In an otherwise interesting opinion piece in the Irish Times, Elaine Byrne takes a lurch into banking matters in the closing paragraphs.
The elephant in the room is default. It was reported on Wednesday that since the last week of January, Irish banks have issued €18.35 billion worth of government-guaranteed debt.
This suggests that the banks may effectively be issuing sovereign paper with the approval of the Government, the Central Bank and the ECB. In other words, the banks have effectively increased Ireland’s public debt by about 11.5 per cent of GDP in the last few weeks.
Since they are unlikely to be able to repay this debt any time soon, a future government will have to. To appreciate just how extraordinary this is, €18.35 billion of government-guaranteed debt is more than half the entire tax revenue for 2010 at €31 billion.
This kind of arithmetic – certainly not limited to Elaine – is unnecessarily raising fears and adding to confusion.
The central question is how the actual and contingent liabilities of the Irish State are affected by these auto-bond issues. As I noted yesterday, the State is now effectively on the hook for the losses of the banking system, which amounts to saying the liabilities of the system are explicitly or implicitly guaranteed. When funds (liabilities) leave the system they have to be replaced. The main source of replacement is now the ECB/CBI. Thankfully the ECB appears willing to provide the funds, but requires a government guarantee because of a shortage of eligible collateral. When it comes down to it, the auto-issue of bonds is just a way of providing the guarantee while staying within the ECB’s rules. One form of guaranteed liability is being replaced by another and the effective liability of the State has really not changed. Things are bad enough without double-counting arithmetic.