Funding Versus Capital

The debate about the banks has gone off the boil.   But, as John Ihle argues in yesterday’s Sunday Tribune, the next six months will be a very active period in the restructuring of the Irish banking system (article here).    

Fixing the credit system and minimising the cost of the rescue to the State have been the focus of the debate.    The first has strangely faded from view.   The second has acquired an ominous twist: tension between the ECB (which bears increasing risk as funder of last resort of the banking system) and the State (which is effectively on the hook for bank losses given limits on creditor loss imposition).  The ECB wants to shrink the balance sheets of Irish banks to minimise its exposure, even at the cost of “fire sales”; the State wants to minimise bank losses to give it a fighting chance of regaining its creditworthiness.    Like the ECB, the Central Bank of Ireland is increasingly on the hook for funding the banks through its Emergency Liquidity Assistance, although things are complicated by the fact that first on hook for losses on this assistance will be the State itself.  

This basic funding versus capital tension is most likely behind the conflict pointed to by John Ihle between the Central Bank/Financial Regulator on one side and the NTMA/Department of Finance on the other.   How this conflict plays out will have a significant impact on how the restructuring unfolds. 

46 thoughts on “Funding Versus Capital”

  1. The first point of friction is the recapitalisation of Bank of Ireland, which must meet the Central Bank’s new minimum core reserve level of 12% by 28 February.

    If you had to find a case study to support Basil Moore’s argument that in practise reserve requirements are adjusted to keep up with changes in the degree of leverage in the banking system, and not the other way around, then you could do a lot worse than the Republic of Ireland 2000-2011, no?

  2. If the haemorrhage of deposits is continuing, it is not hard to see why the CB wants early re-capitalisation. They are on the hook for €50 bill, perhaps more, collateralised but perhaps not well, possibly guaranteed by the state but a huge multiple of CB capital.

    This has gone to repay wholesale deposits at Anglo and elsewhere which lenders declined to roll over, and these folks now hold claims against the CB which, as Willem Buiter points out, are not claims against the ECB. But what are they? Could banks which hold them not convert at par into claims on the ECB by tendering at the next sterilisation auction? Or could a nervous holder of Irish CB ‘money’ sell these claims below par?

    Of course it makes sense to do the stress tests first and then re-capitalise but there must be reasons why knowledgable people want to put carts before horses.

  3. When you hear the Irish Dept of Finance is holding out for a low cost solution to the banking crisis, be afraid. Be very afraid.

  4. “The ECB wants to shrink the balance sheets of Irish banks to minimise its exposure, even at the cost of “fire sales”; the State wants to minimise bank losses to give it a fighting chance of regaining its creditworthiness”

    Isn’t it all hopeless ? The banks seem to be like the legend of the deceased el Cid who went into battle tied to a horse because the Arabs were so in awe of him.

    I see from the FT that bond speculators have moved on to Nigeria.

    http://www.ft.com/cms/s/0/3f1333a6-2590-11e0-8258-00144feab49a.html#ixzz1C2NnN9M9

    “The 10-year bond priced with yields of 7 per cent, higher than other similar bonds from other sub-Saharan nations. Gabon and Ghana 10-year bonds trade at 5.8 per cent and 6.2 per cent respectively.
    One investor said: “Ordinarily we would have bought this bond as Africa is a coming market in our view, with potential for strong returns. But we were not impressed by the Nigerians.”Mr Aganga said the pricing was a good result and that if Ghana launched a bond in today’s market it could expect to pay more than 7 per cent.”

    7% for Ghana is impressive compared to the Irish 10 year. Or is it insane?

    They pour in their money for coupons that ignore the underlying risk. And when things go t*ts up they’ll presumably do the same as they did in Ireland.

  5. Emmet Oliver in today’s Independent is claiming the NAMA (Amendment) Bill has been shelved and that this development might have significant implications for banks trying to deleverage.

    The NAMA Bill was mentioned by An Taoiseach three days ago as one of the two vital pieces of legislation required before this Dail’s dissolution (the other being the Finance Bill).

    Where does this latest twist (if Emmet’s claim is correct) leave our banks?

    http://www.independent.ie/national-news/elections/complex-plan-for-90pc-bank-bonus-tax-shelved-2509095.html

  6. John,
    Thanks for your comments. You’ve made explicit what my piece only suggested. I suspect you’re right about the funding vs. capital tension, yet I’ve also picked up a sense of institutional inertia from the DOF and, to a lesser extent, the NTMA (although they claim they’re shackled by EU processes). Really, there’s a lack of ideas and confidence around town. Everyone still kind of in shock.

    Colm,
    You’re point about the CB’s €51bn exposure is right on; I’m embarrassed I didn’t mention it. When you say ‘there must be reasons knowledgeable people want to put carts before horses’, you’re being characteristically deadpan, right?

  7. The new government will have the hot potato of big job losses at the banks as well as the main issues.

    What keeps 1,200 at Anglo busy every day?

    It can only be hoped that the main players know what they’re doing.

    They should have reliable information on the state of big non-property business loans by now.

    NAMA should be able to sell-off London commercial properties this year, without incurring losses.

  8. @Colm McCarthy

    Forgive me, Colm (a neophyte, non-economist contributor since just before Christmas from here in Paris) for bouncing around on your excellent “board” but I’m addressing myself to you arising out of your previous, excellent “Bord Snip” attempts to address structural means by/through which Irish government policy can be formulated and executed with a view to optimising our future economic performance particularly as it relates to export-driven growth and the emigration arising out of what looks like being serious unemployment in Ireland for quite some time to come.

    Specifically, I contend that Irish “Industrial” policy since TK Whitaker has served us relatively well but that it is now out of date and unsustainable and needs a root and branch review. The MNC-driven export growth that we need to be able to pay our massive debts is NOT creating net increased employment at anything like a rate necessary to soak up our out of work and emigrating citizens. ( No quibbles about the exact numbers please!).

    I contend that, Smart/Knowledge Economy, The Irish Mind, The Food Island slogans aside, we do NOT, in fact, have a sustainable “industrial” policy, much less a strategy, in place AND we have no suitable mechanisms for coming up with one.

    I have been advised by some well-intentioned and disposed contributors that this board has limited influence on policy.

    My reply was that I have already expressed the core of my views to selected future Irish government leaders.

    One future minister, for example, has graciously confessed to me his own frustration that strategy for the exports of the employment-critical “indigenous” food and drinks sector currently lies within the remit of the Department of Agriculture!

    From my background as former CEO of the primary international food, drinks and consumer goods business federation ( CEOs), it is no insult to the Irish Department of Agriculture to gently point out that its expertise in global fmcg marketing is….zero!

    If my comments are more strategic than “economic”, I cite the appointment yesterday by Barack Obama of Jeffrey Immelt, former CEO of General Electric to lead the renamed President’s Economic Advisory Council.

    On the basis that in the US at least, they believe they are no longer in mid financial crisis but that growth is not lifting employment, Obama has fired former Fed. Chairman Volcker and named Immelt to lead the “new” “President’s Council on Jobs and Competitiveness.”

    Shouldn’t we be voting for the party that proposes the immediate appointment of an equivalent Irish body, headed up by ONE, accountable, former private sector Irish ( OR non-Irish) business executive who REALLY knows something about exporting?

  9. Are we looking at an old-fashioned, but slow motion, bank run? It also seems that the EU’s priorities (and time-line) – gear the EFSF up to organise sovereign debt buybacks and then look at bank stress-tests – is totally out of synch with Irish requirements. Just as the politics is going into meltdown mode, it seems the banks are heading in the same direction – and just when the real economy seemed to be showing some signs of life.

  10. @ Paul Hunt

    ” Just as the politics is going into meltdown mode, it seems the banks are heading in the same direction”

    Is it not all part of the same process that has been going on since 2007 ?
    An incredibly complex financial system based around the assumption that property prices will rise forever breaks down.

  11. Richard Fedigan

    manufacturing employment peaked in 2002, an event concealed by the Twin Bubbles in credit and public spending. The immediate banking and fiscal crises need to be resolved and a viable strategy for tradeable sectors put in place. The tradeables sector has been under the cosh for the best part of a decade.

  12. @Seafoid,

    Agree. The ability to sustain this characteristic Irish ability to supend disbelief has been remarkable; but, inevitably, it collapses in a trice.

    @Richard Fedigan,

    I don’t doubt the sincerity or validity of the case you are making, but the immediate priorities are fiscal sustainability and a functioning banking system. And these must be accompanied by a removal of the deadweight costs on the tradable sectors (I suspect this is part of the coshing Colm McCarthy has in mind). Remove these burdens and much potential will be realised. It will be time then for a thorough strategic review of industrial policy.

  13. @Colm,

    Manufacturing is not (as you know) the same thing as the tradable sector, with most of the growth in exports over the last decade coming from services. Goods exports in 2010 will be around €85bn (compared to €63bn in 2000) while services will be around €72bn (a more than 5-fold increase on the €13bn in 2000). To draw conclusions as to the success or otherwise of industrial policy based only on manufacturing data is a mistake.

    Separate data from UNCTAD for 2008 suggests that Ireland was one of the most attractive countries for FDI in the world, which doesn’t point to a country with a huge problem in terms of industrial policy.

    I think many economists over estimate the extent to which high prices in the sheltered sector flowed through to the trabale sector. While some areas the flow-through is clear (e.g. construction costs,r ental costs) in others it is not. Most importantly, the public service and MNCs fish in different labour pools, and it is not clear that the excesses in the former had much impact on pay levels in the latter.

  14. @John McHale
    re: The second has acquired an ominous twist: tension between the ECB (which bears increasing risk as funder of last resort of the banking system) and the State (which is effectively on the hook for bank losses given limits on creditor loss imposition).

    I hope that you are correct in your view of the delineation of solvency requirements and liquidity requirements with the State being on the hook for bank losses ‘only’.

    However, I take it from Colm McCarthy’s remarks and the CB’s own borrowings that the CB and therefore the State is on the hook for all borrowings whether for solvency/ratio issues or indeed for liquidity to cover the loss of deposits.

    What is the truth of this matter or has the truth been defined or established?

    This issue is at the kernal of the bank support issue. Initially, I approached this from the perhaps naieve view which equates with your own statement above but as of now I am more unclear. Indeed I fear that the ECB has disowned the Irish banks and the CB is now having to provide funding for both solvency and liquidity.

    I would welcome clarification on this issue.

  15. One of the most salient features of this whole mess of crisis followed by institutional can kicking is the speed with which “solutions” quickly become useless. The bank guarantee got 2 years 2 months. NAMA hasn’t been around for 18 months and already it has been rendered irrelevant. Capital injections into the banks ? A few weeks. Olli Rehn’s assurances about the bailout? 4 days.

    The banks are banjaxed. They are going to continue to leak deposits.
    (Who puts up the replacement capital? The taxpayer?) They aren’t lending. The housing market is in freefall. Small business are going to the wall in their hundreds. The sovereign edges closer and closer to default.

    How would a round of debt to equity swaps work ?

  16. @Paul Hunt

    “It will be time then for a thorough strategic review of industrial policy”… after… “the immediate priorities of ..fiscal sustainability and a functioning banking system.

    You’re right, Paul, and I’m not disputing what you say. Leaving aside quibbles about “manufacturing and “tradeables” definitions in Colm’s comment, I intuit, I hope without immodesty, that he agrees that employment generated by our “legacy” industrial strategy is just that ( a legacy, out of date, call it what you like) an employment effect that has been “over” ( he uses the term “peaked”) since 2002.

    That is what is causing the understandable sustained unemployment consternation (NOT only in Ireland) but in Ireland this is translating into the emotive “emigration” wailing, at least as we in Ireland have historically seen and defined it. (Chinese, Indians, Pakistanis, Africans and Latinos, of course, see “emigration” very differently).

    So, I agree that fiscal sustainability and resolving the banking crisis are priorities but please don’t lose sight of the underlying structural and strategic weaknesses that can only be addressed by a recognition that our existing “industrial strategy” is bust.

    Finally, from my experience of running relatively large international enterprises, leaders MUST recognise the immediate need to put appropriate mechanisms in place early to deal with fundamental threats that are looming even while we deal with the “immediate priorities”.

    If we don’t, these threats will become the next “immediate priority” FAR sooner than we would wish and could be decisive for even more generations than the current fiscal and banking threats.

    Right now, perhaps understandably due to the present chaos, we’re in denial about these underlying threats.

    Let me assure you (from “out here”), however, that planners of global strategic “industrial” investment are very much aware of how the leaders of Ireland Inc. face up to these threats. NOW. And smart (arse) innovation, cloud computer and R&D slogans are not going to convince them.

  17. @ Ronnie O’Toole

    Jobs in the exporting FDI sector are back to 1997 levels.

    Every time Tesco opens a new shop, UNCTAD data includes it as a ‘greenfield’ FDI investment, which of course it is but our surplus on food and drink trade with the UK is evaporating fast and as Ireland’s exports in the sector dipped 15% 2009, the UK posted a 6% rise.

  18. I’ve come to realise academic types like citations, so to quote Harvey Norman – “Once it’s gone, it’s gone”

    Any prudent plans should assume that the deposits/snr debt fleeing the Irish banks isn’t coming back any time soon. ‘Overcapitalisation’ of banks will help stem the flow of deposits, but I don’t see it attracting new deposits. Attracting new funds would require some form of European guarantee and the offer of higher interest rates. This seems remote. Overcapitalisation should assist interbank lending, but over-reliance on very short term funds isn’t exactly a solution.

    Fire-sales of Irish loans will be extremely expensive – way more than expected losses. Banks’ foreign loans might achieve better prices, though we’d need to figure out how much non-nama/non-securitised stuff there is. A knock-on problem of getting ‘reasonable’ discounts is that they inevitably end up selling the higher quality assets.

    So, at present, I don’t see any option other than continued support. It would be helpful to get this formalised and reduce the uncertainty.

  19. @Richard,

    We’re going off-piste here, but I agree. Ronnie O’Toole makes some valid points, but quoting UNCTAD figures from 2008, at the cusp of the collapse of the Great Moderation, doesn’t entirely convince me. And the deadweight costs the sheltered sectors impose on the tradable sectors are not communicated solely via wage costs.

    But I do concede that Ireland has been remarkably successful in leveraging its position at the intersection of the trans-Atlantic economic space defined by the US and the UK with the economic space defined by the EU. The question now is: will this be a sufficient basis for future economic success (as many Irish policy-makers and economists seem to think) or does it need to be recast in the context of Germnay’s global strategy for the EU (which I believe is necessary – and to which I gather you also subscribe)?

  20. @Michael,

    The annual figures I calculate, as published by NIB/FDI Intelligence, remove the retail sector from the figures (as well as other obvious stuff, e.g. mining, oil exploration etc, where choice of location of investment is not mobile). Our figures show that, per capita, we are one of the most attractive countries in the world for FDI. Further, Irish exports have outperformed the Eurozone average by a large margin over the last 2 years.

    Where you are right is that employment has largely stagnated over the last decade or more, as we shift from medium-skill, more labour intensive production to higher productivity. However standard analysis would suggest you examine peak-to-peak or trough-to-trough shifts. The employment experience as of 2009 (your figures) are after the largest collapse in world trade since the depression. Concluding that we have to change our industrial policy (you aren’t in your post I know) based on this would be flawed. Data from 2008 (before the great collapse in workld trade) suggests that aggregate manu employment in virtually all other European countries are far below 1997 levels.

  21. @Paul

    My point in using the UNCTAD 2008 figures is to show that our share of the pie is very large relative to population size, at a point when our HICP was at its most disadvantageous. The size of the pie subsequently fell, which nicely sums up the story. We gain a large portion of FDI given our size, but depend on the wellbeing of the international economic climate.

  22. @ Ronnie O’Toole

    It’s good to have services export growth.

    However, data from for example the aircraft leasing industry can distort the picture.

    Goodbody estimated in 2007 that the aircraft leasing companies based in Ireland were managing a combined fleet of 1,600 across global markets.

    Nearly 500 jobs are anticipated to be created over the next three years in the aircraft leasing industry in Ireland, according to the Irish Aviation Authority (IAA). In 2010, about 1,000 people were employed in the leasing industry and the authority predicted a growth of around 45% – – that may well be the usual bs from a state agency!

    Avolon, the aircraft leasing group headquartered in Dublin, today announced an additional capital raising of US$465m, bringing the total value of funds raised since it was established in May 2010, to in excess of US$2.5 billion.

    @ All

    It seems that we will be in big league company in the debt stakes in coming years.
    The IMF said today that US public debt will exceed 110% of GDP by 2016.

  23. @Ronnie O’Toole
    @Michael Hennigan

    OK, Ronnie. Educate me. (You already know I’m not an economist or an academic and I’m not even sure I’m commenting on the right thread!).

    Let’s say UNCTAD’s right and Ireland continues to be very attractive for FDI. But FDI-driven exports (the main driver of our growth) is NOT adding appreciable net employment ( PLEASE don’t quote the few hundred Intel or Valeo jobs, or even a putative 8,000 jobs in cloud computing as a solution for 450,000 unemployed).

    As a former boss of reasonably intelligent senior managers, Id be inclined to ask a Vice President ( in charge of industrial policy): “So since our industrial policy is successfully attracting FDI but not adding net employment), we have a problem? Or Not?”

    If he said “NOT”. I’d congratulate him, tell him to carry on, conclude that our industrial policy was fine and that our strategic objective must NOT include increasing net employment!

    If he came back to me afterwards and said we needed to change our policy because it wasn’t creating jobs, I’d fire him.

    Does this help? Would I be wrong?

  24. @Richard

    I would tell you that the export sector in a developed economy must compete in high productivity employment. This will create a lot of income, tax receipts etc, but won’t create a huge number of jobs. Thats not to say that there is anything ‘wrong’. Most employment in a modern, developed economy is domestically facing, and therefore the cure to high unemployment is the savings rate falling to more normal levels, not Ireland diving into employment intensive industries where we have no hope of outcompeting India, China etc.

  25. @Ronnie,

    This deserves a thread of its own – and possibly even more than one. (Shame on Mr. Fedigan for leading us astray 🙂

    I realise we have to get through the fiscal and banking crises, but, for me, the real crisis is unemployment. It’s a bit like the hoary anecdote: ‘this is the long run, Keynes is dead and we’re all f***ed’, expect, in this case, ‘Mary Harney has retired and we don’t know where we are between Boston and Berlin’.

  26. @ Ronnie O’Toole

    Net jobs growth in the tradeable goods/services sector in 1998-2007 was 11,000. Even in 2006, when 83,000 jobs were addded in the economy, 3,000 were added in the FDI sector.

    Andy Grove, the cofounder of Intel asks what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed?

    http://bloom.bg/ePcsNA

    Globalization is no longer low manufacturing jobs in Asia and high-paid knowlege jobs in the West.

  27. @Ronnie
    @Paul
    Et al.

    “Shame on”…me. Fair enough. You’ve all been very nice to me, out of my depth as I am.

    Anyway, you know where I’m coming from and, with your permission ( and guidance), I’ll continue to learn from you and touch base on my hobbyhorses in threads that seem appropriate from time to time. Thanks.

  28. @Richard,

    Please don’t take offence. ‘The words that I spoke, shure, were only in jest.’

    I would like to see one of our learned contributors kick off a separate thread on this topic. I just sense a naive optimism that we can wind the clock back to the early 2000s before we took off on the ‘Twin Bubble’ detour and pick up where we left off.

  29. @Colm McCarthy

    “This has gone to repay wholesale deposits at Anglo and elsewhere which lenders declined to roll over, and these folks now hold claims against the CB which, as Willem Buiter points out, are not claims against the ECB.”

    This is really getting a bit bonkers. Who are “these folk”? I would have thought that the guys who wouldn’t roll, or withdrew deposits then had credits made by the Irish (commercial) bank to accounts in other banks, probably in other jurisdictions. Once that has been done I don’t understand how it is possible to distinguish those euros from others within this new bank – or in the banking system generally.

    Isn’t it the case that the people with claims against the Irish central bank are now effectively the ones who are relying on the existence of these newly created euros to support the functioning of the Irish banks that took the liquidity. Those who still have deposits with those institutions for example.

    …..”But what are they? Could banks which hold them not convert at par into claims on the ECB by tendering at the next sterilisation auction? Or could a nervous holder of Irish CB ‘money’ sell these claims below par? ”

    I would ask “who are the holders of Irish CB money?” Euros now in Switzerland deposited n – say, UBS that were at one time in Ireland just seem to be Euros.

    If you are nervous about holding Euros with a dodgy issuer diluting them, presumably you swap them int more or less anything else.

    I am not even slightly convinced I haven’t missed something here. any ideas?

  30. @ Paul Hunt

    Absolutely no offence taken, Paul. I meant it that I’m learning from you guys.

    From Ronnie’s reply ( though he didn’t need to imply I was advocating employment-intensive industries to compete with India and China!), I learned that an industrial policy may not be ‘wrong’ if it doesn’t create a “huge number of jobs” but creates lots of income, tax receipts etc. And, as I sorta knew, that most employment in an advanced economy is domestically facing.

    This brings us to Andy Groves’ depiction of an Irish society of highly paid, high value workers and masses of unemployed which I, believe, could at least be partially held at bay by a radical change in the way we view “emigration” as part of, you guessed it, a new “industrial” strategy.

    A bientôt, on another thread peut-être!

  31. @ Colm McCarthy

    “But what are they? Could banks which hold them not convert at par into claims on the ECB by tendering at the next sterilisation auction? ”

    I’m completely confused. So I am a german holder of a CBIELA deposit. Surely I can to a bank transfer from CBIELA to Deutsche or the German NCB or the ECB itself? Seems to me that if there are any doubts over CBIELA creditworthiness this has been transferred to the ECB. So the ECB have stopped collaterlaised lending to the banks directly but instead have deposits with CBIELA and I can see why they might prefer that. Buitear must be wrong in that last poser he makes.

  32. @Ahura Mazda:
    “I’ve come to realise academic types like citations, so to quote Harvey Norman – “Once it’s gone, it’s gone””

    That’s not Harvey Norman: it’s Homestore+More http://www.homestoreandmore.ie/ Harvery Norman is the chap to whom a popular piece of advice (popular in a less polite form. that is) is addressed, advice that B Cowen has finally adopted.

    Nice to be able to contribute in a debate on the finer points ….

    bjg

  33. BW2

    Don’t forget that if CB Irl looked the other way and held its nose in the repos for these “othere assets” then the issued “liquidity” is a euro liability on the Irish state only – no the ECB. It is an addition to national debt.

  34. @ grumpy

    How do the debt dynamics look ? How much capacity would there be before the sovereign is super saturated with bank fallout ?

  35. @ Richard Fedigan etc.

    Appreciate it should be a new thread but…

    What are the Irish world class at (in a good way)?

    Amongst others:
    Sport
    Agriculture
    Culture
    Software development
    Building things.

    Building has taken a bit of a knock.

    The others are things we can build on further.

    They provide plenty of low-cost employment (though one day I’d like to see higher wages), particularly Culture, Sport and Agriculture. They add to our international prestige. They are diversified across the country. We can export them, but as a whole they can’t be nicked by even lower cost economies. They add to the attractiveness of the country as a destination – people don’t come for the weather.

    If we’re imagining a new industrial policy, then these things offer a way forward.

  36. @ grumpy

    Yes it is sovereign debt albeit “asset” backed

    @ seafoid

    They’ve started now so they will finish. Nothing will get in the way of stopping a bank collapse. First ECB exhausts all possible repo support and this ain’t normal repo – it won’t be unwound for a very long time. Next they allow the CBI to “print” money even though that was not really the way it was meant to be. Next they will allow the government borrow from the EFSF to recapitalise the banks.

    At this stage it is not just wholesale and foreign money which has taken flight. The run on the banks has spread big time to the ordinary depositor. Will 12% capital ratios entice them back?

  37. @MIchael

    Fair point that some industries can distort the data.

    However measured productivity in services isn’t very different from manufacturing (5% higher) using data from the twin Forfas reports of the Annual Enmployment Survey and the Annual Survey of Economic impact (data for 2008). This difference can easily be explained from the absence of an old ‘tail’ of manufacturing employment among FDI firms that wouldn’t have the productivity of a Pfizer or Intel.

    As such, the data for services doesn’t on the face of it seem any more prone to transfer pricing or such that does the manufacturing data.

  38. How is software licenses classified when calculating the value of exports? Is it a separate item or grouped with other items?

    Previously when working where I had to know I knew that a software license was for VAT purposes classified as a remotely provided service. I don’t know if this has changed.

  39. seafóid

    If it is supersaturated we will know because the losses will crystallize presumably!

    Its an apt description and I wouldn’t be amazed if another Wile E Cayote moment might make that happen. Apparently people are still valuing detached houses in parts of inner North Dublin around 1.5 – 2m and Nama is speculatively hoarding property assets to prevent the sort of clearing prices that might entice actual buyers.

    Just how long can that go on?

  40. The CB is simply “magic”ing these 51 billion into existence and these Euro denomiated credits are going into the banks in order to defend against an on-going run. The Irish tax payer is on the hook alright but at a rate that is likely to very favorable and over a term that is likely to be interminable.

    The ECB is effectively turning a blind eye in order that it does not have to fork out. These funds will eventually find their way into the Eurozone proper and will dilute the currency. This is a form of QE through the back door. It is a cheap way for the ECB to get money into the Irish banks without upsetting the Germans in the short term.

    Or maybe I am missing something here and this turns out to be the only way that our banks get readies? Wither ECB/IMF funding?

    The precedent being set here is very interesting. It would be possible for a National bank owned by the State to generate issuance sufficient too restore considerable amounts of lost liquidity in the economy. Its been done in other countries in the past and even in Ireland ( wasn’t the ACC such a lender?). Since the CB seems to have the program up and running, why not do it now in Ireland. There will be no inflation problems if done correctly. The economy is instantly re-configured. Hey presto!

    We need people to save as hard as they possibly can in order to restore investment funding for our entrepreneurs. We do not need ways to discourage saving. We can stimulate the economy, but not through the banking system as currently exists. This is like giving a blood transfusion to a corpse. Better that a national bank funds major projects top down. If there are healthy banks around they too can obviously participate but only after the law has been changed to outlaw fractional reserve lending. In other words the only organ that will create new money in the economy is State owned and does so without borrowing at interest.

  41. @grumpy

    “Don’t forget that if CB Irl looked the other way and held its nose in the repos for these “othere assets” then the issued “liquidity” is a euro liability on the Irish state only – no the ECB. It is an addition to national debt.”

    Thats why it seems mad to sink the money into these banks. However we do not know how these deals have been configured. Maybe they will be sanitized as ColmMcCarthy says and end up expanding the money supply in the Eurozone. Keep going like this and everyone will be doing it. What then interest rates?

  42. Mokabaybob

    “Maybe they will be sanitized as ColmMcCarthy says and end up expanding the money supply in the Eurozone. Keep going like this and everyone will be doing it. What then interest rates?”

    Unless the ECB does the mopping up I don’t see how this doesn’t expand monetary base.

    Worth remembering though – and bond vigilantes just don’t get this – that it is the private sector banks that “print” money via the fractional system. There was excessive money supply during the boom because of this. Recently it has been the banking system that has been “anti-printing” during the credit crunch. Expanding monetary base really is pushing on the proverbial string.

  43. @ Michael H

    Greetings from Erin.

    ‘Every time Tesco opens a new shop, UNCTAD data includes it as a ‘greenfield’ FDI investment, which of course it is but our surplus on food and drink trade with the UK is evaporating fast and as Ireland’s exports in the sector dipped 15% 2009, the UK posted a 6% rise’

    That’s not all that happens, as I’m sure you will agree. There is a loss of employment in the surrounding domestic SME sector, as local family businesses go belly up.Monopsony is hard to combat. Traditional considerations of loyalty, long service, face to face trading etc get tossed into the dustbin of history. Along with that goes homogenisation of the supply chain with a race to the bottom on cost.

    There has to be a loss of social capital when formerly thriving towns are drained of market relevance, with a concentration of consumer spend in a few regional centres. Put that together with closure of rural hospital units, post offices, garda stations, as well as fall in property values, a lack of credit availability (red line zones) and you get a kind of economic desertification.

  44. If you want to get words of wisdom in this country you do not listen to economists or even Irish people but Dutch with South Kerry accents.

    Rebuilding Cahirciveen Power station was the topic of conversation –

    There was once a thing known as the physical economy – even at a micro level multiplied many times this place could kind of work – it will never be Holland but.
    The problem is that money is feeding interest , not capital development – its as simple as that.
    The banks have no interest or understanding of wealth creation – they exist to feed , they do this via credit/debt creation which by definition extracts capital.
    We were always under the Kosh of Banks in this bog hole but since 1987 there has only been the voice of the banks with predictable results.

    The first thing we should do is create a Industrial bank and use its interest free currency to both build infrastructure and hide the fiscal debt withen its walls – the ECB can have its 3% deficit prison if we can game them.

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