Author: Karl Whelan

A Eurozone Safety Net?

From the FT:

Eurozone authorities would help a member-state in serious economic difficulties before it needed to turn to the International Monetary Fund because of a risk of debt default, a senior EU policymaker said on Tuesday.  “If crisis emerges in one eurozone country, there is a solution before visiting the IMF,” Joaquín Almunia, the EU’s monetary affairs commissioner, said. “It’s not clever to tell you in public the solution. But the solution exists.”

Also:

Mr Almunia’s comments made clear not only that EU policymakers would not remain impassive in the face of a crisis in a eurozone country, but would act pre-emptively before a bail-out became necessary. “By definition this kind of thing should not be explained in public. But we are equipped intellectually, politically, economically,” he said.

I’m not sure that it’s really so clever to keep this solution a secret.  As the FT piece notes, there are serious legal restrictions in place that can hinder this kind of thing, such as restrictions on ECB lending to governments (The ECB website states “The Eurosystem is prohibited from granting loans to Community bodies or national public sector entities.”) and the so-called no-bailout clause in the Maastricht Treary prohibiting collective liability for debts (considered “an important pillar on which the European Union was founded” by reliably hard-line ECB Executive Board member Juergen Stark.)

Would it not be better for the Eurozone countries to have an explicit debate about this and, if necessary, outline a strategy and explain why it is legal?  Wouldn’t financial markets be less jittery if they could be genuinely assured that a coherent Eurozone strategy was in place?

IBEC on Financial Regulation

Today’s Irish Times contains a thoughtful and well-argued piece by Brendan Kelly of Financial Services Ireland, the group within Ibec that represents the international financial services sector.  In the piece, Kelly notes that “the financial services industry warned the Financial Regulator about the risks of increasingly complex financial markets for many years” and that the Regulator’s consultative panel of industry representatives “warned the Financial Regulator’s office about the increasingly complex nature of international financial services”  and also “highlighted the lack of financial services experience on the board of the Financial Regulator, and the need for a dedicated unit to anticipate the regulatory hazards caused by financial innovation.”

These are all good points and hopefully will be taken on board within the new structure.  However, it is important to remember that the key regulatory failure in the Irish case did not involve complex financial instruments.  Instead, regulators allowed banks to make loans to property developers on a scale that threatened their solvency once house prices started to decline. 

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A Canadian Model?

In Saturday’s Ardfheis speech, the Taoiseach announced:

I will create a new central banking commission. This will incorporate both the responsibilities of the Central Bank and the supervision and regulatory functions of the Financial Regulator. This will build on best international practice similar to the Canadian model. And it will provide a seamless powerful organization with independent responsibility.  It will have new powers for ensuring the financial health, stability and supervision of the banking and financial sector.

I interpreted this statement as implying that Canada has something called “a central banking commission” which incorporates both central banking and financial supervision.  It turns out, however, that Canada does not have such a structure.  

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Proposed Anglo Deal: Probably a Bad Idea

RTE is reporting that private-equity group Mallabraca is interested in offering the government €5 billion for a majority stake in Anglo Irish Bank. Now this might sound like good news and RTE is sort of reporting it in this way (For instance the story on the website tells us that Mallabraca “would assume majority control and share risks with the State” and that “It is understood any proposal that would benefit the State and stabilise the bank could be agreed”) Getting the bank back in to private hands quickly sounds like a good idea and hey that €5 billion sure would come in handy.

Before you go getting too excited, remember the old motto about things that look too good to be true. Anglo is undoubtedly insolvent, i.e. its assets are worth less than its liabilities. This means that no private investor would pay a cent to take them over. So, what lies behind the offer? As always, but particularly with this kind of thing, the devil will be in the details. And my guess is that the details aren’t pretty—that underlying this €5 billion offer from Mallabraca is a corresponding €(5+X) billion offer back from the Irish government of good stuff like over-priced loan purchases, and of course, risk insurance, courtesy of the Irish taxpayer.

Beyond the issue of whether this is a good idea, this proposed deal also raises the question of whether the Department of Finance has already worked out its philosophy on things like risk insurance (and is not really waiting for the conclusions of Peter Bacon and the NTMA) or whether the Mallabraca gentlemen have pitched an offer to the government about what goodies they’d like in return for the €5 billion. Anglo is wholly public-owned and has fully government insured deposits and other liabilities.  So, we’re not dealing here with any of the sensitivities associated with takeovers of companies listed on the stock market.  Given that, I would hope that the full details of this offer could be made public and open to debate before the government makes a decision.

RBS Deal a Bad Precedent for Ireland

The banking situation is evolving at a rapid pace both here and abroad with a number of important developments having taken place even since I penned the IT piece linked to below.  I thought I’d pass on a couple of comments on what’s going on.

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