Whelan: Time for a deal with Super Mario

Today’s developments that Minister Noonan hopes to see parts of the Anglo debt reduced are most welcome. From an Irish Times report:

On the Anglo debts, Mr Noonan said troika officials were preparing a joint technical paper, drawing on Irish suggestions, to reduce the overall burden involved in repaying the principal of the €31 billion promissory note.

This loan arrangement predates the EU-IMF programme and was agreed to fund an effectively insolvent Anglo Irish Bank but is seen by the Government as too expensive.

“We think there’s a less expensive way of doing it by financial engineering, and we’re not talking about private-sector involvement or restructuring,” said Mr Noonan in Berlin.

Writing in the latest issue of Business and Finance, Karl makes a similar point. Read the entire piece, especially a precise description of what promissory notes are and how they work, but this quote struck me as important.

It is true that the Irish taxpayer has taken on far too big a burden in ensuring that bondholders at Anglo and INBS were repaid. But quibbling about bondholders misses the elephant in the room. It is the huge burden of repaying ELA, not bondholders, that is going to bleed the taxpayer dry for the next twenty years.

It is time for the Irish government to declare that it has no intention of putting €3.1 billion towards repaying ELA in March and that it has arranged an agreement in principle with the Central Bank of Ireland that the state will repay this debt when it has fully recovered from its current crisis.

If my understanding of the legal situation is correct, then Patrick Honohan would only require the support of seven other members of the ECB Governing Council to proceed with this plan. This could easily be achieved with the support of Mario Draghi. Ireland has borne a heavy burden in the name of European financial stability. It’s time for a quid pro quo from super Mario.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

211 thoughts on “Whelan: Time for a deal with Super Mario”

  1. As I understand it the total capital value of the Promissory Note of approx €35 billion, being the Anglo and INBS loss foisted on the nation, is being extracted from the Irish taxpayer and paid back into the Euro system.
    It is then burnt. All €35billion of it.

    I am not clear why the ECB want to extract money from Ireland and then burn it. But that is what they are doing.
    Perhaps we should be grateful.

    In 71BC the Romans decided to crucify 6000 defeated slaves of the Spartacus rebellion along the Via Appia.
    Burning euros extracted from Irish taxpayers is a step forward from Roman times, I suppose.

  2. You are dealing with Malthusians who want zero real growth but yet a return on their “investment”.
    A very serious contradiction really but that is the reality of the situation.

    If they were full money people who stated enough with Growth as it is unsustainable I would respect their position but they are not – they are credit junkies who want more money / energy from the future
    – therefore they have become consumed by the power of the precious.
    We have to accept now we are viewing this circus from the inside out – the Second Fall of Rome.
    Super Mario……………… ha , Super Turd more like.

    I guess Brussels does not have the option of reinventing itself as a tourist centre for future pilgrams of the Dark lands given its own Dark nature.
    However maybe Frankfurt might do a Constantinople on it & build huge fire wall fortifications.

    Meanwhile a couple of hundred years after we recover we might send a animal hide boat across the Atlantic to see what is on the other side.

    http://www.youtube.com/watch?v=OM64YBRZtac

  3. Yeah, extraordinary to hear Noonan blather about some technical discussions on the possibility of some ELA/promissory relief….This should be in the Fiscal Compact…blog about it here:

    http://colmbrazel.wordpress.com/

    Should have been done years ago. Who is foolin who? I’ve written out a version see below of Irish amendment to the Compact…….our shambolic leadership are merely bailiffs and debt collectors….

    Here’s the piece:

    “http://www.openeurope.org.uk/research/100112fiscalpactdraft.pdf

    I think there’s a piece missing from my version of the draft. It should come after the following in the draft.

    TITLE VI GENERAL AND FINAL PROVISIONS Article 14

    Should there not be also:

    TITLE VII

    AMENDMENTS AND BURDEN SHARING

    1. This Treaty shall be ratified by the Contracting Parties in accordance with their respective legal requirements. It will include a burden sharing structured agreement between contracting parties, the ECB and government of Ireland. A sum of ¢34 bn through ELA and promissory repayment mechanisms will be set to null and void. Instead this debt will be collateralised through the EFSF and later through the ESM to ensure the citizens of Ireland are not held legally responsible for the debt of Anglo and associated banks.

    2. This Treaty shall further include clauses and amendments to be agreed as part of an overall restructuring agreement for Ireland’s debt based on ability to repay. These clauses and agreements on burden sharing will be put to the Irish people in a referendum; the support for these amendments and clauses requiring possible further burden sharing will include a decision to leave the euro currency if such conditionality is not accepted and such burden sharing losses are not to be freely accepted by all parties to the agreement.

    ——————

    Wonder why the above is not in your copy of the Fiscal Compact? 🙂 Where’s Honahan , Cardiff et al…The Sleepers

  4. While the Minister and Karl are both focussing on the promissory notes, I doubt they’re making “much the same point.” Karl’s proposition, in his usual precise and authoritative way, speaks for itself. Anything I’ve seen publicly from the Minister so far suggests the government is thinking in terms of lengthening maturities and/or lowering interest rates on the notes, and not tackling the principal (ditto re the ELA). Indeed the Minister’s phraseology quoted above speaks of reducing the burden of “paying the principal”.

    Perhaps the position is different in the detailed paper the Minister mentioned today, but this looks like sticking with the present value of these liabilities, with different cash flows. Whether paying more in non-present value terms over the lifetime of a longer maturity loan amounts to “reducing the burden” is questionable, to say the least, and certainly not anything like a waiver, or still less, a write-off.

  5. A deficit of 6% this year sounds much nicer than 6.1%!

    This point needs to be made in the mainstream media if it really gives the Government a ‘legitimate’ method of easing the burden.

  6. Karl on VB tonight.

    Very disappointed with VB’s proportional attention to catching out Brendan Howlin’s wording on the use of the proceeds of semi-state assets.

    Does he not realise that the 3.1bn saving in this year regarding the promissory notes is worth far, far more than any likely sale of assets which could take years.

  7. @ Rob S,

    The Promissory Notes were added in full to the General Government Deficit when they were created in 2010. The 2010 General Government Deficit was 32%.

    If we don’t make the €3.1 billion payment this year the deficit will still be heading for around 8.6%. Of only getting it down to 6% was that easy.

    The €3.1 billion payment is like a debt rollover except that €3.1 billion of Promissory Note debt is transformed in €3.1 billion of an EU/IMF loan. We don’t owe an extra because of the payment but we do owe it to someone else.

    The €3.1 billion does form part of the Exchequer Deficit because we need the cash to make the payment. It doesn’t stay as cash for long as the CBoI will “burn” it. From 2013 there will be interest payments on the Promissory Notes and this will be added to the deficit.

  8. Why has the current government chosen to endorse the “economic war crimes” that is the previous government’s bank guarantee pledge?

    Why, why, why? And today we are told that emigration is a “lifestyle” choice?

    Shame on the current goverment.

  9. @ Tim

    When I read about it being a lifestyle choice it really became apparent that with this government it is same circus different clowns!!

  10. @Blucher
    How can a CB become bankrupt ? – except when they are in a currency union I guess. (?)
    CBs can produce money , unlike commercial banks which produce debt.

    People need to face facts – we have always been in a non optimal currency since the days of Adam although pre 1979 it was half optimised.
    The experiment post 1979 was a disaster as the CB persued a policey of continental integration at all costs, destroying the previous fabric of society in its wake.
    Despite or indeed because of gross misallocations of capital it chased its own tail for generations.

    The built envoirment & social chaos we see around us is a product of that fiendish experiment.

    I say again – I have never seen anything like the Irish built landscape – its truely spectacular in its credit misallocations.

  11. Forgive me for intruding, and I’m not unsympathetic, but I have taken an interest in these issues and came across Perry Mehrling’s posts at INET where you have also been invited to speak. Mehrling uses an approach that allows non experts like me to understand the issues. Upon whose balance sheet will the losses appear?

    All well and good to say Ireland should not have to pay this that or the other thing but someone will or absorb the loss. Easy to say ‘the banks’ but that means depositors, lenders and, ultimately taxpayers in other countries.

    I’ve read enough of this MMT crap to realize that there are some who believe you can just have a Central Bank excrete ‘money’ and cover all the losses but I’m skeptical. I can’t believe no one was smart enough to have thought of that before. Is there any empirical evidence that it will work because it sure sounds like a solution. If not, I’m back to my first point, who absorbs the losses?

  12. @Scot
    The losses are inbuilt in the system – you cannot escape them.

    I am not a fan of MMT as I am a Full Money Advocate but it is better then this.
    Anyway much of MMT is normal CB practise in many ways.
    1.The Greek (Irish?) government would announce that it will begin taxing exclusively in the new currency.
    2.The Greek government would announce that it will make all payments in the new currency.
    That’s it, deed done! The government can now provision itself and continue to function on a sustainable basis.

    You need to produce paper before you can tax it , Ireland is trying to increase taxes on a declining money supply – thats impossible in the long run – (eventually they will have to split up the last 5 euro note in the country into smaller & smaller pieces.)
    The ECB / Irish ? destroyed the value of the currency when they did not default on credit deposits.
    I am on record saying you must not do this – you are stealing from people.

    But the job is done – the plan was effective.

    The problem now is we are not using the resourses of the country in a efficent manner – the country is bleeding externally to pay interest on sov money held outside the state & also on Increased oil / gas cost
    For instance the trains are empty because on a indivdual level some people can afford to have cars so therefore the money is going to exterior sourses via very high imports
    There is therefore a constant drop in the collective Irish money supply.

    It simply cannot go on – as soon we will be exchanging cows for pints (very messy)

    But it will not work if we continue to pay exterior debts in euros – it would then be worse then the present fiasco – (see Hungary)

  13. @scottinflorida

    I’ve read enough of this MMT crap to realize that there are some who believe you can just have a Central Bank excrete ‘money’ and cover all the losses but I’m skeptical.

    The ECB already excreted money from the euro system when it gave out cash to Anglo so that Anglo could pay off its favourite bondholders. [It did so by discounting the Irish government promissory (PN) notes given (under duress) by the Irish government to Anglo.

    So the ECB had no problem with Quantitative Easing (QE) so long as that
    QE was used to pay off bank bondholders.
    But the ECB wants its QE back. It wants the QE back from Irish taxpayers.
    There are no losses anymore.
    There should have been losses. Either:
    1. The bondholders in a bust bank should not have been paid. The bank should have been sent down the capitalist queue, with the bondholders losing their money. Or
    2. The ECB should have paid off the bondholders if it truly believed that the purpose of paying them was to ‘save the European banking system’. They did pony up the money for the Irish government to pay the bondholders by issuing the PN. Now they want the money back.

    The whole matter could be resolved by the ECB changing the category of the PN money on its balance sheet from ‘Liquidity’ to ‘Our Sweet Bondies’.
    It is that simple.

  14. I am quite fond of Dr. Gurdgiev’s outlook on the issue:

    http://trueeconomics.blogspot.com/2012/01/19012012-one-question-please.html

    “Given that since the previous review, Irish economy has posted”

    -A full quarter of GDP & GNP contraction
    -Missed targets on fiscal side covered up by vague reforms papers publications and capital spending cuts, plus ‘temporary’ tax measures
    -Rampant tax increases & state costs rises, covered up by deflation in the private sector economy
    -Stuck sky-high unemployment, with massive contractions in labour force and emigration
    -Another botched ‘austerity’ budget with hope-for revenue measures substituted for reforms of spending
    -Repayment of billions in bust banks bonds
    -Continued lack of recovery in its banking sector

    What part of (1)-(7) above constitutes ‘successful completion’ of the review?”

  15. I can understand the fixation of those with knowledge and competence in the area on the totally excessive and unnecessary burden that these promissory notes/repayment of ELA and ECB liquidity support are imposing. But surely is there not some perception that the political pressure on Government to secure some relief is overwhelming and that, presumably behind the scenes, it is straining every sinew to secure this?

    It is rapidly getting to the point that, while this burden remains unrelieved, it will prove impossible for it to sustain the apparent sullen and resigned popular acceptance of continued fiscal adjustment. And it is clear that it has abandoned any serious progress on structural reform. It is being forced to fall back on grubby deals and the usual optical illusions.

    The political pressure is also building on the senior EU politicians behind the Troika. They may not be paying much attention at the moment, but, on the basis that some version of this ‘fiscal compact’ will be agreed for ratification (in however many member-states sign up), they will find that, in Ireland’s case, and irrespective of whether or not a ratifying referendum will be required, a major concession will be required on this issue. It will obviously be dressed up as purely technical adjustment. Every effort will be made to project the optical illusion that it is entirely independent of any political considerations. The coincidence of the technical adjustment and the political imperative will be explained in terms of the technical compexity of the issues and the time needed to resolve them.

    The desire of politcians to remain in power, to be able to exercise this power as they wish and to maximise their chances of re-election will always overwhelm any considerations of sensible economics or public policy.

    Could we not please re-allocate a fraction of the time and effort being expended on this issue to focus on some of the pressing economic policy issues that are fully within Ireland’s power to resolve and which, potentially, would have a far greater beneficial impact on the fiscal position and on the performance of the economy than any relief of this unncessary and excessive burden?

  16. @Seamus Coffey

    “The Promissory Notes were added in full to the General Government Deficit when they were created in 2010. The 2010 General Government Deficit was 32%.”

    Ahh of course, thanks for the reminder.

    Point withdrawn!

  17. Questions from a dullard.

    Why do we have to pay interest on the promissory notes if the Irish Central bank just created the money with permission from the ECB?
    Who are we paying this interest too? Is it the ECB or is it Euro, mainly German Banks (who I believe guarantee any money the ECB creates)

    Are there other examples of this in world history?

    I know sometimes countries partake in quantitative easing which devalues their currency and sometimes they say ‘oh we have done enough of that we should stop’.
    But are there examples of countries who agree to actually destroy the money later?

    Since the purpose is to create and later destroy this money why should anyone be entitled to receive any interest payments? Isnt it just a perverted Ponzi scheme?

    The Money was created for the benefit of European banks in order to replace real losses that had already occurred in a private bank (Anglo) and yet they expect the Irish people to pay it all back with interest.

    The sheer lack of morality.

    This is a massive transfer of real Irish wealth back to the banking system that is intent on destroying us. We are participating in crazy acts in order to please our captors. This is Stockholm syndrome on an industrial scale.

  18. “Anything I’ve seen publicly from the Minister so far suggests the government is thinking in terms of lengthening maturities and/or lowering interest rates on the notes, and not tackling the principal (ditto re the ELA).”

    That’s a quote from Aidan Kane’s post above.

    In fairness to Minister Noonan, he has publically stated that he would like to see the principal repayment burden on Ireland reduced and see the ESM part recapitalise IBRC. Try getting the Germans to agree to that though. Why would any other European country agree to it in fact?

    Several posts here have been very critical of the government’s supposed inaction on this issue without acknowleding that short of a unilateral exiting of the current Troika bailout, it is reliant on the agreement of the other negotiation parties.

  19. @ Paul Hunt

    “Could we not please re-allocate a fraction of the time and effort being expended on this issue to focus on some of the pressing economic policy issues that are fully within Ireland’s power to resolve and which, potentially, would have a far greater beneficial impact on the fiscal position and on the performance of the economy than any relief of this unncessary and excessive burden?”

    Size of “unnecessary and excessive burden” = $3.1 billion of real Irish wealth being destroyed every year for the next 15-20 years.

    Could you outline the “economic policy issues that are fully within Irelands power to resolve” and would have a “far greater benificial impact” than the above?

    I take your point that there are things that Ireland can do to improve its position but I disagree that the things within our control are bigger than those outside.

  20. Is it too much to ask that the economists occasionally look at EU law instead of ignoring it?

    Here is a link to the consolidated treaties, you want to go to the Consolidated version of the Treaty on the Functioning of the European Union in which you will find Art 123.

    http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2010:083:SOM:EN:HTML

    Art 123(1) provides the general rules that governments and public bodies should not be financed by the ECB/ Central Banks, and Art 123(2) provides for nationalized banks to be treated as private banks rather than public bodies for the purposes of that Article. This is why IBRC can still access ELA.

    What Karl is suggesting is that IBRC should be treated differently to, or better than, private banks because it is nationalized. In which case it no longer falls into the carve-out for private banks and falls back into the general rule that the ECB cannot finance organs of the Member States. This would clearly be in breach of Art 123 (and possibly 125 to boot).

    You have to bear in mind that EU law is directly effective and as we can see retired German’s have a propensity for testing the actions of the ECB in court. Personally I think the SMP stands a much better chance of surviving that challenge (assuming the ECB is not caught up in the Greek PSI which would link SMP and Art 125 quite clearly), than the suggested shenanigans above would.

    However, as we can see from the LTRO impact on the recent auctions the ECB is pretty good at thinking laterally about the treaty provisions, but no amount of lateral thinking will make this one a flyer.

  21. “On the Anglo debts, Mr Noonan said troika officials were preparing a joint technical paper, drawing on Irish suggestions, to reduce the overall burden involved in repaying the principal of the €31 billion promissory note.”

    From the IT above, the curious may be interested in dredging the full meaning of that sentence.

    Some might conclude from the above that we are all violating hallowed ground here as we probe and tease out and critically examine these matters.

    These matters will be considered, not by us, but by ‘troika officials’; they will be developed in a joint paper developed by our masters, with the consideration of some ‘point of view’ by Irish negotiators. We are backseat passengers driven by ‘the troika’.

    It would appear negotiators in order to protect their own lifestyles and the lifestyle of their political masters, have reduced their input to a compliant assent to whatever is put on the table for them.

    In order to backstop this negotiating stance, we are told of unknowable, obscure and ‘commercially sensitive’ ‘technical’ negotiations; in other words, mind your own business, leave this to the troika professionals and our ‘professional’ negotiators.

    So, what do we have from them so far, its another fudge, much ado about nothing, ‘Fiscal Compact’. Now the different emerging incarnations of the Fiscal Compact have amounted to a complete watering down of the original document.

    Instead of critical evaluation of the content of the document as a remedy to ‘save the euro’; the debate switched to one that chose to concentrate on whether it might lead to the need for a referendum.

    So it got watered out to it is hoped for by some: will get past the AG; avoid further challenge in the High Court.

    The Compact has nothing in it to address burden sharing. Perhaps because of this blog and commentary elsewhere, the Compact now contains a vague association made by Noonan to ‘the possibility’ of some movement on ELA/promissory notes.

    This would be similar to his empty promises on burden sharing for Anglo, unsubordinated senior bondholders.

    The Government have freely associated themselves with the Troika austerity demands without getting anything in return. This amounts to a betrayal of the Irish people. Its insulting of the sacrifices made by Irish people to suggest emigration in these times is ‘lifestyle’ choice.

    Its insulting Kenny and Noonan are preventing real debate on debt burden sharing by taking it off the political agenda; handing control of the debate over to the troika and adopting a craven, policy of capitulation rather than proactive involvement.

    Knowledge is not been shared with the electorate. It is actively suppressed and discouraged. Expect no briefings from our officials on their involvement; their demands for burden sharing.

    But the above is no surprise. We have a government of the bankers, by the bankers, for the bankers; the ‘people’ are an embarrassing obstacle to their dictats.

    Finally, lets focus on the craven word ‘suggestions’ in the quoted 1st par above. Says it all. Your input is to make suggestions, not decisions; ensure your suggestions don’t rock our boat.

    I’ve included in earlier post some burden sharing suggestions that should be in the ‘Compact’: Jan 19, 10:17 above. Damn sure the Kenny/Noonan/Gilmore stooges will not rock the boat in the manner of Icelandic Grimsson or a Bo Lundgren Lundgren. Unfortunately, ‘quiet negotiation’ has been a mask an cover for blind incompetence.

    Currently Greece with its burden sharing negotiations are fighting at a weight far above us.

    The irony is what has been achieved so far by our negotiators brings us closer to leaving the euro. Our debt burden has been massively inflated by them. They’ve left an economic mess in their wake that is worsening by the minute.

    This ‘Compact’ has as much chance of ending the crisis as a leaf falling into a puddle.

    When we do leave the euro, we’ll do what we should have done in the first place, http://en.wikipedia.org/wiki/Swedish_banking_rescue

    In our case, we will have to enter into true burden sharing negotiations with our lenders.

    Rock the boat, gentlemen !

  22. @ Eamonn

    “Why do we have to pay interest on the promissory notes if the Irish Central bank just created the money with permission from the ECB?
    Who are we paying this interest too? Is it the ECB or is it Euro, mainly German Banks (who I believe guarantee any money the ECB creates)”

    Everything has to be ‘arms length’ and commerical in nature. There has to be an interest rate on it equivalent to what a real loan/bond would trade at, so as to be able to value it at par (100) on a rational manner, and so to really amount to 31bn in capital on Anglo’s balance sheet. So the interest rate is linked to the Irish govt bond yield.

    So we (the taxpayer) pay the interest (c.8%) to IBRC, IBRC pays the interest (c.2.5-3.0%) to the CBI (in return for ELA), and CBI pays interest (1%?) into central ECB fund (i believe), which we would have some claim over (3% of total is our ‘equity’ stake i think, and which, incidentally, has been valued at around 50bn by Citi). German banks do not guarantee anything at the ECB.

  23. @Aisling
    Yes , Art 123 is at the root of the problem.
    For the present private euro money system to work Gold must cover the full M1 Euro money supply & all term loans to banks must be risk / reward transactions – risks not covered by CBs
    Otherwise we are best going back to goverment money systems with CB defecit spending of low pre 1987 leverage. (8 to 1 or less)

    http://www.youtube.com/watch?v=P8fDLyXXUxM

  24. @ Colm Brazel

    re Bo Lundgren – he’s in favour of blanket guarantee of senior bondholders, fyi.

    re “will get past the AG; avoid further challenge in the High Court.”

    Supreme Court, obviously, but anyone can take a case to it. In fact, i assume the Irish government itself will take it before the Supreme Court so that any case can be heard on their timeline and not be labelled as a populist/independent challenge.

    “The Government have freely associated themselves with the Troika austerity demands without getting anything in return.”

    Apart from €67.5bn in long term, below market cost, loans, which keep things running here at the moment…

  25. @Carson

    It’s a game we have to play seemingly. The fact that the bulk of our problems are caused by excessive public spending is the thing these games are intended to conceal. Most of the chat raises the spectre of a group of foreign bogeymen who can somehow be conned to solve all our problems in a game of high stakes poker. This site suffers from the same attitude. Look back over the posts and you’ll see very little about ways to cut public spending and a lot about how to renege on banking debts.

  26. @Eamon Moran
    “the things within our control are [not] bigger than those outside.”

    That, in a nutshell, sums up the state of the Irish mindset right now. What do you think the ratio of current expenditure deficits to bank bailout payments looks like each year for the next 5 years?

  27. @Aisling,

    What Karl is suggesting is that IBRC should be treated differently to, or better than, private banks because it is nationalized. In which case it no longer falls into the carve-out for private banks and falls back into the general rule that the ECB cannot finance organs of the Member States. This would clearly be in breach of Art 123 (and possibly 125 to boot).

    Aisling, What I believe, Karl is suggesting, (I’m sure he might want to reply to you also), is that the ECB through ELA/promissory notes has already funded IBRC. In fact, correct me if I’m wrong, the word is we would not have got ELA unless we signed up to repayments eg this year ¢3 bn + most of which will be funded by ELA.

    Now recently there has been some strange debate about this to the extent that the troika have indicated under questioning from eg Vincent Brown, that the troika are not insisting there be no burden sharing.

    So perhaps this is a ‘lifestyle’ choice made by our present government.

    But the kernel of this is the state is paying out on our behalf national debt into which has been subsumed, IBRC obligations.

    To be fair, you do raise the interesting question under European law, whether government has the legal right to guarantee that ‘private’ debt with ELA/promissory note repayment obligations. One could make the same argument re paying for NAMA.

    You could argue there should be a clause in the ‘Compact’ expressly forbidding states to take on the private debt of banks, but this will not happen.

    The fact is once these debts went from private debt to sovereign debt now paid for through ELA, these institutions are no longer private institutions in the true sense. Their debt is considered part of sovereign debt.

    Moving on to renegotiate ELA/promissory note obligations freely given and used to fund bank obligations; this should be our main priority to burden share with our ECB lenders.

  28. @Eamonn Moran

    “Why do we have to pay interest on the promissory notes if the Irish Central bank just created the money with permission from the ECB?
    Who are we paying this interest too?”

    Apparently, if we allowed the CB to loan money to IBRC/Anglo at some below market rate price than we would be in breach of some competition laws (amazing we can pump over 20,7bn into AIB/BoI and get the okay from the Commission but an interest free loan is totally out of the question).

  29. @Eamon Moran,

    Despite the significant ‘internal devaluation’ that has taken place for Ireland’s non-sheltered sectors, it has not taken place in the sheltered sectors and the price level of Irish household consumption remains stubbornly above the EZ average. I have been banging on for so long about the structural reforms that need to be implemented that I realise I am p1ssing off a lot of people.

    So, in effect, is what you are saying is that we should continue to refuse to do anything to help ourselves until external parties solve this problem first?

    Good luck with that.

    @Aisling,

    “Is it too much to ask that the economists occasionally look at EU law instead of ignoring it?”

    Thank you, thank you, thank you. At last. It seems that most academic economists – with the possible exception of those based in the US where law, economics and democratic governance are part of one garment – totally ignore the extent to which democracies – and unions of sovereign democracies such as the EU – are governed by the rule of law that is based ultimately on democratic consent.

    This tendency by economists to ignore the rule of law and the requirement for democratic consent seems to be more pronounced in Ireland. It may be because governments in Ireland are at the end of the spectrum in terms of the excessive executive dominance they exercise. Once a government has secured and is able to maintain a comfortable Dail majority it is able to operate as a tyranny within the bounds set by the Constitution, irrespective of how softly or mildly it might impose this. Once a government decides to act – and there is no conceivable constitutional constraint – it can get its way.

    Since government in Ireland can do this, perhaps many of the economists presume that governance in the EU operates on the same basis. Indeed they might advance in evidence the way the EU’s Grand Panjandrums ensured the (tortuous) enactment of the (reduced) EU Constitution and the establishment of EMU without securing sufficient democratic legitimacy. But it remains fully and legitimately bound by EU law and the requirement to secure genuine democratic legitimacy is now becoming paramount as witnessed by the difficulties Chancellor Merkel is having with the Bundestag and the positions being adopted by governments in the Netherlands, Luxembourg, Finland and Sweden – among others.

    However, on this specific issue, as per my comment of p:42am above, I suspect that where there is a political will a way will be found. But it will have to be entirely compliant with EU law as enacted. And it may take a little more than lateral thinking.

  30. @Johnny Foreigner

    That’s strange. This may be news to you, if you are indeed a “Foreigner,” but Ireland did not have any serious fiscal trouble before the government decided to be extremely friendly to the bondholders of the banks. Hell, we had even had budget surpluses, just like Spain. I wonder what your definition of fiscal soundness is if even pre-crisis Ireland fails at it, if even out right surpluses aren’t good enough.

    You really need to explain what exactly you mean by “the fact that the bulk of our problems are caused by excessive public spending,” unless you mean bailing out the bondholders and banks by “excessive public spending.” I see no such “fact”.

  31. @Bond 10:27

    I know Lundgren didn’t burn senior bondholders. That’s why I included the condition, ‘ In our case, we will have to enter into true burden sharing negotiations with our lenders .’ But senior bondholders at this time are not the main cause of concern as much of it already repaid; our main problem is refactoring the ELA/promissory notes and interest rates on our loans, extending maturity dates

    RE “Apart from €67.5bn in long term, below market cost, loans, which keep things running here at the moment…”

    Surely you mean ‘running down’ not ‘running’; ‘running down’ is not working. Its destroying the economy, unemployment, emigration, more austerity.

    Plus you present the €67.5bn in long term, below market cost, loans, as if a charitable gift; that money is presently looting the economy with its repayment obligations based on austerity fueled by negative growth.

    Note that we do not have a way to inflate our way and grow out of that debt; we cannot devalue; so the true weight of that debt is increased by deflation, rather than decreased.

    We live in a society based on deception and odious debt with plenty making hay while the sun shines 🙂

    Although for some it hardly effects their lifestyle at all.

  32. @ Fulcrum

    do you think we would not have “fiscal trouble” if we had burnt every bondholder? Would we now be running a balanced budget, something close to a balanced budget, or would be perhaps be running surpluses still?? Ever heard the suggestion that while we were running headline surpluses, we actually had truely massive structural deficits in the 2003-2007 period??

  33. @Colm Brazel Once the debt is there and you refinance it or change the terms you likely create new debt or a new facility as at that moment in time so you can’t then argue grandfathering.

    In this case, in order for there to be any benefit to Ireland you’d need to change the maturity at least, possibly the coupon (interest holiday) etc which would impact on the NPV and which would look and quack exactly like a new facility to me which would breach Art 123 by failing to fall within the 123(2) carve out.

  34. @Fulcrum

    It’s not an opinion it’s a mathematical fact. Every year we spend more than we owe. Some of that is because of the banking bailout. Most of it isn’t.

    Ireland has had enormous fiscal problems since around 2001. These were obscured by a fake housing boom. Do you seriously think an enormous increase in public spending funded by stamp duty is a credible fiscal model?

  35. @ Colm

    “But senior bondholders at this time are not the main cause of concern as much of it already repaid; our main problem is refactoring the ELA/promissory notes and interest rates on our loans, extending maturity dates”

    And how do you think we repaid the senior bondholders? With the ELA. So one is a function of the other. So if Bo Lundgren were in charge here, we’d be in the same situation as we already are. I’m not sure why you are hoisting him up as your hero? What would he do differently?

  36. @Eoin Bond.

    “So we (the taxpayer) pay the interest (c.8%) to IBRC, IBRC pays the interest (c.2.5-3.0%) to the CBI (in return for ELA), and CBI pays interest (1%?) into central ECB fund (i believe), which we would have some claim over (3% of total is our ‘equity’ stake i think, and which, incidentally, has been valued at around 50bn by Citi). German banks do not guarantee anything at the ECB.”

    So will there be left over money at IBRC and the CB to be paid back to the Government? Seeing as how IBRC is recieving an 8% interest coupon but only paying 2.5-3.0% to the CBI.

    If, at some stage in the future, the Government fully expects to get back 47bn-31bn = 16bn (give or take a billion or so since there may be some real net cost in interest payments to the ECB) then would you agree they have done a rather poor job of making this point?

    I mean they have had to provide the repayment schedule umpteen times to opposition part members over the last year and haven’t seemed to argue that the net cost won’t be 47bn.

    I wonder if our fiscal projections for 2012-2015 include greater returns to the Government from IBRC or the CBI in their annual reports?

  37. @ Bond,

    “we actually had truely massive structural deficits in the 2003-2007 period”

    Keynessian economic theory would be in favour of running substantial budget deficits during the bad times.

    During the good times is the time to get your budget deficit way, way, down.

    Unfortunately, economically illiterate Dept of Finance and Harney/Ahearne/McGreavy spent the other way.

  38. @ Aisling

    “Is it too much to ask that the economists occasionally look at EU law instead of ignoring it?”

    Is it too much to ask blog commenters to actually read what people have written before launching these attacks?

    I haven’t ignored EU law. In fact, I’ve been very specific about the exact piece of EU law that is relevant.

    The CBI’s powers to provide ELA are given to it under Irish law. The only aspect of EU law that prevents the CBI from operating its ELA programme as it sees fit is the one that I have pointed to — article 14.4. of the statute governing the ESCB and ECB.

    http://www.ecb.int/ecb/legal/pdf/en_statute_2.pdf

  39. @Colm In relation to your second point Colm McC made the argument at it is morally with merit but I suspect legally without because of the nature of the bank bond holders at the time. Had they all been German banks as public rhetoric would like us to believe then yes, that action would have foisted the protection of the German taxpayer onto the Irish one and there would be an issue.

    However, the reality is that the majority were non eurozone investors, the protection we afforded was to the global financial system rather than any particular eurozone State and as such it would be very difficult to argue based on Art 125.

    It was unfair to us, of course it was. Yet, looking at Greek contagion at the moment I’m not sure that the ECB wasn’t right in their stance given their mandate is pan Eurozone and not Irish specific, but we need a political solution based on fairness rather than looking for a legal one which doesn’t exist if you look at the actual identity of the bondholders at that moment in time.

  40. @Seamus Coffey
    “The Promissory Notes were added in full to the General Government Deficit when they were created in 2010. The 2010 General Government Deficit was 32%.”

    They’re not national debt yet though are they – despite being money the country now owes. Can’t remember the details but possibly the deficit recorded the 31B for the promissory notes but balanced that off with a financial asset on the other side of the debt calculation.

    If so plans to reschedule/defer the payments may have accounting issues, i.e. the government might need to recognize the increase in debt in one go rather than over a period of years which isn’t great from the painting-a-rosier-picture-to-the-world view.

  41. It would be wonderful if you were the Fulcrum to which the lever of evidence might be applied to move the great stone of blindness, but, alas, you are not. Nobody is denying that Ireland is not bearing an excessive and unnecessary burden as a result of the ECB’s failed, and, at the time, predictably futile attempt to shore up bond funding of the EZ’s dodgy banks – and this will have to be resolved.

    But a signifcant proportion of the bubble era taxation receipts and the public expenditure they financed and the fiscal surpluses they generated were based on an optical illusion that the boom would get boomier. If you honestly believe that the fiscal deficit has been generated solely by bank recaps and payments to bondholders then, I fear, you are being wilfully blind.

  42. @Johnny
    I will do my best Tina Turners impression for you – whats public spending got to do with , got to do with.
    Its just a second hand form of money in this private money system.

    @Paul
    I just don’t get it – you want us to be more effiecent , but in this system the surplus created from this will just flow to pay interest.
    Most of the Irish don’t own our sov bonds.
    A reduction of pay to the sheltered sector will therefore externalise more money out of the country to pay external bonds interest which is happening as we speak anyhow.
    The private shopkeeper will have less money in his pocket & so on.
    We will have to export even more of our wealth……… this will never stop.
    Learn some exponential functions why don’t you.

    Productivity will not improve under this money system – its just a transfer of consumption although a lower & lower collective european consumption over time as both physical & human capital gets destoyed to pay interest.

  43. @ Bond,

    Too late for cuda, shuda, wuda,

    http://krugman.blogs.nytimes.com/2008/09/28/the-good-the-bad-and-the-ugly/

    http://en.wikipedia.org/wiki/Swedish_banking_rescue

    To devalue and effectively achieve this result you need your own currency eg Iceland; you can devalue

    At least with the above you dont end up as roast pig turning on the spit while the young are looted with emigration/unemployment; while the rich protect their lifestyles.

    Our present bancocracy has more similarities to Russia than the capitalist west. Speaking of which our assets are being sold off for a song, a Russian lady has just purchased the Morrison

    http://www.irishtimes.com/newspaper/finance/2012/0114/1224310243813.html

    But I expect some will wait a little more for more property falls; until other state assets get sold off for song

    There’s no future in the euro.

  44. @Karl Of course, I apologise for the generalization. Allow me to amend it.

    “Is it too much to ask that the economists occasionally look at the relevant parts of EU law instead of ignoring them, possibly with a basic understanding of how EU law works?”

    Your issue is Art 123, and trying to claim that Irish domestic law governing the CBI can ignore this is just plain wrong. Even if it were possible to give IBRC special terms under a literal reading of Irish domestic law (ignoring the specific compliance with the treaties requirement in that protocol – which is unnecessary given the jurisprudence of the Court of Justice on this) Irish law must be interpreted in conformity with the treaties, and any such reading would run splat bang into Article 123.

  45. @Paul hunt

    “If you honestly believe that the fiscal deficit has been generated solely by bank recaps and payments to bondholders then, I fear, you are being wilfully blind.”

    What’s our biggest deficit ?

    Its truly, awful, blind political leadership driven by useless NTMA, CB, Department of Finance officials, infected by a useless banking cartel, corrupted by big business and bought out institutions/unions who continue to run this place into the ground with Croke Park jokes 🙂

    They are now attacking the old, the young and the disabled.

  46. @ Aisling

    “Your issue is Art 123, and trying to claim that Irish domestic law governing the CBI can ignore this is just plain wrong.”

    With all due respect, I don’t agree.

    Let’s take a look at the relevant part of 123

    “Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.”

    The CBI can set out new terms for the use of its ELA facilities. The fact that the facility is now almost exclusively used by IBRC doesn’t matter. This would still count as everyone who uses the facility getting the same terms.

    I’d note that when asked about this issue, Mr. Noonan has pointed to 14.4 of the ECB statute as the relevant piece of law:

    http://debates.oireachtas.ie/dail/2011/11/22/00083.asp

    “The Central Bank Act 1942 provides the statutory basis for the Bank to provide emergency liquidity assistance. Section 5B(d) provides the Bank with a general power to lend against security to credit institutions, which power may be exercised in pursuit of the Bank’s financial stability objective provided by Section 6A(2)(a) of the 1942 Act. Regarding the functions carried out by a NCB, other than those specified in the Statute, I would draw attention to Article 14.4 of the following:
    http://www.ecb.int/ecb/legal/pdf/en_statute_2.pdf

  47. @Bond Eoin Bond
    Re yours of 7.05

    I see bloomberg reporting the the new Treaty/Compact or whatever provides for incorporation of debt brake at constitutional level…
    “The treaty will enshrine tougher sanctions, which are already in effect, at the constitutional level. It will make it easier to penalize high-deficit states and require each country to enact balanced-budget amendments.
    An ECB spokesman reached late yesterday declined to comment. Martin Kotthaus, chief spokesman for the German Finance Ministry, declined to comment on the pact when contacted by telephone in Berlin.”

    To become operative after 12 of 17 ratify.

    So it takes away our veto regardless?

    Looks like a referendum will be required.

  48. @Bond Eoin Bond
    Re yours of 7.05

    I see bloomberg reporting the the new Treaty/Compact or whatever provides for incorporation of debt brake at constitutional level…
    “The treaty will enshrine tougher sanctions, which are already in effect, at the constitutional level. It will make it easier to penalize high-deficit states and require each country to enact balanced-budget amendments.
    An ECB spokesman reached late yesterday declined to comment. Martin Kotthaus, chief spokesman for the German Finance Ministry, declined to comment on the pact when contacted by telephone in Berlin.”

    To become operative after 12 of 17 ratify.

    So it takes away our veto regardless?

    Looks like a referendum will be required.

  49. @ CP

    once the UK was out, this stopped being a “full” EU treaty, so there was never any automatic veto right. In fact, this new draft at least pushed up the requirement from 9 members to 12. Note: this just means that it’d be operational in those 12 countries, it only becomes operational here provided we agree to it, via referendum or otherwise.

  50. John McManus commented on this very point in an IT op ed. Didn’t fully understand is argument but he seemed to be saying reducing the headline interest rate on the promissory notes makes little or no difference. It’s a circular transaction. Maybe someone could read and explain. If he’s right then we’re barking up the wrong tree.

  51. @aisling

    “You have to bear in mind that EU law is directly effective and as we can see retired German’s have a propensity for testing the actions of the ECB in court. Personally I think the SMP stands a much better chance of surviving that challenge (assuming the ECB is not caught up in the Greek PSI which would link SMP and Art 125 quite clearly), than the suggested shenanigans above would.”

    But who would have standing?

  52. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:115:0047:0199:en:PDF

    Article 123 (ex Article 101 TEC)

    1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments. 2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

    @Aisling,

    The picture you paint of Ireland protecting the global banking system is laughable. No other serious economist, politician, professional worldwide looks at its own banking interests in such terms. This is fools gold swallowed by our negotiators to inflate their foolish egos and appeal to self sacrifice as a mask for self interest.

    You are talking about foreign bondholders mainly in France/Germany but also some exposures to US banks; through financialization sprung with insurance CDS defaults. This should have been a winning hand to obtain a good deal; but we fell for the con job and into the hands of our lenders.

    You write:

    “Art 123(1) provides the general rules that governments and public bodies should not be financed by the ECB/ Central Banks, and Art 123(2) provides for nationalized banks to be treated as private banks rather than public bodies for the purposes of that Article. This is why IBRC can still access ELA.”

    Now read:

    ECB Bank Rescues

    http://www.ecb.int/pub/pdf/scplps/ecblwp8.pdf

    Ireland page 46

    This sets out the full legal basis supported by the ECB for the ‘bank rescues’ in Ireland.

    The unfortunate keyword ‘systemic’ is the word to focus on. Once a ‘private’ institution gets the accolade of ‘systemic’ it moves out of the narrow and confined interpretation of ‘private’; when it becomes systemic, strictures you mention no longer apply.

    Plus 123 above really defines the role of the ECB in regard to its central banks. This means ECB cannot directly fund credit institutions such as banks; but it directly funds national CB’s. CB’s are responsible for the liquidity of banks in their domain. In that regard, ELA is used by our CB to fund our ‘systemic’ banks as described in the ECB bank rescue document above, which defines ‘national banking rescue measures across europe’. This is an ECB policy endorsement.

    At least that’s my understanding of it 🙂

  53. @Karl If ELA were to be provided to everyone on the same terms then in theory you might have a starting point since Art 123 (2) could be invoked. But to offer a deferment on all ELA by the CBI? At first glance how could BOI not gorge herself on the “free” money? Or indeed RBS or KBC or any other bank eligible for ELA from the CBI?

    If you change the terms as you suggest you’d change the uptake as night follows day.

    State Aid rules mean you’d have to offer the favorable terms to everyone, not just those currently borrowing which would be a pretty expensive shot in the foot unless you think that the Commission would bless something as not being an aid when it was designed to circumvent Art 123?

    Yes, the Irish legislation is at issue but only in so far as it does not breach the treaty with the prohibition on State financing in Art 123 and the prohibition on State Aids in Art 107 being the obvious ones. Either or both of these treaty provisions depending on how you structure it will nobble the proposal.

    You’ll note that while 14.4 essentially says that the actions shall be deemed to be undertaken by the CBI and not the ESCB the rule in Art 123 does not only apply to actions undertaken in an ESCB capacity, the rule is an absolute prohibition on Central Bank financing meaning, even if there was any doubt, it still trumps the protocol provisions.

  54. @ jackh,

    The National Debt measures the debts of The Exchequer. The Promissory Notes will only become debts of the Exchequer as the €3.1 billion annual payments are made.

    The Promissory Notes do form part of the General Government Debt which is a much broader measure of public indebtedness. The Promissory Notes were added to the GGD when they were created.

  55. @Bond Eoin Bond

    Er, we already operate under a Treaty fully ratified by all member states. The effect of the new treaty (and you can call it anything you like) is to negate existing rights, I.e. the veto, and impose sanctions not contained in existing treaties at the behest of a minority of EU members.
    At international law level it must be suspect. Perhaps the Brits are right.

  56. @ Aisling,

    Actually, it would be great if your interpretation were true, we wouldn’t be landed with the ‘systemic’ debt of so-called ‘systemic’ private banks; and the ‘rescue’ of the ‘financial services industry, at the expense of democracy across the whole of Europe.

  57. In this blog there is a consensus that states that Ireland is victim of an injustice that needs redress. This consensus does not exist outside of the island .On the contrary there is a lot of bitterness against the PIIGS ;it is going to be a very hard sell .
    “Help us or we will default and you will be in bad trouble” might work , “Help us because we are worth it”, will not.

  58. @Ger

    Allow me to explain how an ECB head would engage on this matter:

    Ireland: ‘ Hi Dublin calling, hope all is well in Frankfurt, it’s not so good here, I’m sure you’re aware but we’re mending our ways, very slowly. We’ve just decided to do it a bit quicker by way of a little self help’

    ECB: ‘Was ist this ‘self help’ really mean’

    Ireland: ‘It means the unguaranteed bond holders of all the covered banks – well we’ve decided the fact that they are actually unguaranted well we ain’t paying for them any more – in fact one of my colleagues had a nice phrase some while back he said it like ‘not another red cent’ – pretty cool, yeah. Oh and by the way the €3.1bn PNs due in March – we aint paying that either. Talk later yeah?, by for now’

    ECB: ‘Mario, Mario, Mario the Irish – they do have balls after all – we need to do something’

    You see pressure in the right direction will generally yield a result.

  59. @ Aisling

    “If ELA were to be provided to everyone on the same terms then in theory you might have a starting point since Art 123 (2) could be invoked. But to offer a deferment on all ELA by the CBI? At first glance how could BOI not gorge herself on the “free” money? Or indeed RBS or KBC or any other bank eligible for ELA from the CBI?

    If you change the terms as you suggest you’d change the uptake as night follows day.”

    No.

    The terms under which ELA is used require that the bank applying for it have run out of eligible collateral for regular ECB operations and also that the bank is in big trouble and would fail without ELA causing financial stability problems. This wouldn’t apply to these other banks you are citing.

  60. @Colm Brazel You’ve somehow got the wrong end of the stick.

    My interpretation is that we have managed to legally get the worst of all possible worlds but my posts on this thread are simply about the fact that I think Karl’s argument for IBRC not repaying the ELA until we can afford to do so would be illegal.

    Politically and morally we should get some recompense, legally I don’t see any.

    The only bright side is the ECB’s comment at the troika press conference that if we don’t repay the Anglo debt we could suffer reputational damage but otherwise it is up to us. That being the case I would argue that the reputational damage associated with defaulting on loans by an insolvent bank is a risk I’d be happy to take provided that it could be structured to avoid a cross default, and provided that the holders of said bonds are not on our watch such that we’d have to make them whole again.

    @Overseas that’s an issue for us. German taxpayers think we didn’t balance our budgets and that is what led to the crisis as opposed to us having a better P/L and B/S to Germany prior to the banking crisis, albeit one financed with private sector borrowings. Yes we’re running a huge deficit which needs addressing but we blew our balance sheet bailing out our banks.

    Interestingly a lot of commentators view Sweden as being a paradigm of virtue at the moment while others are warning they’re in a housing bubble. Imagine Germany’s balance sheet if they had to recognise their pension deficit? Adjust German private debt for (discounted) future rental expenses given the low level of home ownership and then compare it with the private sector debt of nations with higher home ownership.

    The problem with all of this is that national accounts don’t reflect the kind of accounting standards we’d enforce on companies so we remain comparing apples with pears depending on our own political ideals or views on morality.

  61. I had assumed that bleeding the taxpayer dry for the next twenty years was a ‘lifestyle choice’ the government had made on our behalf so that we didn’t have to worry our pretty little heads about making it (or not) ourselves.

  62. @ Aisling
    I do not quite get your argument a about private debt and rental in Germany .The renters are paying rents to private people for which those rents constitute an income .Globally it does not change one bit to private sector debt.
    I am always surprised by the fascination that Irish people (and to a lesser degree Americans and British) continue to have to home ownership ,in my opinion they should have learned because they have been severely punished for it .

  63. I think the whole prom debate is tertiary to the larger central question.
    Our sov debt is external.
    Ths whole mess could have been avoided if credit deposits were nationalised and private debts & bank bonds were considered null & void given the corruption in the system.
    Which is a very non MMT position – (the MMT boys like the CB to control things , not the people)
    Anyway I accept the BoI & AIB boys will always run this sad little bog – giving them a new credit poison licence the next day could have been a option.
    Now the debt dynamics are looking terminal although its never too late to try.

  64. @aisling

    The problem with all of this is that national accounts don’t reflect the kind of accounting standards we’d enforce on companies so we remain comparing apples with pears depending on our own political ideals or views on morality.

    Just to help this reader, what broadly would your own political ideals or views on morality be as it pertains to the bailout and the behaviour of the ECB and German government?

    For myself I think that blaming the apparent insolubility of our ongoing economic disaster on legal requirements (which Ireland’s democratic elected representatives all agreed to while not under duress, blah blah blah) plays into the German/neoliberal narrative: Those who are now in trouble in the Eurozone simply failed to observe the rules (or their spirit) in the same way that industrial giant and centrally located geographical and philosophical home of the ECB Germany has.

    It is a division between those who see Germany’s comparative success in the new zero sum EU economic game as having been due to following the rules, as opposed to those who see the peripheries problems as significantly due to Germany and client states setting the rules.

    So the EU has a systemic crisis that is being addressed at the level of individual responsibility as the system “as is” nicely serves the interests of political powerful constituencies (the German conservative electorate and the ECB and its stakeholders).

    Confronting the dangerous new adversarial nature of EU politics and economic policy making is beyond the experience of many of the Europhiles who served Ireland well up to now, especially the Irish politicians and civil servants who have long seen the EU as a potential escape from our small countries petty concerns.

    Europe’s embrace is now its grasp.

  65. @Karl

    It would appear Aisling has conceded in her last post but on another area of the law/voting system at ECB you stated in your article that;

    “If my understanding of the legal situation is correct, then Patrick Honohan would only require the support of seven other members of the ECB Governing Council to proceed with this plan.”

    I am not aware of any statute that refers to this but I do recall an interview Patrick Honohan gave to Vincent Browne in the aftermath of the Honohan report where Vincent questioned Honohan on the ELA and how it is provided.

    From recollection, the governor responded by stating that the ELA is provided by the Central Bank of Ireland only after unanimous consent of the entire governing council. He was then asked, from recollection, what would happen if they refused and he responded that they wouldn’t refuse. Presumably a deferment of payment could also fall under this umbrella where unanimous consent of the council would be required?

    Shall try and find the interview, which I believe took place after the publication of the Honohan report.

  66. @Shay
    It was a trap – the old left new this.

    Read some Micheal Hudson stuff to see how the left drifted from economic concerns to worrying how much we drink everyday.
    Its sad , very sad.
    I don’t want anybody including Rosin Shorthall messing with my freedom to do whatever I want with my body.
    Lower life expectancy saves the state money anyhow.

  67. @Aisling

    re “I think Karl’s argument for IBRC not repaying the ELA until we can afford to do so would be illegal.”

    As I’ve written earlier on this, my view is that our ELA/promissory note obligations need to be recollateralised. Let me explain 🙂

    Imagine all 27 states in the euro and a ship with 27 ballast tanks called EUPANIC.

    Lets say debt = liquidity = euros = water

    Fill all tanks up with water. Now take away 10% of the water from each tank.

    Fill up with too much water, hyperinflation, spillage, disaster, ship sinks.

    The captain notices some tanks are leaking badly. To maintain stability the water in those tanks needs to be replaced and balance of the ship restored. So, he takes it from other tanks and redistributes the water until order is restored. He/she has also made sure those leaks get fixed!

    Archimedes people will say the captain can now print more water for all tanks but again he must avoid spillage.

    The reason the euro is doomed is some tanks will not allow their water to be used to replace the water in eg Irelands tanks. They want Ireland to fix its own leaks but also to do so at no expense to them.

    They give us some water but want to charge us for it; even profit from our loss.

    Proportionally in the real world some tanks are bigger than others but the analogy holds.

    The Fed through the FOMC operates along the above lines.
    The euro has no effective means of operating on such lines. Germany, it seems, is adamant it won’t pay through euro bonds.

    The EFSF and ESM using the above analogy would take out 10% of good collateralised assets from all tanks and use it to balance the leaking tanks and fix them. I’ve argued that Ireland’s ELA/promissory note obligations should be set to null and that debt be recollateralised through EFSF depleting the fund amount by the amount required. this would satisfy markets, avoid inflation.

    IF ELA obligations were deferred under some assumed ability to pay mechanism as Karl suggests, markets would correctly value that debt at null and void and mark down the euro accordingly.

    The euro is tied up politically in restrictions that prevent it rescuing the peripherals. It may have a big heart and is making a great effort to do so, but its arteries are clogged.

    Bottomline The German parliament, the Bundestag have ensured Merkel will be hobbled if any moves are made to make Germany lose any water to the peripherals.

    So present solutions to the crisis are all avoiding the elephant in the room; who gets sent the bill. That’s why Europe is fiddling while Rome burns.

    We could all agree to annexation by Germany, but who needs that? Basically, the gap between the peripherals and the core is widening. Adjustments proposed are deceptive and odious.

    We need a new and better adventure with new beginnings without being straddled by the ghosts and mistakes of the past 🙂 Meanwhile we need to turn up the lights on this stuff: http://www.youtube.com/watch?v=HAfFfqiYLp0

  68. @ Johnny foreigner and paul hunt
    “That, in a nutshell, sums up the state of the Irish mindset right now. What do you think the ratio of current expenditure deficits to bank bailout payments looks like each year for the next 5 years?”

    I think you guys misunderstand what I am arguing.
    I can tell you that the deficit for 2011 was made up of 9 billion in Banking repayments and 15 billion on Irish annual deficit.

    Lets presume we do what you ask and cut hard and in 2 years time we are able to reduce the Irish annual deficit to about 7.5 billion. We still have another 3.1 billion in promisory notes and about 5 billion in interest repayments on our national debt.

    I can also say that it there are already further bank repayments for ILP and credit unions on the cards for this year and lots more pleasant surprises down the road.
    There is also evidence from Nama Wine Lake that unless there is a 20% increase in current property prices Nama are looking at losses of about 10 Billion. As prices continue to fall this figure rises.

    I agree with your prognosis about the need to shake up the many powerful vested interests who are like a chain around the economies ankle.
    However i believe that the banking debts the country have taken on are like a foot on our neck.

    My only query is with regard to what actions will have the biggest financial impact.

    Tackling the vested interests or Arguing for relief on banking debt.

    Obviously the answer is that we should do both.

    But if you were to ask me what would have the biggest impact on our financial position then I believe convincing our EU partners that we need significant debt right down will have a bigger immediate financial impact.

    The only reason i make the point is because People like Colm McCarthy argue we should concentrate on the things within our control.

    I would argue that the a significant increase in pressure from all areas of Irish society aimed at the troika is also within our control and may well have very significant positive results.

  69. @ Overseas Commentator
    Re home ownership. In 1845 it was mostly landless labourers that died in the Great Famine. We had 100s of years of being prevented from owning our own land. The historical factors do have a bearing. But at least our birth rates are ok – have to fill all those bedrooms!

  70. @Eamon

    Good honest answer, I wish the people who run this site would have those figures on the front page so no one can avoid them. The % of total annual increase in debt that is associated with the bailout will be lower in the coming years and don’t forget that the interest payments on the total national debt are largely related to excessive public spending.

    There is so much visceral anger in this country at the payment of promisory notes but so little at the deficit spending – more than 1 billion every month at the current rate. Karl Whelan believes the Irish government should ‘declare’ that we won’t repay a 3. 1 billion promisory note in March – while at the same time this State will borrow the same amount to cover current public spending over a few months. What if the people we borrow this money from ‘declared’ they didn’t fancy giving it to us?

    Re the ‘foot on the neck’ problem, all the debts we incur as a nation are like a foot on the neck, they all have to be repaid in the end.

  71. @Paul Hunt

    I would agree with you if we lived in the world where all the people analyse the situation rationally, taking into consideration all the facts and whatnot on the level field. What is important is the narrative, and the currently dominant one in most of the European elitedom is that everything was caused by “profligate” governments in the Club Med and Celts. Only very recently have some started mentioning “growth,” whatever that means, as if it was something incidental. They refuse, to this day, to recognize the fact that countries like Spain were most certainly NOT “profligate” before the crisis hit them hard. When there is already TOO MUCH emphasis on that in public discourse, I believe saying public spending should be our overriding priority will put us into an even worse deadlock down the road.

    Every country has to live in the so-called new reality, which will certainly necessitate the cut in spending, not only in public sector but private sector as well, but that would be forced upon us by the economic reality anyway, as it more or less has already. The immediate concern I have regarding the whole issue is that very FALSE narrative currently wide-spread in Europe (and elsewhere for that matter), which will certainly lead to unnecessary misery everywhere. Economy is a delicate matter which has no definite one-way solution, but I can’t possibly embrace your priority in discourse given the way the European elite have been acting.

  72. @Colm

    Are some tanks are also more competitive and want to suck in additional water from the other tanks and steal some of their materials so that they can make themselves into bigger tanks and maybe even want to export some of their water outside of the ship they’re currently in and might some of the tanks near the outer hull (let’s call them ‘periphery’ tanks) want to leave the ship and bob about on their own in the big wide ocean….

    I liked your analogy but the word ‘tanks’ always reminds me of Panzers. As in: “Get your Panzers off of my lawn Dr Merkel.”

  73. @ PR

    At PR Guy, …….those problems lie there as well…Panzers are not on the lawns; but, you never know, they might want us to build some, in return for more water at some point ?

  74. @Karl Sorry, I missed a step because it struck me as obvious and I referenced it but didn’t spell it out. It is not obvious at all if you’ve never worked with State Aids.

    ELA is a State Aid but is pre-approved as it were by the Commission under certain conditions including that the rate is 1% above the ECB rate which makes sense. So the rate doesn’t reflect the rubbishness of the assets, but it is higher than is otherwise available. So while BOI can’t access ELA they wouldn’t want to so long as they can access LTRO (itself accepting some pretty rubbish assets). If ELA gets better than LTRO then you have an obvious competition issue which the Commission cannot wave away, and little to defend it as there has been no material deterioration in the Irish banking system on which to justify it.

    If you were to drop the rate, in order to have any chance of getting it through State Aid you’d have to broaden the terms to avoid distorting competition so the class of borrowers would increase thus making it uneconomic, or else admit it was designed for IBRC and thus not distorting competition as the aim was to help the Irish taxpayer. Neither argument appeals, the latter because somehow IBRC is still in competition with the pillar banks as long as it remains.

    State Aid will get you from one side, Art 123 from the other.

    An idea that is vaguely percolating, but I know nothing about sovereign accounting other than it is opaque is whether if you could convert the ELA into a discounted facility, and convert the pro-notes into discounted notes you could help with the deficit by never having (well, not for years) a cash hit? In IBRC’s accounts they should be capable of matching out the two, the economic terms of the ELA could remain only you’d swap interest for discount accretion which shouldn’t raise issues.

  75. Valiant proposal by Karl Whelan but does anyone believe that the ECB in particular will move unless there is (a) a likelihood of Ireland’s debt becoming black-and-white unsustainable (which it won’t be at 120% in the ECB’s eyes judging by its attitude to Greece) or (b) Ireland unilaterally acts.

    Renegotiating PNs will be wheeled out in a bath chair again next Wednesday to divert attention away from the €1,250m payment of Anglo bondholders (too little too late to worry about maybe Karl but it’s still almost 1% of GNP). But come on, in a month or two’s time, it will be announced that we tried, and tried our best, but the ECB would not agree to changes to the PNs, and that will be that. Unless Ireland does a (b). And it will be on far stronger ground if it does a (b) on next Wednesday’s payment of unguaranteed, unsecured bondholders in a defunct bank. The PNs with the Minister’s “letters of comfort” are closer to true sovereign debt than the bondholders.

  76. @ Colm Brazel

    “As I’ve written earlier on this, my view is that our ELA/promissory note obligations need to be recollateralised. Let me explain”

    I don’t understand what you mean by that. Right now the promissory note is the collateral for the ELA. So you want to replace it with something else?

  77. @Jagdip Singh
    I agree with your analysis ,but if b) was tried ,the rest of the world would consider it as a sovereign default (politically if not legally) and that would be Armageddon .I do not think Mr Kenny and Noonan are the type to try it. Game theory shows that if you want to bluff you must first build yourself a reputation of being irrational some times ,which they have not done yet.

  78. @Overseas
    The local petty elite here , are not irrational although they are not very bright either.
    The dynamics were different then in Iceland , because the Krona devalued almost everybody lost withen that society.
    Because we are using a external currency the wealthy & sections of the middleclass thought they could ride it out.
    But the debt dynamics are unstopable now……………. its just a question of time.
    All those motorways & houses in the middle of nowhere will decay.

    Anything not connected to the railway network will slowly rewild.

    http://www.youtube.com/watch?v=ZZNSUp9nQyM

  79. @Overseas commentator

    Game theory shows….

    Oh dear. Richard Curtis’s BBC television series The Trap dealt nicely with game theory in its first episode, outside of hospitals for the criminally insane game theory is not a useful tool of analysis.

    Mr Noonan could develop a reputation for independent mindedness simply by not doing what he is told when he is told, a delay of indeterminate length (ostensibly for legal reasons, perhaps an accounting oversight in the DoF that needed to be investigated) in paying the Anglo bondholders would be a cheap way to do this.

    We do not have any partners any more in the ECB or the German co-prosperity sphere and it is long past time to acknowledge it.

  80. Aisling:

    You fear that a state aids issue arises because ‘…somehow IBRC is still in competition with the pillar banks as long as it remains.’

    IBRC does not make loans, does not accept deposits, and is in the business only of collecting whatever it can from its remaining loan book. I cannot see how it is in competition with the other banks in any way that matters. Could you expand on ..’somehow…’ ?

  81. @PeterJ

    RE “I don’t understand what you mean by that. Right now the promissory note is the collateral for the ELA. So you want to replace it with something else?”

    OK, let me try putting this another way. Firstly, great Karl is publishing again on this topic. It was his earlier article, by the way B&F should date their articles, that educated me to the intricacies involved. Actually, its not that complicated.

    So, a couple of points from Karl’s article.

    “…These terms included a guarantee from the Minister for Finance that the ELA would be repaid but no official timeline for repayment has been published….”

    “…If this collateral still does not cover the amount loaned out, the losses incurred by the central bank are shared with all the other central banks in the Eurosystem.”

    “..The ELA is recorded on the Central Bank’s balance sheet under the heading “Other Assets” and this category rose from only a couple of billion euros before the crisis to €70 billion in February. This had fallen to €48 billion by October as money from recapitalising banks and selling off assets was channelled towards repaying the ELA….”

    “…At this point, the vast majority of the outstanding ELA, about €42 billion by my estimate, is owed by the dreaded IBRC. In fact, the ELA now appears to account for about two-thirds of the debts of the IBRC.”

    “..Unfortunately, the balance sheet of the IBRC shows very little in the way of good financial assets likely to yield funds to repay this enormous ELA debt, equivalent to almost €10,000 per man, woman and child in the Republic.

    IBRC’s principal assets are what is known as “promissory notes” from the Minister for Finance. These notes promise to provide Anglo with €3.1 billion on March 31 every year up to 2023 and then an additional €7.6 billion in payments up to 2031. These notes currently account for 20 percentage points of GDP of our national debt and the interest payments on the notes will continue to be added to the debt in the coming years….”

    So, using Karl’s work above, putting this into the following perpective, my points follow:

    The IBRC promissory notes are not backed by any tangible assets owned by the IBRC, they are an asset only insofar as they make available liquidity assistance to IBRC in the order of “€3.1 billion on March 31 every year up to 2023 and then an additional €7.6 billion in payments up to 2031”

    The ¢42 bn or so these notes represent are a burden to Irish taxpayers backed by a guarantee from the Minister for Finance that the total ELA will be repaid.

    However, the point I’m trying to make is, quite distinct from the lack of collateral in IBRC to make good these promissory note ‘assets’, the fact that the Irish government is obligated in an annual repayment schedule to repay the total ELA extended to Ireland, this represents an asset to the ECB.

    If the Irish government does not make good these losses, these losses have to be shared among all other CB’s under the ECB.

    My call to set the ¢46 bn there of ELA to null and void in this scenario would see the ECB burden share these losses among the other central banks across Europe. Great if agreement can be reached on this tomorrow.

    But I also made the suggestion of a different route to take; namely, through the EFSF and future ESM. My view is the ¢46 bn, whose collateral basis is the promissory note oblige to repay should be set to null and void.

    But if its set to null and void the promise to repay needs to be made good elsewhere. The easiest way to do this would be through the EFSF, so the EFSF could step in and take over the responsibillity of the Irish taxpayer and the Irish Minister for Finance to repay the ¢46 bn.

    I don’t believe as Karl believes, he can correct me if he thinks I’m misinterpreting, that the ICB can just at will set the ¢46 bn debt to zero and snuff it out as if its imaginary.
    The ECB works on repo collateral liquid transactions. Here’s a document that explores this.

    http://www.ecb.int/pub/pdf/scpwps/ecbwp909.pdf

    illiquid asset types are not allowed to form part of its transactions. At some point transactions such as promissory notes must in terms of ELA be based on sound collateral; IBRC has no collateral except, unfortunately, the deceived taxpayer conned into the obligation to pay back its ¢46 bn of odious debt.

    If the taxpayer is not going to pay back its debt, then other mechanisms such as EFSF can step in to do this. But step in they must.

  82. Shay,
    Default may be the end game. If we did it now, how would you close the primary deficit. 85 % top rate of tax and 30-40% reduction in public service pay bill.

    Since default may be the end game, no citizen should keep a red cent in an Irish bank. Of course those with money know that and their assets are offshore. It is the poor middle class sap who does not have enough that will get burned.

  83. @Aisling

    “The only bright side is the ECB’s comment at the troika press conference that if we don’t repay the Anglo debt we could suffer reputational damage but otherwise it is up to us.”

    Glad you noticed and drew attention to that.

    My guess is that the ECB scored an “own goal” with that answer.

    IMHO “pressure” can be (and is being) applied both ways. 🙂

  84. @Colm McCarthy the “somehow” caveat was intentional because the definition of having the capacity or potential to distort competition under the State Aid rules is incredibly broad.

    “in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings”

    Let’s say that IBRC has a bunch of loans it is working out but would sell if an offer was made at the right price. BOI has a similar portfolio. In that case there is the potential for competition, both could sell the loans to the same potential bidder. We don’t need a current auction. No actual distortion is required for Art 107 to bite, the fact that IBRC could hypothetically undercut BOI in such a sale because it is in receipt of cheaper financing under the proposed ELA could be enough. The fact that its general cost of finance is higher is neither here nor there if the official financing is cheaper.

    Once the cheaper financing is available the onus is really then on the beneficiary to prove that competition could not be distorted by it, and the fact that the Commission has laid out so much detail on bail outs they clearly think that ELA is capable of distorting competition.

    So while to a lay man the lack of deposits etc should be enough to say there is no competition, any potential to distort competition (and such potential has to exist so long as IBRC has any assets comparable to the pillar banks) is enough to ensure that the Commission has a look.

    The killer with State Aid is that if there is a risk of one, and you grant the aid without it being blessed by the Commission in advance, then there is a claw back with interest which would increase the cost of the pro-notes!

  85. Oh and we don’t just look to the pillar banks, could look to other banks operating in Ireland, or non banks like NAMA. The comparable is any one who could be in competition in any part of their business and is not eligible for the aid.

  86. @TullMc
    The new higher cost of imports will reduce imports………….. less imports means more money is available in the domestic economy to tax , spend & save.

    The higher imports costs will show our planning for what it really was – bringing forward wealth via credit that was not there or is at least is gone now.
    Colm Mcs precious highways will be useful to drive cattle I guess.

    But that is only if society holds together – I have my doubts.

  87. @ Colm

    Few of clarifications

    “The IBRC promissory notes are not backed by any tangible assets owned by the IBRC, they are an asset only insofar as they make available liquidity assistance to IBRC in the order of “€3.1 billion on March 31 every year up to 2023 and then an additional €7.6 billion in payments up to 2031″

    The ¢42 bn or so these notes represent are a burden to Irish taxpayers backed by a guarantee from the Minister for Finance that the total ELA will be repaid.”

    This is confused/confusing. The promissory notes amount to 28bn right now I believe, not 42bn, and they are not and would never be backed by ‘tangible assets’ of IBRC (otherwise you’d just use that tangible asset as the collateral directly), they are backed by a guarantee from the Irish state. The 3.1bn is not “liquidity assistance”, it is a cash funding of those government guarantees, essentially like a government bond being redeemed at maturity, or in this case amortising down over time.

    “If the Irish government does not make good these losses, these losses have to be shared among all other CB’s under the ECB.”

    Nope. ELA, as opposed to normal ECB liquidity, is a credit risk solely on the ICB. It takes the losses on it’s own. Not sure how this interacts with Target further on down the line, but the Irish Central Bank goes bust, losing it’s equity share in the Eurosystem amongst other thing, before anyone else takes a loss.

    “illiquid asset types are not allowed to form part of its transactions.”

    Illiquid assets can form part of the transactions, the ECB just uses it’s own models and large haircuts to value them. It can’t offer liquidity to insolvent banks, or provide more liquidity than the underlying value of the collateral (hence the high rate on the promissory notes), that’s the big issue.

  88. @ BEB

    Thank you very much for this contribution. It clarifies a lot of things for me which, I suppose, even someone not an expert could intuitively guess; if the Irish taxpayer is to be relieved of a loss it has to be borne by someone else. The someone else in this instance is either the bondholders – who are home and dry – or the taxpayers of other countries (although this reality can be camouflaged by references to CB’s sharing the losses etc etc.).

    To the argument that Ireland has “taken one for the team” with regard to the treatment of bondholders, to use a phrase used, as far as I can recall, by Colm McCarthy, and should be recompensed, this “compensation” is already reflected in the concessionary nature of the financing that we are now receiving.

    What Minister Noonan is saying about the promissory notes makes perfect sense to me and should make sense to those that have the deciding in the matter viz. the loan will be repaid but over a more extensive period to improve the capacity of the debtor – Hibernia – to actually manage it.

    On the argument that all this is the fault of the designers of the euro system, we can hardly complain as we were part of the design team.

    The rest of the argument, in all its arcane detail, is beside the point.

  89. @Karl W

    If my understanding of the legal situation is correct, then Patrick Honohan would only require the support of seven other members of the ECB Governing Council to proceed with this plan.

    Coincidentally, Monti has been reiterating a congruous point for the past two weeks, viz. no one euro country can make it alone. the Franco-German axis (terrible metaphor, apologies) is not enough nor does it have sufficient support/confidence to turn the tide. Perhaps, i am missing the bigger political picture, which is quite likely, but the countries either in or on the edge of bailout should consider their commonalities and especially their limited capacity for growth and try to advance a common front when negotiating extension of debt. Ultimately, I believe without wages falling and I realize this is anathema in Ireland, it won’t be possible to move forward. Some for of domestic debt default is essential to make a recovery on low wages viable.

  90. @Alchemist.
    Wages falling cannot work , domestic demand is on the floor while imports is rising.
    This is very simple.
    We have a non optimal currency – don’t yee guys get it ?
    You should be trying to save towns such as New Ross with real potential & old wealth before all is lost.
    These Mario guys are bad to the bone – you cannot negoiate with criminals.

  91. @Dork
    Look, wages have to fall. Unfortunately, social welfare is a pit of of snake with its various scales of entitlement. Personal debt is a major problem but the government has decided to look everywhere else but at that for as solution.

    I had a chat with a medical friend of mine a few weeks ago who told me he had been threatened with being reported to his disciplinary body because he was ‘blocking’ a social welfare claim by refusing to provide a requisite diagnosis.

    That is the reality of life in Ireland. A proportion of people determined to scam and game the system and a proportion determined to do the right thing. But when push comes to shove, the politicians will side with the social welfare claimant, the gougers of the public purse, the aficionados of public sector largesse.

    That’s ireland, where the obvious is broken but the gentry rant and rave about the failure to accept anomalies as normal.

    We have two Romanians working for us in Italy. One speaks six languages, and the other five. One has a degree of some sort the other is what the Irish would class as ‘just a mechanic’. Neither earns anything near what the Irish would consider comfortable.

  92. Well , I am not talking about wages in Euro.
    The money system we have cannot contract without destroying the engine block.
    Basically we need more money to buy domestic stuff & less money to buy foreign stuff.
    Its as simple as that in many ways.
    I don’t look at exports much anymore as the chemical stuff skews the data – but we really need to leave this roach Motel.
    Even if it kills us as we are going to be dead soon anyway.

    We cannot optimise the use of domestic resourses without doing this I am afraid.
    Synthetic devaluations don’t work because the money supply keeps shrinking.
    This will be dreadful but we have no other choice in the matter.
    As a guy with a interest in Transport I can see how the Sterling zone is trying to get more out of less with its rail system & its subsequent huge rise in rail passengers – ditto for America & its rail freight.

    We simply can’t do stuff like that because of our non optimal currency problem.
    Anyway I still can’t get Colm Mcs Today Tonight appearance out of my little brain.
    The man said trains only work between cities of 1 million or over !!
    He clearly does not know what is going in Britain.
    There are now tiny branch lines expanding chiefly because of the constant Sterling fuel price rises & just as important the ready availability of fiat in the south.

    en.wikipedia.org/wiki/Lymington_Branch_Line (5.6miles long with 2 stops from mainline junction.)
    Lymington (14,000 – very rich)
    Annual rail passenger usage
    Town station
    2005/06 * 0.148 million
    2006/07 * 0.171 million
    2007/08 * 0.175 million
    2008/09 * 0.194 million
    2009/10 * 0.203 million

    Lymington pier station (terminus)

    Annual rail passenger usage
    2004/05 * 0.109 million
    2005/06 * 0.113 million
    2006/07 * 0.115 million
    2007/08 * 0.162 million
    2008/09 * 0.176 million
    2009/10 * 0.160 million

    These numbers are happening all over Britain.
    Why are we getting negative to static numbers in this Bog ?
    Could it be the currency sovereignty issue ?
    Its certainly not the population density which is low also……………..

    It is a excellent tourist destination with unspoilt countryside about – I guess we blew up that money boat also.

    Paying everybody less money does not work for countries – we are not running a friggin shop here , are we ?

  93. I’m enjoying this tennis between Prof. Whelan and Aisling (if the sports world has Wozzilroy can we here on Irisheconomy.ie have Karling?).

    At the moment, I’d say the ball is in Karl’s court; Aisling has played solidly from the baseline but, it seems to me, has wound up the rally with an unstoppable cross-court forehand winner which appears to have not only defeated Karl but knocked out a player (Colm McCarthy) on an adjoining court.

  94. Aisling is a refreshing addition to the discussion.

    Are you a lawyer and how do we get all your information into the mainstream? I’ve been plaintively searching for lawyers since this started…The Silence of The Lawyers has been most frustrating…

  95. @ Sarah

    Sorry, I’m afraid that Aisling is not refreshing; IMHO, she needs to apply an evidence-based approach to her argument – both Karl and Colm have highlighted the irrational aspects of her positioning.

    Having said that, I do agree with your point about the silence of the lawyers…

  96. Powerful insiders in Ireland were more desperate than the ECB to stop Anglo from going under, thats why such a terrible deal was made on behalf of the Irish taxpayer. The shenannigans are summed up here with the headline “former executive critices state role in Anglo”. If the state had not issued the notes and nationalised the bank it would not have had a role in Anglo to be critised. http://www.irishtimes.com/newspaper/frontpage/2011/0905/1224303500416.html
    The burden will be reduced simply because Ireland is headed for another bailout and that is something that where debt can be cut without touching private creditors. The CEO of Citigroup even suggested it. The large global banks don’t want more private creditor write downs like in Greece so anything they can put on the plate of other governments or central banks instead is a plus for them.
    “if one examines the stance the official sector has taken toward banks, it looks much more like Eurozone leadership “takes (sheepishly) whatever its large banks do” – even when those actions are much more in the banks’ narrow interest than in the wider public one.”
    http://www.voxeu.org/index.php?q=node/7511

  97. In the Vox article Dr. Goldstein also points to Dr. Lanes ESBies as the best answer to break the banks and soveirgn debt tangle.

  98. @ Aisling

    Very interesting and well argued contributions thank you.

    ‘The problem with all of this is that national accounts don’t reflect the kind of accounting standards we’d enforce on companies so we remain comparing apples with pears depending on our own political ideals or views on morality’
    ‘…we need a political solution based on fairness rather than looking for a legal one…’

    A couple of earlier contributors have put their finger on it, particularly Chris above. I read that Martin van Eden noted in his departing speech to staff, we have little or no awareness of conflict of interest issues in Ireland.

    Our state has been captured’, and national accounts are opaque for all sorts of reasons. Our well heeled clans have family members in key positions in state, business, universities, and the professions. They exchange insider information and assets amongst each other as they see fit. ‘Why wouldn’t you for God’s sake? Everyone else does’.

    There is always change, of course, We have the old, brass-plate private school types, and the driven hustlers arriving in from the bog and the suburbs. New elements are introduced as the country interacts more with the outside world, but the game doesn’t really change. The rules are made up along the way, but the law of omerta is constant.

    As you rightly point out, we ended up with the worst of all legal worlds after the Anglo debacle. But who gave us that ? It was the same well-placed, thoroughly conflicted network of legal and accounting firms who gave us the bubble. Fairness was never a consideration for the professionals. It’s just business. As the Russians say, the fish rots from the head.

  99. @ All

    Aisling has brought a welcome dose of reality into what has hitherto been a rather surreal debate with billions being thrown around like snuff at a wake. However, the state aids and competition aspect are secondary to the points made by BEB above. In fact, the state aids regime never envisaged the situation with which countries are now faced; the conundrum of “too big to fail”.

    What the Commission is doing in the area of competition is a bit of a charade, nibbling around the edges to prevent obvious abuses but doing nothing to address the real problem.

    A very thoughtful comment piece in the FT from an unexpected source – Otmar Issing – illustrates the point.

    http://www.ft.com/intl/cms/s/0/f673c85a-42b1-11e1-93ea-00144feab49a.html#axzz1k5ddfvSr

    A Finnish expert, interviewed some years ago at the start of the crisis, was asked (by Pat Kenny, if my memory serves me right) if he had any parting piece of advice in the light of the Finnish experience to which he replied; “keep an eye on your banks!”.

    Unfortunately, the advice came too late and is now hardly any longer relevant as we are ending up with a basic Mom and Pop hollowed out banking structure. But it remains entirely relevant for the larger countries in Europe, all of which are, to a greater or lesser extent, in thrall to their banks and doing much less than the US about it.

    As to “you people” (AKA the Troika) and the grand-standing by one of our leading journalists at its recent press conference, this type of nonsense is, hopefully, now being seen for what it is and running out of steam.

  100. @ All

    Some interesting figures on the emerging shape of the Greek “voluntary haircut” which give an indication of just how deep the larger European banks must have been involved, almost certainly with the encouragement of their governments, especially in relation to financing multi-billion defence contracts for military equipment that Greece neither needed nor could afford.

    http://nachrichten.rp-online.de/wirtschaft/glaeubiger-griechenlands-verzichten-auf-68-prozent-1.2681131

  101. @DOCM.

    No need for Finnish experts to warn about banks. Am I the only one who remembers Willie Slattery doing so as early as 2000? But then he is only an Irish expert.

  102. @ Bond

    Look if you are confused/confusing based on not understanding the points I’ve made, that’s one thing; its quite another to state your lack of understanding of my points is due to their inaccuracy.

    So, let me clarify a bit more for you 🙂

    Regarding the amounts of ELA in question, the figures I’ve used came from Karl’s estimates I quoted above, here again:

    ““…At this point, the vast majority of the outstanding ELA, about €42 billion by my estimate, is owed by the dreaded IBRC. In fact, the ELA now appears to account for about two-thirds of the debts of the IBRC.””

    You write:

    “The promissory notes amount to 28bn right now I believe, not 42bn,”

    You obviously have only included the IBRC portion, outstanding ELA is €42 billion by Karl’s estimate.

    Also you get the following wrong:

    ” The 3.1bn is not “liquidity assistance”, it is a cash funding of those government guarantees, essentially like a government bond being redeemed at maturity, or in this case amortising down over time. ”

    There’s no point debating how many angels are on the head of a pin with you. I think its evident throughout the discussion I, others, Karl are motivated by the DEBIT in our balance of payments in the exchequer returns that must be repaid to the tune of The 3.1bn

    But I’ve already quoted Karl on this:

    “IBRC’s principal assets are what is known as “promissory notes” from the Minister for Finance. These notes promise to provide Anglo with €3.1 billion on March 31 every year up to 2023 and then an additional €7.6 billion in payments up to 2031. These notes currently account for 20 percentage points of GDP of our national debt and the interest payments on the notes will continue to be added to the debt in the coming years….”

    That the above is so is a national disgrace.

    @ Karl @Aisling

    The invocation of article 123 is a bit of a red herring. I’ve invoked the term ‘systemic’; Karl has mentioned the discretionary powers of the ICB and the banking legislation underpinning this. But, fair dues to Aisling, her legal mind looking solely through the lens of Article 123 leads her to be not for turning on this:

    “I think Karl’s argument for IBRC not repaying the ELA until we can afford to do so would be illegal.”

    The problem with Aisling’s view is that it is too narrow a view of what ELA is and how ELA has come to be used in the meltdown across the EMU. Note the reference to Gerry Corrigan in this press release and the term ‘constructive ambiguity’

    http://www.ecb.int/press/key/date/2003/html/sp030707.en.html

    “Fourth, emergency liquidity assistance (or, in older terminology, lender-of-last- resort), perhaps the most traditional tool available to a central bank for dealing with financial instability, is possible. It includes both the provision of liquidity to the financial system as a whole through market operations, as well as emergency lending to individual banks. It is important to recognise that not all liquidity injections aimed at preventing the spread of a liquidity problem relate to a crisis, as central banks routinely offer liquidity against specified collateral requirements in order to support the orderly functioning of markets.

    Because of the obvious dangers of moral hazard, central banks have maintained an increasingly cautious stance towards emergency lending by adopting a policy of case-by-case discretion. They decline to specify in advance which financial institutions would be granted emergency liquidity and under which conditions. Gerry Corrigan has dubbed this “constructive ambiguity”.

    In theory, we all agree that emergency liquidity support should be provided only to illiquid but solvent institutions. But the distinction between these two concepts is particularly difficult to make in periods of financial distress, which is exactly when central banks may have to use this tool. Consequently, careful judgement is necessary in providing emergency liquidity assistance. The Asian crisis provides a clear example of this. Central banks in the region had to make difficult choices between providing support to individual institutions and encouraging moral hazard, and limiting the fall-out of failing institutions for the wider economy. All central banks could potentially face this dilemma.”

    I should restate my own position. I’ve called for the setting of the repayments under our ELA obligations to null and void. Its important to note debt restructuring of this form requires amendments to the present Treaty. So the debate re the present legality of this is erroneous; the legality would be an amendment to present treaties.

    My point is the fiscal ‘compact’ is the perfect place for such amendments to be dealt with that would provide the required legal framework for this.

    So, I wrote a draft amendment to the Fiscal Compact our ‘leaders’ should be campaigning to achieve instead of silently hiding.

    After the following in the compact,
    ‘TITLE VI GENERAL AND FINAL PROVISIONS Article 14’

    Should there not be also:

    TITLE VII

    AMENDMENTS AND BURDEN SHARING

    1. This Treaty shall be ratified by the Contracting Parties in accordance with their respective legal requirements. It will include a burden sharing structured agreement between contracting parties, the ECB and government of Ireland. A sum of ¢34 bn through ELA and promissory repayment mechanisms will be set to null and void. Instead this debt will be collateralised through the EFSF and later through the ESM to ensure the citizens of Ireland are not held legally responsible for the debt of Anglo and associated banks.

    2. This Treaty shall further include clauses and amendments to be agreed as part of an overall restructuring agreement for Ireland’s debt based on ability to repay. These clauses and agreements on burden sharing will be put to the Irish people in a referendum; the support for these amendments and clauses requiring possible further burden sharing will include a decision to leave the euro currency if such conditionality is not accepted and such burden sharing losses are not to be freely accepted by all parties to the agreement.”

    end of draft.”

    Instead of signing the above and making himself a captain Smith of The Titanic or a Capt Schettino of Costa Concordia, agreement re debt sharing on the above lines, might actually give Ireland a fighting chance.

    Kudos to Karl’s excellent work on the above. I trust I’ve broadened Aisling’s mind and shown how murky 123 actually is.

    Note, the above would only cost the EFSF ¢3.1 next March and it would sure indicate to markets that we are not the Costa Concordia; the EFSF take the full bill.

    I should say I still believe the Der Euro Ist Fertig !

  103. As the Americans say, we need a government that can walk and chew gum at the same time.

    Last July it was pressure from the European Commission that resulted in an easing of the interest burden and while we get marks from the troika for meeting financial targets, they are surely aware that there is little interest in reform in Ireland.

    I doubt that the ECB would make a decision itself on easing Ireland’s debt burden.

    By pushing through a significant reform programme in governance/ accountability systems, education, employment, health and welfare, we would not only help ourself but increase the chances of getting the debt eased over time.

    As Seamus Coffey has pointed out, most of the debt is related to annual budget deficits and debt carried forward from earlier times.

    Sweden and Finland have large negative net public debt positions because they set aside much more that Ireland in the good times.

    On reform, Sweden with its current enviable economic record, has an ongoing ‘national reform programme’ and both it and Finland responded to economic crises in the 1990s with significant reforms.

    Finland’s enviable education system dates from that period.

    In Ireland, we put the cart before the horse.

    Who can credibly believe that a line-by-line negotiation of work practices in the public sector can have an impact when the Government is at best going to later propose reforms separately in areas such as education, welfare and health? – – more opportunities of course for lavish payoffs for accepting change.

    @ paul quigley

    When a company based in Dublin (RBS Aviation Capital) with about 70 staff is sold for $7.3bn, it shows how national economic data can be skewed.

    It suits policy-makers to conflate the FDI and indigenous sectors.

    The forthcoming ‘action plan’ on jobs will provide plenty examples for believers in fairytales.

  104. @Aisling,

    More here on why the ‘the one-rule-fits-all ‘ does not apply:

    http://www.ecb.int/pub/pdf/scpwps/ecbwp1008.pdf

    “The basis of discussion goes back to the argument of Bagehot (1873) who expressed the fundamental, classical
    view on this issue. He argues that the central bank should be known to be ready to lend without limits to any solvent bank against good collateral and in penalty rates, so that banks do not use them to fund their current operations.
    However, a lot of research and experience have been accumulated since Bagehot and the points in his principle have been questioned and re-visited. A naive onerule-fits-all intervention policy is no longer considered, rather, intervention policies appear in practice to be tailor-made. The Appendix of this project attempts to shortly review the debate on the Bagehot principle, address a few more relevant issues (such as the role of monetary policy and the issue of lending to the markets versus lending to individual institutions) and discuss the dilemma faced by policy
    makers with respect to intervention policies.”

  105. @ Colm

    “You write:

    “The promissory notes amount to 28bn right now I believe, not 42bn,”

    You obviously have only included the IBRC portion, outstanding ELA is €42 billion by Karl’s estimate.”

    ELA does not = Promissory Note. There is other, ‘real’ collateral backing up the ELA. You keep confusing the PN with ELA. They are separate, but related, instruments. All the Irish banks were at some stage in receipt of ELA (72bn at one point), the promissory note was only ever 31bn, and is reducing/’amortising’ down year by year (the 3.1bn figure).

    And while you may have meant what the impact of the debit was to the state, you have completely inaccurately described it as ‘liquidity assistance’. It is not, it is a capital infusion, year by year transforming from a govt guarantee capital instrument to a cash instrument. If Anglo only needed “liquidity assistance” then we wouldn’t be in the hole we’re in right now.

  106. @ Bond

    Your confusion is unreal at this stage:

    You are ‘supposedly’ now correcting me in

    “““…At this point, the vast majority of the outstanding ELA, about €42 billion by my estimate, is owed by the dreaded IBRC. In fact, the ELA now appears to account for about two-thirds of the debts of the IBRC.”””

    In fact, that quote you refer to is from Karl. I know what Karl means, it should be apparent to everyone, apparently not to you. €42 billion needs to be repaid. We are obligated to repay it.

    Yours “reducing/’amortising’ down year by year (the 3.1bn figure).”

    That is laugh provoking. You are paying for it. We’re all amortising it down. Its money that needs to be repaid.

    In short you’ve blinded yourself on technical definitions unfit for purpose in order to ‘pretend’ these instruments do not exist; and no obligation exists on the state by way of its errant guarantee re Anglo and the banks.

    The technical definitions of ELA I’ve provided for the ECB links earlier posts. Unfortunately, you choose to ignore these.

    Obviously your correction there of Karl, doesn’t apply to me 🙂

  107. @ Colm,

    We have put €4 billion of cash into Anglo Irish Bank. We gave Anglo a Promissory Note to the value of €25.3 billion and Irish Nationwide one for €5.3 billion. These are assets of these institutions and now form part of the IBRC.

    We (the State) do not have to pay €42 billion. We have to pay the €30.6 billion capital amount on the Promissory Notes. We made a €3.1 billion payment in 2011 and after taking out interest the capital amount is now €28.5 billion. We have to pay this €28.5 billion on the Promissory Notes.

    Separately, the IBRC has gone to the Central Bank and has drawn down Emergency Liquidity Assistance. To get this the IBRC needs assets. One asset the IBRC has is a Promissory Note. The IBRC presented this to the Central Bank and received cash in exchange. The Central Bank says that “[w]here appropriate, haircuts (ranging from 5.5 per cent to 80 per cent) have been applied to the collateral.” It is not clear if a haircut is applied to the Promissory Notes as they have a government guarantee. Assume no haircut is applied.

    This means that €28.5 billion of the €42 billion ELA that the IBRC is accessing is as a result of using the Promissory Notes as collateral. The other €14.5 billion was acquired by using other assets (loans, bonds, buildings, almost anything I’d guess).

    The assets of the bank (mainly loan repayments) are supposed to cover this €14.5 billion of the ELA. The Promissory Notes will cover the other €28.5 billion (again assuming no haircut has been applied).

    We (the State) will make a €3.1 billion payment each year and this will reduce the capital amount outstanding on the Promissory Notes. Once the Promissory Notes have been repaid we no remaining liability for the ELA drawn down by the IBRC. That is where the assets come in. If these are not sufficient then the State may have to contribute more but it is not first in line at the minute.

  108. @Micheal
    We will never be a Scandinavia , however I don’t think you understand how much a non – optimum currency has changed the real domestic scene over generations now.
    Domestic factories no matter how well managed cannot cope with these extreme monetory credit flows which utilise energy in a non holistic manner.

    I am sure you know we had real domestic factories albeit mainly agricultural in nature up to the 70s that dominated the place & indeed beyond for a bit.
    No country no matter how well managed can live with this extreme Russian Doll syndrome of succesive multinationals which hold more cash then nation states.
    But we choose to tap into this model for whatever reason (perhaps because we had no choice)

    We were integrated with the UK economy , but we decided to leave – for very good reasons.
    But our GNP was higher then our GDP back in 1973 perhaps because of labour remittances.
    We now have a Frankestein like economy because of efforts to integrate the impossible into the European experiment.
    This extreme form of social engineering must stop – it cannot continue for much longer anyway.
    Historical & real economic factors outside of artifical capital flows and their sister labour flows has caught up with us.
    You must now accept that the energy put into developing extreme market states such as ours as been very net negative.
    When the capital flow rather then real trade model dies as it surely will we will be left out in the cold as our petty elites have difficulty understanding how real energy systems actually operate.
    They just want to the feed really.
    Poor dears.
    The succesive changes in 73 , 79 , 87 & 92 has reduced the redundancy of the place both in Human & capital terms.
    Just look at young kids now – could they work down in Verolme dockyard today – not a chance.
    They don’t even play football for fun anymore – they all have to be put into a structured team envoirment before they play.
    They have become brainwashed, unable to use innovative thinking or even the most basic organizing ability.
    Do people honestly believe we will have a civil war on the tiny scale of the last one when social mores prevented a continental style butchery the last time ?
    No – when this goes down , it will be catastrophic – given the severe mental damage people have been exposed to by the cartel.

    Most of yee lads have difficulty understanding the scale of what has happened & what is about to happen.
    This talk of Prom notes is merely a distraction & abstraction.

  109. @ colm mccarthy

    I am sure that there were experts in Finland prior to their crisis in the 1990’s who were doing the same thing. The real issue is how the Finns responded (as Michael Hennigan comments above).

    The problem with the debate in Ireland is that it has hitherto been based on a “them and us” attitude with little appreciation – even in the new government – that Ireland is a sovereign nation participating in everything that is going on.

    The situation seems to me to be very finely balanced and could tip into disaster territory very easily cf. latest news on PSI negotiation with Greece.

    http://www.irishtimes.com/newspaper/breaking/2012/0121/breaking6.html

    On a related issue, that of the true causes of the crisis, which I have been banging on about for some time, and the need to deal with them, Derek Scally had a very interesting report on the changing mood in Germany with regard to the conduct of German labour policy over the past decade. The topic for the next summit will be how to put meat on the bones of this change in direction (even Sinn appears to admit the justification for it), not the fiscal pact, which is all but a done deal.

    http://www.irishtimes.com/newspaper/finance/2012/0120/1224310513431.html

    Will Europe get to the meeting on 30 January in one piece? That is the question!

    P.S. NB omission of Ireland from one study because the authors did not trust the relevant statistics!

  110. @ Seamus

    Thanks for your post there. It might help other posters focus on this. I enjoyed it, its stated very well, but you’ve left out one or two issues.

    Firstly, let me state what you have in your post was already my understanding there.

    Let me deal with your points paragraph by par:

    Par 1:

    You’ve approached ELA by way of the promissory note function. I didn’t focus on ‘promissory’ note definition as it was unnecessary to do so. You are correct in how you describe ‘promissory notes”‘. I’m glad you’ve focused on this aspect of ELA.

    Basically, to tie ELA and promissory notes together, for other posters unfamiliar with this, let me explain: ELA is provided by the ECB to Central Banks, it isn’t provided by the ECB directly to private banks. It’s a warchest, say ¢42 bn given by the ECB to our CB. If you like, its comparible to a loan approval. It only becomes real and non virtual by way of ‘promissory’ notes. So, ELA might be of the order of ¢42 bn; however, if Anglo is only given a promissory note of ¢28 bn, only ¢28 bn has to be paid back by the state due to our ‘guarantee’. As you say:

    “We have to pay this €28.5 billion on the Promissory Notes”

    par 3: I’ll not comment on this other than to say Karl Whelan has also posted some excellent work on this.

    Basically think of the concept of an asset that is based on an asset (promissory note) promissory note given on the basis that no asset exists..But, you are perfectly correct.

    par 4: I’ll quote here as it represents an additional contribution to the discussion I or no one else has yet made:

    This means that €28.5 billion of the €42 billion ELA that the IBRC is accessing is as a result of using the Promissory Notes as collateral. The other €14.5 billion was acquired by using other assets (loans, bonds, buildings, almost anything I’d guess).

    Firstly, I could argue the point that yeah, thats what Karl has calculated ELA to be; so thanks for backing me up on that one. But, “The other ¢14.5 bn” has been acquired using other assets. That’s a useful point worthy of more in depth analysis; how much distressed loans, negative equity, toxic assets are represented in that figure.

    Paragraph 6 was my understanding also. In summary, apart from your explanation re ¢14.5 bn above, you concur
    with my understanding of these matters.

    So, I restate my call for the ‘compact’ to address the matter of ELA by setting it to null and void; that missile of Irish economic destruction of ¢3.1 annual repayments must be removed, to allow our economy to breath again.

    The repayments are a national disgrace. Forget referendums and fiscal ‘compact’, that financial missile of Irish economic destruction, the true meaning of the consequences of so-called, misnomered Extra Liquidity Assistance, should be enough to make us exit from the euro asap 🙂

  111. @ Colm

    Here is a very abridged version of Anglo’s final balance sheet from the 30th June 2011. Can you see what will happen if all the Central Bank deposits (the ELA) it had drawn down was declared “null and void”?

  112. @ Seamus

    “This means that €28.5 billion of the €42 billion ELA that the IBRC is accessing is as a result of using the Promissory Notes as collateral. The other €14.5 billion was acquired by using other assets (loans, bonds, buildings, almost anything I’d guess).”

    The €42 billion figure for ELA is just an estimate of mine and it may be wrong. It comes from combining the €38.4 billion that Anglo declared in it half year report with adding €3.7 billion that INBS had to give up in liquid assets when sending its deposits to INBS — my understanding is that these assets had been used as collateral with ECB and INBS had to get ELA to pay off the ECB loans.

    On the collateral for the ELA, this is described as follows in the CBI’s annual report

    “The Bank has in place specific legal instruments in respect of each type of collateral accepted.

    These comprise:

    (i) Promissory Notes issued by the Minister for Finance to specific credit institutions and transferrable by deed,

    (ii) Master Loan Repurchase Deeds covering investment/development loans,

    (iii) Framework Agreements in respect of Mortgage-Backed Promissory Notes covering non-securitised pools of residential mortgages,

    (iv) Special Master Repurchase Agreements covering collateral no longer eligible for ECB-related operations and

    (v) Facility Deeds providing a Government Guarantee.

    In addition, the Bank received formal comfort from the Minister for Finance
    such that any shortfall on the liquidation of collateral is made good.”

    http://www.centralbank.ie/publications/Documents/2010%20Annual%20Report%20-%20FINAL.pdf

    Separately, could you tell us what you think the answer is to “Can you see what will happen if all the Central Bank deposits (the ELA) it had drawn down was declared “null and void”?” Not being coy, just wondering what your point is.

  113. @Seamus
    If we externalised the losses on the bond holders & indeed large depositors at the time the private debts could have been written off.
    With mortgages holders becoming the owners of their property although much of it would become near worthless in a all goverment money envoirment , which is in fact a very good thing as it would fee up resourses for productive uses.

    But that boat has sailed more or less.
    The private debts have become goverment fiat – which is criminal in my opinion.
    So we must defecit spend that amount & more.
    We have no other choice now because real human capital is being destroyed – its catostrophic whatever way you cut it.
    We must enter into a triage operation , with the west of Ireland in very big trouble (only Limerick & Gal-way can be saved although I have my doubts about Galway since it is a teacher like economy using the wild colonial boy routine to get income)
    The population must move into the empty apartments of Dublin & Cork , with the wider Waterford market towns becoming Industrial areas also.

    Without a rational spatial stratergy we will diffuse any surplus into more waste via imports.

  114. @ Karl,

    I think your estimate of the level of ELA going to the IBRC is good.

    If we just take the numbers from the Anglo balance sheet at 30/06/2011 and in some fashion cancel the Central Bank deposits that Anglo owes, we would go from a situation where the State owes €24 billion to a company with a book value of €3 billion to a position where we owe €24 billion to a company with a book value of €44 billion.

    We would suddenly be in the black to the tune of €20 billion from a position of being in the red by a similar amount. Expecting the ELA to be declared “null and void” is not realistic in my view. The ELA will continue to be a liability but, as you have said, it is when it is repaid (if ever) that is of significance.

  115. @ Karl

    Anglo sold a $10bn US loan book in Q4, so I assume ELA to be materially lower as a result now. I reckon 36-38bn.

  116. @ B.EB

    Good spot. Do we know when that sale went through? ‘Other Assets’ in the Financial Statement of the Central Bank fell by about €5.5 billion in October and has shown much smaller drops since then.

  117. Seamus Coffey wrote above ‘We (the State) will make a payment..’ but the Irish Constitution says:

    “..the source of authority in Ireland and of the fundamental law of the state is the people of Ireland. Hence the Preamble to Bunreacht na hÉireann says: ‘We, the people of Éire,…do hereby adopt, enact, and give to ourselves this Constitution’.

    http://www.constitution.ie/constitution-of-ireland/default.asp?UserLang=EN

    the source of authority in Ireland and of the fundamental law of the state is the people of Ireland. Hence the Preamble to Bunreacht na hÉireann says: ‘We, the people of Éire,…do hereby adopt, enact, and give to ourselves this Constitution’.

  118. This is madness

    Have we reached the point where we have to bail out private companies so as to no breach state aid rules.

    Kafkaesque

  119. @ Seamus

    Start October was my belief. And 80-85% of par payment for them. So IRBC ELA = 36-37bn (incl INBS), small bits at the other guys. I believe BOI to not be in receipt of any at all anymore.

  120. I have been following this guy for a few years now – unfortunetly he wiped his early videos (he has a angle)
    However that does mean his thoughts are of no consequence.
    http://www.youtube.com/watch?v=Q0CZV4So_0M

    His graphical thoughts are quite structured & rational & for the most part agnostic when it comes to understanding power which I always like to see in peoples view.
    His stability / instability trajectory & his 6 vectors of economic structure is quite good.
    1. Physical world.
    2. Human capital
    3. Transport
    4. Technology
    5. Rule of law
    6. Money

    May I suggest first you simplify the money debate thingy by dividing the money thing from the credit thingy in a clear concise fashion.
    These magic box extraction tricks are no real fun anymore.
    Bond has wonderful propoganda & all (unlike DOCM) which I appreciate in a kind of twisted way (he would make a great Magician) but nearly all of us depend on the structure of society to provide life support.

    I cannot understand the Irish elite really – looking after the commons is a selfish activity yet they seem to have little interest in this now.
    Just show me the ATMs I guess.

  121. @ Eoin

    Without updated accounts, it’s tricky to guess the outstanding amount. However, the Times reported in late October that IBRC had only received €2 billion so far.

    http://www.irishtimes.com/newspaper/finance/2011/1027/1224306561456.html

    And for all we know they could have directed that towards paying off, em, bondholders or the ECB.

    @ Seamus

    I think you know this but just to be sure to be sure — I have never said the ELA should be declared “null and void”.

  122. @ Colm

    “Thanks for your post there. It might help other posters focus on this. I enjoyed it, its stated very well, but you’ve left out one or two issues.

    Firstly, let me state what you have in your post was already my understanding there.”

    Genuinely hilarious.

    Here’s the deal. ELA and promissory notes are entirely different things. Stopping confusing the two.

    ELA is a liquidity tool used by the central bank of Ireland (not the ECB, though their approval is required) to give liquidity to Irish banks on the back of non-standard collateral outside the ECB collateral framework. It is presently around 42bn, which is primarily given to IRBC, but which is also being provided to other Irish banks.

    The promissory note is a 28bn capital instrument being used to act as the underlying regulatory capital base of IRBC and EBS. It is a long term government guarantee which is slowly amortising down at a rate of c.3.1bn per year, the guarantee (which has a subjective true value) being replaced by physical cash (which does not, fist current critics notwithstanding).

    The fact that IRBC “owns” the PN is inconsequenntial. It could technically (though not practically) be sold on or held by anyone. A French bank could own this claim against the Irish state, for instance, and given where Irish bond yields are right now, in theory it may actually be valued at more like 110% of original nominal value.

    The PN is ‘worth’ 28bn right now, and is used, alongside other ‘real’ loan assets, to access between 36-40bn of ELA for IRBC/EBS. Other Irish banks, using ‘real’ collateral, also access a small amount of ELA of a value between 4-8bn.

    ELA and PN are completely separate instruments. ELA provides liquidity only and pre dates the existence or creation of the PN. The PN is a capital instrument, does not liquidity (cos it’s not cash), but which can and is being used as the collateral for the ELA facility, alongside other collateral. However the ELA does not exist purely because of the PN, and does nothing to help the capital position of any bank, nor is the PN’s purpose (as opposed to its use) to provide liquidity to any banks. Both could, and have, operated completely independently of each other, and could, though unlikely, operate in such a mannner again sometime.

  123. Not paying the amount due to the ELA sounds very sensible except for one thing. As I understand it the debt is actually held by the Central Bank of Ireland in trust as it were for the ELA. The powers that be in Europe are not daft (unfortunately) and they have neatly passed the buck to us. We can default on payments to the ELA all we like but it just means the CBI and thus the Irish taxpayer picks up the tab. I maybe wrong, but that is my understanding of the conundrum we face.

  124. @Sarah Not a lawyer, a tax adviser hence years of training in the discipline of “if you think you spot a loop hole, make damn sure no other provisions will come back to bite you before you use it” which is where I think Karl’s analysis fell down. Academic degrees are in law, practical experience is in tax including EU tax law (where State Aids crop up a lot).

    @Colm Brazel I’m not sure of the point of your previous posts to me. I don’t think all ELA breaches Art 123 (if it did Art 123(2) would be almost superfluous), I acknowledged on the thread that the Commission has publicly given directions as to what terms of ELA they will not view as being prohibited State Aids such that ELA can be compliant with those rules.

    My point was simply that the significant alteration of the ELA Karl proposed strikes me as breaching either or both of the prohibition on State financing in Art 123 and the prohibition on State Aids in Art 107.

  125. @ Bond

    I think this conversation is done. There is no confusion other than your refusal to accept what I, Karl Whelan, Seamus Coffey have already stated.

    Re “ELA is a liquidity tool used by the central bank of Ireland (not the ECB, though their approval is required) to give liquidity to Irish banks on the back of non-standard collateral outside the ECB collateral framework.”

    I’ve at length given links to ECB documents explaining the process involved. Its tiresome to be ‘corrected’ with a ‘correction’ that agrees with what I’ve already stated.

    Technically you are incorrect in StaTing “ELA and PN are completely separate instruments.” I’m not going to pull you up on this technicality because you yourself correct yourself there by StaTing :

    “ELA is a liquidity tool used by the central bank of Ireland (not the ECB, though their approval is required) to give liquidity to Irish banks on the back of non-standard collateral outside the ECB collateral framework.”

    Read back through the posts to see exactly what that ‘approval’ means; I’ve provided the links for people to read up on ELA considered from the ECB point of view.

    These links provide the substantive case against the narrow understanding of Article 123 and comments by Aisling. They refer to the ‘murkiness of ELA’.

    I really do hope the Irish team and are not blinkered by such an understanding that will prevent them obtaining burden sharing relief on the odious debt concealed by the PN especially in regard to Anglo.

    So no need to go repeating forever what has been set out clearly already by Seamus Coffey post on PN. Clearly at this point you are not out to contribute substantially to the discussion, just troll comments meant to incite and showing a tiresome conceit.

    But look, I dont disagree with most of your 5:51 post apart from your contradictory PN and ELA are completely separate instruments. NB ELA does indeed require the approval of the ECB, in layman’s terms earlier I compared it to the issuing of loan approval.

    I’ve also explored earlier what happens when there are losses made by one CB through its ELA facility, read back on that also.

    @ Karl, Seamus

    Re setting ELA to “null and void” never at any point quoted you guys as saying anything of the kind.

    I believe Karl’s position is the rather lightweight call to have such payments deferred until the time arises that the total bill drawn down by PN against ELA can be afforded to be paid back. But he can elaborate on his position in this regard is he wants.

    My own position is the same as before. We should demand that ELA be set to null and void. Note, I used the figures of ¢42 bn of which the IBRC is ¢28 bn.

    By using the figures to declare and substantiate the way I was using the term ELA, i was using the term in the same way Karl Whelan in the B&F article uses the term; namely, the realisation of ELA through PN we are all paying through the nose for at ¢3 bn annually.

    So Bond, it is indeed hilarious to see you attack me on a number of occasions when I discover you are not doing your homework and hilariously discover the quoted remarks you attribute to me are not mine at all, but those of Karl Whelan.

    Another hilarious moment for me was when you rubbished another remark allegedly made by me again, but in fact was taken from an ECB document.

    So here you go rubbishing ECB, Karl Whelan and myself on technical points you find disagreement with; then you correct those points with a restatement of the same points indicating you agree with those very same points yourself.

    Hilarious is the word. Next time, before hitting ‘submit’ button, have a cup of coffee, followed by a read of the post including any links it might have:)

    The question is, which one of us is ‘Moriarty’? Lol

  126. @ All

    Is it not time to declare this thread “null and void”?

    It has been a useful exercise, at least as far as I am concerned, as it confirms the accuracy of the view that there is no such thing as a free lunch.

    @ Ceterisparibus

    Interesting NYT article, notably the following;

    “And Greece appears to be closer to a deal with its creditors to pare back its debt obligations rather than a disorderly default that could plunge the financial system back into chaos”.

  127. @ Aisling

    Re “My point was simply that the significant alteration of the ELA Karl proposed strikes me as breaching either or both of the prohibition on State financing in Art 123 and the prohibition on State Aids in Art 107.”

    I’ve answered this is earlier posts. Basically, I’ve argued that you are mistaken; that confining your interpretation of law through the lens of those two articles means that you do not realise that such a classical understanding dismisses further development and refinements of the ECB position re ELA.

    I’m not trying to be a contrarian here. I’m purely basing this view on research of my own I believe to be very solid.

    This document encompasses my understanding. Your view is more Bagehot than tailor made. I believe you’ve boxed yourself in; a more correct approach would be to try to think outside the box in this case 🙂

    Also my 12:40 post there.

    My own view is represented here:

    http://www.ecb.int/pub/pdf/scpwps/ecbwp1008.pdf

    “The scope and the merits of emergency central bank liquidity assistance become murkier when one considers the conditions under which the bank should lend in cases of crises, i.e. the optimal intervention policy.

    The basis of discussion goes back to the argument of Bagehot (1873) who expressed the fundamental, classical view on this issue. He argues that the central bank should be known to be ready to lend without limits to any solvent bank against good collateral and in penalty rates, so that banks do not use them to fund their current operations. However, a lot of research and experience have been accumulated since Bagehot and the points in his principle have been questioned and re-visited. A naive onerule-Öts-all intervention policy is no longer considered, rather, intervention policies appear in practice to be tailor-made. The Appendix of this project attempts to shortly review the debate on the Bagehot principle, address a few more relevant issues (such as the role of monetary policy and the issue of lending to the markets versus lending to individual institutions) and discuss the dilemma faced by policy makers with respect to intervention policies.”

    Above by Kleopatra Nikolaou Liquidity (Risk) CONCEPTS DEFINITIONS AND INTERACTIONS 12:40 “

  128. @Rob. S, Seamus Coffey, et al

    I have exactly the same questions as Rob S (Jan 20 11:16am) and I don’t think they have been answered yet. In an answer in the Dail (Oct 13, 2011) Noonan stated:

    The total cost of the promissory notes including the principle amount and interest will be €47.4 billion over the life of the promissory notes.

    The payment schedule is 13×3.06, 1×2.09, 6×0.91 1×0.05 for the 21 years beginning 2011. Interest and principal are being paid back at the same time (e.g. the 3.06 payment in 2014 is 1.84 interest and 1.22 principal).

    The question of exactly what happens to the interest is not clear.

    Interest paid by Exchequer to IBRC:
    (a) Will it remain as reserves in IBRC to be returned to the Exchequer at some point. If so, when?
    (b) Will it be used by IBRC to pay off creditors, never to be returned to the Exchequer?
    (c) Something else?

    Interest paid by IBRC to CBI
    (a) Will it be returned to the Exchequer (in the same way as Fed “profits” are returned to the US Treasury”)
    (b) Will it be “burned” in the same way as the principal is burned – i.e. just deleted from the system
    (c) Something else?

    We know the gross cost of the PNs is €47.4bn – what is the net cost? (ignoring for now the fact that all the payments have to be financed by further borrowing).

  129. @ DOCM

    re “Is it not time to declare this thread “null and void”?”

    I’m ELA’d out at this point and I’m not even in LA or on a plane to LA 🙁

    But its been a good discussion.

    I’ll allow Bond to have the last word, he always has 🙂

  130. Yee guys believe in turning goverment fiat ( sanctioned tokens) into credit money (private loans) , not credit money into goverment fiat ……..enough said I suppose.
    But if you honestly can’t see what is wrong with that we are all lost.

    They were just non productive loans which distorted the real economy although there was little real economy remaining , this is not real money (medium of exchange sanctioned by goverment)

    Yee are all children / victims of Ireland inc – I wonder what your grandchildren will think of this.
    The rentier max generation I suppose.

  131. Game, set, and match to Aisling. Who would have thought a tax adviser would have blown everyone off the court? Perhaps the site has become too inward looking. It need more input from those other than economists.

  132. @Seamus Coffey

    I have since read your excellent post on this topic from a few days ago.

    To no doubt oversimplify, the answers would seem to be (a) and (a).

    We know for definite that the interest profit that Anglo makes on the Promissory Notes is not initially lost as Anglo is 100% state-owned. It remains to be seen what Anglo will do with these profits. It appears that the chunk of the interest that the Central Bank takes for providing the ELA also stays within the State.

    It would seem that the real costs of the interest rate on the PNs are the finance charges on the money borrowed to pay for the interest rate portion of the annual PN payment.

    The question remains as to why Noonan doesn’t simply say, in response to all the Dail questions on the matter, that the PN interest charges are paid from one arm of the State to another, and that the cost of the PNs will be closer to €31bn rather than €47bn.

  133. @Aisling

    If you were to drop the rate, in order to have any chance of getting it through State Aid you’d have to broaden the terms to avoid distorting competition so the class of borrowers would increase thus making it uneconomic, or else admit it was designed for IBRC and thus not distorting competition as the aim was to help the Irish taxpayer.

    Just viewing the matter through the lens of the State Aid rules (and ignoring the broader bailout issues), I do not think it obvious that the Commission could make a coherent case that the current IBRC restructuring package does not impact the internal market, but that reducing the interest rate reverses this position.

    For a start the State Aid process allows for comments from interested parties, so there is plenty of scope for BOI or RBS, say, to make their case as to why an interest rate reduction negatively impacts their business. If BOI and RBS wish to make such a case, then let’s see the details, but they haven’t complained about any of the restructurings to date, so why would they start now?

    In the absence of any complaints from other banks (not known to be reticent about pursuing their own interests whenever possible) on what basis could the Commission decide that reducing the amount of money that the government is borrowing to pay itself damages the internal market? (assuming that both the CBI interest rate and IBRC interest rate are still just above the ECB’s base rate).

    Or are the Commission so omniscient that they can see activity that distorts the banking industry even if none of the banks that form that industry can see it?

  134. @Bryan G A complaint is not required although this is an interesting point. Let us say that moral suasion (is that the phrase du jour from Greece?) could result in all other parties making reps to the Commission which were sufficient for the Commission to bless it (and I think you’d run into significant moral hazard arguments there since so many State Aid cases involve public entities or even public monopolies such that the Commission has to take its own position regardless of reps) then the aid could, in theory be granted.

    But, and this is a big but, two years later BOI is bought out by X Bank Plc the board of whom take a very different view not least because the economic climate in the EU has greatly improved (fingers crossed). They then challenge the ruling, in Court if necessary. Because the Commission blessed the original aid the claw back would not be retroactive, but there the aid could be required to be withdrawn going forward. So long as any player who is currently in, or could enter any market in which IBRC is, this risk remains.

    In the scenario we’re discussing, in the context that IBRC is not the party intended to benefit (the Irish taxpayer is) and IBRC can (through us, nasty zombie that it is) cope with the current ELA You’d be asking the Commission to take a significant risk here to allow the rescuing of an entity which doesn’t, at this moment in time, need rescuing which I don’t see them taking.

    The jurisprudence of the Court on this is very clear, once there is an aid, and once any potential for competition distortion is shown, there is a very high burden of proof to prove no threat to distortion.

  135. @Aisling,

    You have played a blinder, but I fear you haven’t convinced the economists. However, you have exposed two delusions under which they labour. The first is that governments of economies within the EMU can issue and enforce decrees when exposed to the implications of previous follies without taking full account of the full legal governance of the EU and the EMU. The second is that a fix, once it is based on economic principles, is always possible.

    Colm McCarthy writes today of the ‘hostility’ of the ECB towards Ireland, but the ECB is as much a prisoner of the flaws institutions and procedures of EMU as Ireland is. I’m sure the ECB would much prefer that an EMU-wide bank resolution procedure had been in place ab initio. But it wasn’t, and it can’t simply wish one in to being – or authorise ad hoc, specific resolution arrangements. Even the US, with a long-established bank resolution procedure, struggled to deal with systemic risk – and only found out what it really meant when it allowed Lehman Bros to go belly up.

    Restoring effective democratic governance of banking in the EU will be a long drawn out process. Ireland should not allow this fixation with ELA to distract attention from vitally necessary structural reforms in a wide range of sectors.

  136. @ Paul Hunt

    “Colm McCarthy writes today of the ‘hostility’ of the ECB towards Ireland, but the ECB is as much a prisoner of the flaws institutions and procedures of EMU as Ireland is. I’m sure the ECB would much prefer that an EMU-wide bank resolution procedure had been in place ab initio. But it wasn’t, and it can’t simply wish one in to being – or authorise ad hoc, specific resolution arrangements”.

    I agree entirely. While I think the headline (decided by the editorial staff!)does not accurately reflect the content of the article, the article does reflect a thesis to which Colm returns time and time again and which is, in my view, seriously flawed because of the failure to recognise the limitations on the actions of the ECB and the responsibility of Euro Area governments.

    The burn the bondholders controversy is no longer really relevant although it dominates the debate in Ireland but with some voices in the various media reporting accurately and telling it as it is. Indeed, there was such a voice in today’s Sindo in the report by Daniel McConnell.

    http://www.independent.ie/national-news/troika-targets-top-public-execs-in-savings-plan-2996229.html

    The fact that ministers never cease repeating that the bulk of our difficulties stem, not from the bank bailout, but the excess of public expenditure over tax receipts (a) seems to have little impact with the public and (b) does not actually cause them – the ministers that is – to take the necessary difficult decisions.

    However, the disparity between the public and the private sectors, and the unfairness in the manner in which they are being dealt with, is becoming so obvious that it simply cannot be denied and is beginning to have political implications, especially for Fine Gael (a fact which the Sindo also reports upon).

    Colm McCarthy is also quite trenchant in his views in relation to the need to balance the budget but this element of his argument seems to get lost in the lamentations about the unfairness of it all and the treatment of Ireland at the hands of outsiders when Ireland is inside looking out, not outside looking in.

    It may be that the ECB is unwise in insisting on bondholders being spared in the manner that they have been but it has, at least, been consistent, objecting strongly until the end with regard to the PSI element in the Greek bailout and being proven right by events with regard to the view that investors take of the euro and market risk.

    P.S. As to who is the winner in the argument on this thread, this can only be judged by all those that have bothered to read the contributions. But, for my money, BEB has demolished the view that the ultimate bill for the Anglo-Irish lies with anyone other than the Irish taxpayer, Aisling has demolished the narrow argument based on the zombie status of the IBRC and Tullmcadoo has pointed out the uncomfortable, but unavoidable, consequences of Ireland deciding to go it alone.

  137. @DOCM
    Re NYT article..obviously written before the latest suspension of talks. The two top guys had to go to Paris for long standing dinner engagements.
    Excellent article in Der Spiegel on debt..would make you wonder about Germany.
    Thought this bit was classic…a solution to our debt woes….
    “Greece experienced a particularly unusual bankruptcy in 1922, when then Finance Minister Petros Protopapadakis ordered that all banknotes be cut in half. The one half remained currency, but was worth only half as much as the original note, while citizens were required to exchange the other half for a government bond. A quite literal debt haircut.”
    Could we cut our euro in half?

    http://www.spiegel.de/international/world/0,1518,806772-2,00.html

  138. @Ceterisparibus

    “The two top guys had to go to Paris for long standing dinner engagements.

    I must try that one the next time I’m working late and there’s a critical deadline to meet. Sorry guys but I’ve a long standing social engagement to go to with the lads down at the pub. That’ll go down well.

  139. @Paul I broadly agree with you expect for the reference to Colm’s article. Actually I’d be quite supportive of Colm’s position as an adherent to the rule of law. The ECB has a mandate to protect the eurozone banking system just as it does not have a mandate to bail out Governments of Member States.

    I’d read Colm’s article as questioning whether, if the ECB is continuing to put pressure on the Irish Government to pay the holders of junk bonds in a zombie bank, to protect a banking system already paralyzed they are acting within this mandate?

    I don’t think we’re going to get an answer (we clearly didn’t at the press conference), I’m not sure we should get an answer because if the ECB is aware of further stresses (and the obvious ones are pretty clear) in the eurozone banking system I’m not sure putting those in the cold light of day is actually the best way to deal with the crisis (negative feedback loop between EBA stress tests and sovereign bonds anyone?).

    But he’s right to question whether they’re acting within that mandate. The rules should be applied, both when they hinder us but also where they could benefit us, and questioning whether they are being applied is a good thing. Even if it doesn’t illicit an answer it can help further the debate.

  140. @DOCM:

    The point I am making, and I hope clearly, in today’s Sindo is that whatever case there may have been for supporting the access of European banks to the unsecured bond market through compromising the credit-worthiness of this state has evaporated, at least for most of the banks.

    The continuing failure of the ECB to explain or justify its actions, which place our government in an impossible position and play into the hands of purveyors of snake-oil, is a confusion of central bank independence with an entitlement not to be accountable.

    A programme of austerity, hopefully with reform, cannot be avoided in Ireland anyway. It is rendered more difficult politically by the unexplained choices the ECB continues to make.

    I cannot recall a case where a central bank required, under threat of liquidity withdrawal, a state to pay unguaranteed and unsecured creditors in bust and closed banks out of funds provided by official lenders. Can you?

  141. @aisling

    @Paul I broadly agree with you expect for the reference to Colm’s article. Actually I’d be quite supportive of Colm’s position as an adherent to the rule of law. The ECB has a mandate to protect the eurozone banking system just as it does not have a mandate to bail out Governments of Member States.

    “The rule of law”? Oh dear Lord.

    Almost every economist outside the Eurozone and anyone on the left inside it grasps that the laws that the EU operates under, particularly the single mandate of the ECB, is a substantial reason the European component of the global financial crisis grew into the disaster it now is and also that these same laws, and the political and class interests they serve, remains a major obstacle to solving it. The fiscal compact, the latest iteration of the austerity and misery pact, is the perfect example of how the law itself and who it serves is a central part of the problem.

    We have bad rules and insisting that sticking to them is an essential part of the solution is somewhere on the continuum between disingenuous and delusional. The rules are the problem.

    We have a systemic crisis and the system needs to be changed, fantasising how we can solve the crisis without changing the system is a terrible mistake for Ireland.

    This has been one depressing thread to read.

  142. @ Colm Mc

    Re unsecured bond issuance

    The market is still difficult, but in the last three weeks there has actually been fleeting, and surprising, signs that some banks may be able to issue, albeit primarily within the LTRO window. Still a major problem area, but perhaps stories of its complete demise have been overstated, at least for now. Pricing on all issuance remains stretched though, the cost of credit will remain high for some years to come (vs base reference rates, which may remain low for the same reason), and defaulting in senior debt will only make that situation worse. That’s the conundrum to solve until the economy sustainably recovers.

  143. @ Colm McCarthy

    The short answer to the question that you pose is no and the reason is that the ECB is not a central bank in the sense that such a term is normally understood i.e. the central bank of a sovereign state.

    To quote Article 1 of the relevant protocol (No. 4 to the Lisbon Treaty); “In accordance with Article 282(1) of the Treaty on the Functioning of the European Union, the European Central Bank (ECB) and the national central banks shall constitute the European System of Central Banks (ESCB). The ECB and the national central banks of those Member States whose currency is the euro shall constitute the Eurosystem.”

    BEB has explained the implications of this structure in terms of who is left holding the can for the ELA lending by a national central bank.

    As Aisling points out, the ECB has a mandate to protect the eurozone banking system just as it does not have a mandate to bail out governments of Member States. One may have a view as to whether it is taking the right or the wrong action with regard to its primary mandate but this must be set in its proper context, not in terms of a particular instance in relation to a particular problem in a particular member country of the Euro Area (which, most probably, does not figure at the forefront of the concerns of the ECB).

    In fact, the issue ties in with the comment of Ceteris Paribus above about the “long-standing dinner engagements” of the officials representing private bondholders in the ill-fated negotiations on PSI for Greece. It is clear that they wished to have a time-out in order to allow ministers come to some agreement at ECOFIN on the level of coupon on the replacement bonds. What the markets will make of this tomorrow remains to be seen. But it bears out the accuracy of the view taken by Trichet at what might be described the “Deauville moment”, in a very charged exchange with Sarkozy at a European Council, that taking on the markets in this way was a very foolhardy exercise.

  144. @Shay,

    “…the laws that the EU operates under, particularly the single mandate of the ECB, is a substantial reason the European component of the global financial crisis grew into the disaster it now is and also that these same laws, and the political and class interests they serve, remains a major obstacle to solving it.”

    This is a statement of fact, similar to Colm McCarthy’s observation that the ECB is requiring, “under threat of liquidity withdrawal, a state to pay unguaranteed and unsecured creditors in bust and closed banks out of funds provided by official lenders”, but it doesn’t get us very far.

    These laws were enacted in the context of the Faustian pact that many EU governments entered into with the banking and financial system. While these laws have full constitutional legitimacy at both the EU and member-state level, they lack genuine democratic legitimacy because their enactment was overseen and propelled to completion by political and offical elites, often suborned by financial and other interests, and genuine informed democratic consent was not secured.

    It will take a long time to unwind this Faustian pact and to impose effective demcratic governance on financial capitalism. And it is becoming more drawn out and lengthy because voters, whose trust has been seriously abused, are loth to risk their trust being further abused. And most leading politcians and officials are implicated in this distaster either directly, because they facilitated the establishment of the institutions and procedures whose flaws have led to this disaster, or indirectly, because they attempted to sustain the optical illusion in the face of convincing evidence of fundamental flaws. And all these leading politicians, at some stage in the near future, will be seeking re-election.

    So you may lament the failings and desires of these politicians as much as you want and you may lament the impact this is having on Ireland, but these are the politicians EU voters have elected in free and fair elections – and the officials they have appointed. And these voters are justifiably angry at the way their trust has been abused, the parliaments they have elected (in many member-states) are becoming more assertive and, eventually, all of them will have their say. All will be resolved in time.

  145. @DOCM@Colm McCarthy

    re your post of Jan 21st 2.28 pm highlighting Irish Times link to suspension of Greek discussions.

    If you take a look at the photo on the Irish Times link one of the individuals appears to be the ECB guy who made some sort of half hearted attempt, at the recent “troika” press conference in Ireland, to warn Ireland about a possible risk to our “reputation” if we decide IBRC is no longer solely our problem.

    IMHO it is time for some “minion” in the dept of Finance to make a short telephone call to Frankfurt re IBRC.

    If “reputation” is all we need to worry about then it better be a short phone call because even “minions” are paid quite a lot these days and need to be getting on with other work. 🙂

  146. @Aisling

    once there is an aid, and once any potential for competition distortion is shown, there is a very high burden of proof to prove no threat to distortion.

    Well it seems the Irish government must have excellent lawyers, since they have managed to achieve this very high burden of proof over 30 times in the last three years alone, as that is the number of bank-related State Aid cases that have been approved for Ireland. One of the problems with your position is that it fails to recognize that this will be the 31st or so bank-related State Aid case, not the first, and ignores all the precedents that have been set.

    Even when Anglo was potentially a competitor in some areas, no competitor raised any objections with the Commission about the State Aid. IBRC is now, under the conditions imposed by Commission, solely a work-out vehicle. The idea that a new acquiring bank would enter the Irish market and start off by trying to reverse a Commission decision that had no impact on its own business (the interest rate payments are circular) at the expense of Irish taxpayers, while at the same time trying to attract Irish customers, is bizarre.

    The Commission has already accepted that the objective “is to work out the loan books of Anglo and INBS with a view to maximise the return and reduce the cost for the Irish taxpayer.” So reducing the interest rate would be fully in line with this objective.

    If the game is to be played out in the legal arena, which it is, then all the available instruments should be used. If the Commission disagree, then there should be an appeal to the EU General Court. If that fails the matter should be brought to the ECJ. Many other countries and companies are far more assertive about what they see as their legal rights. Running away from any potential court actions is hardly the way to fulfil the obligations that the Irish government has to manage taxpayer money wisely.

  147. The current situation is a classic example of the problems with a Germanic-style “governance by rules” paradigm as against an Anglo-Saxon style “governance by principles” one.

    As a result you have a situation where “the rules are the rules and must be obeyed” right up to the point where

    – the rules are suddenly reversed (e.g. ECB accepting junk collateral)

    – all limitations on scope are ignored (e.g. Trichet writes letters to governments on Friday demanding changes in return for ECB actions on Monday)

    and you end up with far less structure, coherence and pragmatism than you would have in a principles-based system.

    The current rules-based approach, as embodied by the ECB for example, has certainly been hostile to the basic principles of capitalism (risk may result in loss as well as profit) and democratic governance (taxpayer money should be spent for the public good, not paying off someone else’s debts).

  148. Brian G,
    There is a lot of truth in what you say. However Timothy G was also against burning bondhloders- presumably to protect his turf.
    Changing this policy of self interest can only be achieved when the pre-existing policy fails. Thus the interest rate for programme countries is only cut if it looks like one is going to default. Similarly, Objections to LTRO only disappear when one or more of the French banks can’t fund not when the Irish can’t fund.
    The choices we face are I) go it alone and live with the consequences or b) keep badgering, keep getting knocked back, keep trying.
    If the govt has got the troika to come up with a paper on reducing the burden of the PN it
    Might have got some leverage since we are told the ECB and the IMF don’t exactly see eye to eye on this. This just might force this into the open.

  149. @BrianG@all

    “The current rules-based approach, as embodied by the ECB for example, has certainly been hostile to the basic principles of capitalism (risk may result in loss as well as profit) and democratic governance (taxpayer money should be spent for the public good, not paying off someone else’s debts).”

    +1

  150. @Bryan G Nowhere did I say all bank bail outs/ ELAs were illegal State Aids indeed I have acknowledged twice on this thread that they can be compatible with EU law in the eyes of the Commission.

    I’m not going to further derail the thread explaining State Aids are in detail – they are way too complicated for a blog post, I shall try a gross oversimplification.

    Question one is – is there a State Aid i.e. are funds made available through State resources which threaten to distort competition? In all Irish banking bailouts to date, as with Karl’s proposal, the answer is yes.

    Question two – If there is an Aid under question one, can that aid be justified? In almost all Irish bailout cases to date the answer has been yes under the criteria for crisis management laid out in the rules.

    So the bailouts were not allowed because they passed the competition test, they were allowed because having failed the distortion of competition test they fell into one of the “good categories” for dealing with the crisis and did no more damage to competition than was necessary in the eyes of the Commission.

    Karl’s proposal is not about dealing with a fresh crisis in IBRC so it cannot fall into the “good” aids carve-out and as such failing the first test is fatal, not least because it is designed to circumvent another treaty provision being Art 123.

  151. @all

    I wonder if the reason given this week for “temporarily suspending” any further payments will be:
    A)Pending “technical” clarification
    or
    B) Pending “legal” clarification.

    Of course either A or B will suit the rest of us just fine as long the “clarification” takes 35 years or until the “rules” change.

    Since, as a “reputable” member of the EuroZone we have already shelled out more than 3% for the Anglo/IBRC adventure, we might as well include a bit of discussion with our friends about a “rebate” pending clarification`.Such a gesture (while we all await clarification) of good will would probably do wonders for the “reputation” our friends in the ECB. 🙂

  152. @DOCM:

    ‘… the ECB is not a central bank in the sense that such a term is normally understood…’

    Indeed. It has wrecked about half of the European sovereign bond market in a failed attempt to pretend that there has not been a banking crisis. Normal central banks, even moderately sub-normal ones, do not behave this way. The principal policy response is a d(r)aft treaty about fiscal policy, rather than an honest attempt to re-engineer EMU. The fact that Ireland is the principal victim is incidental – the failure of the ECB to show an ounce of leadership in these matters is a European failure. Who precisely do they expect to lead the charge?

    @Aisling:

    I still cannot see how any compromise with creditors of banks which have been removed from the market raises competition issues. Competition with whom, precisely?

  153. @aisling

    Question two – If there is an Aid under question one, can that aid be justified? In almost all Irish bailout cases to date the answer has been yes under the criteria for crisis management laid out in the rules.?

    At this stage, given that there would be no banking system in Ireland without the donation of somewhere between thirty and fifty billion euro of public money and that Ireland is faced with an arguably unsustainable debt burden which may bring down the sovereign (and therefore the banks) I think it would not take a legal mastermind to argue that the banking crisis is ongoing and therefore that further exceptions to rule one (“Firstly ye shall distort no market, even if the market would not exist without massive public aid.”) are in order.

    The law is not just there to protect private property and an imaginary free market.

    @Paul Hunt

    So you may lament the failings and desires of these politicians as much as you want and you may lament the impact this is having on Ireland, but these are the politicians EU voters have elected in free and fair elections – and the officials they have appointed.

    We agree on the the tremendously negative effect of financial capitalism coddling on the current EU (and it was a global financial crisis that kicked our little nightmare off) but I do not recall electing Angela Merkel and nobody elected Jean Claude Trichet – though there may have been a straw poll among the heads of European banks.

    The last three and a half years demonstrates that there can be no solution to Europe’s ongoing crisis without confronting the utter brokenness (and baked in political dogma) of the European Union institutions and political arrangement – we can not just say that we need to accept the current democratic consensus when it has pretty clearly been thoroughly subverted (back to “Super” Mario Monti and Donkey ECB).

  154. @ Colm McCarthy

    The job of the ECB – as a full institution of the EU since adoption of the Lisbon Treaty – is not to lead the charge anywhere, but to fulfil its legal treaty mandate. It has already, in my opinion, stretched that to its very limit. If change is to come about in the foundations of the EMU it is up to the governments and peoples of the Member States to make them. I agree that the fiscal compact is an irrelevancy. Its only value is that it provides the necessary camouflage for a profound change of direction by Merkel, probably too late, but that is justification enough.

    Meanwhile, at the coalface, events move on.

    http://www.nytimes.com/2012/01/23/business/global/greek-talks-stumble-over-interest-rates.html?_r=1&hp

    Notably;

    “Also holding up discussions was the question of what to do about the European Central Bank’s 55 billion euros in Greek bonds. The E.C.B.’s refusal to take a loss has been regularly cited by investors as unfair, and many have said that they will sue Greece if they have to take a loss while the E.C.B. does not.

    To get around this, official are now discussing the possibility that Europe’s rescue fund might lend money to Greece to allow it to buy the bonds back from the E.C.B. at the price the central bank paid for them — thought to be about 75 cents on the euro.

    The E.C.B. would then not have to take a loss on these holdings. By selling them back to Greece, it would remove itself as an obstacle to a broad restructuring agreement.

    “Both sides know that a deal has to get done,” said a banker who asked not to be identified because he was closely involved in the talks. “But they have to dance this dance to get there.”

    How many Irish bonds is the ECB holding?

    Germany wants to reverse the ECB out of the bond-buying programme embarking on which it considers was a fatal error by Trichet. It probably was, given the chaos in the bond markets that has since arisen but insistence on PSI was probably equally damaging but this was not the work of the ECB but of Merkel. (I am with Professor Winkler in his view on both topics in the context of the joint production of confidence by banks and sovereigns, which both parties across Europe are now desperately trying to achieve!).

  155. @ DOCM

    “How many Irish bonds is the ECB holding?”

    C.€20bn

    The difference, of course, is that their holdings of Irish bonds are not all that far from flat p/l right now…

  156. @DOCM re your link at 8.06pm

    “…..previously planned personal engagement……”

    Well thats alright then we will just carry on with our crisis while you take the the kids to the pool.:)

  157. @ BEB

    I presume that this reflects the dramatic decoupling of Irish spreads from those of Portugal over the past weeks.

    @ All

    FYI

    http://online.wsj.com/article/BT-CO-20120122-703315.html

    Schaeuble has, predictably, said that there will be no increase in the €500 billion ceiling on the ESM and that recent auctions have demonstrated that there is a return of confidence to the markets (!).

    Coincidentally, Lagarde is looking for an extra €600 billion for the IMF. Wolfgang Munchau is on the case.

    http://www.ft.com/intl/cms/s/0/6ccb8e40-4364-11e1-8489-00144feab49a.html#axzz1kDG9WeKx

    The IMF as no more a monolithic organisation than the ECB. It is dominated by the same players. It simply provides a different, and perhaps more congenial, forum. (The UK seems incapable of making up its mind in the matter and, having played dog in the manger in Brussels, now seems intent on doing the same in Washington).

  158. @Tullmacadoo

    I certainly would not hold up the system in the USA as a shining star which everyone should follow, but in terms of allocating the losses that occurred due to the bubble there has certainly been a better balance between bank creditors, currency-holders and taxpayers.

    I think a big problem is that the quality of the badgering is so weak and that it is so easy to knock back. Announcing for months that you are going to ask the ECB for permission to hit unguaranteed bondholders, asking politely, and then immediately accepting the response, isn’t very effective. Neither is trying to concurrently hold a position that a second bailout is “ludicrous” at the same as trying to renegotiate PNs because the sovereign is stressed. The badgering needs to be more assertive and based on adherence to principles, with less concern about trying not to offend anyone.

  159. @DOCM:

    If there is a ‘…legal treaty mandate…’ requiring the ECB to force an insolvent government to repay unguaranteed creditors of bust banks which have been closed, I would appreciate a reference.

    The rest of your most recent comment is a kind of Nuremberg defence, or Buckpassers’ Charter. The central bank in a system enduring a financial crisis has a responsibility to lead the debate on how it might be addressed, whether or not it says so in some treaty. I agree that they have stretched some limits. To leave reform proposals to the ‘…governments and peoples of the Member States…’ is dereliction of duty.

  160. @Aisling

    I never accused you of taking a position that bank-related State Aids were illegal, so I don’t know why you chose to lead off with that. I pointed out that the Commission has already approved over 30 cases of bank-related State Aid in the last 3 years. The basis on which they approved them was “to remedy a serious disturbance in the economy of a Member State”.

    The restructurings are incremental in nature. There have been about 8 or 9 for IBRC/Anglo/INBS alone. Each additional modification to the previous one does not require a brand new “fresh” crisis – the crisis was the original implosion. The justification for the incremental modification would be that the sovereign is still under stress, and that a change is needed to better react to current conditions.

    The agreed objective for the State Aid for IBRC, is, as I pointed out, “to work out the loan books of Anglo and INBS with a view to maximise the return and reduce the cost for the Irish taxpayer”. An incremental modification that helped to achieve the already agreed objective, taking into regard the current conditions of the sovereign, would be a perfectly reasonable course of action. To say that the Commission would just dismiss this out-of-hand is just not credible, given the logic that imbued the 30+ approvals that have been granted to date.

  161. @ DOCM

    I reckon they own a similar amount of Portuguese bonds as Irish, certainly same ballpark, and the bulk of the buying of both was actually in Q2/Q3/Q4 2010. Real international money buying, shorts/underweights (which most people don’t realise) covering the amazing H2 performance, and solid domestic interest has been the dynamics behind continued decoupling of Irish vs Portugal in recent months.

  162. @DOCM

    Rule No 1: Ensure other people’s money is used to solve any problem.

    Rule No 2: Use your power to ensure rule No 1 is enforced.

    Rule No 3: Repeat Rules 1 and 2 in an infinite loop, holding a final, definitive, conclusive, we-really-mean-it-this-time emergency summit every month.

  163. According to Leo the Troika told them that ” a bomb would go off in Dublin” if we didn’t pay out the bondholders in Anglo next Wednesday.

    Curious form of words for ” official lenders”.

    Financial terrorism ???????

  164. @ Aisling

    ‘So the bailouts were not allowed because they passed the competition test, they were allowed because having failed the distortion of competition test they fell into one of the “good categories” for dealing with the crisis and did no more damage to competition than was necessary in the eyes of the Commission.’

    In other words, the most fundamental principle at work is the principle of expediency. Quelle surprise.

    The challenge then, is to create the conditions in which the PTB will see it as in their interests to allow proposals of the type put forward by Karl. That calls for a bit of lateral thinking. As we are seemingly inconsequential minnows, perhaps it need to be very lateral indeed.

  165. @Bond Eoin Bond

    The solid domestic demand you mentioned regarding Irish bonds I presume means the banks… That would tie in with the NYT article posted earlier which said that the three year money was made available by the ECB on the understanding that the banks would support their sovereigns.

    BTW, any thoughts on the reduction in deposits at ECB in the last few days…I noted about 120 b reduction… That’s some amount for bond buying..no wonder yields are tightening for the endangered countries.

  166. @ All

    Entering the title of the WSJ piece in Google will get past the pay wall.

    @ Colm McCarthy

    “The central bank in a system enduring a financial crisis has a responsibility to lead the debate on how it might be addressed, whether or not it says so in some treaty”.

    On this, of course, I can agree. There is no limitation on the ECB “leading the debate” which, in my opinion, it has been attempting to do. It is active in all areas of debate and, indeed, it must be consulted with regard to initiatives being undertaken by those capable of taking them viz. the Council, usually acting on the basis of a proposal from the Commission and deciding in co-decision with the European Parliament.

    But when it comes to its actual carrying out of its remit, if an action is not provided for in the treaties, it cannot act. And if a country thinks that it is acting in breach of its obligations, it can be taken before the ECJ (which the UK is currently doing).

    As to the treatment of bondholders, what can I say? The ECB takes a view in the matter which may well be mistaken but Ireland remains free to decide, a fact which now appears to be being finally admitted (if the evening news is any guide).

  167. @ CP

    “BTW, any thoughts on the reduction in deposits at ECB in the last few days…I noted about 120 b reduction… That’s some amount for bond buying..no wonder yields are tightening for the endangered countries.”

    It’s a meaningless number which will gradually increase again as we move through the ECB maintenance period (about a month or so), before dropping down again. Absolutely zero knowledge on banks buying government bonds can be gleaned from the figures, it’s perhaps the most widely misreported and misinterpreted number out there right now, it’s scale is purely related to the amount of ECB liquidity out there, they will move in tandem with each other.

  168. @Colm McC the test is not actual competition, it is a “threat to competition” and I don’t think you can, in good conscience suggest that so long as one entity with an asset book is funded with free money while all entities with comparable asset books are funded partly with cheap money and partly with expensive money there is no threat to competition.

    Cost of funds is a relevant consideration to every business. So long as IBRC has an asset book in any way comparable to other players in the Irish market (or potential players were they to acquire that book from an existing player) the threat remains. It may strike you as logically daft, I’m not disputing that element, I’m just pointing out that once it is possible to identify any potential threat the onus then shifts.

    In relation to the role of the ECB it is, unfortunately, hard wired into the treaties to make the ECB BuBa in disguise. One of the most disappointing elements in, as you so succinctly put it the d[r]aft treaty is the lack of proposals to deal with this. A watering down of the rules on LOLR would be great, even if restricted, but an introduction of a US style “employment” mandate along side the all holy “price stability” one might actually make a difference… To suggest that any treaty change which effectively leaves the role of the ECB untouched in any meaningful way can fix this really is daft.

    There’s never been a financial crisis with a Central Bank governed by supranational law (dictated by the irrational fears of one people) before alas. Shame when they drafted it everyone thought that BuBa was the bees knees so no one thought to seriously question that design for a European institution.

    @Bryan I agree that there has been one crisis and that there have been many incremental solutions. However I challenge you to point out one instance where the State Aid was blessed on the consideration alone of the benefit to the Irish taxpayer? That’s not in the rules, it is not a carve out permitted. The State Aid rules would be rendered entirely toothless if the sole benefit to a domestic electorate could render an aid compliant.

    The carve-out used throughout was to remedy a serious disturbance in the domestic economy. Changing the terms on which IBRC can access CBI ELA would have limited impact in this regard, the intended benefit is a longer term one to the sovereign’s balance sheet, and one which requires a seismic change to the aids approved by the Commission to date all of which have required aids to be more expensive and not less expensive than the comparables.

    Which still misses the point that the major issue here is not Art 107, it is Art 123. But if you try to avoid a Art 123 issue you have to be prepared to run foul of Art 107 and absent any fresh need for cash by IBRC (rather than by a need to deleverage the sovereign) this is going to be a major stumbling block.

  169. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/801

    The Anglo/ INBS press release.

    Their restructuring and their exit from the markets over 10 years under the plan will remove their ability to distort competition (ongoing so not yet achieved such that further aids would have to be reviewed). Potential distortion is removed in the eyes of the Commission if the plan is complied with, but the plan envisages no new aids in the sense of tens of billions of free cash, just the aids granted to date.

    The issue is to remedy a serious disturbance in the Irish economy which this press release believes has been remedied in so far as IBRC is concerned. Any potential new aid then needs to be reviewed and is questionable when it is not required by IBRC (plus it would reopen this investigation which could no longer be considered final or binding).

  170. @ Aisling

    BUBA was the bees knees because it was governed by the law of a sovereign not supranational law. The status of the sovereign is the key element (as the debate on which law – Greek or UK – governs bond issues in the context of the Greek PSI negotiations reveals).

    As there is no political appetite to turn the EU into a sovereign state, some form of stable half-way house has to be worked out. I think that the Euro Area is stumbling towards such a solution (which will have to include the IMF as it will provide extra buttressing).

    Time is now of the essence. If Hollande’s programme is to be taken seriously, it will be a case of Back to the Future if he is elected i.e. a possible repeat of the disastrous early Mitterand years. This scenario is not confined to France!

  171. @ Aisling

    Having just read the Commission press release, I think you may have played the decisive final shot.

  172. @Aisling

    You continue to argue from first principles, while ignoring the realities of what decisions have already been handed down. The issue is not whether the sole beneficiary is the Irish taxpayer, but whether the overall objectives can be furthered, with one of those being financial stability. The Commission have already accepted that minimizing the cost to the taxpayer is an objective the IBRC entity that they approved.

    You appear to be ignoring or mixing up the two interest rates involved – the one charged by IBRC to the government (a), which represents the main portion of the interest payments, and the interest rate charged by the CBI to IBRC (b). One is on the asset side and the other is on the liability side. I have never argued that the CBI rate to IBRC should be lower than the ECB base rate. You have failed to provide evidence that reducing (a), or reducing (b) but keeping it just above the ECB base rate, would cause a spillover effect for other banks in Ireland. This is all simply money the government is borrowing to pay back to itself at a future time, but is incurring costs in doing so.

    So if the impact of the change would be to reduce the stress on the financial system (of which the sovereign is a big part) and there is no evidence of negative spillover effects, what is the problem?

  173. @Aisling:

    I am going to drop this. Competition occurs in markets. The IBRC is not involved in any markets, either for banking assets or liabilities. This parrot is deceased. It’s bleedin’ demised. It’s rung down the curtain and joined the choir invisible. This is an ex-parrot. (from memory).

    By the way folks, comrade Hollande’s speech included the following:

    ‘He repeated his promise to renegotiate the European treaty on fiscal discipline currently being drafted by European leaders if elected, to shift the focus to policies that promote growth and investment.’

  174. @Aisling

    but the plan envisages no new aids in the sense of tens of billions of free cash

    Perhaps you would care to explain where any of the proposals on restructuring the PN interest payments involve “tens of billions of free cash”?

  175. @Bryan G We seem to be talking at cross purposes. Karl’s proposal was that IBRC repay the CBI ELA as and when we can afford to (and for that to make any meaningful impact that must involve not only a deferral of repayment but an interest holiday) hence my reference to it being tens of billions of free money.

    On the pro-note side I wouldn’t have the same State Aid concerns at all, if we could figure out a way to reduce the cost to the tax payers by restructuring the pro-notes the Commission should bless it.

    My concerns on the ELA is Art 123 but if you attempt to “scheme around” creating an Art 123 problem the State Aid rules can, and to my mind would, bite.

  176. @Aisling

    I don’t see such a clear distinction between the ELA on the one hand, and the PNs on the other. The PNs form the bulk of the collateral on which the ELA was granted, and hence the repayment schedule for the PNs and the ELA are tightly linked. The Commission has already granted an interest holiday on the PNs, and so has set a precedent there.

    For better or worse, the State Aid rules have been pushed into service as a form of EU-wide proto-bank resolution scheme. This is not my view but that of the Competition Commissioner:

    In essence, the Commissioner expressed the view that while the application of the state aid rules cannot replace a fully-fledged regulatory framework for crisis management, it will continue to serve as a resolution tool until such a framework is in place.

    That is the context in which everything needs to be placed. It isn’t 2007 any more.

  177. @ALL

    Daniel Gros on Morning Ireland claims that ‘people with knowledge’ of these matters would counter any special pleading by Ireland on unguaranteed bond repayments by pointing out that ‘Irish’ banks are getting very cheap money (approx 1%) money under ELA.

    I would have thought that the ‘Irish’ banks were getting the same ELA rate as all other European banks? I doubt that the ECB has one rate for Irish banks and another for German banks using ELA?

    Funny also, how cheap funding of ‘Irish banks’ seem to be a balancing argument or justification for screwing the citizens of the State that host the banks. Even States that host dead banks!!!

  178. @ Joseph R

    German banks are not believed to be using ELA. Only Irish, Portuguese, Greek and maybe Belgian banks are thought to be accessing these facilities, and the Irish and Greeks are the super-users.

  179. This has been one of the most interesting and certainly the most enlightening thread we’ve had here for a long time. I think we all owe a debt of gratitude to Aisling for pushing the debate beyond the usual ‘economic certainties’.

    I think what some people might learn from all of us if that, if the entire domestic banking system of Germany or France (and, yes I know they are hiding considerable bank insolvency as it is) had gone in to meltdown like Ireland’s on 30 Sep 2008, the rules of the relevant EU institutions would have been changed in short order.

    I know this isn’t fair, but the EU exercises considerable restraint on the behaviour of the big players to the ultimate benefit of all – even if the big players often bristle and chafe at the restraint and seek to avoid it.

    Among all member-states, Finland probably knew, and knows, this best of all. Having emerged 20 years ago from the clutches of an over-bearing mendacious power, it was prepared to submit to governance within the EU – anf then EMU – where the big players, inevitably, dominate the formulation and application of the ‘rules of the game’, but that sufficient protections were ensured for small nations. It appears that Slovenia, Slovakia and Estonia have adopted a similar stance.

    But the best protection, as in Hitchcock’s response to a question seeking his advice to aspiring film directors, is to ‘stay out of jail’. Do not put yourself in a position where you are exposed to the tender mercies of EU institutions – some struggling under serious institutional and procedural design flaws and others struggling to apply Community instruments in situations for which they were not designed and all seeking to balance this against a determined push by leading politicians asserting national priorities and seeking to re-connect with justifiably angry voters.

    Finland secured this protection by dint of good governance and regulation; Ireland, by virtue of woeful governance and regulation, was exposed. The retreat from this exposure to a place of protection will be long drawn-out and painful. It will require concerted domestic and external action. But the focus is on a single external action that the external parties find difficult to carry out – even though some resolution will be crafted eventually. But on the domestic front, even though the identity of those who govern has changed, progress is being made on the necessary fiscal adjustment and bank supervision and financial regulation has been improved, the principal structures and process of governance and regulation that led to Ireland being so exposed in the first place remain unchanged and unreformed.

    It is ironic, but, perhaps, not surprising that the cry in Ireland is for the EU to change its procedures to help Ireland, while Ireland will do the least possible to help itself.

  180. @ Paul Hunt

    ‘I think what some people might learn from all of us if that, if the entire domestic banking system of Germany or France (and, yes I know they are hiding considerable bank insolvency as it is) had gone in to meltdown like Ireland’s on 30 Sep 2008, the rules of the relevant EU institutions would have been changed in short order’

    +1
    Power and influence are exercised through the expedient adjustment of procedures/regulations. As the sociologist Pierre Bourdieu puts it, the powerful maintain their position by continually adjusting their stance. Naive epxectation of ‘fair treatment’ won’t get us very far.

  181. @ Paul Quigley,

    Good to see this discussion getting so many hits:

    Re “Naive expectation of ‘fair treatment’ won’t get us very far.”

    Very true. Apparently our naivety knows no bounds:

    For example, Varadkar has warned us not paying Anglo $1.3 bn this Wednesday would result in a financial bomb going off in Dublin.

    A Little bit of Math warrants here:

    http://www.politics.ie/forum/economy/140523-anglo-irish-bank-bondholders-revealed.html

    BrahMos is a stealth supersonic cruise missile that can be launched from submarines, ships, aircraft or land. It is a joint venture between Republic of India’s Defence Research and Development Organisation (DRDO) and Russian Federation’s NPO Mashinostroeyenia who have together formed BrahMos Aerospace Private Limited. It is the world’s fastest cruise missile in operation.[3]

    http://en.wikipedia.org/wiki/BrahMos

    Unit cost US$ 2.73 million = ¢2,111,140

    My math gives 1000000000/2111140 = 473 Brahmos

    So, the equivalent of 473 of the latest cruise missiles in financial terms will be targeted at Irish taxpayers this Wednesday.

    The irony is Varadkar is warning of significant increase in borrowing costs for Ireland if the Anglo bondholders are not repaid. The markets are punishing Ireland BECAUSE they are paying off these bondholders…. 🙁

    No folly too great to build for this most incompetent Government Europe has known; I include the last in that.

    Massive numbers leaving the public service in health/education on great pensions will have to be rehired
    towards end of year on special contracts to fill up the black holes.

    More Math: Irish economy to grow by 1.3% this year; Troika says .5%. Assuming Troika figure which is understated, correction means statistically the government has made a significant error of judgment of the order of magnitude: (1.3 – .5)/.5 * 100 = 160 %……Sounds like they’re up to their usual standards then 🙂

    Along with the pension mess above, the Troika are concerned the financial sector has not even begun to shed the number of jobs required. They are looking at layoffs 2-3000 required between now and April; how long the government can hide from shedding these jobs is anyone’s guess.

    Hoping for reform? Not a chance. Too busy cutting and slashing the lower end of health/education to protect Croke Park. Even the troika are underwhelmed at the outrageous salaries paid out by a bankrupt government to senior cronies across the public service.

    From a macroeconomic point of view a stage is reached in every currency crisis when the elite circle the wagons around themselves to protect their interests. Nothing above is any different to the experience of other countries eg Argentina, Russia. Its the eye of the storm used to save what can be saved before the titanic capsizes.

    Right now we’re on top of the waterfall paddling full steam ahead on exports; even though shaken by threats re CT and a financial tax. Foreign bondholders are looting what they can before the inevitable fall.

    Fa la lala la, la, la, la, la
    a financial

  182. @Paul Hunt

    Each of the 4 million Irish citizens has considerably more clout than each of the 82 million Germans in European affairs.

    As to banks insolvency ,the follies of Hypovereinsbank have been charged to the German taxpayer alone and those of Dexia to the Belgian and French taxpayers.

  183. @Paul Quigley,

    Indeed. What most people seem to forget is that the EU’s initial starting point was to ensure the great powers in Europe were prevented from ignoring the rule of law and democratic consent and. thereby, in pursuit of the ambitions of the deluded or megalomaniac, wreaking havoc on all. And this was achieved by requiring the pooling of some sovereignty, under effective democratic governance, to develop arrangements for a common market based on the principles of competition, co-operation and solidarity that would further economic prosperity and well-being.

    The requirement for restraint on the powerful for the benefit of all was forgotten during the ‘Great Moderation’ – which was far from moderate as it was based, in the core, on ‘wage repression’ (though not in the PIIGS). The requirement for this restraint using the Community approach has surfaced once again during this crisis, but it is only the veterans such as Jacques Delors and Helmut Schmidt who seem to have any idea of what is involved.

    And Ireland, unfortunately, has placed itself in such an exposed position that it is taking a hit while this existential confrontation is being played out in the corridors of power. I remain convinced that those who stride these corridors would if they could provide some relief to Ireland with regard to the implications of these darned promissory notes and the liquidity support them have secured. I am reasonably confident that they are aware, as Colm McCarthy puts it, that withholding this relief is playing into the hands of the purveyors of snake-oil in Ireland – and, thereby, undermining governability in Ireland. But, for the process of institutional and procedural reform that is taking place in the EU to reach a successful conclusion, the Community method must take precedence over the immediate re-election objectives of leading politicians and it must secure broad-based democratic consent. Given the enormity of what is at stake, it is perhaps not surprising that there is little interest in diverting resources and effort to craft what, in essence, would be an EU solution to an Irish problem. And there is a risk that a decision on some exceptional arrangements might undermine the overall thrust of the main effort. In addition, it is complicated by the political grandstanding on Ireland’s use of taxation policy (as one instrument among many) to attract, from the core EU perspective, a disproportionate share of FDI in the past.

    All of this is proving to be a particularly difficult circle to square. And, as I keep emphasising, it will be a long drawn-out process. The Irish purveyors of snake-oil are an Irish problem. It is for Irish politicians and the Irish people to expose the snake-oil for what it is. It is not for other EU politicians or officials to enter in to what would possibly be ad hoc, exceptional arrangements to deprive these snake-oil merchants of some purchase on Irish public opinion. But they do have an duty to craft a resolution to this problem in the context of the overall programme of instutional refrom being pursued.

  184. @Overseas Commentator,

    Thank you. However, you have no need to remind me of this. But I am very pleased you have brought it to the attention of others here.

  185. @Overseas commentator

    Each of the 4 million Irish citizens has considerably more clout than each of the 82 million Germans in European affairs.

    Well, even when that was true back in the bad old days of the community method and national vetos, pre Lisbon treaty, the collective will of the German people was still vastly more influential in setting the direction of the EU (and rightly so).

    However now that we are up to our necks in the Christian Democrat cess pit of the intergovernmental method I think it is not unfair to say that the constituency of Germany’s current ruling parties have far more influence per head over Europe’s economic policy making than Ireland does since by my count we have roughly zero influence per citizen to the average German CDU voters not zero. There is not even any math to do.

    Coupled with the fact that even when the community method nominally held sway the ECB was, be design, a far more Germany friendly institution I think it is a little bit unfair to be complaining about the EU being under sensitive to German concerns.

    Lastly a lesser man than I might note that post Lisbon and with the increased influence of the larger countries the EU has lost allegiance domestically and face internationally. The Americans now laugh at our economic ineptitude. It is not a great advertisement for the centre right Mittleeuropean Consensus.

  186. @Aisling

    State aid given “to make good the damage caused by natural disaster or other exceptional occurrences” is automatically exempted under Art 107(2)(b)

    I think we are all aware of how wide the interpretation of this phraseology has already been stretched

    I don’t think many countries will want to see the meaning of “other exceptional occurrence” litigated and interpreted before the ECJ!

    There is of course the other non mandatory exception, Art 107(3)(b)

    “aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;”

    The promotion of EC financial stability seems such a project and does seem that we are experiencing a serious disturbance to our economy.

  187. @ Shay Begorrah,

    Yep, Angela is beholden to the Bundesbank; the Irish negotiators are beholden to no one. They’ve a well oiled propaganda machine to blindfold the people with scare mongering nonsense, see earlier post.

    Don’t see much clout to attribute to 4 million Irish citizens currently being scammed by the snake oilers? Instead there is largescale compliance to odious debt that will make this country forever beholden to Bundestag et al. This ‘Compact’ makes us an easier target for further scalpings as time goes by.

    The ‘reforms’….IMF old school stuff, read John Perkins experiences in Ecuador, Panama, Indonesia, taking out the elite is often a mask for ensuring the ‘foreign bondholders’ will get paid, at expense of democracy.

    As for opposition, FF, the 4 million Irish citizens, there are
    no Paul Revere’s, http://www.youtube.com/watch?v=U4hUMQG3MI8

    “So through the night rode Paul Revere;
    And so through the night went his cry of alarm 120
    To every Middlesex village and farm,—
    A cry of defiance and not of fear,
    A voice in the darkness, a knock at the door
    And a word that shall echo forevermore!
    For, borne on the night-wind of the Past, 125
    Through all our history, to the last,
    In the hour of darkness and peril and need,
    The people will waken and listen to hear
    The hurrying hoof-beats of that steed,
    And the midnight message of Paul Revere.”

    Boring stuff as there’s not much appetite to listen to that snake oil anyway.

    Sleep with one eye open:) Plenty of rocks closeby in euro debt waters….We’ve loads of Capt Francesco Schettino’s on the Irish Cruise Ship.

    Fascinating opportunity to observe a currency meltdown though.

  188. Well, Michael Noonan is meeting Mario Draghi tomorrow (for ‘talks on Irish banks’) so perhaps they will get round to discussing this thread then.

  189. @ Paul Hunt
    Interesting take, but I am not sure the that EC was all about democracy. The Common market was also driven by powerful European industrialists and financiers, seeking to establish structures to combat US trading and currency hegemony.

    Wages rose in the PIIGS for a number of reasons, including the effects of core-country-savings-driven capital inflows. While that was not exactly hot money, it was money looking for yield, and so stoked inflation in the periphery. Flawed periphery governance structures, which you rightly target, exacerbated that.

    Doubtless there are many genuinely democratic and competent public officials in the EC machinery. They will have to get a bit of a tighter focus on the financial sector, as the Dork is not far off the mark in his dark perceptions of what GS, Geithner and the Dear Irish Boy get up to.

    ‘Ah go on ! Give us a squeeze’ 🙂

    http://www.nakedcapitalism.com/2012/01/chris-cook-naked-oil.html

  190. @Paul Quigley,

    I agree that there are no clean hands in any of this from start to finish, but those who are elected to govern – and those they appoint to implement governance – have a duty to have the least dirty hands.

  191. @paul quigley

    The Common market was also driven by powerful European industrialists and financiers, seeking to establish structures to combat US trading and currency hegemony.

    +1

    The attempt to displace the dollar as the primary reserve currency has an awful lot to do with the refusal of EU policy making elites to back us out of our share of the global financial crisis.

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