Wolfgang Münchau has an interesting take on the bailout/default debate that is relevant to recent posts (see here).
Category: Bailout
See here for the reasons behind S&P’s downgrade (registration required). See here for Irish Times report; here for Bloomberg report.
This is noteworthy:
The downgrade reflects our view of the concluding statement of the European Council (EC) meeting of March 24-25, 2011, that confirms our previously published expectations that (i) sovereign debt restructuring is a possible pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans. Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers.
While having to put another €24 billion into the banks is hard to stomach, I am still surprised by the overwhelming negativity in the reaction to the release of the stress test results. I think there were three big questions going into yesterday:
(1) Would we get the information necessary to reduce the large range of uncertainty about ultimate banks losses that has been weighing so heavily on the creditworthiness of both the banks and the state? The detailed information on bank balance sheets and projection assumptions used allows anyone interested to reengineer the calculations as necessary, and is a step change from the kind of information analysts were working with before. The bank balance sheets and loan loss projections are now far less of a black box.
(2) Would the banks end up sufficiently well-capitalised to overcome the difficult funding environment? By my calculations, allowing for the capital buffers, Core Tier 1 is close to 10 percent under the stress scenario and close to 17 percent under the base scenario. [Note that the stress scenario is binding for all four tested banks this time round; see Table 16] We will have very well capitalised banks.
Given the day that’s in it, I was contemplating whether to do a funny story. But then I remembered the Irish Independent’s entry in the April Fool’s stakes from last year and figured I couldn’t beat it.
Brendan Keenan interviewing Brian Lenihan:
“With the banks playing for time, and the regulatory system discredited, we needed to establish an asset-relief programme like NAMA. That takes time to put into practice. It can’t be done overnight.”
He makes a point that tends to be overlooked in discussions of whether more should have been done sooner. It could not have been done 12 months ago, with the financial markets fretting over the scale of the budget deficit.
The country came close to not being able to borrow the money to keep it running. Attempting to cover the bank losses as well might have made that danger a reality.
At the time, however, I didn’t find it that funny.
Michael Noonan has an article in the FT. There’s no mention of bondholders or new ECB facilities. We do get this, however:
We will, of course, repay our debts but we must ensure that the debt is sustainable and not such a burden that it could cripple the economy for generations.
The EU has helped make Ireland the business-friendly, entrepreneurial country it is today and the solidarity shown recently through liquidity support from the Eurosystem, the ECB and through the Europe Financial Stability Mechanism, the European Financial Stability Facility and bilateral loans is greatly appreciated. It is in everyone’s interest that this support be repaid by the banks and we can ensure that that happens by pursuing policies that foster growth and boost market confidence.
Message: Ireland ♥ Europe and don’t worry about all that money we owe ye.