Two months ago as speculation grew about an IMF bailout, there were calculations on here which suggested that any eventual bailout would need be in the €200bn range. And there was no little surprise therefore when on 28th November, 2010 the bailout was announced with a quantum of €85bn. Just seven weeks later it is becoming obvious that not only is a €200bn bailout needed but the mechanics of that enlarged bailout are taking shape with the Central Bank of Ireland apparently providing funding to support promissory notes used to fund the bailout banks and both the CBI and ECB continuing to provide exceptional funding to replace fleeing deposits. This entry examines the true quantum and funding of the bailout.
At the end of November, 2010 the question on everyone’s lips was how much of a bailout did the State need and Minister for Finance Brian Lenihan was telling us to work it out for ourselves. And on here the stab was €207bn composed of the following:
(1) NAMA development funding of €5bn
(2) Deficit funding for 2011-2014 of €43.25bn
(3) Funding of the promissory notes used to bailout the banks – €31bn
(4) Repayment of national debt (maturing of existing bonds and treasury bills) in 2011-2014 – €38bn
(5) Replacement of ECB Emergency Liquidity Assistance – €90bn +
So imagine the surprise when on 28th November, 2010 the announced bailout was only €85bn with €50bn earmarked for deficit funding and up to €35bn set aside for the banks. The deficit funding of up to €50bn was in the same ballpark as the deficit funding identified by the government for 2011-2014. Add in an extra year’s deficit funding for 2015 and you’re pretty much up to €50bn so that component of the bailout made sense.
But what about the other components of the estimate on here? They haven’t gone away you know. It seems likely that one of the main reasons for the ballooning “Other Assets” (€51bn at the end of December 2010) being recorded by the Central Bank of Ireland (CBI) might be that the CBI is exchanging promissory notes from Anglo, Irish Nationwide Building Society and the Educational Building Society with brand spanking new funding. These promissory notes of course are the product of essentially Minister Lenihan writing IOUs up to the amount approved by the EU for bailing out the banks. And the CBI is also apparently helping to shore up fleeing deposits.
But what about the other three components? How exactly will Ireland repay maturing bonds and treasury bills this year and beyond? We are still close to historic highs on the bond market so presumably that avenue is still practically closed to us. So either we reallocate some of that €50bn-earmarked deficit funding or we return to draw from the seeming bottomless well that is the CBI’s “Other Assets”. Of course the government might issue more directions to the NTMA and NPRF to invest in the rollover of maturing debt and pressure might also be brought to bear on the banks, particularly the State-guaranteed banks to substitute existing investments with Irish state debt. Ditto with pension fund operations in the State. It would be helpful to know though what the government’s plans are in this area.
The ECB’s “non-standard” liquidity measures, y’know the ones it has been “non-standardly” using since September 2008 when Emergency Liquidity Assistance (ELA) first exceeded €50bn. And ELA funding has not once been below that level since and according to news sources the ELA balance to Irish banks at the end of December 2010 stood at €132bn though that would represent the first month-on-month fall since July 2010. The ECB or CBI apparently didn’t release figures for ELA funding of the 20-odd domestic Irish banks and of course they never release funding figures for just the six State-guaranteed banks. If deposit flight had halted however I would have expected high-profile announcements by the CBI and ECB – after all our banks are crying out for confidence at present and you might expect officials to dispense with formal reporting schedules if we had some good news. So how much longer is the ECB going to make available 24.1% of its total support to Eurosystem banks to Irish banks? Deleveraging options for Irish banks seem confused (NAMA 2 but who would fund it? Selling loan books but providing insurance against losses? Attracting foreign capital into a toxic Pandora’s box of a banking system?). At what point can we economically convert the perception of ELA funding from an overdraft to what it has practically become – a term loan, AKA a bailout?
NAMA’s €5bn development funding of a maximum of €5bn allowed by the NAMA Act is small beer compared to the totals under the other headings but as NAMA is a key theme on here the question needs to be asked – where is NAMA getting its much vaunted development funding? According to NAMA’s website : “Programme details [of the €2.5bn medium term note funding] will be published in Q4 2010” which plainly hasn’t happened and as far as I can tell NAMA’s €2.5bn short term euro paper programme has been effectively scrapped though the Q3, 2010 NAMA Report and Accounts (which are nearly three weeks overdue) might shed further light on the subject. NAMA may end up using loan repayments to help fund future developments but that is not how NAMA was intended to operate. So for the time being the source of that €5bn funding is unclear.
And what is the significance of the bailout being €200bn+ rather than €85bn? Firstly there is the risk that the additional funding might not continue – step forward Mr Trichet and the ECB, and it is unclear how the CBI can continue to quantitatively ease itself towards €100bn+ of “Other Assets”. Secondly there is the risk that even if funds are forthcoming they may be tied to the Irish sovereign and to assets which might eventually fall in value – step forward further bank losses. And thirdly there is potential debt servicing which might more than double the annual €10bn-odd presently being contemplated.
So at this point the bailout is looking more like €300bn composed of the following sources – IMF (€22.5bn), EFSF (€22.5bn), EFSM/bilaterals (€22.5bn), NTMA/NPRF (€17.5bn), ECB (€100bn), CBI (€95bn). The €90bn from the CBI is composed of €50bn of existing “Other Assers” plus €40bn of redemption of debt plus €5bn of NAMA funding. The €100bn of ECB funding is the estimated ELA being provided to the domestic Irish banking system (as opposed to the €132bn which is provided to all Irish-located banks including those in the IFSC which don’t service the Irish economy). Plainly much of the bailout is for shoring up fleeing deposits and is apparently underpinned by assets held by banks.
NAMA Wine Lake 
From week to week, as time passes, the problem of sovereign debt grows larger and it is no longer just Ireland and Greece.
Italy, Spain, Belgium, and Portugal will need to raise over $800 billion this year to cover rollover debt and new borrowings. Add in Greece, Ireland, and a few others and it gets to a trillion or so. A lot of debt!
Belgium’s total debt is pushing towards 100% of GDP and, given its fiscal deficits, probably will push through that level soon. This is a country of just 10 million people, and a deeply divided one at that, unable to elect a government. They are making progress on getting their fiscal house in order, but are not there. And the market is getting nervous.
But it has to be said we are the EU’s big headache at the moment. Our banks were a multiple of our GDP. The government’s decision to guarantee those debts are going to cost us about 30% of GDP. And as we are all well aware, because the most of those guarantees are to German, French, and British banks, Irish taxpayers are in effect bailing out not only their own banks but banks all across Europe.
The “bailout” engineered by the ECB and IMF will require that that we pay approximately 10% of our national income in a few years time just to service the debt. How can we take 30-50% of our government taxes and pay down such high debt loads at 6% interest? It leaves little for actual government and public services. And it requires us to take a lot of pain, whilst the bank bondholders, which again are German, French, and British banks take little or none.
This is not politically sustainable, as anyone who has read about Germany’s experience with World War I reparations should know. A populist backlash is inevitable. The stage has been set by the Commission, the ECB, the IMF and the German Government (and our own Department of Finance) for a situation where Ireland’s new government will reject the recently negotiated budget.
The situation is simply economically unsustainable.
Ireland has been told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency.
But the more successful it is at reducing wages and costs, the heavier will be its inherited debt load. Public spending then has to be cut even more deeply. Taxes have to rise even higher to service the debt of the government and its wards such as the banks.
This in turn implies the need for yet more internal devaluation, which further heightens the burden of the debt in a vicious spiral. This is the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.
This debt deflation/devaluation spiral will end in tears. Irish tears.
In the forthcoming election, which of the parties will campaign to repudiate that debt? Irish bank bondholders need to face a haircut of some 80% – more akin to an amputation than a haircut!
The next government, if they reflect the current will of the people, will have a mandate to simply not guarantee Irish bank debt. This would reduce our total debt-to-GDP down to a still-high but more manageable 100%. Not good, but better.
Such potential restructuring would involve some very tough negotiations. The incoming government needs to respond to its new instructions and mandate from the citizens of this country. Why should the Irish taxpayer underwrite private Irish bank debt to the Germans and the French at the expense of being mired in a depression for a decade or more?
If the ECB, IMF, and the rest of the EU says, “If you don’t take on the banks’ debt we will not buy any more of your debt ever. You will be shut off from the subsidized debt markets.” …… Then what happens?
Ireland’s new negotiators need to have the cajones to refer them to the famous response in Arkell v. Pressdram (1971). It will be a very intense and interesting set of negotiations, but we actually hold the aces.
Britain is particularly exposed. What would it do to sterling if the Bank of England had to bail out British banks to the tune of almost $200 billion? Note that Royal Bank of Scotland and Lloyds are almost wards of the state, as it is.
And the euro could come under intense pressure.
If eurozone leaders do not respond proactively in our interest, the confrontation could spiral out of control very quickly. Think November 2007. Think Lehman Bros. Interbank lending could dry up almost overnight.
Could it happen? No one knows. Will it happen? Unlikely – unless we elect new leaders with courage. Have we new leaders with courage? I doubt it.
But if we DID walk away, what does that say to the Greeks? Or to the Portuguese? Would it be a “once off” —Ireland giving the bondholders, IMF, ECB et al. the finger on their bank debt — or could it be the first domino of a general debt restructuring?
Time to throw away the chessboard. Anyone got a deck of cards and know a good poker player?
@wstt
well put.
if debt restructuring ( be that anything from mortgages to national debt) is to happen, two things come to mind
– debt forgiveness is practically alien to the Irish psyche
– debt restructuring should happen earlier not later.
This presents an obvious conundrum, so the first step would seem to be finding agreement that yes some debts need to be written off, ( for some, maybe a neighbour you don’t like who cannot pay his mortgage, will be in this group).
But as we know, private and government debt are intertwined. It’s not about winners and losers, it’s about everybody moving forward together. Some people (and Ireland as country) will only be able to make this move when debt restructuring becomes an integral part of the big picture.
I think the issues of the Irish psyche in the context of debt forgiveness is a very real problem, maybe even fatal.
to quote and old friend:
“sure why should that fella get off and I workin’ me balls off for twenty years to pay me mortgage ”
He doesn’t realize the Germans are probably saying that about us!
One thing: CornerTurned suggests that “Emergency Liquidity Assistance” refers to the “Other Assets” liquidity from the Central Bank of Ireland rather than the ECB liquidity.
To quote the excellent Lorcan Roche Kelly on that blog entry “The information regarding amounts of ELA are provided by the relevant NCB and is not made public by the ECB.” ELA is provided by *both* the ECB and separately the CBI. the CBI publish the amount of ECB ELA in its monthly statistics report (which will be due in two weeks for December 2010). The CBI also show under “Other Assets” the total of CBI ELA (which is separate to the ECB’s).
By the way if what Lorcan, quoting a response he received from the ECB, writes is correct – “ELA is not made public by the ECB”, you’d have to ask how the Financial Times yesterday was able to report on ECB ELA in December 2010 ” Separate figures from the European Central Bank show that Irish banks’ use of the ECB’s liquidity window declined in December by €4.4bn although total amounts outstanding to Irish banks at December 31 stood at €132bn or 24.1 per cent of total ECB support for the eurosystem of eurozone central banks”
http://www.ft.com/cms/s/0/8796eb78-1fea-11e0-b458-00144feab49a.html?ftcamp=rss#axzz1BNhEaiF4