Author: Karl Whelan

Sinn Blames Those Overly Active Bloggers

Professor Sinn is back with a paper length version of his ideas about Target 2, co-authored with Timo Wollmershäuser.

I suspect people are a little bored with this now, so I’ll confine my comments to a couple of areas.

First, in relation to whether ECB operations have crowded out credit in Germany, Sinn now argues (page 19) that he has been “wildly misunderstood” and that he never meant to imply that the ECB was auctioning off fixed amounts of liquidity so that additional central bank money loaned to Irish banks would cause contracting credit in Germany. He appears now to be merely observing that because the Target 2 payments system facilitated movements of large amounts of money from Irish banks to German banks, then German bank demand for liquidity from the Bundesbank was bound to decline.

Well, who knows what Sinn did or did not understand about ECB operations when he penned his various pieces and really who cares? From my perspective, the key question is whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany. Interpret the following excerpts for yourself:

the credit to the Irish farmer comes from the Bundesbank at the expense of a similar credit provided to the German economy.

and

This is a forced capital export from Germany to Ireland

(Note of course, the transaction generating this supposed “forced capital export” in many cases was an Irish bank providing funds to a German bank to pay off a maturing bond!)

In relation to the idea that he mentioned the ECB auctioning off fixed amounts of liquidity, Sinn now claims (page 45) that there is a misunderstanding of what he said on this topic due to “an overly active blogger” (a reference to the perfectly admirable Olaf Storbeck of Handelsblatt) mistranslating something Sinn wrote in the Frankfurter Allgemeine Zeitung. And yet, here it is, in English, right in the middle in his VoxEU piece:

Moreover, strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders.

I suppose Professor Sinn would point to the word “if” in the previous sentence and claim this was merely a hypothetical observation. But, it was his decision (and not Olaf Storbeck’s) to mention limited auction tenders as an argument for the idea that ECB operations will lead to crowding out of credit in Germany. Indeed, Sinn’s response has something of a Scooby-Doo feeling about it (“if it wasn’t for those meddling bloggers”!)

Second, in relation to his proposal that Target 2 balances be settled each year, as Fed districts settle their Fedwire balances, Sinn provides a non-response response to my point that Fed districts have no fiscal connection to the regions they serve and thus provide a poor comparison. The response that “the economic situation with 17 euro countries and 12 US districts is certainly comparable” is hardly an answer to the relevant question: What would happen if a Fed district bank did not have the resources to settle its Fedwire balance?

Sinn’s paper appears to concede that his VoxEU article’s call for annual settlement of Target 2 balances is unrealistic, as it would require a full year of GDP to be transferred by the Irish people. Implicitly, then, he appears to be moving back to his earlier proposal of setting annual limits.

As I noted before, this would effectively spell the end of a truly integrated Eurozone. No matter how many “euros” I appear to have in my Irish bank account, the ability to make a cheque payment to Germany from this account would depend on whether Ireland has reached its Target 2 limit. Why anyone would maintain a bank account in Ireland under such a system is beyond me.

As you might expect, the paper contains a number of other gems. Stuff like page 48’s “However, all debts need to be repaid or at least be serviced such that Ireland’s debt-to-GDP ratio, including its Target debt, returns to reasonable levels” is a particularly unhelpful mixing of a genuine sovereign debt problem with an imagined “Target debt” problem that would only exist if Sinn got its way.

Then there was my favourite. Page 16 tells us that the availability of loans from the ECB “saved the GIPS the need to take measures to recapitalise its banks.” And here’s me thinking we’ve forked over €50 billion and counting to make sure that our banks could repay the bond investors that loaned them funds for speculative property investment.

QNA Release for 2011:Q1

The quarterly national accounts for 2011:Q1 have been released. They show seasonally adjusted real GDP increasing 1.3% quarter over quarter and seasonally adjusted real GNP falling 4.3% over the same period.

Smoothing through the volatile quarterly series, looked at on a year-over-year basis, real GDP was up 0.1 percent and real GNP was down 0.9 percent.

Overall, the picture seems to be one of an economy in which output has stabilised. Given the substantial negative headwinds (fiscal contraction, falling credit, debt overhang and a frozen property market) this is a pretty good performance. Still, it seems too early to say that the economy is about to produce a period of job-producing growth.

Monetary Dialogue Briefing Papers: June 2011

The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 30.6.2011). One set of papers (including one by me) discusses the prospects for monetary policy in light of the wide variations in the economic cycle across different Euro area economies. The other set of papers discuss issues related to restructuring Greek debt.

I’ll repeat my final couple of paragraphs here. These were written prior to the comments discussed here

The relationship between the ECB and the peripheral economies has become extremely complex. However, it is clear that ECB officials have regularly used the implicit threat that they can withdraw their support for peripheral banking systems, or else continue to provide funds to “persistent bidders” at interest rates that are perhaps considerably higher than are charged to other countries, as a way to obtain actions they deem necessary.

In relation to Greece, ECB officials have been using the threat of the withdrawal of the eligibility of Greek sovereign debt as collateral for open market operations to put forward their argument against any debt restructuring. In the case of Ireland, it is known that Irish government officials have requested that assurances be provided that the ECB will continue to provide sufficient liquidity to Irish banks over the next few years, perhaps via a special medium-term facility. However, no such assurances have been provided. And without greater clarity on the timeframe for repaying their loans to the ECB, it will remain impossible for even recapitalised Irish banks to obtain market funding.

The ECB’s strategy of threatening peripheral banking systems (and the regular coverage this receives in the media) has become one of the destabilising factors that have contributed to worsening the current crisis. It is time for this poorly-thought-out strategy to cease. The ECB’s obligations under the European Treaty mean that it cannot help peripheral countries via keeping interest rates low for the next few years. But it can continue to act as a lender of last resort to the banks in these countries in a way that reassures (rather than worries) financial markets.

To my mind, the latest “anonymous ECB official” comments represent a new lowpoint for that particular institution.

Lowered Ambitions

Ok, so it’s true. The headline in the Times piece says it all.

THE GOVERNMENT has conceded it is seeking a smaller reduction in the interest rate of the EU-International Monetary Fund bailout package than the 1 per cent originally sought, and only on the remaining money it has yet to draw down.

In what the Opposition portrayed as a U-turn and a tacit acceptance that a cut is no longer achievable, Taoiseach Enda Kenny yesterday said the maximum savings the Government could achieve from an interest rate cut were €150 million per annum, compared to €400 million if the rate on the whole loan was cut from 5.8 per cent to 4.8 per cent.

Mr Kenny, speaking in the Dáil, based the reduced figure on the fact the interest rate reduction would not apply to the €15 billion in European loans already drawn down, and only to the €24.6 billion remaining.

Let’s be clear about this. There is no reason whatsoever why the EU could not grant Ireland a one percent reduction on all its borrowings (not just those yet to be drawn down) as was previously granted to Greece. The EU has decided to add a particular margin on to its borrowing costs. The EU can decide to reduce it.

The lowered ambitions appear to be a combination of preparation for a deal barely worth accepting and (more relevantly) an attempt to use a fake argument (“can’t change the interest rate on funds already withdrawn”) to present the “feasible” rate reduction as not that big a deal.

I suspect “lowered ambitions” could prove to be the epitaph for this government.

Germany a Huge Beneficiary from ECB Operations

One thought that I should have put in my, em, original Sinn post is the following.

Sinn and others believe that the Target 2 balances show that ECB operations have created a big risk for the German taxpayer, channelling lots of funds from Germany to Ireland. In fact, the truth is exactly the opposite.

The big change in Target 2 balances in recent years shows that German banks were huge beneficiaries of ECB operations. Without the intervention of the ECB, there is no way that the Irish banks or the government that backed them would have been able to pay back the huge amounts they owed German banks.

So the ECB operations allowed the German banks to turn hugely risky loans to Irish banks into completely safe deposits with the Bundesbank (the Bundesbank’s Target 2 balances are the mirror image of these deposits). Now, of course, Germany will share 28% of the credit risk stemming from these operations. But the rest of the Eurosystem has taken on 72% of the risk of operations that have hugely benefited German banks and the taxpayers that would have had to recapitalise them in the absence of the ECB operations.