. The Irish State at worst (following the insane guarantee) should only be liable for solvency losses.
    How could the recent EU/IMF agreement have been signed without nailing down the responsibility of the ECB to provide liquidity to the banks?

  21. @ John McHale,
    “Isn’t it the case that the Irish Central Bank can create liabilities (with the agreement of the Governing Council),…?”

    Well the 50bn suggests so. I didn’t know the Ir CB could do this. What was to stop them buying Irish sov debt via the banks?

  22. Was it just me or did Mr Noonans article seem a bit of a mish-mash?

    The first act of the new government has to be to stop paying off seniors as their bonds fall due because as we are doing this we are turning ever more private debt to public. We need to end the guarantee and say no more seniors will be repaid.

    The places and amount of national debt held off balance sheet are growing, and the denial about this is largely unchecked

    Kevin O’Rourkes hope for a big bang would be the best outcome for us but the problem is being able to hold out long enough to allow that happen when all the while the ECB’s money pit is trying to prevent it.

    I think it more likely that Ireland is the catalyst for any big bang.

    I still think, unpalatable as it is, the only solution is to default and balance the books within a 1 year period. I know the collateral damage will be awful but I think its the least worst way out of this.

  23. @EB

    If the Irish CB became insolvent due to losses on support extended to the Irish banks who would recap it?

  24. I’ll wedge this link in as it relates to bank funding 😉

    Kathleen Barrington questions the sale (by Anglo) of its Austrian private bank in 2008. Accepting her assertion that it was deposit rich and assuming these weren’t tied up elsewhere, it seems like a very strange time to offload it.

    http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=THE-INSIDER-qqqs=themarket-qqqs=computersinbusiness-qqqid=53914-qqqx=1.asp

    This is Kathleen’s second bite at this particular cherry:
    http://kathleenbarrington.blogspot.com/2010/09/curious-tale-of-anglo-irish-bank-and.html

  25. @Ahura Mazda

    Back in mid to late 2008 it was clear that Anglo could default on its creditors. The decision to sell the Austrian bank would have been taken in the summer – maybe even the spring of 2008.

    Now If you were running a bank and became aware that your depositors might not get paid back in full one of the calculations you would; have to make is – what might the consequences be.

    We already know that many who “rose” to the “top” in Irish business were sociopaths. The main calculation was therefore about consequences to ones self, not the economy or society in general.

    We also know what sort of depositors and “organisations” use Austrian banks to deposit funds – and why they choose Austrian banks.

    What do you think might have happened to the senior management at Anglo if it had gone down and taken those deposits with it?

    If you can’t work it out, watch the film “Casino”, there is a clue about half way through.

  26. We’ve had vague discussions on restructuring in recent months but there is very little data available apart from BIS data that appears to be unreliable.

    The NTMA says there were €70.9bn worth of Government Bonds outstanding, or 94.3% of National Debt, at end-2009; some 84% of Irish Government euro denominated bonds held by international investors.

    Of course no breakdown is given, even on a country basis; it’s not surprising that NAMA another offspring with DoF antecedents has a similar love of secrecy, which is usually used to benefit whom?

    An internal Bundesbank report apparently came up with a German exposure to Ireland of €25bn to Ireland rather than a BIS reporetd total of €139bn.

    As for a big bang restructuring, we also do not know what the exposure is for the suckers with Irish private sector pensions, who are already under water.

    So besides the lack of data, what happens when most of the overseas deposits in the banking system take flight as Ireland gets a junk credit rating?

  27. I find it amazing that nobody in Ireland is questioning the nature of the fractional reserve system , nothing nada zilch.

    There is no more capital to run down – banks cannot create credit from zero capital – the country needs to build it.
    What does it take to stop this – a famine ?

  28. @MH
    re:
    So besides the lack of data, what happens when most of the overseas deposits in the banking system take flight as Ireland gets a junk credit rating?

    At the moment it looks as if the Irish Central Bank is conjuring up ‘money’ to lend to the bank to replace the loss of deposits, the ECB having done a runner.
    I wonder does the Irish Central Bank have the legal authority to run up these kind of liabilities or debts?

  29. @ Eoin B,

    “the ECB were against the guarantee, but they were also against any even modest burden sharing beyond equity and subdebt. As such, the two stances cannot work in tandem to any meaningful effect. They appeared to want an implicit guarantee which would be honoured in near fullness.”

    It appears that Sean Fitzpatrick could contact the MoF in Vietnam, but Trichet had to leave a voicemail because the MoF was at the races. It is very surprising that Lenihan didn’t seek to involve the ECB/EU. You’d expect a politician would recognise the cover this would provide. Was it the case that they feared the ECB would advise the nationalisation of Anglo & INBS?

    The Irish bank guarantee put us in the position that we were on the hook. As a result the prospect of burden sharing was severely limited. The attempt to look at burden sharing came too late. At that point the ECB held the aces.

  30. Ireland is moving further along the road to recovery. We have regained our competitiveness and stabilised our public finances, and are making significant progress in bringing the economy back to full employment. We have laid the foundations for a solid and sustained recovery. The task now is to build upon the gains we have made in recent years and to keep the recovery going.

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