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.

National Bank Rescue Measures

The ECB has released a useful description of the measures taken by each country in rescuing its banking system: you can download it here.

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.