The ECB Have All the Means to Prevail?

The key dynamic of the current Irish economic situation is that Irish governments keep adopting positions in relation to banking and fiscal matters but then abandon these positions because “the ECB won’t agree.”  We are told that we have little choice but go along with the ECB because the Irish banks are borrowing so much money from them and, apparently, they keep threatening to pull the plug on the Irish banking system if we don’t do what they want.

This position is neatly encapsulated in this statement yesterday by Catherine Day, secretary-general of the European Commission:

However, she held out little hope of bondholders sharing the burden of Ireland’s debt. “This is primarily for the ECB to decide. They are providing the liquidity to keep Irish banks going and they have all the means to prevail with their arguments.”

Ok then, let’s envisage a scenario where the Irish government does something that the ECB doesn’t want and then the ECB decides to pull funding from the Irish banks.

At this point, the Irish banks would not be able to come up with the money to pay back the ECB. The ECB could claim the collateral that has been pledged for these loans but would have great fun trying to flog over €100 billion of dodgy eligible collateral, including wonderful stuff like NAMA bonds and own-use bonds. It would be hard to figure out how much the ECB would receive for this stuff but I’d bet they’d make pretty serious losses.

Meanwhile the Irish banks would be bust, with all their good assets gone and deposits flying out the window. The Greek and Portuguese banking systems would also be well on the way to meltdown too, as people tried to figure out when the ECB was willing to support peripheral banking systems and when it would not. Sovereign debt markets would most likely go berserk.

What part of this scenario would the ECB really be willing to put up with? If you don’t think they’d be happy with it, then perhaps they don’t really have “all the means to prevail” and perhaps our governments should stop being so scared.

At a minimum, I think Enda Kenny should come out and be clear about exactly what it is that the ECB is threatening and why he is so scared of it. Such a move might have positive effect of getting the ECB to explain whether it is indeed the case that they keep threatening to destroy the Irish banking system and, if so, why.

58 thoughts on “The ECB Have All the Means to Prevail?”

  1. Is the ECB exceeding its powers as a central bank.

    Surely a national central bank wouldn’t demand insolvent banks pay bondholders in return for providing a lender of last resort service for eligible assets.

    Where does it say that the ECB can dictate “credit management exercises” in return for providing its mandated lender of last resort service.

  2. Karl,

    I find your position on this hard to understand. I agree that it would be far from costless for the ECB to pull liquidity support to the Irish banking system, and this does give us a degree of leverage. But there are ways the ECB could make live difficult (interest rates charged for extraordinary support facilities, conditions for deleveraging, etc.) Beyond a certain point, can we be so sure that they would not pull the plug on what is afterall a relatively small part of the banking system of the euro zone rather than see its exposure continue to rise? They might not mind making an example of us for moral hazard reduction purposes, while at the same time strenthgening their commitment to well-run banks and their depositors.

    If I recall correctly you have previously referred to the ECB’s stupidity for allowing itself to get into this position, which seems to suggest you think tehy should have pulled the plug a long time ago. We have a tendency to expect a lot in terms of transfers from other countries; I wonder if we would be so generous. While the funding commitment is more vague than we might like, it appears we got a lot in terms of extended support for our broad crisis resolution policy this week. I am not sure it is wise to keep poking them.

  3. If the ECB as a central bank that puts a lot of store in its credibility, decides that it cannot allow one member of the 17 to defy the will of the others — it wouldn’t be just Trichet, Stark and Bini Smaghi who would be calling the shots — I would guess that the governing coucil would pass the issue to the Eurogroup.

    The question would be how long would it take for such a stand-off to be resolved and how many jobs in the private sector should be sacrificed as a result of a credit squeeze and market panic?

    This is a type of issue that is reminiscent of the lead up to the Civil War; the dreamers believed that the British Empire could be forced into a capitulation while the realists led by a tough revolutionary, Michael Collins, saw the virtue of compromise and the value of half a loaf rather than no bread.

  4. As Colm McCarthy said this is finger in the dyke stuff. In fact it is more of a nuclear bomb standoff – all sides annihilated.

    How much are we into the ECB. We know from Michael Noonan that we have 200b in liquidity money and then the bonds they purchased on the open market. Lets say 20b. They would be lucky to get 50% on all that paper.
    Those little promissory notes with harps should be worth 10% of the face value.So a loss of north of 110 b would wipe out their capital and require our Euro partners to refinance the ECB at a time when their banks are imploding (spanish).
    But, we don’t do radical

  5. @ John Mc.

    “you have previously referred to the ECB’s stupidity for allowing itself to get into this position, which seems to suggest you think tehy should have pulled the plug a long time ago.”

    Or that the ECB should not have provided enormous amounts of funds to pay off senior bondholders in insolvent banks. I’d recommend easing off on attributing mutually contradictory positions to other people as a style of argumentation.

    As for your position that they’d let the Irish banks fail for moral hazard purposes, perhaps you don’t buy in to the argument that this would cause a European financial crisis. My guess is the ECB don’t want to find out whether you’re right.

  6. Karl,

    My comment was meant to be constructive. You know I think very highly of your contributions, which is why I wanted to push you on this one.

    Feel free to let it drop here: But are you saying that it would have been better if the ECB had not provided liquidity support giiven that part of it was used to meet the ECB’s goal of protecting senior bondholders? I have no doubt this would have led to a situation in which the senior bondholders would not have been paid back; but there would have been a big risk that a lot of others would not have got their money back as well.

  7. Maybe I’m not understanding something subtle about our relationship with lenders and the ECB but it seems pretty clear to me that we have no real option but to do as the ECB says.

    Surely the important threat that the government have to deal with is maintaining access to some financial market\lenders in order to cover the deficit and that isn’t going to just magically disappear if we default on the existing debts relating to the banks. If we default in any meaningful way the markets will refuse to play with us for quite some time which would leave us with only the ECB\IMF as an option for any funding we might need. And we will need regular funding for our deficit, so the ECB certainly do have a strong hand in this poker game.

    Without a friendly lender somewhere the €15bn deficit we need to cover this year’s €15bn deficit will be impossible to get. Services would not be delivered, civil servants wouldn’t be paid, lights _would_ go off. That is a doomsday scenario for the country.

    If we were running a budget surplus then a default might just be viable but as it stands we cannot afford to unilaterally do something that would close down our access to markets and annoy the ECB. From that perspective making the statement that the ECB have all the means to prevail seems perfectly accurate to me – when they say jump the government have to acquiesce and ask “how high?

  8. I would certainly like to see the ECB explain its stance, which seems quite indefensible to me. The best shot I can make, acting as a sort of Devil’s Advocate, is: if you really believe your banks are insolvent, they shouldn’t be trading, so liquidate them. If you’re not prepared to do that then you’re not entitled to burn the bondholders.

    But that’s just a guess. Does anyone have a more plausible ECB argument?

  9. @ John

    I have not, to my knowledge, written any posts complaining about the size of the ECB’s exposure to the Irish banks. They have been faced with difficult decisions in relation to supporting the European banking system and I understand how the current situation came about. That said, had the ECB worked with other EU organisations to develop a coherent and fair policy towards senior bondsholders of insolvent banks (for example before September 2010) then its current exposure would be smaller and I’m pretty certain I have made a few comments in the media to that effect.

    Anyway, we are are where we are and the Irish sovereign is in extreme difficulties. The ECB’s threats to hike the cost of its support or to scale back this support, perhaps to the point of allowing a banking collapse here, don’t strike me as good European policy.

  10. @John McH, Karl W

    If the Irish gov controlled the banks and chose to do nothing to liquidate or resolve them then it made a bad choice. It made a bad choice to guarantee the liabilities.

    It is govs job to stand up to pressure that is against national interest and they either didn’t understand what was going on, or were not willing to do so.

    Having kept the banks “capitalised” you can hardly blame the ECB for pushing for banks to honour their obligations.

    The Irish side all along seems to have been out of its depth – bluffers found out.

    It would have been preferable if Ireland had not suspended capitalism, thereby pretending the banks weren’t bust and having to keep up appearances by meeting their obligations. Of course the bonds should not have been paid off, but it wasn’t the ECB’s job to point that out – they were and are content to let suckers be suckers.

    Maybe the ECB and EZ could have been faced down as Karl suggests but Ireland had a golden opportunity to turn up for negotiations with a mandate and carrying a threat. Its politicians chose instead to concentrate on competing with each other as to how silent they could be about the consequences of losing credit facilities. They then turned up and were transparently in no position to demand anything.

  11. @Karl Whelan
    Good post.
    Is the ECB threatening to pull the plug on the already dead Irish banking system in a manner that ensures maximum chaos in Ireland?

    That is certainly the tone of the messages coming from the Euro hawks.

    If so, one can only conclude that the ECB is a dysfunctional, irresponsible and dangerous organization.
    The answers need to be flushed out from both the Irish government and the ECB.

  12. @ Kevin O’Donoghue

    The ECB is an unusual animal. It represents the political deal struck in Maastricht to establish a common currency without an associated federal political structure i.e. a bank the independence of which must be totally beyond question. It is effectively and legally responsible to nobody other than its governing council (with some reporting responsibilities to the European Parliament).

    That this credibility had to be earned is beyond question. That Jean-Claude Trichet has been one of the architects of achieving it is also beyond question. This could not include include dealing with arguments such as the suggestion that it should take equity stakes in Irish banks (even if this is camouflaged by having the EFSF put up the money).

    It is not in the business of bailing out national banks. If the crisis has demonstrated anything, it is that this is the responsibility of the governments supervising them and to whose economies they are systemically fundamental.

    Jean-Claude Trichet has, literally, the ability to move markets. He is responsible for the second largest reserve currency in the world. I suggest that Irish commentators try and get a sense of proportion and avoid making us look any more ridiculous than we already do. A policy line which could colloquially be expressed as “Hold me back or I’ll do us all an injury” is not likely to help.

  13. Karl,

    ….The ECB’s threats to hike the cost of its support or to scale back this support, perhaps to the point of allowing a banking collapse here, don’t strike me as good European policy…..

    It is not astonishing though, considering the history!

  14. Reposted from a comment which crossed with this post:

    (Disclaimer: Not an expert on anything.)

    […]

    Regardless, the ECB is very unlikely to shut off the liquidity to the banks soon as long as the government continues to play ball. But this has more to do with saving its leaders’ own hides than honouring quid pro quos. Frankfurt’s situation is strangely similar to that of Ireland, partly because the weapon it has in negotiations is a hand-grenade. Since the only way the ECB can get its money back from the Irish banks is to lend them more, cutting off the banks’ funding would immediately blast a big hole in the ECB’s balance sheet. The hole wouldn’t sink the ECB, but (see Buiter) repairing it would amount to a dramatic and unscheduled fiscal transfer from the core to this country via Frankfurt. (However much we might not enjoy the experience.) Crash money-printing might be involved. This would be extremely bad politics. Resignations might not be the end of it. And that’s cheerfully assuming that the systemic consequences of detonating Ireland would all be nicely contained. Small wonder that the ECB was trying to get the EFSF to pick up the task of lending to Irish banks last month. This was refused, so we and the ECB remain locked in our deadly embrace until depositors and private lenders return to the Irish banks, or until something else happens first.

  15. Reposted from a comment which crossed with this post:

    (Disclaimer: Not an expert on anything.)

    […]

    Regardless, the ECB is very unlikely to shut off the liquidity to the banks soon as long as the government continues to play ball. But this has more to do with saving its leaders’ own hides than honouring quid pro quos. Frankfurt’s situation is strangely similar to that of Ireland, partly because the weapon it has in negotiations is a hand-grenade. Since the only way the ECB can get its money back from the Irish banks is to lend them more, cutting off the banks’ funding would immediately blast a big hole in the ECB’s balance sheet. The hole wouldn’t sink the ECB, but (see Buiter) repairing it would amount to a dramatic and unscheduled fiscal transfer from the core to this country via Frankfurt. (However much we might not enjoy the experience.) Crash money-printing might be involved. This would be extremely bad politics. Resignations might not be the end of it. And that’s cheerfully assuming that the systemic consequences of detonating Ireland would all be nicely contained. Small wonder that the ECB was trying to get the EFSF to pick up the task of lending to Irish banks last month. This was refused, so we and the ECB remain locked in our deadly embrace until depositors and private lenders return to the Irish banks, or until something else happens first.

  16. @ DOCM

    “A policy line which could colloquially be expressed as “Hold me back or I’ll do us all an injury” is not likely to help.”

    Whose policy line are you attributing this to? The ECB?

  17. The question is a narrow one surely: is this ECB threat (assuming they are making it) credible?

  18. @Kevin

    I would answer — more than likely not. But even a relatively small probability that they would make good on the threat (if it exists) should give us pause.

  19. Why does the ECB allow the ICB continue to issue liquidity which is not backed by any debt issue?.
    Surely this is printing money through the back door.

    As a tactic why not print limitless liquidity to Irish financial institutions and behave as if the economy was in good working order.
    The liability surely then rests on the euro as a debasement and ultimately with the ECB as the monetary authority.

    As you suggest we are a busted flush but not without the power to call the ECB’s bluff. As you also suggest if they pull the plug on Ireland it may be mutual assumed destruction.
    We are being treated as a debtor who has reneged on its loans and whose ‘legs’ should be broken if necessary to maintain discipline.The notion we are a political partner in the EU is just that,notional.
    Effectively the actions of the ECB are undemocratic.

    So maybe the best thing is to plan for default with our own interests central,plan for exit from the euro and use every conceit and monetary and fiscal operation available (such as ICB debt issuance) but talk the talk of partnership and austerity.
    Just buy enough time to build a wall of protection for Ireland in the event the euro collapses or the ECB pulls the plug on us.

  20. @Kevin O’Rourke

    “The question is a narrow one surely: is this ECB threat (assuming they are making it) credible?”

    Precisely the question all the other EZ players were always bound to ask themselves about the Irish “team” turning up accompanied by mutterings about unilateral haircutting of bonds.

    Why is and was this elementary tactical error so hard to understand in Ireland?

    If the question was as you say – a narrow one – since it was Ireland campaigning for renegotiation not the EZ or ECB, why is it not obvious that if the opening move was an incredible threat by Ireland, it almost didn’t matter whether the potential retaliation by the ECB was credible. The game never started.

  21. @Karl

    I had in mind this paragraph from your recent IT article:

    “This kind of proposal will hardly be popular with our European partners. However, it would achieve many common goals. It would restore the credibility of the ECB, who would hopefully learn a few lessons about lending to insolvent banks. It would restore the Irish banks to stability without seeing defaults on senior bank bonds, which has been a high priority for the European authorities. And it would give the State a chance to avoid a sovereign default, which should be in everyone’s interests.”

    I may well have read too much into the third sentence.

    Full article here: http://www.irishtimes.com/newspaper/opinion/2011/0315/1224292162766.html

  22. What if the Irish government were to issue say €50 billion in bonds bearing a 2% coupon above the ECB rate and the Irish Banks were to buy these bonds?

    Irish Banks would make a profit of €1 billion on these bonds per annum.

    The Government would cut it’s interest bill in half.

    The ECB would be subsidising all this!

    Would this amount to Burden sharing by the backdoor?

  23. @ John

    Well, I think that’s a pretty reasonable paragraph — one can only hope that whenever another banking crisis comes around, that the ECB won’t facilitate wholesale repayment of bonds by insolvent banks.

  24. DOCM,

    Since your comment was addressed to me I presume it was an attempt to deal with the question which Karl Whelan and I would like answered: just what is the ECB threatening (and what’s their justification)? So thanks for the response, but for my part I found it non-responsive.

    With regard to this: “I suggest that Irish commentators try and get a sense of proportion and avoid making us look any more ridiculous than we already do.” I’m afraid your suggestion is a non-starter. All the way back to Dean Swift and Edmund Burke, Irish commentators have felt that a sense of proportion was the last thing they needed. (I’m sure you know that Swift wasn’t seriously advocating cannibalism.) Burke explained the point rather eloquently: “The calm mode of enquiry would be a very temperate method of losing our object; and a very certain mode of finding no calmness on the side of our adversary. Our being mobbish is our only chance for his being reasonable.”

  25. @ Karl Whelan

    It is hardly the policy line being pursued by the ECB! It emanates in a rather amorphous fashion from right across the political spectrum in Ireland and all sectors, including academic, of society (and , regrettably, until very recently, government). It has its source in the belief, not unfounded, that German (and other) governments are unwilling to force losses on their banks but ignores the fact that the reason that they do not wish to do so is that they in turn would have to recapitalise their banks and make their own taxpayers cough up. (And I do not want to hear the argument that it was all the fault of the banks. As I have said on another blog, they did not paper the walls with the money but dispersed it to an enthusiastic Irish public who spent it like there was no tomorrow).

    The threat (“hold me back”) is (i) to default or (ii) “burn the bondholders”.

    It is an impossible position to defend against a background where (i) sectors of Irish society pay themselves well above levels in other European countries on borrowed money from the same sources that it is proposed to burn and (ii) of a political unwillingness to confront even the most obvious choices e.g. a property tax and payment for the precious resource of water.

    And lastly; Ireland cannot injure Europe. She can only injure herself.

  26. @ DOCM

    “It is hardly the policy line being pursued by the ECB! …. The threat (”hold me back”) is (i) to default or (ii) “burn the bondholders”.”

    Perhaps you’ve missed that the position of the ECB appears to be “Do what we say or we’ll blow up the European banking system”.

    As for your points about political unwillingness to make tough choices, I think you know that I consider this to be moralistic nonsense.

    http://www.irisheconomy.ie/index.php/2011/03/22/behaving-like-teenagers/

  27. @ Kevin Donoghue

    I am a great fan of both writers. But you are in the wrong century. (It might be worth checking out to see if either was ever in debtor’s prison! Creditors did not fool around in those days).

  28. @Karl re your last paragraph

    Maybe Enda Kenny is not so much scared about “threats” from the ECB but rather is uncomfortably aware that the ECB itself is scared that it will implode and bring the currency with it.

    Ireland and itś government would not want to be left in a position where it could, however incorrectly, be blamed for the currency collapse.

    It would certainly be more diplomatic for the government to be amenable, amicable and less argumentative as they cautiously identify where the exit door is while calculating the least contentious way to get there.

    One should only argue and negotiate energetically if there is a reasonable possibility of persuading the other parties. If the other parties are not open to persuasion then energy can be expended elsewhere.

    In a post Euro scenario Ireland would still need to bi-laterally negotiate with the USA, the UK, individual European states , bondholders and perhaps the IMF. This may explain why Mr Kenny quietly stated yesterday that the Department of Foreign affairs is embarking on a charm offensive to repair and restore connections.

  29. @ Kevin O’Donoghue

    The view from the Low Lands.

    http://uk.reuters.com/article/2011/04/01/uk-ecb-wellink-idUKTRE7300ZC20110401

    You probably know this quotation:

    ”In matter of commerce the fault of the Dutch
    Is offering too little and asking too much.
    The French are with equal advantage content,
    So we clap on Dutch bottoms just twenty per cent.”

    George Canning (1770-1827), British statesman, prime minister. coded letter, Jan. 31, 1826, to the English ambassador at the Hague, Holland.

  30. @ Karl,

    I heard the interview of Catherine Day by P. K. and she made excellent sense to me. She pretty much concluded to the effect that today’s solutions are not tomorrow’s solutions.

    I look at our disastrous management of our banks as a big problem we have imposed on the Euro zone/EU. This is compounded for the EZ by all the other losses it has to address, and in the context of USA monetary and trade policy.

    The least we can do now is to try to be polite while they try to deal with the problem. I think it is reasonable that they see it as primarily an EZ, rather than Irish, problem and that they require us to be patient for the next few years.

    There is another economic issue which I think needs highlighting: namely Trade Liberalisation policy. I think that the rapid opening up of trade by the old G7 countries with vast populations and near zero income is bound to lead to a vast transfer of wealth in one direction, which is likely to have a vast range of consequences.

    (Note: I do believe in making our science available, albeit with a five or ten year lag, to developing countries and in some trade with them. It is just that the rate of opening up can be economic (and other types of) suicide).

  31. @ Karl Whelan,

    I listened to the discussion on RTE radio this morning, with the politicians, Fionnan Sheahan, the lady from UCC and yourself. I thought what you said in the RTE debate made quite a lot of sense. Granted, it is hard for everyone to get their speak in, in that situation on a radio debate. The hour long debate runs by very, very quickly. The point you made towards the end, that as long as the ECB is a perceived threat, to pull the rug, as you put, it is difficult for small or corporate depositors to look at Irish financial institutions and feel confident about them. That is perfectly simple logic and I do go along with it. Would there be any merit in an analogy I thought of, that the ECB’s position providing liquidity to Ireland, is like that of a certain superpower providing troops on the ground in a volatile region of the developing world? I.e. It is quite difficult for that region to attain stability, owing to the fear the troops may be removed. And unless the troops are removed, you are still stuck, in trying to achieve the goal of stability. There is another phenomenon in logistical science to do with shipyards and container goods transportation, that it reminds me of. Say there was a series of ships carrying an order, which consisted of hundreds of containers of cargo. The ships proceed to unload their cargo at the dockside. But the dockyard becomes full, before all of the shipment is unloaded. Then you are kind of stuck in a bind. Some of the ships are stilling waiting outside the harbour to advance, and they aren’t moving. The stock that is left in the dockside cannot move either, until it all arrives and is accounted for. So the system is jammed up basically and nothing moves. This was one of the early failure scenario that some clever clogs envisaged in the first Internet back in the 1950s. So they tested out the network and found, surprise, surprise, it was a point of failure in the network, which they had to design for. I often wonder with ECB interventions, have they really got a clear picture for these ‘failure conditions’ when devising a policy to assist and repair peripheral nations in the EU region? The more I think about it, the more the ECB and Eurozone crisis looks to me, like a networking problem. BOH.

  32. Good article Karl and it is something I have been wondering as well. Of course we are getting no indept explanation from the gov or the ECB just that it can’t be done. Wouldn’t we all like to know why! Catherine Day also came out with the comments

    “But what is also undeniably true, even if it’s uncomfortable, is that it was Irish people and Irish organisations that took the loans, and nobody made us take the loans. We did it.”

    I presume I don’t have to go into what is so wrong about this statement but this is coming from an Irish person within the halls of power so you can just imagine what the rest of them think.

    Karl in the article you explain what could happen from an ECB perspective, but domestically how would you see it play out if we acted unilaterally?? Also the IMF were in favour of burning the bondholders so could we not go to them to receive our immediate financing??

  33. @ All,

    What I am saying is, that the ECB view the bondholders kind of like the ship yard views those few ships out in the harbour that cannot unload the cargo, until the there is enough space in the docks. But the docks cannot make the space until the ships can offload in the port. It should come as no great surprise therefore, to find that the captains sailing out in the harbour have gotten wise already, and are actively trading responsibility for this cargo that is going nowhere, between other ships that are buying it off them at a discount. That second set of cargo ships, who have more time to wait around and see what happens, know instinctively that someone somewhere will have to bend just slightly, to unlock the systems and allow movement to happen again. BOH.

  34. @ All

    the ECB policy, in my view, is as follows:

    when your entire banking sector goes bust (confirmed this week), it is no longer a private sector banking problem, and instead a quasi-soveriegn issue, due to lack of regulatory oversight and appropriate govenment policy, as well as some type of societal issue around general property prices/leverage and general governance attitudes.

    Now, the ECB wants to helps us out, as low base rates (03-06) and poor reciprocal regualtion clearly helped fuel our idiocy, so they provide large amounts of liquidity on a relatively open-ended basis. However, the ECB somewhat lost its never when it was clear our debt was becoming towards unsustainable levels, and tried to extract itself in double quick time.

    They have now been perusaded that such an approach would only make our, and their, situation worse, so they have recommited, via existing mechanisms, for the medium term, on the basis that we don’t risk wide-spread contagion to the rest of the stable, but fragile, Eurozone via senior debt defaults. They hope that hopefully our economy eventually benefits from a cyclical recovery and stabilises the debt trajectory without the need for a restructure, but even if a restructure is required, it will come 6 years after the initial onset of the crisis, and the Eurozone economy will be far better able to withstand it at that point.

    Now, please note, i dont necessarily agree with this view, or thinks its either fair, reasonable or the best solutuon, but i believe its the ECB’s view over the last 2 years.

  35. What would Catherine Day know she’s just a civil servant and does whats she’s told; ask Eamon Gilmore. Or do you surmise he now thinks differently about J-CT.

  36. Eoin says,

    They have now been perusaded that such an approach would only make our, and their, situation worse, so they have recommited, via existing mechanisms, for the medium term, on the basis that we don’t risk wide-spread contagion to the rest of the stable, but fragile, Eurozone via senior debt defaults.

    I see where you are coming from. It’s like being at a party you don’t really want to be at. But you have just good enough reason, that leaving early will result in some worse form of pain, or repercusion. So the easiest compromise is to remain attendant and be part of the crowd, even if your mind is somewhere else entirely. I have been at a few of those kinds of parties in my day. BOH.

  37. @Eoin Bond

    It is the level of commitment to continuing liquidity provision in the medium term that worries me.

    We were all on notice that the ECB was committed to unwinding the exceptional liquidity program for everyone (the addicts program) – that did not happen.

    I have not seen any documentary evidence that they will provide medium term liquidity (other than MN statement to RTE)

    Can you point me in the direction of a clear statement of intent from the ECB?

  38. @ CP

    it is unclear whether something explicit will emerge on that front right now, or whether we will have to make do with statements from the EU/ECB/IMF saying that Irish banks will “rely on ECB during deleveraging”, alongside the suspension of the minimum threshold in Irish debt.

  39. @eoin bond
    Thanks.
    Not very reassuring. Uncertainty to continue until all the deposits are gone.

  40. may be i am slow on the take up but if the ECB insists all bank bondholders are to be paid by the people who are already loaded with huge personal debt through buying their home maybe we should smell the stench and make preparations to get the hell out of the eurozone before we completely impoverish our children and our grand children thanks to our last goverment never has a generation been thrown to wolves and to fend for themselves as our generation has taken everything and left nothing but scraps for our children i must i am sick too my teeth of the me feiners/vampires
    social partnership dont make me sick!

  41. The ECB isn’t going to unilaterally withdraw liquidity while the potential blowback from unilateral action by Ireland, is very uncertain.

    We once had ‘gallant allies’ in Europe and we used to brag about punching above our weight. Without the support of the 16 other members of the EMU, we could end up like a blinded boxer on the ropes aimlessly flaying about.

    Iceland needed its Nordic neighbours and the IMF to help it at a time of crisis.

    Ministers of small countries such as Austria, the Netherlands and Finland have made the point that the EU-IMF deal was only agreed a few months ago and wonder if we were looking at the world from their vantage point, how indulgent we would be of for example Greek strikers seeking to protect closed shops etc?

    It may seem like the proverbial old gramophone record but it’s again appropriate to make the point, not directed to anyone in particular, that the contrast between advocacy of policy towards Europe that may be either brave or reckless, and the timidity towards culling sacred cows at home, is glaring.

  42. @Mr. Bond

    believe its the ECB’s view over the last 2 years

    It surely is part of the ECB’s view, and the part that it presents to the public. Privately, all the Frankfurt prominenti are also perfectly well aware that there will be Hell to pay if they lose €50bn+ on lending to bombed-out Irish banks. The ECB ain’t the Fed, as you know better than I. Destroy the Irish economy or resign in disgrace? Not a difficult decision for most of these chaps.

  43. Aenghus Fanning has an article in today’s Sunday Independent: ‘We need leaders who will ignore the eurobabble and just say no’

    “In my (no doubt ignorant) opinion, we should be threatening to kick the table over and leave the eurozone while remaining in the EU, joining Britain in an Atlantic alliance that will still have the clout to maintain access to the single market.

    There’s no hope of that happening — we’re too inherently Anglophobic for that. It is 38 years since I listened to government officials in Brussels telling me that our future lay with the deutschmark, and that our curse was the link with sterling.

    It is surely strange that, after all these years, the perfidious Brits are still our biggest trading partners.”

    Interesting argument expect for the strange fact: exports to the Eurozone in 2010 at 38% of total exports (goods + services) are double the level to the UK.

  44. “when your entire banking sector goes bust (confirmed this week), it is no longer a private sector banking problem, and instead a quasi-soveriegn issue, due to lack of regulatory oversight and appropriate govenment policy, as well as some type of societal issue around general property prices/leverage and general governance attitudes”

    This is where we would disagree.
    There was no oversight in Germany/France either where the credit emanated from.
    This is a banking problem – pure and simple. They should be allowed fail

  45. The ECB’s all you can eat liquidity at 1% looks somewhat like Lenihan’s guarantee. As long as the economy recovers reasonably quickly it’s grand.

    It also throws up moral hazard issues in that the buffet is much cheaper than a meal in the market.

    There are also questions such as whether the banks need weaning or if in fact they have late stage Alzheimers.

  46. @Bond. Eoin Bond

    I think your account of what JCT and LBS would say for themselves is plausible. But it doesn’t address the question posed by Karl Whelan: does the ECB actually keep threatening to destroy the Irish banking system and, if so, why?

    Of course they will say that Ireland presents the ECB with a difficult problem. But why on earth do they think this is the way to fix it? It certainly doesn’t encourage me to put any more of my money into Irish bank deposits. Quite the opposite.

  47. Sometimes playing for time is not a silly idea. Dan of the IT reported Friday that Irish banks mortgage books have fallen by 22% to €99.1 billion since peaking May 08. Basically we’re not borrowing anything but are gradually paying off our debts. Excluding the failed banks problems we’re going the right way.

    What rate of interest is the ECB charging us? I think it’s fairly low so let’s keep tapping it as long as possible.

  48. @ Kevin Donoghue

    The Irish banking system was destroyed in Dublin not Frankfurt.

    This style of language is not helpful as it is part of the narrative of victimhood.

    I hope an Irish journalist will ask Trichet the question next Thursday? However, the reply to such a loaded question would be likely very short.

  49. I’m with Mr. Bond and Danny Haskins on this. ECB support will be wound down over time in line with bank deleveraging. And I’ll throw in the usual points about the work that needs to be done this year on structural reforms (to enhance economic performance) and on the semi-states (potentially opening up some fiscal space). While price levels for irish household consumption (and pay and transfer rate levels) are 20% above the EZ average our major EU partners (who have price levels close to the average) will not be encouraged to put their hnds in to their taxpayers’ pockets to help us.

    But two further points are relevant. Karl Whelan may perceive the ECB as being threatening, but it is struggling to plug a serious governance vacuum in the EZ and the EU. There is a serious democratic governance deficit in the EU and this has yet to be addressed. Ireland not only exploted this lack of effective central governance, but failed to develop its own. So this is a double whammy.

    Secondly, Colm McCarthy along with the FT, The Economist and other high profile organs and commentators are highlighting the fact that the sovereign bond market is unambiguously saying an irish default is inevitable. (I sometimes worry about the objectivity of UK-based organs given their instinctive distaste for the Euro project. I’m prepared to give the ‘respectable’ ones some leeway, as it may be motivated by a recognition of the democratic governance vacuum which I see as the fatal flaw.)

    But is it not possible that these sovereign bond market players who gloriously under-priced risk in the run-up to this bust are now over-shooting the mark in the opposite direction? And, alternatively, but possibly reinforcing this, is there not also the possibility that, now that they may have analysed the Irish economy more closely they did previously, they see immense political opposition to the kind of very necessary internal reforms that would greatly enhance Ireland’s debt service capability? And that the absence of these reforms will impair debt service capability and justify current yields?

  50. “Europe – lets be at the heart of it”

    Any chance that a party so naive about european real politik could assume a position you suggest Karl.

    What would the 14 other PMs of the European People’s party think.

    FG seems to think that their approval is a end rather than a means to an end.

  51. Paul Hunt says,

    There is a serious democratic governance deficit in the EU and this has yet to be addressed. Ireland not only exploted this lack of effective central governance, but failed to develop its own.

    Ireland couldn’t be bothered to even show up to the meetings, and when they do, they only stuck around for 10 minutes and buzzed off. I am back in full time education at the moment, studying construction economics. It is funny to see this exact same behaviour is actively tolerated by full time students. And then we wonder why we have a country which is destroyed by a combination of politicians and property developers who actively contribute to the governance deficit, and then complain having failed to participate, that they are the victims. When they learn this habit at the youngest age, in the same institutions where we are supposed to be teaching them to be construction professionals, capable of managing the economy and construction. BOH.

  52. The primary problem is not the debt, it is the cost of servicing the debt. Whether it is 1.0 or 1.5 times GDP is of little significance. The problem staring us in the face are the continuing budget deficits leading to increasing national debt further eroding our ability to service the debt. To my mind it is a given that we are unable to service debt as it exists today and as each month goes by our position is further weakened. There is no doubt in my mind but that our Gov’t is incapable of revealing in realistic terms to all and sundry how serious our predicament is. We are reduced to a few mealy mouthed mantras such as to burn or not to burn the bank bondholders and to pressure Merkel, Sarkozy et al into giving us reduced rates on our outstanding and new debt. Until we show results in correcting the excesses of the boom built up at every level of gov’t and particularly by the national gov’t we will not have credibility at home or abroad and particularly in Brussels and Frankfurt where it matters. First and foremost we have to balance the budget and if that is impossible ( the jury is still out) then do the unthinkable and default on the sovereign debt. Sinking deeper into the muck as each month goes by is the present gov’t policy as they blame everybody and everything but themselves. The GFG rant on celebrity economists is a symptom how deep the rot has set into FG in a few short weeks. He may know that the coalition is unlikely to work toward a solution and that is even more worrisome.

  53. Equity in the Irish banks seems to be wiped out now & more or less at the same time an agreement seems to come into place that the ECB will allow them access to cheap liquidity. It may be coincidence and probably is just that but it could also be a message about moral hazard.

    We’ll see what happens when the Irish banks are deleveraged, recapped and in private hands again, my guess is that the special treatment given to Ireland as owner will not be extended to new private owners.

  54. @Michael Hennigan

    re: Aenghus “….threatening to kick the table over and leave the EuroZone”.

    We would still be trading with the EuroZone. Denmark and Sweden have their own currencies but still trade actively with the EuroZone.

    As for an “Atlantic alliance” many people I speak to in other European member states believe Ireland is already in one with the US and UK.

    High profile visits by Irish politicians to the USA last month, upcoming simultaneous visits by President Obama to Ireland and the UK next month as well as a visit by the UK monarch to Ireland in the same month possibly also contribute to this European perception of an “Atlantic Alliance”.

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