The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 30.6.2011). One set of papers (including one by me) discusses the prospects for monetary policy in light of the wide variations in the economic cycle across different Euro area economies. The other set of papers discuss issues related to restructuring Greek debt.
I’ll repeat my final couple of paragraphs here. These were written prior to the comments discussed here
The relationship between the ECB and the peripheral economies has become extremely complex. However, it is clear that ECB officials have regularly used the implicit threat that they can withdraw their support for peripheral banking systems, or else continue to provide funds to “persistent bidders” at interest rates that are perhaps considerably higher than are charged to other countries, as a way to obtain actions they deem necessary.
In relation to Greece, ECB officials have been using the threat of the withdrawal of the eligibility of Greek sovereign debt as collateral for open market operations to put forward their argument against any debt restructuring. In the case of Ireland, it is known that Irish government officials have requested that assurances be provided that the ECB will continue to provide sufficient liquidity to Irish banks over the next few years, perhaps via a special medium-term facility. However, no such assurances have been provided. And without greater clarity on the timeframe for repaying their loans to the ECB, it will remain impossible for even recapitalised Irish banks to obtain market funding.
The ECB’s strategy of threatening peripheral banking systems (and the regular coverage this receives in the media) has become one of the destabilising factors that have contributed to worsening the current crisis. It is time for this poorly-thought-out strategy to cease. The ECB’s obligations under the European Treaty mean that it cannot help peripheral countries via keeping interest rates low for the next few years. But it can continue to act as a lender of last resort to the banks in these countries in a way that reassures (rather than worries) financial markets.
To my mind, the latest “anonymous ECB official” comments represent a new lowpoint for that particular institution.
74 replies on “Monetary Dialogue Briefing Papers: June 2011”
Hostility measures from the ECB.
Since Greece cannot be expelled from the euro, the ECB seems intent on pushing it into a position where it has no option but to leave.
The ECB is a rogue institution.
Indeed. The fact that the ECB has this kind of discretion at all is as worrying as their obvious willingness to use it for political purposes. What is the solution? More oversight from the European Parliament? A whole new monetary policy architecture for the EZ?
From an Irish perspective, when does default and withdrawal from the currency union become a realistic option? As our European partners are clearly in the business of issuing credible threats, how credible is the threat to “burn everything” à la Morgan Kelly?
Thanks for the link to interesting papers.
However, it is not clear to me what exactly you suggest the ECB should do.
As you know, the ECB is obliged by the treaty only to lend against “adequate” collateral. Should junk-rated government paper be considered as adequate? And if not, how exactly should the ECB “continue to act as a lender of last resort” to banks that don’t have eligible collateral? Should it suspend its collateral policy altogether?
As to lender-of-last-resort function, it is not obvious what the ECB has to do with it. In the Eurosystem division of labour, ELA was always kept within the national central banks.
“However, it is not clear to me what exactly you suggest the ECB should do.”
You make this sound as though the ECB are merely following some pre-set rules. This is clearly not the case. The collateral rules have been changed plenty of times in recent years.
I think it’s also clear that I’m suggesting they should stop their policy of anonymous briefings suggesting they are about to make an entirely discretionary decision to stop providing support.
The weakness seems to be who decides what is adequate collateral.
Outsourcing it to external credit rating agencies seems to be a bad idea.
Leaving it to the discretion of the ECB-board seems to be a bad idea.
If the collateral turns out to be bad, then the ECB will face losses which will in turn be compensated for by the euro-zone member states. Would it be a crazy idea to have the ones who are expected to cover any losses on bad collateral to be the ones deciding what is acceptable collateral?
-> Finance ministers of the euro-zone decide what the ECB can accept as collateral. Voting and countries votes are weighted by size of economy/expected contribution to cover losses
Isn’t the problem at least as much with the German and Irish authorities as with the ECB though? I mean, if the ECB were to (and this would in many ways be a sensible move) commit to providing stable funding for the Irish banks for three years, what commitments would the Irish government make in return? It’s surely not tenable from either side for the ECB to be locked into providing funding to an entity called “The Irish banking system”, while the Irish government for its part reserves the right to remove funded entities from that group and put them into bankruptcy; nor can it make an open-ended commitment to lending against Greek collateral unless it’s got some reciprocal commitment that this collateral won’t be suddenly written down for reasons of German politics. If you look at this from the ECB’s point of view (ie, the point of view of an institution lending billions to Irish and Greek banks, while politicians casually discussing defaulting on these assets), they see themselves as the ones being threatened.
In general, politicians which want the ECB to form long-term partnerships need to demonstrate this wish with their actions as well as their words.
Well done, Karl!
I noted on another thread the Concluding Statement of the annual IMF Mission on Euro-Area Policies (available at http://www.imf.org. since yesterday)
It includes the following rebuttal to Draghi’s misgivings of last week:
“Many banks still rely heavily on European Central Bank (ECB) financing, and market access might not be immediate even after a recapitalization. A conditional term funding facility for private illiquid assets, possibly operated by the ECB but with the explicit backing of euro area sovereigns (e.g., via the EFSF), would smooth the transition, while protecting the ECB’s independence and flexibility and reinforcing the incentives to tackle the banking problems at their root.”
Mr. Draghi has to do more than give simplistic dismissals to MEPs.
The ECB was not supposed to take any government paper as a collateral,junk-rated or AAA rated.Nobody envisionned a banking system without deposits.The present situation is a pure nightmare for the ECB board which went way beyond its charter to avoid a sovereign or a big bank default to end up in a situation where its efforts might fail and it will itself be insolvent.
The whole EZ system was based on the assumption that the national central banks would be acting responsibly and the states would not accumulate deficits.The ECB is a victim of the present situation ,being punished for its good deeds and it is not surprising that it acts in a
irrational fashion out of dispair.
With an Italian in the hot seat – printing Three Trillion should not be a bother. Why wait? It’s inevitable if EU to proceed and its dodgy banking system to be ‘protected’. Roll on those EZ ‘stess tests’!
I have some sympathy with this POV, but on the other hand, if the ECB doesn’t chivvy things along, what’s stopping the banks using them as a permanent dominant funding source?
It’s not pretty, but in the absence of central fiscal or political powers, the ECB simply has to throw its weight around or get swamped by events.
It makes little sense for the ECB to provide open-ended funding to private banks or nationalised banks that intend to be continuing concerns. There is a clear market distortion there. What would make more sense is for a commitment to be given to fund wind-down vehicles with a commitment from governments that they will make up a capital short-fall if required at the end of the wind-down period.
There should be no particular requirement that the wind-down banks themselves should be solvent during this time – zero coupon promissory notes should be enough.
A levy on financial transactions should build up a fund to cope with insolvency costs that result from the wind-down.
Where banks that are currently operating are insolvent or terminally illiquid (another word for insolvent), they should be broken up, sold off, with the rump put into wind-down.
This would satisfy both moral hazard and financial stability.
What does this sound like? Oh yeah, the FDIC…
The way I see it is that if any central bank, ECB or otherwise refuses to accept the collateral of a State bond that it purports to act as central bank for then it is grounds for an immediate divorce of the parties involved.
In effect the ECB is declaring the State insolvent.
Despite its utmost protestations that insolvency cannot happen.
@ Karl Whelan
Good stuff. Spot on.
“However, it is clear that ECB officials have regularly used the implicit threat that they can withdraw their support for peripheral banking systems”
The threat is explicit here:
“The Eurosystem has provided – and is still providing – support to those national banking systems which face liquidity needs. I would like to underline that the key precondition for such a support is that the country concerned sticks to the EU/IMF adjustment programme and are on track.”
LBS – “One size fits all?”
Summary of the Irish attitude towards the ECB: no good deed will be left unpunished.
Is the ECBs show of force a weakness ?- are they displaying fear in the face of a full scale physical breakdown crisis.
Do we need a Confucian solution that rides with this tempest or do we stop it with blunt force ?
Here is a excellent presentation …. at the 6 minute mark he makes a great observation , just why is American crude less expensive then European on a continual basis ?
“I would like to underline that the key precondition for such a support is that the country concerned sticks to the EU/IMF adjustment programme and are on track”
This is utter nonsense. The world knows that their programme is not on track and that they are in imminent danger of going bankrupt. Der Speigel today has a story which states that the troika have two inspectors in Greece to ensure that Papandreou does not attempt to dilute the new austerity package. With this level of distrust it is difficult to see how any package can be made work.
As for the new bailout proposal…well it looks like it is stillborn…
Reuters) – Fitch Ratings said on Tuesday that it would regard a voluntary rollover of Greece’s sovereign bond maturities as a default and would cut the credit rating appropriately, keeping pressure on Athens ahead of a confidence vote in parliament.
“A levy on financial transactions should build up a fund to cope with insolvency costs that result from the wind-down.”
A 10% tax on the insured value of naked CDS should act better than fibrogel to flush out a lot of the system.
I think (IANAL) it’s important to distinguish between the different documents in play here.
1) There’s TFEU (alias the consolidated Lisbon treaty).
2) Then there’s the Statute of the ESCB and of the ECB, as decreed in Article 129 TFEU and embedded in its back-matter.
3) And then there’s the current edition of the General Documentation, alias “The Implementation of Monetary Policy in the Euro Area”.
Pace Anonymous, the ECB can write, rewrite and (probably) suspend its own General Documentation; the Statute only seems to require that the ECB have something like the General Documentation (Statute article 18). But the “adequate collateral” language is in Article 18 of the Statute, which is binding on the ECB. The European Parliament and Council of Ministers, however, can alter the Statue by legislation – that doesn’t require a treaty change (TFEU article 129). So if the Parliament finds the “adequate collateral” requirement not to its liking, it knows what it can do about it… However, other restrictions on the behaviour of the ECB and NCBs are embedded in TFEU and can’t be altered without a treaty revision: Article 123 TFEU springs to mind in this case.
The intent was to forbid any monetizing of state debts (“quantitative easing ” à la Bernanke) .Remember that the sole objective of the ECB was to limit inflation. Any use of monetary policy to influence economic growth ot fight unemployment was verboten. I think this make little sense,but it was the price to pay to have Germany on board.This had nothing to to do with the present situation of the Irish banking system.
Could you please describe the divorce procedure?
“But the “adequate collateral” language is in Article 18 of the Statute, which is binding on the ECB.”
“The collateral rules have been changed plenty of times in recent years.”
True, unusual times have forced the ECB to accept unusual collateral. But I’m not sure what should logically follow from that. The boundary between what is adequate and what is not may shift in times of crisis, but it does not mean that the concept becomes irrelevant and that anything should be accepted as collateral.
“… if any central bank, ECB or otherwise refuses to accept the collateral of a State bond that it purports to act as central bank for then it is grounds for an immediate divorce of the parties involved.”
You are entitled to that opinion, but the treaty was drafted differently. It explicitly forbids the ECB to give preferential treatment to government paper.
So Incognito reckons: “Summary of the Irish attitude towards the ECB: no good deed will be left unpunished.”
So the Irish government have followed the ECB’s advice of paying off bondholders in insolvent banks and transferring all the risk onto the sovereign. Now, the Irish having taken this course of action and lost access to sovereign bond markets, the ECB regularly threatens to cause a liquidity crisis if the transferring of private bond risk to the sovereign isn’t fully completed. Good deeds?
Ask yourself this: Would any member of the Fed’s FOMC or the Bank of England’s MPC threaten to remove a bank from its liquidity operations by musing to a journalist that support for the bank was illegal? The ECB have wandered so far into the area of unprofessional behaviour that people don’t even seem to notice anymore how strange this is.
A very messy screaming match followed by a long period of silence and standoff until finally both parties decide to go their seperate ways and start to make a better future for themselves.
It usually has serious financial implications in the beginning, but the the person in possession of the real estate usually gets the better deal, regardless of whatever papers the other party can wave in the air.
It seems to me that if the LITTLE DUTCH BOY acted like the ECB, he would have gone home sucking his finger because his mandate from his mother was to be in bed by 9.00 PM.
When the bodycount was done next day he could not have been blamed. He had his mandate according to Article..x, y z, of protocol a.b,c.
What else could he have done.
And finally he would have the excuse that he was only A LITTLE BOY.
There are no little boys in the ECB just a lot of infantile minds.
Karl, do you not see that what you’re saying is effectively “the ECB made a deal with Ireland that they would provide liquidity as long as Ireland guaranteed the bank debt. Now the ECB is saying that they will provide liquidity as long as Ireland guarantees the bank debt”. It is the Irish government which, having made a deal, is now trying to change the terms of the deal. In answer to your question, no analogous situation would ever arise because no private sector bank would ever behave that way to the Fed or Bank of England. The IMF, which is more analogous in this case, regulalry does discuss the circumstances under which it can and cannot continue to provide lending to a borrower which does not want to comply with the terms of the deal.
Even granted that you don’t agree with the specific deal done last year, can you not see that Ireland has a massive and overpowering interest in maintaining its reputation as a trusted party? If the anonymous ECB official was being unprofessional, how would you describe Noonan?
Here is an interesting story on the use of Greek Government bonds…
Drug firm chief warns Greece over payments
The chief executive of Swiss drug firm Nycomed SCA has warned that Greek hospitals could face medicine shortages if the government continues to fall behind with payments.
“This is a major issue,” Hakan Bjorklund told the Wall Street Journal in an interview yesterday. Greece started paying pharmaceutical firms with government bonds since last year.
“In reality, this means we’re not getting all of the money they owe us. If the situation gets totally out of hand and we don’t think we will get paid in the end, we simply cannot continue to deliver products.”
Nycomed generates revenues of between 30 and 40 million euros a year in Greece, according to the WSJ.
“The ECB have wandered so far into the area of unprofessional behaviour that people don’t even seem to notice anymore how strange this is.”
And what exactly was it that made you think the ECB was “professional”. Whatever that is.
The ECB is a disgusting political adventure.
And it is about to fail.
And with it Nice and Lisbon.
Or maybe not.
Maybe the ECB can use the threat of not providing thin air money to corrupt every Nation in Europe to its will.
But they wouldn’t do that.
Re: Comparison to the Fed & BOE
Several times during the crisis the Fed actually set limits to which institutions it can finance and under which conditions (Lehman & AIG come to mind). In some cases, the Fed required the Treasury to indemnify it against losses. There was a clear understanding between the Fed and the Treasury that the Fed only provided liquidity, and that it wasn’t the central bank’s business to put its capital at stake.
In the EU, there is no corresponding political body to indemnify the ECB. If there had been the political will, the EFSF could have been beefed up and mandated to play a role somewhat similar to the Treasury (ie. post collateral and guarantees where needed). The political will wasn’t there, and the ECB is now acting largely alone, taking much bigger risks than the Fed ever did.
This is not to say that the ECB did not make mistakes. I think it overestimates the risks of touching senior bank debt. It happily took on too big a political role – it never should have made itself part of the Troika. And the strong federalist leanings at the top of the ECB sometimes interfered with effective crisis management.
But the view of many contributors here of the ECB as a rogue institution blinded by its own power is just plain wrong. This is a civil service organization that is pressured to go far beyond its mandate, to fill in the vacuum left by the inability of EU leaders to come up with an effective political solution. Obviously, the ECB feels highly uncomfortable with the situation.
At present, the ECB is being lambasted by one half of Europe for not going far enough in its crisis-management efforts, and by the other half by going too far. Perhaps it got it roughly right.
I’d would agree with much of what you have written. My point about comparison with the Fed and BoE was referring to the dealings with the press – claiming current policies are illegal. I cannot imagine that happening at either the Fed or BoE.
“There was a clear understanding between the Fed and the Treasury that the Fed only provided liquidity, and that it wasn’t the central bank’s business to put its capital at stake.”
Well, there are several times when the Fed has indicated that it has put its capital at risk.
– A two trillion dollar bond purchase program (including the purchase of newly minted treasuries).
– The purchase of bad bank assets – the Maiden Lanes to ease the sale of bust banks to competitors.
– Changing its accounting mechanism so that it can basically never be insolvent. Why bother if there is no risk of that?
None of these are liquidity provision measures. The ECB was first out of the traps in recognising the liquidity problems in the market and worked very effectively to fix them and the dollar drought. The Fed has been the one to recognise the basic insolvency of the financial system. The ECB still doesn’t seem to believe that the paper pyramids are built on sand.
From The Rotarian (USA), Dec 1920.
“It is not only the opinion of members of the French Government that our present economic outlook creates a feeling of absolute confidence in its soundness; interested visitors from other countries who have traveled thru France with a view to seeing what his happening, have the same impression,” M. Francois Marsal, French Minister of Finance said recently. “In every part of France, in the city as well as in the country, in the factories and on the farms, evidence is seen of the nation’s desire to work and its will to produce.”
Referring specifically to financial matters, M. Marsal said: “As to our finances, tho great efforts must still be made in order to get back to our former position, we already see certain signs which indicate beyond doubt that re-establishment has started. The outstanding fact is that the currency circulation, which had increased during 1919 by 8,000,000,000 france, has not increased by a single sou since January 1, 1920; the State has asked for no new loan from the Bank of France; the floating debt has diminisht nearly 2,000,000,000 francs between November 19 and June 20, whereas it had increased in the corresponding period for the year previously by 15,000,000,000.
“Another important fact is the increase of revenue from taxation. Revenues for the first seven months of 1920 are 65 per cent in excess of those for the corresponding period of the year before. Lastly, the voting of 8,000,000,000 francs in new taxes by Parliament, the raising of railway fares, postage rates, and the prices of tobacco and of government controlled bread show our willingness to make sacrifices.
“Our revenues for the current year will exceed 20,000,000,000 francs which will cover the expenses of our ordinary budget, including of course, the interest on our debt and war loans.
“But it is not enough to pay taxes; we must reduce our state expenses. Already the Government has supprest the subsidies for bread, frozen meat and sugar; we are doing our utmost to increase production and discourage all expenditure on luxuries.”
The French economy contracted by more than 4% in 1921. France’s quixotic efforts to rejoin the gold standard at 1914 parity failed; in the end only the fascists of Action Française were in favour of continuing. It didn’t rejoin until 1928 and even then at only 20% of the 1914 rate, facts that place Marsal’s bizarre list of ‘achievements’ in perspective.
Today the arguments are the same, the issue identical, the interests arguing the different sides of the debate are equivalent, as are the winners and losers, and in the end the result will be no different either.
@ Karl Whelan
The ECB have wandered so far into the area of unprofessional behaviour that people don’t even seem to notice anymore how strange this is.
Precisely and yet no one of standing is prepared to challenge their legitimacy.
The ECB is completely undemocratic. Members are elected for very long periods and acting completely in the interests of private wealth over the interests of any or all of the Euro states. They are an executive without a parliament or judiciary and now they are giving ananimous comments to the media?
Given the power the members have isnt it in the interests of investment banks and hedge funds to seek to lobby, chat to, influence these people.
It doesn’t have to be outright corruption, they just have to manufacture their consent.
In saying that, given the power these guys have shouldn’t we be constantly ensuring that we know how and where they make their money?
In the field of sport, corruption happens all the time even though thee general public are keeping a much closer eye on how sport operates.
To treat the members of the ECB like benevolent Gods when the general public are not interested or smart enough to understand whats going on is just madness considering the money at stake.
Why are you so surprised that the ECB is not acting in a benign manner ?
A organisation with such a concentrated and unchecked power base is always a dangerous beast.
Its no longer the merry dance between the needs of the exchequer and the wants of the usury class.
Any symbiotic advantages are seen as a regression for these new Olympian Gods.
Nation states are a Lichen to them now – a necessary stage in evolution but now a interesting curiosity.
These men want all the of the economic biosphere – they do not want to share.
Don’t you think it unfair to compare national central banks dealing with one stable nation state to the only supra national central banks dealing with many diametrically opposed Member States?
The Greek taxpayers and electorate don’t want more austerity, the German taxpayers and electorate don’t want a transfer union, national politicians (i.e. the council) have to play to their national electorates and not to the European whole.
As we saw recently, the German’s publicly pushed for compulsory private investor involvement in the Greek bailout, the ECB publicly argued against it, the ECB now seems to be getting its way. While it is possible that the ECB is mistaken as to the level of contagion, the ECB has a mandate to consider the impact of contagion which the various national governments (including our own) do not.
The ECB has, in fairness, been placed in a difficult situation, and it has tried to be flexibile with its collateral policy, but too often it shouts “independence!” when asked to think of some more aggressive measures to fix the debt crisis, and too often it hides behind the “primary mandate” as the guidng ‘compass’ for all its actions, practical outcomes be damned. There is a complete lack of joined up thinking between the national governments, the EU Commission, and the ECB. At many stages the different arms of the Eurozone have been almost warring with each other. Can you imagine the Fed and the Treasury acting like that?? The IMF seems to the only one to see the big picture and the gaps that still need to be filled out in the Eurozone policy response to the crisis.
Merkel appears to be selling the line now that haircuts should and can be avoided, the alternative being Spain in the hands of official funders via the activities of speculators.
Victory to the ECB. Reality can feck off.
Agree in as much as part of the explanation for the ECB being so defensive about risk is that it hasn’t been given political cover to take losses.
“they are about to make an entirely discretionary decision to stop providing support”
But what collateral to accept is an entirely discretionary decision. You want hard-and-fast rules where there are none, unless you want to trust the ratings agencies, which is not to the advantage of the peripheral economies.
The Fed’s bond purcase program (Like Japan’s earlier) was a monetary policy measure aimed at boosting private credit. It was not aimed at helping the sovereign’s funding – the US Treasury yields were at historically very low levels and there was no shortage of buyers. The Fed never considered taking a credit risk in purchasing these bonds.
As to the Maiden Lanes, each of them had a loss buffer provided by a third party (JPM or the Treasury). The Fed initially considered both the Bear Sterns and the AIG “bad assets” merely illiquid rather than fundamentally impared and accepted small equity/loss buffer (about 3% for ML I, 5% for ML II). Later with the ML III it had realized the true extent of the problems and required a whopping 17% loss buffer. The Fed was very much concerned about its capital and did its best to keep itself in the role of liquidity provider.
Incidentally, each of the Maiden Lanes is well in black, so the Fed does not stand to suffer any losses.
I’m not aware of the chage in accounting mechanism you refer to. But by definition, a central bank can hardly go bust in a currency it controls and can create at will. At worst, its currency looses credibility and value.
From a currency trading point of view the Euro appears a hard currency play, so hard that the question arises – is it also so brittle it will not be resilient?
“There was a clear understanding between the Fed and the Treasury that the Fed only provided liquidity, and that it wasn’t the central bank’s business to put its capital at stake.”
Willem Buiter doesn’t agree:
“Obviously, the ECB feels highly uncomfortable with the situation.”
In Europe taxpayers also obviously feel highly uncomfortable with the situation. There are only three groups that can pay: taxpayers, creditors and currency holders. In Europe the actions of the ECB have allowed private creditors to be made whole and replaced by official ones, a process that will be largely complete by 2014/2015. Any efforts that involve creditors taking losses on their investments have been opposed by the ECB using any tactics necessary. The final split across the three groups in Europe will look something like 100/0/0.
In the US the total cost to taxpayers of the bailout is very low – e.g. with estimates of a $25bn loss on TARP. On the banking bailout taxpayers made a profit, and are even looking at a small profit on AIG. In the US there is thus a completely different split between the three groups, with minimal taxpayer support, some creditor losses, and currency holders taking a hit via QE/inflation.
The ECB takes an extreme, ideologically driven, approach to protecting its clients (i.e. the banks and the moneyed classes), and is openly using the crisis to drive the institutional structure of the EU towards its federalist goals. In fact as Trichet nears the end of his term he is becoming more candid on his views for an elitist technocratic central control mechanism and dismisses public/democratic control as “populism” that will lead to chaos. I find his views profoundly anti-democratic.
The US response in my view has been far more pragmatic and successful than is the case in Europe, due in part to the close co-ordination between Fed and Treasury, and the fact that each side isn’t throwing its “rule book” at the other.
A basic principle is that no public institution ought to be allowed to determine the scope and extent of its own power – they tend to think it’s larger than it is and justify expansion by saying they are the ones acting in the public interest.
The ECB have never explained why they are involved in the senior debt decision.
Specifically, surely their role is to give WRITTEN ADVICE as to the effect of burning seniors that member states can use when determining whether such a course of action would be advisable. That’s it.
Blocking or vetoing a deal on where losses fall – where in its constituent documents is it granted this power?
Thanks, because the TALF is indeed the perfect proof of my point: we are talking about a program in which the Fed only lends against triple-A-rated collateral, and even here it requires the Treasury to indemnify it against the first $100 bn of losses.
Compared to the ECB, any credit risk assumed by the Fed has been insignificant.
“The ECB have never explained why they are involved in the senior debt decision.”
This actually is quite simple. The ECB was not, strictly speaking, directly involved in the senior debt decision. Whether or not to burn bondholders was purely an Irish decision.
But, as it happens, Ireland’s cost/benefit analysis in the senior debt decision was heavily affected by two other decisions which clearly did belong to the ECB: i) what it considers a financially sound counterparty and ii) what it considers adequate collateral.
Whatever the ECB’s views on the links between the senior debt decision and its own counterparty and collateral decisions, it was enough to change the government’s mind.
“The Fed’s bond purcase program (Like Japan’s earlier) was a monetary policy measure aimed at boosting private credit. It was not aimed at helping the sovereign’s funding – the US Treasury yields were at historically very low levels and there was no shortage of buyers. The Fed never considered taking a credit risk in purchasing these bonds. ”
Come now. You must be one of a handful of people in the world who don’t believe that the Fed’s purchases didn’t have an intended side-effect of reducing the cost of government borrowing.
“Incidentally, each of the Maiden Lanes is well in black, so the Fed does not stand to suffer any losses.”
Eh, yeah. The books are being held at bought price. As they are still providing an income stream and the Fed has no cost of funding, of course they are in the black. Were they marked to market, the picture might be a teeny-weeny bit different.
“I’m not aware of the chage in accounting mechanism you refer to. But by definition, a central bank can hardly go bust in a currency it controls and can create at will. At worst, its currency looses credibility and value.”
Again eh, yeah. Zimbabwe’s central bank is in no danger of going bust. No other central bank, not even the Japanese, has resorted to direct monetisation.
The change in policy was, IIRC, to carry losses forward and reduce income to the treasury in future years. This could be carried on indefinitely. It is something the ECB should seriously consider. Effectively it says that a central bank will be cash-flow positive so balance sheet insolvency doesn’t really matter. This is, IMO, sensible.
@ Bryan G
I would agree with the manner in which you put the situation except in one respect, that of attributing an ideological view to the ECB. The general consensus across Europe, except among many of the benighted commentariat on this island – or at least on this blog – is that, of all the participants in the not very edifying spectacle of the management of the crisis in the euro, the ECB has emerged with its reputation most intact.
What escapes many of the participants in this debate is the fact the EU operates on the basis of a distribution of powers between various players which follows the pattern of, and is legally based on, the democratic debate in its constituent member states (paradoxically, especially that of Germany). The Commission (Administration) proposes, the Legislature (the Council and the Parliament under co-decision) disposes and the European Court Of Justice decides whether their actions are in accordance with the constituent treaties or not.
There are two exceptions to this general rule in respect of the supranational executive powers granted (i) to the Commission and (ii) to the ECB.
Contributors are jumping up and down about the exercise by the ECB of the powers given to it by the treaties and there is either no interest in, or a total unawareness of, the draconian powers exercised by the Commission – including visits to commercial premises at dawn – as the competition authority of the EU. This is what the member states have collectively decided in legally binding texts, as in the case of the ECB, and if there are objections the place to start is with proposals to debate and change those texts.
cf. the attached comment from the NYT (by still another American professor!) that “there is no such thing as a free haircut”.
The professor in question is ignorant of the democratic functioning of the EU in a manner in which he would never be in respect of the federal government in Washington. The taxpayers across Europe are on the hook not alone for the decision of the ECB to intervene in the secondary bond markets, but also for failing to realise that the Maastricht Treaty, with its no bailout clause, left the solvency of banks as an issue of national responsibility, with varying capacity on the part of the nations concerned to actually carry it.
I think this proves my point about the ECB’s use of the “rule book” winning out over common sense and pragmatic solutions. The reality is that the ECB forced Irish taxpayers to assume the debts of unguaranteed senior debt holders against the wishes of the Irish government. It had its own reasons for doing so and these reasons had nothing to do with trying to ensure debt sustainability in Ireland. I will also point out that since the Treaties are so vague with regard to “financial stability” issues, the operational “rule book” is one written by the ECB itself, and it can and does change these rules as needed for its own benefit.
As a postscript to my contribution above, the following is an extract from the Treaty of Lisbon ratified by the people of Ireland.
Articles 10.1 & 2 of the Treaty on European Union.
“The functioning of the Union shall be founded on representative democracy. Citizens are directly represented at Union level in the European Parliament. Member States are represented in the European Council by their Heads of State or Government and in the Council by their governments, themselves democratically accountable either to their national Parliaments, or to their citizens”.
Mindful of different people can interpret legislation to suit their particular point of view, I decided to do a liitle research on the what the ECB can or indeed is capable of doing.
After some research it is not at all clear the ECB remit is simply “price stability”
The overall ESCB/ECB objective is defined in the Treaty:
(ex Article 105 TEC)
1.The primary objective of the European System of Central Banks (hereinafter referred to as “the ESCB”) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119.
Therefore whatever specific objectives are laid down in other legislation regarding collateral, it is clear that the ESCB/ECB shall support the objectives of article 3 of the Union: Article 3.3 is particularly interesting in this regard:
3.3. The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance. It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child. It shall promote economic, social and territorial cohesion, and solidarity among Member States. It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe’s cultural heritage is safeguarded and enhanced.
How the ECB can claim to operating in accordance with article 3.3 at the moment is quite beyond me. The full employment and social progress references must be real strangers in the ECB boardroom. Cutting off the Greek or Irish banking systems must be a novel way to promote social and territorial cohesion.
So yes, the unnamed ECB source is right. The ECB have operated and are operating illegally. Certainly when Article 3.3 is the governing treaty law.
So I agree with @Hogan. What we have here is a rogue institution. A rogue institution that is implementing policies to directly favour a financial elite in direct contravention of Article 3.3 of the Treaty of the European Union.
“The general consensus across Europe … is that the ECB has emerged with its reputation most intact.”
You may claim that, but I don’t see the evidence for it. I’ve just finished reading an article in the Economist that points out that the can-kicking exercise that is Greek Bailout 2.0 ignores the insolvency problem, and says that when restructuring does inevitably occur it will hit the taxpayer even harder (due to the preponderance of official creditors). I’ve read many articles that make the same point. Since the ECB led the charge against even the modest 7-year extension restructuring, it must be seen as a leader in this can kicking exercise. Their position, as exemplified by allies such as Juncker with his statement the other day that “Greece’s debt is clearly sustainable”, is viewed outside Europe as almost delusional.
…unless you mean its reputation as a defender of the banks and the moneyed classes in which case I would be forced to agree!
“You must be one of a handful of people in the world who don’t believe that the Fed’s purchases didn’t have an intended side-effect of reducing the cost of government borrowing.”
Side effect it might have been – and even that is controversial – but the aim it was not. With all the flight to quality/Treasuries going on during the financial crisis, the problem in the US never was the cost of public borrowing but the cost of private borrowing.
“Eh, yeah. The books are being held at bought price.”
Eh, no. They are held at fair value, which is different, and as close to mark-to-market as you can get valuing assets without secondary markets.
You demonstrate that Jesuits have wasted their time educating Irishmen.This is a fine piece of convoluted logic to demonstrate exactly the opposite of the very text you quote first.
Who would lend to institutions that have been managed as the banks in Ireland have when the managers of the banks are still the same?
I’d expect the self-inflicted reputational damage by some banks will keep many potential investors/lenders away.
Greece can choose to cancel payments -> The expected default would happen.
National leaders can choose to cancel the offer of additional lending to Greece -> The expected default would happen.
Continuing to fund Greece seems like a bad idea, however, the ECB cannot in any way veto a default.
@ Joseph Ryan
How do you possibly infer from the articles that you quoted that the ECB has an obligation to Ireland at the expense of the Eurozone whole? The ECB has been entirely consistent throughout the crisis as having an issue with contagion, as being scared about the risks of contagion. They may well be wrong on the impact of this, but they have been consistent so one assumes that their fear has a basis.
Karl Whelan, on previous posts, has suggested that the Central Bank numbers fail to take into account beneficial, as opposed to mere legal ownership of assets, and has also suggested that the CBI numbers fail to take into account the secondary markets in bonds. Neither proposition is supported by the rules governing the reporting of data by the CBI/ ECB, indeed he is suggesting that we are subject to large scale non-compliance with said rules
Yet KW can infer that these guidelines are not being complied with, without providing any data to support that inference, while this blog does not seem to expect any support for that inference of non-compliance. Is it possible that there might be an anti ECB agenda here because the remit of the ECB has to prioritize the Eurozone whole over Ireland? Like it or not we voted for it, just as we voted for FF to remain in power throughout the bubble.
“the ECB cannot in any way veto a default”
Your logic is wrong.
(i) They can, and did, veto anything that smacked of default within the context of an agreed bailout or bailout negotiations as proven last week.
It is also true that
(ii) within the context of an agreed bailout or bailout negotiations, parties other than the ECB can veto a default (with the EFSF anybody can veto anything)
(iii) outside the context of an agreed bailout or bailout negotiations (i.e. no bailout or unilateral actions taken by Greece without reference to any bailout) Greece may choose to default.
The fact that (ii) and (iii) are true does not make (i) false.
Well, it’s crystal clear that the ECB’s pro-creditor (one might say pro-speculator) policies don’t promote ‘balanced economic growth…aiming at full employment and social progress’, let alone ‘solidarity among Member States’.
“How do you possibly infer from the articles that you quoted that the ECB has an obligation to Ireland at the expense of the Eurozone whole? The ECB has been entirely consistent throughout the crisis as having an issue with contagion, as being scared about the risks of contagion. They may well be wrong on the impact of this, but they have been consistent so one assumes that their fear has a basis.”
Aisling you are completely misreading this. Its not Ireland V the Eurozone.
Its Ireland V (the senior bond holders) Financial/commercial elites in Europe and the US. By 2015 once/if the senior bondholders have been paid (and I prey it doesnt come to that) then it will be Ireland (and all the other pigs) V the Eurozone. But if it does come to that we will actually have a much better chance because the ECB don’t actually care as much about the Eurozone in general as they do with protecting the above mentioned elites.
@ Eamon and Aisling
“They may well be wrong on the impact of this, but they have been consistent so one assumes that their fear has a basis.”
Or maybe it doesn’t – “I’m against simple restructuring, as the risks are unknowable, and I have a hunch, there’s the contagion possibility,” said Jean-Claude Juncker.
If I could do italics mine, I’d italicise ‘unknowable’ and ‘hunch’
A link to an IMF working paper from 2008 that provides evidence from 128 Financial Crises that propping up insolvent banks prolongs the misery.
“Its Ireland V (the senior bond holders) Financial/commercial elites in Europe and the US.” If Trichet and Geithner and co are right then any bondholder burning would not threaten some mythical “financial/ commercial elite”, it would threaten tipping the global economy into a long and deep recession.
Anglo senior, and the ECB has left the door ajar on this, could be burnt provided that the holders of such debt are, as one would suspect, hedge funds rather than players in the real economy.
If this were simply about protecting creditors then there would be uproar about the AIB default, but there is not, because players in the real economy should not have been holding AIB sub, and senior holders have had more than enough time to protect themselves.
This is about contagion, nothing more and nothing less.
I don’t think that the ECB has stated that they have a hunch, or that it is unknowable.
If they, and the various eurozone central banks, are in compliance with their reporting guidelines, then the ECB has access to the best numbers on this. Numbers which admittedly will not disclose derivatives, but which will disclose the cross exposures of the European banking sectors to each other’s debt, and to sovereign debt.
While nothing is certain in financial markets you can and should make informed choices, and the ECB is informed, and has chosen to act against contagion. We know that they were right in relation to us and the bond markets, Merkel seems to have finally copped on that they might be right in relation to Spain and the bond markets, in fact I wonder whether a Greek default would take out Belgium before Spain due to the combination of Depfa, a whole heap of debt and no government. The ECB has been entirely consistent throughout this crisis, the various Member States are playing catch up.
One of the reasons for the crisis is an inconsistent approach across the eurozone, caused by the very structure of the eurozone as something more than a voluntary combination of States and something less than a federal whole. We are finally reaching a consensus view, and it is the view of the ECB. Now that the ECB view is the German view, that view may in and of itself calm the markets once the Greek storm abates.
Prussian General Carl Von Clausewitz was a noted military thinker in the same class as Sun Tzu who has written a number of books which would help us to see who has obligations to whom and why.
The ECB’s first responsibility is to ensure the continuity of the ECB, its second responsibility is to the Eurozone as a whole. How Ireland fits into that scenario determines how Ireland will be treated, being liked or disliked, friendly or hostile is irrelevant.
Our relations with the past and present Imperial powers are based solely on our interests and their interests and not on warm fuzzy sentimentality.
My reading of the situation is that countries that reverse the plunge toward bankruptcy by balancing their budgets will fare better than the ones that prop up insolvent banks and bail out bondholders while courting sovereign default.
Of the utmost importance is how cost competitive we are. Our hotels are now competitive. An ice cream cone in Heringsdorf, Vor Pommern is 0.80E
in Mitte, Berlin it is 1.00E and at Castleisland Race Course is 2.50E. restaurants in general are grossly out of line with the rest of Europe and North America. Of course the Gov’t has decided that tourism and manufacturing can be competitive in spite of a minimum wage scale and inducements not to work that are grossly out of whack.
The candy store on Kildare street is still in business and we can get our TD to get a Passport renewed in five working days. This is Ireland and that is what really matters.
@ Bryan G
I am nor arguing that the track record of the ECB is not open to criticism. I am saying that casting it as the villain of the piece is seriously mistaken. The bank’s role in the institutional structure of the EU is deeply misunderstood in Ireland (as exemplified by the remark that Trichet was merely a “civil servant”). Very significant appointments are made to the institutions of the EU in which those appointed play a political role but, and this cannot be emphasised enough, strictly within the legal powers granted to them by the treaties. Indeed, I cannot understand why this point is not grasped as no questions are raised, for example, about the political authority of the appointments made in the American Administration.
But, to go slightly off topic as far as this thread is concerned, and to return to one raised by John McHale, the change in preferred creditor status of the ESM for countries already “in a programme”, the attached report by the Danske Bank research team is of great interest.
Juncker at his press conference on Monday stressed, in response to a question, that he personally thought that the only way to make real progress in the EU was through the “Community method” (which I described in my earlier post). The ESM is a classic case of breaching this injunction. It is being negotiated – on German insistence – outside the institutions of the EU but with their active involvement as otherwise it could not be negotiated at all.
The reading put on the preferred status change in the Irish media is, in my opinion, completely off the mark. The change simply corrects an egregious error as far as the deal agreed in March is concerned in anticipation of the second Greek bailout being subsumed by the EFSF. It has the not unimportant benefit of making it easier for Ireland and Portugal to return to the markets but increases the pressure on them to take the necessary steps nationally to enable them to do so. It is not a “get out jail” card.
As to advocates of default and other assorted sorcerer’s apprentices, even the WSJ seems to be waking up to what is at stake.
The author is wrong on the last point with regard to the rate being charged to Greece but I think he is right on everything else. The issue of any change in the Irish interest rate can hardlyy be addressed against such a background without the risk some considerable additional disruption.
We now have the rather uninspiring spectacle of a meeting of the European Council which cannot sensibly either talk or decide on anything of any real significance while awaiting for events to unfold in Greece. It is the great good fortune of the smaller countries in the EU that the strength of the institutional structure of the EU is such that even the combined assault on it of such luminaries of international politics as Merkel, Sarkozy and Berlusconi have been unable to subvert it (yet!).
“If they, and the various eurozone central banks, are in compliance with their reporting guidelines, then the ECB has access to the best numbers on this. Numbers which admittedly will not disclose derivatives, but which will disclose the cross exposures of the European banking sectors to each other’s debt, and to sovereign debt.”
Completely reasonable point. The niggle is that throughout this crisis, it has been revealed that responsible people other reasonable people thought were on the case turned out not to be. Witness Colm McCarthy’s strangled fury at the appearance of Pat Neary on RTE. “And then they saw him and said, Who the f*ck was that??? Is that the f*cking guy who is in charge of the money??? That’s when everyone panicked.”
Meanwhile: it’s Draghi
I would recommend you listen to Mike Darda latest take on the ECB
“the ECB is sabotaging fiscal austerity”
Its contracting the monetory base and raising interest rates baby.
Basically its doing what the FED did in the late 30s – punishing the Treasuries for their “mistake”
In my opinion if people want a central treasury in Europe we need to remove the Gold from the banks control.
Impossible in a Europe infested with a 2 century long banking plague however.
Having trouble getting the link
Please Goggle : DARDA: GREECE COULD BE THE TIP OF THE ICEBERG | PRAGMATIC CAPITALISM – 13:
“Anglo senior, and the ECB has left the door ajar on this, could be burnt provided that the holders of such debt are, as one would suspect, hedge funds rather than players in the real economy.”
Eh, the ECB left the door ajar when exactly? Wasn’t their actual reaction “We’ll cut off liquidity to the Irish banks”, as referenced by Karl above?
I don’t think you’re wrong in suggesting that senior debt is being protected for fear of contagion, and i don’t think all that many people have too much of an issue with that. The problem is that Ireland is being asked to shoulder a mammoth burden for this purpose, and no one else seems willing to pitch in for what should be a common goal.
Oh, its one of THOSE days…
“Noonan Says He May Print ‘Ireland Is Not Greece’ T-Shirts
By Joe Brennan and Dara Doyle
June 23 (Bloomberg) — Irish Finance Minister Michael Noonan said he’s considering getting T-shirts printed that say “Ireland is not Greece” in an attempt to distance Ireland from other debt-burdened nations.
“We won’t give them away, we’ll sell them,” Noonan said at an event in Dublin today. He also said Ireland is “on track” with budget measures under its bailout agreement with the European Union and International Monetary Fund.”
More interestingly, he also claimed the bank recap plan may only end up costing “€15-16bn” instead of €19bn…
“Meanwhile: it’s Draghi”
A Golden Sacks boy in command of ECB….maybe Suds could have a word in his ear.
@Bond Eoin Bond
Nobody is listening to him…2nd 13.7%. A record?
Although having read it back it sounds a bit wishy washy, perhaps it just struck me as the logical position for them to be taking in private, but not in public.
I have to say that if I were at the ECB and Ireland (playing to local interests as Irish politicians must) brought up bondholder burning while Greece is aflame I’d show my teeth too in order to remind the markets that no event, designed to appeal to one electorate but which could trigger contagion, will be tolerated. Given that the ECB was in the process of trying to get Germany to back down over the Greek investor participation I can fully understand their fury at the issue being raised at the time Noonan raised it, but I can also understand Noonan’s timing and it comes back to the core issue here which is the mismatch between nation states, a supranational Union with its own Central Bank, and a global financial system.
It seems that discussions will take place in the Autumn and it makes sense that if the holders of CCC bonds are distressed debts funds etc (as one would expect) then there should be room for movement provided that the Greek crisis has been dealt with for the time being.
As an Irish person of course it is frustrating that we have to take a back seat while Greece is dealt with, all the while accepting our austerity and getting on with it.
But I don’t see the ECB position as either ideological or unreasonable, and won’t until someone can prove that the risks of contagion at this time are remote since they have been completely consistent in their analysis on this throughout and have been proven right time and again.
Buying time gives the bondholders time to exit/ shore up their balance sheets etc. It also, unfortunately, allows them to be repaid as they fall due. However, I don’t think we’d be in a better position if Germany, France and the US tipped back into recession, and I certainly don’t think that that is a risk we take to shave, what is ultimately a very small percentage off our national debt. I do think that with the growing realization of the risks of contagion, that there now needs to be a better understanding by our creditors that while part of our problems are certainly of our making, part of them are as a result of us “taking one for the team” which should be reflected in our interest rate.
With regards to the WSJ article – on any topic there will always be contrarians and outliers, but you can only believe “Greece is solvent” if you ignore the likely growth rates (given the huge contraction in demand due to the austerity measures and the ever increasing debt servicing load), ignore likely interest rates when Greece returns to the market, and ignore the reality of the political and institutional make-up of the country and the speed with which this will change. If everybody in Greece suddenly woke up tomorrow with the mind-set, institutions and technological know-how of the Wirtschaftswunder of Germany in the 1950s, then maybe there’s a chance, but that’s not going to happen.
What matters is the view of the markets that Greece hopes to re-enter. From a recent UBS Q&A session:
Indefinite can-kicking won’t work – the laws of arithmetic will win in the end. A little financial repression helps to kick the can (it appears the 7-year extension plan is back, except that it is now a 3-year extension plan or a 5-year one with coupons equal to the EFSF interest rate), but ignores the insolvency elephant in the room.
I agree with the niggle point entirely. However, what we are seeing is a public questioning of the ECB’s position with no evidence that they either do not have the data they are supposed to have, or that their data is flawed. There seems to be outrage that the ECB is not acting in Ireland’s best interests, when it is not their job to act in Ireland’s short term national interests, their job requires them to protect something far bigger than this little rock in the Atlantic ocean, and by protecting it they may actually be protecting our own longer term best interests, not least from ourselves.
When do you expect the ECB to print a few Trillion?
@Overseas Commentator and others in ECB PR Dept
The Jesuits never had the benefit of my attention.
But when you have satisfied yourself with trying to insult both Irishmen and Jesuits, you could deal with the points raised. After all you are probably paid to do so.
Personally I was looking in the legislation to find out where it said “Don’t burn the bondholders” but I could not find it. Maybe that comes under “price stability” but that would be a real stretch of convoluted logic.
I did not infer that Ireland was a special case. The ECB have inferred and more than inferred that bondholders are a special case. Try to find law in the ECB or European textbooks which protects bondholders or that says taxpayers must pay the creditors of bust private banks.
As fo the ECB being worried about contagion. Really?
Or worried about samll bank creditors?. Do you know there is no depositers protection scheme in Irl or most EZ countries. So how come the ECB is not worried about that. One would think it should be.
This is no longer about acceptable collateral or repos or other financial instruments. As DEEPTHROAT would say follow the money. This is starightforward shakedown in favour of very powerful bankers and bondholders. Everything including the concept of a social democratic Europe is to be sacrificed to get them as much of their money back as possible. It is as simple as that.
If you think differently, dream on!.
Gettin pretty sick of this Contagion Spin for the Financial Classes meself – roight on!
@ Joseph Ryan
Mr. Bini Smaghi to go?
At such point as it no longer seems like the global economic recovery is teetering on a knife edge.