Financial Diplomacy

This Businessweek profile of Michael Noonan gives some background to the renegotiation of Ireland’s official funding (EU funding; prom note funding) – here.   A more detailed account is available in Pat Leahy’s new book – here.

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42 thoughts on “Financial Diplomacy”

  1. “In theory, the European Union operates through a complicated decision-making process, balanced among state ministers, the European Commission, and the European Parliament. In practice, Germany makes the decisions. ”

    Including no doubt the decision that all bank bondholders be paid in full or else, to use Tricket’s reported threat, the ‘bomb will go off in Dubin, not in Frankfurt’.

  2. Speaking of Noonan, it does not seem to be getting much attention, but Angela’s man at the ECB, Jorg Asmussen, does not like that Noonan is saying a new program would have no extra conditions —

    (note: google translate from German)

    Q: Another pressing issue is Ireland. The rescue program ends later this year. If there should be more help, it would take a decision soon.

    A: It is also possible that the Irish alone find a solution.

    Q: But Finance Minister Michael Noonan has announced that the country seeks a precautionary credit line of the ESM in the amount of 10 billion euros to secure the return to the capital market. Would already suffice as a prerequisite to enable the ECB buys under their OMT program Irish government bonds to – if necessary – to support the courses? Noonan says yes, he hoped that the credit line will be connected with no new requirements.

    A: Of course, I read what he said. He knows that a precautionary ESM program includes conditionality.

    Q: The limited but that a country adheres to the Stability Pact and other EU rules. There are no new reform requirements. Is that the ECB?

    A: Apply for the activation of OMT, the known necessary conditions: A country needs an ESM program, and that can just be a precautionary program, with the possibility of primary market purchases by the ESM. Furthermore, the involvement of the IMF is necessary. But is particularly important and that we have repeatedly said, countries under EFSF or ESM program must be in a situation in which they regain full access to capital markets. T-bills as not enough. OMT is a monetary policy instrument, it is not a substitute for lack of access to capital markets.

    http://www.ecb.europa.eu/press/key/date/2013/html/sp130912.de.html

  3. @ Frank Galton

    At last week’s ECB press conference, Draghi was asked by a Japanese journalist about the success of OMT and in response he gave the clear impression that he is very proud of its success without having had to use it.

    So no free lunches likely there.

    Michael Noonan deserves credit for the pn deal but this BW piece could have been written by the Fine Gael PR department.

  4. Mr Noonan’s plans are in serious jeopardy. Next Friday, 20th September, will see challenges in Delaware to the IBRC US liquidation. $1 billion of assets are “up for grabs”.

  5. Neat photo-shoot – shadowy. Looks like The Minister is ready to star in a remake of Alfred Hitchcock’s “The Lady Vanishes” (1938). No prizes for who gets to play “The Lady”.

    @Morgan Kelly

    You’re very quiet these days! Fancy a nixer as a scriptwriter on an upcoming HORROR MOVIE?

  6. Off thread but interesting account of how close British banking came to imploding….2 to 3 hours.

    http://www.theguardian.com/business/2013/sep/13/lehman-brothers-collapse-five-years-later-shiver-spine

    And bankers were the same everywhere…
    “The scene was set for a series of eyeball-to-eyeball meetings at the Treasury in early October. On one side of the table sat the heads of RBS, Lloyds, HSBC, Standard Chartered, Santander, HBOS, Barclays and the Nationwide building society. On the other side sat Darling, King and Turner, flanked by their advisers. Myners says he was shocked at the bankers’ lack of humility and the way they tried to intimidate ministers even when the crisis was at its most acute.”

  7. @ Flj

    This link is by no means off thread. Financial diplomacy is what it is all about.

    Take this extract;

    “For those running Britain’s banks, the change in the climate was sudden and, for their institutions, potentially fatal. In the good years, banks had become highly leveraged – they had increased their lending far more rapidly than they had built up capital to guard against losses. With markets booming, the banks’ supposedly failsafe models showed that catastrophic losses were out of the question. In any event, they could always rely on the wholesale money markets – populated by other financial institutions – to see them through any cash-flow problems.

    These beliefs were shattered in the weeks that followed the Lehman collapse. None of the executives at RBS or HBOS, the two most prominent casualties of the crisis, would talk to the Guardian for this series but it was clear from the testimony of Andy Hornby, HBOS’s chief executive, and Lord Stevenson, its chairman, to parliamentary committees that they were completely flummoxed – and terrified – when they found that the wholesale markets were closed for business.”

    And compare with a contribution by “What goes up” on the thread dealing with “strategic default” which I am taking the liberty to quote;

    “Most people don’t understand buying assets, or investing in pensions, using leverage. Leverage is your friend when prices are rising – but it magnifies your losses when prices fall.

    Putting only 10% down and effectively gambling that the income stream and/or capital appreciation will cover the remaining 90% is a risky 20-year strategy – but people don’t seem to see it that way!”

    Neither do banks! But sovereigns are compelled to bail them out – to avoid collapse of their entire banking systems and their economies with them – when no such pressure exists to do the same for the individual borrower who, for example, bought a BTL to provide him or her with a pension which society as a whole had failed to do!

  8. @Philip Lane,than you for the book link,it’s available as a download in US.
    the writing is excellent could not put it down last night,gripping stuff the story writes itself but very well written,fun easy read.

    Regarding the article,a bit confused over this rather boorish statement a bit f…..g grandiose or simply bravado ?
    Or all part of a plan,the decision making on the hoof is suspect…ah shur close it …like WTF really that’s how these decisions are made?
    But bondholders and creditors should be trilled….so if was definitely not insolvent right then,can we have our money if full!!!!

    “With Schaüble’s help in Cyprus, Noonan pulled aside Jörg Asmussen, a German on the executive board of the ECB and a likely holdout on Project Red. After several hours, Noonan offered a symbolic concession. Would it make a difference, he asked, if the IBRC were to lose its banking license? “And [Asmussen] says, ‘Yeah, that would make a huge difference, because we’re no longer dealing with a bank,’ ” says Noonan. That way, Project Red can’t be a precedent for other banks in other countries. Ireland’s prime minister, Enda Kenny, announced the deal on Feb. 7, 2013.”

  9. Quote from the above..
    “So the Western world has responded to a problem of too much debt by taking on even more debt – not least here in the UK. While some households have “deleveraged”, this country’s overall private sector indebtedness remains higher than at the start of the sub-prime crisis.
    As such, with our government fiscally hobbled and our gilts market reliant on printed money, we’re even more vulnerable in the event of another market-driven “Minsky moment” than we were in 2008.”

  10. @ All

    FYI

    http://www.4-traders.com/news/Exclusive-Berlin-mulls-way-to-bank-union-without-Treaty-change-officials–17266888/

    The general assessment would appear to be that the parties are inching towards some kind of resolution on the ‘Banking Union’. There is extreme reluctance on the part of finance ministries to accept that the current treaties designate the Commission as the EU’s executive, whether they like it or not. If powers are to be delegated to, in effect, a supranational body capable of deciding independently, they cannot be, almost by definition, under the terms of an intergovernmental treaty such as that on which the ESM is based.

    As Cliff taylor points out in today’s SBP, “it is now looking a lot less likely that ESM funds will be made available in future to deal with bust banks, at least not until bondholders, national governments and maybe even depositors have been hit first”. He adds ” so much for banking union”.

    If there is to be another “Minsky moment”, a possibility being recognised in surprising quarters, it would be best to have a cohesive and coherent government position. There is no sign of this on the horizon currently.

    On the extent of the mortgage debt crisis, Seamus Coffey has the figures.

    http://www.irishexaminer.com/analysis/getting-banks-back-on-track-242858.html

  11. DOCM,

    it looks like the OMT bluff is going to get called. Portugal signs some sort of MOU to be good and Draghi prints money. Of course, it would be better if it were IT.

  12. @DOCM

    Cliff Taylor’s assessment of the watered down banking union is about right. On the faint chance that some kind of banking union might be agreed, Asmussen has now decreed that ‘national budget could be forced to contribute’ in the event that private capital does not make itself available.

    http://www.irishtimes.com/business/economy/ecb-s-asmussen-says-national-budgets-may-have-to-contribute-if-stress-tests-show-shortfalls-at-banks-1.1527278.

    I have no idea who appointed Asmussen as European or Euro Tsar, but clearly he assumes that he has the powers to bring governments to heel, just like Trichet assumed, and in the case of Ireland, made good on his assumption, by insisting that bank bondholders were preferred to State bondholders and everybody else.

    Many commentators, Colm McCarthy among them, have drawn attention the fact that depositors are now in the firing line, if banks fail, and that post Cyprus that is now the new normal.
    I beg to differ with those views and with the views of Asmussen, who considers that national taxpayers or citizens, are there exclusively to prop up capital flows, both real and manipulated, across the EZ, mostly flowing towards the banks and bonds of core countries.

    Exit from the EZ is always an option. Indeed if the deposit haircut % exceeds the devaluation %, the exit from the currency zone is preferable for the depositors themselves.

    The ECB, or at least some of its board members, are still very much in rogue bank mode, unaccountable as ever, mendacious as ever, and partial as ever. Partial to the point where some countries have had to cough up a king ransom, to bring bank capital up to almost 15%, whereas Deutsche Bank had an equity/total asset ratio of 2.7%.

    Personally I think McWilliams article on to day’s Sunday Business Post is well worth reading. Cliff Taylor is to be commended for presenting views that run opposite to the normal Irish and indeed Euro group think.

  13. @Tull
    You could be right. Seems Portugal 10 yr finished on Friday at 7.42% having moved 19 bp on the day. But OMT cannot be used because they are not in an ESM programme. Will Draghi just buy their bonds in the open market without using his nuclear option…before the fertilizer hits the fan. Next week should tell the tale.

    @DOCM
    David mcWilliams is warning today in the SBP that depositors will have to be hit or we abandon the euro if the banking mess is not resolved. Talk about scaring the horses.

  14. Fiat,

    Read McCarthy last week. Failure to tackle the issue of widespread strategic default will require further recaps which can only come from deposit haircuts. Ergo, it is entirely logical to move deposits outside the EZ to a properly governed polity like the US, UK or basically anywhere else except Zimbabwe.

    Given the rules on everything have been changed since the crisis began, you cannot take anything the EU says at face value. A good dose of existential crisis before the Germans vote would be welcome..

  15. @ TMD et al

    The only bluffs likely to be called are those of the politicians in both Ireland and Portugal incapable of setting out clearly to their citizens the budgetary situations in which their respective countries find themselves. Instead, they attempt to dissimulate and appeal to their individual electorates; and fail to take the necessary hard decisions.

    This incapacity is also reflected in Ireland – and no doubt in Portugal – in a failure to place the debate in its wider European context and to come to terms with the relative weights of the players involved. Gavyn Davies has a really good post on this topic.

    http://blogs.ft.com/gavyndavies/2013/09/15/angela-merkel-lame-duck-or-saviour-of-the-euro/

    The key paragraphs;

    “There is one big exception, though, and that concerns the role of the ECB. Everyone now agrees that the turning point in the crisis came in July 2012, when Mario Draghi made his “whatever it takes” speech about the euro. But the decisive moment actually came in August, when when Mrs Merkel supported Mr Draghi rather than Jens Weidmann at the Bundesbank on the subject of ECB purchases of troubled government debt, and implicitly on the growth of Target 2 imbalances.

    That was a critical decision, more critical than her support for the ESM in October 2011 or for the supposed separation of bank debt from government debt at the euro summit in June 2012. It is difficult to know whether Mrs Merkel really understood the economics of the ECB’s balance sheet, but her political instincts told her that this was the only way of making the implicit transfers from Germany to the south without inflaming the German electorate beyond breaking point. Those famous political guts certainly made a great contribution to the European, and indeed the global, economy at that perilous moment.”

    In short, in siding with Draghi i.e. Asmussen (German representative on the executive of the ECB) rather than Weidmann (head of the Bundesbank), both of whom have worked with her (protegés?), she recognised, whether fully aware of the import of the decision or not, that Germany is locked into the euro as much as, and possibly more than, any other participant. If the AfD gets into the Bundestag, this fact will become transparently obvious in the post-election debate.

  16. DOCM,
    The other big bluff that will be called is the assertion that the Euro can be kept intact without some mix of debt restructuring, fiscal transfers and QE in what ever proportion you want to determine.

    At some stage one of the important countries in the EZ is going to say Nein.

  17. @Tull
    I did read CMcC. It wasn’t as explicit as dmcw. Shaving depositors is the new holy grail?

    Gene Kerrigan on MN
    “Michael gave a business journalist the inside story on Michael’s own brilliance. “The most essential thing in Europe is, first of all, you need to know what you want,” he said. He explained how “his colleagues, other finance ministers, travel to the continent’s endless circuit of meetings, but some don’t know what they’re asking for.”

    Oh, those silly finance ministers. Michael, on the other hand, is the James Bond of international finance: “I have a very clear view of what I want all the time,” he said. The reporter, Brendan Greeley, catches precisely an aspect of our Michael that we’ve all seen: “He has a way of interrupting his stories with his own laughter.”

    The James Bond of international finance or the Trappatoni of soccer..taking one for the team?

  18. @JG
    No, its not satire. Debtors are entitled under law to their money, there are also entitled under law to sell mortgaged property.
    But, they are not entitled to continually harass people, even people that they suspect have funds. I think that is the point that Noel Smyth was making.
    The debtors have a recovery mechanism. Driving people to suicide by continual harassment is not a lawful recovery mechanism.
    The KBC letter to the Priory Hall widow will be remembered long after their cheap local adverts in GAA programs (as in the program Limerick County semi-finals todays). The GAA should be ashamed for agreeing to publish the advert in the aftermath of the Priory Hall tragedy.
    Time to hoist KBC on its own petard.

  19. @ JG

    Unfortunately not (satire that is)! In fact, the debate is beyond satire.

    An example; four weeks away from a further swingeing budget, two junior ministers from the same party in the governing coalition are contradicting one another on what the target for savings should be.

  20. @ TMD

    I suggest you consider this sentence in the blog post by Gavyn Davies.

    “It is difficult to know whether Mrs Merkel really understood the economics of the ECB’s balance sheet, but her political instincts told her that this was the only way of making the implicit transfers from Germany to the south without inflaming the German electorate beyond breaking point.”

  21. @DOCM,is legal aid to be made available or is this solicitor willing to work pro bono.
    next he will be complaining that legal aid is not available to litigate against ones pursuer !!!!
    Or does he want people to engage solicitors via life insurance proceeds to sue these guys ?
    “IN times of austerity, it is common practice for financial institutions, public bodies, government departments, banks, Revenue et al to apply as much pressure so as to ensure recovery of money claimed to be due and owing by the recipient of the threat, by phone call or letter.”

  22. @Joseph Ryan,Hi Joseph given the numbers involved in mortgage arrears, a foolproof system paid for by the state/taxpayer or say a few errors here there.

  23. JR,
    If a customer is refusing to pay debt and has cash or cash flow from some other source that would discharge that debt, I would want the Bank to take every measure that is legal to get access to the cash. Otherwise there can be no banking system.

    DOCM,
    Time for the peripherals to call that bluff me thinks.

  24. @Tull
    “If a customer is refusing to pay debt and has cash or cash flow from some other source that would discharge that debt, I would want the Bank to take every measure that is legal to get access to the cash. Otherwise there can be no banking system. ”

    I could not disagree with that all. The key point being legal.

    It is clear that some very well-to-do creditors have expertly managed to use the law to put assets beyond the reach of banks, thereby leaving the debts for citizens of the State. In this they have been ably assisted by well known insolvency ‘experts’ and various ‘legal’ experts.
    I am not in favour of the law being used to achieve such outcomes, or of the banks agreeing to debt write-off in such cases. However, I am in favour of the law being used to protect people who have nothing, at times not even the roof over their head, from almost daily harassment by well creditors.

  25. DOCM,
    You beloved EU is beginning to,sound like the USSR with the ECB instead of tanks. I suppose it is an improvement of sorts but it barely adheres to the high minded vision of its founders. It is hardly to the credit of the EU that its great powers mandated the pastoralisation of one of its smallest members.

  26. I expect the law in Ireland curbing harassment of debtors by creditors is abysmal. Kick them while they are down and make them atone for their sins, so very oirish.

    There has to be law governing day of week, time of day, no phone calls to the workplace, friends acquaintances, relatives.

    Noonan is far too chatty for his own and the country’s good. He knows he will be going cap in hand to Brussels and Frankfurt for Euro 10 billion+ before the end of the year. Making public the use of the type cute hoor thinking he employs will simply infuriate the German public and their future leader the thrifty, responsible Swabian housewife.

  27. @ FiatLuxJnr

    “are we being fed BS”

    It might be UBS. I saw an interesting interview yesterday with Martin Hellwig He has a newish book out.

    http://www.amazon.com/The-Bankers-New-Clothes-Banking/dp/0691156840

    He says that banks need to hold way more capital – the effective “push button in case of crisis” insurance kindly provided by the state to its banks does not adequately reflect the full cost of bank risk capital. You end up with clowns who don’t understand their own balance sheets.

    I think when the dust settles we’ll see significantly higher interest rates. Financial engineering was a crock.

  28. Looked up the “code” looks like some restrictions regarding financial diplomacy.
    But I still don’t understand that solicitors scheme,is he prospecting for business via the national papers-are there no rules on ambulance chasing.

    People after suffering that type of loss are likely financially a bit vulnerable.Hes advocating hiring a solicitor to sue any over zealots finance institutions,proving causation would be problematic.
    Any increases in drinking,smoking what if multiple institutions involved…in the highly unlikely event of prevailing what’s the fees to solicitors/lawyers?

    I would caution anyone to stay well away from this scheme all a bit dodgy,should be laws protections vulnerable people from this type predatory solicitation for work.

    Here’s the code.
    “Previously, the number was capped at three and had been the subject
    of significant criticism from the banking industry as an impediment to dealing with early arrears cases. Lenders must now ensure that communications are ‘proportionate and not excessive’ and that borrowers are given sufficient time to complete actions that they have committed
    to completing. The Revised CCMA also contains new provisions (along the lines of those proposed by CP 63) setting out a lender’s obligation when making an unsolicited personal visit to a distressed borrower”
    http://www.arthurcox.com/uploadedFiles/Publications/Publication_List/Arthur%20Cox%20-%20Revised%20CCMA,%20July%202013.pdf

  29. @Seafoid
    I like a Alister Darling’s quote…

    “Five years on, the view of former City minister Lord Myners is that not a lot has changed: “The banks are still too big, too interconnected and too undercapitalised.” He is not alone in fearing that too little has changed to prevent another crisis, and that lessons have not been learned. Turner, too, fears that history could repeat itself, and Alistair Darling, chancellor at the time of the bailouts, agrees: “As long as people think they can make money out of nothing, it will happen again.”. From the observer.

  30. @JG

    Thanks for link to Arthur Cox CCMA update:
    I wonder if ACC / Rabo bank have been advised about it.

    http://www.mayonews.ie/index.php?option=com_content&view=article&id=13203:bank-debt-collector-head-butts-acc-customer&catid=23:news&Itemid=46

    http://www.independent.ie/irish-news/two-men-suing-debt-collector-and-acc-over-altercation-29580145.html

    Now, that’s financial diplomacy for you.

    From the ACC Rabobank website
    Rabobank is a full range international financial services provider which operates on the basis of cooperative principles. Its origins lie in local loan cooperatives founded in the Netherlands over 115 years ago by enterprising individuals who had no access to the capital market. Today, it is comprised of 141 independent local Rabobanks and Rabobank Nederland, the hub organisation owned by the local banks, which services their needs and which itself owns a number of specialist subsidiaries.
    Here in Ireland, although Rabobank is not legally structured as a cooperative, we adhere to the Rabobank Group cooperative ethos. This includes strong community involvement, local participation in the cooperative sector, as well as leveraging of our food and agri research for the benefit of the overall sectors.

  31. @Joseph Ryan
    Don’t get me wrong there have been some awful abuses over here,off financial diplomacy.The counter argument is that the costs associated with a perfect system,fair outweigh some compensation to the odd ‘victim’.

    http://dealbook.nytimes.com/2013/03/03/banks-find-more-wrongful-foreclosures-among-military-members/

    Its just somewhat surprising that there are no Law Society or Press rules regarding ambulance chasing.He’s a practicing solicitor openly soliciting for business from very upset people.Whats the success rate here,is he pro bona?

    Cant imagine handing over a retainer then reliving the phone calls,letters perhaps testifying in court.How many variables must be involved,again be very careful off solicitors offering false hope to those suffering this kind of loss and asking for a retainer.

    As ‘bad’ as the states is we don’t have lawyers advising bereaved people to litigate against large financial concerns ,unless they “Erin Brockovich” this he ain’t.This whole scheme should be supervised by the Law Society,never mind the medical council as no doubt consultants and experts will have to be paid and retained.

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