“Last month Honohan and the Government ruled out any burden-sharing with these lenders to the banks. Instead taxpayers will have to dig deeper. These bondholders will be repaid in full. Ireland has a sophisticated economy governed by “a network of contracts”, he says, and it was “fully expected” that these contracts would be fulfilled.
“Sustaining that network of contracts and ensuring that we are taken seriously as a nation is something that is very important and can be achieved, and [it is] much more important than cutting off your nose to spite your face in the interest of settling old scores.”
It may not seem fair, he admits, but it was, again, for wider interests of the country.
“I am thinking of the benefit to the people – the poor people and the rich people. It is the poorest people and most vulnerable people who lose out most when the economy stumbles and falls into a recession. These things aren’t absolutes. It is about finding the package that does the best not for one section of society but for society as a whole.”
A network of contracts!
Of course we do – but it is not a term or condition of these contracts that they be bailed out by the state – this is the crux of the point. Why are we not living by the letter of our legal obligations and instead pushing the state closer to insolvency by paying out on unguaranteed private contracts.
This is a new line on this – it seems to be an unwarranted extension of the idea that the state must keep its promises – the state has made no promises here
What annoys me about this is the flippant manner in which these questions are addressed.
We can’t because legal advice says its not possible (presumably unconstitutional)!
Well lets see the legal advice or at very least have the reasons explained – don’t hide behind a convenient deferral of responsibility – there may be legal problems – I can’t see them but that of course doesn’t mean they don’t exist – but by refusing to reveal them you block debate and you stop people evaluating whether the government’s position is reasonable. This is a major policy decision that is patently inequitable – if it is a necessary decision then it may need to be taken in any event but it seems to me that at very least it raises a duty on the government to put its cards on the table and explain, IN DETAIL, the reasons for which the decision is being taken so that its appropriateness or otherwise can be evaluated.
we can’t because the ECB blocked it –
on what basis did they block it – when did they take this decision – was it voted on by the ECB governing council – did the ECB issue formal advice on the issue – what role do the ECB play in the troika and more particularly what is the legal source of their power to veto Ireland imposing losses on seniors? In other words whats going on with the whole ECB veto thing
we cant because the functioning of the state relies of a network of contracts and those contracts must be honoured!
…but the contracts themselves envisage losses – this seems non-sensical – instead, how about insisting that the terms of contracts be honoured?
Also, I’m no central banker but with the amount of base money that is in the system and with an effectively unlimited amount of it being supplied at prevailing rates the ability for a quarter point raise in interest rates to have any meaningful effect on inflation seems limited.
Is the natural course of action not to slowly drain the excess reserves/liquidity out of the system and when that is done then start to raise rates
In the old days you tore up newspaper into sheets, gathered them together, punched a hole through one corner, threaded them with a piece of sisal string and hung them on a nail in the privy. Practical but uncomfortable.
Now? I use my Greenie Bin. And I have to pay for that as well!
As I have said before. The Boyz know exactly what they are doing. We, The Citizens, no longer matter. You always insist that a ‘contract’ must be honoured if, by not honoring it, you end up being ‘bent over the table’! Better the citizen than you.
BpW
Found the comment “fully expected” that we would pay back the senior bondholders interesting.
Is the saorstat biding time until political cover from a Greek restructuring can be sought.
Like all central bankers his words are carefully choosen because they are carefully parsed.
“Ireland has a sophisticated economy governed by “a network of contracts”, he says, and it was “fully expected” that these contracts would be fulfilled.”
This is a really quite interesting bit since it seems to suggest that in a sophisticated economy, risk is forbidden.
Someone has sold to lttle, post-colonial Ireland, the idea that if it wants to join the grown ups – with proper, countries – it has to rig things so that risks to bank capital are not permitted.
Viz
“Sustaining that network of contracts and ensuring that we are taken seriously as a nation is something that is very important and can be achieved, and [it is] much more important than cutting off your nose to spite your face in the interest of settling old scores.”
What old scores?
Abandoning capitalism and the role of risk in the efficient allocation of capital is being presented as a prerequisite for being “taken seriously as a nation”
What a load of cobblers. The words “gullible” and “naive” spring to mind.
Either this is a poor presentation of Patrick H’s views, or he has been captured.
TEU Article 132
(ex Article 110 TEC)
1. In order to carry out the tasks entrusted to the ESCB, the European Central Bank shall, in accordance with the provisions of the Treaties and under the conditions laid down in the Statute of the ESCB and of the ECB:
— make regulations to the extent necessary to implement the tasks defined in Article 3.1,first indent, Articles 19.1, 22 and 25.2 of the Statute of the ESCB and of the ECB in cases which shall be laid down in the acts of the Council referred to in Article 129(4),
— take decisions necessary for carrying out the tasks entrusted to the ESCB under the Treaties and the Statute of the ESCB and of the ECB,
— make recommendations and deliver opinions.
2. The European Central Bank may decide to publish its decisions, recommendations and opinions.”
I’m not sure if the above is a relevant provision but it could be
It seems they have a discretion as to whether they publish their opinions etc.
It also seems from reading other articles that the ECB, in general, can often only make recommendations – the idea of a veto seems alien to the type of power with which they are conferred – they sometimes need to be consulted – but veto – I can’t see anything that would give them such a jurisdiction
For example
“Article 138
(ex Article 111(4), TEC)
1. In order to secure the euro’s place in the international monetary system, the Council, on a proposal from the Commission, shall adopt a decision establishing common positions on matters of particular interest for economic and monetary union within the competent international financial
institutions and conferences. The Council shall act after consulting the European Central Bank.”
@grumpy,
I think you’re being a tad harsh. Capitalism and the role of risk in the efficient allocation of capital were abandoned already in the run-up to this blow-out. We are in the long-drawn-out process of trying to restore, in some way, these forces and features – and it is more long-drawn-out in the EU than in other unitary or federal jurisdictions. And, inevitably, the small fry who ventured too close to the fire will get fried in this process.
Do I like it? No. Is it fair or just? Certainly not. But, unfortunately, it is in the nature of things.
@christy
I think you raise important points. I am also surprised the Governor makes the “network of contracts” argument. This is not convincing unless you accept Mr. Bini Smaghi’s argument that their is an implicit contract to prevent systemic effects to the European system if you had primary responsibility for bank regulation in your jurisdication. It seems the one thing that almost all of us agree with is that Mr Bini Smaghi has a rather oversimplifed view of the issue.
You ask: “on what basis did [the ECB] block it – when did they take this decision – was it voted on by the ECB governing council – did the ECB issue formal advice on the issue – what role do the ECB play in the troika and more particularly what is the legal source of their power to veto Ireland imposing losses on seniors? In other words whats going on with the whole ECB veto thing.”
I think you are looking in the wrong direction when you look to legal power. The unfortunate fact is that we badly need something that only the ECB can provide: liquidity support for our banks given their inability to fund themselves sufficiently on the market. Under the rules, they have ample scope to limit that support (e.g. rules on collateral) or make it less certain going forward. Even though the extraordinary liquidity facilities in place apply to all euro zone banks, they are almost certainly only in place in their current form because of the problems of the periphery banks, with Irish banks the most in need. This is where the “power” comes from. I see the government’s policy in regard to senior bondholders as largely a pragmatic response to this reality.
@ John McHale, Grumpy, and others
Yes, but anyone’s parents should have taught them not to agree to anything to do with money without seeing it in writing.
If it is a verbal implicit understanding, the ground will soon shift again, and we will be faced by another key player, asking us what we are talking about, as they have no record of that understanding.
“Article 263
(ex Article 230 TEC)
The Court of Justice of the European Union shall review the legality of legislative acts, of acts of the Council, of the Commission and of the European Central Bank, other than recommendations and opinions, and of acts of the European Parliament and of the European Council intended to produce legal effects vis-à-vis third parties. It shall also review the legality of acts of bodies, offices or agencies of the Union intended to produce legal effects vis-à-vis third parties.
It shall for this purpose have jurisdiction in actions brought by a Member State, the European Parliament, the Council or the Commission on grounds of lack of competence, infringement of an essential procedural requirement, infringement of the Treaties or of any rule of law relating to their application, or misuse of powers.
[…]
Any natural or legal person may, under the conditions laid down in the first and second paragraphs, institute proceedings against an act addressed to that person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them and does not entail implementing measures.
I suppose a situation like this shows the limits of A230 – i suppose the ECB would argue that what they have done is a “recommendation” and that in any event an individual applicant doesn’t have standing by virtue of the final paragraph.
I suppose that’s a concrete example of what is meant by the European democratic deficit. No effective JR
@John McHale
I agree that the “power” comes from the liquidity support currently provided by the ECB. They are continuing to keep us on a very tight leash by refusing to set up medium term funding. To what end-we get downgraded again today. You have to wonder what they are trying to achieve.
“I am also surprised the Governor makes the “network of contracts” argument.”
Particularly when the Government went to the High Court yesterday to unilaterally alter the terms of contracts with major international investors
Paul
“Capitalism and the role of risk in the efficient allocation of capital were abandoned already in the run-up to this blow-out.”
They were not abandoned. There was LTCM’s bailout and the Greenspan put, but they were a retreat, not an abandonment. It is as if the Greenspan road has been decided to be the correct one and the basic principles of thoughtful decisions over the allocation of capital to balance risk and reward are being replaced by decisions based on estimations of the power of various institutions to rig things as suits them.
Part of the reason the “market” mispriced risk so much a few years ago was because participants were convinced it was just a mugs gave to think the authorities would not “prevent” downward movements in prices. The game seems to be on again bigtime.
Lozza Bullsh!te has already proclaimed himself to be anti-market. It appears that there is an EZ movement to suspend the principles of capitalism.
@John
“I think you are looking in the wrong direction when you look to legal power. The unfortunate fact is that we badly need something that only the ECB can provide: liquidity support for our banks given their inability to fund themselves sufficiently on the market. Under the rules, they have ample scope to limit that support (e.g. rules on collateral) or make it less certain going forward. Even though the extraordinary liquidity facilities in place apply to all euro zone banks, they are almost certainly only in place in their current form because of the problems of the periphery banks, with Irish banks the most in need. This is where the “power” comes from. I see the government’s policy in regard to senior bondholders as largely a pragmatic response to this reality.”
I really disagree with this – its balance of power / practical reality arguments that have no place in a constitutional legal order such as the EU.
One of the principle aims of establishing a legal order is to act as a check on the manner in which institutions exercise their discretion. We are not talking about inter governmental negotiations here – instead we are talking about the actions of an EU institution and such institutions are, or at least ought to be, accountable for their decisions in the same way Irish public bodies are accountable
Such accountability is a fundamental requirement the necessity for which is clearly demonstrated by the current situation. The ECB is making fundamental and important decisions and is not even providing reasons for so doing. This is an exercise of unaccountable power that has no place in a modern democracy.
I know this all sounds a bit shrill and over the top but I don’t think that changes the fact that its correct.
Statement by the EC, ECB, and IMF on the Review Mission to Ireland
Press Release No. 11/136
April 15, 2011
It has been said that the ECB couldn’t enter into an agreement to provide long term for financing for Irish banks “for legal reasons”
I’d say damn right they can’t – but for the same “legal reasons” they can’t veto Ireland burning seniors
These decisions are simply not the ECB’s to make
I remember a lot of people asking questions about the hinted at “side agreement” or “side letter”.
Has anybody found out whether it exists yet or is there a sort of Bermuda Triangle of curiosity that envelopes every Irish person that gets a sniff of official office?
BTW another downgrade today anticipating pre-ESM restructuring. Haven’t they heard about the network of contracts?
@ Paul Hunt
If you are so enamored with the sanctity of contracts, I would suggest you sell everything you have and purchase the Irish ten year bond, which today is closing in on 10% again. You will make a great deal of money on your investment as a sovereign contract is obviously much more sacrosanct that a private bank bond contract, no?
What we have here is a market, which in capitalism cannot be wrong, telling us the Irish sovereign bonds are very likely to take a haircut, while at the same time the very same state is claiming it will back a private bank bond til the last drop of blood is drained from the poorest Irishman. Ironic, no?
@christy,
In principle, you’re absolutely correct, but, unfortunately, the decision to prohibit the burning of bondholders in Irish banks, the requirement on the state to provide capital and the open-ended liquidity support are all elements of a wrinkle in a much, much bigger game. You can’t thumb your nose at EU institutions when they have the temerity to hint, ever so politely, that your policies might be sub-optimal and then expect these institutions, when they are under huge external and internal strain – to some of which you have contributed through your errant behavior, to behave like the father of the prodigal son.
We have here an excellent lesson on the limits of legalistic reasoning, as well as textbook economics. As some comments above suggest, the current actions of the ECB would seem to be based on the principle of expediency.
Explanations will not forthcoming, for the simple reason that any attempt to formulate them would risk revealing the expedient nature of the actions. And so undermining the political and technical legitimacy of the
‘independent’ ECB.
Insfoar as the frying of ‘little people’ is seen in the core EZ as ‘necessary collateral damage’, such thinking discounts the possibility of passive or active resistance. That’s not smart. Either form will suffice, if sustained, to scupper the EZ recovery and the EC project itself.
Greek yeild at 13.8% as Hoyer says
*GREEK DEBT RESTRUCTURING `WOULD NOT BE A DISASTER,’ HOYER SAYS
The EU is beginning to look like a badly run circus.
Finland elections.
“Finnish politics rarely drive international financial markets, but the rise of the anti-bailout True Finns party means Sunday’s national elections can’t be ignored by investors wary of another adverse turn in the euro zone’s long-running debt crisis.
The True Finns are backed by nearly 17% of the electorate”
“Strategists note that the main opposition Social Democrats, with support in the polls of around 20%, have hinted they may also oppose a bailout. The center-left Social Democrats opposed bailouts for Greece and Ireland.”
“You can’t thumb your nose at EU institutions when they have the temerity to hint, ever so politely, that your policies might be sub-optimal and then expect these institutions, when they are under huge external and internal strain – to some of which you have contributed through your errant behavior, to behave like the father of the prodigal son.”
I don’t want them to behave like a father to an errant son – I just want them to be accountable for their decisions and to not act outside their remit.
More fundamentally, the reasons why we can’t impose losses on seniors keeps changing we’ve had;
legal advice
funding for our financial system in the future
contagion
ECB forced us
network of contracts
But none of these reasons are explained in any detail and when you start to look at them more closely they don’t seem to hold up to scrutiny. Surely these decisions are not been made on a sort of ad hoc 15 second sound bit basis – and if that is true then let us see the real advice, i.e
1 The AG’s opinion on the legal issues raised
2 The ECB’s formal opinion / recommendation that seniors not be burned
The Greek two year is one heck of a deal, now approaching 18.5%. All you true believers jump on this one. To follow the fiasco:
“Last month Honohan and the Government ruled out any burden-sharing with these lenders to the banks”
I think it is reasonable to say that the Guvna is a good economist but a poor negotiator.
While the True FInns party may be against a bailout it is hardly any different, except due to the parliament vote requirement, than the divided approach in Germany which is against bailouts but against restructuring as well.
@John McHale
Concerning the ELA: do you really think the ECB would pull the plug on the Irish banking system if the government unilaterally restructured the 20bn or so of unguaranteed senior bank debt?
I seriously cannot see this happening. Their credibility would be in tatters. They would be seen for what they are widely suspected of being – a mouthpiece of the Bundesbank.
Do you seriously believe that if one of our southern neighbours were in the same position (e.g. Spain or Italy) that the ECB would behave in the same manner?
The ECB KNOWS that Ireland will tow the line. Why? Because every “serious” politician and economist in Ireland has been making excuses for them for the past year. I am no Sinn Fein supporter, but if Pearse Doherty was Finance minister, I think the ECB would have a very different attitude to senior unguaranteed bank debt.
Christy,
the reason we cant burn seniors is the same as why we had to meet the 3% deficit and why it was supposed to be impossible to renegotiate the IMF-EU deal.
Its just a follow the crowd, “thats what the experts say”approach.
Interesting example was laura Noonan on VB on Wednesday I think with Gurdgiev, Keyser, Sommerville and Lucey. She sounded exactly like the politicians and the political commentators who have suddenly become experts in economics – repeat mantras and once they fall by the way side then repeat new ones but whatever you do dont do anything thats different.
brian Lucey commentated we were a conservative state. He was right but maybe it is the conservatism of those who lackk courgae to do their own thing and require outside affirmation before something can be considered as right.
@christy,
I agree that the EU doesn’t have the institutions and procedures in place to deal with this crisis and is making stuff up on the hoof. But it would be totally surreal if Ireland, which claimed it had ‘world-class’ bank supervision and financial regulation (and woe betide anyone who queried this), failed to apply them and, as a result, risked damaging the EMU, were now to demand that the EU, in the midst of a crisis with which it is ill-equipped to deal, should stick to the precise letter of the law.
Get the impression this is the kind of plan where its failure is the critical part of it.
Basically push austerity and no restructuring as hard and as fast as you can and when it fails default.
They know it’ll fail – but the impact of the failure will be reduced, they think
@all
Interesting company for The Governor ………… breaking newz
CRISIS ASSESSMENT
IMF Support Helping Restore Growth but Key Risks Ahead
IMF Survey online
Timo ‘Soini is the head of the True Finns political party, the most recent arrival on Europe’s right-wing populist scene and one that is armed with the usual collection of phobias. He is anti-immigration, anti-Muslim, anti-abortion and anti-Europe. Of particular concern on the Continent, however, is Soini’s extreme skepticism regarding efforts to provide euro-zone aid to heavily indebted Portugal. And should his party do well in general elections on Sunday, the True Finns — together with anti-bailout allies — could block efforts to prop up Portugal.’
In Solidarity with Portugal, the European Project, and Olli!
David O’Donnell
Doesn’t sound like a very nice man.
Hoyer’s comment is interesting though.
I think as someone said above can we have written proof that the EU has “instructed” us not to negotiate with bondholders.
I would also like to see a sworn affidavit from Brian Lenihan that he and/or Cowen were instructed “not to let any of your banks fail”.
@JohnMcHale, Ceteris Paribus
“Networks of contracts”
A few people have remarked about the network of contracts point. One of the interesting legal developments in the last Government’s handling of the fiscal side of the crisis was the Financial Emergency Measures in the Public Interest Act 2009.
This was the measure under which public servants’ pay was reduced, but it also contained provisions to override contracts with pharmacists and other contractors in the health sector, and to reduce payments from the State to them.
The justification was, of course, the dire state of the public finances. It has been used a number of times now. It has also been challenged in the High Court, but the State prevailed. There were various features built into the legislation that required notification and consultation with affected parties, with the final decision resting with the Minister (for Health).
Perhaps because it is not dealing with the banking issues, and is very much in the ‘micro-economy’ rather than a macro concern, this legislation received little enough attention.
However, it is an instance of the State legislating to override contracts entered into by the State itself, built on the justification of financial necessity.
Of course, it is also true that those on the other side of the contracts were domestic economy service providers, not international portfolio or direct investors.
While there is certainly a point of principle to be drawn from this, pragmatism, the old art of the possible, is also a dominant factor in decision-making, I would think.
.
I wonder what the good Professor, and his underlings, are doing about this very important situation ………….
Gretchen Morgenson of ‘The New York Times’ on the lack of prosecutions in the aftermath of the financial crisis:
Oh, surely. Back in September Brendan Keenan let the cat out of the bag somewhat on this point. NAMA Wine Lake’s interview with Tony Soprano is also relevant. Two qualifications need to be made though. First, the government is nowhere near going all-out for austerity: viz. Croke Park. Even the Troika’s not pushing for the fiscal adjustment to be increased, at least yet. Extra austerity would undermine the coalition of interest which (when all the shouting is done) upholds the EU/IMF status quo. Second, for most of the people involved this is probably not so much a plan as a rationalisation for putting off unpleasant actions.
They know it’ll fail – but the impact of the failure will be reduced, they think
They probably do think that, but they’re nuts. The idea seems to be that if we try really hard then the EU will feel gratitude and seek to reward us for our sterling efforts (if and) when our debt burden goes out of control – you know, just as it has thanked and rewarded us for falling into external assistance in the attempt to protect senior bank bonds. The other assumption is apparently that the ESM will make it easier for us to have a sovereign default. There seem to be good reasons to think the opposite will be true in practise.
@Cearbhall O’Dalaigh
I don’t think one can mention this Irish Examiner story too many times. How is the criminal investigation proceeding, I wonder?
Late last month he hosted the annual dinner of former Central Bank governors. Four attended – Ken Whitaker (who was governor from 1969 to 1976), Tomás Ó Cofaigh (1981-1987), Maurice O’Connell (1994-2002) and Honohan’s predecessor, John Hurley (2002-2009).
So not only did the last governor 2002-2009 leave with a massive pension, he also gets a free “dinner”.
No shortage of neck. Pity about from the neck up.
Personally I think, Brendan Howlin, of behalf of all citizens should send him the bill.
If anybody thinks I am being small minded on this, I am.
@Oliver O’Connor
I think the Act used in the HC was the one BL brought in November last and it seems unique.
Some bondholders are bound to challenge it – perhaps in another forum.
@David O’Donnell, @Greg
Even if Finland votes against the EU package for Portugal (and on balance I hope it does) I’d tend to assume that the EU will simply produce a revised version which exempts Finland from contributing, and Finland will support that. Of course that will tempt others to defect, but my guess is that they’d still be able to hold things together for at least that next Portugal vote.
People need to accept that it is over , whatever it was
Something is very wrong with our financial ecosystem – but we do not have the tools to examine the reality of accelerated entropy so we just engage in verbal grooming.
It just seems too much damage has been done to the forest now – all the fruit trees are gone.
What is that strange straight line between the ground and the sky ?
Picking the nits out of the hair of various central bankers is strangely comforting but mostly pointless now
@all
via Naked Capitalism
Greeks, Germans, Finns & Dear Lorenzo(Da BankBondersTrueFriend)
You know – this could happen and no signs that Ireland ready to act – on the ‘restructuring’ …..
just a question maybe some one can answer
what is the irish central bank trying to do to this country with advising that we can not re structure private bank bondholders to the detriment of irish soverign bonds
is just me but are the markets saying loud and clear ireland soverign dept restuctering in 2013
that will cripple this country when we have nothing left to give
So we have a government who are too afraid to ” bail in” bondholders as they fear the ECB might act against the interest of the Euro zone and turn the credit tap off off. Our governor is too afraid to vote against his peers ethnocentrically driven monetary policies. Honohan fully understands that this reversal of interest rates policy will do immense damage to the already bankrupt Irish banking system and more importantly the economy of the country which pays his salary, he has been wrong on recapitalisation wrong on the problem being manageable he admits this is all very unfair but somehow still thinks it is “manageable”. He was wrong about the IMF having to come 6 months after he believed the banks were well capitalised and now he believes that raising interest rates, austerity and deflationary policies will be enough for the country to grow its way out of its problems and avoid having to default. To my mind all of this is nonsense.
As our sole representative, is he really incapable of arguing in favor of quantitative easing and against interest rate rises when Nobel prize winning economists like Krugmann and Stiglitz see these policies as anathema to recovery. They have argued consistently that austerity and deflation is the road to perdition for second tier Europe. Any policy that causes Ireland, Greece, Spain and Portugal even further problems should not be supported by Honohan who has a bad habit of believing one thing, writing one thing, then supporting policy initatives which stridently contradict his position.
In 2002 he coauthored for the World Bank a paper on”Controlling the Fiscal Costs of Banking Crises”. What makes these crises worse he opined? The following; open ended liquidity support, regulatory forbearance, repeated recapitalisations, unlimited deposit guarantees, yet all these policies are being pursued with religious fervor in Ireland. Prior to the NPRF being established he warned about the fund being sequestered by the government if it was not ring fenced and he also warned against the fund being forced to invest in particular companies. Who signed the MoU that demanded the fund be pumped into one asset class viz a banking system on its last legs with no legitimacy whatsoever to transfer so called bailout money back to those who lent us the bailout money? I could go on but you all get the drift.
45 replies on “Honohan: Irish Times Interview”
“Last month Honohan and the Government ruled out any burden-sharing with these lenders to the banks. Instead taxpayers will have to dig deeper. These bondholders will be repaid in full. Ireland has a sophisticated economy governed by “a network of contracts”, he says, and it was “fully expected” that these contracts would be fulfilled.
“Sustaining that network of contracts and ensuring that we are taken seriously as a nation is something that is very important and can be achieved, and [it is] much more important than cutting off your nose to spite your face in the interest of settling old scores.”
It may not seem fair, he admits, but it was, again, for wider interests of the country.
“I am thinking of the benefit to the people – the poor people and the rich people. It is the poorest people and most vulnerable people who lose out most when the economy stumbles and falls into a recession. These things aren’t absolutes. It is about finding the package that does the best not for one section of society but for society as a whole.”
A network of contracts!
Of course we do – but it is not a term or condition of these contracts that they be bailed out by the state – this is the crux of the point. Why are we not living by the letter of our legal obligations and instead pushing the state closer to insolvency by paying out on unguaranteed private contracts.
This is a new line on this – it seems to be an unwarranted extension of the idea that the state must keep its promises – the state has made no promises here
What annoys me about this is the flippant manner in which these questions are addressed.
We can’t because legal advice says its not possible (presumably unconstitutional)!
Well lets see the legal advice or at very least have the reasons explained – don’t hide behind a convenient deferral of responsibility – there may be legal problems – I can’t see them but that of course doesn’t mean they don’t exist – but by refusing to reveal them you block debate and you stop people evaluating whether the government’s position is reasonable. This is a major policy decision that is patently inequitable – if it is a necessary decision then it may need to be taken in any event but it seems to me that at very least it raises a duty on the government to put its cards on the table and explain, IN DETAIL, the reasons for which the decision is being taken so that its appropriateness or otherwise can be evaluated.
we can’t because the ECB blocked it –
on what basis did they block it – when did they take this decision – was it voted on by the ECB governing council – did the ECB issue formal advice on the issue – what role do the ECB play in the troika and more particularly what is the legal source of their power to veto Ireland imposing losses on seniors? In other words whats going on with the whole ECB veto thing
we cant because the functioning of the state relies of a network of contracts and those contracts must be honoured!
…but the contracts themselves envisage losses – this seems non-sensical – instead, how about insisting that the terms of contracts be honoured?
Also, I’m no central banker but with the amount of base money that is in the system and with an effectively unlimited amount of it being supplied at prevailing rates the ability for a quarter point raise in interest rates to have any meaningful effect on inflation seems limited.
Is the natural course of action not to slowly drain the excess reserves/liquidity out of the system and when that is done then start to raise rates
In the old days you tore up newspaper into sheets, gathered them together, punched a hole through one corner, threaded them with a piece of sisal string and hung them on a nail in the privy. Practical but uncomfortable.
Now? I use my Greenie Bin. And I have to pay for that as well!
As I have said before. The Boyz know exactly what they are doing. We, The Citizens, no longer matter. You always insist that a ‘contract’ must be honoured if, by not honoring it, you end up being ‘bent over the table’! Better the citizen than you.
BpW
Found the comment “fully expected” that we would pay back the senior bondholders interesting.
Is the saorstat biding time until political cover from a Greek restructuring can be sought.
Like all central bankers his words are carefully choosen because they are carefully parsed.
“Ireland has a sophisticated economy governed by “a network of contracts”, he says, and it was “fully expected” that these contracts would be fulfilled.”
This is a really quite interesting bit since it seems to suggest that in a sophisticated economy, risk is forbidden.
Someone has sold to lttle, post-colonial Ireland, the idea that if it wants to join the grown ups – with proper, countries – it has to rig things so that risks to bank capital are not permitted.
Viz
“Sustaining that network of contracts and ensuring that we are taken seriously as a nation is something that is very important and can be achieved, and [it is] much more important than cutting off your nose to spite your face in the interest of settling old scores.”
What old scores?
Abandoning capitalism and the role of risk in the efficient allocation of capital is being presented as a prerequisite for being “taken seriously as a nation”
What a load of cobblers. The words “gullible” and “naive” spring to mind.
Either this is a poor presentation of Patrick H’s views, or he has been captured.
TEU Article 132
(ex Article 110 TEC)
1. In order to carry out the tasks entrusted to the ESCB, the European Central Bank shall, in accordance with the provisions of the Treaties and under the conditions laid down in the Statute of the ESCB and of the ECB:
— make regulations to the extent necessary to implement the tasks defined in Article 3.1,first indent, Articles 19.1, 22 and 25.2 of the Statute of the ESCB and of the ECB in cases which shall be laid down in the acts of the Council referred to in Article 129(4),
— take decisions necessary for carrying out the tasks entrusted to the ESCB under the Treaties and the Statute of the ESCB and of the ECB,
— make recommendations and deliver opinions.
2. The European Central Bank may decide to publish its decisions, recommendations and opinions.”
I’m not sure if the above is a relevant provision but it could be
It seems they have a discretion as to whether they publish their opinions etc.
It also seems from reading other articles that the ECB, in general, can often only make recommendations – the idea of a veto seems alien to the type of power with which they are conferred – they sometimes need to be consulted – but veto – I can’t see anything that would give them such a jurisdiction
For example
“Article 138
(ex Article 111(4), TEC)
1. In order to secure the euro’s place in the international monetary system, the Council, on a proposal from the Commission, shall adopt a decision establishing common positions on matters of particular interest for economic and monetary union within the competent international financial
institutions and conferences. The Council shall act after consulting the European Central Bank.”
@grumpy,
I think you’re being a tad harsh. Capitalism and the role of risk in the efficient allocation of capital were abandoned already in the run-up to this blow-out. We are in the long-drawn-out process of trying to restore, in some way, these forces and features – and it is more long-drawn-out in the EU than in other unitary or federal jurisdictions. And, inevitably, the small fry who ventured too close to the fire will get fried in this process.
Do I like it? No. Is it fair or just? Certainly not. But, unfortunately, it is in the nature of things.
@christy
I think you raise important points. I am also surprised the Governor makes the “network of contracts” argument. This is not convincing unless you accept Mr. Bini Smaghi’s argument that their is an implicit contract to prevent systemic effects to the European system if you had primary responsibility for bank regulation in your jurisdication. It seems the one thing that almost all of us agree with is that Mr Bini Smaghi has a rather oversimplifed view of the issue.
You ask: “on what basis did [the ECB] block it – when did they take this decision – was it voted on by the ECB governing council – did the ECB issue formal advice on the issue – what role do the ECB play in the troika and more particularly what is the legal source of their power to veto Ireland imposing losses on seniors? In other words whats going on with the whole ECB veto thing.”
I think you are looking in the wrong direction when you look to legal power. The unfortunate fact is that we badly need something that only the ECB can provide: liquidity support for our banks given their inability to fund themselves sufficiently on the market. Under the rules, they have ample scope to limit that support (e.g. rules on collateral) or make it less certain going forward. Even though the extraordinary liquidity facilities in place apply to all euro zone banks, they are almost certainly only in place in their current form because of the problems of the periphery banks, with Irish banks the most in need. This is where the “power” comes from. I see the government’s policy in regard to senior bondholders as largely a pragmatic response to this reality.
@ John McHale, Grumpy, and others
Yes, but anyone’s parents should have taught them not to agree to anything to do with money without seeing it in writing.
If it is a verbal implicit understanding, the ground will soon shift again, and we will be faced by another key player, asking us what we are talking about, as they have no record of that understanding.
“Article 263
(ex Article 230 TEC)
The Court of Justice of the European Union shall review the legality of legislative acts, of acts of the Council, of the Commission and of the European Central Bank, other than recommendations and opinions, and of acts of the European Parliament and of the European Council intended to produce legal effects vis-à-vis third parties. It shall also review the legality of acts of bodies, offices or agencies of the Union intended to produce legal effects vis-à-vis third parties.
It shall for this purpose have jurisdiction in actions brought by a Member State, the European Parliament, the Council or the Commission on grounds of lack of competence, infringement of an essential procedural requirement, infringement of the Treaties or of any rule of law relating to their application, or misuse of powers.
[…]
Any natural or legal person may, under the conditions laid down in the first and second paragraphs, institute proceedings against an act addressed to that person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them and does not entail implementing measures.
I suppose a situation like this shows the limits of A230 – i suppose the ECB would argue that what they have done is a “recommendation” and that in any event an individual applicant doesn’t have standing by virtue of the final paragraph.
I suppose that’s a concrete example of what is meant by the European democratic deficit. No effective JR
@John McHale
I agree that the “power” comes from the liquidity support currently provided by the ECB. They are continuing to keep us on a very tight leash by refusing to set up medium term funding. To what end-we get downgraded again today. You have to wonder what they are trying to achieve.
“I am also surprised the Governor makes the “network of contracts” argument.”
Particularly when the Government went to the High Court yesterday to unilaterally alter the terms of contracts with major international investors
Paul
“Capitalism and the role of risk in the efficient allocation of capital were abandoned already in the run-up to this blow-out.”
They were not abandoned. There was LTCM’s bailout and the Greenspan put, but they were a retreat, not an abandonment. It is as if the Greenspan road has been decided to be the correct one and the basic principles of thoughtful decisions over the allocation of capital to balance risk and reward are being replaced by decisions based on estimations of the power of various institutions to rig things as suits them.
Part of the reason the “market” mispriced risk so much a few years ago was because participants were convinced it was just a mugs gave to think the authorities would not “prevent” downward movements in prices. The game seems to be on again bigtime.
Lozza Bullsh!te has already proclaimed himself to be anti-market. It appears that there is an EZ movement to suspend the principles of capitalism.
@John
“I think you are looking in the wrong direction when you look to legal power. The unfortunate fact is that we badly need something that only the ECB can provide: liquidity support for our banks given their inability to fund themselves sufficiently on the market. Under the rules, they have ample scope to limit that support (e.g. rules on collateral) or make it less certain going forward. Even though the extraordinary liquidity facilities in place apply to all euro zone banks, they are almost certainly only in place in their current form because of the problems of the periphery banks, with Irish banks the most in need. This is where the “power” comes from. I see the government’s policy in regard to senior bondholders as largely a pragmatic response to this reality.”
I really disagree with this – its balance of power / practical reality arguments that have no place in a constitutional legal order such as the EU.
One of the principle aims of establishing a legal order is to act as a check on the manner in which institutions exercise their discretion. We are not talking about inter governmental negotiations here – instead we are talking about the actions of an EU institution and such institutions are, or at least ought to be, accountable for their decisions in the same way Irish public bodies are accountable
Such accountability is a fundamental requirement the necessity for which is clearly demonstrated by the current situation. The ECB is making fundamental and important decisions and is not even providing reasons for so doing. This is an exercise of unaccountable power that has no place in a modern democracy.
I know this all sounds a bit shrill and over the top but I don’t think that changes the fact that its correct.
Statement by the EC, ECB, and IMF on the Review Mission to Ireland
Press Release No. 11/136
April 15, 2011
http://www.imf.org/external/np/sec/pr/2011/pr11136.htm
It has been said that the ECB couldn’t enter into an agreement to provide long term for financing for Irish banks “for legal reasons”
I’d say damn right they can’t – but for the same “legal reasons” they can’t veto Ireland burning seniors
These decisions are simply not the ECB’s to make
I remember a lot of people asking questions about the hinted at “side agreement” or “side letter”.
Has anybody found out whether it exists yet or is there a sort of Bermuda Triangle of curiosity that envelopes every Irish person that gets a sniff of official office?
BTW another downgrade today anticipating pre-ESM restructuring. Haven’t they heard about the network of contracts?
@ Paul Hunt
If you are so enamored with the sanctity of contracts, I would suggest you sell everything you have and purchase the Irish ten year bond, which today is closing in on 10% again. You will make a great deal of money on your investment as a sovereign contract is obviously much more sacrosanct that a private bank bond contract, no?
What we have here is a market, which in capitalism cannot be wrong, telling us the Irish sovereign bonds are very likely to take a haircut, while at the same time the very same state is claiming it will back a private bank bond til the last drop of blood is drained from the poorest Irishman. Ironic, no?
@christy,
In principle, you’re absolutely correct, but, unfortunately, the decision to prohibit the burning of bondholders in Irish banks, the requirement on the state to provide capital and the open-ended liquidity support are all elements of a wrinkle in a much, much bigger game. You can’t thumb your nose at EU institutions when they have the temerity to hint, ever so politely, that your policies might be sub-optimal and then expect these institutions, when they are under huge external and internal strain – to some of which you have contributed through your errant behavior, to behave like the father of the prodigal son.
We have here an excellent lesson on the limits of legalistic reasoning, as well as textbook economics. As some comments above suggest, the current actions of the ECB would seem to be based on the principle of expediency.
Explanations will not forthcoming, for the simple reason that any attempt to formulate them would risk revealing the expedient nature of the actions. And so undermining the political and technical legitimacy of the
‘independent’ ECB.
Insfoar as the frying of ‘little people’ is seen in the core EZ as ‘necessary collateral damage’, such thinking discounts the possibility of passive or active resistance. That’s not smart. Either form will suffice, if sustained, to scupper the EZ recovery and the EC project itself.
Greek yeild at 13.8% as Hoyer says
*GREEK DEBT RESTRUCTURING `WOULD NOT BE A DISASTER,’ HOYER SAYS
http://www.bloomberg.com/apps/quote?ticker=GGGB10YR:IND
It would be nice if EU spokespeople could speak with one voice.
Anyway, what’s good for the goose is good for the gander.
Reuters link.
http://uk.reuters.com/article/2011/04/15/germany-greece-debt-idUKBAT00616520110415
The EU is beginning to look like a badly run circus.
Finland elections.
“Finnish politics rarely drive international financial markets, but the rise of the anti-bailout True Finns party means Sunday’s national elections can’t be ignored by investors wary of another adverse turn in the euro zone’s long-running debt crisis.
The True Finns are backed by nearly 17% of the electorate”
“Strategists note that the main opposition Social Democrats, with support in the polls of around 20%, have hinted they may also oppose a bailout. The center-left Social Democrats opposed bailouts for Greece and Ireland.”
http://www.marketwatch.com/story/finland-election-could-spark-euro-jitters-2011-04-15
@Paul Hunt
“You can’t thumb your nose at EU institutions when they have the temerity to hint, ever so politely, that your policies might be sub-optimal and then expect these institutions, when they are under huge external and internal strain – to some of which you have contributed through your errant behavior, to behave like the father of the prodigal son.”
I don’t want them to behave like a father to an errant son – I just want them to be accountable for their decisions and to not act outside their remit.
More fundamentally, the reasons why we can’t impose losses on seniors keeps changing we’ve had;
legal advice
funding for our financial system in the future
contagion
ECB forced us
network of contracts
But none of these reasons are explained in any detail and when you start to look at them more closely they don’t seem to hold up to scrutiny. Surely these decisions are not been made on a sort of ad hoc 15 second sound bit basis – and if that is true then let us see the real advice, i.e
1 The AG’s opinion on the legal issues raised
2 The ECB’s formal opinion / recommendation that seniors not be burned
The Greek two year is one heck of a deal, now approaching 18.5%. All you true believers jump on this one. To follow the fiasco:
http://www.bloomberg.com/apps/quote?ticker=GGGB2YR:IND
“Last month Honohan and the Government ruled out any burden-sharing with these lenders to the banks”
I think it is reasonable to say that the Guvna is a good economist but a poor negotiator.
While the True FInns party may be against a bailout it is hardly any different, except due to the parliament vote requirement, than the divided approach in Germany which is against bailouts but against restructuring as well.
@John McHale
Concerning the ELA: do you really think the ECB would pull the plug on the Irish banking system if the government unilaterally restructured the 20bn or so of unguaranteed senior bank debt?
I seriously cannot see this happening. Their credibility would be in tatters. They would be seen for what they are widely suspected of being – a mouthpiece of the Bundesbank.
Do you seriously believe that if one of our southern neighbours were in the same position (e.g. Spain or Italy) that the ECB would behave in the same manner?
The ECB KNOWS that Ireland will tow the line. Why? Because every “serious” politician and economist in Ireland has been making excuses for them for the past year. I am no Sinn Fein supporter, but if Pearse Doherty was Finance minister, I think the ECB would have a very different attitude to senior unguaranteed bank debt.
Christy,
the reason we cant burn seniors is the same as why we had to meet the 3% deficit and why it was supposed to be impossible to renegotiate the IMF-EU deal.
Its just a follow the crowd, “thats what the experts say”approach.
Interesting example was laura Noonan on VB on Wednesday I think with Gurdgiev, Keyser, Sommerville and Lucey. She sounded exactly like the politicians and the political commentators who have suddenly become experts in economics – repeat mantras and once they fall by the way side then repeat new ones but whatever you do dont do anything thats different.
brian Lucey commentated we were a conservative state. He was right but maybe it is the conservatism of those who lackk courgae to do their own thing and require outside affirmation before something can be considered as right.
@christy,
I agree that the EU doesn’t have the institutions and procedures in place to deal with this crisis and is making stuff up on the hoof. But it would be totally surreal if Ireland, which claimed it had ‘world-class’ bank supervision and financial regulation (and woe betide anyone who queried this), failed to apply them and, as a result, risked damaging the EMU, were now to demand that the EU, in the midst of a crisis with which it is ill-equipped to deal, should stick to the precise letter of the law.
Get the impression this is the kind of plan where its failure is the critical part of it.
Basically push austerity and no restructuring as hard and as fast as you can and when it fails default.
They know it’ll fail – but the impact of the failure will be reduced, they think
@all
Interesting company for The Governor ………… breaking newz
CRISIS ASSESSMENT
IMF Support Helping Restore Growth but Key Risks Ahead
IMF Survey online
http://www.imf.org/external/pubs/ft/survey/so/2011/new041511a.htm
@Greg
More on Finland …
Timo ‘Soini is the head of the True Finns political party, the most recent arrival on Europe’s right-wing populist scene and one that is armed with the usual collection of phobias. He is anti-immigration, anti-Muslim, anti-abortion and anti-Europe. Of particular concern on the Continent, however, is Soini’s extreme skepticism regarding efforts to provide euro-zone aid to heavily indebted Portugal. And should his party do well in general elections on Sunday, the True Finns — together with anti-bailout allies — could block efforts to prop up Portugal.’
http://www.spiegel.de/international/europe/0,1518,757299,00.html#ref=nlint
In Solidarity with Portugal, the European Project, and Olli!
David O’Donnell
Doesn’t sound like a very nice man.
Hoyer’s comment is interesting though.
I think as someone said above can we have written proof that the EU has “instructed” us not to negotiate with bondholders.
I would also like to see a sworn affidavit from Brian Lenihan that he and/or Cowen were instructed “not to let any of your banks fail”.
@JohnMcHale, Ceteris Paribus
“Networks of contracts”
A few people have remarked about the network of contracts point. One of the interesting legal developments in the last Government’s handling of the fiscal side of the crisis was the Financial Emergency Measures in the Public Interest Act 2009.
This was the measure under which public servants’ pay was reduced, but it also contained provisions to override contracts with pharmacists and other contractors in the health sector, and to reduce payments from the State to them.
The justification was, of course, the dire state of the public finances. It has been used a number of times now. It has also been challenged in the High Court, but the State prevailed. There were various features built into the legislation that required notification and consultation with affected parties, with the final decision resting with the Minister (for Health).
Perhaps because it is not dealing with the banking issues, and is very much in the ‘micro-economy’ rather than a macro concern, this legislation received little enough attention.
However, it is an instance of the State legislating to override contracts entered into by the State itself, built on the justification of financial necessity.
Of course, it is also true that those on the other side of the contracts were domestic economy service providers, not international portfolio or direct investors.
While there is certainly a point of principle to be drawn from this, pragmatism, the old art of the possible, is also a dominant factor in decision-making, I would think.
.
I wonder what the good Professor, and his underlings, are doing about this very important situation ………….
Gretchen Morgenson of ‘The New York Times’ on the lack of prosecutions in the aftermath of the financial crisis:
http://www.charlierose.com/view/interview/11619
.
@Eureka
Oh, surely. Back in September Brendan Keenan let the cat out of the bag somewhat on this point. NAMA Wine Lake’s interview with Tony Soprano is also relevant. Two qualifications need to be made though. First, the government is nowhere near going all-out for austerity: viz. Croke Park. Even the Troika’s not pushing for the fiscal adjustment to be increased, at least yet. Extra austerity would undermine the coalition of interest which (when all the shouting is done) upholds the EU/IMF status quo. Second, for most of the people involved this is probably not so much a plan as a rationalisation for putting off unpleasant actions.
They probably do think that, but they’re nuts. The idea seems to be that if we try really hard then the EU will feel gratitude and seek to reward us for our sterling efforts (if and) when our debt burden goes out of control – you know, just as it has thanked and rewarded us for falling into external assistance in the attempt to protect senior bank bonds. The other assumption is apparently that the ESM will make it easier for us to have a sovereign default. There seem to be good reasons to think the opposite will be true in practise.
@Cearbhall O’Dalaigh
I don’t think one can mention this Irish Examiner story too many times. How is the criminal investigation proceeding, I wonder?
So not only did the last governor 2002-2009 leave with a massive pension, he also gets a free “dinner”.
No shortage of neck. Pity about from the neck up.
Personally I think, Brendan Howlin, of behalf of all citizens should send him the bill.
If anybody thinks I am being small minded on this, I am.
@Oliver O’Connor
I think the Act used in the HC was the one BL brought in November last and it seems unique.
Some bondholders are bound to challenge it – perhaps in another forum.
@David O’Donnell, @Greg
Even if Finland votes against the EU package for Portugal (and on balance I hope it does) I’d tend to assume that the EU will simply produce a revised version which exempts Finland from contributing, and Finland will support that. Of course that will tempt others to defect, but my guess is that they’d still be able to hold things together for at least that next Portugal vote.
People need to accept that it is over , whatever it was
Something is very wrong with our financial ecosystem – but we do not have the tools to examine the reality of accelerated entropy so we just engage in verbal grooming.
It just seems too much damage has been done to the forest now – all the fruit trees are gone.
What is that strange straight line between the ground and the sky ?
Picking the nits out of the hair of various central bankers is strangely comforting but mostly pointless now
@all
via Naked Capitalism
Greeks, Germans, Finns & Dear Lorenzo(Da BankBondersTrueFriend)
http://www.nakedcapitalism.com/2011/04/will-german-push-for-greece-restructuring-tank-greek-banking-system.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
You know – this could happen and no signs that Ireland ready to act – on the ‘restructuring’ …..
just a question maybe some one can answer
what is the irish central bank trying to do to this country with advising that we can not re structure private bank bondholders to the detriment of irish soverign bonds
is just me but are the markets saying loud and clear ireland soverign dept restuctering in 2013
that will cripple this country when we have nothing left to give
So we have a government who are too afraid to ” bail in” bondholders as they fear the ECB might act against the interest of the Euro zone and turn the credit tap off off. Our governor is too afraid to vote against his peers ethnocentrically driven monetary policies. Honohan fully understands that this reversal of interest rates policy will do immense damage to the already bankrupt Irish banking system and more importantly the economy of the country which pays his salary, he has been wrong on recapitalisation wrong on the problem being manageable he admits this is all very unfair but somehow still thinks it is “manageable”. He was wrong about the IMF having to come 6 months after he believed the banks were well capitalised and now he believes that raising interest rates, austerity and deflationary policies will be enough for the country to grow its way out of its problems and avoid having to default. To my mind all of this is nonsense.
As our sole representative, is he really incapable of arguing in favor of quantitative easing and against interest rate rises when Nobel prize winning economists like Krugmann and Stiglitz see these policies as anathema to recovery. They have argued consistently that austerity and deflation is the road to perdition for second tier Europe. Any policy that causes Ireland, Greece, Spain and Portugal even further problems should not be supported by Honohan who has a bad habit of believing one thing, writing one thing, then supporting policy initatives which stridently contradict his position.
In 2002 he coauthored for the World Bank a paper on”Controlling the Fiscal Costs of Banking Crises”. What makes these crises worse he opined? The following; open ended liquidity support, regulatory forbearance, repeated recapitalisations, unlimited deposit guarantees, yet all these policies are being pursued with religious fervor in Ireland. Prior to the NPRF being established he warned about the fund being sequestered by the government if it was not ring fenced and he also warned against the fund being forced to invest in particular companies. Who signed the MoU that demanded the fund be pumped into one asset class viz a banking system on its last legs with no legitimacy whatsoever to transfer so called bailout money back to those who lent us the bailout money? I could go on but you all get the drift.