By Karl Whelan
announcement that Ireland is accessing an EU-IMF
rescue plan is a damning indictment
of the governments banking policies of
recent years. In the space of just over two years,
the government has shifted from claims that the
banks were fully solvent and that the state
guarantee was the worlds cheapest banking
bailout to Brian Lenihans frank admission
that the banks were too big a problem for the
country to solve on its own.
We have also
gone from a position where, only a few weeks ago,
it was widely believed that the state had enough
money to fund itself through until next summer to
an agreement to use funds from the EU and IMF to
fund the state over the next three years. How
exactly this swift change of position came about
has not been well explained to the Irish public.
mechanism for the bailout talks appears to have
worked as follows. Because the original Irish
liability guarantee ran out at the end of
September, the Irish banks had a large amount of
bond funding that matured in September as well as
many corporate deposits with terms set to run up
to the end of the guarantee. The banks failed to
obtain new bond market funding and turned to
borrowing from the ECB, and in some cases where
banks had run out of eligible collateral for ECB
loans, to the Irish Central Bank for emergency
liquidity loans underwritten by the Irish state.
It appears that
during November, the ECB decided that its
exposure to the Irish banks had grown to an
unsustainable level (90 billion to the
domestic banking group and about 30 billion
in emergency liquidity assistance from the Irish
Central Bank). At this point, the ECB directed
the government to access a bailout in order to
fix the Irish banks once and for all. With the
banking system so reliant on ECB support, the
government seem to have had little choice but to
comply. And with the ECB still providing large
amounts of liquidity to the banks, there has been
a reluctance from the government to publicly
complain about the ECBs role in pushing
Ireland towards seeking external assistance.
So, have we
been rescued by this plan? There are plenty of
reasons to believe that we have not.
On the banking
side, the details of the plan released at the
time of writing include a long list of vague
statements about restructuring and deleveraging.
However, despite the promise of an introduction
of a special legislative regime to deal with
distressed banks, there is little sign that there
will be burden-sharing with senior bond holders
of even grossly insolvent banks such as Anglo or
has said that this was a decision of the European
arm of the rescue team but I have not seen
anything legally binding in the agreement
requiring the Irish government to continue
bailing out bondholders at insolvent banks.
Getting subordinated bondholders to accept their
part in the losses is also being complicated by
the apparent plan to first put in large amounts
of state money in the form of equity to take
losses ahead of bondholders.
If we are not
going to get any sharing of losses with bank
bondholders, then we should at least hope that
the main Irish banks will be re-organised and
sold to well-funded outsiders as quickly as
would most likely require our government to
provide insurance on their loan books so that
unforeseen losses still end up costing the Irish
taxpayer, with funding provided by the EU and the
IMF. But at least the economy would then be
better served by having banks that make lending
decisions on the basis of the commercial merits
of borrowers, rather than restricting credit to
raise capital ratios in the hope of avoiding
nationalisation, as we have seen over the past
two years. Of course, in light of the misguided
and poorly-executed nature of the banking
policies that we have seen thus far, hoping for a
rapid and efficient solution of this sort may be
fiscal policy? Here, we have even less reason to
feel rescued. The average interest rate of 5.8%
offered by our external rescuers is about the
same as seen in the bond market in September and,
at that time, there were serious concerns about
the sustainability of borrowing at such an
interest rate. That the rate is lower than what
would be on offer now from the bond market is
of the adjustment is also somewhat harsher than
is necessary. I had argued in recent months for a
sharply front-loaded adjustment to get the
deficit below ten percent in a bid to restore
access to the sovereign bond market. With this
target now beyond us, there was a strong case for
a smoother adjustment that would have been less
disruptive to growth in 2011.
do we stand in relation to the sustainability of
our debt burden? Ireland seems likely to have a
debt-GDP ratio of over 110% in 2014. By that time,
Europe may have agreed on how to implement
sovereign default procedures for Eurozone
countries with Greece as the likely first test
case. It is easy to imagine a scenario in which
sovereign debt markets still refuse to lend to
Ireland even if it has succeeded in reducing its
deficit. The high yield on our sovereign bonds
trading in the secondary markets suggests that
eventual default is viewed as likely by those
with money to invest.
We may have
been rescued from the wolves. However, it is open
for debate whether our rescuers are planning to
feed us to the lions.
? Bank of Ireland Sub Debt Exchange
Irish Central Bank.
Dude, wheres my
December 10, 2010
Anyone that has kept an eye on Irish Politics
over the past few months will be very familiar
with the phrase Ireland is pre funded into
the second half of next year.
So, being a nosey sort, I went looking for it.
The first port of call was the National
Treasury Management Agency (NTMA) website
They list the total outstanding national debt
at 88.5bn. This, of course, is the Net
national debt, ie it is total borrowings less any
To get the total amount of borrowings, we have
to go to Instruments comprising the
national debt page
click to enlarge
Note that the figures on this page have not
been updated since the end of September.
So good, so far. There is the number on the
page. But, where is the money?
I briefly had nightmares about the NPRF
keeping the money on deposit with commercial
banks, but a quick email to their (surprisingly
helpful) press people sorted that out.
The NPRF keep their pre-funding on deposit at
the Central Bank.
And here it is, plain as day in the financial
statement of the central bank:
click to enlarge
Ok, maybe plain as day might have
been a little untrue. But it is there under
Liabilities to other euro area residents in
So, thats good news isnt it?
Not be one to miss an opportunity to kick a
hornets nest, I wondered what happens the
financial statement of the Irish central bank as
the government draws down the money they have on
deposit on the central bank.
After all the financial statement does balance,
so surely a reduction in liabilities would lead
to a reduction in assets.
There is an entry on the other side of
financial statement called Securities of
other euro area residents in euro. These
seem to be a bit of an odd fish, described in the
bank annual report as
Other securities, which
marketable and non-marketable securities that
are not related to the monetary policy
operations of the Eurosystem.
So I figured I could graph these against the
government deposits and see if they match up:
Basically, they did, but they dont
anymore. Also there doesnt seem to be
anything else on Assets side to meet the drawdown
of 24bn (ish). there is an entry
called other assets but they are not
really worth anything at all, I wrote about them
So, confused by all this, I sent a little note
off to the Central Bank asking them how they deal
with draw downs on the government account. I
eventually received this (very opaque) reply/slapdown:
Further to the text below any reduction in
Government deposits at the Central Bank of
Ireland would not give rise to a need to sell
Your analysis is not accurate as
Government deposits are a so-called
autonomous factor on a Central Banks
balance sheet and movements thereon affect
monetary policy assets NOT financial/investment
assets. Any change on this liability item
will have a liquidity impact in the euro area
money market and lead to a correspondent
change in the amount of money lent in
Eurosystem credit operations.
For instance, in the event of a fall in
the amount of government deposits with the
Bank, the Banks liability to the
government will fall while the contra entry
depends on what the government does with this
money. There are two scenarios:
1. The government places the funds with an
Irish bank and liability item Government
Deposits decreases on the CBI balance sheet.
Assuming the Irish bank retains this
additional liquidity, its need to refinance
through the Eurosystem via the CBI falls and
this leads to a corresponding fall on the
asset side of CBIs balance sheet.
2. The government places the funds with a
German bank and liability item Government
Deposits decreases on the CBI balance sheet.
As this payment is made to a German bank, the
CBIs TARGET liability item under other
liabilities increases by a
corresponding amount while the asset side of
the CBIs balance sheet remains
unchanged. Assuming the German bank retains
this additional liquidity then it has a
reduced need to take recourse to Eurosystem
lending via the German central bank.
At first reading that all seems very sensible.
But, there is a huge assumption in 1. above.
The government only draws down money to
commercial banks for current spending. The
assumption seems to be that the cheques the
government write end up back in the same banks
they are drawn against ie zero leakage
closed economy model.
2. above talks of a Target Liability in other
liabilities on the financial statement. (Now
I have to call BS on this one. How can a
liability be a target? How can that be accounted
for? I searched the balance sheet and there is no
entry in the other liabilities column
called target presumably because a
target can only be accounted for as zero.) Thanks
to Eoin below for pointing out that TARGET is not
a target, rather it is this.
So, note to self, dont take anything a
Central Bank says at face value
For more info on the how the ECB deal with
entries like this in finacial statements, the ECB
have helpfully sent me this
note explaining the situation. Note also that
the central bank are assuming again that the
German bank retains the money.
The bank does not show what happens if the
government draw down money to pay a non euro area
bill (for example a UK holder of Treasury bills).
All of this has left me very confused.
So, when I heard that as part of the EU/IMF
programme Ireland would be coming up with 17.5bn
from the National Pensions Reserve Fund and the
NTMA, I decided to do some maths again.
Im working off the September figures
above which show a cash balance of 24.5bn
at the end of September.
The remaining outstanding repayments then for
2010 totaled 5.883bn
That leaves 18.667bn.
In early 2011 the rest of the outstanding
treasury bills fall due. I cannot find the
maturities of the commercial paper programme, but
will update these numbers if I do. In the
meantime I will have to be a little arbitrary.
Total short term debt due in 2011 is 6.386bn.
Seeing as this was short term debt (ie maturity
under one year) and that amount was outstanding
in September it is safe to assume that the
majority of that will fall due in the first half
of 2011. The treasury bill programme is finished
in April, for example.
That leaves us with a running total of 12.276bn.
Now we have to take away the 5bn for the
bailout and we are down to 7.276bn.
Still not looking to bad?
Between September and end November, the
government actually ran a surplus of 26m so
we can add that back on and we get 7.302bn.
But, every year December is the biggest month
for government spending. Last year the deficit in
December alone was 2.6bn. Assuming a repeat
performance, we are left with 4.7bn
Because the tax system in Ireland means much
of the tax is collected in November, the first
half of the year tends to be fairly barren.
To end June last year, the deficit was 8.887bn.
That deficit will have to be cut in half if
Ireland really is funded to the second half of
So, is Ireland funded to the middle of next
year? It is now, if the IMF/EU package is voted
through the Dáil next Wednesday.
The bigger question is, could the Central bank
have afforded to give us the money?
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