text:
Letters of November 2010
Post author By Seamus Coffey
Jean Claude Trichet's 19th November 2010 letter to "Tánaiste" Brian Lenihan is here. Brian Lenihan's reply. It should be remembered that Gavin Sheridan has been to the fore in the efforts to get the Trichet letter published.
UPDATE: ECB page on this is here with lots of related information and material.
Categories In Bailout
150 Comments on Letters of November 2010
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150 replies on "Letters of November 2010"
Ciaran O'Hagansays:
There is nothing in the letter in the ECB to the Irish MoF, if this is it, that surprises me or seems out of line with its role.
I'd be afraid though that the media and readers will confuse matters. It is all easy too easy to forget that this letter came after the process of the socialisation of Irish bank losses by the Irish government at the time was almost complete. That process started in 2008 and was largely approved by the Dáil, including most of the opposition. But even at that point, there was still time to provide a less iron-cast guarantee.
The position of the ECB and of other EU governments tended to be anti-guarantee in 2008 (as my previous posts here indicated). That was more because they thought Ireland was embarking on anti-competitive measures rather than fears for the Irish taxpayer.
And this latter now shows in 2010 that the ECB is coming in to help clear up the mess and safeguard financial stability, and in the process providing support with zero cost funding through the ELA. .
DOCMsays:
This information note from the ECB on ELA which I posted on another thread is also informative.
https://www.ecb.europa.eu/pub/pdf/other/201402_elaprocedures.en.pdf?e716d1d560392b10142724f50c6bf66a
@ COH
Rather agreeing to it being provided!
"The repayment of the funds provided in the form of ELA shall be
fully guaranteed by the Irish government, which would ensure the payment of
immediate compensation to the Central Bank of Ireland in the event of missed
payments on the side of the recipient institutions."
Maybe the references in the Lenihan letter to the Eurosystem will finally bring home to the Irish commentariat the fact of its existence.
Bond. Eoin Bond...says:
From the other thread, while we waited for Sea us to finish his cornflakes…
Bond. Eoin Bond… Says:
November 6th, 2014 at 10:31 am
The letter contains nothing particularly surprising or scandalous, but does show how the ECB, due to their increasing role as firefighter of the euro crisis whilst at the same time lacking formal rules requesting or allowing them to do this, were becoming increasingly uncomfortable in this position. They then strayed into areas of public policy and sovereignty which should be reserved for democratically elected people only.
So the ECB should not have threatened and demanded a decision of so overtly the Finance Minister of a democratically elected EU and EZ member state, but on the other hand I'm not sure that they had any other choice than to make clear their unwillingness to allow this unusual situation (ever rising ELA access, one country taking huge amounts of Eurosystem liquidity way beyond their relative size in EZ) to continue indefinitely or without some form of public guarantee/support backing it up. The alternative would be for Trichet to not bother writing the letter at all, and decide via the GC to just end the ELA, justifying it on the basis of ECB independence?
Ernie Ballsays:
@Ciaran O'Hagan
What reason is there to think that the same ECB that blackmailed Ireland into accepting a bailout did not also blackmail Ireland into guaranteeing its banks (or something very like it) in 2008?
seafóidsays:
I think what Morgan Kelly said back in 2011 was most relevant.
"Brian Lenihan's original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.
As a respected academic expert on banking crises, Honohan commanded the international authority to have announced that the guarantee had been made in haste and with poor information, and would be replaced by a restructuring where bonds in the banks would be swapped for shares.
Instead, Honohan seemed unperturbed by the possible scale of bank losses, repeatedly insisting that they were "manageable". Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s.
Rising dismay at Honohan's judgment crystallised into outright scepticism after an extraordinary interview with Bloomberg business news on May 28th last year. Having overseen the Central Bank's "quite aggressive" stress tests of the Irish banks, he assured them that he would have "the two big banks, fixed by the end of the year. I think it's quite good news The banks are floating away from dependence on the State and will be free standing".
Honohan's miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person. "
What, if any, influence did the ECB have in Honohan's "it'll be grand" strategy ?
By the time Trichet sent that letter to Lenihan Aughrim was lost.
@ Ernie
Reasonably sure the charred remains of FF would have alerted us to that particularly conspiracy theory were it in even the smallest bit true.
Stephen Kinsellasays:
There's nothing new in the letter, really, though its tone is a bit strong, in the context of the negotiations taking place at the time detailed by Alan Ahearne in the Calm and Crisis book, the letter was stating the ECB's position.
I'm worried the ECB will now be portrayed as the big baddie in all of this, an external oppressor whose actions made our lives worse, while of course eschewing our own role in the Irish economy's collapse.
In any case, a more pertinent question is why now? Why today are we seeing a letter Gavin Sheridan of the story.ie and colleagues have been hunting for for 3 years?
Who benefits from the leak today?
Carsonsays:
Hardly a conspiracy! The ECB was clearly happy for the Irish government to bear much of the cost of the Irish banking sector collapse while seeking to protect senior bond holders as a rule. That is well known. No conspiracies there and I'm not sure why you would even choose to use that word.
Looks like I was wrong to give Brian Lenehan ALL the credit for Ireland's current boom. Some of the credit at least should go to Monsieur Trichet. With his firm hand and wise advice at the time, Monsieur Trichet helped restore the honour of France, which had been badly marred by the Thierry Henri cheating incident almost a year to the day before.
That we are talking about 'credit' and not 'blame' is obvious from the following:
(1) Ireland's GDP growth between Nov 2010 and Q2 2014 was 9%, one of the highest in the EU – and EU Commission forecasts Ireland to have the highest growth in the entire EU (not just the Eurozone) up to 2016 at least (its forecasts don't go beyond that).
(2) Budget deficit in Nov 2010: 12% of GDP – budget deficit forecast for 2015: 2.7%, but going by this week's exchequer figures, likely to be well below that. In the UK the budget deficit is stuck stubbornly at 6% and is rising.
(3) Government 10-year borrowing rate in Nov 2010: 14% – as of now, approximately 1.5% – 2%.
(4) Unemployment rate in Nov 2010: 14.7% – as of now, 11% and falling rapidly. At its current rate of fall, it could hit 7% by 2016. And the EU Commission forecasts this week show net immigration returning by 2016.
The onus is on those, who are saying that the banking system should have been allowed to collapse and bondholders screwed, to tell us whether they think Ireland would now be achieving these results if their advice had been followed. They should now tell us what they think Ireland's growth rate, budget deficit, borrowing rate and unemployment rate would now be if MK's advice at the time had been followed. If they can't tell us, it speaks volumes.
Of course, it would have been much better if Ireland had not got into the situation it was in at that time. The budget deficit was far too high. But, it was not significantly higher than the UK or US, which had no problem funding their deficits in the market. The difference was that Ireland was deluged with Armageddon forecasts from numerous braindead politically-motivated economists. Every day they told us that the economy was finished and bankruptcy was inevitable. MK was the worst, but plenty of others too. The result was that the markets panicked, wouldn't lend, and Ireland was in a stew. The decisions taken at the time are what has turned it around.
The bottom line is this: Between Nov 2010 and now the trajectory of the Irish economy has been 180 degrees opposite to what these economists predicted at the time. Realisation that this is so is why they sneer at every economic statistic that now comes out and why they are going to such absurd lengths to deny the current growth, as a recent article in Village Idiot magazine highlights.
@ Carson
So you think the ECB blackmailed ireland into putting the bank guarantee in place in 2008? I'm going to assume you misread the comments above.
Well the word blackmail is a bit emotionally charged. Replace it with influenced or strong-armed and then I don't see anything too conspiratorial in Ernie's comment.
Very obvious that the British Nationalist anti-EU movement in the UK hopes to benefit (not sure if they will). I expect the Torygraph and Mail will go to town on this. Ambrose-Evans Pritchard and Daniel Hanaan are sure to be telling us soon how appalled they are at the way the EU has treated Ireland and how much better the UK would treat Ireland, if only Ireland saw sense and returned to the UK's loving embrace. I am not saying Cameron or Osborne are behind it. But, there is currently a strong British Nationalist anti-EU movement in the UK, which is heavily represented among the political class, the media, the military/MI5, and the City of London. They would dearly love to bring down the Euro and possibly the EU itself. Their reasons are twofold: (a) legitimate economic concerns (b) the future of the UK as a political entity. Scotland's independence movement and its refusal to go away has spooked them. They now realise that a successful Euro and EU means the end of the UK. They see Ireland as a weak link in the Euro and EU, not because its economy is weak, but because of its historic connections with the UK. They would dearly love Ireland to be forced out of the Euro and have to crawl back to Mother England for support, so they could hold it up as an example to the Scots not to go down the same route. A successful Irish economy within the Euro and EU means inevitably Scotland following Ireland's example within a few years and the end of the UK. I'd be amazed if they aren't paying a lot of Irish politicians, commentators, academics and economists to do their bidding.
@ JTO
It was undoubtedly a prospect too terrible to contemplate, that of being annihilated at the polls, that made the then government dither until it was almost too late. But the point that you make is essentially correct i.e. without the strong direction of the president of the ECB and the financial cooperation of other countries, including two not even in the EZ (the UK and Sweden), the situation would have become even worse. Not a very pleasant experience which has left more than a few scars, the dispute about who is responsible for them being unlikely ever to be settled.
In this respect, the reply of Brian Lenihan is more interesting, in many ways, than the letter from Trichet.
That there has been no improvement in the quality of government in Ireland is obvious. In many respects, the economy succeeds despite the best efforts of government to intervene.
The ELA numbers given by Dan in the previous thread demonstrated that foreign capital had left the building so the bailout was a formality given the emotional state of the markets . A classic emerging markets crash.
http://www.ft.com/cms/s/0/2bd925be-0bdb-11e3-8840-00144feabdc0.html
Dan McLaughlinsays:
Ireland had already implemented half the total fiscal adjustments eventually undertaken anyway but should the ECB be linking support for ELA to changes in fiscal policy?.
On a broader point the tension reported by Reuters within the Governing Council about QE is intense, including a North/South divide and the possibility of internal legal action if this report is to be believed
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11211973/Mario-Draghis-efforts-to-save-EMU-have-hit-the-Berlin-Wall.html
John Martinsays:
The official EU line is that the guarantee was a solo run by Lenihan. The EU condemned it, perhaps under pressure from the UK. But then it realised that some form of guarantee was necessary and other countries implemented a similar policy.
The fact that Lenihan went on a solo run was very convenient for the EU. Because they (e.g Ollie Rehn) could put about the idea that the cause of the banking crisis was down to the guarantee or at least the guarantee was a "mistake". But as Alan Ahearne has pointed out in his essay in the recently published book on Brian Lenihan: even when the guarantee expired the EU prevented Ireland from burning senior bondholders.
But overall I think the guarantee was the correct policy (although we could argue about some of the details, which in my view are quibbles). Also, I agree with JTO: Trichet could not continue pumping ELA into the Irish banks and allow the Euro to be undermined.
That's legal?!says:
This is about sovereignty, no? The letter shows the ECB over stepped the mark. They probably did it because the only action they could perform within their mandate was to withdraw funding. The why doesn't make it Legal though.
@ Talking about leaks!
http://euobserver.com/news/126404
@ That's legal
Sovereignty is limited by the legal obligations freely accepted not just by the Irish government but with popular endorsement in the case of the EU. What is clear from the letter is that it was largely a case of crossing the T's and dotting the I's on an agreement to which the then government – still putting electoral survival at the top of its priorities – had to be dragged or, at least, left a doubt as to sticking with it.
It may be noted that the Lenihan letter, referring to Trichet, refers to the "advice that you have personally and courteously conveyed to me in recent days"
Ossian Smythsays:
Paul McCulley, the Pimco economist was interviewed on Morning Ireland today.
He said something very odd:
"Ireland didn't have a fiscal problem, it had a banking problem.."
http://www.rte.ie/radio/utils/radioplayer/rteradioweb.html#!rii=9%3A20676788%3A48%3A06%2D11%2D2014%3A
the ECB was AGAINST the Irish government guarantee (at least in its explicit format, the implicit one was how EU/EZ economies were supposed to do it). You need to refresh your history.
Re: The Famous Risky Assets
In November 2010, minister Lenehan wrote,
The establishment of NAMA was announced in April 2009 to remove the riskiest land and property development loans from the banks' balance sheets.
I do have to laugh at this now. It's almost cute to look at, isn't it?
In a way I'm glad that this sentence managed to make its way into minister Lenehan's November 2010 letter, as it will give me an opportunity now, . . . to put this all in the context of present day Ireland and banking and finance.
In the midst of the whole confusion and chaos in 2008, 2009, . . . it appeared as if, all one had to do with the balance sheets of the Irish banks, was to remove this 'risky' stuff.
I'll tell you what though. What a banking inquiry should try to demonstrate, if it was possible to do so, . . . is that the problem with the Irish banks' balance sheets, . . . was not the presence of too much risk, but something entirely different.
And the reason this is important, to understand, is because it's still a problem today.
The major problem with a banking duopoly, in Ireland, is as follows.
The Irish banks want to hedge too many bets, or worse, not bet at all. I think, that this is much closer to the truth of what did happen, with the said risky loans, what minister Lenehan had tried to understand back in 2008, 2009 and 2010.
The problem with having a duopoly in banking in a country such as Ireland, is that the banks attempt to bet on every horse in the race, in a mistaken comprehension that this is going to remove risk from their balance sheets. The Irish banks in the period leading up until 2007/08, . . . were able to fund almost every nag, in every part of the island, . . . to take up a position on the starting blocks.
However, the Irish banks had no idea how to get any horses off of the starting blocks, and anywhere near something that would resemble a finishing line.
The reason why NAMA had to be created and loans removed, from the balance sheets of the Irish banks, . . . is that the Irish banks had arranged so many runners, for the start of the race, . . . perhaps, an awful lot more than was necessary, . . . and those runners by 2008, had begun to freeze to death, because they had nothing to feed them, and there was no starting gun.
That's when all of the runners, begin to fight with each other, . . . as we all witnessed, . . . and began tearing numbers off each other's backs, and other such devilment.
And this is still the problem, that is embedded into the Irish banking system in 2014, . . . where these risky developers, that the minister refers to, . . . are still trying search down the backs of couches to find money to do anything.
We went through an extraordinary expensive process of moving loans around the place, and engaging in all kinds of smoke and mirrors, . . . and we still haven't IDENTIFIED, much less addressed any of the major sources of risk, that caused the collapse of the Irish economy.
And this is with how many episodes now of the Vincent Browne show, and how many appearances from how many of our best economic analysts on that show ? ? ? ? BOH.
http://news.bbc.co.uk/2/hi/uk_news/northern_ireland/7650041.stm
081003 Brian Cowen, arriving at a conference in Trinity College, Dublin yesterday: "We're in extraordinary economic circumstances. We face stark choices. If we do not make the right ones, it will have catastrophic consequences."
http://www.rte.ie/news/2014/0625/626436-banking-inquiry/
"The banking inquiry has been told that, on legal advice, it will not be able to discuss the Cabinet meeting during which the bank guarantee was discussed due to Cabinet confidentiality."
@ BEB
Ok. I'll take that at your word. But if the ECB was initially against the bank guarantee, why did it insist the Irish government stand over it later when it was clear the ultimate cost was going to be enormous? Why not bail in the senior bond holders then and has now become policy for future bank failures within the EuroZone?
Gavin Kosticksays:
I look forward to Colm MCarthy's column on this.
Some points:
* It would be interesting to go back to Governor Honohan's account.
Recently he is quoted as saying:
'"The Troika staff told Brian in categorical terms that burning the bondholders would mean no programme and, accordingly, could not be countenanced," Dr Honohan writes. "For whatever reason, they waited until after this showdown to inform me of this decision, which had apparently been taken at a very high-level teleconference to which no Irish representative was invited."'
But the Trichet letter is clear about the ECB's position at least:
"3) The plan for the restructuring of the Irish financial sector shall
include the provision of the necessary capital to those Irish banks needing it and will be funded by the financial resources provided at the European and international level to the Irish government as well as by financial means currently available to the lrish government, including existing cash reserves of the Irish government; 4) The repayment of the funds provided in the form of ELA shall be fully guaranteed by the Irish government, which would ensure the payment of immediate compensation to the Central Bank of Ireland in the event of missed payments on the side of the recipient institutions"
For the sake of clarity, prior to the bailout did Governor Honohan think senior bondholders could/should be burned? Was this brought up at the ECB Council? A narrative would be nice.
* I see here the ECB already considers itself as part of the Troika. How and when did that actually come about? Should the ECB be active in negotiating a bailout programme, given it has a representative on either side (Honohan) and that it is causing duress on the sovereign to take additional debt for a particular purpose – bailing out the banks, not necessarily in the self-declared interests of the country or Europe as a whole?
* What is the legal position on the ECB demanding fiscal adjustments from a government under threat of withdrawing funding.
* Does the ECB have the right to threaten to withdraw ELA to banks if no rules/laws have been broken? If it does, does it also have the right to insist sovereigns fully underwrite those losses when the sovereigns do not wish to do so?
http://www.independent.ie/irish-news/politics/revealed-the-troika-threats-to-bankrupt-ireland-30621197.html
@ Gavin
the best way to surmise ELA is as follows: the Lord giveth, and the Lord taketh away. It was a facility which it was completely at their discretion to advance and formulate the cost of, and therefore also to withdraw. They did not need a reason. The only thing they would have 'obligations' around would be the more regular liquidity they offered through their liquidity operations/tenders/windows. Given that no rules really applied to the offering of ELA, they could apply whatever "directions" or requirements they wanted to ensure its continuation.
Joseph Ryansays:
@JTO
You are a little confused in the history of our relationship with Mother England.
Lloyd George threatened "immediate and terrible war" within three days, if no Irish agreement was forthcoming.
The ECB in effect threatened economic war within 48 hours; no reply necessary.
@ Bond. Eoin Bond…
Fair enough – though it makes you wonder why you'd want to be part of that system. It's hard to imagine the Fed or the Bank of England doing something similar. Or perhaps they have.
The new documents added by Seamus Coffey show the ECB attempting to get its retaliation in first. It is true by very early October, 2008, they are having doubts about the near total guarantee – mainly as Irish banks get an unfair advantage.
But I think it was also the case that Brian Lenihan said that in a phone call with Trichet just before the guarantee he was urged to "save your banks at all costs".
At the moment it reads like a panicky situation where there was pressure from the ECB to save the banks – not only in Ireland – but that what the government did was beyond what was expected, to the point of really annoying not just the ECB but Alistair Darling as well. Perhaps a banking inquery might sort this out.
Neilersays:
As Pimco observe Ireland did not have a fiscal problem, it had a banking problem and accordingly the crux of the issue is the Bank Guarantee. As Morgan Kelly has written, why did the Irish Government not terminate or amend the terms of the Bank Guarantee at an opportune time in 2010 to reduce the exposure to the taxpayer? What was the involvement of the ECB (and Trichet personally) in such decision, which ultimately led to the bailout?
Second point is that if retrospective capitalisation of the banks is not legally permissible according to the ECB and Germany then we in Ireland can turn to legal niceties. We could focus on the ECB acting ultra vires (unlawfully) in effectively dictating fiscal policy to Ireland. Such unlawful actions had the clear intention of causing loss to Ireland and its taxpayers by demanding bailout funds and cash reserves to capitalise the banks, most of which will never be returned to Ireland and its taxpayers. As a lawyer, there seems to be some possibility for a claim of unlawful tortious interference with economic interests. We would certainly have needed a bailout but we did not have to use the funds to bailout the banks. No doubt those in Government don't have the courage to push that argument notwithstanding that the ECB and Germany throw fine legal argument in our faces to decline retrospective recap. If only we had a proper Irish Constitutional Court to give power to the taxpayer ….
The argument is often made that the euro system had no real rules that were taken seriously by the member countries.
In the early years of the currency, Germany and France broke the deficit rules.
Trichet was acting on behalf of the Governing Council and like any bank providing loans it was within its powers to restrict the Central Bank of Ireland from providing emergency funding. It had already provided Irish banks with funding of about €50m.
It's unlikely that the ECB threat of cutting off liquidity would have been pursued if the Government had rejected the bailout demand – what would have happened is that the ECB would have asked the Eurogroup of finance ministers to guarantee the advances and the end result would have been the same.
Iceland still has capital controls and like Argentina, vulture funds are waiting for their payoffs.
skeptic01says:
@DOCM
While the ECB was perfectly within its rights to demand that ELA be sorted out pronto or be withdrawn, it is very unfortunate for the monetary authority to give the impression of dictating what fiscal policy elements should be used to do that. They should also not have been involved in Troika arrangements, either here or elsewhere. No doubt they will defend what they did from a legal/mandate perspective, but the fact remains their actions have embroiled the ECB in political controversy. That's what happens when you try to determine the fiscal policies of states. Not appropriate for an independent central bank.
It is course true that governments abused ECB liquidity to avoid making difficult decisions. But they could have remedied that situation by simply stating that they would withdraw ELA unless the situation was resolved, and left it at that.
@ skepticO1
A very large audience will have been listening to a recap of the gruesome series of radio interviews given by some of the principal players on the Irish side during the weeks in question on RTE at midday. It will be clear to it that the then government, if not all over the place, had no clearly established position until the last minute. We should look collectively to the mote in our own eye before continuing this wild goose chase for a fall guy (which Trichet has evidently no intention of becoming).
What you suggest would not have remedied the dilemma confronting the ECB. It had given the Irish government too much ELA rope (a point which Trichet constantly repeats) but the fact that the country was broke could no longer be hidden e.g. behind meaningless mantras about being "fully funded until the middle of next year". Or the idea that ELA could be anything other than a temporary arrangement.
The ECB is remarkably free of supervision in the terms that this would be normally understood for a national central bank. But it is but an element of the Eurosystem which is made up of these banks, a fact which has yet to penetrate in commentariat and public awareness.
the Fed or BOE would not have done the same because they are at least partially answerable to a single political entity – the ECB is not. It is only somewhat answerable to a set of 17 countries, and that via an only marginally effective European Parliament. The Fed or the BOE would at least have to use some joint-up-thinking with their national governments before doing anything major in nature (outside of simple monetary policy). In the EZ context, you had creditors at odds with debtors at a national level.
@ Ossian Smyth
Paul McCulley: "Ireland didn't have a fiscal problem, it had a banking problem."
…and Spain didn't have a fiscal problem either until the bubble bust.
Alas, there was no bail-in mechanism and of course crying over spilt milk is too late – the issue of the bank guarantee had in effect resulted in Ireland unilaterally surrendering any chips it could play two years before.
On Sept 30 2008, it was regarded as a masterstroke by the insiders and their cheerleaders.
There was a smug satisfaction that a stroke had been pulled while the Europeans slept
Draghi said today that people "look at past events with today's eyes" and he added about the growth outlook that the bailout "decision wasn't that stupid."
@ DOCM
My suggestion is that the ECB should simply have stated that ELA would be withdrawn within a defined timeframe unless the Irish government could demonstrate that it would be repaid in full. That would assuredly have solved the ECB's problem as it would have forced the same outcome, but without the ECB participating in political negotiations about fiscal measures.
@ MH/Skeptic
i agree with Skeptic that the ECB response was very/too blunt and perilously drifting into national democratic politics. They should have kept their opinions/complaints to the Irish bank capital vs ELA usage debate, even if we all knew where the markets were leading the conclusion to.
@ Michael Hennigan
"Alas, there was no bail-in mechanism"
there still isn't
And there's way too much debt in the system
unfeasiblycharmingsays:
There was a unilateral, democratically taken decision taken by Ireland to guarantee everything that moved. In doing so, the mood was that it had yet again out-smarted stuffy old Europe, just like it had done in other areas of economic policy.
That Irish decision gave everyone managing funds a date to put in their diaries of Q3 2010 to either get the funds out of the country's banks or to have been convinced the Irish state would extend the guarantee beyond 2 years.
As the funds left, the ECB facilitated the honoring of Ireland's bank guarantee by extending ELA to the banks.
The unilateral move in 2008 by Ireland invented a new concept – risk-free banking – which by default, and unsurprisingly with the approval of bankers, was in then imposed on everyone else.
The 2008 move, in the absence of the many, many bears being wrong about Irish banks, meant future funding ie funding in late 2010 was entirely dependent on there being a credible state guarantee.
Once put in place with the approval of the Irish parliament the guarantee, later ELG, was legally binding under Irish law until the relevant expiry. The guarantee was said by the Irish government to be in Ireland's self-interest and the finance minister presented full repayment on Irish bank bonds as necessary in order to support confidence in Irish government bonds (presumably someone advised him market participants would fail to make the connection the other way round).
I would be interested to know how Patrick Honohan could have had the guarantee nullified before its expiry. How would that have worked?
I have heard the suggestion that the Irish government should have announced that they hadn't really meant they were guaranteeing liabilities when they guaranteed them in 2008. Bonkers stuff.
I would also be interested to read an explanation of why the ECB would have been obliged to continue providing ELA to institution the markets clearly believed were insolvent, a) indefinitely and b) when a state guarantee had been allowed to expire.
If the ECB were providing ELA on the basis of a state guarantee for the institutions it was lending to, was it supposed to ignore the market pricing of Irish government bonds which was suggesting the state guarantee itself might be demonstrably inadequate?
By Q3 2010 the mobile funds had already gone.
BeeCeeTeesays:
It's interesting that, while the letter from Trichet frames the ultimatum that all banks should be rescued, and that this should be done from public funds, as being about ELA, the justification provided by the ECB on its web site for opposing the bail-in of bondholders in 2010 gives a list of reasons that makes no mention of ELA whatsoever.
@ unfeasibly
"The 2008 move, in the absence of the many, many bears being wrong about Irish banks, meant future funding ie funding in late 2010 was entirely dependent on there being a credible state guarantee…." ….
or someone at the ECB promising to do "whatever it takes"
Which saved Commerzbank and MPS , amongst others
David O'Donnellsays:
Genealogy on the origin of the 'Banking Crisis':
Simples: The Progressive Democrats (PDs) takeover of Fianna Fail with their odious ideological 'FREE' (sic) Mawrket Ekonomicks ….
Michael McDowell, Mary Harney, Charles McCreevy & B. Ahern …
Rem the 'Light Touch Regulation' report chaired by McDowell anyone?
As sh1t hits fan, add in the powerful lobbying of the Financial System – Geithner, Trichet, German & French Financial Systems …. and a flawed ECB(undesbanke).
BTW, where are 'we' on a 'deal' on the odious Banking Debt? Sorted yet?
@BCT
Geithner. Period.
One of the features of this crisis is how often it has been underestimated. FF thought the guarantee would be enough. Trichet thought sticking the peripheral countries with the bond losses would do. Sarko thought his deft leadership could save France. The Fed thought QE would get exit velocity going. Every single growth projection has been wrong.
The ECB is ready to throw another E 1 trillion into the mix
http://www.ft.com/intl/cms/s/0/2a6a4896-65aa-11e4-aba7-00144feabdc0.html
skeptic01
Your suggestion would have been impracticable from the point of view of the ECB as it would have given up its leverage and left the markets to decide the issue; almost certainly to the detriment of the Eurosystem. The two requirements (i) restoring confidence in the ability of the Irish state to repay its loans whether to bail out the banks or to provide a soft landing (as opposed to a catastrophic crashing out likely to mark the economy for decades) by acceptance of the bailout and (ii) winding down ELA had to go together as a matter of practical politics.
The argument that the ECB should behave like a national central bank is IMHO beside the point as the ECB is not the central bank of a sovereign state but of a system of central banks, the ESCB. "Conditionality" has, in any case, become part of the language of its operations. That the institutional arrangements that applied at the time of the bailout were less than satisfactory is, of course, not in dispute.
In short; it worked! The country was put into administration; and emerged from it. Not even this government could put it back in.
@Unfeasibly
Agreed that the crux of the issue is whether the Irish Govt, the ECB and Prof Honohan had an option in 2010 to nullify the Guarantee. It was only renewed in Sept 2010 after Commission approval. Surely the option was for the Guarantee to be extended for all banks except Anglo and Nationwide who would be put into special liquidation and have deposit books transferred to Pillar Banks. Sounds familiar? In my view the fact the majority of the Irish banks' eligible bonds maturing in the period Oct 2010 to Dec 2010 must have something to do with the extension for all banks including Anglo and Nationwide. The Irish Govt, the ECB and the Commission knew all of this and yet they allowed for the Govt to extend the guarantee for Anglo and Irish Nationwide who clearly had no future and were of no systemic risk. Surely if Mr Trichet was so concerned about Irish fiscal position as opposed to his bondholders, he would have suggested in Sept 2010 what we ultimately ended up doing with Anglo and Nationwide, albeit without a guarantee. As the evidence shows there would have been no flight of capital. The ECB has effectively admitted that it got it badly wrong prioritising bondholders. In holding back the correspondence for so long the ECB has shown that it feels somewhat exposed.
@ sceptic01
On my second point above, it is also made in the FT article just linked to.
@Neiler
Whether you were managing deposits or bonds your calculation was basically:
a) How likely is it the guarantee will be extended for relevant bank?
b) How credible will said extension be?
Deposits don't trade at a discount – so you just pulled them.
If you were holding securities issued by Irish banks you had to assume the answer to each could not be assumed to be 100% and therefore every competent holder penciled in a discount to par.
Quite why there was such reluctance to even look for tenders for the duffers is something that still needs to be explained. People were trading on the basis of guesstimates of haircuts. Will the banking inquiry publish advice to the government about market expectations?
Frank Galtonsays:
The big leak today was not of the ECB letter to the Irish Times.
It was of Luxembourg's dodgy tax deals with multinationals.
The Commission goes after Ireland's tax arrangements, and ends up snaring their own President in the net.
@ Neiler
the guarantee was only extended in Sept 2010 on deposits and new bonds, not pre-existing bonds.
Draghi on the crucial issue!
http://www.irishexaminer.com/breakingnews/ireland/draghi-irelands-bailout-decision-not-that-stupid-650050.html
The real benefit is not that this masterpiece of understatement is in "de paper" but the fact that Super Mario's comment is being widely reported by the national broadcaster this evening.
The Bigger Picture in citizen-serf landes:
'We no longer have a private financial system responsible for its own risk, regardless of how it's computed or supervised. We have a system whose risk is shouldered by the federal government and its central bank entities, and therefore, the people whose deposits seed that risk and whose taxes and futures sustain it.
We have a private financial system that routinely commits financial crimes against humanity with miniscule punishments, as approved by the government. We don't even have a free market system based on the impossible notion of full transparency and opportunity, we have a publicly funded betting arena, where the largest players are the most politically connected and the most powerful politicians are enablers, contributors and supporters. We talk about wealth inequality but not this substantial power inequality that generates it.
Today, neither the leadership in Washington, nor throughout Europe, has the foresight to consider what kind of real stress would happen when zero and negative interest rate and bond-buying policies truly run their course and wreak further havoc on their respective economies, because the very banks supported by them, will crush people, now in a weaker economic condition, more horrifically than before.
The political system that stumbles to sustain the illusion that economies can be built on rampant financial instability, has also failed us. Past presidents talked of a square deal, a new deal and a fair deal. It's high time for a stability deal that prioritizes the real financial health of individuals over the false one of financial institutions.'
http://www.nakedcapitalism.com/2014/11/nomi-prins-financial-political-system-failed-stability-matters.html
btw Ballyhea (still) says NO.
On the question as to whether the present government might actually put the country back in receivership!
http://www.herald.ie/opinion/columnists/dan-white/why-have-we-the-most-expensive-water-in-europe-30719381.html
Popular media are getting the message across. To coin a phrase; "Paddy wants to know what the story is".
@ Frank Galton
The decision with regard to investigations into various tax affairs was taken by the previous Commission not that now headed by Juncker. The possibility that it was just doing its job has to be considered.
There is no denying, however, that it creates a bit of a problem for the present incumbent.
http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale
@DoD
I think Nomi Prins used to work for the Squid. She wrote a book a while ago called "other people's money"
She did & fairly senior. Poacher turned gatekeeper … and difficult to disagree with her.
The dominant theme in comments seems to be 'move along folks', 'nothing to see here'.
That is unlikely to be view of posterity on that particular letter. The PIMCO executive on RTE this morning, displayed a much better fundamental understanding of what the letter said.
The ECB governing council, with Trichet in the vanguard on behalf of his friends 'stuck a gun in the Ireland's ear', and Ireland bottled it, not risking to find out whether the gun was loaded or not.
'We ended up not only saving 'our' banks, but the big creditors in our banks.
To add a little salt to the wound, the EU masters and their home grown supporters, continue to urge the pushing of the tax burden of the 'bail-out' away from themselves (the higher rate) and onto the minnows.
Great link to AEP article in Telegraph, and the spinning against Draghi's lack of communicating with the ECB Gang of Two, or is it Gang of Four.
Roll on the day for final denouement of the Euro. A mercantilist gold standard without the gold.
" Europe's leaders and officials have run monetary union into the ground. Mr Draghi has bravely tried to bring them to their senses and contain the damage. He seems to have hit the limits of European power politics.
There is another job waiting for him in Rome as Italian president, should he wish to take it. The offer must be tempting, if only for sweet revenge.
His departure would shatter market confidence in the euro overnight. He could then lead his country to recovery, with a correctly-valued lira, and inflict a massive trade shock on his tormentors in the North for good measure."
I am surprised that you refer to the Examiner quotation of Draghi is being supportive of the letter. It sound anything but to me. Pontius Pilate could not have washed the actions from his hands any more quickly that Draghi did with those comments.
@ JR
I may be wrong but my feeling is that the plain people of Ireland have the wit to see the truth of what Draghi had to say. Of course, it all depends on the performance of the economy in the coming years.
Not that I have any illusion as to the political ding-dong continuing in Ireland. That's politics!
The political class in Ireland, all parties confounded, and the parochial commentariat following it, is not up to the job of explaining to the Irish people what involvement in an undertaking such as the EU and, in particular, a single currency entails. But events are doing so.
Anyone living in the UK will tell you that the claim ('we have the most expensive water in Europe') in the Evening Herald is nonsense, a continuation of the abysmal standard of statistical accuracy in the braindead Irish media. Its high time people stopped paying the slightest attention to anything written in the Irish media. Most Irish journalists are statistically illiterate but highly politically-motivated. People should do their own research, which is very easy these days with the internet.
Bottom line: the only meaningful figure is how much your annual bill is.
These are recent figures for the UK:
http://www.telegraph.co.uk/finance/personalfinance/9849057/Average-household-water-bill-to-rise-by-3.5pc-to-388-a-year.html
As can be seen, average household water bills in the UK range from about £350 annually to about £500 annually, depending which area you live in. That is, from around 450 euros annually to over 600 euros annually.
I do not know for certain what the figure in Ireland will be, as I don't live south of the border and haven't received a bill or any information about charges. Joan Burton says the average household bill in Ireland will be about 200 euros annually, about one-third of the average UK bill. Others say she's wrong and that it will be 250-280 euros annually. I am not able to confirm these. I haven't seen any figures in the Irish media suggesting that the average household bill will be more than half that in the UK. Have water bills been sent out yet south of the border? Can anyone post how much they are, in comparison with the UK figures? Can any posters living outside these islands post how much their water bills are, so we can do a comparison. Without claiming this is my specialist area of expertise, it looks at first reading that the Evening Herald article ignored (a) a free allowance of 30,000 litres per household annually in Ireland (b) in many countries, the tariff households pay consists of a water tariff plus a sanitation tariff.
Dragbi's comment "it's safe to say, after all, that the decision wasn't that stupid" seems to be a more succinct and condensed version of my own post this morning. I wonder if he read it. Given that Ireland's GNP was growing at 9 per cent y-o-y in the latest quarter, and that Ireland is forecast to be the fastest-growing EU country for the next 3 years (at least), Dragbi probably consider Irish journalists repeated attempts to monopolise his monthly press conferences with this issue to be completely off the wall (a bit like German journalists monopolising every FIFA press conference with complaints about the ref in their 7-1 victory over Brazil).
@DOCM x 11/59
@ThatsLegal
I have no legal knowledge whatever. I have no idea if it was within their legal remit or not. For me the only issue is whether or not the correct decision was made regarding maximising Ireland's future growth trajectory. Subsequent events tell me that it was. I'd prefer if the FF government had made the decision off their own bat.
Where are all the economists who have been banging on about the events of Nov 2010 for the last 4 years? Where is Morgan Kelly and 'Column' McCarthy and the one who can not be named? Surely, today of all days they should be prominent in the media putting forward their case and claiming vindication. I suspect the answer can be found in my first post this morning: "Between Nov 2010 and now the trajectory of the Irish economy has been 180 degrees opposite to what these economists predicted at the time." They obviously are afraid that being too prominent today would draw attention to this fact.
Re: A role for Irish economists
The thing that Irish economists can do, and it would be helpful and useful in the 'long run', . . . although, they'll get precious thanks for it in the short run, . . . is not to get sucked into this Trichet letter thing.
There is one, almost universal fact, about people, . . . it is, that they will find almost any ingenious way possible, . . . to avoid doing some real home work.
What the large volume of opinion-offering, and opinion-making community in Ireland can afford to do, . . . is completely ignore, the period and the sequence, which led to our banks having problematic balance sheets in the first place.
And if we really want to have that conversation, with the European Union, or European Court at some stage, . . . it won't be done on the backs of beautifully worded opinion, . . . it will be done, on the backs of hard earned analysis work.
Deep down inside, all Irish economists know that.
Colm McCarthy, has pursued a clear and consistent line in his inquiry in relation to this issue, from the very beginning, . . . a lot to do with legal structures, at EU banking level.
His contributions in many fora on this score, have added to debate and enriched it.
Every time that Colm has expressed his opinion in relation to the Trichet affair, it has been with a view to clarification of the functioning mechanism of the ECB, in relation to European member states (whom ever those European states happen to be).
I'd give Colm a pass on this, because he has followed the thing so closely and for so long.
But my expressed hope would be, for Irish economists not to band wagon, on this one, and maintain focus on the analysis side.
One of the primary values of economists to society, at times like this one, . . . is to remind people in a subtle way, about the laws of cause and effect, of action and reaction, as they behave in the financial world, as opposed to the physical one.
To use a cliche, I'm not an economist, . . but I can appreciate, that the physics, that led to the eventual Trichet letter, had their origins a long ways away from either minister Lenehan, or Trichet, or Sarkosy, or Merkel, or anyone else.
There is the danger, is that no one will want to actually do the hard 'spade work' to really examine what happened INSIDE of Irish banks, between 2002 and 2008.
There is that real danger.
It was a point made also I think, by economist Seamus Coffey on Irish radio today.
It's not like there aren't enough chef's in the mix as it is. It's been like a rugby scrum of TD's, ex. ministers and present ministers today, to run for the touch line on this.
I'm sure that economist Colm McCarthy will continue to exercise his judgement and skill in observation on the Trichet affair. But it's important that economists do what we need them to do most, . . . to offer a counter balance, to the tunnel-ed vision-ism, that plagues the rest of us mere mortals, when it comes to inquiry, and analysis.
What duopoly banks would really love more than anything at the moment, is for this sort of thing, to draw the crowd's gaze away. That is to answer I think, to economist Stephen Kinsella's question above, who gains from this? BOH.
Well it's certainly worth teasing out whether or not they have such a mandate, I'd be surprised if they do.
And if they don't, what about next time? If a guy sticks a gun to your head and forces you to bet on a winning horse, would you simply thank him?
The ECB said on Thursday that by the time of the international bailout of Ireland in November 2010, we as one of the euro area's smallest economies, accounted for 25% of the central bank's emergency lending – directly and indirectly via the Central Bank of Ireland – to banks in euro area countries.
We have gained from the "whatever it takes" OMT bond-buying proposal, which some Germans claim is beyond the ECB's mandate and it would be a stretch to believe that the European Court of Justice would find that Ireland was entitled to unlimited liquidity.
There is a difference between the Nov 2010 letters when Trichet was writing on behalf of the governing council and a phone conversation on Sept 28, 2008 with Brian Lenihan.
There is no evidence that Trichet told Lenihan to guarantee bank debt and in these matters, it would be very odd if a momentous decision was made on the basis of a phone call without checking for confirmation with the other party.
Ireland had unilaterally issued a guarantee of bank deposits and bank debts on Sept 30 2008 and following the expiry of the guarantee in September 2010, market tensions mounted and as foreign deposits flowed from Irish banks, the Central Bank of Ireland had to provide €50bn in emergency funding.
The reality about the letters was that the bailout was inevitable by Nov 19 when Trichet penned his key letter.
On Nov 18, 2010, The New York Times published an op-ed by John Banville, the Irish writer, titled: "The Debtor of the Western World"
There used to be a nice acronym that neatly expressed how the Irish people conceive of themselves: MOPE, that is, Most Oppressed People Ever. For a decade or so, when the Tiger was at its fiercest, we threw off the mantle of oppression, as once we had thrown off what used to be called "the yoke of British rule." On Wednesday, the British chancellor of the Exchequer, George Osborne, announced in Brussels that his government stood ready to help Ireland in its hour of need. Oh, bitter day.
All the same, life goes on, somehow. We are learning a new resilience. Humbled as we are, we might even begin to learn social responsibility, a quality in which we have been singularly lacking up to now. Who knows, we may at last recognize the irreplaceable value of public and private honesty. But let us not light the firecrackers just yet.
http://www.nytimes.com/2010/11/19/opinion/19banville.html?_r=0
@MH
Banville is on the long (and probable short) list for selection as Hibernian Laureate – Guy Fawkes couldn't have put it better.
@Thats Legal
The main thing is that the correct decision be made, based on pragmatism (i.e. what will benefit the economy most in the long-run), rather than ideology. The evidence is mounting that the correct decisions were made in both September 2008 and November 2010. That explains the virtual absence of those economists most hostile to the Sep 2008 and Nov 2010 decisions from the media following the release of the Trichet letter. The trajectory of the economy has turned out to be totally the opposite to what they predicted.
Of course, it would be best never to get into that situation. To achieve this, I'd advocate (a) keeping public expenditure as a percentage of GDP/GNP at a low level, say 25 per cent – governments which follow this rule rarely, if ever, need to borrow (b) paying less attention to publicity-seeking celebrity economists who cry doom.
PS Do you know yet what your water bill will be?
Banville's article reeks of the mob hysteria of the time. But then he's a dramatist (I assume – have only vaguely heard of him), so always seeking out the dramatic, and no particular reason why he should have a talent for analysing economic or social statistics. The article seems laughable now, given the growth trajectory the economy is on. What the Irish economy and society needs is less of the 'dramatics' and more cool-headed sober statistical analysis. This is particularly true at the moment for the water debate. Of course, drama kings and queens have a vital role in society, but for entertaining the rest of us, not for their economic analysis.
On the price of water, one thing is clear; what the government seems to be proposing means that it will have difficulty meeting the target for income generated (required to pass the relevant EU competition law test to keep the overall cost out of the national debt calculations).
"The evidence is mounting that the correct decisions were made in both September 2008 and November 2010"
That's a keeper
5 hail marys and some knock water on the child of prague and we should have 5% growth for the remainder of the century. Just BECAUSE.
One of the things holding back the EZ is tax avoidance. Draghi is ready to pump another trillion into the markets but investment is at negligible levels. Companies won't invest and many won't even pay tax. The big 4 accounting firms have their snouts in the trough too- their cashflows depend on the continuation of this system because otherwise they can't justify their salary loads.
http://www.theguardian.com/business/2014/nov/06/luxembourg-jean-claude-juncker-pressure-tax-deals
"Guy Verhofstadt, president of the alliance of liberals and democrats for Europe and former prime minister of Belgium, said: "Recent allegations against the Grand Duchy of Luxembourg on tax avoidance practices need to be clarified immediately. The commission should come to the European parliament immediately to explain if these practices are in accordance with EU law. It must be made clear, if the setup chosen by Luxembourg is legal or not."
The anti-corruption campaign group Transparency International said: "EU ministers must now take action to end the secrecy of corporate tax deals in Europe. The Luxleaks deals could not have been kept secret if all companies were required to report details of their tax payments in every country where they operate."
Oxfam's tax adviser, Catherine Olier, said: "The leaks underline the scale of tax dodging – it's not just one isolated scandal; we're talking about a whole industry making profits disappear. Tax-dodging results in both developing and European countries missing out on billions in tax. This is money that would be much better spent on healthcare or education rather than lining already wealthy corporate pockets."
On the point you raise in regard to Irish journalists at ECB press conferences, they were responding to the political debate in Ireland and, without doubt, to prodding by their editors to reflect its character i.e. that it is incapable of admitting, or even recognising, a wider context. I think this explains why continued "leading with one's chin" is the standard tactic adopted. There is usually an 70% to 80% majority opinion which recognises reality – which enables the government of the day to actually follow the right advice – but a large percentage of that majority is unwilling to admit it until the opportune moment.
It is a bit of a pity that this moment did not come before a very public documented slap-down by an institution of the EU.
To quote perhaps its most telling statement.
"The guarantee was introduced by the Irish government without any coordination with European partners."
Ireland is still the biggest debtor of the western world – public + private as a ratio of GNP.
The jobless numbers are falling but in Oct there were 447,000 on the Live Register and in public schemes – over 20% of the workforce.
The number of full time employees was up 15,000 from Q1 2011 to Q2 2014.
Yields or Bustsays:
You have suggested above that with the benefit of hindsight the Sept 2008 Guarantee and the continuation of same in 2010 and the move into the Troika bailout have proven to have been the correct policy choices. My friend, I hate to tell you, the real answer to this is we'll never actually know if these were indeed the right choices or not because the alternates can never be acted out or tested. Whose to say that we'd be worse off today if we hadn't burned €40bn of Bondholders ? Do you really know ?
So please desist from believing the right choices were made. The actual truth is decisions were made at the time and they have shown to be relatively favourable to us, except of course if your one of the 400k still without a job and losing your home as a result.
So the right policy choice tastes very differently to each and every citizen,
Whilst we'll never please everyone all of the time it might be worth remembering that we'll never know what a different place we could be in if in fact Lenihan had said no and the ECB had also said no and the Irish banks did in fact fail and we were forced out of the Euro and back to the Punt and the Euro collapsing as a result ete etc.
These alternates are scenarios that may or may not have been more favourable to us. The fact is we'll never know. I hold the view however that not burning private bond investors was a monumental mistake simply because the equity behind every single policy choice made thereafter could and is being correctly questioned.
We allowed capitalism to play on Monday, then the Guarantee happened on Tuesday, a massive anti capitalist move, and we moved back into capitalist mode on Wednesday pretending that Tuesday didn't happen and have been asking the citizens to pay for Tuesdays actions ever since. I'm sorry the right policy choices at times needs to better analysed than you have tried to do. Who knows if leaving the Euro may not have been a real and sustained bonanza to us.
Current water charges are here:
http://www.water.ie/customer-applications/charges/index.xml
There are of course tax credits too. The goal posts are currently being moved though.
My issue is the flat charge stuff. As I mentioned we're renting a small apartment. They say that those paying over the odds via the flat charge will be compensated once a meter goes in and proves it. Chances are I'll be out of here before then so no rebate and I pay the same as a guy with enough space to wash his pet elephant and two cars. Bad enough I'm being hit with a 2400 rent hike.
Coordination between European partners was not available at the time, DOCM . If it had been perhaps there wouldn't have been a guarantee. It was only after Cyprus and after Angela freaked out about the implications of Greece leaving that co-ordination appeared on the menu. The EZ institutional response has been behind the curve every single time.
Re: Late night television soap boxes as the gauge of opinion
It's striking, the conversation on TV3's late night television show, . . . just how much something like the Trichet affair, has the impact of moving focus away, . . . from doing actual (boring) real home work.
And how vulnerable, even the best and brightest minds in the public sphere, are to this sort of intrigue.
The Trichet letter thing is real sexy, . . . in ways that balance sheet analysis of bust banks, will probably never be.
On Vincent Browne's tv show, it was possible observe experts, who do possess very keen insights into the political science, . . . try to dream up ways that a banking inquiry committee, . . . could become centralized around a 'Trichet affair', inquiry.
That was noticeable.
And I don't know, whether the media is partly implicated in this, or not. Or whether there is just a synergy that exists, between political raincoats, the media and possibly celebrity economists also.
Some of the most astute political commentators in Ireland, . . . who are brilliant in many ways, . . . (if not perhaps, in matters to do with finance), . . . are head-turned, captivated by all of the implications of the Trichet affair.
You'd almost think, the small matter of the bill, . . . the EUR 60 billion, which continues to be counted and valued, transacted and calculated on some back-room bond trading piece of information technology somewhere, was just a side show. BOH.
eamonn moransays:
@ Ciaran O Hagan
"The position of the ECB and of other EU governments tended to be anti-guarantee in 2008 (as my previous posts here indicated)."
Not sure how this statement can sit beside the comment attributed (but not confirmed by fact) to Trichet in 2008. 'At all costs save your banks'
@All
If that comment is correct it severely restricted Lenihans choices.
I have to agree with Dan O'Briens arguement that the Guarantee and the bailout were merely a crystallizing of losses that had already occurred. The main question then is should the Irish tax payer rather than the European banks/Bondholders have been the one to pay the bill.Bond holders would argue that there has always been an implicit insurance given by states of the banks incorporated within them to make bondholders whole even if they are private.
The mistake in McWilliams plan which Lenihan implemented to the letter immediately (but then ignored Mcwilliams plea's to go back on the "Bluff") was that his solution was designed to fix a liquidity problem. Kelly's comments regarding Honahan, believing that he should have acted to protect the irish people from the previous errors that protected bondholders/European banks/ECB forget one thing. Who is Honahans employer?
The Thing that is helping Ireland most now is that the ECB has reigned in the global bond markets and they are happy to purchase bonds at levels that belie the levels of risk they are taking in Peripheral country bonds. Organising this must have taken huge behind the scenes efforts from the ECB. The threat of buying up the bonds themselves doesn't explain the benign lack of opportunism from euro bond buyers. Ireland is benefiting more than any other country from this policy which perhaps shows that playing a long game and trusting the ECB to do right by us was legitimate stance taken by Honahan. The big question now is when will the bond vigilantes be let off/bite through the leash?
Re: Walked into it again
@ Eamonn Moran,
The implications in all of this, should be quite clear to anyone who has lived in Ireland, . . . for let's say, . . . the last five or six years, round it up to an even decade, give or take.
The banking guarantee
The Irish hadn't done their home work, landed themselves into deep water that they couldn't swim out of.
The bail-out program
The present day, six years afterwards
The Irish, once again, are on their bicycles, peddling down the road, their feet whizzing around in a blurry cartoon-type circle, . . . you've guessed it, . . . no home work in the mala scoile.
Mind you, you'll find some of the best column inches, authored anywhere begin to appear in the Irish print media.
But essentially short on analysis, which could be used build a case on top of.
It has almost become routine for the Europeans, to be able to deal with Ireland, . . . they can essentially be relied upon to shows up with an empty copy book, . . . albeit, with a nicely phrased letter from Pops, to explain why.
It is fine, as far as that goes.
Does anyone feel, . . . I mean, at all, . . . that we should try to alter that predictable pattern?
For once at least in the whole sorry sequence of events?
Does it always have to end up, with the same soul-ful, emotional release on late night television?
Irish Journalism and political analysis, more than anything else, . . . has fed that addiction, rather than try to help it.
What is actually telling, is that after it all, we are almost celebrating the fact, that we are allowed (by Europe), to publish a few soul-ful, heart-felt emotional letters from our own ex. minister of finance.
The Europeans have got the measure of the Irish race after all of this. That's the really scary part. We don't present them with anything new, or surprising. BOH.
Mary Feelysays:
Question to all you economists from a stay-at-home mum: doesn't this action by the ECB prove that Ireland in effect has no central bank, in that it has no lender of last resort? And isn't a central bank required by any modern economy? Just asking.
@ Eamonn
the ECB was against explicit guarantees put in place by individual nations, which risked both creating a beggar-thy-neighbour situation where all government would have to guarantee all banks, and also took away any flexibility which might be useful when actually dealing with a failing or failed bank. They were in favour of implicit guarantees agreed at an EU institutional level and/or specifically designed guarantee schemes which would be much more fine-tuned than the rather blunt Irish version.
"They were in favour of implicit guarantees agreed at an EU institutional level and/or specifically designed guarantee schemes which would be much more fine-tuned than the rather blunt Irish version."
They didn't have any procedures in place for bank failures. They had no resolution system, no deposit protection and there was no LOLR. It was all shown very clearly in Cyprus. They didn't expect any tail risk.
Duisenberg and later Trichet put an incredible amount of time into micromanaging Debt to GDP ratios but they ignored the buildup of private debt that is now the cancer in the banks.
This is a huge problem and it's going to get worse
http://www.ft.com/cms/s/0/3e509974-2a03-11e4-914f-00144feabdc0.html
"Banks and businesses seeking to capitalise on record low borrowing costs in the west have seen worldwide bond volumes increase by 6 per cent to $2.74tn so far this year compared with the same period in 2013."
Increasing debt is fine if there is sustainable economic growth but there basically isn't.
@ seafóid
The ECB statement is factually correct. That's it!
http://www.independent.ie/business/irish/irelands-bank-guarantee-could-be-model-for-other-countries-26480997.html
Re: Central Banking
@ Mary Feely,
The British have had to grapple a lot with this one too. They are exploring other alternatives and instruments, in addition to just the 'interest rate' lever, by which to adjust their economy with.
For example, you will read a lot of economists now, talking about the level of indebtedness across all sectors, and all scales, . . . individuals, businesses, financial institutions, public sector.
With just the monetary policy (money supply, and interest rates) tools that Central banks like that in Britain used to depend on, . . . the question post-crisis, is whether these tools are sufficient on their own.
They are even wondering in America, what is the value of human intervention, in to adjustments to the base interest rates there at all. This thing of the central banker announcing what the policy is going to be. Why have a human being, to intervene in that way at all? And how did central bankers end up with that kind of a mandate and a responsibility?
Needless to say, in America, a central banker there from twenty or thirty years ago, . . . . looking at the number of different pies that the American central bank, has its finger in these days, . . . could not recognize it, as being the same job, that central banks used to do in the past.
It's as if Central banks themselves, even the largest of them, seem to have exploded balance sheets, which need to be managed and reduced back down to size, at some stage too.
And this gets us back to the letters and the European Central bank. There was no 'rule book' written for what the Central banks in any part of the world, have had to do, in the last few years. They were literally making up new rules, at the same time as events were happening, and usually over-taking them.
Someone else here, might explain this a lot better than I can. But above, are some of the major points, that real economists here, will have run into in studying central banking.
Paul Krugman actually summed it up best.
He re-published some text book of his, a while back, . . . and he commented on how many of the other major textbooks about economics, being used in universities, were just out of date now, . . . entire chapters that had been there for a long time, needing to be taken out and re-written.
I think, that sort of sums up, in simple terms the past few years, from an international perspective. The role of central banking everywhere, is sort of under revision and heavy debate and scrutiny. BOH.
But the walls were closing in on Lenihan/Ireland. Anglo was going bust on the Monday Morning. What implicit guarantee could Lenihan have provided that would have prevented a complete bank collapse?
One of the few issues I disagree with Michael Hennigan on is How much pressure Ireland felt from the ECB/European Banks/Bondholders prior to the the Bank Guarantee in 2008.
He is of the opinion, it seems to me, that it was a foolish solo run on the basis we where being cute paddy's.
I think that essentially due to all the options that the ECB and others had removed from Lenihan, they had essentially left him with either option a) Do nothing and watch the Irish banks fail and possibly contagion within Europe (we know JCT wouldn't like that). b) Some kind of limited but explicit guarantee excluding bondholders (again we know from the fact bond holder burning was forbidden in 2010 that that was not a popular option with JCT. c)Go all in with a pair of 2's, which is what they did.
I cant even imagine any plausable option d) involving an implicit guarantee.
But really What I and MH are disagreeing on is the level of pressure in his mind, Lenihan was under from JCT and other European banks and how much that affected the final decision. To be honest that's a very subjective thing to disagree about.
Anglo Irish Bank in "already insolvent since 2008" shock.
@ BOH
On your point regarding failure to do our homework, I think this is true. It is also almost certainly the case that the political and media establishment in Ireland are unlikely to change position publicly. Their behaviour has created political facts on the ground which they cannot avoid.
However, the broader point is, as usual, being missed and it is this; an institution of the EU would not go up against a member state in such a fashion were it not for the fact that it is aware that the other countries of the EU are in general agreement. This is unprecedented!
The pitcher i.e. the continuing domestic Irish melee in the goalmouth, has been taken to the well once too often! This is a great pity as it seems to me to risk removing whatever sympathy – and associated leverage – that is left. However, I have no doubt that the remaining issues will be dealt with in the same hard-hitting way – at least by other countries – that the very business of international relations requires. It is in their interest that Ireland continue to be a success story.
@Eamon
"The mistake in McWilliams plan which Lenihan implemented to the letter immediately (but then ignored Mcwilliams plea's to go back on the "Bluff") was that his solution was designed to fix a liquidity problem."
The reaction to the announcement of the 2008 Irish bank guarantee was near volcanic in some quarters. Betting the whole pot in order to 'dig out' a couple of stupidly cocky banks that were definitely going out of business (even though we were not 100% certain they were totally insolvent) particularly among those who had navigated previous bank collapses and were positioned accordingly, caused a lot of antagonism.
The idea that you subsequently just tell people you were only kidding would have totally shot to pieces any credibility the Irish state had with the markets and collapsed the banking system. It is cartoon stuff.
Donal Donovan on the general issue.
The ECB has, of course, done much more than release a letter; it has mounted a detailed rebuttal of a battery of points being made against it.
The fandango continues, however, on the domestic political front.
I have not seen any detail rebuttal by the ECB, in particular one that outlines how the conditions attached to the letter of Nov 19th 2010, accord with its mandate under the various treaties that we keep hearing about.
On the other hand, a number of commentators, Donal O'Donovan and yourself very much included, are doing their best to defend the ECBs actions. The nub of the argument in both your pronouncements is that 'Ireland' deserved by she got, bank bondholder debt included, and that we should be grateful to our EU betters from being visited with a worse fate.
The money is now gone, compliments to the ECB 'gun in the ear'.
The fact that some people (at least) are unwilling to say- thank you Massr- to the ECB or its institutions for 'sticking a gun in our ear', is probably just another sign of how immature we are as a people.
A backward ungrateful little nation, perhaps.
@ eamonn moran
Eamonn,
There appears to have been little engagement with European institutions prior to Sept 30 2008.
Fitzpatrick and Drumm heading up the back alley to Bank of Ireland's hq on the afternoon of Sept 29, 2008 to meet the chiefs of its arch rival and then later having the chiefs of AIB and BoI arrive in Merrion Street (the Anglo guys were told to get lost) begging for state protection must have been a huge shock to all involved.
It shouldn't have been as it was 18 months since HBSC had first revealed multi-billion dollar losses in the US on sub-prime mortgages and it was over 13 months since BNP Paribas had discovered that the credits markets had frozen up.
We know that the Department of Finance had sketched out different scenarios in early 2008 but the status quo having embraced the religion that the free lunch had been invented was in deep denial.
Bar a day, a year before Lehman Brothers collapsed, Northern Rock announced that "extreme conditions" in financial markets forced it to approach the Bank of England for assistance. The announcement triggered the first run on a British bank in more than a century.
Even after the US financial system came close to meltdown, the Irish insiders remained in denial.
Documents released by the Oireachtas Public Accounts Committee in July 2010 show that the former financial regulator, Patrick Neary, told Brian Cowen, taoiseach, that Anglo Irish Bank was in good health three days before the Government issued the State banking guarantee at the end of September 2008.
Anglo Irish Bank was simply judged as being "resilient" without being aware of the true state of its loan book.
One of the documents is a presentation by Anglo Irish Bank on September 18th, setting out a positive summary of its development with 7,000 clients, 17,500 properties and over 45,000 cash flows. Anglo compared various indicators with those of Bank of Ireland, such as loan-to-deposit ratios. The builders' bank said its loan-to-value ratio was a low 73%.
"Irish banks are resilient and have good shock absorption capacity to cope with the current situation ,"
said the Financial Regulator, on September 19, 2008: – two days after the collapse of US investment bank Lehman Brothers.
In February 2009, exactly 2 years after the subprime crisis broke out in the US, the Irish unit of Pricewaterhouse Coopers (PwC), the biggest of the Big 4 accounting firms, delivered a report on Anglo Irish Bank to the minister of finance.
It said: "These annual impairment charges were €2.3bn and €3.0bn respectively per annum under the two scenarios for the years ended 30 September 2009 and 2010. The two PwC impairment loss scenarios exceeded Anglo's worst case impairment loss scenario."
Jones Lang LaSalle valued a sample of 160 properties held as security in relation to the top 20 land & development exposures on Anglo's books.
Anglo Irish Bank reported a loss of €12.7bn for the 15 months to the end of December 2009 – the largest loss in Irish corporate history – after charging €15bn to cover bad debts.
Re: Political Capital
DOCM wrote,
Their behaviour has created political facts on the ground which they cannot avoid.
I guess, there is no major political capital, at all, to be harvested from facts of what might have happened in 2002-08. Politics is forward looking.
This is the sort of place, where economist Kevin O' Rourke or somebody would be able to stand in, and make the argument on behalf of economics history.
In the absence of that, . . .
. . . it might be worth, reading something in to the humble record, that is the Irish Economy blog.
The major point, about a banking inquiry, is that there shouldn't be any extra homework credits for doing it. It is about doing work and analysis, unfortunately, that should have been done ages ago.
It's not like we deserve any 'extra' marks. We might think, that we should.
Worse, we may expect, that having set up a banking inquiry at all, and then wandering off, there might be some credit going for doing that.
What could form a part of a useful inquiry, is why was it so difficult for the Irish to do the necessary homework at all?
From Sean O'Rourke radio show this morning.
What the Irish government should do now, is go with the LETTER, back to the European Parliament, . . . skin in the game, etc, etc.
Any excuse to, . . . 'run out the gap', and Dodge doing the home work.
Data or analysis, . . . that's for other people.
It could be our national moto.
But from the point of view of financial institutions, it reads something like, . . I see a big sign, that reads, open for business, and ripe for the taking, again.
I do appreciate though, the reality that political capital, if not gathered in time, cannot be harvested. BOH.
In the days before the guarantee, US Investment bank Merrill Lynch produced a document setting out various scenarios and in respect of Anglo, said only 3% of its loans valued at €72bn were impaired, according to the banks' management. It said Anglo needed to raise funding of €4.9bn by Oct 24th.
Speaking points were produced for the taoiseach on September 30, 2008, the first day of the State guarantee.
The asset quality in the financial institutions, the document said, was good with a strong concentration in residential mortgages with a relatively low loan-to-value ratio. It said there is a "very significant capacity within the institutions to absorb and losses."
"There is therefore, a significant buffer before there is any question of credit impairments on the Exchequer on foot of the guarantee," the note said.
The regulator told the taoiseach, days before the guarantee was issued "there is no evidence to suggest Anglo is insolvent on a going concern basis – it is simply unable to continue on the current basis from a liquidity point of view."
Brian Lenihan, finance minister, commented on the July 2010 release of the documents;
On 26th September 2008 in an analysis of the strategic options, Merrill Lynch said a Guarantee for the 6 Irish Banks was the 'Best / most decisive / most impactful from market perspective.' It said it would stem funding outflows and may result in inflows. It also envisaged the guarantee would protect senior and subordinated creditors.
In a further analysis, provided three days later, Merrill Lynch says 'All solutions require financial resources from the Government and could add pressure to the sovereign credit rating and borrowing costs of the Government". The Memorandum also stated 'there is no right or wrong answer and the situation is very fluid.'
The document goes on to explore all the options, laying out the advantages and disadvantages of each. In the case of Anglo Irish Bank and Irish Nationwide, Merrill Lynch set out the option of nationalisation with a full State Guarantee given to all creditors and senior creditors as well as dated subordinated debt holders. They say this would again send a strong implicit message to the investor community that this level of protection would be afforded to all other Irish banks.
It is wrong to suggest that Merrill Lynch recommended one option over another. Indeed, the only option which Merrill Lynch discounted, after full consideration, was the option of allowing an Irish Bank to fail. This is the option that Fine Gael has advanced since 2009.
In the context of rapidly deteriorating circumstances on the night of the 29th September, the Government decided in favour of the option considered by Merrill Lynch of the 'Best / most decisive / most impactful from a market perspective.'
In his report on the Banking Inquiry, the Governor of the Central Bank, endorsed the Government's approach of issuing a broad guarantee and he made clear the catastrophic consequences if the Government had not taken action. The Governor also agrees that Anglo Irish Bank was systemic and could not be allowed fail."
However, Governor Honohan made clear that he did not support guaranteeing existing bank debt.
@JR
The ECB was not required to advance ELA and it could be argued it was not allowed to once it was obvious the institutions involved were probably insolvent or the collateral questionable.
If the ECB gave the Irish government an outline of what the CG would require in order to allow them to advance further ELA then it was an Irish decision to either:
a) go along with it
b) tell them to stuff their ELA
c) from the starting point of a credible position, having prepared public opinion in Ireland, tell the CG they could not do quite as requested and were prepared for the fall-out, and insist on a compromise
As the Irish public had been told both public sector funding and bank funding would not be touched, and [big hint] outside observers had noticed this, the Irish did not give themselves c) as an option.
http://www.ecb.europa.eu/press/html/irish-letters.en.html
Go to the bottom of the page entitled "Role of the ECB in the Irish adjustment programme".
You attribute a view to me that I do not hold. My beef is not with the Irish people who, by their general behaviour, have shown themselves to be the equal of any, but with the political class and media that allows a minority to put them in an entirely invidious and not very dignified position.
http://www.independent.ie/business/irish/howlin-calls-on-ecb-chiefs-to-give-evidence-at-banking-inquiry-30725815.html
POWER, CONTEXT & TIME [H/T BLIND BIDDY]
'At political talks in Brussels on the Tuesday of that week, Lenihan himself came under pressure from a majority of euro zone ministers to leave the meeting and declare immediately that Ireland was seeking a bailout. German minister Wolfgang Schäuble led the charge and was backed up by Christine Lagarde, then finance minister of France. While it appears that only the Austrian minister backed Lenihan at that time, the situation hardly has the makings of a full-frontal assault by the ECB without aid or assistance from elsewhere. Trichet certainly raised warnings at this meeting, but he was not the only one. One week had passed since a G20 meeting at which Timothy Geithner had joined in the clamour to settle the Irish question quickly.
http://www.irishtimes.com/business/economy/claim-that-ecb-bounced-us-into-bailout-does-not-stack-up-1.1991451
Power: lost when irish bankers & legal eagles conned Cowen & Lenihan
Context: global financial system on super heroine in manic withdrawal
Time: Emergence of PD jihadi-neoliberals from anti-Haughey FF
Ongoing: The greatest 'peace time' theft of value from labour by capital in the history of Europe
@Senior Hurlers in the Diaspora
Nearly all junior standard players here at the mo; come home well armed with intellect, balls, & brass.
@Unfeasibly charming
My comment re the Guarantee being a 'bluff' is taken from an article McWilliams himself wrote a few months after the Guarantee. In fairness it is exactly what Morgan Kelly suggested that Patrick Honahan should do.
I don't think I understand your point.
If you are suggesting that The Irish Gov were in denial and oblivious to the state of the Irish banking system till well after the Guarantee it doesn't match up with all the panic and sleepless nights Lenihan had leading up to the guarantee. He was a desperate man. Why else turn up on the door step of a journalist in the middle of the night to discuss his latest article on the need for a guarantee while chewing garlic?
Brian Lenihan himself pointed the finger at the ECB for forcing his hand. As I said we are largely arguing over the strength of feelings inside someones head so its impossible to prove either way.
It wasn't clear in September 2008 that the EZ was going to be such a clusterfuc%. Doesn't mean the Government of the time is excused but in September 08 nobody knew how bad it was going to get. The picture only emerged over time. Tnd there was no meaningful help from the ECB until after the French and Italian banks were in trouble. Even the "bailout" was a stitch up.
13 October 2008 IT
" If, on the other hand, it turns out that some Irish institutions do need recapitalisation, then it will be difficult to exonerate the Financial Regulator and Central Bank. Those institutions stated quite clearly as recently as mid-July last that Irish banks had not experienced a material increase in loan arrears, that they were well capitalised with good asset quality and that their shock-absorption capacity remained strong
But it is vital to diagnose the problem accurately. Is it one of liquidity or one of capital? Which view is correct? Only time will tell.
It is not being suggested here that the Irish system suffers from "regulatory capture", but the long-standing practice of former governors and senior regulators joining the boards of banks on their retirement should be stopped
http://www.theguardian.com/business/2008/oct/06/creditcrunch.eu
Another observation – again fairly obvious – is that the eurozone remains a hybrid. It is a monetary union but not a political union, and so countries such as Ireland have had to go it alone in bailing out struggling banks. There is a clear distinction between the US, where the government has financial clout across all 50 states, and the EU.
081117 Irish Times
" THE IRISH economy will contract by 4 per cent in 2009, and the recession will last for two years, according to Ulster Bank's latest quarterly economic forecast, writes Ciarán Hancock , Business Affairs Correspondent. Mr McArdle also warned that the Government's latest estimates for tax revenues in 2008 are "too optimistic" and taxpayers face more pain over the next two years. He predicted that 85,000 jobs would be lost in Ireland in 2009 as unemployment averaged 8.5 per cent, which would be the highest rate in 12 years"
http://blogs.ft.com/maverecon/2009/01/can-the-uk-government-stop-the-uk-banking-system-going-down-the-snyrting-without-risking-a-sovereign-debt-crisis/#axzz3Hin1LlIy
"According to the rating agencies, the CDS rates and the 10-year sovereign spread over Bunds, the leading candidates for a sovereign solvency crisis are Greece, Spain, Portugal, Italy and Ireland. Among the countries where the sovereign is highly exposed to the banking sector, Ireland may well be the next country where the 'too large to rescue' theory may be tested , although countries like the Netherlands, Belgium, Luxembourg, the UK and, outside the EU, Switzerland, are also potential candidates for the 'too big to rescue'(without external support) club. Ireland's outstanding sovereign debt is low as a share of GDP (around 25 per cent) , but the exposure of the sovereign to its overgrown banking system is massive: the Irish state guaranteed the entire liability side of the banks'balance sheets, except for the equity..Irish 10-year sovereign debt spreads over Bunds stood at 198 basis points on January 16. "
090514 Irish Times (this is complete WTF)
Mr Gleeson said nationalisation would be "a bad thing for shareholders and for Ireland"and the bank would avoid it "at all costs".
Asked why AIB did not heed warnings from analysts about the risks facing the lender as far back as late 2006, Mr Gleeson said: "If you look at the tipsters for yesterday's racing, one in 10 of the tipsters is right and nine are wrong."
090515 The latest European Commission forecasts suggest that Ireland will be something of an outlier in terms of the sensitivity of unemployment to declining output: they see our unemployment rate rising by 11.5 percentage points over the 2008-2010 period while GDP contracts by 13.4 per cent
100531 http://www.emaxo.com/news/show-htm-page-1-itemid-405-page-2.html
For all the talk of European solidarity, there is absolutely no evidence that German taxpayers will agree to a common fiscal policy to provide the budgetary support for the weaker parts of the euro area that Washington provides for the poorer US states. As such, the only options for countries like Greece, Ireland and Spain are devaluation (ruled out by monetary union), default (ditto) or years of deflation. They have opted for the third course, even though this will lead to slower growth and make it even harder to reduce budget deficits. Europe, touted as a progressive alternative to Anglo-Saxon economics, has become neo-liberalism on steroids.
@eamonn
The guarantee was a confidence trick. As the renewal deadline approached the button was pressed on the pre-scheduled transfers out of Irish banks and focus shifted to the credibility of the guarantee itself, not only whether it would be renewed.
Many observers reached the conclusion that the guarantee in fact could not be honored by the state. That was a gradual process and the state could not be blamed for it – except in the sense that it was to blame for its own ineptitude.
In contrast, a decision to announce a change of policy which would have amounted to a deliberate, voluntary choice not to honor a sovereign guarantee would have trashed the Irish sovereign as a credit and no competent manager could justify funding an Irish bank without a very hefty risk premium. Most wouldn't want to risk it for deposits or senior credits and you would have been looking at adventurous hedgies as entirely insufficient funders.
I really don't think those taking the decision to guarantee, or those suggesting it, really understood how much of a corner they were painting the state into.
@Gavin SHERIDAN
Text from Blind Biddy ….
It could have been worse; Sarkozy might have gone for regime change …
http://www.independent.co.uk/voices/comment/the-west-is-silent-as-libya-falls-into-the-abyss-9833489.html
Public meeting Thursday 13 November, 8 p.m.
The 80th Anniversary of the Republican Congress: Its Relevance Today
Speakers: Brian Hanley (historian and writer), Tommy McKearney (trade union official, writer, former hunger-striker)
Pearse Centre (27 Pearse Street)
Organised by the Peadar O'Donnell Socialist Republican Forum.
http://www.irishleftreview.org/2014/11/05/20381/
Yves here. Brace yourself for the perverse spectacle of Republicans and their US corporate masters whinging about tax rates when effective corporate tax rates are super low by historical standards, in large measure due to clever tax structuring and the use of tax havens.
The European Union has made a show of cracking down on Ireland as a tax scam, um, tax haven for its low corporate tax rate, while leaving the even more flagrant destination of Luxembourg untouched. A newly-relesed report shed some light on the scale of the Luxembourg tax scam, which is now leading to some official kabuki as to what to do about it. What goes unsaid is the degree to which the US and UK are top players in tax avoidance, the US through destinations here (including Delaware and Wyoming limited liability corporations) and the Caymans, the haven preferred by US banks. In the UK, the City has its own network of preferred tax haven, including the Isle of Man, Jersey, and Bermuda.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
I'm in Kilkenny, Ireland where Kilkenomics V begins tonight. '
http://www.nakedcapitalism.com/2014/11/bill-black-magical-fairyland-corporate-tax-scams.html
http://www.bbc.com/news/uk-politics-29956289
It is nice to know that, when it comes to political silliness, Ireland is not alone (with or without the latest borrowed soundbite – a gun in one's ear – from the chief economist to Pimco!).
http://www.independent.ie/business/irish/the-ecb-letter-was-a-gun-stuck-in-the-ear-of-the-government-leading-economist-30723102.html
I'm not arguing that the Government wasn't aware of the risks from the escalation of the crisis in the US from early September.
The federal takeover of Fannie Mae and Freddie Mac, the mortgage guarantors, was announced in early September and within two weeks after the collapse of Lehman Brothers, AIG and Citigroup, two of the biggest financial firms, had to be bailed out at a time when short-term Treasury yields went negative for the first time since the Second World War. Meanwhile the Bush administration requested Congress for cash to support Wall Street.
It's easy to be wise after the event but a crisis that began 18 months before and in September had triggered unprecedented developments in modern times in the US and Europe, wasn't going to blow over anytime soon and return the Irish property market to growth.
Through 2008 the big developers were reported to be rolling over interest and not meeting loan mandates but via the Dept of Finance and Central Bank ministers did not have a realistic picture of the state of the banks.
On September 18, Anglo made a presentation to the DoF which had a bad debt provision charge of 0.7% in 2009.
A Morgan Kelly sceptic was needed on the inside to argue against the Central Bank, that the crisis was one of insolvency not liquidity
Oireachtas documents:
http://www.oireachtas.ie/viewdoc.asp?fn=/documents/Committees30thDail/PAC/Reports/document1.htm
@Michael
Rolling over interest and not meeting loan mandates is Ponzi territory. There must have been people who joined the fots. The fear of scaring the horses probably drove the management response. The horses eventually left anyway.
As prof Julia Black observed about the crisis nobody did anything well.
@Mary Feely
"..doesn't this action by the ECB prove that Ireland in effect has no central bank, in that it has no lender of last resort? And isn't a central bank required by any modern economy? Just asking."
Not only has Ireland no central bank, neither does the Eurozone, imho.
The ECB is, in reality, just a manager of a currency block, supervised supposedly by the ESCB (European System of Central Banks), accountable supposedly (per Draghi) to the European Parliament, but in reality controlled by the larger EZ states of which Germany is somewhere from 22%-27%.
Banks in the first instance are there to protect people's savings, ie protect the wealth of those citizens that have wealth. Just to provide double protection for wealthy people, central banks were devised to protect those saving banks. Since 2008, banks for the most part, have reverted to the traditional role of protecting savers, period. Collateral damage to to the wider economy appears not to be the slightest concern to them.
Some central banks have tried to add an economic management tools to their portfolio, i.e the FED, BOE, BOJ, recognising that just providing an insurance policy for the wealthy is somewhat elitist in the post French Revolution era. The ECB, not being a central bank, seems to be prevented from engaging in economic management as other central banks, stopped from doing so principally by Germany.
The real give-away in the ECB modus operandi, which shows that it is a mere tool of the major members is contained in its data linked to above. This states (point 4 of their explanation )
"While the ECB always acted within its remit and in line with rules established for the whole of the euro area, there are limits to the support that the Eurosystem can provide to banks in the Member States"
This in effect means that the ECB, on behalf of the EZ powers, can bankrupt any small country anytime, by refusing liquidity anytime (even for a seemingly solvent bank on the basis that that such liquidity support is disproportionate to its membership size.
So bankrupting a country is simple. Take Cyprus for instance.
Start spinning negatively about the "business model", thereby causing money to leave the countries banks. Then have the ECB complain about too much liquidity support or liquidity support being disproportionate, and threaten to cut it off (Ireland, Cyprus, Greece, Portugal; all small countries, note).
The coup de grace is then administered, by threatening to shut off the ATMs, if the country does not implement a 'program' acceptable to the great powers (Germany 22-27%).
This modus operandi will not be used on France (too big) or Italy or possibly Spain, but the sniping continues, the ECB being rolled in all the time as enforcer.
So Ireland does not have a central bank, neither in any accepted sense of the word does the Eurozone.
Draghi, in fairness to him, seems to have attempted to change the nature and modus operandi of the ECB ( but read the Ambrose Evans Pritchard link, linked to above by Dan McLoughlin), but is being stonewalled at every turn.
PS: I am not an economist, but over the past few years I have tried to follow and make sense of the actions of policy makers, who had loads of economist to advise them. We can all see how well they did.
My apologies if I attributed views to you that were not your views.
It is to their great credit that the organisers of Kilkenomics are going ahead with their unique combination of comedians and stand-up economists, despite the thick black clouds of 6-7% growth rate, collapsing unemployment and the end of austerity. I hope they will continue it even as the boom gathers pace. Seems to have been badly overshadowed by the Web Summit this year though. I doubt if there would be as much support for ending Ireland's low Corporation Tax rates there. Both Kilkenomics and the Web Summit are examples of Ireland's entrepreneurial flair, which is helping fuel the latest boom.
Is this Bill Black chappie a comedian or a stand-up economist? Never heard of him and its not clear from the article which he is. But, he seems very unhappy both with Ireland's Coporation Tax rates and with the way his fellow-Americans voted this week. Poor man. BTW, someone at Kilkenomics should take him aside and politely inform him that only hardcore loyalists from East Belfast still call it 'Eire'.
He'll not get much support for his campaign to stop N. Ireland having similarly low Corporation Tax rates as R. Ireland. All parties favour it. But, at least he knows where Luxembourg is, which I doubt more that 1% of Americans do. BTW, does anyone, who like me favours Ireland having low Corporation Tax rates, find it both hilarious and reassuring that a former prime minister of Luxembourg is now head of the EU. I hope they give him the post for life.
The 80th Anniversary of the Republican Congress: Its Relevance Today.
A real tragedy that Ireland did not follow down the path laid out by the Republican Congress. Why, if only we had, we might now be as rich as Cuba, Venezuela or North Korea. I was in Cuba in February and was amazed by the wealth of its people. Large house and fast cars everywhere. The latest high-tech communications gadgetry on sale at every street corner. A thriving press. And the people are obsessed with cleanliness. Why, when my taxi driver dropped me off at the airport, he even asked me if I could give him the few bars of soap I had in my carrier bag. A mark of the people's happiness is that they have unanimously re-elected the Communist Party at every election since 1960. Alas, Ireland went down the route of American capitalism and that's why we are where we are today.
From the CSO website
"Weekly household disposable income in 2012 was €776.26, a decline of 3.1% on the 2011 value. Household disposable income peaked in 2008 at €939.89 and decreased by 17.4% between 2008 and 2012."
Do update us when we household income gets back to 2008 levels, even if some of us may not alive at that point.
Thanks! No offence taken!
My view that the Irish political class, like a dog with a bone, is unable to let go of the issue of the supposed role of the ECB, is being rapidly confirmed, the IT referring to the "clamour" for it to appear before the banking enquiry.
http://www.irishtimes.com/news/politics/oireachtas-banking-inquiry-faces-legal-hurdle-over-ecb-1.1992782
By the way, I used to share your view on the role of banks until the crisis hit until I was forced, like many others, to take a sudden interest in their activities. To quote Fragile by Design (a book that can be highly recommended) "Any undertaking whose inputs and outputs consist primarily of promises to repay debts is inherently unstable and risky". As the Irish electorate found out to its cost.
I have no idea if true or not, but this is what Michael Noonan says.
http://www.irishexaminer.com/business/ireland-will-win-apple-tax-probe-quite-easily-296972.html
But, back in August/September all the media cognoscenti were predicting that the Apple tax probe would be the killer blow for Ireland's corporate tax strategy. It was to be the end of the road for FDI in Ireland. But, if Michael Noonan is to be believed, the case against Ireland and Apple is very weak and might be withdrawn and, even if it is not withdrawn, Ireland will win it easily. Wasn't it the FT and the Guardian who were making a song and dance about Ireland and Apple a few months ago? Is it possible for Ireland to now sue them? Like I posted here at the time, a lot of the black propaganda against Ireland's corporate tax policies published in the London media back in August/September had no substance whatever, but was simply intended to damage the 'yes' campaign in Scotland's freedom referendum, as the SNP had stated they would replicate Ireland'd corporate tax strategy in a free Scotland.
"collapsing unemployment"
Obviously you can't give any details of the medium term trend.
Perhaps the Germans have the best response
Einsturzende Neubauten- Ich warte
Collapsing new buildings – I'm waiting
http://www.youtube.com/watch?v=b831nCMRI4Y
I'm waiting with closed eyes
waiting for the morning
I'm waiting for the cleaner
to dispose of the flower waste
I'm waiting for the waitress
moons are what I've ordered…
I'm waiting throughout the newspaper
until it's time for the world
I'm waiting with the ballpoint pen
for ideas to strike
I'm waiting waiting waiting
until it's time to return
I'm waiting in the gaps in between
allegedly unprotected
I'm waiting for the new language
that that will be of use to me
I'm waiting for the dopamine
that have been internally promised
I'm waiting for the vision
that the film finally begins
Is not "freaking the markets" what it is all about? To quote Harry S.Truman; "If you cannot stand the heat, get out of the kitchen!".
Nobody forced Irish banks to gorge on cheap overseas funding or those who took the subsequent loans to do so. The only people responsible under the rules at the time for regulatory supervision were the Irish authorities. Their failure to act put the entire Irish banking system and the Irish economy on the edge of the precipice. There is a resolute political unwillingness to recognise these facts. How widely shared it is by the public is another question.
Confidence is of course importance in finance but so are fundamentals. The worse your fundamentals are, the more important confidence becomes. Often when there are complaints (especially from insiders) about the need to silence "doom-mongers" who are undermining confidence, it's a warning sign that the fundamentals are in a very bad way indeed. Berties Aherns suggestion that they commit suicide comes to mind.
You are quite wrong about the nay-sayers having no data to back their case. In 2007 it was possible to find detailed reports written by a certain economist providing comparative analysis of Ireland's property market at the time to many other property bubbles that had occured in numerous other jurisdictions, backed with reams of data. The analysis presented was very convincing. Unfortunately those who were pointing out that the emperor had no clothes were the ones who had done their homework, while the remaining boom cheerleaders were running around with empty schoolbags.
the problem with not listening to people like the Kellys is that the Gleesons do nothing
And it's not horse racing either.
Re: Conserving the Legacy of our Leaders
Apart from anything else, what the Trichet affair, has highlighted is the job that historians do, and looking after the legacy of its main players. The Business, radio program on RTE this morning, had a piece that looked back to much older letters, those of the 1930's, the 1970's and so on. The archive of broadcasts from The Business, radio program, also contained a very good interview with economist Alan Ahearne. He discussed his appointment to an IMF adviser position, to look at under-performing parts of economies, and long term strategic vision. Ahearne was able to offer some views of his time at the department of finance during this period, and it is interesting to listen to.
Economist Ahearne, also offered some good ideas about approaches to take with a banking inquiry. They were very intelligent ideas, and I do hope that the inquiry can take on board his advice.
There is one point which deserves to be highlighted on this. Ahearne's idea was basically that we do some economic case studies, based on the same principles that would be used, where a contaminated food product entered into the food supply system. In that case, we would begin at the origins of that food product, and follow it right through the system, where it came into contact with the various participants in the 'chain'.
As an economist, Ahearne does use some very good analogies. He compared the department of finance in the time of the crisis, to an accident and emergency department. He compared the role of minister Lenehan to that of a doctor on duty. If nothing else, the views of some economists do make us look at events and their sequence, in ways that we might not otherwise have done. I can recommend the podcast archive of The Business radio show, to anyone who wanted to listen. BOH.
Your comment prompts me to post a very well known quote from Shakespeare.
Brutus:
There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.
Julius Caesar Act 4, scene 3, 218–224
The present coalition has missed the tide!
What matters is not the puny steps of a coterie of utterly incompetent politicians and their advisers – in terms of serving the broader national interest – but how the real economy behaves in the coming months.
Playing ducks and drakes by them with the institutional workings of the state may, however, do lasting damage.
http://www.irishtimes.com/news/politics/how-the-economic-management-council-undermines-cabinet-and-government-1.1991236
Footnote: On residential mortgage lending
At the risk of boring economics readers here, there is something that I believe could be added to the above. It is something which doesn't get expressed, by economists who speak about property lending (the subject is gaining renewed attention at the present, pressure coming on institutions such as the central bank of Ireland, lenders, certain ministers, to re-kindle the investment in real estate).
I noticed something in today's news headlines, about mortgages and lending. In the absence of a place to write this, I'll use this space.
There isn't anything wrong with the Ahearne suggestion to look at some case study development project in Ireland, tracing problems as they entered 'the system'. But there is a counter balancing argument to this, which deserves to be considered.
It is not always stuff, that does get built, which causes a problem in banking systems.
I certainly do hope that the Irish banking inquiry, can approach the task, which economist Ahearne had set for it. But there is another aspect to this, which is also important. My suspicion would be that inside of an Irish lending institution, the common human resources practice would be to start employees in residential mortgages. As employees are promoted inside of the company, as they learn how to get handle that initial challenge, and become familiar with the mathematics, they may find themselves working at some stage inside the non-residential part of the business.
This approach to human resources management, in modern banking, can be deathly from one point of view (I wish to contrast this with Ahearne's point about food contamination, in terms of lending inside of banking). The fundamental challenge of residential mortgage lending is to distribute in some way, a large amount of credit across a large size of population.
The analogy of providing food into an open market, fits like a glove. The problem is, that people gain experience in that area, and begin to acquire bias from an early age in their banking careers.
Unfortunately, one has to re-train one's brain, to look at things very differently, in non-residential bank lending. The objective of a commercial mortgage lending, is not to provide homes at a measured amount of risk, to a large population – the objective instead, is to create income-producing assets.
I'm not sure if many in the Irish banking industry ever fully appreciated that distinction.
The risk that a banking system can run into, is where you approach non-residential mortgage lending, as if it was the vanilla, residential sort. What we witnessed in the Irish banking during the period, where so much damage was done, . . . wasn't always contaminated food. What we did see was distribution of a large amount of credit, (not unlike you would see in the residential mortgage lending side), to a very large part of the Irish population.
There is the another important aspect to the bias, that a banking employee acquires over a long period of time, in the residential mortgage lending business. Residential mortgages do sit on the back burner. They tend to cook best, when on a low boil.
This is disastrous in the non-residential lending area, simply plain disastrous.
With commercial property lending, there is no advantage to be gained by backing the whole field (no matter how much amounts of wholesale finance, that you have at your disposal). Instead, you do everything in your power to get your equine challenger, to complete its circuit.
No one in Irish banking understood this either.
Irish banks, spread themselves so thinly across so many competitors, in so many races, that have of them never ran, . . . much less entered into the system, as contaminated food. But I would still suggest humbly, that Ahearne's lending case studies are things, which an Irish banking inquiry, could do and learn much from. BOH.
What we did see was distribution of a large amount of Commercial Property credit, (not unlike you would see in the residential mortgage lending side), to a very large part of the Irish population. BOH.
Cogent article by Stephen Donnelly on the issue.
'Perfect gentleman' Trichet dictated terms to Ireland
http://www.independent.ie/opinion/columnists/perfect-gentleman-trichet-dictated-terms-to-ireland-30729207.html
@Gavin
I think Irish politicians are on to an electoral winner when it comes to characterising the actions of foreign institutions vis a vis Ireland. I would advise anyone seeking domestic public popularity to join in.
Who will put the other side of the argument – what is their rational incentive?
"So the ECB stepped in, and provided Anglo with something called Emergency Liquidity Assistance (ELA), or 'cheap loans'. By the time Trichet wrote his letter, the ECB had nearly €50bn of its money in the Irish banks.
Why did the ECB do this? To protect Anglo? To help Ireland? No – it did it to protect the eurozone banking system. It wanted to avoid a loss of confidence in the banks Anglo owed that money to, which is where the contagion might have come from. The ECB loaned that money to private banks operating in Ireland to protect other private banks operating elsewhere."
It was the Irish Central Bank that stepped in and lent ELA, rather than the ECB.
So his rhetoric should be:
"Why did the Irish Central Bank do this? To protect Anglo? To help Ireland? No – it did it to protect the eurozone banking system."
…but that might not raise the same level of domestic indignation.
And did the ICB really do this solely to protect the eurozone banking system? Why should we not conclude that the ICB did so because the Irish government had issued a state guarantee on its banks deposits (amongst other things) to protect the Irish banking system, and that guarantee looked like it was going to be called as cash left the banks.
Without ELA the Irish banks would have run out of liquidity and the Irish state would have had a chaotic banking collapse and its senior creditors (mainly Irish at that point) would have been looking for the state to honour a guarantee it could not honour.
Within just 6 months of the 2008 guarantee the ICB -not the ECB – had issued 11bn in ELA to Anglo against 'collateral' the Eurosystem would not have accepted.
This was the ICB's money, not the ECBs money.
Was that not a choice made by the ICB?
Had the ICB made a different choice would it have got more criticism from foreigners or from Irish citizens?
The ECB CG presumably reached the point in Q3 2010 where they had watched the Irish spend 2 years doing nothing about their banks, except expecting property prices to start going up again, meanwhile the widely expected wall of withdrawls of funds from Irish banks that would obviously lead to their collapse was snowballing.
the ECB could not prevent the Irish central bank issuing ELA without a 2/3rds majority. It was clear from JCT remarks some weeks earlier that there was some exasperation among the CG about the snowballing ELA and associated 'collateral'. It would appear that 2/3rds majority was not far off being in place
when Trichet's letter was sent.
Some Sunday morning questions.
Is the state still pursuing a moral case for redress for Ireland? The government seemed to be in 2012 but has that fizzled out?
Can the state pursue a legal case? What would that look like?
Is there yet a mechanism by which Ireland can gain financial redress that doesn't require other citizens of Europe to pick up the tab?
How is the eurozone doing in terms of making the banking sector as a whole, not citizens, responsible for bank losses?
Within Ireland what are the plans (and/or what has been achieved so far) for the banking sector with regard to recouping the e64bn that the state has put in?
http://www.economist.com/blogs/charlemagne/2014/11/trichet-letter
@ GK
Cogent? A more confused article would be hard to imagine, especially in relation to the nature of ELA.
It would seem, however, that the commentariat caravan has moved on.
@ unfeasiblycharming
Thanks for that,though the Irish Central Bank is part of the eurosystem so I'm not sure there is such a clear division.
It is very complicated but I think what I'm asking is that if reducing the burden of the Irish Government's debt is a good thing for the country what are the ways and means in which this can be achieved? Are they being pursued vigorously?
My only personal note there is that I find the aim shifting debt onto other European citizens as unattractive. It is simply wrong that profits be kept private losses should be socialised.
Its a matter of spin. It is not trivial that it was the Irish central bank that issued the ELA in support of the Irish 2008 guarantee, that the rest of the CG effectively put up with it until it got ridiculous, and yet for populist reasons it is presented as all about the foreign ECB.
It is misleading that Trichet's letter is characterised without question, for domestic political gain, as threatening to deny Ireland something it had a right to. Ireland did not have a right to unlimited printing against what were little more than fantasy assets.
Why is nobody drawing an analogy between an exasperated owner of a chain of pawn shops, one of whose local branches had been giving a break to an old pal by accepting a crescendo of tat, eventually telling the guy – this can't go on unless you sign up to a programme.?
That's rhetorical btw. I know the reason why.
The problem is that there is a tendency in Ireland to be unwilling to properly consider the view outsiders might take, and while it might sound good on the doorstep, town hall pre-electoral, RTE or VB, it gets you nowhere with said outsiders.
FF have an opportunity to make people belief these letters present the current government with an open goal to get a refund of the 64bn, or at least the 32bn, If they don't it will be another FG/Lab failure, won't it?
Airbrushing out the role of the Irish central bank and replacing it with the totally unreasonable ECB only ever interested in protecting German and French banks is helpful in that regard, isn't it?
In Oct 2008 Alan Greenspan, ex-Fed chairman, told a congressional committee that he had found a flaw in his ideology.
"I don't know how significant or permanent it is, but I've been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, that's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
So when the Celtic Tiger was snuffed out on Sept 30, 2008, did you feel devastated that the small minority of 'cribbers' were the ones who had been right?
It's interesting that Paul McCulley of PIMCO provided the soundbite of the week – of course if PIMCO's bonds had been in play and his bonus, it would have been a different kettle of fish.
Paul McCulley is being required by Pimco to get out there and get noticed. They are trying, in a hurry, to make him on the road to being someone the man in the street has heard of. Why?
http://online.wsj.com/articles/pimco-sees-48-billion-in-outflows-after-gross-departure-1415209111
All fair enough and I get the necessity of looking at a variety of viewpoints/agendas (I don't mean agendas in a sinister way, I mean actually having different remits).
But I think in the interests of Ireland its people it is worth pursuing this on multiple levels.
And the country does seem to have some international support, eg the IMF and this from Philippe Legrain, which you've probably seen.
http://www.independent.ie/business/irish/irish-were-bullied-and-treated-outrageously-during-crisis-legrain-30250226.html
My fear is that the 'water under the bridge' brigade, eg Olli Rehn, will have their way and it will simply fade out.
@ Gavin Kostick
Beyond construction, people lost their jobs and businesses as a result of massive negligence and misgovernance while officials, politicians and bankers were given gilted hammocks.
Any apologies on offer to the tens of thousands of broken lives?
The warning may have been blunt or the country may have been 'bullied' to the sensitive but is the argument that there was no need for a bailout no matter how high the funding cost?
It should also be kept in mind that there was always the option of defaulting and quitting the euro.
The bailout in that case would have come from the IMF and maybe George Osborne.
It is FF's job to conflate the 2008 surprise Irish guarantee with the IMF/EZ 'bailout' and Trichet's letter. That Legrain, in the context of a book launch doesn't mind blurring the distinction…..
""I understand why the Irish government did what it did (agreed to implement a bank guarantee) but they could have stood up for themselves . . . the European Central Bank would have blinked," the former London School of Economics academic added."
…suggests they will have an easy time of it – with the man in the street, that is.
The problem with this popular echo-chamber stuff is that it does not prepare Irish negotiators for encounters with fully briefed opponents, and they have sometimes tended to underestimate the opposition and raise ridiculous expectations amongst the electorate.
According to Colm McCarthy, two Irish governments tried to get the ECB to allow them to burn senior unsecured bondholders in Irish banks. The first time was in early 2010 (FF/Green) and also in April 2011 (FG/Lab).
On both occasions they were told to, well, get lost, regardless of whatever pronunciamento the ECB has made about our 'no discussion; guarantee in 2008.
Now why would the ECB have objected in early 2010. Look at the linked article and chart and work it out. 2010 was the year for making the bond harvest safe for big European investors.
http://economic-incentives.blogspot.ie/2011/02/disappearing-bank-bonds.html
That link shows that between June 2010 and Oct 2010, the ECB oversaw the repayment of bank bonds from Irish banks, with ECB / ICB money.
Clearly they wanted the money out and onto the loans of official Ireland before making too many noises about collateral adequacy etc etc.
The Irish banks in large part caused the mess, ably assisted by the lending EZ institution with Trichet urging on the free market.
When the bets went wrong, the liabilities were passed to the Irish taxpayer, first by the Irish parliament (in dead of night) and later at full and explicit insistence of the ECB, particularly in early and mid 2010, when it would have made a real difference if losses had been allocated to bank creditors.
We have a clear and justifiable case to sue the ECB for damages caused by its policy in early 2010.
Dan O'Brien with an informed comment.
http://www.independent.ie/opinion/lenihans-tale-of-the-bailout-remains-truest-30729192.html
His general conclusion refers to the question of how the ECB is being held to democratic account; or not!
"The bigger picture of all of this is how the great power of the ECB is check and balance, and how it is held to account. Frankfurt has had to act quickly at times during the crisis and one could plausibly argue that having Ireland enter a programme in November 2010 was warranted in the interests of stabilising the wider eurozone. But the manner in which it did it had an arbitrariness and suddenness that smacks of an institution that is subject to insufficient democratic controls. That is a serious matter for Ireland and for Europe."
One could say simply that the heat in the kitchen gets fairly intolerable at times. But the rules that the ECB saw as itself operating to were agreed by all participants in the EZ. And there was clear political support from other capitals for its actions. To date, no country has chosen to challenge the ECB before the ECJ (other than the UK – a non-member – in relation to some specific issues; it lost!). The court's decision on OMT – a matter referred to it in the most ambiguous manner possible by the German constitutional court – is awaited.
The slow but certain implementation of the Banking Union can be seen as helping to remedy the perceived defect in democratic controls. It will not, however, overcome disputes withing the Governing Council as to the management of monetary policy.
http://www.euronews.com/business-newswires/2773504-french-german-resolution-fund-bill-15-billion-euros-per-country-french-finance-minister/
The Irish political establishment has now the choice between "getting with the programme" or continuing to flail around in a debate set out and delimited – in response to loud but not necessarily representative popular pressure – in a manner which none of the other external parties involved agrees with.
@ Ufc
I doubt if Irish negotiators are put at a disadvantage. Every delegation has to cope with its own political backwoodsmen.
@ Michael
My favourite Greenspanism is this one where he told the New York Times
"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders…" (Greenspan 'shocked' that free markets are flawed, November 23, 2008).
The US non farm numbers are out for October.
214 k new jobs, lower than expected, but the main news is for another month real average salaries are going nowhere.
Bill Gross a few years ago on the capital vs labour issue
http://www.pimco.com/en/insights/pages/sixpackin.aspx
"It is obvious that "capital" as opposed to "labor" – – moving from 8 to 13% of GNI over the past three or even 30 years – – has been the cyclical and secular champion. Why one or the other should be policy and politically advantaged is not commonsensically clear. Granted, the return on capital as opposed to the return to labor should logically be higher if only to encourage savings.But once an historical midpoint or range has been established, a relative equilibrium should be observed. Even conservatives must acknowledge that return on capital investment, and the liquid stocks and bonds that mimic it, are ultimately dependent on returns to labor in the form of jobs and real wage gains. If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road"
Janet Yellen doesn't care
http://www.ft.com/intl/cms/s/0/502b3a92-2a1b-11e4-a068-
00144feabdc0.html
"Markets have been looking to wage and price rises as an indication of when the Fed will raise rates, but Ms Yellen gave three reasons why weak wage growth may not necessarily mean a high level of underemployment.,.. she said that wages have failed to keep up with productivity for years, and that could continue even once the economy gets back to full employment."
I don't think she's the one to get the Yanks back on the right path.
One third of UK mortgage borrowers would struggle if interest rates rise
32% of borrowers overall would find it hard to meet payments with a 2 percentage point rise; in the south-east the figure is 39%
http://www.theguardian.com/money/2014/nov/09/one-third-would-struggle-to-pay-mortgage-on-two-point-rate-rise
Wolfgang Munchau rains on everyone's parade!
http://www.ft.com/intl/cms/s/0/f626669a-6528-11e4-91b1-00144feabdc0.html?siteedition=intl#axzz3IZv6d29E
The interest in the context of this thread is that the country "with the fastest -growing economy in Europe" continuing to be that is of more than passing Irish interest.
For the record from the Draghi's press conference;
"Question: The ECB has today published a series of letters relating to an exchange between the former President, Jean-Claude Trichet, and the Irish Finance Minister at the time of the Irish financial rescue. I was just wondering if you could spell out exactly what the ECB's concerns were at that time about the exposure in terms of the emergency liquidity that was extended to Irish banks, and also, how do you respond to the allegation that the ECB was effectively putting a gun to the Irish government's head by threatening to let the banks go to the wall unless Ireland entered a bailout?
Draghi: A very short answer would be: just read the four letters, and they would give you the whole story. The decision to ask for a programme was the government's decision. It was not the ECB forcing the government into doing this, but I think the four letters actually show exactly the sort of dialogue that took place between the government and the then President of the ECB, Jean-Claude Trichet. So for me, there is very little to add to that.
And a second exchange some time later.
Question: I refer again to the letters, Mr Draghi. You were a member of the Governing Council in 2010. In your assessment, was it appropriate for Mr Trichet to threaten the withdrawal of emergency support for the Irish banks at that time, because we do know there were serious concerns around the stability of the eurozone at large, and those concerns led to the decision or led to the reluctance to accept the burning of senior bank bondholders, so if the ECB was not going to burn senior bank bondholders, it seems very unlikely that the ECB would ever have withdrawn ELA, and yet that's exactly what Mr Trichet said he was going to do if there was no bailout.
Draghi: I've said several times, also for other countries, it's a very big mistake to look at past events with today's eyes. You should go back and consider what the situation was at that time. I wouldn't say it was a decision by Mr Trichet. It was a dialogue between the government and the ECB, and a decision by the government. The question is whether at that time, with that sort of information you had at that time, that decision was justified or not. Subsequent events, the extraordinary performance of Ireland –next year Ireland will be the fastest-growing economy in Europe, in the euro area certainly — seem to say that after all, that decision wasn't that stupid.
Question: Who in your view would be best placed to represent the ECB at the forthcoming parliamentary enquiry into the Irish banking crash? Mr Trichet, it seems likely, will be invited. Do you think it would be a good idea for Mr Trichet to go?
Draghi: We haven't looked into this matter. Never forget that the ECB is accountable to the European Parliament, not necessarily to the national parliaments. We have accepted invitations that national parliaments have kindly extended to us, but the normal counterparty is the European Parliament."
Text from Blind Biddy @The Wall:
"Rockin!"
Re: Bail-out Inquiry or Banking Inquiry ?
I couldn't help notice, in the various broadcasts, in Irish media and political discussion today, . . . a deathly fear which seems to grip Irish public figures, at the prospect of doing any inquiry into anything financial or banking related.
This is most curious.
It is a challenge that the Irish mentality, appears to be very reluctant to attack.
Before I have even heard any of the proceedings of upcoming Oireachtas banking inquiry, or read a line from its report, . . . I have already understood, how so many failures in central banking, failures financial government departments, failures in regulation and failure of political oversight, . . . could come about in the sovereign state, known as Ireland.
People there, don't do financial analysis. It's for other people.
To suggest that economic or financial inquiry could hinge around something such as a few letters (with a cart load of politics heaped on top), seems like the equivalent of trying to push a camel through the eye of a needle.
But surprisingly, that camel has got pushed very hard in Ireland, in the last week.
I can't help but wonder, indeed, if the nature of the paralysis on display in Irish politics in 2014, was the same one which governed over so many events leading up until 2008? The question that remains now, . . . is why don't we just 'scrub', the idea of a banking inquiry, . . . and proceed with a bail-out inquiry instead ?
Would I be incorrect in thinking, that it would make a lot of the participants in Irish public life and politics, a lot happier? BOH.
At the end of the day, we Irish are a race of excitable story-tellers. Excitable story-tellers and banking don't mix well. There's a case to be made that the Irish are not good at managing, regulating or governing banks. The collapse of 2008 was only the latest installment in a long liturgy of Irish banking scandals. The collapse of ICI. Tax evasion. Not paying DIRT. Over-charging customers. Guinness and Mahon bank (back in the news again!). Our escapades in the world of insurance (including most recently Quinn's contribution), suggest that not just banking but the entire universe of finance should be a forbidden zone for us. The hard cold numbers and equations of finance have a way of slaying the heroes of our beautiful, exciting stories.
A banking inquiry would probably involve a lot of hard cold numbers, certainly if it was done properly. But a bail-out inquiry – now that would make for an exciting story!
Re: Story Telling
Skeptic wrote,
Excitable story-tellers and banking don't mix well.
I used to struggle with the same challenge, ever day, when I used to be in the business of land and property development, ironically. I was surrounded in fact, by people who were trained in science and engineering, many of whom were completely swept away in something. It was a challenge to go to work, and not get dragged into the same thing. The romance, the intrigue and the amazing, are always close by.
The theme is explored in stories about sport too, such as the one about baseball in north America. I read Michael Lewis's book Moneyball a while back. He was a radical and scientific managing director in that game. But he always came back to an observation, it's hard not to get romantic, . . . and that's when people get hurt. BOH.
A very good example of the genre!
http://www.independent.ie/opinion/columnists/shane-ross/haughty-contemptuous-thats-the-ecb-for-you-30728940.html
And another from across the Irish Sea, this time on an unrelated issue but on the same point i.e. how to get political representatives to act in the general interest rather than their own.
http://www.theguardian.com/law/2014/nov/10/cameron-facing-rebellion-denied-mps-vote-european-arrest-warrant
An interesting FT blog post by Peter Spiegel.
http://blogs.ft.com/brusselsblog/2014/11/11/draghis-ecb-management-the-leaked-geithner-files/
"On Ireland's decision to guarantee all its banks in 2008:
Ireland, most people view in retrospect, was stupid to guarantee all their banks. They couldn't afford it. They were eight times the size of their economy. Now it's easy for us to say that. If they had haircut all their bondholders to the banks, then there probably would have been other forms of contagion. The rest of Europe maybe shouldn't have guaranteed them, but the rest of Europe could afford to guarantee. The Irish couldn't."
Re: Ireland was a Free Lunch for the EU
@ DOCM,
You saw it all through the Clinton administration in the 1990's, in America. Every time that Mexico tripped over its own shoe laces, which was pretty frequently, the democratic party could sweep in like captain America, to buy Mexico out of trouble, . . because it was seen as cheaper than not doing it.
It was one of the commentators, with a more global perspective on these matters, mentioned it in passing at the weekends. If the Irish banks, government, everything had defaulted in 2010 or 2011, it would have made 'page two' in the French newspapers. Exactly, the same way as America had begun to view its neighbour on the southern land border by the 1990's. It was almost expected that the Mexicans would end up in trouble again, and the cheapest thing to do, was to throw some money at it, to get rid of the annoyance. Sort of like swatting at some flies.
There are many experienced observers who will argue that after a sequence of these kinds of things in the 1990's, that by 2008, that economic policy in America was going to become exposed. Short story being, there are no free lunches, after all.
Deputy Shane Ross, and so on, have spoken about Ireland pulling the pin. The question that could be asked, is if Mexico had done the same, at any stage, would it have affected the broader north American continent in any way? Probably not, and we'd be looking at a story on page two of the Wall Street Journal. The real question though, is where it all leads to, after ten or twenty years, of throwing fists of cash at things, as they did in the Clinton, years, to make stuff go away, . . . and saying, we get it all back in the longer run anyhow.
That's the real issue coming out of all of this, from a European economic policy point of view. People here in Ireland, have got it back-to-front, about our 'bail out' program. At the end of the day, it's going to be really bad, bad, bad for Europe, . . . as opposed to Ireland, and all these chickens eventually come home and roost somewhere, . . some future president of the ECB, or EU, ten twenty years from now, will be finding out that lesson, as president Obama did in 2008. BOH.
I cannot see that the relationship between the US and Mexico has many parallels with that between the US and, in substance, two other economies, the German and the French, that agreed to manage a single currency and that share with the US the distinction of being among the top five or six economies in the world; a fact that is reflected in their voting strengths in the IMF.
The word "stupid" has now surfaced in both the recent comment by Draghi and the earlier one by Geitner. This should give some pause for thought on the part of those who consistently refuse to view the overall situation from any perspective other than their own; rather than that of the parties who effectively bailed us out. The latters' reasons for doing so were not altruistic. States simply do not do sentiment. It seems to me that this fact is finally sinking home with the broader Irish electorate and it has turned its attention – and wrath – to other aspects of government performance.
The Indo picks up the story.
http://www.independent.ie/business/irish/ireland-stupid-to-guarantee-banks-timothy-geithner-30738356.html
Re: We have more of a right to be angry as Europeans
Put this another way. There are ways in which I could become angry about Ireland and it's bail out program.
But I feel most angry as a European citizen, than as an Irish citizen.
Does that make any sense?
A lot of public figures in Ireland, in the recent week, have seemed to have been angry, first and foremost as Irish men and women.
And I would distinguish myself, very much from that camp.
Honestly, I am old enough to remember the early 2000's in Ireland. I am old enough to have understood some of the commonly held understandings that existed in Ireland at that time, in the early 2000's, about it's place in what was known as the European project.
But as I said, I'm less satisfied as a European citizen, with Europe's solution to Ireland, than I am as an Irish citizen.
I'm not sure if that makes any sense.
But being in the industry I was in, over eight percent of my work colleagues here in Ireland, weren't Irish citizens, but they were European citizens.
And their story has never really been articulated either, least of all by people here in Ireland, who gained such enormous benefit from the contribution of those European citizens who arrived here, and supplemented our labour force.
I think that the best and proper way for Ireland to present any case, would be as Europeans talking to other Europeans.
But we don't seem to be able to do that.
We're still stuck in this idea, of being victimized 'Irish', talking to something very far away, called Europe.
Europeans (including the French, the German), should all be shocked about the manner in which Europe has dealt with Ireland.
The most worrying thing about the approach of Mario Draghi, is that he doesn't see what happened in Ireland, is really a very bad omen for Europe, more over than being a bad sign for Ireland.
We need to do our homework, better though, in order to educate our European neighbours, a lot better. We should become teachers, in a sense. Maybe, I'm very wrong. But I happen to think that is a realistic goal. We're not going to look convincing as Europe's teacher though, by running around waving a letter, Neville Chamberlain style. BOH.