This year’s conference is organised by UCD PhD students Alan Fernihough, Mark McGovern, Svetlana Batrakova and Rob Gillanders and will take place in UCD on Thursday 18th and Friday 19th August. Deadline for abstracts is May 30th. There will be keynotes by Professors Morgan Kelly (UCD) and Peter Neary (Oxford). Further details are available on the website (www.isne2011.com), or from the organisers. Last year’s session in TCD featured 28 sessions with over 100 speakers from 66 departments in 20 countries. There is no registration charge and unfortunately no funds for assistance with travel and accommodation.
In an otherwise interesting opinion piece in the Irish Times, Elaine Byrne takes a lurch into banking matters in the closing paragraphs.
The elephant in the room is default. It was reported on Wednesday that since the last week of January, Irish banks have issued €18.35 billion worth of government-guaranteed debt.
This suggests that the banks may effectively be issuing sovereign paper with the approval of the Government, the Central Bank and the ECB. In other words, the banks have effectively increased Ireland’s public debt by about 11.5 per cent of GDP in the last few weeks.
Since they are unlikely to be able to repay this debt any time soon, a future government will have to. To appreciate just how extraordinary this is, €18.35 billion of government-guaranteed debt is more than half the entire tax revenue for 2010 at €31 billion.
This kind of arithmetic – certainly not limited to Elaine – is unnecessarily raising fears and adding to confusion.
The central question is how the actual and contingent liabilities of the Irish State are affected by these auto-bond issues. As I noted yesterday, the State is now effectively on the hook for the losses of the banking system, which amounts to saying the liabilities of the system are explicitly or implicitly guaranteed. When funds (liabilities) leave the system they have to be replaced. The main source of replacement is now the ECB/CBI. Thankfully the ECB appears willing to provide the funds, but requires a government guarantee because of a shortage of eligible collateral. When it comes down to it, the auto-issue of bonds is just a way of providing the guarantee while staying within the ECB’s rules. One form of guaranteed liability is being replaced by another and the effective liability of the State has really not changed. Things are bad enough without double-counting arithmetic.
The dominant view on this site seems to be that the new government should play hardball with regard to senior bondholders. While I sympathise with the fury over the inequity of bailing out private creditors, I have reluctantly come to a different conclusion. In the interests of debate, I give below a stripped-down overview of my reasoning. I’m sure people will tell me where I’m wrong.
Cutting to the essentials, the State is now effectively on the hook for: (i) bank losses beyond their capital; (ii) any losses on capital the State itself has injected; and (iii) and the eventual losses on NAMA. The ECB/CBI will provide the necessary liquidity/funding to meet all ongoing obligations to creditors. In return, they require a shrinking of bank liabilities (to reduce their exposure) and an eschewal of loss imposition on senior bondholders given concerns over balance sheet contagion and eurozone precedents. (Arthur Beesley reports on eye-opening estimates by Seamus Coffey on the ownership of the Irish bank bonds.)
There is a growing chorus that Ireland should insist on imposing losses on (at least) unguaranteed seniors. This comes down to gambling the ECB won’t significantly pull the liquidity/funding support, and indeed that we should take the further risk that the fiscal components of the bailout deal will not be withdrawn.
I think most of us agree that the original blanket guarantee was a shocking mistake, and also that in ordinary circumstances losses should be imposed – Danish style – on unguaranteed bank creditors.
I think the difference in views comes down to how we see the obligations of the ECB. If we think the ECB is simply doing its job with its liquidity/funding support, then demands to protect bondholders do seem indefensible. (By the way, the dictatorial language used by Commissioner Rehn earlier in the week barring such loss imposition was both undiplomatic and, I thought, extremely unhelpful.) But if we see the ECB as going beyond its ordinary lender of last resort obligations to small set of banks within the eurozone, then proportional additional conditions do not seem unwarranted. I think people should take a close look at what the ECB/CBI are giving, as well as what they are demanding. From where I sit, the ECB’s willingness to act as long-term lender of last resort does qualify as extraordinary support.