Category: Banking Crisis

The ECB Have All the Means to Prevail?

The key dynamic of the current Irish economic situation is that Irish governments keep adopting positions in relation to banking and fiscal matters but then abandon these positions because “the ECB won’t agree.”  We are told that we have little choice but go along with the ECB because the Irish banks are borrowing so much money from them and, apparently, they keep threatening to pull the plug on the Irish banking system if we don’t do what they want.

This position is neatly encapsulated in this statement yesterday by Catherine Day, secretary-general of the European Commission:

However, she held out little hope of bondholders sharing the burden of Ireland’s debt. “This is primarily for the ECB to decide. They are providing the liquidity to keep Irish banks going and they have all the means to prevail with their arguments.”

Ok then, let’s envisage a scenario where the Irish government does something that the ECB doesn’t want and then the ECB decides to pull funding from the Irish banks.

At this point, the Irish banks would not be able to come up with the money to pay back the ECB. The ECB could claim the collateral that has been pledged for these loans but would have great fun trying to flog over €100 billion of dodgy eligible collateral, including wonderful stuff like NAMA bonds and own-use bonds. It would be hard to figure out how much the ECB would receive for this stuff but I’d bet they’d make pretty serious losses.

Meanwhile the Irish banks would be bust, with all their good assets gone and deposits flying out the window. The Greek and Portuguese banking systems would also be well on the way to meltdown too, as people tried to figure out when the ECB was willing to support peripheral banking systems and when it would not. Sovereign debt markets would most likely go berserk.

What part of this scenario would the ECB really be willing to put up with? If you don’t think they’d be happy with it, then perhaps they don’t really have “all the means to prevail” and perhaps our governments should stop being so scared.

At a minimum, I think Enda Kenny should come out and be clear about exactly what it is that the ECB is threatening and why he is so scared of it. Such a move might have positive effect of getting the ECB to explain whether it is indeed the case that they keep threatening to destroy the Irish banking system and, if so, why.

U-Turn on Bondholders?

Today’s newspapers contain stories that the government are denying any U-turn in relation to previous commitments on bondholders.

“We have not broken our word,” Mr Noonan said, arguing that all election promises were predicated on agreement being reached at European level.

He said that since the banking crises had emerged Fine Gael had been in favour of burden-sharing and said that it has already happened with subordinated debt.

“We want burden-sharing but we would not do it unilaterally. We would only do it with the agreement of Frankfurt and we did not get it,” he told RTÉ.

“The ECB in Frankfurt has held out solidly that senior bondholders will not be touched. It’s a majority view in Frankfurt. There are governors in Frankfurt who do not hold that view.”

He said the ECB had been “very good to Ireland”, providing almost €200 billion in liquidity. He also added that the Government was reserving its position in relation to Anglo Irish Bank.

He said if Anglo told the Government there was a need for more capital the Government would enter discussions with the ECB on burden-sharing in respect to senior bonds in that institution. But he agreed the Government would not be pushing for renegotiation on senior debt in either AIB or Bank of Ireland.

“The debate is over. Frankfurt would not agree,” he said.

Well let’s take a look at Fine Gael’s banking policy document “Credit Where Credit’s Due”. Pages 5 and 6 list a set of options that Fine Gael wished to pursue for “a more credible, fairer package that is better for Ireland and Europe.”

These options included extending the EFSF “to take equity and long-term debt investments in systemically important European banks, such as AIB and Bank of Ireland”, EU-funded insurance schemes, procedures for restructuring debts of troubled banks, and “a more sustainable funding solution for the Irish banks.”

Page 6 then tells us that

Should some credible, combination of these options prove not be available from Europe, the next Irish Government would – in order to restore its own credit worthiness – be left with little choice but to unilaterally restructure of the private debts of those Irish banks in greatest need of recapitalisation.

Well, none of these options have been made available. And yet rather than unilateral restructuring, we’re told “The debate is over. Frankfurt would not agree.”

Looks like a U-turn to me.

Anti-gloom on the stress tests

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. 

Continue reading “Anti-gloom on the stress tests”

April Fools One Year Ago

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 in the FT

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.