John Bruton has written an open letter to José Manuel Barroso, available here.
I appeared today before the Oireachtas Committee on European Affairs to discuss the interest rates on the EU-IMF loans. I provided the committee with a briefing paper (available here) and a short presentation (available here). I will edit this post later to include the transcript of my opening statement and the questions and answer session when these materials are posted on the Oireachtas website.
There’s a lot of material in the briefing note and I’m not going to repeat it here. One point I would briefly point to, however, is that the note discusses how recent movements in market interest rates and the pricing of EFSM’s initial bond issue on January 5th (EU Commission press release here) meant that, by my estimates, the cost of funding from the EFSF and EFSM would be 40 basis points higher than had been estimated in the December note released by the NTMA.
These materials were prepared prior to today’s €5 billion bond auction the EFSF. Press stories have been very positive about how this bond auction went (e.g. here and here). However, the material I prepared discussed the pricing of the EFSM bond yield relative to swap rates. The January 5th bond was priced at mid-swaps +12 basis points while this bond mid-swaps +6 basis points, so the interest rate on today’s bond would not change my judgment on this issue by much.
Update: As promised here‘s the transcript of my appearance
The estimate for Q4 GDP in the UK has come in at negative 0.5 percent (well below expectations of mildly positive growth), with the deviation ascribed to the terrible December weather.
Ireland’s Q4 GDP number does not come out until March but we should not be too surprised if a similar undershoot happens here, in view of the similar weather in December.
Attached are the four conclusions of the IMF’s Financial Stability Update just released, in so far as they concern the Eurozone, with my comments:
‘In the European Union, the steps listed below are needed to reduce uncertainty and help restore confidence in markets.
- Further rigorous and credible bank stress testing is required along with time-bound follow-up plans for recapitalization and restructuring of viable, undercapitalized institutions and closure of nonviable ones.’
Comment: The IMF is suggesting new stress tests and ‘follow-up’ recapitalisation and re-structuring of banks. In that order, not in the reverse order.
- ‘The effective size of the European Financial Stability Facility should be increased and it should have a more flexible mandate. For countries where the banking system represents a large proportion of the economy, it is now even more essential to ensure access to sufficient funds, going beyond national backstops whenever necessary.’
Comment: Means the EFSF is inadequate in size and function, particularly for countries with large banking systems, such as Ireland.
- ‘Euro area-wide resolution mechanisms need to be deployed and strengthened as needed. The introduction of a pan-European bank resolution framework with an EU-wide fiscal backstop would help decouple sovereign and banking risks.’
Comment: Means the IMF wants to share bank losses with bank creditors and re-capitalise banks with EU-wide, and not just national, fiscal support.
- ‘The European Central Bank will need to continue to supply liquidity to banks that need it and keep its Securities Markets Program active, while also recognizing that this is a temporary set of measures and will not solve the underlying problems.’
Comment: Means that ECB has been overly restrictive on both counts.
Does anyone still believe that the IMF was happy with the design of the Irish bail-out?
The debate about the banks has gone off the boil. But, as John Ihle argues in yesterday’s Sunday Tribune, the next six months will be a very active period in the restructuring of the Irish banking system (article here).
Fixing the credit system and minimising the cost of the rescue to the State have been the focus of the debate. The first has strangely faded from view. The second has acquired an ominous twist: tension between the ECB (which bears increasing risk as funder of last resort of the banking system) and the State (which is effectively on the hook for bank losses given limits on creditor loss imposition). The ECB wants to shrink the balance sheets of Irish banks to minimise its exposure, even at the cost of “fire sales”; the State wants to minimise bank losses to give it a fighting chance of regaining its creditworthiness. Like the ECB, the Central Bank of Ireland is increasingly on the hook for funding the banks through its Emergency Liquidity Assistance, although things are complicated by the fact that first on hook for losses on this assistance will be the State itself.
This basic funding versus capital tension is most likely behind the conflict pointed to by John Ihle between the Central Bank/Financial Regulator on one side and the NTMA/Department of Finance on the other. How this conflict plays out will have a significant impact on how the restructuring unfolds.