A draft of the proposed Treaty has been released. I think we should be very very slow to look to put this to a referendum, if such is required (and it probably is). Many things may happen in the meantime that could derail this particular process.
In the meantime, our leaders should stop making up exciting scenarios involving Ireland leaving the euro if a treaty is rejected. That Stephen Collins vehemently disagrees with this only strengthens my conviction on this point.
From the Irish Times:
THE GOVERNMENT has quietly downgraded its campaign to persuade the European Central Bank to change the terms of the €30 billion of promissory notes it issued to bail out Anglo Irish Bank, according to an authoritative Government source.
The efforts by Minister for Finance Michael Noonan to seek a reduction from the ECB in the 8.2 per cent interest rates being charged on the notes or extend the term of the loan has not really worked, said the source.
I suspect most of us can think of other euphemisms for “quiet downgrading”.
The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 19.12.2011). Five papers (including one by me) discusses issues related to ratings agencies, prompted by the recent package of regulations proposed by the European Commission. Three other papers discuss the ongoing Euro crisis.
The latest European Commission report on Ireland is available here. Lots of interesting stuff in it. One bit that caught my eye is a discussion of an internal report prepared by the Central Bank
A second report covering the use of certain types of credit limits, from a prudential point of view, is at an early stage of development. This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits, as well as potentially fixing all interest rates for certain products such as mortgages.
It’s not obvious to me that banning variable rate mortgages is a good idea, either from the point of view of consumers or from the point of view of international financial institions considering coming into Ireland to offer mortgages. While fixed-rate mortgages do offer increased stability, the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).
There are various reasons why fixed-rate mortgages are not common in Ireland or the UK (this 2004 report on the UK mortgage market by David Miles discusses this issue in detail). But banning variable rate mortgages seems to be an extreme proposal.
This could have been a useful contribution to the discussions about Target 2 if it was tweaked a bit.
For instance, the following slight re-wordings may have helped to inform rather than mislead:
Involuntary money acquisition is what happens when your spouse wins the lottery and gives you loads of money. At some point it dawns on you that you’re rich.
Or this
The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically received €495 billion to the European Central Bank via Target2.
Ok, no big deal. Financial journalists in getting things wrong shocker!
However, the piece does address a new aspect of the question that was not discussed in earlier discussions about the Target 2 balances. What happens if the Euro area breaks up?
Mr. Coy from Bloomberg is pretty sure it will be bad for Germany:
If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget.
But let’s take a closer look. Who is this “Germany”? Will the German residents who got their accounts credited as a result of the Target2-facilitated transfers out of Ireland now lose their money? No. There will be no losses to private citizens. Despite all this misleading stuff about “enforced lending”, German citizens will be very grateful that they managed to repatriate their money to German via Target2.
So who loses? Well, the Bundesbank has a Target2 credit from the ECB, an organisation that used to be considered sound and a good credit because they have the power to print money.
If the ECB ceases to exist and the Bundesbank wanted its balance sheet to still balance, it could simply replace the “Target2 credit” by writing itself a big check and sticking it in the vaults. Call it “Sondervermögen Ersetzen Vermögensverwaltung Früher als Target2 Kreditkarten Bekannte“ (“Special Fund Replacing Asset Formerly Known As Target2 Credit” – blame Google Translate!) Just like that, the Bundesbank’s balance sheet is balanced again.
Now watch how many commenters will try to convince you that placing a piece of paper in an empty vault will unleash hyperinflation.