Is the grievance against the ECB overdone?

Colm McCarthy and Kevin O’Rourke rightly point today to the damage that a sense of grievance towards the ECB does to political support for necessary domestic adjustment efforts (see Kevin’s post below).   While few would disagree that the ECB has been remiss on the public relations front, I think the all-things-considered case against it has been overdone. 

Two main charges have dominated the recent discussion: that the ECB “bounced” Ireland unnecessarily into a bailout; and that it has unfairly insisted that Irish taxpayers bear the burden bank losses that are rightly the responsibility of senior bondholders. 

I think it is fair to say that the bailout of Ireland was actually well advanced before the formal EU/IMF programme.   Borrowing from the ECB by the six main banks had risen from €30 billion in August to €66 billion by November (with overall borrowing from the Central Bank of Ireland rising from €14 billion to €45 billion over the same period) as wholesale deposits fled.    This slow motion bailout was taking place without formal conditionality, and was leaving the ECB with default risk that any central bank would be loath to take on.  Can we really blame it for pressuring for a formal deal that would put in place a more credible banking and fiscal adjustment strategy and force official lenders to shoulder a significant part of the default risk?

I doubt if anyone on this site disagrees with the principle that taxpayers should not be on the hook for the losses of investors in private institutions.   But the mistake of the original blanket guarantee, the systemic importance of AIB and BOI to the Irish credit and payments system, and the legal equality of depositors and senior bondholders under Irish law (which contrasts with depositor preference in the U.S.) were always going to make loss imposition problematic.   In the hope that it would facilitate a degree of loss sharing, many of us argued for a new bank resolution regime to be in place for when the original guarantee expired last September, but it was always obvious that such loss imposition through retrospective legislative changes was not going to be easy. 

In any event, the needed resolution regime was not put in place and so the practical potential for loss sharing was limited even without the ECB’s objections.   Moreover, with a significant (if unfortunately indeterminate) fraction of the bonds held by Irish residents, and so a real danger of domestic financial contagion, the practical opportunities for loss imposition on unguaranteed seniors – at least beyond Anglo and Irish Nationwide — was likely  limited.   

Against these lost opportunities for loss sharing we should, in fairness, weigh the value of the extraordinary funding support the Irish banks are receiving, and recognise that the ECB has legitmate goals that go beyond the rescue of the Irish banking system.   The funding support is now coming with an interest rate of 1.25 percent.    It is not obvious how much of a subsidy in contained in this rate, but I don’t think it comes close to compensating for the continuing default risk being faced by the ECB, and nowhere near the rate that would need to be paid for these funds to be secured on the market – if they could be secured at all.   One might argue that the ECB is only doing its job as lender of last resort.   But this classic function is to provide liquidity support for short durations to solvent banks on adequate collateral.   Even the ECB’s sternest critics must recognise that it has gone well beyond this role.  

All things considered, it seems to me the strength of the case for a major grievance against the ECB is less than many suppose.

87 thoughts on “Is the grievance against the ECB overdone?”

  1. John, the facts of the case are that when the IMF came to town in November it argued that the bondholders be burned. The Irish government was convinced. There turned out to be no insuperable legal obstacles. The ECB vetoed this course of action. And everyone knows this.

    So the anger at the ECB is completely understandable. In my case, I am not only angry about the tens of billions of euros in debts that they insisted the Irish taxpayer be saddled with, or the fact that this is going to lead to a sovereign default (unless something turns up, of course). I am also angry about the completely predictable political damage that they are doing to the European project. And it really is completely predictable.

    Also, like Wolfgang Munchau, I find the way that they think that there is no question that can be posed to which austerity is not the answer utterly bewildering. If these guys were some tea party fringe caucus in a red state in another continent, that would be one thing; but they are an incredibly powerful, unaccountable, and very ideological institution that has been soldered onto the essentially social democratic political economies of Europe. It is quite bizarre.

  2. ECB enshrines the banks interest above the citizens

    what do you want john a thank you to the ECB what a great job you did
    to Ireland i think not ,

    the sooner people educate themselves of the huge stitch up the ECB has imposed with the FF/ GREEN goverment to this country ,the sooner that we can start moving forward with the national interest of the people rather than the bankers interest

  3. John
    ” Can we really blame it for pressuring for a formal deal that would put in place a more credible banking and fiscal adjustment strategy and force official lenders to shoulder a significant part of the default risk?”
    Isnt the role of a central bank to be the lender of last resort? So, ptah for its concerns re default risk. That dear sir is their raison d’etre. They are not doing us a favour – they are doing their job. So, yes, we can.

    “Moreover, with a significant (if unfortunately indeterminate) fraction of the bonds held by Irish residents, and so a real danger of domestic financial contagion, the practical opportunities for loss imposition on unguaranteed seniors – at least beyond Anglo and Irish Nationwide — was likely limited. ”
    Irish residents or entities resident in ireland? Irish residents can be multibillionaires, large fiscal entities in the IFSC or the widow and her mite. I suspect its much much more of the first two.

    Kevin has the right of it. The ECB for domestic political reasons in germany are scuppering decades of european integration for fear that we will be suddenly sucked into a hyperinflationary weimar nightmare with mustachioed austrians sure to follow. Newsflash : we wont.

  4. @Kevin

    I do not agree there were no legal obstacles. I do understand that the legal opinion was that losses could be imposed on pre-crisis suborindated bondholders even if new capital had gone into the banks post crisis. But the legal parity between depositors — who by the way are also private creditors of the banks — and senior bondholders cannot be waved away so easily.

    If you have a moment, I would be interested in your reaction to to positive support the ECB has provided to the Irish banking system. Even if we feel the ECB severly limited the justifed and feasible loss imposition, do you not agree that we should weigh the positive aspects as well?

  5. @John , Kevin

    Just tell the people the ratio of money to credit withen the euro system – everything else is just noise.
    Bankers do not create things , all they know is leverage – if you give them such extreme power they will use it.
    They have decapitalised the entire European continent to the point of absurdity creating the weirdest trade relationships in the history of commerce.
    It ain’t bizarre when you realise they are looking after their own – the fact that executives are looking after themselves by catering to these charlatans is I suppose predictable.
    This thread runs throughout European History – we should not be surprised.

  6. There were no legal obstacles that could not have been overcome. Again, this is common knowledge. The proof of this, if you want to go by what people have said publicly, is that Lenihan has said that the Irish side proposed burden sharing, to include senior bondholders, but that this was vetoed by the ECB. If they proposed burden sharing then they must have had some mechanism in mind, wouldn’t you think?

    The ECB is the lender of last resort.

  7. @Kevin

    I would see the legal mechanism as moving depositors out of Anglo and INBS — now accomplished. Recognising the ELG and secured loans, the remaining savings were limited, though still very much worthwhile. But again I come back to weighing those savings against the value of the LOLR support. Maybe where we differ on the latter is that I do not see the LOLR function as unconditional.

  8. @ All,

    I think the problem seems to be, that in Ireland the practice of lending to entreprise has been neglected for far too long. In the past decade in Ireland, we all witnessed a situation whereby entreprise, small and medium, in order to get any kind of credit needed to put forward some form of property collateral, to secure their debt against. Indeed, it got to a stage, where entreprise in Ireland, in order to get access to credit at all, needed to use at least some of the same credit to become a property investor. That is, you had a business and required cashflow, to run your business – but, you only received a cashflow – if you, as a small business were willing to take on the risk of investing in some site, or some building along with getting the cash. We can all talk about wrecklessness, and fecklessness, and a variety of problems now. But the stark reality was, that in order to do business, that is the kind of dance that had to be done, as long as the music played.

    What worries me more than anything else about the European Central Bank, and the policies around lending and finance in Europe/Ireland is this. It is not the fact that institutions have over lent, or are insolvent, is the real problem at the moment. The real problem is that which created the collateral whereby one institution could offer another institution (the small business), some form of cashflow – there had to be a valued property asset as part of the deal. It is a bit like buying petrol at the station and collecting tokens to get a sun lounge chair or a new beach ball. You can to invest in the petrol in order to get the prize. The transaction became very messed up with items that could and should have been sweetener’s, incentive’s, or what not. But the sweetner, the acre or two out the road, ended up becoming the object of the whole deal and the engine for economic development in our little part of the world. We still don’t have a policy, or the beginning or a policy, that can re-address this imbalance in our economy between property and credit systems. So yes! I do agree with Kevin O’Rourke, to say that our financial system is out of control. NAMA doesn’t address this either. A detachment of credit policies from property. The ECB isn’t addressing it either. So it is very hard to accept ‘measures’ which are supposed to be for our collective benefit, when one can plainly see the root of the disease isn’t even being addressed. BOH.

  9. John
    Lets say the ECB had decided to not be LOLR. What then for the banking system euro wide? Answer : contagion. Now they are rethinking it, forcing the decision onto the irish state. Dont hit me with the banking system in me arms…..

  10. This is a little pointless. The ECB is a bankers’ bank. It has done us over but it has also failed the rest of Europe. Rising interest rates will destroy hopes of recovery in the periphery.
    So….it is better to focus on where we go from here. Regardless of the ECB the new world order dictates that any kind of debt is bad. We must start trimming our reliance on it. This means cutting public sector pay and social welfare.
    Europe may or may not survive what’s ahead. With calculated cuts Ireland will. And we will really, really thrive.
    The ECB is no longer that relevant. It has made us ill but now the cure is within our power

  11. @John

    Perhaps this interesting discussion might be more productive if various claims were disaggregrated.

    If, for the sake of argument, one accepts K O’R’s view that there was no insurmountable legal obstacles to imposing losses on the senior bondholders while safeguarding depositors, but the ECB nonetheless decisively insisted that no losses should be imposed on those senior bondholders, then on those facts would you still claim there is little cause for a major grievance against the ECB?

    Or do you think that accepting the facts and legal position as K O’R describes them, there would then in fact be major cause for complaint about the ECB’s role?

  12. John McH

    What are these legal difficulties? Resolution of some form would have exposed lack of assets to cover liabilities. Creditors get paid out what is covered. Deposit protection compensates depositors from outside the banks asset pool. Ditch the staff contracts and pension / / bonus / golf club arrangements. Some staff plus new staff from countries with less woeful banking culture run new banks for fraction of cost.

    Irish banks have been plainly delusional and staffed at senior levels by classic big-fish/small-pond-ers to those in a position to know, with an international perspective.

    Of course, they were Irish, which meant for domestic consumption – like so much else – they had to be assumed to be the best of the best.

    The ECB are being unfair to Ireland but they don’t give a sh!t because the lying little weasels at banks, regulators and political level fed them a load of crap to get liquidity support.

    There is a way of standing upo to the ECB but nobody is prepared to market it.

  13. grumpy..well said
    I believe the deposit guarantee was increased from €20k to 100k in September 2008 and then they followed it with a blanket guarantee…

    But the grubby little detail was that the blanket guarantee was designed to allow private sector banks to present irish bank credit to the ECB discount window, and the only way the ECB could prevent this would be to a) refuse Irish sovereign debt at the window, essentially kicking Ireland out of the EZ or b) allowing Ireland and then Greece etc to be downgraded and then refusing to change the rating rules around collateralizable assets.

    Ireland’s moronic politicians did this to themselves and, because they are almost all puffed up small minded, second hand car salesmen, they really think that if they set up a distraction, nobody will remember this. There are many many options available to a small, highly productive population with a huge diaspora of highly educated and productive people. But instead of accepting that the game is up, tackling the changes the country needs to fix the current problem and prevent it’s reoccurrence, they bleat about how mean the ECB and IMF are…pathetic

  14. John, the facts of the case are that when the IMF came to town in November it argued that the bondholders be burned. The Irish government was convinced. There turned out to be no insuperable legal obstacles.

    Kevin,

    1. On the IMF position, is this not media speculation becoming a convenient fact?

    2. €20bn or half the o/s senior bonds were covered by a State guarantee (Eligible Liabilities Guarantee Scheme) up to Dec 2015.

    So no legal problem in courts such as in Delaware where a guarantee for depositors remains intact but the State guarantee to new bond investors is cancelled?

    3. So a haircut of 50% on the €40bn would be equivalent to one year’s current deficit and the ECB + CBI with an exposure then of 7 times that level, would surely have had some right to argue that they could not increase emergency lending to fill the gap of shutting off future external lending?

    It is true that the ECB has become obsessed to avoid a repetition of Lehman Bros but before policy had evolved, Ireland itself had cut-off the opportunity to restructure the banks and its ‘masterstroke’ guarantee had only expired weeks before the EU-IMF bailout.

    The Irish Government effectively left itself out of aces in particular in respect of Anglo and INBS. Most of the socialisation of bank losses happened during the first guarantee period.

    4. As for the ECB being unaccountable and tarring it as the European version of the tea partiers/birthers, it’s ridiculous to suggest that 6 executive board members have idiot puppets from 17 national central banks doing their bidding.

    It ignores a reality that at a political level, there is a consensus as to what is required from Ireland and Greece.

    It’s easy to paint it as a Franco-German conspiracy but apart from Luxembourg, where are our allies?

    5. Seamus Coffey of UCC has estimated that half the senior bondholders are resident in the RoI — some maybe based in the IFSC but people who have one of the world’s best unfunded pension schemes linked to current earnings, costing almost €3bn annually in cash terms and many billions more on an accrued basis that in total was estimated at €129bn at Dec 2009, should surely check what would be the exposure of private pension funds that are already under water and have been in the red in real terms for the past 10 years?

    6. As for austerity, the CSO reported last month that while there is blanket coverage in the public sector, the number of self-employed workers with a pension fell sharply – – from 47% in early 2008 to just 36% towards the end of 2009. It’s likely less than 30% now.

    Where is the outrage at the slow-motion pace of reform?

    The VHI said last month it had cut payments to medical consultants by 15% who the NCC has said earn double counterparts in Norway- Europe’s richest country; the country is actually bankrupt and costs built on a property bubble are simply not sustainable.

    A bankrupt country pays €50,000 to a lawyer for doing some proofreading over a few weeks? Where is the outrage?

    Destatis said Friday that the avg German household water bill in 2010 was over €400; Ireland has no charge, the highest consumption in Europe and the biggest per capita network to maintain and the litany could go on….

  15. @ John McHale

    Just to go back one step, the Nyberg has this to say about the September 2008 bank guarantee. I’ve noted it before.

    “There was no euro-wide framework in sight for dealing with emerging difficulties and clear indications had been given to the Irish authorities that it was their responsibility to address the problem. The Government had earlier concluded that it could not permit any Irish bank to fail (which the Commission understands was also the advice from the ECB), given the potentially very serious adverse effects on confidence in the banking system in Ireland and elsewhere.”

    Infortunately, in terms of the role of the ECB and grievance, this still leaves things opaque – well at least I can’t make it out. It seems that ‘clear indications’ had come from, er, Europe, a very large place, and the ECB had advised that no Irish Bank could fail (not even Irish Nationwide, or is that a Building Society not a bank?)

    Only the ECB doesn’t remember it that way, and many commentators here suggest the fact that as the Guarantee came as a shock to senior European politicians, it must have been a solo run by the Irish.

    It can’t be beyond some enterprising journalist (or Economist?) to phone Mr Nyberg and/or the ECB and sort this out, or at least clarify the positions.

    Crudely, on this point, the notion that the ECB put the tax-payer on the hook for Fitz and Drum, and other private losses, is bound to be a running sore.

  16. @John,

    The anger is towards the ECB, not you in any way.

    “Moreover, with a significant (if unfortunately indeterminate) fraction of the bonds held by Irish residents” If it’s “indetereminate”, how do you know it’s “significant”? Further, by way of illustration, is BlackRock, the US company which has an office in the IFSC and which manages trillions of assets, “an Irish resident”?

    “Even the ECB’s sternest critics must recognise that it has gone well beyond this role” The ECB provides liquidity against eligible assets which it haircuts and it has extensive and uniform rules on eligibility across the EZ (arguably there was a change on 31st March 2011 but we’re talking about last November 2010). Are the banks solvent? With €46bn of our nation’s funding, yes they are and if they weren’t solvent, what the heck is our Financial Regulator doing?

    Forget about the ECB for a hypothetical moment and say that the Central Bank of Ireland was still at the top of our banking hierarchy. If our banks couldn’t borrow on the open market then they would turn to the CBI as LOLR. Could the CBI reject eligible assets as collateral from solvent banks? And could the CBI turn around to the Government and say “Right lads, I don’t mind providing a LOLR function but yous have to agree to repay private investors from State coffers” It wouldn’t happen.

    There are delicate layers of detail, to be sure, but the bottom line is that both Minister and DoF were cowed into this dreadful, dreadful bailout. And because there is a several year delay between cause and effect there is not anarchy on the streets.

  17. @ John McHale
    This issue of whether the government could impose losses on bond holders has always been a political red herring – although Ireland no longer has the ability to print its own currency, it is still capable of writing it own legislation and could have solved any issues regarding seniority of bonds/deposits with the stroke of a pen. To my mind the legal issue was always a weak excuse that FF were hiding behind in order to fulfil the bidding of the ECB.

  18. I’m getting sick to death of the assertion that the Banks where systemic to the system when they themselves in an internal accounting scheme had structures such that the good bits could easily be stripped out. The branch network was little more than investors to the center. So why the hell look at them from the top down when from the local up would have provided most of the answers since it was how they played with their internal profits. And the bankruptcy system the remainder of them.
    And as to the ECB, quite honestly the games we’ve been playing for the last number of years provide the reasons why the big economies should not touch the smaller one with a barge pole. We will always play the gambler with others money. It’s the scorpion and the frog. And the quicker the ECB pulls the plug like German Bundesbank did with the UK in the 90’s the better for them and us.

  19. Thanks for the comments. Apologies that I only have time to respond to a few.

    @William
    Your logical approach is appreciated. Putting aside the legal issues as you suggest would weaken the case for excessive grievance, but I don’t think take it away entirely. There are still the issues of financial contagion, reputational effects and the level of support being provided for by the ECB (on which I say a bit more in response to Jagdip below).

    @grumpy
    Without the support of the ECB, I am not sure where we would get the funds to pay off depositor guarantees in the case of bank failures. What the guarantees really boil down to is an arrangement where the government eventually absorbs certain losses and the ECB provides the necessary funding in the mean time to meet guaranteed creditor claims. A depositor guarantee by an insolvent government is essentially worth nothing without the backing of the central bank.

    @Jagdip
    My point about significant (but indeterminate) resident holdings was sloppy, and you are right to pull me up. The limited available facts as I understand them are that the Central Bank records more than half the outstanding bonds as being held by Irish residents (a fact orignally brought to our attention by Seamus Coffey). As Michael notes above, however, Seamus has also pointed out that part of these holdings are by IFSC institutions, so we can’t say for certain how significant how large the non-IFSC holdings are. Maybe Seamus will be able to shed additional light on this.

    I also take your point that Irish banks are being treated like other banks in terms of access to liquidity facilities. But Irish banks have drawn on the extraordinary facilities disproportionately. I think it is also reasonable to say that the ECB would not have left these liquidity measures in place for as long as they have absent the problems of the banks in the periphery and Ireland in particular. I also see the ELA coming from the Irish Central Bank as a way to effectively provide additional ECB-sanctioned liquidity assistance to the Irish banks.

  20. @ All

    It will be clear from other comments that I have made that I am wholly on the side of the argument advanced by John McHale. But it seems to me that the differences arise because of a failure by those “angry” with the ECB to grasp what its role is and how it fits into the institutional structure of the EU. It is in charge of defending the value of the euro and its decision-making structures have been designed to enable it to do so. They have been successful.

    But Europe has been hit by a crisis of totally unexpected proportions and, faced by a collection of dilly-dallying political leaders who could not confront the political challenges involved, the ECB has stepped in, stretching its mandate to the limit. It is not some deus ex machina which has suddenly arrived on the stage but an institution with close links through its governing council with the Member States that have adopted the euro cf. the comment by Michael Hennigan.

    In short, those attributing a leading and, it seems, malevolent role to the ECB are shooting at the wrong target. It is the governments of the creditor countries of the euroarea, and the German and French leaders in particular (they do not seem to have governments capable of directing them) that they should have in their sights.

    Indeed, the issue of the “mission creep” of the ECB, and how to reverse it, is at the very heart of the political debate in the real world cf. a recent comment in the FT by Desmond Lachman of the American Enterprise Institute.

    http://www.ft.com/cms/s/0/6a9874d6-7023-11e0-bea7-00144feabdc0.html#axzz1LB5VBC1u

    Of course, the ECB will be very touched by the concerns expressed and it, and European leaders, will be grateful to the Institute for drawing attention to the issue. One way or the other, the article does underline that the heavy political lifting is for the political establishment in Europe, not its central banks. It is showing not the slightest evidence of any capacity to do so, under the direction of a political leader, in the person of Merkel, who appears, in the eyes of many, to be leading it into a cul de sac and who shows no sign of any willingness to change direction.

    But Europe is the richest area of the globe after the US and it cannot be compared to Latin America, no matter how intellectually attractive the idea might appear. The game of chicken between the providers of loans, the countries forced to accept them and the markets will simply continue.

    The conclusion for Irish policymakers is obvious. Get out of the game as quickly as humanly possible. Saying it cannot be done before the real heavy lifting has even begun is not a solution. Returning the levels of public consumption to that which can be funded by taxation is a sine qua non. The banking problem, while it will not take care of itself, can then more easily be resolved. (Paradoxically, in political terms, the smaller party in the coalition seems to have grasped this better than the larger one).

  21. @ JMcH,

    Having thought about Colm McCarthy’s article a little further, and the issues it tries to raise, some things do become apparent. Colm McCarthy has raised the important point (and the logic of it has been picked up by Paul Krugman in his NYT blog), that sovereign bonds and private institutional bonds have become mixed up and confused. The sovereign paper has become somewhat de-valued, and the holders of the same have already absorbed significant losses. Bearing in mind, the idea of confusion, the idea of mixing up of things. We can observe at a different level, within our credit system in Ireland a similar unfortunate behaviour. The credit system in Ireland required property assets as a component in most transactions. In order to finance enterprise in Ireland, to make the better mousetrap, or run the public house or whatever, one had to obtain property debt in order to obtain business credit. The idea of one credit type intermixed with another. Morgan Kelly conducted some research in which he observed the direct relationship in the Irish economy between residential property prices and the amount of credit available in the system. Kelly’s analysis could be looked at in reverse. The amount of credit in the Irish system, depended upon the amount of property changing hands in the system. What is observed at different levels in the Irish system, are these unfortunate relationships. BOH.

  22. @bklyn_rntr

    ‘Ireland’s moronic politicians did this to themselves and, because they are almost all puffed up small minded, second hand car salesmen, they really think that if they set up a distraction, nobody will remember this’

    I don’t think our pols are any less smart than any other country’s. It’s more useful, I feel, to ask what sort of political system could produce leading politicians who are capable of the sorts of gross economic ‘errors’ which were committed by serial MoFs. And who gains from those sorts of ‘errors’.

    There are various stakeholders and chains of vested interests which are brought to bear on any decisions taken. It’s not so much the official advisers I am thinking about, it’s the folk in the background who get to chose which advisers to call. The movers and shakers, who look upon government as a kind of private club, and who set the standards for others to aspire to. Many state officials know the grubby reality, but transparency, it seems, is still foreign to us.

    Nyborg shows the extent to which our leading professions and institutions have let the nation down. Who was it that said ‘Gentlemen, you have disgraced yourselves again’ ?

    @ Jagdip

    ‘Forget about the ECB for a hypothetical moment and say that the Central Bank of Ireland was still at the top of our banking hierarchy’

    That would be a whole different environment. If we had not been in the EZ, the banks would not have had the flood of cheap credit to play with in the first place. We could still have had a property bubble, but the bells would have been ringing a lot sooner. We would not have the current ECB liquidity stream, but we would have had options which are foreclosed by the path we have taken.

    For many reasons, including those cited above, we are where we are I am afraid.
    As for the anarchy, only time will tell. With u-25s unemployment running at 36% and rising, I am surprised the country is as orderly as it is.

  23. “I also see the ELA coming from the Irish Central Bank as a way to effectively provide additional ECB-sanctioned liquidity assistance to the Irish banks.”
    except that its sanctioned by the ECB but secured on thee and me.

  24. The blog entry has a yes-no question as its title: “Is the grievance against the ECB overdone?”.

    IMHO the answer to the question is: Yes it is overdone. The ECB has probably made some mistakes during the crisis, but the depiction of the ECB often seems too harsh.

    The ECB did not create the fragile and unwieldy architecture of the Euro system, they have just tried to maintain it, within the constraints of the untenable role that there were assigned.

  25. IN relation to an earlier point about the interest being charged by the ECB being low compared to the risk incurred, this is correct.

    However the extra interest is not being charged to cover risk but to discourage borrowing at an attractive rate for financially strapped countries and to encourage adoption of policies which facilitate return to the bonds markets.

    So considering above should we not suggest that instead of a reduction in interest rate that we get repayment of the excessive interest provided we meet certain targets? The expectation – if positive – that this would happen would ease things, especially as we approached eh targets.

    Such an approach would not be counter to the drivers embedded in the high interest rate – return to bond markets and non-attractiveness of ECB funding.

  26. The questions should not be “is it overdone”, the question should be “is it surprising”? And the answer is clearly ‘no’.

    Institutionalised bureaucrats fail when presented (apparently) intractable problems.

    Country suffering the results of bureaucratic failure unhappy at outcome.

    Blames bureaucrats.

    Plots thicken…

  27. @ John,

    “I doubt if anyone on this site disagrees with the principle that taxpayers should not be on the hook for the losses of investors in private institutions. “:

    While I agree with virtually the remainder of the thrust of your post, I think your concept “private institutions” has implied connotations which are problematic. I would regard these “private institutions” – our then banks – as under taxpayer policy, via the elected FF governments, the DOF, the MOF’s private advisers, his outside consultants and the central bank, all dearly paid for by the taxpayer. He – the taxpayer – who pays the piper is ultimately responsible for the played tune.

    I should think that the German “investor” banks would have seen these “private institutions” as such. The German culture seems not to be to borrow from neighbours- -family for consumption – FF culture would have been something of a shock to them.

    The taxpayers were due “a bouncing” into a new culture.

  28. @Kevin O’Rourke

    So the anger at the ECB is completely understandable. In my case, I am not only angry about the tens of billions of euros in debts that they insisted the Irish taxpayer be saddled with, or the fact that this is going to lead to a sovereign default (unless something turns up, of course). I am also angry about the completely predictable political damage that they are doing to the European project. And it really is completely predictable.

    Excellent summary of damage already done to Ireland and Europe by the ECB.
    Ireland being bounced into a “bail-out” is an irrelevant distraction.
    By insisting in not burning bank bondholders, they have placed a huge burden on Ireland.
    Ireland in turn has shifted that burden away from the elite and on to the shoulders on the young, the unemployed, the working poor.

    Hopefully the winds of the Arab spring may eventually blow northwards, before the ECB has managed to fully destroy post war European cooperation.

  29. This seems to miss the point entirely. The Irish can burn while they prop up their zombie banks in order to protect reckless banks in the core. Of course its not just Ireland — tightening with near 21.3% unemployment in Spain?

    This trainwreck could well take down the European project.

  30. @ John McHale

    Thanks for a totally rational common sense analysis.

    @ Prof Lucey

    Godwin’s Law!?

    @ Prof Lucey & KO’R

    We are not in any way entitled to the LOLR that we are enjoying on such a massive scale. Just think of what is happening. The covered banks are making massive back to back deposits to each other just so the ECB can have Government backed paper for collateral. No way are these shenanigans an entitlement, they are entirely at the behest of the ECB.

    Now I do agree that the ECB motivation is not entirely, if even at all, a sentimental attachment to the Emerald Isle. But what I do know is if the rug was pulled tomorrow we would be surely down the pan. Motivations are much less important than the results.

    Finally, I think I am safe in saying that the anti ECB brigade were even more anti the last government. Can’t they at least begrudgingly thank the ECB for precipitating the fall of that government. But for the ECB intervention the Greens would have continued to support the slow motion train crash – “we have enough to last to mid 2011 etc.”

  31. @Paul Quigley
    “If we had not been in the EZ, the banks would not have had the flood of cheap credit to play with in the first place.”
    Tell that to Iceland! Iceland! Iceland!…

  32. @John

    “I think it is also reasonable to say that the ECB would not have left these liquidity measures in place for as long as they have absent the problems of the banks in the periphery and Ireland in particular.”

    I don’t understand why the ECB’s liquidity measures are being regarded as some premium service being offered to Ireland. The ECB is advancing short-term loans to solvent Irish banks in return for collateral which is uniformly assessed throughout the EZ and is subjected to haircuts; though the quantums are different this assessment of collateral was no different in November 2010 to the assessment of collateral in German, French or other EZ banks.

    Since when did the LOLR service become a premium service which entitled the provider to demand private debts were met by citizens? We accepted the euro bargain when we joined the single currency – we ceded control over some aspects of monetary policy but we cut down on exchange risk and we got a collosus of a central bank. And a central bank’s function is to provide a lender of last resort service. I understand the above is a simple interpretation but the essence is that the ECB is providing its intended service as lender of last resort, no more, no less.

  33. @ paul quigley

    You say:

    “Who was it that said ‘Gentlemen, you have disgraced yourselves again’ ?”

    In case you’re not being rhetorical, it was Yeats at the opening of O’Casey’s “The Plough and the Stars”.

  34. @ All

    As a postscript to my earlier comment, I would draw attention to the following sentence in the paper by Gary Evans and Peter Allen (advancing a “Brady Bonds” type solution) a link to which I posted on another thread.

    “The Eurozone is in a destabilizing feedback loop that it cannot control. Sovereign credit in the periphery is deteriorating fast and this is reducing confidence in the region’s banking systems, causing or increasing the likelihood that sovereigns will have to assume bank liabilities. This further impairs the sovereign credit and increases the lack of confidence in the banks”.

    Is this view correct? The answer will prove to be the nub of the matter.

    Personally, I do not think that it is. Were it correct, Spain would already be part of the destabilizing feedback loop. The bond spreads, at least for the moment, seem to confirm that the country has successfully decoupled from the three laggards. And one can safely assume that means to keep the situation that way are likely to be made available, including removing the need for the planned return of Greece to the markets next year i.e an extension of the present aid package.

    The only ace that Ireland holds is the fact that it is difficult to imagine a package for Portugal more generous in terms of the interest rate than that agreed for Ireland. But the “reform” of the EFSF and the final details of the ESM are now inextricably mixed up. We will see what will emerge over the coming weeks.

  35. @Brian Lucey
    I am still trying to get my head around ELA – being a simple creature.

    If the assets it is secured on have no time component is it not just money printing ?
    For instance if a foregin corporation pulls out deposits from this country its interest does not have to be serviced – yes ?
    The hole is just filled with money – these are Lincoln Greenbacks . i.e. money tokens only.

    The banks extreme capital requirements maybe a backdoor bailout as the liabilties do not have to be serviced with the above.
    The higher the capital requirements the more the ELA and the less real liabilties
    ELA is net positive for the Irish State in my view given our foregin liabilties are so huge.
    Am I wrong here ? – is it a trap ? – or is it just expediency under extreme conditions

  36. The so-called 1.25% ‘short term’ liquidity support for Ireland is a form of insurance by the ECB that we will not default in the short term.

    1. This ensures German, French and US banks such as Goldman are protected eg Guido, an ex bond trader has the frequently referred to list of Anglo bondholders here: http://order-order.com/2010/10/15/anglo-irish-bondholders-should-take-the-lossesis-the-ecb-forcing-ireland-to-protect-german-investments/

    2. The best that can be said of the so-called and misleading term ‘bailout’ is that it represents a short term debt pileup solution forced on Ireland without any serious consideration whatsoever to our ability to pay it off in the medium to long term.

    3. At worst, it has cast us to the wolves in the knowledge that in the manner of Greeks bearing gifts, it carries within itself certainty of eventual sovereign default.

    Insofar as Trichet has built a steel wall against any restructuring in Ireland and has put us on short term liquidity life support, we are a patient etherised upon a table, economically junk dead to the markets.

    Meanwhile or stakeholders in NAMA, our legal profession, our financial services sector, our bankers, our politicos, media cheerleaders together are locked embraced in a fond debt hug growing tighter and tighter by the ECB praying mantis:)

    So I consider the statement, “All things considered, it seems to me the strength of the case for a major grievance against the ECB is less than many suppose” to be simply plain, deluded nonsense.

    Everything else John has above is excellent neatly encapsulating many of the problems we face:)

  37. The anger is not overdone but is it productive?
    We’re a bit like first years in secondary school – we’ve been picked on by the bigger boys. No point in crying about it. Knuckle down – get the fiscal problem in order then build up alliances with Spain and Portugal and restructure debt en masse.
    Europeans have been doing each other for centuries – no point crying about it – just need to start making ourselves strong.

  38. Why is it ok, almost becoming the consensus position, to grandstand on the demand that bondholders and/or the ECB take a hit yet at the same time not turn this argument inwards and demand that Irish banks take a hit on their domestic mortgage books?

    Fine, NAMA has given them a haircut on certain categories of loans, but the reality is that the whole system is heading again for the rocks on the back of mortgage defaults. No growth, jobless recovery, deficit unstable, increasing taxation on the horizon – the economy is not heading in the right direction yet and how mortgages can come good in this scenario is beyond me. So please let us fix up the domestic default needs before hammering the external providers of funding.

  39. EU of which I’m a supporter should strongly reflect on the damage the ECB is doing to the political heterogeneity of Europe , replacing it with political chaos and moral hazard due to ECB faulty supervision of lending in Europe over the past ten years in breach of the Stability Pact….

  40. @dork
    Lots of (much better than me) explanations on blog.cornerturned.com from Lorcan RK

  41. Alchemist: Take a hit on the domestic mortgage book = some sort of debt writeoff/forgiveness? Or something else? ITIR some economists writing on that back in November…

  42. @Michael Hennigan
    “Where is the outrage at the slow-motion pace of reform?
    The VHI said last month it had cut payments to medical consultants by 15% who the NCC has said earn double counterparts in Norway- Europe’s richest country; the country is actually bankrupt and costs built on a property bubble are simply not sustainable.
    A bankrupt country pays €50,000 to a lawyer for doing some proofreading over a few weeks? Where is the outrage?
    Destatis said Friday that the avg German household water bill in 2010 was over €400; Ireland has no charge, the highest consumption in Europe and the biggest per capita network to maintain and the litany could go on….”

    I have wondered about this also and have concluded that Irish people have not felt austerity yet but rather what Ciaran O’Hagan refers to as ‘hysterity’. It is why, on a separate thread, I asked what sovereign default would actually mean on a practical level. It may be that the outrage will only appear when we have to start ‘cutting into bone’ after ‘trimming fat’. For example, if people can’t afford to run their cars, go on holiday, or have to cancel their kids’ out of after-school activities then, that might bring us out on the streets.

  43. Alchemist, Eureka, we need to restructure as part of a default, NAMA should be dumped back to the banks, mortgage default needs to be factored into this, we cannot solve our fiscal problems without default.

    The empirical evidence all around us is that we cannot return to growth. We tried with NAMA and with austerity, growth is heading to minus values for GNP, if not GDP.

    A major part of restructuring will have to be getting our house in order. Unfortunately, the stakeholders are not up for this. Or believe it when you see it.

    Realistically, even with default it will be very difficult to do and may not be within our competence to do.

    We may be left depending on Morgan Kelly’s ‘kindness of strangers’ .

  44. @Eureka
    There would be no fiscal problem if we had a cash only property market and the banks transfered their term deposits to goverment money.

    The fiscal problem is a illusion.
    We are now running a current account surplus.

  45. The Alchemist says,

    So please let us fix up the domestic default needs before hammering the external providers of funding.

    Precisely.

    Lets try and get the sequence correct. But furthermore, lets try to acknowledge that our credit delivery system on the island of Ireland was never 100% in full health ever, even when we were creating the jobs, paying the mortgages and growing the economy. There was something severly underdeveloped about our credit delivery system even then, when was not addressed or acknowledged. It is like have a human being growing in maturity and adulthood, where one of their vital organs had stayed at the stage of development, from when they were a child. If we grow the economy again, through pump priming, austerity or default in the future, then our underdeveloped organs will still be there causing us the same basic problem. BOH.

  46. @Brian Lucey

    Yes its a great blog , but I would not contribute much to the debate other then ramblings about the precious.
    The precious only becomes powerful when you have extreme corruption in the system – sovergin money guys use a more effecient system but only when the spirit and rule of law is respected in capital structures.

    The apparent supperioty of credit money over goverment money is very disturbing to me.

  47. @BOH,

    “If we grow the economy again, through pump priming, austerity or default in the future, then our underdeveloped organs will still be there causing us the same basic problem.”

    Sadly, those of us calling for default recognise this. Not only that, but we have the culture of austerity for the poor, while previous stakeholders get their teeth into bailout mana from heaven for previous Celtic Tiger stakeholders such as the legal profession feeding from NAMA provisions.

    Those coining it on the way up are the same lot coining it on the way down and they control access to the bowl provided them by the ECB, which in many ways is Anglo’s Big Brother.

    Interesting times ahead!

  48. @John McHale
    “You almost appear to be saying that LOLR services are a right. I don’t think that is the way central banks see it. ”
    This may be the way central banks see it, but they are, IMO, incorrect in this opinion. The ‘market’ sees it as an obligation. History tells us that is the reason for central banks to exist in the first place (Bagehot, for example). Mind you, history also tells us they shouldn’t lend to insolvent banks…

  49. @John,

    Yes I had come across that DB note. To be clear, I hold the view that the ECB must provide a LOLR service as a condition of euro membership. Now the interest rate on the €111bn advanced to Irish banks could legitimately be debated and increased but not the principle that the ECB must lend to solvent Irish banks with eligible collateral. I don’t have the legalities to hand but this is from an ECB news conference in April last year.

    Press: I think that the mystery behind this whole IMF debate is that Europe has one weak point, namely it has no lender of last resort. I would like your comments on whether you believe that Europe can do without such a lender of last resort in the future because the governments also say they are not lenders of last resort. So who will be responsible in the end?

    Jean-Claude Trichet: As regards the lender of last resort function, I am not sure I follow you, because we have a central bank in the euro area, which is the ECB, as the captain of the team, and the members of the team. And together we have all the functions, and we are fulfilling all the functions of a central bank in any other economy. In any case it is a very vast economy. So I do not see your point.

    http://www.ecb.int/press/pressconf/2010/html/is100408.en.html

  50. Eureka Alchemist Colm Brazel

    completly agree with the need for irish bank mortgage right downs
    return NAMA to the banks balance sheet
    build alliances with Greece Portugal Spain ect before external default

  51. @ John McHale

    A very clear exposition of the situation by Deutsche Bank, even to a layman such as myself. The reference to the actions of Spanish banks packaging instruments with the deliberate intention of using them to borrow from the ECB is of particular interest, given the subsequent course of events. The note also helpfully underlines the reality of the ECB’s powers rather those it is imagined to have (and which have not been greatly increased since the note was written).

    But the crux of the present situation is summed up at page 18 of the Winkler paper.

    “A flexible ESM would facilitate ECB LOLR activities in these extreme scenarios by exposing the ECB to a diversified credit risk encompassing all the euro area Member States instead of the idiosyncratic credit risk represented by government bonds issued by weak euro area Member States only, as it is currently the case. Thus, a strong and flexible ESM would transform euro area governance either to one resembling the crisis mode of US CBCHs operating without a LOLR, if the separation principle was reinstalled (Stella 2010), or to one resembling a mature economy nation state with a central bank and government, the latter in the form of the ESM, providing each other with reciprocal stability services in terms of liquidity and solvency.”

    This is what Trichet would like to have and precisely what Germany is refusing to concede. Germany cannot have it both ways. If a United States of Europe is off the agenda, some reasonable and stable half-way house will have to be found and half-hearted allegiance to an “ultima ratio” and ambiguous status for the ESM is not it. Without a credible solution to this issue, and an end to the political but unreal posturing about the creation of a “transfer union”, the euro will fail and the rest of the European project with it.

  52. Colm Brazel says,

    Sadly, those of us calling for default recognise this. Not only that, but we have the culture of austerity for the poor, while previous stakeholders get their teeth into bailout mana from heaven for previous Celtic Tiger stakeholders such as the legal profession feeding from NAMA provisions.

    It would almost make one wonder, if it is more profitable for a segment of Irish society to allow those organs of the system to remain under developed in the extended time period, as opposed to doing the right thing now. It is a question which is worth exploring through both political and social avenues. There is probably a medium to long term task for some worthy organisation to undertake, that would become of lasting value to the nation, and possibly to Europe as well. BOH.

  53. The euro resulted in that the periphery got access to (too) cheap credit. Some might have expected them to use the cheap credit and time to reform their systems and invest. That did not happen so now there is a crisis.

    The periphery now says: give us cheap credit and time and the systems will be reformed.

    Fool me once…..

    Btw, after the election in Finland there has been some preliminary negotiations. The True Finns have said they will stand by their promise and oppose the proposed permanent ‘stability’ mechanism. It will be interesting to see if a government can be formed without them.

  54. Jesper writes,

    The euro resulted in that the periphery got access to (too) cheap credit. Some might have expected them to use the cheap credit and time to reform their systems and invest. That did not happen so now there is a crisis.

    I believe you are on the right track there. What happened in Ireland I believe, is that we did receive vast amounts of credit during the 2000’s. The only problem is, that we were not socially well developed enough by that stage, to administer it properly throughout the system. What happened was a number of parasitic organisations (more commonly known as property development companies), absorbed the greater proportion of the credit on all our behalfs. In Ireland there was a socially held belief, which must be very deep rooted, that credit is something which ought to be reserved for a key minority to deploy. It is kept within that circle, and the Irish banks were obviously in charge of its deployment.

    I would compare it to the logisitical division in an army. It is worth noting also, that during the Ardennes campaign in WWII, the allies were sending in troop divisions in the forests around places like Bastogne, without any ammo at all. They had no bullets going in to defend an area against a German counter offensive. This looks to be what happened in Ireland. That the logistical branch of the army handed out everything they could to the early armoured divisions, and now the poor old foot soldier is left in the fox hole without so much as a rifle round. In 2011, is credit is locked inside the property companies, with no clear way or method for how to re-distribute it to where it is required.

    What I am trying to alude to, is that armies which have suffered badly in previous campaigns owing to certain strategic errors in judgement – the solution usually involves some form of review and investigation – and subsequently a change in the entire organisational culture. BOH.

  55. @ Jesper

    What you say about the “periphery” is the very opposite of the facts.

    I can call on Gary Evans and Peter Allen for a reply:

    “Our proposal, unlike other European debt proposals, is predicated on the notion that the borrowers and lenders and not outside parties should take the losses, set terms of the restructuring, and design the instruments in a menu of options which best fits their needs. The consenting adults who created Europe’s crisis are the ones who should resolve it – albeit with assistance from EU regulators and officials.

    There is much at stake, not just for Europe, but the rest of the highly-indebted West. Forbearance by piling debt upon debt to deal with what is ultimately an insolvency issue is no longer an option in the Eurozone and further stumbles could increase global systemic risk. Policymakers should not entirely discount the risk that the crisis in the periphery could spread to the core of Europe and even skip across continents and oceans.”

    Read more: http://www.creditwritedowns.com/2011/04/a-credible-solution-to-europes-debt-crisis.html#ixzz1LCnJhDDO

    The True Finns are no asset to Europe but they are simply following the bad example set in other larger countries that should know their history better. Indeed, it would be a very welcome dvelopment if they did block the ESM as it is at present constituted.

  56. @John McH

    “Without the support of the ECB, I am not sure where we would get the funds to pay off depositor guarantees in the case of bank failures. What the guarantees really boil down to is an arrangement where the government eventually absorbs certain losses and the ECB provides the necessary funding in the mean time to meet guaranteed creditor claims. A depositor guarantee by an insolvent government is essentially worth nothing without the backing of the central bank.”

    How this could have worked would have depended on exactly were you were in the timeline when going down this route. Earlier = easier.

    Kevin OR suggested there were no insuperable legal problems in this regard at the time of the bailout discussions and I don’t see what these legal obstacles that were insuperable were.

    If you left it so late to resolve the banks then as you say the practicalities – not legalities, get sticky. However, given that restructuring is likely anyway, there were things to do even then.

    If you cannot fully compensate depositors you can do things like draw up a distribution of account sizes and terms. You use this to part compensate in liquid form and part compensate in what amount to gilts.

    There is also the disastrous PR for the ECB should it sulk so much that it refused liquidity to make whole ordinary depositors where banks could clearly be demonstrated to be insolvent and the ECB itself clearly demonstrated to have imposed insufficient haircuts via its risk assessment on Irish bank collateral. Heads would roll.

    Then there is the rather ambiguous situation wrt the Central Bank of Ireland and the fact that actual practical sanctions on its own liquidity provision are very unclear indeed. Were PH on board the ECB would then have been extremely wary of attempting to withhold liquidity in this way.

  57. @John McHale & Jagdip Singh
    There is also this:
    http://www.ecb.int/pub/pdf/scpwps/ecbwp298.pdf

    I haven’t had a chance to read it yet, but the abstract is interesting:
    “The classical Bagehot’s conception of a Lender of Last Resort (LOLR) that lends to illiquid banks has been criticized on two grounds: on the one hand, the distinction between insolvency and illiquidity is not clear cut; on the other a fully collateralized repo market allows Central Banks to provide the adequate aggregated amount of liquidity and leave the responsibility of lending uncollateralized to the banks. The object of this paper is to analyze rigorously these issues by providing a framework where liquidity shocks cannot be distinguished from solvency ones and ask whether there is a need for a LOLR and how should it operate. Determining the optimal LOLR policy requires a careful modeling of the structure of the interbank market and of the closure policy. In our set up, the results depend upon the existence of moral hazard. If the main source of moral hazard is the banks’ lack of incentives to screen loans, then the LOLR may have to intervene to improve the efficiency of an unsecured interbank market; if instead, the main source of moral hazard is loans monitoring, then the interbank market should be secured and the LOLR should never intervene.”

    It is clear that unsecured lending disappeared with the financial crisis, so one alternate pillar to LOLR disappeared. It also seems clear that secured lending markets were under extreme stress with poor visibility on market values, so the other alternate pillar disappeared. For shaky Irish banks underpinned by a now shakier sovereign, this is a situation that persists.

    To me, it again argues that leaving a common equity component untouched on any Irish bank that has to rely on LOLR funding is untenable, not only for imposing losses on subordinate bondholders, but for continued LOLR funding to escape moral hazard.

  58. @Hogan
    “To me, it again argues that leaving a common equity component untouched on any Irish bank that has to rely on LOLR funding is untenable, not only for imposing losses on subordinate bondholders, but for continued LOLR funding to escape moral hazard.”

    and yet…we still have equity quoted in the banks.

  59. @DOCM,

    it is certainly creative finance.

    How does a borrower make a loss on not paying back debt?

    Did the periphery not get low interest rates when they introduced the euro? Or are they now not asking for cheaper credit than their default risk warrant?

    As for spreading/diluting the risk into euro-bonds – not to far off from how risk was magically diversed away in the 2000s. Risk will remain but the incentive to reform will go away.

    The True Finns are in my opinion doing what any good creditor is supposed to do, looking at the credit-worthiness of the asking debtor and saying no to a risk they perceive is too high. Irish people seem reluctant to don the green jersey and lend to the Irish government so what do you expect foreign citizens to do? When the citizens of a country doesn’t trust the government it elected then it is difficult for citizens of other countries to trust that government.

    I’d rather say that any government who supports bailing out the periphery is following the bad example set by the Irish government who decided to guarantee the debt of Irish banks. On the hook for losses but no power to control and still paying the salaries of the people who created the crisis.

  60. @ALL Irish Citizens

    The Proclamation of the New Republic May 1, 2011 Arbour Hill

    ‘We place the cause of the Irish Republic under the protection of the Most High God of the Financial Markets, Whose blessing we invoke upon our actions, and we pray that no one who serves that cause will dishonour it by courage, humanity, or generosity. In this supreme hour the Irish nation must, by its docility and lack of organisation and by the readiness of its children to sacrifice themselves for the senior bondholders, prove itself worthy of the supine destiny to which we have called it.’

    Full detail here:

    http://www.afri.ie/new-proclamation-read-at-afri-event-in-arbour-hill-easter-monday/

  61. @Michael Hennigan – Finfacts..

    “where is the outrage”

    the outrage is there. its being expressed every time someone has their car mended or their house painted, or every time cash is exchanged for goods and services.

    my anecdotal understanding and belief is that the direct consequence of the inequity of this “recession” is the prevalence of a new view towards tax evasion in ireland. I believe we are headed towards a more italian mentality where as many transactions as possible must be conducted in cash.

    I believe this is where us plebs are taking something back. of course, its not possible to evade everything – ESB etc are the most efficient tax collectors pouring money back into the state coffers for incineration, but the mindset of people is changing as far as i can se.

    Maybe we should have more faith in the man on the street. They may not be marching and maybe that will come. for now, i think the outrage is being expressed in a new mindset, that to cheat the state out of revenue is acceptable.

  62. I think it is in fact extremely difficult to overdo grievance towards the ECB.

    As the link in David O’Donnell’s post shows, people are slowly starting to realise that the EU as we knew it no longer exists and it has been replaced by The Banking Putsch Formerly Known as the EU, and that the ECB was the key organisation behind this takeover.

    The damage that the ECB is doing to the European project is more than simply substantial and is quite possibly fatal. And I do mean the European project as a whole, not just the Euro. As someone who believed in Europe as it was, I feel any and all grievances against the ECB are not only justified, but entirely neccessary if Europe is to survive as a united entity.

  63. @Jesper

    By any rational policymaking standard, low interest rates were the last thing that Ireland needed in the noughties.

  64. @ Jesper

    There is a saying that you cannot get blood from a stone which means that you cannot extract what isn’t there to begin with. Driving a debtor deeper into debt is not a means of recovering a loan. Sentiment and morality or creative accounting have nothing to do with it, just self-interest.

    A common currency implies common obligations, the fundamental idea being to remove transaction costs from trading relations impeded by the necessity to also trade currencies. In this context, the idea that the irresponsible “periphery” caused all the current difficulties is as pernicious as the prevailing – but hopefully passing – view in the Irish commentariat that it was all the fault of the “core”.

    Ireland has to get its public finances back on an even keel. As long as the Irish body politic accepts the idea that there should be one law for the public sector and another for the private, that members of the medical professions can legitimately aspire to becoming millionaires while there is no universal healthcare, while the general population considers that water is a cost free resource etc. etc. there will be no sympathy, and deservedly so, on the part of her creditors.

    But the problems of her banks are a different matter. They are part of a system and the system is faulty and the responsibility for correcting those faults lies with all the participants, not just the victims of them.

    What is at issue is EU solidarity. Members of the Union cannot dine a la carte on the menu.

    The True Finns, for example, should look to the implications of a rising euro for the Finnish timber and woodpulp industry, a problem not faced by Sweden, a country in technical breach of her obligation to join the euroarea when joining the EU.

  65. @John McHale

    Listen John, Get on TV with Max Keiser on The Vincent Browne show and argue your point. Then we will see what you are made of. I am just worn out with your good guy approach. My family are facing another pay cut within the next few months and all I hear from you claptrap. Jasus, where is your honour and diginity as an Irish Citizen. Now, don,t give me your “this is all emotional” line.

  66. @DOCM,

    the Swedish crown has gained a lot of value against the euro, the dollar and the pound. As a result Sweden would seem likely to lose out when competing against Finland.

    The breach of obligation to join the euro-zone is an interesting one. There was a referendum and it was decided against. Due to the no-vote Sweden didn’t try to meet the necessary criteria to join and therefore it failed. Now, thanks to austerity measures implemented for other reasons, Sweden do meet the criteria. However, joining now would imply using the benefits of the austerity in Sweden to pay for the excesses in part of the euro-zone. Not surprisingly it is not a popular idea. Some people are arguing to use the money saved by austerity in Sweden to pay for higher salaries to nurses, teachers and policemen in Sweden. All of these groups earn less than their Irish counterparts. So in solidarity with the public sector in Sweden maybe the Irish public sector won’t ask for money from Sweden? Maybe they’ll even introduce a levy in Ireland to pay for bringing it up to Irish wage levels? That would be solidarity.

    This observation: ‘Driving a debtor deeper into debt is not a means of recovering a loan.’ is interesting. Are you saying that any further money forwarded to the periphery are not to be considered as loans? Would that mean that any such money is to be considered as a gift? Or maybe the argument is not to lend them any more?

    Lending out in self-interest? Yep, that will happen if it is believed that the money lent out will help recover the money already lent. However, the saying: ‘Don’t throw good money after bad’ might be applicable. Sometimes it is better to cut the losses and walk away. It is a judgment call. The True Finns seem to believe that money lent to the periphery will be wasted. For those of you who do think that the True Finns are wrong in this, I trust you’ll all don the green jersey and lend your own money to the Irish state?

    Problems with the banks? Default or don’t. There is good and bad with both alternatives, however, it is definitely not an a la carte menu. The situation needs to be dealt with as it is, not as it is wished to be. While an academic discussion about what the situation would have been if the guarantee hadn’t been given is interesting, but I’m not quite sure how it helps resolving the current situation where it was given.

  67. IMHO (with respect) we should not even be debating the title of this article.

    Ireland only has 3 main objectives:

    1) Get itś own socio/economic affairs in order
    2) Back away diplomatically and politely from this ludicrous currency.
    3) Remembering that the European Project has precedence over the ECB.

    As the the 7th member(jointly with Denmark and UK) of the EU/EEC it would be helpful if we remembered the reasons why we joined in the first place and consider the various reasons why Denmark and the UK are not members of the Euro.

    Fortunately most members of the current government (who would consider themselves pro Europeans) also have clear memories of what the original and primary objectives of the European Project were .

  68. @DOCM
    This is weird – I agree with you again.
    I’ll add my own bit here:
    Ireland needs to start preparing for a post Euro world by matching expenditure to revenue asap and sorting out the ensuing mortgage defaults through an external bank debt default.
    Wouldn’t it be great though if Germany just copped on and didn’t squander this opportunity to make sense of history

  69. @ Eureka

    You will have to lie down. My point of departure is that we are collectively searchers after truth (if that does not sound too pompous).

    @ Jesper

    The best way to reply is to send you this link to the article by Fintan O’Toole in today’s IT.

    http://www.irishtimes.com/newspaper/opinion/2011/0503/1224295913381.html

    It is brilliant but, unfortunately, it contains a fatal flaw. O’Toole fails to mention that this is the design of the euro that Ireland signed up to which left responsibility for national banks with the nations concerned. It has been a costly exercise for practically all Member States of the EU to keep their respective banks from going under. They are simply not prepared to accept that responsibility on behalf of others’ banks.

    But on the general political point he is correct. The euro is a collective undertaking and fixing the problems affecting it has to be an equally collective undertaking. Indeed, even Sweden recognises this by participating in the Irish “bailout”. If Germany, in particular, remains blind to this reality, the EU will definitely fall apart. But the EU seldom wastes a good crisis.

    On you other points, countries should not sign up to commitments if they are unable to fulfill them. The official Swedish position is that joining the euro would be a good thing and, given the gyrations of the krona, one can understand why. Technically, the Bank of Sweden does not meet the requirements of the treaties. The country meets all the criteria in other respects.

    On the green jersey argument, nobody voluntarily invests money in a risky undertaking nor should they be required to do so. They can, however, be required to pay taxes to balance the country’s income with its outgoings (including stupidly incurred socialised private debts).

    On how the situation with regard to private debts could be addressed, I recommend the paper by Gary Evans and Peter Allen. It also, however, has a fatal flaw. It is technically brilliant but quite blind to the different political contexts as between Washington-Latin America and Brussels – members countries of a single currency in financial difficulty.

  70. “Isnt the role of a central bank to be the lender of last resort? So, ptah for its concerns re default risk. That dear sir is their raison d’etre. They are not doing us a favour – they are doing their job. ”

    What complete rubbish. The central bank’s role is to be the lender of last resort to institutions which have liquidity, not solvency, problems. It is certainly not the job of a central bank to take on default risk.

  71. @DOCM,

    the Irish government might have had the legal authority to sign Ireland up for socialising Irish bank losses, however, that does not mean that the rest of Europe has to pay for them. The guarantee was a colossal mistake. Pay or don’t pay for the guarantee.

    A bailout of banks is costly now – letting them instead fail will stop the banks from getting bigger and stop an even bigger bailout later.

    The Swedish government might have promised to participate in the euro-zone bailout. However, I need to verify if this has passed the Swedish parliament. If it has not passed the Swedish parliament then it has not been approved and might not happen. The Swedish government does not have a majority of the votes in the parliament. The government has already been forced to go back on some policies that they could not get through parliament.

    Have a read of this speech by Commissioner Charlie McCreevy on the integration of Europe’s financial markets and international cooperation:
    http://www.europa-eu-un.org/articles/es/article_4605_es.htm

    This article is also interesting, in 2007 Ireland changed Irish law to enable Anglo to borrow more. The way the legislation came about is to me a disgrace and it should be impossible to get done this way. Hopefully the new Irish government has made it impossible.
    http://www.sbpost.ie/news-features/bowing-to-the-bankers-54486.html

    Design flaw? Yep, it did not take into account that people in positions of responsibility could be so irresponsible.

  72. I don’t really buy this argument that the ECB are being hard done by, for reasons that have already been stated ad nauseum:
    1. refusal to allow banks fail or bondholders to take losses
    2. penal rates of interest on a loan that has been forced on us. If we were actually begging for it, then maybe penal rates would be helpful, but as it is, it’s simply piracy.
    3. It is a lion when defending investors, yet it is a 3 legged lamb when defending citizens. There seems to be a total imbalance in the efforts it is willing to put into protecting the interests of the two.
    4. Refusal to examine Quantitative Easing to ease pressures on MSs/citizens, for fear that investors would be hurt. They are hiding behind their charter’s focus on inflation IMO. When you consider the coach and horses that has been run through the treaty provisions on EMU, it is laughable that they claim to be prohibited from pursuing Quantitative Easing. I called for QE in 2007, I am still waiting for the ECB to get that message.
    5. They are stern taskmasters with the small MSs, yet they are Yes-men to the big MSs. Frankly, in this regard, I think they are pathetic and deserve only scorn.

    The one concession I will make to them, is that they have a difficult job at present, and failing banks could trigger an even worse calamity. But that does not exonerate the rest of their behaviour, or their insistence that weaker MSs bail out the bigger ones. Frankly, I’d like to see the whole lot of them ejected and replaced -CB independence is not our most pressing concern at the moment.

  73. Dear Eurozone. We’re not going to make concessions on this loan. We don’t even want your money, we want burden sharing.

  74. @JoHn McH

    Is that note not talking about the discount window?

    All eurozone banks can participate in the main refinancing operation as of right – and it is this facility that they are tapping

  75. “There will be seven years of great plenty in all the land of Egypt. After that, there will be seven years of famine, and all the good years will be forgotten, because the famine will ruin the country. The time of plenty will be entirely forgotten, because the famine which follows will be so terrible.” -Genesis

    I think this is rather haunting. I’d cast the ECB in the role of Pharaoh. Hopefully it won’t take him 7 years to agree to let my people go.

  76. @ Jesper

    I am in full agreement with you on the first point as will be evident from other comments that I have made on this blog. But the issue of getting the creditors (not the tax payers of other countries) who have been guaranteed to negotiate an acceptable compromise deal is an entirely different matter.

    Neither am I a defender of the actions of others, the previous two Irish governments in particular, but there is, in my view, a serious design flaw in the construction of the euro that has to be addressed and not in the manner now contemplated.

    Maybe the debate in the Swedish parliament on the issue of contributing to the Irish bailout will help clarify some of the issues. This blog could certainly do with some assistance. Take the point made by ‘a Says’ above. One could repeat the point he makes (“The central bank’s role is to be the lender of last resort to institutions which have liquidity, not solvency, problems. It is certainly not the job of a central bank to take on default risk”) ad nauseam but some contributors will still refuse to accept this statement of fact.

  77. @ DOCM

    Re your Irish Times link, isn’t there something weird when a person with 2 houses on a high salarry, is in effect lecturing the typical German taxpayer on their obligations?

    As with the subprime crisis in the US, there is blame that can be spread around, but is the individual who signed liar loans in the US or Ireland as culpable as say the likes of Goldman Sachs, politicians or regulators?

    Maybe morally but not in terms of systemic responsibility.

    The funny thing about life is that in other circumstances, the people who reserve their vitriol for the likes of the ECB or Merkel would likely be as adamant in arguing a contrary position.

    The outcome of finger pointing and breast-beating by some who may have been closet bubble cheerleaders in the past and now appear to pin most of the responsibility on overseas scapegoats, is that it invites extreme or equally angry responses from Europe.

    There is surely a better way to engage with colleagues in Europe.

    We have yet to implement any significant reform/change almost 4 years after the onset of the credit crunch.

    We should surely be ashamed of that inaction when in the same period more than a quarter million people lost their jobs.

  78. @Michael Hennigan

    ‘We have yet to implement any significant reform/change almost 4 years after the onset of the credit crunch.’

    +1

    One example: Corporate Governance – 9 directors have sat on board of Bank of Ireland throughout; 3 still on Allied Irish Bank Board; ….

    Upper-Echelon Governance pre crash = Upper-Echelon Governance post crash stat sig***

    And there isn’t a social scientist on the island who can dispute this.

  79. @ Michael Hennigan

    I am not sure that the sentiment to which you refer is as widely shared as those expounding it seem to believe. The very poor attendance at the 1 May events underlines that disillusionment in the population with their leadership – including that of the trade unions – stretches right across the political spectrum. I think that Queen Beatrix of the Netherlands had it about right when she praised, according to press reports, the Irish people for the admirable way they faced up to what she called the country’s ‘exceptional debt burden’.

    Now, if those pontificating that things are otherwise, usually from well-paid employment, whether funded by the taxpayer or the private sector, would follow their example, we may make progress.

    On the issue of reforms, in the terms that this would be understood in the structural sense in Greece and Portugal, there is relatively little left to be done in Ireland. What has to be rectified is the rent-seeking that permeates almost all levels of society, or to put it more vulgarly, the gouging that goes on by those who take far more in payment than their contribution to the econoy would justify. On the lack of progress, I am in full agreement, a delay funded by borrowing more from those foreigners that Fintan O’Toole chooses to lecture.

    But on one point he is absolutely right. The countries of Europe are approaching the problems of the Continent in purely nationalistic terms. We have been there before.

  80. @DOCM

    re: Queen Beatrix praising the Irish people “for the admirable way they faced up to wahat she called exceptional debt burden”.

    Maybe I am becoming too cynical lately but I wonder if such “royal praise” was not lavished on “the Irish people” in order to contrast this attitude with that of the Icelandic “people” which the Netherlands is very much aware of.

    @Jesper

    IMHO a debate in the Swedish Parliament about the Euro Zone bailout would be very informative from an Irish perspective.

    Ireland needs to be paying close attention to the attitude of (and reasons behind) Denmark and Sweden to the Euro as well as researching deeply into how both countries eventually emerged from their own dramatic bank crises.

    If Irish government officials spent a few weeks in Copenhagen and Stockholm it may be worth more than several frustrating months (or years) listening to, and exchanging hot, air in Frankfurt and Brussels.

  81. @Livonian,

    I’ve read the transcripts from the discussions in the parliamentary committee that is dealing with EU for the period in late November 2010 when Ireland asked for aid. They were informative, however, the Swedish FOI does not apply to items relating to relations with a foreign nation so there were quite a few items covered in secrecy.

    The parliamentary debates were less informative and grandstanding might be more common there.

    The discussion in the committee at that time seem to indicate:
    -there is a belief that Ireland can resolve the crisis without defaulting, however, I could not find anything about if there was a belief that Ireland would resolve the crisis without defaulting. If it was discussed then it was/is kept secret.
    -it was believed by some in the committee that Ireland would raise the corporate tax to gain political goodwill/capital
    -it was believed by some in the committee that Ireland was unlikely to try to renegotiate the terms after an election
    -it was believed by some in the committee that Ireland would raise property taxes and income taxes in the effort to close the gap in the budget
    -if the loan would be approved, then the loan was intended to resolve a liquidity crisis by making funds available but the interest rate was to kept up to keep the pressure on preventing a possible solvency crisis

    The loan has been approved in the committee – technically that means it is approved, however, the parliament has to agree as to when the funds can be released. Basically the loan is approved in principle, in practice it also needs parliamentary approval.

    The link to the transcript of the meeting on the 28th of November (all in Swedish):
    http://www.riksdagen.se/webbnav/index.aspx?nid=3751&dok_id=GY0A12

    There are some differing views regarding how to deal with the euro-zone bailout. At this time it is difficult to tell what Swedens opinion will be. How solidarity is seen to work within the bailed out countries seem to be a factor.

    If the euro is seen only as a currency, then it seems the euro can be accepted. If there is even a hint about in the name of solidarity that anyone using the currency are required to pay for others spending, then it might be difficult to get Sweden to want to enter.

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