Maarten van Eden, outgoing CFO at Anglo, has an interesting article in today’s Irish Times (see here). One useful feature of the second half of the article in particular is that he focuses on what is needed to allow the banks to play their normal lending function in the economy.
In order for lending to the private sector to resume, the good banks need to be delevered [through debt-funded buybacks of NAMA bonds and promissory notes, with the cash used to pay back the ECB], recapitalised and their funding put on a firm footing.
I am not convinced by his specific solution, but this focus is important given that the debate sometimes seems to have lost sight of the ultimate objective of fixing the banking system.
As an aside, one of the best papers produced on the Irish crisis is Gregory Connor’s “The Irish Risky Lending Gap”, written back in 2009 (see here). Greg focuses on the lending decisions of a risk-averse bank holding a distressed asset portfolio with a value that is correlated with the value of potential new lending opportunities. He shows how the level of lending can be socially sub-optimal, and how various balance-sheet restructuring policies can change the size of the lending gap. It might be useful to re-read along with the van Eden piece.
54 replies on “Maarten van Eden: Applying same analysis to all Ireland’s debt makes no sense”
The part of the Maarten Van Eden that caught my attention was the following:
In other words, take the debt from bank balance sheets and place it without equivocation onto the State balance sheet.
With one leap our heros (banks) are free. On the other hand, an anchor of €60billion would be hooked on to the chains that bind the State, with a triple lock attached.
This country needs to question the reasons and the motives of the people who propose this kind of solution.
The banks are crap. Many of the staff are crap at banking. Their culture is crap. Their assets are crap.
Viewed from the inside, down the golf club, with yer mates, some retired (subscription on the taxpayer of course), the banks are quite literally more important than the state.
New ones please. New management, new boards, new culture. DoF really need to be looking down the back of their sofa for that resolution scheme.
Bankers are now incentivised to not make loans, meanwhile the state is to pay a load of other guys to make the loans the first lot are being told not to make.
I’m with grumpy on this one. The ECB must take a hit – and a big hit – on the unwinding of its ‘liquidity’ support. And as a result our ‘EU partners’ must be prepared to front up to recap it. The Irish state can’t take any more. That’s the real ‘quid pro quo’ for ‘saving our banks at all costs’ to save theirs. Then there’s a sporting chance the ‘Two Pillars’ might do what they’re supposed to do.
But, aye, there’s the rub…
The solution is easy – divorce money from credit.
Correct me if I am wrong lads but I believe when I hold a Post office Bond it is not present on any commercial bank balance sheet
Two Pillars me hole.
I would like to take issue with Van Edens line –
“Although the dividing line between the Government and the banks is becoming more and more vague, it makes no sense to add the debt of the banks to the debt of the Government and apply macroeconomic Government debt analysis to the sum of the two. Funding the assets of the banks and funding the recapitalisation of the banks, on the one hand, are fundamentally different from funding a Government deficit and funding a loss once the capital buffer has been wiped out, on the other. Against the former there is income generated by assets. Against the latter there is no income and thus the cost of funding the debt is a burden on society that will need to be paid from taxes.”
They are different but not in the manner he suggests – first the banks are not generating a income , they are generating a rent , this is manifestly the case as without the supply of goverment money the assets and the banks that back them would be toast.
The banks here have clearly not increased the productive capacity of the country but have expended the credit they have created on unproductive consumption of goods and people.
Now other businesses that have not been bailed out need a money supply for commerce like all businesses – they do not have the privilege of producing it themselves so in the event of private credit institutions failing they need goverment to produce money for them.
Without money you can have no advanced commerce , consumption without gathering or investment without saving.
Is he suggesting that we reduce our money supply to fill the coffers of failed private money cretors ? and we essentially give up internal commerce to do this !
The man is obviously little more then a spokesman for the rent seekers.
Ps who said you need tax to create money -absurd, its just a piece of paper.
I don’t believe van Eden’s proposal is the way to go. Although far from ideal, it is better to have the ECB as a co-funder for the moment, even if they see us as the ones on the hook in the end.
For now, however, it looks as if even a well capitalised Irish banking system will have trouble funding itself. As with the State itself, a significant part of the problem is the lack of a reliable lender of last resort — a problem that will continue as long as the ECB is so heavily committed already, raising doubts about its willingness to increase its exposure. I think this is the problem that Maarten van Eden is trying to grapple with.
But we’re on the hook for more than enough. The ECB has to front up now. It is they who decided to provide the extraordinary liquidity support (which in reality is medium to long term funding as it allowed the full redemption of the bonds previously providing this funding – and which would have been haircut if a proper bank resolution scheme had been in place). And the ECB provided this liquidity/funding to save other, perhaps not as dodgy/insolvent as the Irish ones, but dodgy nonetheless, EZ banks.
As I’ve mentioned previously, Ireland is an insolvent banking system with a troubled, but potentially resilient, sovereign bolted on; Greece and Portugal are very dodgy sovereigns with a much smaller bank problem bolted on. Maarten van Eden’s op-ed piece is highlighting that distinction, but his solution is a non-runner.
It’s time for our EU parthers to cut the Greeks and Portuguese some sovereign debt slack and to recap their banks that take a hit (or let the really insolvent fold) and to recap the ECB to allow it to take the hit as it unwinds irish bank support. Two different problems, but the same solution applied differently. I suspect it would go down like the proverbial turd in the punch-bowl in Germany, the Netherlands and Finland.
Your last sentence is key. We have to deal with the reality of the European political situation as it exists and manoeuvre through as best we can. You have consistently stated this better than anyone. At the risk of repeating myself, I am not supporting Mr. van Eden’s particular policy proposals. But I appreciate that he is attempting to diagnose the banks’ undelying post-stress tests funding and lending problems, and making concrete proposals to deal with them.
@ Joseph Ryan
You are seriously missing the point. At the moment the State owes the banks through NAMA bonds and promissory notes. What is being suggested is a replacement of these loans to the banks with loans to some EU institution. No change whatsoever to the State debt (assuming NAMA bonds are regarded as State debt) or the State involvement with the banks.
@ John McHale
Like you I am struggling to see how it would work but I think I see what he is getting at. I guess the argument is that when potential funders look at the banks and their capital they see that it is backed by NAMA bonds and promissory notes. They mistrust that backing. Now if these wre replaced with hard cash maybe that would give more confidence.
“For now, however, it looks as if even a well capitalised Irish banking system will have trouble funding itself. As with the State itself, a significant part of the problem is the lack of a reliable lender of last resort ”
I don’t believe the LOLR is a problem. It appears that funding is available as required from the ICB.
The problem is that a bank that is using LOLR money is broken. The funding that has gone from the banks (deposits and bondholders) will not be back. That is the funding that is required to make new (profitable) loans.
I am not sure I agree with that interpretation of what he is arguing — hopefully Mr. Van Eden himself might set us straight. The promissory notes are only relevant for Anglo and INBS, and market funding for them is moot. Also I am not sure I see the NAMA bonds as being especially risky compared, say, to the loan portfolios of the banks. The big question relates to the funding of the (soon-to-be) well-capitalised AIB and BOI, and how heavy exposure to an unreliable ECB is scaring away potential funders.
Yes, Hogan, but the question is why are the banks having such trouble funding themselves. It may be that you believe that the banks will not really be well capitalised even after the new injections given the true value of their assets. But even that should not be unsurmountable, at least for deposits, if it was truly believed that a reliable LOLR exists. I would not dismiss the LOLR issue so quickly.
Thank you. I’m sure it must be very annoying for economists with an interest in public policy when perfectly logical economic solutions may not be implemented because of the pig-headedness of politicians. And it is even worse when these politicians’ pig-headedness is caused by their previous deception of their voters – telling them everything was fine and they didn’t have to worry their pretty little heads. They dread revealing the truth to them.
The True Finns may conceal some nasty elements, but their leader seems to understand the requirement for European solidarity – but only on an honest and open basis. It would actually be good if they were in government. They might tell the Germans, we had a problem with our banks in the early ’90s, we took the hit and sorted it. Time for you to do the same.
Ireland needs all the friends it can get – even if, at first sight, they mightn’t seem the most clubbable.
@ John McHale
Simple minded sort of question.
“But even that should not be unsurmountable, at least for deposits, if it was truly believed that a reliable LOLR exists. ”
Why should any person or institution open a new deposit account with BofI or AIB? Is this not a reputational issue, so even if they are ‘healthy’, the thought of them is so ‘ugh’, that people won’t go near them. Perhaps I have the wrong end of teh stick.
The banks could have a 100% capital ratio – it would make no difference – THE MONEY SUPPLY IS DECLINING
Who in their right mind would give credit in such a environment ?
Unless you give substantial ownership of Goverment debt withen the state the ECB will continue to extract real money from this juristiction for their clients – using low interest loan mechanisms, keeping zombie banks alive and their obscenely elevated “assets”
Irish term deposits needs to become Goverment money and property assets /risk capital needs to be vapourised.
If not no capital will be released for useful capital forming purposes.
“Yes, Hogan, but the question is why are the banks having such trouble funding themselves. It may be that you believe that the banks will not really be well capitalised even after the new injections given the true value of their assets. But even that should not be unsurmountable, at least for deposits, if it was truly believed that a reliable LOLR exists. I would not dismiss the LOLR issue so quickly.”
It is a relatively recent situation that recourse to the LOLR is considered okay, indeed, largely it is not. Remember, the BoE wanted to keep its LOLR lending to Northern Rock secret because publication would lead to a loss of confidence in the bank as a going concern. Our banks are so heavily dependent on LOLR facilities precisely because there is a loss of confidence in them as going conerns in their current form.
As grumpy has argued elsewhere, new banks are required – new boards, new management, new identities. The identities of the current banks are so poisoned that they will not recover, at least not in the medium term. Any future liquidity crisis will see them shut out again, even if they do recover from this one. Barings brought itself down. ING-Barings required a 10 bn euro bailout in 2008. Why was it one of the first to fall? Just the name?
That the Dutch government was able to stump up 20bn in 2008 has headed off the panic. The room for the Irish government to do the same is clearly limited. Far more difficult to find than a LOLR is a funder of last resort. The pensions levy will do little to ease the fear of any new depositors and the imposition of losses on junior bondholders in AIB outside the capital structure will likewise do little to ease the fear of any new bondholders. There is going to be no new funding for these banks, willing LOLR or not, good capital position or not.
Gabin Kostick: “Is this not a reputational issue, so even if they are ‘healthy’, the thought of them is so ‘ugh’, that people won’t go near them. Perhaps I have the wrong end of teh stick.”
I don’t think you have. John McHale seems reluctant to accept a simple answer to a simple question. The customers now know how the banks were managing their money. They are relieved that, thanks to the ECB, they can still withdraw it. Having done so they are not coming back.
Economists are trained to see subtle flaws in simple explanations. That’s very useful in some areas, like trade theory. But sometimes a heap of manure is just a heap of manure.
Sorry about the spelling, Gavin.
@Gavin and Hogan
The funding situation facing the banks is clearly challenging, but I think Hogan still exaggerates it. Retail deposits are showing a good deal of stickiness; it is crtical here that the “deposits are unsafe” meme does not get any momentum — what looks sticky one day could be a run the next. Even though most depositors do not think much about what makes their deposits safe, the existence of a reliable LOLR is critical to this meme not getting started.
For more sophisticated depositors, they weigh up return and risk, and will be willing to move depositors in return for an interest rate premium if they believe a reliable LOLR is there so that the risk is minimal.
I think the analogy of a multi-engine plane is useful for thinking about what stops a run. There is redundency in the system, but it is better to have all engines working. The main engines are the capital (for loss absorption) , the guarantees, and the LOLR. In my view, by far the most important at the moment for deposit attraction and retention is a reliable LOLR. The main use of the guarantee at the moment given the creditworthiness of the State is that it is necessary to keep the ECB willing to provide what has so far been unlimited liquidity support.
Grumpy may be right that eventually we will need new banks. But I think we would be better not to try the route of a chaotic collapse of the ones we have.
@Brian Woods II
No. I do not believe that I am missing the point.
Legalities may or may not be on my side, but I will not accept that NAMA bonds are a debt due by the State. They were bonds issued by a 51% privately owned SPV backed by collateral assets that the State in extremis decided to take from the banks in order to stop the banks from declaring insolvency and “get the banks lending again”!!
This ‘NAMA plan’, if it can be called such, was backed and approved by the relevant European institutions.
Not State debt in my book. Hand back the collateral to the banks and cancel the bonds.
Perhaps unlike yourself, I believe that the State should cut the banks loose and let the chips fall where they will.
Therefore in my view the division between the bust banks and the State should be maintained at all costs.
One grievous error in this regard was the changing of the name of Anglo Irish Bank and its removal from the building. It should have been kept there as a permanent monument to Ireland’s denouement by the European and Irish banking industry.
One final point.
If the ECB is now happy that the Irish banks have been super-capitalised, why is it so anxious to free itself so quickly from the €160 billion?
Surely the first vote of confidence in the now recapitalised banks should have come from the ECB in the form of medium term funding. It didn’t happen.
The ECB knows the score on Ireland and the banks. It wants out.
I have therefore a deep suspicion of the ECB motives and believe that they will cut the Irish banks loose at a time of their choosing. In fact they are not coy about this. They would like to do it right now if they could.
I am also conscious that a proposal that the ECB eat the €150 billion would not be career enhancing for any soon to be ex banking executive. In fact a proposal to the contrary would always be well received in the boardrooms that matter.
@ John McHale
I take your point re promissories and Anglo.
I also kinda see your point on NAMA bonds vs other more risky assets. But one of the main thrusts of the IMF/EU deal is to put so much hard cash into AIB/BoI that the funding will return. So let’s say they are attempting a 12.5% Capital Ratio backed by “hard cash”, it still remains that a very large part of the balance sheet is backed by “risky assets”. I suppose if in addition NAMA bonds were also replaced by hard cash it would tip the situation even more towards being resilient to bad loans and/or sovereign default.
It would be good if Van Eden were to clarify his point.
“Even though most depositors do not think much about what makes their deposits safe, the existence of a reliable LOLR is critical to this meme not getting started.”
And I believe you are exaggerating the importance of the LOLR. Retail depositors are concerned about guarantees, not the mechanism by which a guarantee might be funded. (Effectively we have seen deposits moved by Central Bank funding from Anglo and INBS to other banks).
“For more sophisticated depositors, they weigh up return and risk, and will be willing to move depositors in return for an interest rate premium if they believe a reliable LOLR is there so that the risk is minimal. ”
Again, LOLR is not relevant. FSRs, now they’re relevant and the Irish banks are junk. If an institutional investor really wants to invest in junk, they’ll be looking for a far juicier yield than the Irish banks can afford… hence their current funding problems even for secured repo, never mind unsecured deposits.
And, as I say, the ICB has shown willing to lend as required. It is not fair to say that this is not credible, the amounts are simply incredible!
I don’t want to keep this going, but I have to ask you: If the LOLR is as reliable as you say, what on earth has any depositor to worry about? On the guarantees, I agree that they are what many depositors think makes their deposits safe, and so are valuable for this reason alone. But guarantees would be effectively worthless if an actual run occurs given the amounts involved relative to the fiscal capacity of the State, and depositors would learn this soon enough. I come back to the LOLR . . .
“If the LOLR is as reliable as you say, what on earth has any depositor to worry about? ”
Put simply – Sinn Fein (not fair to dump it on them, but you know what I mean – the idea that burning bondholders has no consequences and that we can continue to borrow for the deficit).
Retail depositors simply don’t see the LOLR. They see the guarantee, they see the state behind the guarantee, they see bust.
Institutional depositors see ratings.
Let me return with a question – why don’t the ratings agencies ever mention the LOLR when they assign a FSR? If there is pretty near unlimited LOLR (which there appears to be in the eurozone) and no pari passu left behind, why are the banks rated junk?
My answer is that the situation continues until it doesn’t. It doesn’t matter how strong or how reliable the bank or the LOLR is today when you put your money in to your two year term deposit. It is how strong the bank will be and how willing the LOLR will be in two years time. That is where the uncertainty lies.
The alternative is for the LOLR to give an unconditional guarantee of repayment, but then, if they did that, they might as well open retail deposit outlets themselves…
There is a certain tension between this:
It’s possible to believe that a reliable LOLR can abolish all worries, but it seems to require that the word “reliable” does an awful lot of work. Traditionally, a LOLR lends only to solvent banks, at a penal rate. Of course we have junked that notion, along with many other principles of capitalism. But it seems a bit unfair to expect depositors to keep track of all these shifts in economic philosophy. Who knows what theory Pierre-Marie Ventre will come up with next, to justify whatever bit of asset-juggling is required by the latest fancy rescue plan?
It’s simpler to just take the money out of a discredited bank and put it somewhere else.
“It’s simpler to just take the money out of a discredited bank and put it somewhere else.”
Could I suggest an analogy. Perrier discovered contamination in their bottled water. They recalled the whole lot, junked it, made sure every potential consumer knew about it, and in so doing defied the almost certain destruction of their brand.
Consumers were not put in a position of having to read the latest newspaper reports each day or week of the results of sampling for contaminants, or listen to “experts” arguing about whether the current levels of contaminants were safe or not? Was the science reliable?
Unlike the Perrier strategy the Irish banking strategy has been dumb dumb and dumber still. The brands are trashed.
There is a lot more inertia in retail banking on a fairly nationalistic island. That is the only reason there is are any deposits left in the the pillock banks.
Maybe the overcapitalisation story can be sold successfully to those open to persuasion, but if so it will be just countering the negative effect of the retention of the existing brands.
Being neither an economist nor a banker, I can only venture the opinion that this discussion seems to me to go the very heart of the problem for the three peripherals currently in “quarantine” and the Eurozone.
The ECB is going to return to its core functions whether we like it or not and any confirmed public extension of its exceptional “liquidity” funding can be ruled out.
This leaves the CBI with its LOLR role, the only bank ever to have it under the current system, but it can no longer fill it because the credibility of the sovereign is shot to bits. The same holds true for Portugal and Greece although the economic circumstances of the three countries are totally different.
In Ireland’s case, no amount of capital in the two pillar banks will fix this problem. The core issue of the perceived risk of insolvency of the sovereign has to be addressed. The two types of debt, sovereign and banking, have also to be separated. With regard to the first, the key has to be recognition by the government of the need to convince markets. With regard to the second, one needs, it seems to me, to take into account the manner in which banking debt has traditionally been dealt with via what I believe is called the Paris Club.
The topic is too technical for most people to grasp but the parameters are simplicity itself. Ireland can cope with the first debt – indeed the country will be given no choice as, to take a phrase of HoganMayhew, I believe, putting on the béal bocht while wearing a fur coat does not impress – but the second issue, that of banking debt, is a lot more complex and more amenable to some form of burden-sharing. It seems to me inevitable that a solution at a European level will be found as the financial institutions concerned must also be seeking to get toxic assets off their books (except, of course, for the hedgies who bought them because they are toxic in the hope of making a killing on the back of the inability of the major governments in Europe to decide what to do).
van Eden writes,
The same old plot line again, that the government can step in where the market falters, to provide the longer term support required, so that assets can mature. If the post 2008 crisis has proved anything, it is the limitations of government intervention. It doesn’t appear they have any other cards to play in their hand, and the big bluff is called. BOH.
van Eden writes,
This is problematic also. It supposes that it is okay for sovereign administrations to engage in unsustainable policies over extended periods, of up to a decade and more, and if the incoming administration throws a few shapes to give the impression, that overall good behaviour has been restored, that no one will notice anything. Things should go back to normal etc. I don’t think it works like that. It requires something more. It requires a gesture of some magnitude in order to change the game, back in favour of the sovereign. The fact of the matter is, that adjustment of sufficient magnitude will happen in any case. One can either choose to become a part of the process, and exercise a degree of input and control over the events, or choose to remain outside of the events, but still be affected by them. The shades of grey, are really to do with what degree of engagement we wish to have, in a process which is going to happen with or without us. It’s a bit like everyday life in that respect. Often, all one can do is try to participate. The course is more or less set out. BOH.
van Eden writes,
It wouldn’t be the first time this has happened. The Irish government had a habit of borrowing vicariously through our banks all throughout the Celtic Tiger – where it funded public expenditure vicariously through the transactional taxes paid by banks through 100% loans to Irish citizens. What is new here? BOH.
You write: “It doesn’t matter how strong or how reliable the bank or the LOLR is today when you put your money in to your two year term deposit. It is how strong the bank will be and how willing the LOLR will be in two years time. That is where the uncertainty lies.”
We may not be as far apart as it seems. What you write above is basically what I mean when I refer to a reliable LOLR, though I think this also matters for much shorter term deposits. As I see it, the basic deal with the ECB/ICB is the State has agreed to bear the bank losses (beyond the banks’ capital and a fraction of the sub debt) and the ECB/ICB fills the funding gap to keep the banking system functioning, and in particular to stop a bank run. To varying degrees, we all believe that the bank bondholders should have picked up more of the losses, but it is where we are now given the decisions that were made (notably the blanket guarantee and the failure to put in place a SRR for when that guarantee expired). At this stage, I do not think it helps us to keep banging on about burning the ECB. This is why I worry about the self-defeating claims of grievance against the ECB — it must make the ECB worry that we will leave them with the losses, and it creates a question mark about the reliability of their funding; it is not because I am worried about hurting their feelings.
It sometimes seems — and this is not aimed at you Hogan — that those who profess the most doom and offer the most radical solutions have the least understanding of the true vulnerability of our situation.
‘The ECB is going to return to its core functions whether we like it or not and any confirmed public extension of its exceptional “liquidity” funding can be ruled out’
The ECB doubtless plans to return to its core functions. As we all know, the first casualty of battle is the plan, and there is going to be the mother of all battles with Mr Market (a mostly ka speculators). As my late father, God rest him, used to put it after another Irish defeat ‘They played as well as they were let’.
The withdrawal of ‘exceptional’ ECB liquidity is no more likely that its extension. It all depends how fast and how far the EZ fire spreads.
“We may not be as far apart as it seems.”
No, I don’t think we are. I agree with you the LOLR needs to be reliable. The ECB, though some of its members, has already proved itself unreliable, though. Not though its actions, but through some intemperate words. That memory is not going to fade. Threatening to withdraw liquidity support for struggling banks because the amounts grew large was a really bad idea. In part, I think, it has resulted in the anti-ECB feeling; that and, of course, the “you must save your banks” and Mr. B-S wittering on about fiscal deficits while ignoring debt loads.
I also don’t think that the LOLR issue is relevant to the existing Irish banks, but it is for the rest of the eurozone or any ‘new’ Irish banks (the quotes account for the fact they’d be built from the rubble of the old Irish banks and would contain both their assets and deposits). The existing Irish banks are reputationally destroyed, as others have said above. There are alternatives. The funding isn’t likely to return on any meaningful timeframe.
“It sometimes seems — and this is not aimed at you Hogan — that those who profess the most doom and offer the most radical solutions have the least understanding of the true vulnerability of our situation.”
I agree with you, not because you are not aiming at me (you probably should be), but because most of the radical solutions that are being proposed are old-fashionedly ridiculous.
Nationalising the banks was a very poor platform for Irish academics and economists to propose. It couldn’t resolve the solvency crisis and showed a lack of appreciation of the scale of the problem.
Leaving the euro in a time of increasing commodity prices (import commodity prices) guarantees a serious drop in the standard of living for most of the island. It is a return to Dev’s autarky.
Burning the bondholders (of any type at this stage) and expecting not to balance the budget is magic fairy thinking. Even the bould Morgan Kelly doesn’t go this far.
I’ll leave the fiscal madness for the moment as it’s a little off-topic (!).
Where you should be worried about me are how I’d ‘fix’ the problems.
1. Liquidate the banks (with the recapitalisation money in them). Build them again with new identities. Sell some bits to foreign banks with credibility who already have a presence in the market.
2. Retain the payments system in public ownership with a fixed set of charges open to anyone and all ATMs linked to it by law (again with fixed charges).
3. Nationalise all private pensions, ARFs etc. and allow purchase of years in a new universal pension. To pay for public service employees, the semi-states, the shares in the new banks etc. get transferred to the national pension fund. Appoint asset managers to manage these on a fee basis. How is this relevant? The surplus after buying years is returned to private pension contributors over three years taxed at their marginal rate unless it is used to pay down capital debt.
If you’re going to expropriate pensions to help the state, at least do it properly…
Now do you see why you should include me?
Apologies for cutting across the dialogue, but your point 3 above caused the remaining hairs on my head to stand to sit up straight.
Way to go, man.
We will see! The besetting sin of the debate in individual countries is that it is confined to the country in question. In the case of the euro crisis, this is at variance with the facts.
Despite the very best efforts, there are many on this blog who still attribute an LOLR role to the ECB which it simply does not have. Unfortunately, this seems to include the government (but clearly not the governor of the CBI).
The ECB is en route to getting a new president, Draghi, who has no choice but to reverse the “unconventional measures taken by Trichet. The task being filled by those measures has to be passed on: but to whom? That is the question!
It seems almost a given that more time is needed to answer it. But the strategy seems to be working. The core countries are powering ahead. The peripherals – not including Spain, at least for the moment – are being left to stew.
@ Paul Quigley
I forgot to mention that the Greek stew is, of course, boiling over. It will be calmed by an additional loan.
There is also the curious case of the EFSF that did not bark in the night. Ireland is the only country in the Coventry of the EFSF and seems likely to continue in that role until it expires. Why? Some conjectures can be advanced. The EFSF is subject to unanimous decision and, such is the lack of confidence in Merkel, and the shakiness of her coalition, it is uncertain whether that unanimity would be forthcoming. The EFSM is anchored in the budget of the EU, not an ersatz scheme with seven employees, based in Luxembourg, raising funds on the market with the assistance of the German debt agency. The basis for decision-making is QMV.
The use of the EFSM also underlines the fact that EMU applies to ALL member states of the EU, the UK included. The UK – with Denmark – shares the distinction of having negotiated a permanent derogation from the duty to adopt the single currency (while retaining the right to do so i.e. courageous but not that courageous).
You may be correct. And other than the fact that the State should not be paying the losses this sounds reasonable.
But where is the evidence that the ECB is committed to bridging the funding gap?
If it is doing so, it is doing it most reluctantly and setting stringent conditions on how fast and by what methods the banks will deleverage, thereby increasing bank losses and the cost to the State. And refuses even to offer a medium term facility to allow the funding issue to be worked out over time.
The ECB is funding the Irish banks right now because it believes that it is in the immediate interest of the European banking system. When that immediate interest ceases or the ECB can isolate the Irish problem, we have no reason to believe that their solution will take Irish sensitivities into account.
In fact based on speeches from Bini Smaghi, Jurgen Stark and indeed the ‘ Mr Trichet wants his money back remarks’, we have every reason to be fearful of the retribution that will be visited on the country.
If the ECB is not operating as *a* lender of last resort, where did the Irish vegetables going to get 90 billion of funding?
PS it may be a different sort of LOLR, though – lender of last repo…
van Eden writes,
The problem I have, is the presentation of the narrative, that is ONLY RECENTLY that the Irish government used the leveraging of Irish banks to fund itself. When we clearly know it to be the case, that the Irish government has always used the Irish banks to fund itself, in express preference to obtaining credit on it’s own account. In fact, that has been the distortion in Ireland for the last decade or so. That Ireland as a sovereign nation has not been 100% in the market to fund its own debts for quite some time. But rather, the Irish government has tried to mask itself, behind the Irish banking system, and behind the property asset price explosion. Quite frankly, I am tired of this narrative, that it is only recently that Irish citizens have begun to pay for the cost of the same disfunctionality. When it has clearly been the case, that mortgage owners in Ireland have been leveraging themselves up on behalf of the government and its spending programs for over a decade now. The international markets are honestly tired of this lack of differentiation also. They have no idea what they are funding. They had no idea before the 2008 crash, and they have much less idea today. We talk about the vanilla Irish sovereign debt holders, as if that was the only source of sovereign debt funding in Ireland before 2008. But that was clearly not the case, as the Irish government was employing the Irish banks as its off-balance sheet creation. The Irish banks in turn were employing the property developers as its off-balance sheet creation(s). The Irish citizens in turn, through their own personal borrowings were expected to keep the whole ridiculous hierarchy in motion, for much longer than the last couple of years, and that is the real fallacy about all of the discussion in my view. Now we are surprised that all of the above items are sandwiched together into one entity, and we take the view, that this is incorrect. But perhaps, it could also be argued, that sandwich-ing the whole lot together, merely expresses in plain terms, what was the reality all along, and puts an end to the constant posturing and use of Chinese walls, between stuff, that existed in Ireland for a decade or longer. BOH.
This particular ball has been batted back and forth on this blog on several threads and I thought the matter had been finally settled with the views expressed by the Governor of the CBI to the WSJ. The issues are not new and, indeed, the action taken by Trichet in launching the unconventional meaures (softening of collateral requirements for “liquidity” funding and bond purchasing programme) was clearly not an overnight one cf. study by Deutsche Bank from 2008.
The departure of Weber is directly linked to the underlying division of opinion in the matter among decision-makers in Germany.
The following is an extract from one of the relevant and most up-to-date exchanges. The source is Anonymous (who seems to know what he is talking about, always a useful point).
QUOTE 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 purchase 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 risk-less 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? UNQUOTE
This is what the head of the Finnish Central Bank said in an interview with the FT recently (note the sparing use of words!).
QUOTE “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.” UNQUOTE
This chimes with what the Governor of the CBI said to the WSJ.
One further extension I would like to add to the above. Perhaps what Morgan Kelly is suggesting, is that in order to reset the whole system, and do something which Ireland has never, ever done at all, since the early days of the NTMA creation as an entity outside of the department of finance – is that we begin to borrow as a sovereign entity for the first time, without any complications and vicarious backdoor processes to fund the same sovereign entity, of Ireland. Clearly, what was happening during the Ahern years of the 2000s, was there was a turf war going on between the Irish department of finance and the NTMA body. Where the department of finance re-asserted their primacy over the NTMA, and began to fund the Irish government via their own in-direct way, through their relationship with the Irish bank institutions. I mean, lets face it. For all of the Ahern/McCreevy years, the NTMA’s duty was downgraded to that of a cash hoarding entity. The really bacon was brought home via the department of finance, through the transactional property taxes, and directly from European private credit markets. BOH.
It’s what they do, not what they say…
If only this belief were confined to actual bankers, our problems would be much smaller and more manageable. Unfortunately the attitude that what’s good for AIB is good for Ireland is pervasive in high places here. It seems to be a legacy of the sainted Whitaker generation, and I don’t think it’s a coincidence that the modern AIB and BoI themselves date back to the mid-‘Sixties. (Compare to another economic sacred cow, the emphasis on FDI.)
One result of this is that you often get a real sense of mission creep in discussions about the banking crisis. Suggest doing something radical about the banks, and people will object that we need to urgently need to protect the Irish banking system for fear of no-cash-in-the-ATMs. And of course it’s true that deposit wipeouts or a collapse of the payment system would be a serious blow to the country. But many (not all – Honohan seems to be one conspicuous exception) of these people will go on to imply that for some unspecified reason we also really, really need to go on having Irish-owned banks. And then it turns out that it’s also vital to keep the future cost of funding low for these banks – and they don’t mean low enough for them to be viable businesses, they mean as near as possible to the salad days of last decade, and even if aiming for this this means putting our national solvency on black. Oh, and it really would be the best thing for now if these Irish-owned banks continued to dominate the Irish market: two large “pillar banks” seems about right. And, apparently, it really works best if these pillars bear the names “Allied Irish Banks” and “Bank of Ireland”. What are the odds, eh?
A very satisfying thread. The Grumpy – Perrier analogy is very good. I was also looking to think of branding disasters: believe it or not Thalidomide is being brought back for various ailments, but I bet it won’t be prescribed under that name.
For what it’s worth, I think that for John’s plane to fly, the ratings agencies will have to eventually mark the banks back up again, and in so far as the ECB have their fingers ready to pinch the tubes of the intravenous fluid going into the bodies of the banks, that is asking a lot.
Also, if the banks are offering a premium for business, presumably that makes them a bit less profitable. Oh, well.
Not to worry about spelling. I find that the moment after I post, the blog scatters a few randon changes through my posts and moves a few commas and apostrophes about to make me look foolish. This is probably a life-lesson.
On that point, of course, I agree. The ECB will not pull its support to Ireland simply because it cannot afford to do so. But the issue is the direction that the EZ is taking in the matter. We can either recognise it, and participate in the associated negotiation, or live on in an illusory world (and permanent invalid status).
RE the ECB pulling support.
The €150billion is not wedged as solidly up the ECB’s fundament as Morgan Kelly would like to think.
The troika, at the three monthly review, can simply insist that the State swallow the full €150 billion on pain of the Troika not signing the cheque.
Ireland will be in a real beggars dilemma at that point.
This will be done in stages of course.
The proposal by Maarten Van Eden for an initial €60 billion to be offloaded is akin to a probing attack. Just to test the defences.
And we did not defend very well. That will not have gone unnoticed.
I have real question marks as to where a proposal like this came from and why it came at this time. Cui Bono?
@ Joseph Ryan
You are totally wide of the mark. We are dealing with serious people with whom the State has signed a Memorandum of Understanding. If we live up to the terms of the MOU, there will be no problem. The liquidity provided by the ECB has no link to the MOU. I do not know how often it has to be repeated, but the question of national solvency is a matter for the governments concerned and no one else. How could it be otherwise?
Imagined sanctions or blackmail plucked from thin air for ulterior motives are excluded. It is up to us.
For an example of what happens when a country does not live up to its undertakings cf. this article from the WSJ regarding Greece (for once, mercifully free from obvious errors except in relation to the reference to the EFSF with which Greece is not involved and which cannot raise money overnight – as suggested – but must raise it on the markets).
We continue to lead with our chins on the issue of a cut in the interest rate payable by Ireland and a leading member of the junior partner in the coalition has just raised questions regarding the sustainability of what Ireland has undertaken. Is there any wonder that there is no rush to accept any arguments emanating from Irish official sources? The proof of the pudding is in the eating.
@ Joseph Ryan
I should add, to avoid misunderstanding, that I do not include Sarkozy among the ranks of serious people. Luckily, he has nothing to do with deciding on the implementation of the MOU.
I accept your genuine bona fides in making your contributions but I cannot accept your benign view of ECB actions. Was it not the ECB that made all the running in terms of pushing for the ‘bail-out’, because they were very uneazy about the liquidity they provided. [Not LOLR as has been pointed out to me, but outside of their normal operations….]
Suggesting that funds be provided from the ESFM to bailout Greece or indeed Ireland, is simply taking the scenic route to transfer debts from banks or sovereign onto citizens. (A point made in the wsj article).
Ireland is now in the maelstrom of a war for survival. It has failed abysmally to recognise that it is even in a war let alone set up some defensive positions. The Kelly article now largely dismissed as bordering on insanity deserves more careful analysis in terms of a strategy for survival. A survival strategy needs as a minimum.
1. A clear statement of the country’s position that does not appear to have reached the upper echelons of society.
2. A more serious effort to balance the budget.
3. A collapse (“like a circus tent”) of outrageous rent seeking > €60,000 salaries/ pensions of all State/Semi State.
4. Absolute immediate ban on all pensions paid by the State, where employees or consultants are still earning from the State.
5. Full immediate removal of all tax reliefs (except personal/paye), including pension reliefs.
6. Imposition of 25% tax on all foreign deposits of resident not repatriated by June 30th. For both individual and for ‘domestic’ companies and for domestic pension funds and ARFs, especially ARFs.
7. Abolition of all property reliefs with immediate effect.
8. A jobs program by Coillte to take people off the live register and plant all fallow Coillte in the new planting season. Possible 20,000 jobs at very little extra cost to State.
9. Tell all bondies that if State debt goes above 115% of GNP, their bonds will be replaced with bonds of the same denomination and terms as the original bond. No cash paid.
The overall strategy is simple.
A. We are all in this together. The upper echelon free ride is over.
B. We are prepared and rapidly moving towards living within ours means.
C. We no longer have confidence in the chaotic response of the the EU/ECB and will do what it takes to survive as a nation, with or without them.
D. The days of bleeding the country for financiers, local and foreign is over.
The difficulty with most ‘burn the bondholder’ proposals is that they want to move straight to item D. On the other hand those who label the ‘burn the bondholder approach’ as insane show no urgency or inclination to get as far as step A above. They are too well fed to think clearly.
As a nation we are as in the words of the old Cill Cais abhrain :
Mar sheolfai aoire bo gan aireacht
Ar thaobh na greine, do Sliabh na MBan-(-from memory,loosely translated ‘ A herd of cattle without a sherherd…)
or as former hurling manager would say
‘Sheep in a heap’.
The older generations have sold out the younger. And for what…’To fumble in the greasy till and …”.
As I have rambled on a bit let me conclude with a quote from an ardent capitalist, whose philosophy abhors me but came up with one comment worth repeating.
“We must define reality and face into it”-Jack Welch (formerly GE, I think)
‘For an example of what happens when a country does not live up to its undertakings cf. this article from the WSJ regarding Greece’
I read that article as a warning about the contagion from the failure of the Greek bailout. As P, I and G are already underwater, renewed turmoil on bond markets will see the waves washing up on Spanish shores, and wash Ireland out to sea.
@ Paul Quigley
There were two major aspects of the article that struck me (i) the fact that there are no good options and (ii) the incapacity of US journalists to grasp how the EU actually functions. I do not share your pessimism. The strategy of kicking the can down the road continues to function reasonably well.