ECB and State-Owned Banks, Again

There are a lot of reasons why attention has turned to the idea of leveraging EFSF via one of a number of possible methods. If this can be done, it takes a big step towards solving both the solvency and liquidity issues plaguing Euro area sovereigns and banks – on the liquidity front, a €2 trillion or €3 trillion fund is big enough to buy up Spanish and Italian bonds for a number of years, while €440 billion is big enough to absorb a lot of the potential losses.

The financial press are abuzz with various mechanisms that could be used to leverage up the EFSF. However, I was surprised today to twice read that Gros and Meyer’s proposal to have EFSF (or some vehicle funded by EFSF) register as a credit institution and borrow from ECB is likely to be illegal.

The Wall Street Journal reports

Klaus Regling, chief executive of the European Financial Stability Facility, told a podium discussion that “there are serious concerns” that such a scheme wouldn’t be allowed under the EU Treaty, which forbids the ECB from financing governments directly.

And at the FT’s Money Supply blog, Ralph Atkins writes

But Jens Weidmann, Germany’s Bundesbank president and ECB governing council member, has already made clear his opposition. Giving the EFSF access to ECB funding, Mr Weidmann argues, would be “monetary financing” – central bank funding of governments – which is banned under European Union treaties …

More crucially, an ECB legal opinion issued in March made clear that the European Stability Mechanism – a permanent fund expected to replace the temporary EFSF from 2013 – would not be allowed access to its liquidity because of the ban on monetary financing. “The ECB recalls that the monetary financing prohibition…is one of the basic pillars of the legal architecture of economic and monetary union,” its lawyers wrote then. I am not a lawyer, but to me that would also rule out giving the EFSF access.

The ECB legal opinion states

Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB. On this latter element, the ECB recalls that the monetary financing prohibition in Article 123 TFEU is one of the basic pillars of the legal architecture of EMU

Of course, we in Ireland have been here before. Back in 2009, a number of very serious people assured us that nationalising any banks would be inadvisable because the ECB was prohibited under the monetary financing clause from lending to nationalised banks. (That Anglo were at the time borrowing in a big way from the ECB didn’t seem to get in the way of what seemed like a great argument).

As I pointed out back then on a few occasions (e.g. here and here) this wasn’t true because while Article 123 of the current consolidated Treaty on the Functioning of the European Union states

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

This is immediately followed by

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

So while the ECB may recall the monetary financing prohibition, you could argue that they don’t recall it very well.  One could quibble that EFSF is not currently not a “publicly owned credit institution” but it’s hardly high octane financial engineering to create a vehicle funded by EFSF that counts as such.

IMF: “Nothing to see here, keep moving”

The European Commission, European Central Bank, and International Monetary Fund have passed Ireland with flying colours in their latest quarterly review. I’ll post audio of their press conference when it’s available (commenters please drop the link if you see it). The IMF press release is here.

The statement reads that bank reforms are on track, fiscal consolidation is on track, structural reforms are to come, and it’s all good. Lots of touchy-feely language. Those pesky bond markets, and the burning of senior bondholders, weren’t looked too kindly upon in questions, but overall the message seemed to be: Nothing to see here, nothing at all, no to burning senior bondholders, but guess what lads, the next review will be tougher. Stick with the programme.

On twitter, NamaWinelake reported a divergence between the EU and IMF, with Ajay Chopra of the IMF saying he expected to see a more robust approach to burden sharing, while the ECB representative said no, that wouldn’t be happening.  Although much can be made of comments like this, the review exercise seems to be, on balance, a qualified success. The government did meet its agreed targets. Whether the exercise enhances our credibility to the point that Ireland can wean itself off EU and IMF funds without a second loan package is another question entirely.

Professor Sinn Doubles Down

I know this is getting silly now and everyone knows what’s going on with the Target 2 debate. Still, it’s entertaining to see Professor Sinn doubling down on his false claims about the operation of the Eurosystem.

By the end of 2010, ECB loans, which originated primarily from Germany’s Bundesbank, amounted to €340 billion.

Em, no. I don’t know how to explain this any better than here. But, like I say, really, honestly, no.

But, he’s on a roll now is Professor Sinn, so now we get a new nonsensical talking point:

If this continues for two more years as it has for the past three, the stock of refinancing loans in Germany will disappear altogether.

Indeed, Deutsche Bank has already stopped participating in refinancing operations. If German banks drop out of the refinancing business, the European Central Bank will lose the direct control over the German economy that it used to have via its interest-rate policy. The main refinancing rate would then only be the rate at which the peripheral EU countries draw ECB money for purchases in the center of Europe, which ultimately would be the source of all the money circulating in the euro area.

I literally laughed out loud when I read this. So Deutsche Bank don’t borrow from the ECB? Who cares? There have always been banks with surplus liquidity and banks that are short of liquidity. That’s why interbank money markets exist.

The fact that the ECB stands willing to make unlimited amounts of short-term loans to all Euro area banks at 1.25% is clearly the key influence on short-term rates throughout the Euro area.  Deutsche Bank may not be borrowing from the ECB but they certainly won’t be able to lend their funds out on a short-term basis at rates that are much higher than the ECB’s.

So ECB rates are clearly setting German short-term interest rates just as they set them elsewhere in the Euro area. (Note also the resemblance between ECB rates and short-term German government bond yields.)

So another scary sounding but ultimately baseless claim from Professor Sinn.

Sinn Blames Those Overly Active Bloggers

Professor Sinn is back with a paper length version of his ideas about Target 2, co-authored with Timo Wollmershäuser.

I suspect people are a little bored with this now, so I’ll confine my comments to a couple of areas.

First, in relation to whether ECB operations have crowded out credit in Germany, Sinn now argues (page 19) that he has been “wildly misunderstood” and that he never meant to imply that the ECB was auctioning off fixed amounts of liquidity so that additional central bank money loaned to Irish banks would cause contracting credit in Germany. He appears now to be merely observing that because the Target 2 payments system facilitated movements of large amounts of money from Irish banks to German banks, then German bank demand for liquidity from the Bundesbank was bound to decline.

Well, who knows what Sinn did or did not understand about ECB operations when he penned his various pieces and really who cares? From my perspective, the key question is whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany. Interpret the following excerpts for yourself:

the credit to the Irish farmer comes from the Bundesbank at the expense of a similar credit provided to the German economy.


This is a forced capital export from Germany to Ireland

(Note of course, the transaction generating this supposed “forced capital export” in many cases was an Irish bank providing funds to a German bank to pay off a maturing bond!)

In relation to the idea that he mentioned the ECB auctioning off fixed amounts of liquidity, Sinn now claims (page 45) that there is a misunderstanding of what he said on this topic due to “an overly active blogger” (a reference to the perfectly admirable Olaf Storbeck of Handelsblatt) mistranslating something Sinn wrote in the Frankfurter Allgemeine Zeitung. And yet, here it is, in English, right in the middle in his VoxEU piece:

Moreover, strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders.

I suppose Professor Sinn would point to the word “if” in the previous sentence and claim this was merely a hypothetical observation. But, it was his decision (and not Olaf Storbeck’s) to mention limited auction tenders as an argument for the idea that ECB operations will lead to crowding out of credit in Germany. Indeed, Sinn’s response has something of a Scooby-Doo feeling about it (“if it wasn’t for those meddling bloggers”!)

Second, in relation to his proposal that Target 2 balances be settled each year, as Fed districts settle their Fedwire balances, Sinn provides a non-response response to my point that Fed districts have no fiscal connection to the regions they serve and thus provide a poor comparison. The response that “the economic situation with 17 euro countries and 12 US districts is certainly comparable” is hardly an answer to the relevant question: What would happen if a Fed district bank did not have the resources to settle its Fedwire balance?

Sinn’s paper appears to concede that his VoxEU article’s call for annual settlement of Target 2 balances is unrealistic, as it would require a full year of GDP to be transferred by the Irish people. Implicitly, then, he appears to be moving back to his earlier proposal of setting annual limits.

As I noted before, this would effectively spell the end of a truly integrated Eurozone. No matter how many “euros” I appear to have in my Irish bank account, the ability to make a cheque payment to Germany from this account would depend on whether Ireland has reached its Target 2 limit. Why anyone would maintain a bank account in Ireland under such a system is beyond me.

As you might expect, the paper contains a number of other gems. Stuff like page 48’s “However, all debts need to be repaid or at least be serviced such that Ireland’s debt-to-GDP ratio, including its Target debt, returns to reasonable levels” is a particularly unhelpful mixing of a genuine sovereign debt problem with an imagined “Target debt” problem that would only exist if Sinn got its way.

Then there was my favourite. Page 16 tells us that the availability of loans from the ECB “saved the GIPS the need to take measures to recapitalise its banks.” And here’s me thinking we’ve forked over €50 billion and counting to make sure that our banks could repay the bond investors that loaned them funds for speculative property investment.

Professor Sinn Misses the Target

I’ve written a post at the IIEA blog commenting on Hans Werner Sinn’s recent columns on the operation of the Eurosystem. Sinn has made some seriously incorrect claims and followed them up with dangerous policy recommendations. These columns have been cited approvingly by Martin Wolf, Paul Krugman and Felix Salmon over the past week.

Felix, however, has now read this post by Olaf Storbeck of Handelsblatt and doesn’t seem sure who is correct on these issues: He’s looking for “a central-banking wonk out there who fancies adjudicating this dispute”.

Well, with 11 years experience working in central banks, I suspect I meet the job requirements. I wrote my post before seeing Storbeck’s but hopefully my arguments back his up to help counter Professor Sinn’s somewhat wilder claims.

Dan O’Brien on the Story of the Bailout

Dan O’Brien has an interesting article (and an accompanying news piece) in today’s Irish Times on the “behind-the-scenes” story of Ireland’s bailout. The article is based on interviews for a radio documentary to be aired tomorrow on BBC Radio 4.

I suspect that regular readers of this blog won’t be surprised at the story of how the ECB triggered Ireland’s bailout and then favoured a plan involving a larger upfront fiscal adjustment than the government were comfortable with and a massive and rapid downsizing of the banking sector.

Time will tell whether the ECB’s actions in November helped or hindered the resolution of Ireland’s economic problems.  However, the story of November’s events does raise very serious questions about the role the ECB now plays in European politics. Should the key role in this historic decision have been played by an unelected and essentially unaccountable organisation?

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.

Speculation on New ECB Lending Programme

There has been a lot of focus in the past few days on stories based on leaks of Thursday’s stress tests results. Perhaps more important, however, is the question of what the plans are for the €150 billion in central bank funding that the Irish banks are currently receiving.

Two interest stories here and here suggest there is lot to be negotiated on this issue. While less visible than the question of the interest rate on Ireland’s EU loans to the sovereign, the questions of how long the Irish banks will have to pay back these loans, and at what interest rate, are perhaps more important.

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.

The Irish Banks and the ECB

On Friday, the Central Bank reported (in Table A.2 of its Credit, Money and Banking statistics) that its lending to euro area credit institutions as part of the ECB’s monetary policy operations jumped from €95 billion in August to €119 billion in September. This represents one-fifth of the total amount of ECB lending that took place in September.

I have put together some charts here that illustrate what is going on with Irish bank borrowing from the ECB. First, some technicalities. The release reports (on Table A.2) how much ECB-related lending the Irish Central Bank did. It also reports (on Table A.4) how much ECB-related borrowing our banks did but these tables are a month behind. The first chart, however, shows that the two series are pretty much the same most of the time and they have been very similar lately. (I’m not sure what makes up the difference. It may be a statistical discrepancy or it may be due to different reporting periods.)

The second chart shows ECB borrowing by Irish banks broken down into the Domestic Banking Group (taken from Table A.4.1.) and the rest (essentially meaning IFSC institutions.) Non-domestic bank borrowing from the ECB has been pretty stable lately. Also, there’s little secret as to why the domestic banks needed to borrow more from the ECB during September: Many of the bonds issued under the September 2008 guarantee matured last month when the original guarantee expired. The banks were not able to issue new bonds to roll over the maturing bonds and so much of the funding to pay off September’s maturing bonds came from ECB borrowing.

The final chart shows the total share of Eurosystem lending accounted for by the Irish Central Bank and also shows the fraction of Eurosystem borrowing accounted for by the domestic banks. I have assumed in this chart that the €24 billion increase in September’s ECB lending from the Irish Central Bank all went to the domestic banks, so I’m issuing a health warning about the last point on the green line: This is not data, but rather my guess as to what this series will show when released next month. Health warning issued, it looks as though the fraction of Eurosystem borrowing accounted for by the Irish banks probably reached about 14% as of September. This would be the highest fraction yet accounted for by these banks.

What happens now? Unfortunately for the Irish banks, there are signs that the ECB is considering taking steps to end the dependence on its liquidity operations of banks that can’t get bond market funding. The last month has seen a plethora of newspaper articles prompted by the ECB insiders briefing journalists using the phrase “addict banks” to describe those banks still dependent on Eurosystem operations.

Now, this weekend, the ECB has issued a statement that would be barely understandable to most people but that the Financial Times have interpreted, probably correctly and based on briefings, as opening up the possibility of taking action against the “addict banks.”

Digging into the announcement, one can see why there may be cause for concern among the ECB-dependent banks. The relevant document that has been approved is Guideline ECB/2010/13, which is amending Guideline ECB/2000/7. Checking out what exactly is being changed requires a tedious checking over and back between the two documents and I can’t claim to have spent all of my Sunday on this. However, a couple of changes stand out as being potentially very serious for ECB-dependent banks.

Section 2.4 of the original 2000 guidelines could already be invoked as a reason to cut off funding for certain banks because it says that “the Eurosystem may suspend or exclude counterparties’ access to monetary policy instruments on the grounds of prudence.” (Counterparties means banks borrowing from the ECB.) The new guidelines supplement this with the potentially ominous “Finally, on the grounds of prudence, the Eurosystem may also reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties.”

A bit more clarity about the prudence business is provided later on in the new guidelines. Box 7, under the heading “Risk Control Measures” previously contained the line “The Eurosystem may exclude certain assets from use in its monetary policy operations.” This has now been augmented to include “Such exclusion may also be applied to specific counterparties, in particular if the credit quality of the counterparties appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.”

Since the Irish banks are submitting NAMA bonds as collateral to the ECB, as well as securitised loan books formed from turning large amounts of Irish loans into marketable securities, it could be argued that they fit the bill for being counterparties who are offering up collateral whose credit risk is highly correlated with the credit risk of the counterparty itself. As such, they could be forced to reduce their borrowings from ECB if it is decided to exclude some of the collateral that they are offering up to get access to ECB funds.

This may just be tough talk from the ECB. But if it’s not, then it raises the very serious question of what exactly needs to be done to allow the Irish banks to access funds on the international bond markets.

INBS and the ECB

Today’s story about INBS issuing €4 billion in government-guaranteed debt effectively to itself (i.e. issuing it, then keeping it on the balance sheet to use for repo with the ECB) seems a bit strange. Indeed, normally the ECB doesn’t allow this kind of thing.  Page 39 of its eligible collateral documentation contains the following guideline:

Irrespective of the fact that a marketable or nonmarketable asset fulfills all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links.

The INBS issue seems to be ok, however, because of the following qualification:

The above provision on close links does not apply to: (a) close links between the counterparty and the public authorities of EEA countries or in the case where a debt instrument is guaranteed by a public sector entity which has the right to levy taxes.

So the government guarantee appears to be what allows INBS to do this.

Honohan Interview with Bloomberg

There were some media stories over the past few days with selected quotes from an interview Patrick Honohan gave to Bloomberg. Dara Doyle from Bloomberg kindly sent me the full text of the interview and since it doesn’t seem to be elsewhere (or at least anywhere I could find) and contains a lot of interesting material, I’m posting it below the fold.

Continue reading “Honohan Interview with Bloomberg”

ECB Opinion on Bank Guarantee Extension

Writing in today’s Irish Independent, Emmet Oliver notes an important story. The ECB has released an opinion on the government’s proposed extension of its bank liability guarantee.

The ECB is unhappy that the guarantee continues to cover interbank deposits:

The extension of a guarantee to cover interbank deposits should be avoided as this could entail a substantial distortion in the various national segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States and impairing the implementation of the single monetary policy, which is a unique competence of the Eurosystem under Article 105(2) of the Treaty.

They also appear to be unhappy that the guarantee does not have a minimum  maturity:

In the same vein, the ECB’s recommendations on government guarantees state that ‘Government guarantees on shortterm bank debt with maturity of three to 12 months could be provided so as to help revitalise the short-term bank debt market.’ Moreover, it is noticeable that under the draft scheme there is no stated minimum maturity for any guaranteed liabilities which means that liabilities with a maturity of less than three months may be guaranteed in practice.

The ECB’s concerns about national guarantees interfering with the normal operations of interbank money markets are not restricted to Ireland. Here’s a similar opinion offered on an Austrian extension of interbank guarantees.

The ECB also notes about the Irish guaratee scheme that

for the sake of transparency, a more precise indication should be given on the method to be used to calculate the fees.

These opinions are consistent with various earlier warnings from the ECB Executive Board members about their plans to remove their exceptional extension of credit and to return to their normal operational framework. Unfortunately, we are now being repeatedly reminded that those who told us that the ECB would be lending €54 billion to Irish banks were not at all accurate.

ECB and Nationalised Banks, Again

My former colleague, Mike Casey, wrote the following in this article in today’s Irish Times:

When Nama is up and running, the banks will be able to borrow far greater amounts from the ECB. Some of this money may be lent to the private sector (one hopes), but it is likely that substantial funds will be made available to the Government to finance the budget deficit.

This may be the main reason why the Irish banks were not nationalised. If they had been nationalised this transfer of funds could not occur, since the ECB cannot lend directly to government.

I’m afraid I have to disagree with this argument for why Irish banks cannot be nationalised.

Continue reading “ECB and Nationalised Banks, Again”

Jurgen Stark on ECB Operations

Here‘s an interesting speech from ECB Executive Board member Jurgen Stark about the plan for an exit strategy from the current non-standard operational framework.  Two quotes stand out for me:

As regards our area of responsibility, we are well prepared to phase out the measures we took in response to the crisis. The way these measures were implemented provides us with reasonable flexibility in unwinding them. For example, unless we decide otherwise, the maturity and size of our operations will automatically decrease, starting next year.

And, more interestingly,

It is therefore crucial to monitor the sources of funding constraints for banks. We need to judge whether these funding constraints relate to individual banks rather than to the functioning of the money market and the banking system as a whole. Our operational framework is not designed to counter funding problems at the individual bank level. Rather, our funding support is designed to alleviate funding risk to the extent that it is systemic.

Gift Horses and The Taxpayer’s Pocket

With only a couple of days to go before the key details are announced, it seems to me that confusion over the role of the ECB has now become a central feature of most journalistic discussions of NAMA (I’ll pass on speculating as to why this is the case). Take this paragraph from an op-ed on the Greens in today’s Irish Times by Deaglan de Breadun:

A key point was that the European Central Bank is prepared to provide €60 billion on favourable terms to assist the Nama process. Moreover, the more pragmatic element in the party is reluctant to look this particular gift-horse in the mouth, especially since it will not be coming from the taxpayer’s pocket.

Is the fact that NAMA is being paid for by the issuance of Irish government bonds really so hard to understand? Even the role that the ECB is playing in the process—which I discussed here—isn’t really so complicated.

Moreover, doesn’t anyone find it strange that the same people who worry night and day about the government budget deficit—the issuance of €400 million in IOUs per week—and tell us that large cuts are necessary because of it, then regularly tell us that we don’t need to worry about the costs of NAMA because it just involves printing IOUs?

One might as well say that deficit financing spending is a fantastic idea (a gift-horse from the bond market!) because it doesn’t come from the taxpayer’s pocket.

ECB Opinion on NAMA

During today’s Oireachtas Committee meeting, the Minister for Finance referred to a formal ECB opinion document on NAMA and that it was being published this afternoon. Well, lo and behold, here it is.

I haven’t had a proper chance to read this but two sections jumped out. First, on valuation of assets being transferred:

Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.

And on nationalisation:

the ECB notes that the Irish Government shares the guiding principle that the preservation of private ownership is preferable to nationalisation. If the NAMA scheme will be successful in this respect, this strategy should help to avoid, in the short-term, the high costs involved in nationalisations and, in the medium-term, the risk of banks’ objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field.  

The opinion is silent on what should happen when their preference for pricing that is “mostly risk-based and determined by market conditions” comes into conflict with their preference for preserving private ownership.

Lenihan on the ECB and the Guarantee

In my earlier post on the government’s criticisms of the IMF, I left out what was probably the most interesting argument because it raised a number of other issues.

Speaking on This Week on Sunday, the Minister for Finance criticised the IMF’s assessment of the cost of the liability guarantee on the grounds that the guarantee would not be called on. I’ve already noted that this is a somewhat spurious way to look at the cost of the guarantee. However, what was particularly odd about the Minister’s comments was his particular explanation of why the guarantee would not be called upon.

Continue reading “Lenihan on the ECB and the Guarantee”