When examining the promissory note deal on here, the conclusion is that it does amount to monetary financing – allowing a State to create one fifth of its annual economic output in new money and charging a mere 0.75% per annum for such money, possibly for 15 years, in the view on here, is “monetary financing”. In Ireland’s case we have been allowed issue €25bn of bonds, equivalent to 1/5th of our annual Gross National Product of €127bn in 2011, and the plan published last week anticipates the ECB providing cash to us against these bonds for 15 years.
When analyzing the deal on here, there was high praise for Irish negotiators in convincing the ECB to accept such a deal. But the risk of other EuroZone countries seeking a similar deal was raised, and the triumph of last June’s EU summit when the communiqué afterwards said “similar cases will be treated equally” was regarded not as an asset to Ireland, but something that could come back to bite us on the bum. So what happens now if Cyprus demands 0.75% loans from the ECB to bail out its banks?
And this morning, there are reports emerging of the ECB threatening to renege on the deal, after the Germans said the Irish deal came “dangerously close” to monetary financing. [CORRECTION: 15th February, 2013. The president of the German Bundesbank Jens Weidmann is reported to have said that, in relation to the deal, the ECB “has to make sure that its actions are in conformity with its rules and statutes”. The ECB president has said that the ECB will re-examine the deal]
Perhaps we should be grateful at the deal last week which saw €25bn of promissory notes, which were almost definitely illegal in the context of ECB rules, and may well be unlawful in Ireland – something we may find out as David Hall’s challenge progresses through the courts – converted into sovereign debt. The view on here is that we should not be at all grateful, because even though the overall debt shouldered to bail out the banks has been reduced in net present value terms, we are still shouldering debt which threatens to seriously undermine our society.
How might the ECB renege on the deal? It might require the term in which the Central Bank of Ireland can hold our bonds, to be cut from 15 years to a much shorter term, perhaps even months.