Question: If I loan you €10 on 3rd April 2012 for a maximum of 90 days, what is the maximum “maturity date” for you returning the €10 to me? Answer: Should be 1st July, 2012 but according to the Department of Finance, it’s 30th May 2012
Cast your minds back to the “deal” on the Anglo promissory notes announced in the Dail…
This is an expanded and linked verison of a column published in the Irish Examiner Saturday 12 may 2012. http://www.irishexaminer.com/business/a-reluctant-yes-voter-for-vital-access-to-funds-193627.html
I have decided, very reluctantly, to vote yes in the upcoming referendum on the fiscal compact. I have previous expressed many many doubts, most of which have remained unanswered. The compact is bad economics, it is inserting an ill-defined and inestimable concept in the constitution, it is highly likely to be a moot compact as soon as a large country deems it domestically expedient to be dropped, and it will result in us having to radically change our way of doing things. The latter may not be a bad thing given how poor at governance we have shown ourselves to be.
The debate has rapidly, and predictably, gone off the rails of the actual debate onto tracks that are only vaguely parallel. It has morphed into a debate on austerity, driven for the most part by the ideologues of the left tapping into an inchoate if understandable desire on all our parts to see an end to austerity. At some levels the debate has been farcical, with Richard Boyd-Barrett claiming that an unspecified 10b (presumably per annum) can be found from “wealth” while at the same time arguing against taxing housing….wealth. The 10b wealth tax meme has been roundly exploded by Seamus Coffey, but as is all too common in Ireland RBB has decided to engage in policy based evidence rather than evidence based policy. At least we are spared so far the more extravagant claims (YES For JOBS) on the yes side but expect the ludicrous level to rise there as the debate intensifies. Another feature of the no side is that it features the same old same old – SF have opposed every single EU referendum since our entry into the EU and one can assemble a DIY ULA Speech from a box of 1982 Socialist Workers Party posters.
The most often repeated argument is that signing to the treaty will institutionalize austerity as we drive towards a 60% debt gdp ratio. This is possible but not necessary. It all comes down to growth . Adopting the fiscal compact will require that in the end the debt to gdp ratio head to 60%. That is a massive fall from where we are now, and many of the commentators, including to some extent myself, see that trajectory as most probably involving a requirement to not simply run small or zero deficits but to actually have surpluses. Underlying the concern that this will institutionalize austerity is is pessimism about growth. The reality is that debt at the national level is rarely paid down. The debt/gdp ratio, the metric that will be used in the fiscal compact era, can fall as a result of debt being paid down (which doesn’t happen), gdp rising, or both. These figures are measured in nominal terms also, so the ratio can be eroded by inflation. An examination of the 1990s onward shows that debt/gdp ratios can fall very quickly.
From 95% in 1992 the ratio had fallen to 53% in 1998. Admittedly the 1990s was an era that in many ways was more benign in terms of the external environment and in terms of the degree of policy maneuver available to government, but the lesson stands: so long as debt does not grow the ratio should fall. It is abundantly clear from the debt-GDP analysis that first, this can can change for good or ill rapidly and second the deterioration since 2007 is appalling, driven by the collapse of the tax base (hence the need to rebalance and re broaden), the collapse of the economy (driven as it was in large part by a credit boom) and by the bales of wet straw that were placed on it by the gargantuan folly that was and is the bailing out of Anglo. The latter is important but it is not by any means the font et origo of our problems. While it may be tempting to call it bank debt treaty (as the superlative Namawinelake has when explaining that that is why he/she/they are agin it) the reality is that 2/3 of the increase in debt since bout 2007 to 2015 in down to our own deficit. It is without a shadow of a doubt true that the bank debt is usurious, that it should never have been loaded on the state, that we have shown ourselves to be singularly unable to gain meaningful change in its repayment and that it is an albatross around our necks. The issue is not that – it is whether or not voting yes or no is more likely to allow us a better negotiation position. As to whether we can effectively use that position is quite another thing.
S
o we are fine if we get growth but where will that come from? This is the key dilemma for Ireland and for the world. The latest IMF World Economic Outlook is at best cautious on prospects for growth. . We face a period of significant fiscal consolidation through 2015 to simply move to a state where the level of debt stands still. Indeed, at present the plans are still to run a deficit. Structural or otherwise a deficit where debt continues to grow is not conducive to reducing the debt/gdp ratio. The Fiscal council has suggested that additional to the government plans to have fiscal consolidation of 12.4b through 2015 an additional 2.8b might be required to achieve balance. This will weigh on any recovery and regardless of any fiscal corset or compact getting to a broadly balanced budget when the debt-gdp ratios are as high as they are is a good macroeconomic aim.
Nonetheless, as the fiscal compact is specified on nominal levels, so long as we keep debt rising by less than the nominal growth rate we will be reducing the ratio. Given that our average annual nominal growth rates over the longterm have been in and around 10%, achieving even modest nominal GDP growth should be feasible. So long as we do that we will, almost automatically, comply with the headline adjustment figures (see Seamus Coffey again and Karl Whelan on that issue)
A major problem with the plan “going forward” by the government is that it relies in essence on an export led recovery. The entire world seems to now be betting on export led recoveries, which makes sense only if we have found a Martian civilization willing and able to pay for our goods and services. Successive government projections for growth have been shown to be on the optimistic side, and it is clear as a bell that coordinated and prolonged austerity, lite or heavy, in the Eurozone is not going to lead to a recovery and all the evidence is that this is beginning to sink into the political consciousness. Thus at some stage we can reasonably expect some pro growth measures at a European level, whether written into a revised compact or as an addendum. The French and Greek election results guarantee that.
The main reason why I see myself, reluctantly, voting yes is to secure access to funding as and when we need it. The reality is that even if we were not to require a single additional euro of debt, by running a balanced budget, we face a massive refunding requirement. To reiterate, national debt doesn’t get paid off – it gets rolled over and over. Paying off the maturing debt with new debt does this. The trick, as we have noted above, is that with a modest amount of growth the burden on the state falls as a proportion, and with a modest amount of inflation the burden in present day funding terms falls further. The challenge then for Ireland is to achieve this. But we will still have to pay off the debt. We need to repay, to refinance, over €30b between 2014-2018 in national debt, and some 23b in funds issued under the bailout. There is guaranteed funding from the ESM for this. There is the argument that we can apply to the IMF which is true but application is by no means the same as acceptance. The IMF have previously expressed doubts (P 12 here) as to the appropriateness of them sharing the burden alone. The EFSF continuation would also seem to me to provide some cover only for the existing bailout, leaving the remainder of the rollover of national debt and any additional funding to be sought from the markets.
Voting no would thus expose the state to having to fund at least a part of its total requirement from the markets or from internal resources or from the markets at a still usurious price. As States can always fund themselves from internal sources, as a consequence the argument that “they will not let us collapse” do not hold as strongly as did the same argument for restructuring the banking debt. Ireland no longer holds the cards that it did when our banking system was a source of major potential contagion.
Banks reliance on the ECB has fallen and continues to fall, and we now are approaching a percentage of borrowing from the ECB more in line with our economic size. The ECB will support banks (although that support has to be coming to its limits) but they will not and cannot support states. Thus we face a “lesser of two evils” argument : this is pragmatic and economic reality no matter how much it may stick in the craw. Voting No would be the eviler of two lessers, and would rapdly expose how unimportant we now are.
Posted in Blogpost, Journalism
Tagged Anglo, banking, Central Bank, ECB, economy, Europe, Fiscal Compact, politics, Promissory Notes, Referendum
This is a version of an opinion piece originally published in the Irish Examiner Sat 14 April 2012. See http://www.irishexaminer.com/business/euro-crisis-still-very-much-alive-and-pressing-190499.html.
It hasn’t gone away you know? The Euro crisis? Its back, waxing and waning. Italy struggles to raise money at the short end even with significantly increased rates, and there is event talk now of france being in trouble. To recap: last year the ECB finally began to take action to deal with the acute problems in the sovereign bond market and the banking market, now increasingly and worryingly scrambled together. Through two successive waves of cheap (1% pa) money a massive trillion euro was pumped into the banks. in what was called LTRO – Long-term rollover. Although significantly less in net terms this injection of liquidity (in November and march) was sufficient to significantly cool the sovereign bond markets. It was also a mechanism, as I have noted previously, to allow the banks to begin to fill some holes in their own balance sheets.
Modern economics absolutely needs banks. They are the pumps that drive money and credit around the rest of the system. In Ireland these pumps are broken and we see daily the effects of same. What the ECB has done is quite proper, but in mathematical terms it is necessary but not sufficient. Other factors in the ECB and elsewhere to my mind make this policy less likely to succeed than might be hoped.
First, this approach depends on the banks ultimately passing on their money to productive sectors of the economy. The way in which central bank actions filter into the real economy is one that has been much studied. The bank channel has been the focus of much scrutiny in recent years. The BIS concluded that individual bank capital positions were crucial to their ability to lend on. The also concluded that the key issue was structuring the capital base to allow this to happen. European banks and in particular Spanish banks are not yet fixed. We see in Ireland that the next wave of losses from mortgages is now beginning to consume political and economic capital.
Second, it is in any case treating the symptom not the cause of the problem. European sovereign states display high borrowing costs because of too much debt. The cost of debt is a function of supply and demand; at present there is a lot of cheap liquidity sloshing around which allows banks to purchase this high yielding debt and make a profit. But this exacerbates the issue if states consider that the lowering of bond yields indicates that they can take reform slow. European states are on a tightrope: too much austerity and the economy crashes – this is Greece, where real poverty and want are now rampant, and still the debts are unsustainable. Too little and the markets fear a Greek or worse write-down, this is Portugal or Spain. The circles of austerity-growth-market confidence are unsquarable in my view. We cannot solve too much debt with more debt.
Third there is evidence that the ECB is beginning to adopt a core-periphery approach. In his press conference after the last ECB board meeting Dragi made a number of comments that suggest to me that the ECB board was preparing a Plan B. He restated that where central ECB liquidity operations were not available for banks then domestic central bank liquidity was available. He also reiterated that this was however at the risk (read certainty) of exposure of the domestic sovereign. We have seen this here: despite the best spin that the government has put on it and notwithstanding that there is another game in town with the final settlement of the banks, the brutal reality is that at the end of march this state DID pay 3.1b to the Central Bank of Ireland to pay down ELA which it had advanced to prop up the rotting corpse of Anglo. When the ECB speak of ELA being advanced at local risk this is what they mean. Prop up your banks if you wish but it’s on your own head. Oh, and don’t let them fail. This is a recipe for a Europe populated by Anglo Irish Bank zombie clones. On household (read mortgage) debt overhangs being somehow adjusted (read, written down), The IMF suggests, and the ECB kinda agrees that it should be talked about, but of course the ECB also want us to continue to repay for the ghastly corpse of Anglo (but if he can find some money lads, after that, why not write down a bit of debt)…More recently Jörg Asmussen of the ECB told audiences in Ireland that, in essence, we were on our own with the banking debts.
Fourth, there is a growing theological strain in discourse that debt is not just wrong; it in some ways indicates a moral laxity. Backbench government TDs are increasingly adopting a ‘tullamore housewife’ approach, that government should not spend more than they earn. This of course ignores completely the reality that a state is not a household, and displays a dangerous ignorance of modern macroeconomic reality. At the same time we are being asked to vote on a fiscal compact which will not only in effect ban borrowing but given our debt levels will require us to run cyclical surpluses. That will, inevitably, lead to more austerity.
There are irreconcilable forces beginning to emerge in the European and national debate. At the heart of these lies the ECBs insistence that under no circumstances must banks fail coupled with its abhorrence of any hint of inflation. This is of course counter to the emergent European commission perspective on bank resolution and to the historic reality that debts do get restructured either via inflation or default. Europe will have to choose. There is too much debt. Either it gets written off via inflation, anathema to the Bundesbank , now incarnate as the European Central Bank, or it gets written off in a more or less organised fashion via a Greek style arrangement. The alternative is that the strains on the euro grow, and something breaks. Even now Citibank estimate a 50-50 chance greece will have to exit. Like a seat of flywheels, when one part of the euro breaks off it is highly probable that that a majority of the other parts will fly off also. The German politicians who have then demanded impossible things of the periphery will find the export chickens coming home to roost rather rapidly as their exporters face 30% plus deutche mark appreciation. Then we will see that competitiveness is relative, not absolute.
Posted in Blogpost, Journalism
Tagged Anglo, banking, Central Bank, ECB, economy, Europe, Fiscal Compact, greece, ireland, politics, Referendum
Back in antebellum America, it was common for negro slaves to avoid marrying a spouse from the same plantation for a very poignant reason – no man or woman wants to see their beloved raped, humiliated, beaten or whipped before their very eyes, it’s more than can be borne, and for that reason slaves often married slaves from neighbouring or distant plantations to avoid the reality of their powerlessness in protecting their beloved.
Well, if you want to know the answer to that question you will have to buy my new book, which contains a bunch of essays.
Contributors include:
Aimed at the general reader and published by Orpen Press it is available from all good bookstores and from Amazon. An ebook/kindle version should be available by 6/April/12
Posted in Blogpost
Tagged Anglo, bondholders, competitveness, declan ganley, default, economy, Europe, financial economists, greece, ireland, literature, NAMA, politics, Promissory Notes, reform, research
And the results are in :
76% of people DO NOT think there will be a meaningful deal on the Prom Notes, 17% DO and 8% dont know what a PromNote is. These may include members of the oireachtas….
Posted in Blogpost
Tagged Anglo, banking, Central Bank, Fiscal Compact, politics, poll, Promissory Notes
So another day and more discussion on will we/wont we get a deal on the Anglo Irish Promissory Notes….
What do you think? Here is a short poll, I will leave it open until 1700h today. I define “meaningful” as a deal that will at the very least allow the state to save €1b or more per annum over the next decade on these notes….
Posted in Blogpost
Tagged Anglo, banking, Central Bank, Fiscal Compact, politics, poll, Promissory Notes
This post is a longer version of an oped published in the Irish Examiner Saturday 3 March 2012
So, another European referendum looms, with all that heat and lack of light that we can expect based on previous referenda. Expect the arguments from the no side over the months ahead, to revolve around septic tanks, water charges, local hospitals, waste collection policy, calls for imaginary non-austerity policies, anything but the substantive issue. This will be matched on the yes side by increasingly every more apocalyptic warnings of a no, stating the dangers of being expelled from the euro, the EU, EFTA, the UN, the planet, with accompanying rains of frogs. The reality is that the fiscal compact, as I have noted prior, is a poorly specified and blunt instrument to institutionalize euro wide a particular style of Germanic fiscal policies. It may however be the best poor and blunt instrument we can get at this stage. Many questions remain, and I await answers to them as a voter.
To reiterate, the core of the compact is that countries should adhere to a 60% debt/GDP limit, getting there via a deficit target of 3%, and a structural deficit of 1% per annum.
The present state of Euro affairs is that for the most part countries are outside these limits. For 2011, looking at the Eurozone, Estonia, Finland, Luxembourg, Slovakia, and Slovenia are at or below the 60% limit and only the first three comply with all the requirements. Outside the zone only Sweden is compliant. Thus the entire EU is being asked to adhere to a rule that at present less than 4% of the union, by GDP, can achieve. This is strange to put it mildly.
The good idea at the heart of the Fiscal Compact is that in the long-term a lower debt/gdp ratio is more sustainable, the country is more solvent. The 60% level is well below the by now generally accepted 80% as being danger and 120% unsustainable rubrics which research has indicated. Thus, the fiscal compact is one of good intentions. My concern is whether we can in fact get from here to there. For many of the highly indebted countries we are seeing the limits to austerity. The danger of self reinforcing negative feedback loops, where more austerity leads to a faster decline in the economy requiring more austerity to reach targets is evident in Greece and spain and in my and other opinions we in Ireland run that risk also. Indeed, the EU commission has noted this stating
“negative feedback loops between weak sovereign debtors, fragile financial markets and a slowing real economy do not yet appear to have been broken.”
In the Irish case, which is the one we should in the first instance be concerned with, we face two separate but interlinked debt burdens. First, we have a debt burden, the largest part of the total, which is as a consequence of previous overspending by governments. Second, we face a debt burden arising from the disastrous banking policy of 2008-9. Much of the talk on the compact is around whether we can get relief on the 3.1b per annum repayment of the Anglo promissory notes. The Irish times posits this talk as being “a quality of deep naivety or cynical politicking”, a Manichean view that omits the possibility that…one might think it the right and correct thing to do. I have been arguing for years , sometimes in the Irish Times no less, that whatever about the other banks, Anglo (the black sheep of the Irish banking crisis) and INBS (its dingleberry) should not be a drain on the taxpayer. So have many others, including even now the IMF, and it is sad to see a lamentable lack of understanding of the basic elements of the Promissory Notes that once again the Times seems to think that the interest rate on the notes is an important issue. While complex it was not beyond the comprehension of the members of the Oireachtas committee to see that this is not the case. See here for my presentation, here for Karl Whelan and here for Stephen Kinsella.
At present the success of the austerity policy is being noted via the fall in bond yields. While this has happened, it is in significant part down to the trillion euro of cheap three year money which the ECB has made available to banks over the last months vi its Long-term RollOver programme. What has happened to this money is that banks have taken the cash at 1% and either paid down own debt or invested in high yielding peripheral bonds, gaining significant profits either way. The effect has been to restore faith in the bank bonds, again showing the importance that the ECB can play if it desires. Very little of this money has or will trickle down to the real economy. This money is for three years only, as otherwise it would result in a seemingly unacceptable increase in EU money supply.
A proposition then appears which while logical and in my view sensible would almost certainly not be approved by the inflation and austerity hawks of the bundesbank manqué that the ECB has become. It is to explicitly link the writing down of all national debts to 60% GDP via monetization of debt combined with the fiscal compact. At the bottom of the post see a table where I show the present state of debt and how much of a reduction would be required to get it to 60%. If we think that the broad outlines of the fiscal compact are reasonable sensible (and with reservations, I do) then we should ensure that all countries are able to adhere to them. The issue is that we might not be able to get from here to there. So, while as a general principle monetization of the debt leads to inflation (defined recall as too much money chasing too few goods, and it is undoubtedly the case that at present there is a lag in aggregate demand in Europe making the too few goods argument weak), as a once off restoration of state balance sheets along the lines that the LTRO has done for bank balance sheets I would support it. Inflation in the Eurozone is hardly raging out of control.
While Eurosystem central banks are prohibited from directly purchasing government debt the use of LTRO funds via banks has indirectly breached this. But reducing government bond yields is only of use to a country seeking to raise funds if that country is solvent. To reduce the debts of all , even Germany, to the 60% level would require 2.4t to be mobilized, used to purchase and retire debt. We have seen that While this is a very large amount, it would be of direct benefit to the citizens of Europe. If we can, in effect, bail out the banks via the LTRO then we should be willing to bail out the citizens. To do otherwise would be in my opinion immoral.
| Debt as % GDP 2010 | Debt €M | GDP | 60% Target | Reduction in Debt | |
| Greece |
144.9 |
329,351 |
227,295 |
136,377 |
192,974 |
| Italy |
118.4 |
1,842,826 |
1,556,441 |
933,865 |
908,961 |
| Belgium |
96.2 |
340,739 |
354,198 |
212,519 |
128,220 |
| Ireland |
92.5 |
144,269 |
155,966 |
93,580 |
50,689 |
| Germany |
83.2 |
2,061,795 |
2,478,119 |
1,486,871 |
574,924 |
| France |
82.3 |
1,591,169 |
1,933,377 |
1,160,026 |
431,143 |
| Hungary |
81.3 |
78,250 |
96,248 |
57,749 |
20,501 |
| Austria |
71.8 |
205,576 |
286,318 |
171,791 |
33,785 |
| Malta |
69 |
4,250 |
6,160 |
3,696 |
554 |
| Netherlands |
62.9 |
369,894 |
588,067 |
352,840 |
17,054 |
| Cyprus |
61.5 |
10,653 |
17,321 |
10,393 |
260 |
| Spain |
61 |
641,802 |
1,052,134 |
631,281 |
10,521 |
| total |
2,369,586 |
Posted in Blogpost, Journalism
Tagged Anglo, Central Bank, ELA, Europe, Fiscal Compact, greece, Promissory Notes, Referendum
Below is a version of the written presentation I circulated to members of the Oireachtas Committee on Finance at our discussions today on ELA and Promissory Notes.
ELA is money. It is not a bond. Dealing with ELA does not involve dealing with bondholder although the money so created was used to redeem (pay off) bondholders. The acronym ELA stands for Extraordinary Liquidity Arrangement, and the name of indicates what it is. It is first and foremost extraordinary, in that it is a facility extended to commercial banks by central banks when ordinary (usually taken to be interbank or regular central bank ) short or medium term funding is not available for whatever reason. It is liquidity, in that it is designed to allow a bank to maintain liquidity to its operations and customers, rather than a solvency arrangement, which is designed to ensure that the organization is well capitalized and able to trade in the longer term. It is a basic tenet of corporate finance that we draw a distinction between these two concepts ; solvency, achieved through capital, is a longterm concept while liquidity is a rolling short-term issue. Liquidity crises, for countries or for companies, can arise when lenders no longer have confidence in the solvency of the borrower. This is what happened in September 2008, the initial focus being on the solvency of Anglo and Irish Nationwide (now collectively known as Irish Bank Resolution Corporation, IBRC).
ELA is money. In the normal course of events in the eurosystem money is created under agreed mechanisms. Central Banks have the power to create money ‘by fiat’ that is to say they can create it from nothing. ELA is not part of the normal operation of this monetary creation but is allowed in extraordinary circumstances. ELA is carried as an asset on the balance sheets of the creating central bank, in the case here the Irish central bank. It is not created by borrowing from other central banks. It is not a bond. It is not money loaned to the central bank of Ireland from the ECB, nor money loaned from the other central banks. It is money, as real as any other form of credit agancy. It is pure money creation, by fiat, allowed in exceptional circumstances. As of end-2011 this domestically created money amounted to some €44billion.
How is this money mobilized? When Anglo/INBS became hopeless and obviously insolvent the Irish government recapitalised them. The largest part of this recapitalisation was via the creation by the irish government of a Promissory Note which was issued to the banks. This was not and is not a sovereign bond. We know that it was not and is not as the ECB refused to accept this for normal liquidity operations, forcing Anglo/INBS to instead go to the central bank of ireland and swap this for money which was then used to finance Anglo/INBS, including paying off senior bondholders, paying staff wages, payment of interest on deposits etc. In effect the Central Bank of Ireland monetized the government IOU. The government have agreed to pay off the Promissory Note over a 15 year period. As there is, to put it mildly, considerable doubt as to whether the remaining assets of IBRC are sufficient to generate income to repay its debts the Minister for Finance in March 2010 as well as creating the Promissory Notes also gave (as of this date secret) letters of comfort to the Central Bank (Sole shareholder, the Minister for Finance) promising repayment of the ELA were IBRC unable to repay. Thus the state in effect is indemnifying itself against its own actions. An analogy might be that we borrow from a bank, put that money into a pocket, then move it to another pocket, then take it out and burn it. The effect is the same. Money is destroyed in the same amount as it was created, in order that the european money supply does not increas
How much is this going to cost us? In essence, through the next 15 years the state will repay the promissory note at a rate of approximately €3.1b per annum.
This repayment is treated in the government accounts as a capital expenditure, and can be found in Note 6 of the 2012 estimates as show above. This expenditure cannot therefore be deployed to other, productive, usage. Each year a capital allocation is made for the repayment of these. This capital must be either raised from taxation or borrowed. The true interest issue therefore of the Promissory Note is NOT the implicit interest rate which is paid on them, rather it is the cost of the funds borrowed to, in effect, recapitalize the banks holding the Promissory Notes. Thus seekingconcessions on the interest rate element of the Promissory Note is seeking the wrong concession.
Another issue as to why this matters and why we are paying is that Eurostat decided that as the Promissory Note was irrevocable it was appropriate to treat this as a €31b increase in the national debt, resulting in a world-beating 32% of GDP deficit in 2010. There is no doubt in my mind that the nature of the note and the consequent realization that it was in fact debt played a large part in the slow but inexorable locking out of Ireland from the regular bond markets and the need to become wards of the Troika.
What can be done about this and who can do it? The essence therefore is as follows: the Central Bank of Ireland has created money, outside the normal course of Eurosystem operations for the creation of money. This it is allowed to do under delegated power. However, this delegated power is circumscribed. In effect the ECB council can veto the action of the national central banks when they act in the manner in which the Central Bank of Ireland has done, but only by a 2/3 majority. Thus the presumption is that in general when central banks act to extend ELA they are doing so in a manner that does not interfere with the normal actions of the ECB.
This is where the crux of the matter lies I submit. While the creation of €40b or so of additional money by the central bank of Ireland is small in the context of a Euro area M3 (broad money supply) of €9800b, amounting less than 1/2 of 1%, the ECB has a mandated inflation fighting role. Add to this the historic antipathy of Germany, the dominant power in european monetary affairs, to any form of inflation and we see that the creation of money in this manner is potentially problematic. Were the Central Bank of Ireland not to require the repayment of the ELA, and the writing down of the money supply, this would represent a permanent increase in the monetary base of the Eurozone. 1/2 of 1% is not much but what if other countries were to commence to refinance their banks in this manner? What if in fact countries were to take up a suggestion made that the debtor countries refinance their sovereign debts in this manner? Ireland issues a €X hundred billion promissory note to IBRC, IBRC swaps that at the Central Bank of Ireland for newly created money, the NTMA issue a €X hundred billion bond for 100 years duration at a low interest rate, and IBRC purchases the bond with the real money which the state now has on hand on deposit to fund itself while we restructure the financial and economic system. What if Greece were to do this? Clearly we could quickly find hundreds of billions of ELA created euros being added. This is what is known as monetising the debt and it is anathema to the ECB for reasons of inflation as well as being a de facto breach of the rule that the ECB is not allowed to finance government deficits directly. Such monetary creation is further anathema to countries such as Germany who have in the past suffered episodes of hyperinflation. I would note that at 3% inflation we are far from hyperinflation. European money supply (M3) has remained within a narrow band of €9.2tri to €9.8tri since the middle of 2008 and in recent months has in fact begun to fall sharply again, having fallen heavily (as might be expected) in the global financial crisis. We are a long way from inflationary pressures.
It is highly probable that were countries to seek to do this they would find themselves running a real danger of being cut off from further and ongoing liquidity support, might be accused of having the central banks funding the deficit (deficit financing) and be in breach of treaties. Such a move would only be used in extremis but it does show that ELA has the potential for unlimited monetary creation and should be treated as such. It should be noted that we have had experience of a large currency union breakup in the recent past, with the breakup of the Rouble Zone, which zone lasted after the political union of which it was the currency, the Soviet Union. . Nonetheless, such debt monetisation while a solution to the immediate liquidity problems of countries would in the long term pose a threat of inflation and would not in any case solve the solvency issues of countries or banks and might in the long term pose more problems than it would solve. However, in the here and now …
There are three ways in which we can deal with the cost of the ELA.
1. One is to extend the term of the ELA repayment from 15 years to a much longer period. Extending by 10 times, to 150 years would reduce the annual cost in the same manner. However, we would be ‘stuck’ with IBRC for potentially that period.
2. Another way we could deal with this cost is to simply write the whole issue off. This is NOT burning bondholders, nor is it burning ourselves. However, the consequence of removing the Promissory Note and associated Letters of Comfort might be to render IBRC technically as opposed to functionally dead. IBRC, if we write off the ELA and the associated Promissory Notes, would have remaining assets (loans not transferred to NAMA) and liabilities (some remaining ELA , some ECB loans, a small amount of deposits and some remaining bonds. If after restructuring the balance sheet IBRC is not able to service its liablities then it can and should be wound up. Again this seems to have been ruled our by successive governments and the ECB over the years, despite that it too would be the effect of saving the state the ongoing drain of €3.1b per annum.
3. A third solution would be to seek to defer, to continue in the kicking of the can at which successive governments and european institutions have excelled. We have already received deferment till 2014 of the implicit interest payment on the Promissory Notes, and if such were to be extended for a number of years the strain would be at least be deferred.
All of these however, of which I prefer the second, would require that the ECB accede to this request. The Irish voice on the ECB is not answerable to either this committee nor any organ of government, which is right and proper. It is in my view highly improbable that Governor Honohan has not raised these or similar proposals at the ECB, but the evidence is that so far there is no will from the ECB to allow movement. Why that is remains unclear as it has recently shown willingness to accept heretofore unpalatable actions in regard to Greece. Removing the burden of the Promissory Notes in some manner would only assist the government. It would assist it politically in terms of implementing the needed closing of the gap between state expenditure and taxation and it would assist in base monetary terms. If the Troika wish to have a ‘good example’ of its policies as opposed to a set of ‘horrible warnings’ they could do worse than quietly monetize the Irish banking debt, making clear that this is (at least in principle) a one off and reflects the reality that in doing so they acknowledge the role the Irish taxpayer has played in preventing contagion into the banking bond market in 2008/9.
Posted in Blogpost
Tagged Anglo, banking, bondholders, Central Bank, Dail eireann, ECB, ELA, politics, Promissory Notes, Seanad, Senators
Following up on my blogpost today and just in time for the sunday business and talking heads shows, some questions spring to mind on the Fiscal Compact. Feel free to pose these to relevant politicians or better yet to answer them below..
Posted in Blogpost
Tagged Anglo, consistent method, debt levels, economic collapse, economy, Europe, financial economists, Fiscal Compact, ireland, politics, sovereign debt, taxation
