Greek Restructuring: Divergence in Views Among Policymakers

This post was written by Philip Lane

This WSJ article reports on the split in views across European policymakers, with the ECB strongly opposed to restructuring.

41 Responses to “Greek Restructuring: Divergence in Views Among Policymakers”

  1. Joseph Ryan Says:

    It is beginning to look as if the ECB and France are the only hardliners left against default. The German view appears to be shifting.

    “Taxpayers will end up buying out the private sector,” said Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. Finally, when Greece seeks debt relief, the cost will fall on taxpayers, he said.

    He doesn’t specify which taxpayers.

    It is crystal clear too that the ECB is petrified at the thought of default.

    ECB President Jean-Claude Trichet is particularly adamant that any form of Greek bond restructuring could trigger chaos in financial markets, according to officials involved in recent euro-zone discussions with him. A spokesman for Mr. Trichet declined to comment.

    How can any central bank credibly run any financial system if it is incapable of dealing with one of the most fundemenatl realities of life and economics? i.e Institutions can and do bust. Countries can and do go bust.
    Yet here is the institution responsible for the financial system insisting that reality cannot happen!
    The insistence is of course a function of its own incompetence and inability and a complete lack of confidence in being able to handle the fall out from a default.

    There could of course be other more sinister reasons for the view of the ECB and indeed France. But surely not!

  2. DOCM Says:

    The WSJ is really working overtime. I must call on Shakespeare to describe the situation.

    “Double, double toil and trouble
    Fire burn, and cauldron bubble”.

    The problem is that the cauldron refuses to bubble. Spanish bond spreads are back below 2 per cent and even Irish rates are “improving”.

    The previous comment by Joseph Ryan illustrates the gap of understanding that exists with regard to the role of a central bank. It is not its job to rescue banks from default, that is the responsibility of governments. The crisis in Europe stems from a basic dispute about which governments and for what amounts. This has given rise to questions about sovereign solvency which, in turn has impacted on banking sovereignty in the case of Greece, Ireland and Portugal, leading to their banks being both excluded from capital markets and a flight of deposits. This is the weakness in the euro system which the ESM is supposed to remedy.

    The interpretation placed on the actions of the ECB and of Axel Weber (most recently in today’s Indo) is so wide of the mark as to be almost laughable were it not for the disservice it is doing - especially to Ireland - to finding a way out of the crisis.

    The most recent an comprehensive statement of the position of the ECB is that given by Trichet before the European Parliament on 21 March.

    http://www.ecb.int/press/key/date/2011/html/sp110321_1.en.html

    The following sentence is of particular interest.

    “Second, given that the euro area is characterised by an exceptionally high degree of economic and financial integration among countries, the mechanism [ESM] should be able to employ a range of instruments to be effective in stemming against contagion in situations of acute market instability. If indispensable, supporting countries while still keeping some market access, may be an appropriate way and would imply a prudent use of funds. In this context, I continue to consider secondary market interventions as a helpful tool in this context”.

    I hold no brief for the ECB, or for any other position for that matter, but it clear from the foregoing that the ECB, far from failing to act, is seeing rejection of its recommendation in the matter of the intervention in the secondary bond market - a capacity which it evidently views as essential to the success of the ESM - by Germany.

    The handling of this crisis from start to finish by the governing coalition in Germany has been little short of disastrous. It is simply not possible to go in two opposing directions at the same time i.e. that of saying that the euro will be defended at all costs and, at the same time, taking actions and making statements which undermine that objective. This is equally true of the stance of Weber in relation to his decision to breach the collegiality role of the governing council of the ECB and state publicly his opposition to the decision by the ECB to purchase bonds in the secondary market as an exceptional measure. Sitting on one’s hands and allowing the situation to deteriorate even further is not a policy. (The 2010 report of the Bundesbank could be renamed “Axel’s Farewell”. It points out, correctly, that any losses with regard to liquidity support will have to be borne by the governments of all the countries of the euroarea. There is also no sign of the consumer recovery in Germany that is predicted and which is essential to the re-balancing of the euroarea economies).

    It will be noted also that the ECB has a low opinion of the legal route insisted upon by Germany, that of an international treaty governed by international law, and has, with the European Parliament, tried to defend the institutional integrity of the Union. This is more than the Heads of State and Government of Germany and France have been doing.

    Many mistakes have been made by all concerned, the most grievous by Ireland’s two previous governments. But, in coping with the fallout, there is nothing to be gained from confusion.

  3. Gavin Kostick Says:

    @ DOCM

    You say:

    “It is not its [a central banks] job to rescue banks from default, that is the responsibility of governments.”

    I still don’t quite get your position. For example, when M Noonan tells us that the reason the government can’t restructure unguaranteed private bank debt - though it would like to - is that the ECB say ‘non’, then the answer (leaving aside the many other complexities for the moment) should come, ‘thanks for the tip, but as banking is ultimately a national affair, and thus we the Irish government, are ultimately accountable for our banking system, we shall proceed anyway in the way we think best.’?

  4. Colm Brazel Says:

    @DOCM

    Have to totally disagree with you there.

    To avoid repetition here’s a comment posted by me as cbweb on http://www.davidmcwilliams.ie/2011/05/05/eu-now-being-threatened-by-its-own-central-bank#comment-97136

    Greatest threat to EU, whose ideals I support, is the ECB. It has abysmally failed to police the Stability Pact. Through its lack of regulation of ICB it allowed bubble banks like Anglo to grow and flourish. It has abysmally failed to respond to the crisis and its austerity/bailout measures have made the situation worse, both for Ireland and Greece. The True Finn party and many others are finally waking up to this.

    It is sowing political division through member states. The Greek Anglo, Ireland and Portugal are being economically destroyed by the ECB. Sovereign independence of our government is already gone.

    In the words of Abe Lincoln:

    “Let them beware of surrendering a political power which they already possess, and which, if surrendered, will surely be used to close the door of advancement against such as they, and to fix new disabilities and burdens upon them, till all of liberty shall be lost …. “

  5. Colm Brazel Says:

    http://www.smartmoney.com/news/on/?story=on-20110404-000151

    Note above the ECB getting burned on the secondary bond markets re Portugal.

    Only thing ECB has done sofar is increase the mess its made of the Euro Project

    Coming fast down the track is the time it must own up to losses its made on taxpayers money in Germany/France as their banks most exposed to peripheral losses……thus making another huge political and financial mess!

  6. grumpy Says:

    Readers interested in Irish CRE and bank stress tests - remember that one-off 22% - might care to take a look at the LLoyds TSB results.

  7. DOCM Says:

    @ Gavin Kostick

    The best way to reply to your point is to give this link to an interview that Trichet gave to the good old WSJ in January.

    http://www.ecb.int/press/key/date/2011/html/sp110123.en.html

    The following extract is of particular interest.

    “WSJ: Should senior bondholders of bank debt be forced to accept haircuts in the event of a bailout, as proposed by the European Commission?

    TRICHET. This is not a European concept. This is a global concept, which is discussed in particular at the level of the Financial Stability Board and of the Basel Committee It is particularly important for so-called systemic financial institutions. Very careful analysis is required on the various possible options – additional capital buffers, contingent capital, bailing in financial instruments, etc. I would say for us it is still a work in progress. In any case I don’t imagine we could have a different solution in Europe than in other advanced economies”.

    It is a strange world indeed when the entire edifice of international finance seems to be based on a rating structure dominated by three mainly American privately-owned rating agencies and banks can treat government bonds in a way - the systemic issue - that reduces their requirements to hold capital i.e. lend more (I am not an expert in this area) but that is, seemingly, how it is.

    I do not think that Micahel Noonan put the matter well. A more up-to-date position may probably be deduced from what he had to say in th Dáil on Tuesday.

    “The Deputy is correct. All these matters are estimates and projections, and they are the best possible estimate based on the facts, but things are changing rapidly. Things are changing rapidly internationally and therefore it is not possible to predict; but to get back to the Deputy’s original question on sustainability, I believe our position is now sustainable. Some people make false comparisons with Greece. The figures the Deputy has quoted see the debt peaking out in 2013 at 118%. The equivalent figure for Greece is 157%, and that is before its more recent crisis, and it is tending upwards all the time. We are not in the same category as Greece. We are not in the same category as Portugal, and people who talk about sustainability should remember that we are going into surplus on the balance of payments and any country that has a balance of payments surplus is not insolvent when the whole figure is taken together.”

    The issue of haircuts has not, of course, gone away as burden-sharing is an element in the agreement in relation to the ESM through the use of Collective Action Clauses which are to be inserted in “all new euro area government securities”. But then bondholders would be aware of what they were buyinng into before they purchased the government bond in question.

  8. Gavin Kostick Says:

    @ DOCM

    Thanks for the reply. Plenty to chew on.

  9. Colm Brazel Says:

    @DOCM

    Collective Action Clauses acccording to proposed legislation will be post dated to cover bond agreement after 2013, not earlier, so your facts wrong there.

    Noonan is ridiculously not factoring in haircuts throughout his departments over the next three years that will lead to further deflation and decimation of the Irish economy. Neither is Noonan factoring in the high levels of personal debt and mortgage debt that will increase pressure on banks with further interest rate increases from the ECB. Plus all projection so far from DoF re growth levels are currently revised downward anytime we hear of them, and the austerity hasn’t even begun to bite. Clutching at straws as an excuse to do nothing, is nothing short of incompetence.

  10. Colm Brazel Says:

    @DOCM

    Re “The following extract is of particular interest.

    “WSJ: Should senior bondholders of bank debt be forced to accept haircuts in the event of a bailout, as proposed by the European Commission?

    TRICHET. This is not a European concept. This is a global concept, which is discussed in particular at the level of the Financial Stability Board and of the Basel Committee It is particularly important for so-called systemic financial institutions. Very careful analysis is required on the various possible options – additional capital buffers, contingent capital, bailing in financial instruments, etc. I would say for us it is still a work in progress. In any case I don’t imagine we could have a different solution in Europe than in other advanced economies”.

    The above is a typical disingenuous tricky quote from Trichet. “I don’t imagine we could have a different solution in Europe than in other advanced economies”.

    Trichet apparently forgets that in the US, Lehmans was allowed to crash!

    In Ireland in spite of the practice of similar bank closures on a regular basis across the US and Europe, Anglo, a non systemic private domestic bank providing limited services to the Irish economy, was saved in spite risk to the sovereign, fraud and non disclosure of losses. This was on the foot of specious and false arguments such as the above and has led to the Irish economy drowning in debt.

    Trichet raises once again the disastrous canard of ’systemic financial institutions’ the biggest confidence trick of all played on Irish taxpayers.

    Trichet’s actions so far have raised the probability of sovereign default for Ireland, raised the level of danger to the euro project as a whole and left a mess for his successor.

    Re DOCM “The interpretation placed on the actions of the ECB and of Axel Weber (most recently in today’s Indo) is so wide of the mark as to be almost laughable were it not for the disservice it is doing - especially to Ireland - to finding a way out of the crisis.”

    The sytemic canard of bankrupt institutions looking for more taxpayer money, more economic destruction here:

    http://bit.ly/gCHNba

    Axel Weber as successor to Trichet is a huge loss to Ireland. Overall, I regard the sentiments and arguments you make re Weber and in the above as typical of the stupifying nonsense that got us into the mess and is sure to make this mess, if this is possible, a lot worse than it already is.

    On a lighter note lets celebrate the rise in exports and Corporate Tax that will go straight, not to Irish taxpayers, the rebuilding of the Irish economy, but to boost the profits of foreign banks and bondholders from the hoovered Irish economy:)

  11. Joseph Ryan Says:

    @DOCM
    re

    The previous comment by Joseph Ryan illustrates the gap of understanding that exists with regard to the role of a central bank. It is not its job to rescue banks from default, that is the responsibility of governments.

    ECB=European Central Bank.

    1. One of the main roles of a central bank is to act as lender of last resort. Otherwise remove the name central bank. Prominent ECB board members began in August 2010 to publicly renege on its role as LOLR. It was an appropriate moment to fire the entire board and reconstitute the ECB properly.
    2. It is not governments responsibility to rescue banks, or any other private or public institution, except where it is clearly in the public interest to do so and where the government has the resources to protect that public interest.

    3. It is not the responsibility of the ECB to protect bondholders of private institutions by forcing unconnected third parties (Irish taxpayers) to pick up the tab. Thereby shoring up a discredited financial system and its own discredited institution. In fact the imposition of this liability by the ECB, that is the liability not suffered by the bondholders, is a direct theft by bondholders from the Irish taxpayers as directed by and under the protection of their ECB godfather.
    Luca Brazi would not have been a better enforcer than the ECB.

    4. In any case, I would not be concerned with rescuing any banks. The objective should have been to shut them down, protecting depositors only in so far as possible. That is what should have happened on Sept 28/29 2008. And there several opportunities to make it happen since then.

    5. The ECB/EU solution is simple. Shore up the existing system regardless of what it takes because it is that very same system that allows them to live in parasitical luxury at the expense of the productive sectors of the economies.

  12. Joseph Ryan Says:

    @DOCM
    One further point re the Bundesbank report:

    The 2010 report of the Bundesbank could be renamed “Axel’s Farewell”. It points out, correctly, that any losses with regard to liquidity support will have to be borne by the governments of all the countries of the euroarea.

    If that is what the Bundesbank report says, the Bundesbank is being economical with the whole truth of the situation.
    Such liquidity losses should have and still could be imposed on the various investors in those institutions i.e Share holders and bondholders:
    It is only because the ECB rules out the imposition of losses on the favoured bondholders does the statement have any residual validity.

  13. zhou_enlai Says:

    Suggestions in Spiegel that Greece is considering exiting the euro!
    http://www.spiegel.de/international/europe/0,1518,761201,00.html

    Would a unilateral default and all the horrors that entails not be better to introducing a new currency?

  14. Kevin O'Brien Says:

    “The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone.”

    http://www.spiegel.de/international/europe/0,1518,761201,00.html

  15. Kevin O'Brien Says:

    snap!
    I dont really take the story at face value though, but a case of brinksmanship from the Greek government, looking for better terms.

  16. zhou_enlai Says:

    I can imagine the conversation in the cabinet:

    Min. for Social Protection: Will we be getting a nice new currency like the Greeks?
    Min. for Finance: Will we f_ck.

  17. zhou_enlai Says:

    More fuel for the fire:
    http://ftalphaville.ft.com/blog/2011/05/06/562286/greek-out-culminates-in-talk-of-eurozone-exit/

  18. Kevin O'Brien Says:

    Interesting intrepretation from Business Insider: The story was leaked by the German government to speed up a debt restructuring

    http://www.businessinsider.com/german-government-leak-greece-2011-5

  19. David O'Donnell Says:

    More from Der Spiegel ….. just off the press …

    Greece’s economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.

    http://www.spiegel.de/international/europe/0,1518,761201,00.html#ref=nlint

  20. David O'Donnell Says:

    oops …. I’m a bit behind the curve on this one …. must be on ‘old’ time (-;

    @Minister Noonan

    Might as well pop the punt into the pot and stir well - should be worth a point and a half at least on the interest rate …. and if the drachma on the way back why not toss the unsecured bank senior bonds into a debt for equity pot-pourri to flavour the last supper … and perchance turn a real EZ level banking crisis resolution from a Greek Marathon into a Gaelic, as distinct from Gallic, Sprint.

  21. zhou_enlai Says:

    Reuters confirm meeting of larger Eurozone countries. At least we know where we stand with these guys.

    It appears that “The Peripherary” is indeed very much the peripherary.

    http://www.reuters.com/article/2011/05/06/eurozone-luxembourg-greece-idUSLDE74521120110506

  22. zhou_enlai Says:

    Or indeed “the Periphery”!

  23. zhou_enlai Says:

    Is it that they don’t want us to hear just how much of a haircut they are willing to take?

    “Paddy likes to know what’s going on” as Enda Kenny has said.

  24. clintideal Says:

    Greece is not Ireland ?

    Greece is making its play good luck to them

  25. Anonymous Says:

    @Joseph Ryan

    [quote]ECB=European Central Bank.

    1. One of the main roles of a central bank is to act as lender of last resort. Otherwise remove the name central bank. Prominent ECB board members began in August 2010 to publicly renege on its role as LOLR. It was an appropriate moment to fire the entire board and reconstitute the ECB properly.[/quote]

    Can you point me to the place in the ECB statutes where it is given the LOLR task? No, you cannot, and the reason is that it was never given that task.

    The LOLR function was intentionally kept within national central banks, consistent with the fact that banking supervision, regulation and resolution remained in national hands. This is why you can find substantial amounts of ELA in the CBI balance sheet.

    Can I also remind you of Bagehot’s dictum of what LOLR is about: “lend freely at a high rate, on good collateral.” LOLR is not about salvaging failed banks. It is about providing liquidity, at penalty rate, to temporarily illiquid financial institutions.

  26. clintideal Says:

    Greece needs to restructure its debts ,so far it is denies it wants to leave the Euro
    right now a meeting of Euro zone finace ministers is taking place as of yet this may be a select few,with Germany ,France,Italy ,Holland,Finland, Austria and Luxemburg Euro zone G8 and AAA rated contries in attendance

    is Ireland ,Spain , Portugal and more importantly is Greece represented at this meeting ?

    whos pushing the agenda Greece or Germany ,the later me thinks

  27. David O'Donnell Says:

    @Zhou_enlai

    You must have figured out on the long marches that leaving a few members out of politburo discussions is a sure signal of an ensuing schism. Looks more like the show-trials of the nine_teen thirties to me.

  28. shaun byrne Says:

    Can I get this straight? Is now the time to panic?
    Should we all the getting cash and heading for the bunkers, (I have a tree house (beautiful Bijou granny flat, in mature garden))!!!
    It’s so hard to know.
    Although I think it was DmcW that said by the time the average punter knows it will be too late

  29. Joseph Says:

    Any bets on whether the current Greek government will jack it in before calling an exit from the Euro? Imagine the chaos then….

    If Greece does go, Ireland and Portugal surely have to be close behind. I wonder if the meeting last night was considering lumping the periphery into a second stream ‘Euro’? A real twin-track Europe.

  30. Joseph Says:

    Of course, the second stream would be given the opportunity to lift themselves out of there if they met various conditions - a sort of promotion to the ‘Bundesliga’ if you will (and apologies if I didn’t spell that correctly - I’m not really up on footie terms).

  31. DOCM Says:

    @ Anonymous

    I have to admire your perseverance. It is a case of Sisyphus pushing the rock up the hill only to see it roll back down again. The unwillingness of some to accept facts when they are staring them in the face never ceases to amaze me. But there is a real problem as the controversy with regard to the article by Morgan Kelly will shortly reveal. Pusillanimous European leaders are asking too much of their central banks.

    The latest from Der Speigel is that the dreaded Professor Sinn- Morgan Kelly’s German equivalent - has now advocated openly the forced departure of Greece from the euro in an interview with FAZ.

    Why the mystery about the attendance in Luxembourg? They are all the creditor countries. What could be more normal than a creditors meeting!

  32. Joseph Ryan Says:

    @Anonymous

    Can you point me to the place in the ECB statutes where it is given the LOLR task? No, you cannot, and the reason is that it was never given that task.

    The LOLR function was intentionally kept within national central banks, consistent with the fact that banking supervision, regulation and resolution remained in national hands. This is why you can find substantial amounts of ELA in the CBI balance sheet.

    I am relying on experts for my information. Specifically an article by Dr Antoin Murphy (TCD), Ir Times, Nov 26th 2010. (Extract Below).
    Further, even if not in the statutes, the ECB had already engaged in LOLR activity since the outset of the crisis thereby de facto taking on the role of LOLR.

    To use a wartime analogy.
    When a well armed division takes up a front line position and engages in battle, it is not very credible or courageous to attempt to duck out when the situation gets hot. Not only duck out but insist on putting in a peripheral regiment to hold the line at all costs. At all cost to the peripheral regiment but none to the well armed division.

    You then the get desk generals, the Bini Smaghi’s and Jurgen Starks of the world, to issue suitable rallying ‘orders of the day’ to the front line.

    Extract from Dr Murphy article:Nov 26th 2010:

    THERE HAS been a most profound change in the European Central Bank’s (ECB) approach to monetary policy over the last two weeks, produced in great part by the financial crisis in Ireland.

    This change has involved the ECB running for cover from its role of lender of last resort to the euro zone banking system, and in turn seeking some assistance from the European Commission with respect to co-insuring its lending to the banking system.

    http://www.irishtimes.com/newspaper/finance/2010/1126/1224284182197.html

  33. DOCM Says:

    @ Joseph Ryan

    I do not wish to be seen to be intruding in other participants’ discussion but I wonder if you have had time to read the attached research note by Deutsche Bank which was linked (I think by John Mchale) some time ago on another thread.

    http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000222630.pdf

    The issue under discussion is absolutely central to the entire euro crisis, hence my interest in the matter. I have posted below another link to a paper by a professor (German) who actually knows what he is talking about. In a word, up until 2013 the US was a country without a central bank, we now have in the Eurozone, a central bank without a country. This is the fundamental issue that has to be addressed and which the lead country, Germany, is resolutely avoiding.

  34. DOCM Says:

    @ Joseph Ryan

    Herewith the paper on the “Joint Production of Confidence” by Adalbert Winkler.

    It is about the correct sharing of responsibilities between governments in the Eurozone and their common central bank. The ESM is the reluctant answer so far and, as presently constructed, seems unlikely to be enough.

    http://www.eurointelligence.com/uploads/media/110419_winkler_joint_production.pdf

  35. Joseph Ryan Says:

    @DOCM

    Thank you for the links to the research papers. I will try will have a look later.
    On a more general note, it is clear that the so called leaders of developed countries have displayed an abject lack of leadership.

    One wonders if they are more influenced by Morgan Kelly’s ‘German tabloids’ than any research paper or considered view about the future of Europe.

  36. DOCM Says:

    @ Joseph Ryan

    I have to confess to drawing attention to them on several occasions but the noise offstage is so deafening that they do not seem to have received much attention. To complete the dossier, the paper by John Whittaker of Lancaster University.

    http://www.lancs.ac.uk/staff/whittaj1/eurosystem.pdf

    The lack of political leadership is, indeed, the problem and the ECB has become the convenient whipping boy to hide that failure. It cannot go on much longer. The June European Council will be a make or break occasion.

  37. Anonymous Says:

    @Joseph Ryan
    [quote]I am relying on experts for my information. Specifically an article by Dr Antoin Murphy (TCD), Ir Times, Nov 26th 2010. (Extract Below).[/quote]

    I am not sure what Dr Murphy tried to say in that excerpt. Either he did not know what he was talking about, or alternatively he was making a normative point - claiming the the ECB _should_ be tasked to serve the LOLR function.

    If you want better references try the ECB’s website.

    The fact remains that the ECB does not have a LOLR role - the National Central Banks do. To put it simply:

    - The ECB does monetary policy operations, against safe collateral (listed in the ECB’s General Documentation), and at the ECB’s policy rate. These are intended to fulfill the banking system’s aggregate liquidity need, not to prop up fragile banks.

    - In crisis times, for example when euro area money markets are malfunctioning, the ECB may intervene to keep the system functioning. The bond purcase program was justified by this argument.

    - And finally, each National Central Banks provide emergency liquidity (last resort lending) for its domestic banks. It may accept whatever collateral it does and charge whatever interest rate it chooses. Unlike with monetary liquidity, where the whole Eurosystem shares the risk, here the National Central Bank itself carries the risk. The CBI has done plenty of this, as is readily visible in its balance sheet.

    Blaming the ECB for not doing something it was never mandated to do is just silly.

    In short, what happened last fall was that little by little Irish banks, cut off from market liquidity, were starting to hoard an increasingly large share of the ECB’s liquidity provision (this is again readily visible on CBI’s published balance sheet), and providing collateral that was rapidly losing value (Irish government & NAMA bonds etc.).

    So little by little what was supposed to be riskless monetary liquidity provision to sound banks started to look more and more like emergency liquidity to a banking sector that was in imminent risk of implosion - ie. the kind of risky liquidity that belongs to the National Central Bank.

    Is it a wonder that the ECB started to get nervous?

  38. Joseph Ryan Says:

    @Anonymous.
    Thank you for that clarification. It confuses me.

    1. If the ECB has no LOLR function, why is called a a central bank. Should it change its name to the EZICAM : The EZ Institute for Currency And Moralizing.
    2. That is a very fine distinction you are making in the delineation of ECB/ICB functions. That is the distinction between monetary liquidity (ECB)and emergency liquidity (LOLR-ICB). To need monetary liquidity in a bank is surely an emergency. And any liquidity provision is by definition monetary liquidity.

    3. As for the ECB getting nervous about the value of the Irish Govt and NAMA bonds it was accepting, did it not reflect as to how other institutional investors would be feeling when those bonds were dumped back on the State. More nervous perhaps. But what the hell, not the ECB’s problem anymore!

    4. If the ECB has no role in the European Banking system other than the provision of “monetary liquidity” and continuous moralizing , what is it doing mandating that a sovereign country has to pay private bank holders. It should have been told immediately to butt out.
    5. The banks should have been folded under normal rules of commerce with the bondholders taking the pain.

    In summary I have not changed my view one iota, that the ECB is a discredited institution, whose sole recent function has been to act as an facilitator and enforcer for bondholders. As to the ECB getting nervous, enforcers usually are well able to cope with their nerves regardless of how difficult they make life for others.

    The ECB should butt out of Irish affairs and stick to its EZICAM role. The EZ Institute for Currency And Moralizing.

  39. Anonymous Says:

    @Joseph Ryan

    Responses to your questions:

    1. The ECB is called a central bank because it issues euro cash and other central bank monetary instruments and sets the short-term riskless interest rate.

    2. Sorry, but you are mistaken. Banks always need central bank liquidity to settle their payments, crisis or no crisis. The Euro area banking sector presently has a structural liquidity deficit of about € 500 billion (the balance sheet counterpart of cash in circulation and minimum reserve deposits plus some smaller items). This money the banks can only get from the ECB. This has nothing to do with the crisis, it is a structural feature of the Euro area banking system.

    3. The ECB is not an investor in Irish Govt or NAMA bonds. It is a provider of monetary liquidity, against safe collateral. At least in principle. In practice, events have turned this operation into more and more risky emergency liquidity provision, which the ECB obviously dislikes.

    4. No comment on this one, except that your information here is based on rumors.

    5. This is a valid argument that you could make for the Anglo and the Irish Nartionwide. For the rest of the Irish banks, their capital ratios remained above the legal minimum, so there was no legal case for touching the senior bondholders.

    As to your invitation for the ECB to “butt out of Irish affairs”, I suspect it might be tempted to do just so, but the fact is that that would create a hole worth more than € 100 billion in the Irish banking system and would leave zero (0) Irish banks standing. And then the Irish government would have the pleasure of finding somewhere the money to prop up its deposit guarantee system to bail out Irish depositors.

  40. DOCM Says:

    @ Anonymous

    You have provided really helpful and obviously expert information. Now, if only some of the other experts - including professors - contributing to this blog would only read and absorb it we might see the Irish debate leave the surreal world in which it is enmeshed and join the real one!

    Erkki Liikaanen, the governor of the Finnish central bank gave a very interesting interview to the FT today, link to full interview herewith.

    http://www.ft.com/cms/s/0/8b514b06-7976-11e0-86bd-00144feabdc0,dwp_uuid=bd2f85d2-8e90-11db-a7b2-0000779e2340.html#axzz1LqFeQdkW

    As regards the unease of the ECB, the following was of particular interest.

    “FT The ECB is providing crucial support for the banking systems of Portugal, Greece and Ireland. What will happen to the ECB’s liquidity support beyond July?

    EL As regards monetary policy – the standard measures – we [the ECB] will act on behalf of the euro area. The countries you mention have structural problems and monetary policy is not the appropriate tool to tackle them.

    As for the non-standard measures, as Mr Trichet said on Thursday, when we have something new to say, we will say it.”

    According to the RTE economics correspondent, Sean Whelan, this morning the German media are being fed a line that Berlin is being realistic in the matter of Greece, implying that everyone else is out of step. The very opposite is the case. The shambles that we have with one deal for Greece, another for Ireland and still another for Portugal, with salvation through the ESM promised for 2013, is caused solely by political gridlock in Germany and the inability to come to a decision on the core issue of establishing the limits of the shared responsibility of Eurozone governments in the matter of guranteeing the solvency of the Eurozone banking system.

    As Winkler points out (page 18):

    “Without growth, the required long-term assurance to markets that their doubts about weak countries’ solvency are unfounded is likely to be repeatedly questioned. This concern reflects the fact that many market participants use the debt-to-GDP as a key indicator to assess the solvency of governments. However, like the non-performing loan ratio in banking, this indicator is pro-cyclical, sketching a scenario too rosy in the boom and too negative in the bust. As the policies of consolidation and adjustment pursued in weak euro area Member States are likely to imply several years of low growth, the debt-to-GDP might continue to rise in the years to come despite significant progress in consolidation, reinforcing doubts about the solvency of weak euro area Member States”.

    I am not an economist but I can, by this stage, assess the arguments advanced and this is by far the most persuasive (and, in indeed, corresponds closely to that of De Grauw). This is the vicious circle that has to be broken. I am not expert enough to venture a view on how but my money is on the opinions advanced by the ECB with regard to the ESM.

    All the trains are meeting in the station next month. Someone had better be in charge of the signalling.

  41. Joseph Ryan Says:

    @Anonymous

    I am still completely unconvinced about the dividing line between the ECB role and that of The ICB, particularly having read a few pages of the ICB annual 2009 report. I will come back to that later.

    As for the ECB wishing to rid itself of Ireland, please be assured that Ireland would be far better off if it never heard of the ECB.
    The sooner the ECB butts out of Ireland , the sooner Ireland begins the process of managing itself on behalf of its citizens, not on behalf of private bank creditors.

    In the process of untangling Ireland from the ECB/Euro you seem to forget that the ECB/ICB is the creditor to the tune of approx €160billion.
    The Irish people should have refused to pay a cent into these banks, obliging them to declare insolvency.
    The ICB/ECB could then have presented its collateral to the liquidator and queue up.
    And finally, if depositors lose, they lose.

    We then might begin to really contest the argument posed by Steinbruck in Spiegel.

    The most important question hasn’t been answered yet: Who’s in charge, politicians or the financial industry?

    http://www.spiegel.de/international/germany/0,1518,717248,00.html

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