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.

O’Callaghan: ECB Must Share Blame

Gary O’Callaghan has an interesting article in today’s Irish Independent on the ECB’s role in the Irish crisis.

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?

Portuguese Bailout Request, ECB Rate Hike

Clearly these are important. No we’re not ignoring them. I guess none of our blog alumni have anything profound to say about these two predictable events over and above what we’ve already said. Still, here’s a thread for our commenting contingent to explain to us what it all means.

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.