Gosh….he must not be a ‘serious peraon’ with all this talk of debt writwoffs and so on..
Oh for an edit function…
As I tried.to say he mustn’t be a serious person to be calling for debt writeoffs and so on. …
Well said, Ashoka.
A recent IMF Working Paper (here: http://www.imf.org/external/pubs/ft/wp/2013/wp1320.pdf) notes how the role of the Fund has changed as a result of the euro crisis. The authors “highlight a crucial innovation” that “now explicitly takes account of the risk of international systemic spillovers.” In other words, the Fund can now lend to countries explicitly for the purpose of preventing contagion to other countries.
This “systemic clause” (as the authors term it) was used for Ireland, among others, and has profound implications for the operation of the Fund and for its (sovereign) relationship with member countries. The disruption in the relationship between the Fund and its member states is another aspect to the extraordinary innovations of the (Trichet-led) ECB in 2010. Power conquered principle but the ramifications were not thought through.
From the conclusions (of the Working Paper):
“The key question, therefore, boils down to how to improve sovereign crisis prevention in a highly interconnected world facing a higher potential for systemic risks. Sound public finances and fiscal discipline are key to this end. Fundamental progress would arguably be made in this direction if threats of sovereign default were made more credible, so as to foster effective (i.e. timely and gradual) market discipline ex ante. Pre-crisis market failure to discriminate among euro-area sovereigns by applying different spreads is evidence that the no-bailout clause of European treaties was not credible in the private sector’s eyes.”
But, as Ashoka says, a “no bailout” of private creditors was an integral principle of the euro zone construct from the outset.
If a “no bailout of private creditors was an integral principle of the euro zone construct from the outset”, it would be useful to know where this is stated in the treaties.
Wow, nice to see Mr Mody able to come down heavily on one side of the fence now that he is no longer IMF mission chief to Ireland.
An extract of particular relevance in the context of this thread.
“In order for the Single Resolution Mechanism to be perceived as credible, it should have sufficient funding. I am not talking about bailing-out banks with public money. Resolution is about resolving the situation of banks that have attained the point of non-viability and about doing it in a way that minimises the involvement of public money.
First, the writing-down of capital instruments and bailing-in of creditors should be fully exploited. Second, funds accumulated in a European Resolution Fund should be used to provide additional funding needed to realise a least-cost resolution strategy. These contributions should be risk-based and collected ex-ante from all banks participating in the SRM. Third, as a last resort, if the resources of the European Resolution Fund do not suffice, funds could be drawn from a European-level fiscal backstop mechanism. However, any fiscal support to the SRM should come in the form of credit to the European Resolution Fund. The Fund would need to repay the loan through additional levies on the banks under the SRM according to pre-specified rules. This should ensure that the mechanism is fiscally neutral over the medium term. Resolution activity may require the temporary use of public money if the Resolution Fund would not have enough resources, for instance, to capitalise a bridge bank that is sold later on to the private sector thus recovering the capital involved. In the US this is ensured by the existence of Treasury credit line, limited to 50bn dollars that can be drawn upon by the FDIC and later repaid.”
“But not only was sovereign debt restructuring abandoned, governments were forced to assume debt they never signed on to. What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank? The promissory notes deal must not be judged by the relief it provides to the Irish budget; the right benchmark for its achievement is the debt obligations that live on. Why were Irish repayments not reduced further?” [A. Mody]
What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?
What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?
Principle?
Ashoka Mody was the IMF’s mission chief to Ireland and is now Charles and Marie Robertson visiting professor of international economic policy at the Woodrow Wilson school, Princeton University.
@all
Such clarity from an outsider. No spin. Ruthless facts. Welcome.
cartoon of the day
EU budget:
Françoise-Antoinette
12 February 2013 The Times London
“If a “no bailout of private creditors was an integral principle of the euro zone construct from the outset”, it would be useful to know where this is stated in the treaties.”
Which EU or EZ treaty defines either the lex or lex loci of the law bailing out private creditors?
@Karl Whelan, Philip Lane, John McHale, Colm McCarthy
A simple question: “What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?” [ A. Mody]
@ Joseph Ryan
It is a straightforward question to which I was hoping those who find the article persuasive would provide an answer.
As to your question, I am not aware of any such treaty or provisions but EU legislation is certainly in the course of preparation the likely parameters of which are spelt out by VP Constancio of the ECB which I quote above. It seems that there will be some very limited provision but following the US model which ensures that the taxpayer gets his/her money back.
See also the IMF paper on another thread.
Interesting to contrast the take on the state of the nation and the deal as noted by two former IMF honchos ( D. Donavan on other thread.) which one would you buy?
While Mody is clearly sympathetic towards Ireland, he does not appear to understand the workings of the EU very well. There are a number of statements that are highly questionable
The promissory notes deal should be cheered because it firmly establishes euro zone official debt restructuring
His position is that the PN deal marks some sort of radical departure, or the crossing of some imagined line. It does not. Both Greece (sov debt) and Spain (bank debt) have had their principal repayments pushed out to 2020 or so, and interest payments set either very low or at zero for periods of time. The term “reprofiling” of debt was in vogue a while back to denote a restructuring where the principal amount remained the same, but where the NPV was reduced via lowered interest rates, maturity extensions, and holiday periods. The Irish PN deal reprofiled the ELA debt by pushing out the repayment schedule to 20 years from 10. Other debt has been reprofiled in a similar manner by the EU.
The debtors …. hold the strategic advantage
This makes no sense.
The mystery is why, despite the fallout that the official “creditors” are being forced to face, they continue to resist private debt restructuring.
There’s no mystery here. There are two types of “private” debt involved – bank and sovereign. The reason there’s no private creditor restructuring on the bank side is that they’ve already got their money back – they’re all gone. On the sovereign side the decision will be made by EU creditors based on what will cost them less – the debtor country has no say. Greece was a hopeless case with debt/GDP well over 200%, with no hope of market access for a decade. Hence PSI occurred. Ireland has a similar level of debt to Belgium and Italy, and with OMT support can likely bear most of the rollover burden itself. PSI for Ireland would probably transfer the burden from private to official creditors, rather than from new private to old private creditors (the IMF’s traditional model).
The half-baked financial and legal architectures in the EU, the power structures, the selective and inconsistent interpretations of the immutable rules etc. are all no doubt alien to many at the IMF. These things shouldn’t be the way they are, but they are.
@Bryan G
“immutable” is the key word in your argument. How will anyone ever make a reasoned judgement in the face of a never changing “rules” landscape that is now the EU.
Sorry..should be ..” ever changing”
@ David O’Donnell
What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?
Assuming you’re referring to Anglo, there was no principle in the muddle.
The bank was nationalised in Jan 2009 and continued as a ‘going concern’ with a State guarantee in operation. The ratio of customer deposits to senior debt was 5:1. Could the Government at that time have reneged on its unlimited deposit guarantee?
Later in 2009 a chief executive was appointed to run it as a bank not just a debt collection outfit. A year later the European Commission said the entity should die.
@ All
When Mody had responsibility for Ireland, this was the financial assessment in 2006 — the craziest year of the bubble:
The Irish financial sector has continued to perform well since its participation in the Financial Sector Assessment Program in 2000. Financial soundness and market indicators are generally very strong.
The Central Bank had informed me that it did not keep data on interest-only mortgages but earlier that year, a Bank of Ireland mortgage manager had told The Sunday Business Post that 75% of its buy-to-let mortgages were on 10-year interest only terms!!
That should have been a red flag or rag to any bull?
Alan Blinder, a former Fed governor, has said that the absence of an orderly liquidation procedure for a big bank meant there was a very simply choice in mid-Sept 2008 on Lehman Bros. — find a buyer or let it go bankrupt.
The huge fallout was unexpected and although Ecofin had agreed in Oct 2007 on some headline principles for bank collapses, the ECB feared another Lehman.
However, in Anglo’s case, we Irish took most of the consequential decisions.
@Michael Hennigan
‘… in Anglo’s case, we Irish took most of the consequential decisions.
Last week certainly copperfastens the validity of this statement. The upper and governing echelon protects itself and sacrifices the lumpen serfs – how many times has this happened in the past 200 yrs or so?
@David O’Donnell
Last week certainly copperfastens the validity of this statement. The upper and governing echelon protects itself and sacrifices the lumpen serfs – how many times has this happened in the past 200 yrs or so?
It is hard not to see the current behaviour of Irish elites regarding the surrender to the current nexus of EU power as a kind of “Act of Union II” where status (and of course “credibility”) abroad is acquired at the cost of sovereignty and collectively beneficial economic outcomes in the home country – it arises from the asymmetric nature of the benefits from the EU to those in political, financial and business elites and the unconnected citizen.
Mody’s article will be just another data point for the banking quislings and neoliberal fanatics to ignore, excused by explaining that though the current political and institutional arrangements of the EU prohibit fair outcomes for less powerful states (which is only natural plebs) they are still a net benefit, somehow.
The aligned class and political interests of the bank bailout supporting cohorts here and in Europe are simply a coincidence.
@Shay Begorrah
… to rub salt in the wounds – that fine historic ‘Act of Union’ building on College Green is inhabited by an .. er .. serf bailed_out BANK.
20 replies on “Mody: More OSI required”
Gosh….he must not be a ‘serious peraon’ with all this talk of debt writwoffs and so on..
Oh for an edit function…
As I tried.to say he mustn’t be a serious person to be calling for debt writeoffs and so on. …
Well said, Ashoka.
A recent IMF Working Paper (here: http://www.imf.org/external/pubs/ft/wp/2013/wp1320.pdf) notes how the role of the Fund has changed as a result of the euro crisis. The authors “highlight a crucial innovation” that “now explicitly takes account of the risk of international systemic spillovers.” In other words, the Fund can now lend to countries explicitly for the purpose of preventing contagion to other countries.
This “systemic clause” (as the authors term it) was used for Ireland, among others, and has profound implications for the operation of the Fund and for its (sovereign) relationship with member countries. The disruption in the relationship between the Fund and its member states is another aspect to the extraordinary innovations of the (Trichet-led) ECB in 2010. Power conquered principle but the ramifications were not thought through.
From the conclusions (of the Working Paper):
“The key question, therefore, boils down to how to improve sovereign crisis prevention in a highly interconnected world facing a higher potential for systemic risks. Sound public finances and fiscal discipline are key to this end. Fundamental progress would arguably be made in this direction if threats of sovereign default were made more credible, so as to foster effective (i.e. timely and gradual) market discipline ex ante. Pre-crisis market failure to discriminate among euro-area sovereigns by applying different spreads is evidence that the no-bailout clause of European treaties was not credible in the private sector’s eyes.”
But, as Ashoka says, a “no bailout” of private creditors was an integral principle of the euro zone construct from the outset.
If a “no bailout of private creditors was an integral principle of the euro zone construct from the outset”, it would be useful to know where this is stated in the treaties.
Wow, nice to see Mr Mody able to come down heavily on one side of the fence now that he is no longer IMF mission chief to Ireland.
Great piece.
@ All
FYI
http://www.ecb.int/press/key/date/2013/html/sp130212.en.html
@ All
An extract of particular relevance in the context of this thread.
“In order for the Single Resolution Mechanism to be perceived as credible, it should have sufficient funding. I am not talking about bailing-out banks with public money. Resolution is about resolving the situation of banks that have attained the point of non-viability and about doing it in a way that minimises the involvement of public money.
First, the writing-down of capital instruments and bailing-in of creditors should be fully exploited. Second, funds accumulated in a European Resolution Fund should be used to provide additional funding needed to realise a least-cost resolution strategy. These contributions should be risk-based and collected ex-ante from all banks participating in the SRM. Third, as a last resort, if the resources of the European Resolution Fund do not suffice, funds could be drawn from a European-level fiscal backstop mechanism. However, any fiscal support to the SRM should come in the form of credit to the European Resolution Fund. The Fund would need to repay the loan through additional levies on the banks under the SRM according to pre-specified rules. This should ensure that the mechanism is fiscally neutral over the medium term. Resolution activity may require the temporary use of public money if the Resolution Fund would not have enough resources, for instance, to capitalise a bridge bank that is sold later on to the private sector thus recovering the capital involved. In the US this is ensured by the existence of Treasury credit line, limited to 50bn dollars that can be drawn upon by the FDIC and later repaid.”
“But not only was sovereign debt restructuring abandoned, governments were forced to assume debt they never signed on to. What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank? The promissory notes deal must not be judged by the relief it provides to the Irish budget; the right benchmark for its achievement is the debt obligations that live on. Why were Irish repayments not reduced further?” [A. Mody]
What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?
What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?
Principle?
Ashoka Mody was the IMF’s mission chief to Ireland and is now Charles and Marie Robertson visiting professor of international economic policy at the Woodrow Wilson school, Princeton University.
@all
Such clarity from an outsider. No spin. Ruthless facts. Welcome.
cartoon of the day
EU budget:
Françoise-Antoinette
12 February 2013 The Times London
http://www.presseurop.eu/en/content/cartoon/3399521-francoise-antoinette
@DOCM
“If a “no bailout of private creditors was an integral principle of the euro zone construct from the outset”, it would be useful to know where this is stated in the treaties.”
Which EU or EZ treaty defines either the lex or lex loci of the law bailing out private creditors?
Karl Whelan on the PN Deal
http://www.forbes.com/sites/karlwhelan/2013/02/11/irelands-promissory-note-deal/
@Karl Whelan, Philip Lane, John McHale, Colm McCarthy
A simple question: “What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?” [ A. Mody]
@ Joseph Ryan
It is a straightforward question to which I was hoping those who find the article persuasive would provide an answer.
As to your question, I am not aware of any such treaty or provisions but EU legislation is certainly in the course of preparation the likely parameters of which are spelt out by VP Constancio of the ECB which I quote above. It seems that there will be some very limited provision but following the US model which ensures that the taxpayer gets his/her money back.
See also the IMF paper on another thread.
Interesting to contrast the take on the state of the nation and the deal as noted by two former IMF honchos ( D. Donavan on other thread.) which one would you buy?
While Mody is clearly sympathetic towards Ireland, he does not appear to understand the workings of the EU very well. There are a number of statements that are highly questionable
His position is that the PN deal marks some sort of radical departure, or the crossing of some imagined line. It does not. Both Greece (sov debt) and Spain (bank debt) have had their principal repayments pushed out to 2020 or so, and interest payments set either very low or at zero for periods of time. The term “reprofiling” of debt was in vogue a while back to denote a restructuring where the principal amount remained the same, but where the NPV was reduced via lowered interest rates, maturity extensions, and holiday periods. The Irish PN deal reprofiled the ELA debt by pushing out the repayment schedule to 20 years from 10. Other debt has been reprofiled in a similar manner by the EU.
This makes no sense.
There’s no mystery here. There are two types of “private” debt involved – bank and sovereign. The reason there’s no private creditor restructuring on the bank side is that they’ve already got their money back – they’re all gone. On the sovereign side the decision will be made by EU creditors based on what will cost them less – the debtor country has no say. Greece was a hopeless case with debt/GDP well over 200%, with no hope of market access for a decade. Hence PSI occurred. Ireland has a similar level of debt to Belgium and Italy, and with OMT support can likely bear most of the rollover burden itself. PSI for Ireland would probably transfer the burden from private to official creditors, rather than from new private to old private creditors (the IMF’s traditional model).
The half-baked financial and legal architectures in the EU, the power structures, the selective and inconsistent interpretations of the immutable rules etc. are all no doubt alien to many at the IMF. These things shouldn’t be the way they are, but they are.
@Bryan G
“immutable” is the key word in your argument. How will anyone ever make a reasoned judgement in the face of a never changing “rules” landscape that is now the EU.
Sorry..should be ..” ever changing”
@ David O’Donnell
Assuming you’re referring to Anglo, there was no principle in the muddle.
The bank was nationalised in Jan 2009 and continued as a ‘going concern’ with a State guarantee in operation. The ratio of customer deposits to senior debt was 5:1. Could the Government at that time have reneged on its unlimited deposit guarantee?
Later in 2009 a chief executive was appointed to run it as a bank not just a debt collection outfit. A year later the European Commission said the entity should die.
@ All
When Mody had responsibility for Ireland, this was the financial assessment in 2006 — the craziest year of the bubble:
http://www.imf.org/external/pubs/ft/scr/2006/cr06292.pdf
The Central Bank had informed me that it did not keep data on interest-only mortgages but earlier that year, a Bank of Ireland mortgage manager had told The Sunday Business Post that 75% of its buy-to-let mortgages were on 10-year interest only terms!!
That should have been a red flag or rag to any bull?
Alan Blinder, a former Fed governor, has said that the absence of an orderly liquidation procedure for a big bank meant there was a very simply choice in mid-Sept 2008 on Lehman Bros. — find a buyer or let it go bankrupt.
The huge fallout was unexpected and although Ecofin had agreed in Oct 2007 on some headline principles for bank collapses, the ECB feared another Lehman.
However, in Anglo’s case, we Irish took most of the consequential decisions.
@Michael Hennigan
‘… in Anglo’s case, we Irish took most of the consequential decisions.
Last week certainly copperfastens the validity of this statement. The upper and governing echelon protects itself and sacrifices the lumpen serfs – how many times has this happened in the past 200 yrs or so?
@David O’Donnell
It is hard not to see the current behaviour of Irish elites regarding the surrender to the current nexus of EU power as a kind of “Act of Union II” where status (and of course “credibility”) abroad is acquired at the cost of sovereignty and collectively beneficial economic outcomes in the home country – it arises from the asymmetric nature of the benefits from the EU to those in political, financial and business elites and the unconnected citizen.
Mody’s article will be just another data point for the banking quislings and neoliberal fanatics to ignore, excused by explaining that though the current political and institutional arrangements of the EU prohibit fair outcomes for less powerful states (which is only natural plebs) they are still a net benefit, somehow.
The aligned class and political interests of the bank bailout supporting cohorts here and in Europe are simply a coincidence.
@Shay Begorrah
… to rub salt in the wounds – that fine historic ‘Act of Union’ building on College Green is inhabited by an .. er .. serf bailed_out BANK.