Category: Banking Crisis

Quote of the day

“When we were faced with a similar situation after coming into government, we agreed with the ECB and we held back from burden sharing with senior bond holders and we didn’t proceed down that road.”

Michael Noonan, reported here.

It wouldn’t be altogether surprising, I suppose, if the most conservative party in the State agreed with the ECB when it came to the distribution of bank losses as between ordinary taxpayers and financial institutions. But this isn’t the story we have been told to date.

So: does Fine Gael — and Labour — agree with the ECB regarding burden sharing with bondholders?

Update: Michael Noonan has said that Anglo and Irish Nationwide senior bondholders should face losses.

Patrick Honohan on Vincent Browne

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. 

Good news from Iceland

Here.

Credibility

Paul Krugman points to the gap between Icelandic and Irish CDS spreads here.

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.