Senior Irish Official Sees Wider Refinancing Of Bank Burden Post author By Philip Lane Post date March 5, 2012 Eamon Quinn reports on an interesting interview in this Dow Jones piece. Categories In Uncategorized 49 Comments on Senior Irish Official Sees Wider Refinancing Of Bank Burden ← Slow Road to a Federal Europe → A tale of two depressions, updated 49 replies on “Senior Irish Official Sees Wider Refinancing Of Bank Burden” White Knight of the Proms – Live at The Inflection Point – March 31, 2012. One assumes this ‘Senior Official’ is speaking ‘Provisionally’ …. in the spirit of objective realism, of course. Let’s wait and see the colour of the (un)sustainable dawn on April 1. Europa: Madam, would you sleep with me for a hundred Billion euros ? Hibernia: My goodness… Well, I suppose… we would have to discuss terms, of course… Europa: Would you sleep with me for five Billion euros ? Hibernia: What kind of woman do you think I am?! Europa: Madam, we’ve already established that. Now we are haggling about the price. Unnamed or identified “senior official” in Irish govt expresses cautious optimism in discussions that have been going on since at least last September 2011 that have yet to be examined by “principals” When “unnamed officials” at the ECB and EU start expressing “cautious optimism” maybe there’ll be a story but I would be shocked to see any change to the promissory notes which reduces the NPV of the existing schedule. BTW, how did we miss on here the decision by Michael Noonan to unilaterally concede what now appears to be a dreadful change to the ESM treaty last month where he agreed that access to the ESM was dependent on ratifying the Fiscal Compact. What did he get in return for that major concession? Vincent Browne draws attention to the change here. http://www.politico.ie/irish-politics/8322-government-esm-treaty-amendment-stick-to-beat-us-with.html Believe it when I see it, still some technical nuggets in the article make is seem as if it’s not all fog. Some commenters have been highlighting the arrangements to establish the ESM, but most people seem to be fixated on the ‘fiscal compact’ which is associated and has some relevance, but is almost trivial in comparison. The die have been cast and the next step is to convince a majority of voters that they really have no option but to vote ‘yes’. Some stitch up on the PNs – which will probably be a lot less than meets the eye (or will be presented to meet the eye) – will help to ‘seal the deal’. And so it goes. Re ESM (which we will be hearing a lot about …. Demands from abroad to increase the size of the euro bailout fund have put Chancellor Merkel in a difficult position, caught between international pressure and domestic demands. Even worse, the troika monitoring Greece’s financial situation believes that a third bailout package may become necessary within a mere three years. http://www.spiegel.de/international/germany/0,1518,819275,00.html @Jadpig Thought it was reasonably well publicised. http://www.irisheconomy.ie/index.php/2012/02/02/new-esm-treaty/ All it took was for an Irish Ambassador to sign apparently. @Jagdip Looking at that earlier thread you were evidently so gobsmacked by Noonan’s assertion that the idea ESM funds might be needed was “ludicrous” that the fact of the ESM alteration didn’t register 😉 I wonder if it might have been a slightly more savvy approach to avoid putting the importance of spinning that Ireland was not going to require any more sufficiently high up the priority list that the case that agreeing to the ESM alteration could not be simultaneously argued to have been a significant concession worthy of negotiating points. It seems the strategy is all about sneaking in there as the country for which things will be “fixed” to give all the other naughty countries a roll model. The “new” ESM treaty will be ratified by the Dail this Wednesday. The “old” ESM treaty was signed but never ratified as far as I know. It is my understanding that Ireland’s approval was required to change the old ESM treaty into the new one, since the decision to change the terms of conditionality needed for assistance (e.g. ratify the fiscal compact) fell under the list of items to be decided with unanimity. It is very hard to see what Ireland gained by agreeing both to this change and to the sequencing whereby the ESM is ratified first. It would have been far better for the the new ESM treaty to have referenced the enhanced SGP rather than the Fiscal Compact treaty, since the community method and the checks and balances that apply to the SGP (e.g. involvement of EU parliament) tend to water down some of the more extreme proposals. With the ESM, Germany, France and Italy all have a veto over everything – no other country does. In practice Germany can threaten to pick up the ball and go home in a sulk if it does not get its own way. Remember Karl’s article last year “Professor Sinn misses the TARGET” It is worth reading again in the context of the above discussion. http://www.voxeu.org/index.php?q=node/6625 Welcome if only just hope; what would life be like without some optimism? Bitter truths are also welcome…from The Irish Times: Recognising and accepting that harsh reality is still a work in progress within the electorate. The arrogant attitude that sent a turkey to represent us at the Eurovision song contest at the height of the boom may have dissipated. But a sense of entitlement, a belief that others will rescue us – even from ourselves – persists. Euroscepticism and nationalism grow as living standards fall. Fianna Fáil’s decision to back the fiscal treaty does, however, offer hope for rational politics. http://www.irishtimes.com/newspaper/opinion/2012/0306/1224312850856.html @ Michael The old sense of entitlement is nowhere more apparent than in D2. Contrary to the IT’s dismissive cant , rational arguments can be made for NO as well as YES. As for optimism: @Michael Hennigan Anyone who complains about Dustin but is silent on the two muppets, Jedward, we sent afterwards can be safely ignored. Charlie McCreevy as a European Commissioner is proper evidence of the esteem we hold Europe in – and that argument falls down with the appointment of Máire Geoghegan-Quinn. So the disrespect continues. Interesting article in today’s FT. “EU austerity critic’s views gain credence” ‘Mr Andor, a UK-trained economist, came to his current job after directing the European Bank for Reconstruction and Development, which helped steer loans and investment in eastern Europe. ‘The experience coloured his views on the crisis. He notes that in the developing world, short-term International Monetary Fund bail-out loans are accompanied by long-term World Bank adjustment programmes, giving countries time to get their fiscal house in order. No such policy exists for eurozone countries. ‘“It’s very, very ironic that, in a third-world context, this approach to have short-term funding and also long-term support for structural adjustment was provided, while inside the European Union it was not the first idea to have both,” he says. What is needed, he argues, is a Marshall plan: project financing by the European Investment Bank, more public-backed direct investment and a long-term plan to improve competitiveness. ‘Some European policymakers have begun making similar noises around the need for growth initiatives. But after months of pro-austerity rhetoric dominating the corridors of Brussels, any change will almost certainly be slower than Mr Andor would like. ‘“Intellectually, there’s been clearly a strong bias for an approach that fiscal consolidation, as such, alone will do the magic,” he says. “[But] additional policies can deliver more and better.”’ And remember kids – Home taping is killing music. I mean, quality journalism requires investment – buy that FT subscription for your nearest and dearest. And subscribe to Finfacts too. http://www.ft.com/intl/cms/s/0/3c1c3222-613c-11e1-a738-00144feabdc0.html#axzz1oF2XsDv4 @ Robert Browne The article by Karl Whelan in Voxeu needs the counterweight of this article by two officials of the Bundesbank. http://www.cesifo-group.de/portal/pls/portal/docs/1/1213644.PDF The debate at the technical level is a monumental example of missing the wood for the trees. The real issue is as identified by the two officials in question, helpfully using Ireland as the example. “The example of Ireland, whose current account turned from a large deficit into a surplus, also confirms that this need not be accompanied by a corresponding reduction of Target2 balances; the Irish negative balances even rose sharply during this period. This makes clear that the problems with the Target2 balances lie primarily in the banking systems of the peripheral countries of the EMU. It is the voluminous supply of liquidity by the Eurosystem that supports the banking systems with limited access to market financing. This prevents extremely short-term adjustment processes, not least also of current account deficits, and instead allows for a somewhat extended but orderly process of the necessary adjustments in the peripheral countries. Such a gradual adjustment without serious distortions in the financial systems of these and potentially also other countries can keep the total economic costs markedly lower. This does not mean, however, that the correction of the disequilibria can be avoided or should be postponed”. The question is whether the “gradual adjustment” may not be doing more harm than good. We now have the horse remedy of the LTRO but the after effects of this may be more damaging than the original disease. http://www.ft.com/intl/cms/s/0/0261dfdc-66eb-11e1-9d4e-00144feabdc0.html#axzz1oEti5GRg There is no way of getting away from the fact that action in relation to the real economy across Europe is the only way out of this mess. As far as Ireland is concerned, the old adage that one should “say what one means and mean what one says” might usefully be brought to the attention of those in charge of the country’s fortunes. Instead, we have the spectacle of anonymous quotes from every quarter. @ Karl/Philip re What Goes Up “Anyone who complains about Dustin but is silent on the two muppets, Jedward, we sent afterwards can be safely ignored.” Pls can we have a thread about this? We need some light relief… 😀 @ All in case you missed it, Suds in the FT today…. http://www.ft.com/intl/cms/s/0/ec5e59a0-6469-11e1-b50e-00144feabdc0.html#axzz1oEdxmyMp @ Gavin Kostick The only slight difficulty with the thesis of Mr. Andor is that Europe is not the third world and the latter are unlikely to be sympathetic to the reources of the IMF and the World Bank being used in a manner which ignores this fact. The scandal of sick children without beds may, of course, make Ireland look like the third world. But this is attributable to disorganisation, feather-bedding, demarcation disputes and excessive levels of pay, not the budgetary crisis or an objective lack of financial resources. @ DOCM Andors is suggesting “project financing by the European Investment Bank”. In this context I noted the other week: “Bank of Ireland in line to get €150m credit facility for small business loans” ‘THE EUROPEAN Investment Bank (EIB) is in advanced talks to provide a credit line of some €150 million to Bank of Ireland for lending to small and medium-sized firms. ‘The initiative is similar in scope and scale to a €150 million EIB credit facility for AIB, which was agreed last December… … ‘The EIB, led since last month by former German foreign minister Werner Hoyer, does not lend a set amount per member state in any given period. ‘However, Mr Hoyer adopted a positive stance when asked yesterday whether there was a case to be made to increase lending to a country like Ireland, which is the beneficiary of an EU-IMF bailout. ‘“We should have a somewhat closer look at Ireland in these times,” he said.” ‘Information released by the EIB yesterday at the publication of its annual report showed it signed contracts last year to lend a total of €475 million to Irish projects.’ I more in line with Ernie Ball’s comment elsewhere: “From my layman’s perspective it appears that there is no plausible scenario under which the Irish deficit will be zero in 4 or 5 years, no combination of spending cuts, tax increases and growth rates that gets us there.” – unless there is some form of stimulus or stimuli http://www.irishtimes.com/newspaper/finance/2012/0217/1224311915381.html @ Gavin Kostick Of course, I am all in favour of investment spending financed by the EU itself, whether by the EIB or the Commission. This has been a consistent element in my analysis of what needs to be done. The point I was making, although not that clearly, I must admit, is that the IMF has limited capacity and the patience with Europe of the countries that participate in its capital has run out. Incidentally, the EIB route for financing has been open from the very start and would have given rise to no legal difficulties. Instead, Merkel, in the first of a series of fumbles, insisted on punitive bilateral loans to Greece, then the creation of the EFSM on a shaky legal basis coupled with the EFSF, then the ESM, coupled with an amendment to Article 136 of the TFEU, coupled with the Fiscal Pact. All have yet to be ratified. This is without mentioning the needless ceiling inserted into the ESM which the latest hook on which German negotiators find themselves hoist by. Sinn strikes again, this time in Der Spiegel. For once, the coverage is reasonably accurate. http://www.spiegel.de/international/europe/0,1518,818966,00.html FYI *IRELAND MAY ISSUE BOND, NOTE TO REPLACE MARCH 31 CASH PAYMENT *IRISH FINANCE MINISTRY DECLINES TO COMMENT ON MARCH 31 PAYMENT *IRISH MAY BE ALLOWED DELAY $4 BLN ANGLO IRISH CASH PAYMENT *IRISH SAID UNLIKELY TO GET ANGLO-IRISH NOTE ACCORD BY END-MARCH *IRELAND MAY ISSUE BOND, NOTE TO REPLACE MARCH 31 CASH PAYMENT And so the state’s affairs with Anglo gets and more complicated. We didn’t have the €30bn needed to recapitalize the bank, so we in round about ways, borrowed the money from Anglo to do the recapialization, i.e. the promissory note. Now we are replacing the promissory note repayments on the loan from Anglo with a different loan from Anglo. Bizzare, but if it stops us having to put real cash into Anglo we are better off. €3bn additional cash that we now don’t need to borrow before 2014 can’t be bad. @ Mr Bond and Dreaded Estate Could you unpack a little more of what this means – reasonably clear English would be appreciated. “Under the current arrangements, the Government is contracted to pay an annual coupon of about 8 per cent to Anglo Irish (now the Irish Bank Resolution Corporation or IBRC) for the notes, which would cost about €48 billion by the time the notes are repaid. In addition, the Government must borrow or use tax revenues to make the annual €3.1 billion pay-down of the notes.” http://www.irishtimes.com/newspaper/breaking/2012/0306/breaking11.html Its a little frustrating the this article on the IT site right now implies that State would lose 48bn net when all and sundry have agreed (without getting explcit approval from the Government) that the interest (or much of it at least) would return to the Government via the CBI. @ Gavin it sounds like the Irish State will issue a new bond to Anglo, as payment in kind for the 3.1bn due. This bond will not have to be repaid until, say, 2022, but can be used at the CBoI in the same way as the prom note, to access ELA. However, the difference will be that the bond will be a bullett bond, with no repayments due until maturity (there will of course be interest, but thats less of an issue), replacing the amortising nature of the prom note. So we will essentially be going to interest only, as opposed to principal repayments, on the prom note. Thats my understanding anyway. As I put it on Jan 6 last … ‘We didn’t make a payment on the Promissory Notes last year but we will make this €3.1 billion payment each year to 2023 and lower payments right up to 2031. From next year there will be accrued interest added to the Promissory Notes that will increase the General Government Debt. You cannot exclude something that is going to happen for the next two decades as a basis for saying the deficit is getting smaller.’ … we will make this €3.1 billion payment each year to 2023 and lower payments right up to 2031. … we [will NOT] make this €3.1 billion payment each year to 2023 and lower payments right up to 2031. @ECB, EC, IMF … we will make [an €0.31] billion payment each year from  to a reasonable date … we quite simply cannot afford the present LUNACY … http://www.irisheconomy.ie/index.php/2012/01/05/the-exchequer-balance-2/#comment-225000 @ Mr Bond Thanks very much for that – much appreciated. @ David O’Donnell You also advised early on “print a trillion” which has also (sort of) happened. @Bond Eoin Bond On One of the ‘Precious Figure of Eight’ http://www.presseurop.eu/en/content/article/1177241-our-friends-goldman-sachs @Gavin Kostick The trillion went to the financial system …. amazingly quietly … pillars can now borrow at 1% and lend to sovs at 4% …. amazing but it does fill in some of the BigBlackVichyBlackHole …. we get the bill in the Fiscal Corset.. More on One of the Precious Figure of Eight …. But who are the members of the European arm of the institution which is so powerful in Washington that it is referred to as “government Sachs”? The key figure is Peter Sutherland, chairman of Goldman Sachs International, the bank’s London-based European subsidiary. The former European commissioner for competition and ex-chairman of BP, is an essential link between the investment bank and the 27 EU member states and Russia. In France, Goldman Sachs benefits from the support of Charles de Croisset, a former chairman of Crédit Commercial de France (CCF), who took over from Jacques Mayoux, a government inspector of finances and former chairman of Société Générale. In the United Kingdom, it can count on Lord Griffiths, who advised former prime minister Margaret Thatcher, and in Germany, on Otmar Issing, a one-time board member of the Bundesbank and ex-chief economist of the European Central Bank (ECB). http://www.presseurop.eu/en/content/article/202051-goldman-sachs-international-web MatrixsQuidesque …. in whose interests? @ All It may be useful to recall this excellent article by John McManus to help cut through all the confusion about the issue of the PNs (bonfire of the monies etc.). http://www.irishtimes.com/newspaper/finance/2012/0116/1224310308077.html We owe the money! We have to pay it! The one difference of view that I would have with the analysis of McManus is in relation to the setting of the interest rate. It is not a fiction. It reflects something real; what the Irish government would have to pay if it did not have a friendly ECB to go to. No wonder Draghi is non-plussed. Herewith the view of Le Figaro (although it seems to be confusing Ireland with Greece). http://www.lefigaro.fr/conjoncture/2012/03/05/20002-20120305ARTFIG00403-zone-euro-le-referendum-irlandais-inquiete-les-marches.php To be noted, in particular, the reported view of the Commission (which is probably a misunderstanding; there would be continued support but not from the ESM). “Même si du côté de la Commission on explique que la non-ratification du traité ne priverait pas forcément l’Irlande d’un accès au MES…” @DOCM Jens Ulbrich & Alexander Lipponer of the Bundesbank have refuted much of Sinn’s ramblings and provided much support to Karl Whelan’s take on the Target-2. Yet, due to his celebrity status amonst the zenophobic deutsche roight – foolishly followed recently by Weidemann … he is taken seriously and is causing serious damage to the EU Project http://www.spiegel.de/international/europe/0,1518,818966,00.html Sinn has abviously not read the Tao Te Ching – ‘he who thinks he is always right will never learn anything from anyone’ …. btw have you read it yourself? @ DOD My favourite bedside reading! The point that I am making is that the debate between professors on the issue is beside the point. @Eoin Bond, Are you saying that there is a proposal for Ireland to issue an IOU for €3.1bn to Anglo before end of March 2012 as an exchange for the existing IOU? and the new IOU will presumably have an 8% interest rate also? So we escape stumping up the €3.1bn cash now but instead stump up an instrument which will cost us what? €3.1bn*1.08^10 = €6.7bn (8% per annum for 10 years to 2022) @DOCM “We owe the money! We have to pay it!” That may be your view. But for my part I will never accept that the Anglo /INBS money is a debt that is legitimately or morally mine. For my part the IRA, or whoever took it, have a far better claim to the Northern Irish bank robbery money, than the bondholders or ECB have to this money being paid by the Irish State. The IRA, or whoever, put real effort and risk into the money they robbed. @DOCM Let me know when you are ready for the I Ching! @Jagdip Singh: Good point but I don’t see why the rate would be that high. And you would have to calculate the present value based on something such as nominal GNP growth @ Jagdip “€3.1bn*1.08^10 = €6.7bn” The new instrument would be based off the existing rates. Also, the interest rate is the minor, minor issue, its a circular transaction to ourselves. Karl may beat you round the head if you claim the interest rate is particularly importnant relative to the principal cashflow. I know you’re a sceptic of the p-note restructure, but you dont seem to be thinking this through as logically as you usually do. @Jagdip Singh: actually I don’t think the interest rate makes any difference since it is going from one arm of the state to another. @BEB Snap 🙂 The Interest Rate is Irrelevant …. at issue is the absurd logic of shredding real money into a small black hole in the central bank from whence it can never again re-appear …. for legal reasons, one could simply shred tiny morsels an angstrom at a time up to the limits of infinity and all should be well … and this is eminently doable in a world of abstractions gone insane. Once this is sussed then the unsustainable becomes less so … we can then go after Geithner’s lil ol letter of comfort for another 20 billion … at which stage the analysis from the Kiel Institute for the World Economy suggests crossing the inflection point to probable sustainability and probably a good time for a genuine citizens revolt …. To correct what I wrote above – the ESM treaty will not be ratified by the Dail this week. The Euro Loan Bill being discussed in the Dail is to do with loans to Greece, not the ESM. “State to seek delay on €3.1bn cash payment due over Anglo” “The ECB governing council meets today for its monthly session on interest rates and Mr Honohan, a member of the council, is expected to raise the possibility of a substitute to the cash payment.” All the best with that Governor Honohan. http://www.irishtimes.com/newspaper/frontpage/2012/0307/1224312920743.html Seeing as Karl aint doing comments these days, interesting link for Target II junkies, v-a-v US system… http://www.bruegel.org/blog/detail/article/696-target-2-of-the-ecb-vs-interdistrict-settlement-account-of-the-federal-reserve/ @ Gavin Kostick What the Irish Times says on page one is contradicted by what it says in other pages. The best coverage is by Miriam Lord with regard to the “promiscuous notes”. The second-best coverage is by Dan O’Brien. http://www.irishtimes.com/newspaper/finance/2012/0307/1224312914444.html Notably; “The Irish Central Bank’s independence is enshrined in law. It cannot take instructions from politicians. It is also part of the European System of Central Banks which falls under the umbrella of the European Central Bank. The ECB is the most independent central bank in the world. Its independence is enshrined in hard-to-change EU treaty law. Given the importance of its independence, it is hyperallergic to the merest hint of political interference in how it goes about its business. If Honohan gives the slightest suggestion that he is doing the Government’s bidding, the temperature in the ECB’s Frankfurt tower will plummet”. @ BEB From the Bruegel paper; “The important difference between Target 2 and ISA, however, is that in the US all Reserve Banks are owned by the federal government”. This is the central point that I have been making. As Dan O’Brien implies, the PNs, ELA and Target 2 issues are inextricably linked. It is not possible to come to any correct conclusion if the issues are considered in isolation. The Board of the ECB certainly knows this. “The important difference between Target 2 and ISA, however, is that in the US all Reserve Banks are owned by the federal government”. No, they are not; not that it matters. @Eoin Sorry, I was splicing together two sources of information, your comment and the speculation about the €3.1bn coming from a Eurobond or bond issued by the Irish govt to third parties, which would indeed involve real interest leaving these shores. But yes, if an entirely domestic IOU is issued as a substitute for €3.1bn that was supposed to be paid in cash, and if the CBI accepts that then yes, there’s a solution. But for the CBI to accept a deferred IOU when the structure of the PN was to expect a €3.1bn cash payment now, the ECB will need give its approval and it won’t, or at least if it does, it opens the doors to other countries using Promissory-Notes-Squared as well. @DOCM ‘The Board of the ECB certainly knows this. tut tut tut … projections of epistemological certainty from the ECB based on the past few years of irrefutable empirical evidence is laughable … are you, perchance, pitching for a fellowship with your pal Lorenzo in Harvard? @ Jagdip “the ECB will need give its approval and it won’t, or at least if it does, it opens the doors to other countries using Promissory-Notes-Squared as well.” we are seeing different solutions for different problems in the periphery. Not everyone needs or wants an ELA. Its suitable for us because we have a bust banking system that will have to be wound down over a decade. No one else is facing this. Greece gets PSI, an overhaul of its public sector and an introduction of a proper tax system. Ireland will get a package that rescues its banking system and helps reform public sector pay and social welfare systems. Portugal will get a radical set of reforms to boost competitiveness and investment. Spanish, French and Italian banks will be encouraged to take 600bn or so from the LTRO. Any rumours on how this request went down? Comments are closed.