Category: EMU

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.

Daniel Thomas: Irish Bail-Out Terms Endanger EU’s Future

Here‘s an article by my UCD colleague Daniel Thomas that makes an important argument. If the Irish authorities are to get anywhere in relation to getting a better deal on issues such as the interest rates on official loans or dealing with our banking problems, they cannot rely on arguments based on narrow self interest.

Dan points to the dangers to the EU political reform process stemming from Ireland getting a bad deal. I think one can also argue that a deeper role for the EU in solving Ireland’s banking crisis can also be justified on the grounds that it can help to maintain financial stability throughout the Eurozone.

Monetary Dialogue Briefing Papers: March 2011

The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here. One set of papers (including one by me) discuss bank and sovereign debt resolutions (this paper is the source of my comments here on senior bank bonds). The other set discuss the issue of Eurobonds.

EU Needs to Share Ownership of the Irish Banks

Here‘s an article I wrote for today’s Irish Times. It argues that a conversion of central bank loans to equity is now the best way to end the banking crisis and avoid a sovereign default.

Kenny Returns from Brussels

Enda Kenny has returned from Brussels without any agreement yet to reduce Ireland’s interest rate (Irish Times story here and FT story here). Not surprisingly, Mr. Kenny wasn’t too keen to give up Ireland’s 12.5% corporate tax rate in return for a mere one percent reduction in the interest rate on the EU loans.

To my mind, there is a lot of shadow boxing going on here. The EFSF is an EU institution and it cannot set the terms of its lending on a bilateral basis with individual countries. I’d be surprised if thee tradeoff between these two elements ended up being as explicit as suggested in this weekend’s news stories.

I think the business about interest rates and corporation tax rates has a feel of fiddling while Rome burns. More interesting were Kenny’s comments about the ECB:

“I made the point that for me to conclude a deal here I need to be much clearer in respect of elements related to the ECB,” he said.

“I spoke to president Jean-Claude Trichet and the Minister for Finance will be meeting with him on Monday. He has agreed that I should meet with him before the [next EU summit on March] 24th/25th to discuss a number of issues relating to the ECB and its positions.

“Before the council meets again in two weeks time we hope to be in a much clear position insofar as Ireland’s position is concerned and continue on our progress arising from the mandate that I’ve got about an improvement in the terms of the package for Ireland,” the Taoiseach said.

He continued: “In the next couple of weeks I expect to be in a much clearer position in respect of the state of what we have inherited is in respect of Ireland’s position.

“We’ll have had discussions with the ECB in respect of a number of matters. We’ll have a much clearer picture of what’s emerging from the stress tests and as the principle has now been accepted and implemented of a reduction in the interest rate I . . . would regard that actually as the beginning of a process.”

I reckon they could fill Croke Park if they sold tickets for those discussions with the ECB.