Euro Area Banking Supervision: Day One

Today is a red-letter day in the development of the euro area, with the ECB taking over responsibility for euro area banking supervision.  The new banking supervision website is here.

47 replies on “Euro Area Banking Supervision: Day One”

Can somebody, in simple terms, explains what this means; not in terms of day to day supervision, but in terms of what happens if the ECB as supervisor fail to spot deficiencies etc.
In other words, is the ECB on the hook for any real money, if one of the three Irish banks get into difficulty/ has perceived inadequate ratios etc.
Further, as in the case of PTSB, can the ECB mandate the method of increasing capital, in addition to mandating that capital be increased.
Equally, can the ECB mandate that the banks be ‘sold’ back to the private sector?

@ JR

ECB is not on the hook. But they can no longer claim “it was your own fault, you regulated these guys”, which was essentially part of the ideological rational for why the Irish taxpayer was forced to rescue the Irish banks. Will mean early/proactive interventions into failing banks more likely, though that is somewhat debatable as to whether it is a good or bad thing (i.e. Cyprus was somewhat an example of what could happen).

@ All

have the Irish SMEs been annihilated yet? Thought that was the main function of the ECB single supervisor and AQR etc. Forget who suggested that.


Dublin is a small place and that encourages certain attitudes. The EZ is not a small place. There might be big fish in small pond implications…

“Europe’s new senior banking regulator Danièle Nouy has given strong support to the new rules proposed by the Central Bank to try to keep mortgage lending in check. In a strong intervention in the debate on the controversial rules, she said it was “irresponsible to give loans to people who possibly will not be able to repay them”.
The Central Bank recently announced a consultation process on new proposals which would tighten the amount banks could lend in relation to the borrower’s income and also, in most cases, introduce a cap which would mean loans could not exceed 80 per cent of the house value.
Nouy, who is chairwoman of the supervisory board of the Single Supervisory Mechanism (SSM), which will oversee bank regulation, told The Irish Times she “strongly welcomed” the measures, which “have a real impact on stopping asset bubbles in their tracks”. She said she could understand the criticisms relating to the difficulties caused to new borrowers, but that the stability of the banking system had to have priority.
Ms Nouy’s intervention is important, as the SSM – which will co-ordinate the work of the ECB and national regulators – formally takes up the reins next week. In future the key regulatory decisions relating to Irish banks will be taken by the ECB, acting on recommendations from the SSM.
The new rules are likely to be introduced next January, but ways are being examined to make it easier for first-time borrowers to get finance. Banks may take out private insurance on loans where the loan to house value cap is exceeded, allowing some lending to those who cannot save a 20 per cent deposit.
However, the new rules limiting the amount of borrowing relative to the income of the borrower are likely to remain in place. Ms Nouy says it is worse for people to find that they cannot afford their commitments than to be declined credit because they feel outside the guidelines.”


Thanks for info. I had assumed the ECB was not on the hook for anything but thanks for confirming.

re: Danielle Nouy
I happen to agree fully with the new Central Bank rules, even if I cannot fully agree with some of the rationale that Ms Nouy puts forward, such as:

“She said she could understand the criticisms relating to the difficulties caused to new borrowers, but that the stability of the banking system had to have priority.”
The stability of the banking system means little to a young couple shut out from home ownership, and subject to rack rents from highly protected landlords.

“The new rules are likely to be introduced next January, but ways are being examined to make it easier for first-time borrowers to get finance. ”
Easier finance is not really the way to go.
The real issue is the lack of houses and the cost of building land and State costs inflicted on new house buyers, and lack of social housing.

The Central Bank is correct in pushing the problem back to politicians to resolve. However they probably will not even attempt to resolve, as their land owning and property owning friends (and themselves) stand to benefit from higher land and house prices.
In Ireland the housing market is totally rigged. Nouy would have been better served by stating the truth of matter.


The Japanese QE decision seems to have driven EZ bond prices higher.
Italy came in 9 bps.
Is that consistent with any fundamentals ?
Or is it just Kelly who does the nonsense ?

The IMF independent evaluation office has looked at the performance of the IMF during the Eurozone crisis. There is a background paper by Ross Levine here.

Among its points — see the discussion around footnote 7 — is questioning why the IMF has been so insistent on beefed up powers for central banks and financial sector regulators when there was glaring evidence, including that supplied by P. Honohan — that those were the very entities that had screwed up.

@Joseph Ryan
Extract “Fingers” by Tom Lyons & Richard Curran page 90

“Fingleton himself rarely met the reglators personally,preferreng to keep them at arm’s length and leave the official meetings to Purcell as well as the society’s internal auditor,its compliance manager and his other subordinates. As he occasionaslly mentioned at board meetings to employees,he preferred to spend time with their bosses in the Dail”

The greatest benk and property crash in the history of mankind started with one house–Leinster House.

latest euro forecasts:

Ireland to have the highest growth in EU in 2014 and 2015 and joint highest with Greece in 2016.

Unemployment to continue falling rapidly.

Population growth to rise to 40k annually and net immigration to return by 2016.

Debt as a percentage of GDP to fall rapidly.

Construction output lagging demand across the board.

If these forecasts prove accurate (and 2014 forecast looks like under-estimate), Ireland’s GNI per capita will br almost 20 per cent above EU average by 2016 and almost 10 per cent above UK level.

Also out this week:

Manufacturing and services PMIs for October the highest in Eurozone

Another large fall in live register in October

Tax receipts up 31 per cent year-on-year in October – remove 220m euros that was apparently due to timing, and remainder is up almost 20 per cent year-on-year in October – Davy predicted budget targets will be bettered – marked contrast with UK, where tax receipts have barely risen in 2014 and budget deficit is rising.

New car sales up 20 per cent in October.

Despite all this, the Village Idiot maintains the growth is just hype.

Good luck to the ECB overseeing banking.
If they could figure out a way to get the banks to lend money they’d be sucking diesel.

“Unemployment to continue falling rapidly.
Debt as a percentage of GDP to fall rapidly.”

Stick your neck out a bit JTO and give us a 5 year estimate for those 2 metrics. Go on, go on.

I hope this is reasonably relevant.

EU Commission autumn economic report is out. Also IMF now looking back at their forecasts.

I’m going to have a quick look at the EU Commission (GDP) forecasts since 2008 for the eurozone. I’ll be using the envelope to adjust accordingly.

The envelope says that whatever the forecast it will be improved by taking off:
0.2% in the we are in
0.8% in the following year
1.5% in the year after.

For once, before we do this, I would like to make a prediction. I think that in the period 2008 – 2010/11 the envelope will struggle as the stimulus of that period and lower interest rates will be doing well whilst after 2010 I think the envelope will make a come-back and be more accurate overall as the pivot to austerity, briefly raised interest rates and lack of QE, etc will take its toll.

Let’s see:

EU Commission GDP Growth forecast for Eurozone Autumn 2008:
2008 1.2%
2009 0.1%
2010 0.9%

Envelope says:
2008 1.0%
2009 -0.6%
2010 -0.6%

Actual outcome:
2008 -0.4%
2009 -4.1%
2010 1.9%

So 2 – 1 to the envelope.

EU Commission GDP Growth forecast for Eurozone Autumn 2009:
2009 -4.0%
2010 0.7%
2011 1.5%

Envelope says:
2009 -4.2%
2010 0 %
2011 0 %

Actual outcome:
2009 -4.1%
2010 2.0%
2011 1.5%

So 2 1/2 – 1/2 to the EU.

EU Commission GDP Growth forecast for Eurozone Autumn 2010:
2010 1.7%
2011 1.5%
2012 1.8%

Envelope says:
2010 1.5%
2011 0.8 %
2012 0.3 %

Actual outcome:
2010 1.9%
2011 1.4%
2012 -0.7%

So 2 – 1 to the EU Commission

EU Commission GDP Growth forecast for Eurozone Autumn 2011:
2011 1.5%
2012 0.5%
2013 1.3%

Envelope says:
2011 1.3%
2012 -0.2 %
2013 -0.2 %

Actual outcome:
2011 1.4%
2012 -0.7%
2013 -0.5%

So 2 1/2 – 1/2 to the envelope.

EU Commission GDP Growth forecast for Eurozone Autumn 2012:
2012 -0.4%
2013 1.0%
2014 1.4%

Envelope says:
2012 -0.6 %
2013 0.3 %
2014 -0.1 %

Actual outcome:
2012 -0.7%
2013 -0.5%
2014 0.8% (forecast)

2 – 1 to the envelope but with that 2014 forecast going the envelope’s way.

EU Commission GDP Growth forecast for Eurozone Autumn 2013:
2013 -0.4%
2014 1.1%
2015 1.7%

Envelope says:
2013 -0.6 %
2014 0.4 %
2015 0.2 %

Actual outcome (as of autumn 2014):
2013 -0.5%
2014 0.8% (forecast)
2015 1.1% (forecast)

So, as of now, 2 1/2 – 1/2 to the EU Commission but as those forecasts come closer we can see that they are splendidly if depressingly going to the envelope.

If we strip out the forecasts we can see that the current score since the start of the crisis is:

Envelope: 8 1/2
EU Commission: 6 1/2

So, yes, in general just arguing that things will be worse than predicted is more accurate.

I didn’t make the prediction at the start of the post before checking the figures: it was a real prediction and I thought I’d do it fair and square.

But, yes, we can see that in the earlier years of the crisis (2008 – 2010) the EU Commission forecasts for the EZ area were ahead of the envelope but after that the Commission has, for whatever reasons technical and/or ideological, persistently overestimated growth.

If there isn’t much of a policy change at EZ level I expect this to continue to be the case.

Please feel free to check over stats.

I used the EU Commission’s own autumn economic outlook docs.

@ Gavin

I think the reason why the ongoing wisdom of the envelope is superior to that of the forecasters is that this is no ordinary economic cycle.

“Certainly an economic system that is frozen is not alive but neither is it dead. It is in a third state and biostastis is the term I would use to describe it”

Others would call it stagnation


Stick your neck out a bit JTO and give us a 5 year estimate for those 2 metrics. Go on, go on.

Unlike Morgan Kelly, I am not psychic, so I couldn’t possibly predict for how long Ireland’s current boom will go on. But, there are historical precedents.

Ireland’s first boom started at the end of 1958 and lasted until 1982/83.

Ireland’s second boom started at the end of 1986 and lasted until 2007/08.

Ireland’s third major boom started at the end of 2011, so it is still in its infancy.

As the current boom is young and all its vital signs (inflation, competitiveness, balance-of-payments, construction cycle, budget deficit etc) are looking good, so there is every reason to hope it has many years ahead of it.

However, I don’t believe in tempting fate by making over-optimistic predictions. Pride comes before a fall. This is true for one’s personal life as well as the economy. I’m in good health and hope to be around another 30 years. But, I would never predict that because, for all I know, I could drop dead immediately after I send this post. It is always very unwise to be presumptuous. What the Lord Giveth, the Lord Taketh Away.

The main risks to Ireland’s current boom are (a) the takeover of continental Europe by loopy-left-liberalism which has resulted in its stagnation and moral, social and demographic decay (b) the possibility of something similar happening in Ireland if, with media support, this becomes the dominant ideology here too. On the plus side, loopy-left-liberalism received a hammer blow in yesterday’s U.S. elections, so its current advance is neither inevitable or irreversible.

@ JTO, seafoid

It seems to me there are reasons to be less optimistic about Ireland’s current “boom” than the previous two. Like JTO I’m not making predictions. Putting these on the table to see what others think.

1. Unlike in the past the domestic private-sector still has signifcant de-leveraging to do. We’ve had enormous government debt before, but now we have enormous private sector debt too. This will dampen the growth of domestic demand for several more years as income that could be spent or invested is instead used to pay off excessive mortgages from the boom years.

2. In the last two booms we experienced “catch-up” growth as our society moved from being a laggard to the frontier of technological and social organization. We can’t do that again. From now on we can only advance (technologically and socially) as fast as the frontier itself.

3. Our current growth spurt is looking good but contains a large “rebound” contribution from a deeply depressed state. This contribution is strongly cyclical, it will disappear in due course as construction and retail revert to more normal conditions within a few years.

The most obvious (at least to me) way for Ireland to grow strongly for a couple of decades from here, would be to triple our population. Increasing it to central European density levels. However we would have to import the people to do it.


Very impressive performance on FoxNewz (sic) this morning; looking forward to your upcoming slots on CNBC & The Keiser Report.

As for Financial System Supervision – I think it is a wonderful idea. That said, without any empirical evidence of such ‘supervision’ I’m unable to substantively comment further at this time. IMHO, the system has been ‘rogue’ for the past 50 years or so and, like any tyrone outlaw, does not do ‘being supervised’.

The present ECB(undesbanke) is toothless.

The accountability of the ECB should be a bigger issue as it largely amounts to presenting the Annual Report to the European Parliament and in Draghi’s case appearing before the German parliament. Central banks are now going far beyond their traditional remit and QE strays into fiscal policy as well as having significant effects on the distribution of income. For example, would it have been better to credit everyone’s bank account in the US rather than for the Fed to buy assets? The single supervisor can also call time on domestic banks but ,for a time anyway, the tab would still be met by domestic taxpayers.

The institution in the driving seat under the treaties is the European System of Central Banks (ESCB). Comparing the ECB to other central banks subject to control by a sovereign state does not serve much purpose. Insofar as such control exists in relation to the ECB, it resides in respect for the provisions of the treaties. The ECJ has the final word in this respect (assuming the German constitutional court accepts the fact).

“Comparing the ECB to other central banks subject to control by a sovereign state does not serve much purpose”

You are so cute, DOCM.

As Jean Claude Trichet told an audience in Dublin in 2004 “we Europeans have been very bold in creating a single currency in the absence of a political federation, a federal government and a federal budget for the Euro area”.

Very bold or very stupid ?

It’s not fair to compare the ECB to any other CB because it can’t even meet its own inflation target.

fyi – price of a pint in Dundalk er Detroit …

‘Despite mass protests, the emergency management water shutoffs in Detroit have resumed, even as UN experts publish a press release calling the water disconnects “contrary to human rights” and activists decry them as “genocide.”

The corporate-led humanitarian crisis in Detroit is escalating, forcing local activists to appeal for international intervention. “The indignity suffered by people whose water was disconnected is unacceptable” according to Ms. Catarina de Albuquerque, the special United Nations rapporteur on human right to water and sanitation, in a press release October 20.

The “unprecedented scale” of water shutoffs is targeting the “most vulnerable and poorest” of the city’s population, including tens of thousands of African Americans, said Leilani Farha, UN special rapporteur on the right to adequate housing.

The Detroit Water and Sewerage Department has been disconnecting water services all spring and summer from households who have not paid bills for two months, and has sped up the process since early June. Now the number of disconnections is rising to around 3,000 customers per week. As a result, some 27,000 households have had their water services disconnected so far this year. Many activists have stated that Detroit’s water system is being prepared for privatization by the 1 percent.

Good to see local progress on The Amendment …

@ seafóid

Why not make an effort to stick to the point?

If what I have just posted is wrong, by all means tell me how. Leave out the rest!


‘A little-known US investment fund called Waterfund LLC recently announced that it had signed an agreement with IBM (NYSE: IBM) to develop a Water Cost Index (WCI). What this effectively means is that the world is about to witness the financialisation of the most valuable commodity on the planet: water.

In the words of Scott Rickards, the President & CEO of Waterfund (emphasis added):

“By calculating the unsubsidized cost of freshwater production using IBM’s Big Data expertise, Waterfund can offer the first flexibly-tailored financial tools to investors in water infrastructure. The Rickards Real Cost Water Index™ highlights the energy costs, interest rate risk, and capital expenditures required to build and maintain large-scale water treatment and delivery networks.”

The move is just the latest chapter in the financial sector’s ongoing takeover of the global commodity markets.


“Debates about forecasts are all very interesting, no doubt, but the ordinary punter, whether in Spain or Ireland, could not care less.”

I’m curious as to why you continuously hand wave discussions about forecasting accuracy away. I’d say:

* It’s an economics blog.

* Many of your posts contain implicit forecasting assumptions, eg action X will lead to increased growth. ‘Common sense’ or ‘in layman’s terms’ are just other forms of ideology. If you’re making better/worse arguments I would have thought looking at expectations and outcomes would be worthwhile.

* Whether or not forecasting is arbitrary (eg quote attributed Galbraith) it is used to feed in to actual policy decisions such as critical ones made in Europe in 2010/11. If your strong opinion is that all forecasting is pointless would you not argue for an entirely different way of proceeding?

* I’m arguing that for technical/ideological/behavioural reasons forecasting in Ireland and the EZ is flawed to one side, ie it tends to overestimate growth in the specific conditions in which we find ourselves. So I am arguing that forecasting inaccuracy is predictably inaccurate and this has policy implications, and I am also arguing that:

* Ireland is different.

I quite liked the IMF for coming out this week and saying:

“Its calls for global fiscal stimulus in 2008–09 were timely and influential, but its endorsement in 2010–11 of a shift to consolidation in some of the largest advanced economies was premature. At the same time the IMF appropriately recommended monetary expansion in these countries if needed to maintain the recovery. However, this policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers. As time progressed and the growth outlook worsened, the IMF showed flexibility in reconsidering its fiscal policy advice and called for a more moderate pace of fiscal consolidation.”

I find it frustrating that the IMF, etc, didn’t listen to arguments (Koo, Krugman, via Minsky etc) at the time but if organisations like the IMF didn’t put their forecasts on the table it would be harder to hold them to account and for them to honestly reflect on why things did not pan out as they predicted.


Revision Summary

•The EC revised Ireland, Malta, and Slovenia up.
•Greece and Netherlands were flat.
•The EC revised every other country lower from forecasts made in May of 2014.

Notably, the EC cut the Germany forecast from 2% to 1.1% now. France went from 1.5% to 0.7%.

Still Too Optimistic

The revised forecast still seems very rosy.

Unless one uses the strict definition of two consecutive quarters of declining growth, Europe is arguably in recession right now. Greece, Spain, and Italy are actually in economic depressions.

Greece GDP may be positive, but from a crushingly low level and Greek unemployment remains over 26 percent. Youth unemployment is over 50%. It’s tough to view the state of affairs as anything other than an economic depression with unemployment rates that high.

France is at best treading water, and Germany has slowed markedly. Absurd sanctions on Russia hurt the entire Eurozone, and the slowdown in China is icing on the cake.

Goldman’s Model Shows Recession

@ DoD

Martin Wolf sez there are 3 key facts

1 the eurozone is in a depression
2 lack of demand has played a crucial role
3 The European Central Bank has failed to deliver on its own price-stability target.

@Cute Guys an Gals

most people continue to suffer under the dual delusions that most new money is created by the government and that private banks make loans by drawing on their customers’ deposits. The reality could not be further from the truth, as Washington’s Blog explains:

1) Each private bank “creates loans” out of thin air by entering into binding loan commitments with borrowers;

2) If the bank doesn’t have the required level of reserves, it simply borrows them from the central bank (or from another bank);

3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

One can but marvel at the simple audacity of the enterprise. In a nutshell, it is the most audacious con trick of modern human history.

An Orgy of Speculation

Fast forward to today, and no matter how much new digital money is pumped into the system by the major central banks, the moribund global economy refuses to turn the corner. The simple reason for this is that precious little of the trillions of new dollars and euros actually make it into the real economy.

Rather than extending long-term loans to credit-starved small and medium-sized enterprises, the banks have funneled their massive windfalls into liquid assets such as stocks, real estate or commodities, helping in the process to blow up short-term asset bubbles.

They have also used the new funds to plug some of the gaping holes in their balance sheets as well as step up their purchases of over-the-counter (read, totally unregulated) derivatives. Indeed, so great has been the demand for derivative hedges or speculation – what Warren Buffet once described as “weapons of mass financial destruction” – that the total nominal value of the market is estimated to be nominally worth close to one quadrillion dollars (that’s 15 zeros) – almost 20 times global GDP.

As the graph below (courtesy of zerohedge) shows, the global derivatives market grew by a staggering 1,000 percent between 1998 and 2011. What’s more, it shows no sign of halting.

@ GK

It is an economics blog; but not confined to economists. I find it rather odd that so much time is devoted to debate on a virtual version of the Irish economy relative to the international context, almost equally virtual, when the real one is knocking on the door.

I think that the only forecasts that matter are those to which those making the policy decisions are actually privy. These are not widely available, largely because we have a system of public accounts which belongs not in the last century but the one prior to it.

The electorate is asking not so much why am I paying my taxes, but on whom and on what are they being spent? When there is some clarity on this fundamental question, I might revise my views on forecasts, whether academic or otherwise.


“I think that the only forecasts that matter are those to which those making the policy decisions are actually privy.”

Are you saying that the growth forecasts released by the Department of Finance and/or the EU Commission are not the same as ones used in private? I think that would be extraordinary.

@ GK

I referred to “forecasts”. You referred to “economic growth” forecasts. Our system of national accounts is such that no reliable estimates can be made of future government income and expenditure. There is also no effective rolling budgetary control in the sense that would be understood in any successful private enterprise. Without this data, forecasting for the overall economy is the equivalent of attempting to pin the tail on a donkey. The upside is, when the figures are better than expected, it comes as a divine surprise to all concerned.

Further complicating the situation is the fact that the major policy decisions are taken by something called the Economic Management Council
which has no legal status that I am aware of in terms of the Constitution and whose decisions are largely influenced by a gaggle of political advisers without regard to anything other than the electoral prospects of the two coalition parties represented in it.

When this situation changes, you may come back to me with regard to describing anything that is happening in the present government as extraordinary.


When policy choices are to be taken and a democratic mandate is required alleged “experts” are wheeled out to brief “opinion-formers” such as journalists and to “educate” the public about what the “correct” course of action is.

The assumption, still, among the general public is that since they realise they themselves don’t know the answer, they have a duty to take account of the views of those giving the impression that they do.

Serial failure of the forecasts of “experts” whether institutions or individuals should be made familiar to the great unwashed in order to prevent an eventual sudden awakening resulting in some sort of UKIPisation of economic policy.

Currently we have a macroeconomic debate framed by a motley collection of politicians, overt and covert lobbying institutions, and individuals with a need for media attention, all pretending to the public at large (and probably themselves) that they know far more of practical use than they do.

All of them think that were they to communicate that most of the time they don’t know the answer then they will be ignored. Currently there is too much pretending going on.

@ JR

Why did the IT put that in “Asia pacific”?
Was it because Trichet tried to pacify Lenihan ?

Why does the reportage on the Trichet letter focus on forced entry into a bailout, when the key smoking gun in the letter is about insisting on a bank rescue for “Irish banks needing it” to be funded from public resources and by implication *not* by burning bondholders?

“3) The plan for the restructuring of the Irish financial sector shall include the provision of the necessary capital to those Irish banks needing it and will be funded by the financial resources provided at the European and international level to the Irish government as well as by financial means currently available to the lrish government, including existing cash reserves of the Irish government;”

Yes. I agree. The bailout itself was arguably a good thing for Ireland. It’s the stipulation that the Irish government must stand over the liabilities of the banking system that is the real issue.

No ESM then of course but surely a good case for some compensation arrangement. Particularly if the ECB was acting on shaky legal ground.

The letter is like ancient history

“as it may interfere with the objectives and tasks of the Eurosystem and may contravene the prohibition of monetary financing.”

they were so focused on sov debt that they never noticed the bubble in private debt. And now the EZ is flirting with deflation

“The assessment of the Governing Council on the appropriateness of the Eurosystem’s exposure to ——- banks will essentially depend on rapid and decisive progress in the formulation of a concrete action plan ”

they really can get the finger out when they absolutely have to but without market pressure nothing happens. And those so-called bond vigilantes are pussycats if you give them enough liquidity in their milk.

The issue was ELA by the Irish central bank, as the letter makes clear.

At the time, if my memory serves me right, the bank in question was providing the bulk of ELA across the Euro Zone and allowing it to continue growing was evidently not an option, at least as far as Trichet was concerned and, it would seem, a clear two-thirds majority in the Governing Council (if not the entire council).

There were a number of additional issues that got mixed up with ELA, as the letter makes clear. One of them was the insistence that all “Irish banks needing it” be rescued, and that this be done through public funding rather than through the imposition of losses on bondholders. This letter is the smoking gun.

The letter contains nothing particularly surprising or scandalous, but does show how the ECB, due to their increasing role as firefighter of the euro crisis whilst at the same time lacking formal rules requesting or allowing them to do this, were becoming increasingly uncomfortable in this position. They then strayed into areas of public policy and sovereignty which should be reserved for democratically elected people only.

So the ECB should not have threatened and demanded a decision of so overtly the Finance Minister of a democratically elected EU and EZ member state, but on the other hand I’m not sure that they had any other choice than to make clear their unwillingness to allow this unusual situation (ever rising ELA access, one country taking huge amounts of Eurosystem liquidity way beyond their relative size in EZ) to continue indefinitely or without some form of public guarantee/support backing it up. The alternative would be for Trichet to not bother writing the letter at all, and decide via the GC to just end the ELA, justifying it on the basis of ECB independence?

The ECB needed an exit strategy. It did not have to dictate that the exit strategy be structured so as to keep bank bondholders whole at the expense of the Irish state.

ELA around the time of the Bank guarantee was less than €8bn (using the Central bank’s ‘other assets’ data as the ELA measure) and was under €14bn in early 2010. By end-October it had risen to €35bn and then to €45bn by end-November, peaking at €70bn in Feb 2011.ECB lending for the Irish headquartered banks (which is collateralised)had risen to around €90bn at the time of the letter, from €45bn in June.


Sometimes I find your jumping from one thing to another hard to follow: in this case from discussing forecasts of GDP growth to forecasts of tax intake and expenditure.

I think the issue of GDP growth forecasting remains important and certainly of real world pragmatic interest for the reasons outlined above.

@ GK

How can you divorce one from the other, given how much of GDP transits the exchequer?

I have been entirely consistent in my analysis, especially in repeatedly drawing attention to the failure of the current government to focus on what for me is the sine qua non in terms of drawing durable benefit from the crisis i.e. “control” of government expenditure in terms not just of limiting it and finding a rough balance between tax income and government expenditure but establishing a detailed modern set of government accounts which informs the electorate on who is paying and who is benefiting. This could, indeed, be said to be the pressing political issue of the age.

The failure to do so is largely attributable to splitting the task between two ministers representing increasingly warring coalition partners.

What you get instead is this!

@ Docm
You are ducking the issue. Budget accounting is a non sequitur. Forecasts are used to justify decisions made at EZ level. It’s the same in the UK with POI. PFI gives better modelling results but is worse in reality. Power tends to work like that. If the most likely outturns for current EZ policy were presented to show stagnation rather than panglossian growth perhaps alternatives would be considered.

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