The FT reports on Minister Noonan’s IMF initiative here. I would be interested in reactions to the Minister’s tactics.
Category: Bailout
Wolfgang Münchau concludes his two-part series on the end game for the eurozone crisis: see here.
Update — A couple of complementary articles from the Irish Times: John McManus argues perceptively that Europe is already well on the way to a transfer union (see here); Dan O’Brien does not pull his punches in an assessment of Greece’s structural problems (see here).
Thanks to grumpy for drawing our attention to a fascinating segment with Patrick Honohan on last night’s Tonight with Vincent Browne show. (The segment runs from minute 17:40 to minute 36:12; you can read grumpy’s comment here.) Governor Honohan made an unfortunate reference to “the people” in relation to the blocking of attempts to impose losses on senior bondholders, giving fodder for conspiracy theories. But I don’t think there is much of a mystery about the people in question. The ECB clearly worried — and continues to worry — about balance-sheet contagion across the European banking system, and (I would suppose even more importantly) the implications of the precedent of withdrawing the implicit guarantee for senior debt for the funding of a system that continues to be fragile.
On the Irish side, given the existence of the ELG guarantee on post-December 2009 bank funding, the equal ranking of depositors and senior bondholders, and the systemic importance of AIB and Bank of Ireland to Ireland’s credit and payment systems, a pragmatic decision was made that the fiscal savings from feasible loss imposition (most likely the remaining unguaranteed senior debt in Anglo and INBS) would not be worth risking the reliability of large-scale funding from the eurosystem.
(It is worth noting that a special resolution regime was not in place, and even if it was the U.K. example shows U.S.-style depositor preference is considered incompatible with European law. In principle it would have been possible for losses to be shared between depositors and senior bondholders, with the State making depositors whole. But at that stage the State had lost its creditworthiness, making it hard to see how such depositor protection could have been implemented without significant outside support. Lastly, both Anglo and INBS still had depositors back in November. The Credit Institutions (Stabilisation) Act later facilitated the movement of depositors out of those banks, but that piece of legislation – which made it possible to impose proper losses on subordinated bond holders – is unlikely to be costless in terms of the longer-term reputation of the stability of Ireland’s investment environment.)
I think reasonable people can disagree about whether more should have been done to force the issue back in November with senior bondholders. But I find it hard to understand the certitude with which the policy course is criticised given the very real constraints that were faced. At this stage, I feel the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk.
Update: Namawinelake provides a transcript of the key segment with Governor Honohan: see here.
The ECB’s position of “no default” has come in for much derision here, and indeed the Schauble letter makes clear that such an uncompromising stance is not credible. I believe, however, that Ireland gains from a distinct leaning towards a “default-as-last-resort” position, which is why any Greek precedent is so important.
A useful approach is to view the possibility of default as a valuable option, with an orderly, officially supported “restructuring” at the more valuable end of the spectrum. However, the very existence of such an option makes it harder to regain market access. Potential investors will be repelled by the likelihood of getting caught up in a later restructuring.
We thus have a trade-off in the design of the bail-out/bail-in regime, with the optimal point along the trade-off being quite different for Greece and Ireland. A good regime for Ireland, in my view, is still one that offers additional funding on reasonable terms to countries meeting their ex ante conditions without a requirement of restructuring; in other words, a reliable, though certainly not unconditional, lender of last resort (LOLR). Potential investors need to know that funding will be there even in a bad state of the world. Under such arrangements, belief in the country’s capacity to meet pre-specified conditions should be sufficient for renewed market access (assuming of course the LOLR is seen as having the financial capacity to meet its commitment). For all its communication faults, the ECB does push policy in this direction, and I think is more of a friend in the European policy debate than we realise.
The Irish Times’ Cantillon reports the government is increasingly shifting its focus to the design of the ESM. This is the right focus. While I hope that an interest-rate cut is not completely off the table, the reliability of the LOLR function is the most critical factor in resolving the Irish creditworthiness crisis.
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.