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European Tribune - Irish pushback strategy - we get mail
Ireland runs a respectable trade surplus w.r.t. the rest of the €-zone, so in the medium term, the current surplus-friendly setup works in favour of Ireland's narrow self-interest.

The narrow self-interest objective is to secure liquidity until the hysterical children in the international money markets are done panicking about your sovereign default (this takes a year to a year and a half).

We're missing some data here - or at least I'm not satisfied with the data we've seen so far.

When the Irish bailout happened, the Irish government had been saying for some time that they were funded on a cash basis until the middle of 2011. In other words, they already had 8 months of time for the histerical children to calm down before the first batch of bonds came due for rollover.

What likely happened, though, was that the interbank lending market was effectively closed to Irish banks, which were consequently relying on emergency liquidity from the ECB, and the ECB threatened to close the spigot. This would have instantly crashed the Irish banks, forcing a regulatory intervention (the one that should have taken place in 2008 when the government issued their guarantee) and the calling of the government guarantee on bank debts (the government was funded until 2011 assuming the guarantee remained a contingent, as opposed to an actual, liability so this would probably have triggered a default).

Another question is whether the combined Irish Central Bank and Treasury had the ability to honour the deposit guarantee. I don't remember seeing an estimate of how much money was needed for that. In fact, a slow-motion deposit run is probably taking place as we speak. Two weeks ago, I wrote:

In other news: Central Bank steps up its cash support to Irish banks financed by institution printing own money - Irish, Business - Independent.ie
A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.

However, a source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant. The ECB has been lending money to banks in Ireland at just 1pc, as long as the banks can put up acceptable collateral.

Incidentally, this answers my question Can the Eurozone National Central Banks create fiat Euros by themselves? in the affirmative. Yes, they can!

Zero Hedge is, of course, all excited about this: Accelerating Deposit Flight In Ireland Forces Irish Central Bank To Print Money Independent Of ECB

It appears that Irish savers are sufficiently smart to realize that their money is no longer safe in a banking system whose existence is now only backstopped merely from referendum to referendum. As it is very unclear what will happen to the IMF/ECB rescue mechanism once the Irish election is held in March, with a material possibility that the whole plan will be unwound, leaving the country's financial system in the wind, a behind the scenes bank run is accelerating. Incidentally while this was the topic of the December letter by Guggenheim's Scott Minerd, which we discussed in a post titled "Scott Minerd's Detailed Pre-Mortem On What Europe's Bank Run Will Look Like, And Other Observations", his just released January missive deals with precisely the same topic (see chart below). So faced with the prospect of accelerating deposit redemptions, what does the Irish Central Bank go ahead and do? According to the Independent it has gone ahead and proceeded with that traditional recourse to all regimes in the bring: print money.

Today, our correspondent writes
We are in dire straits. We cannot borrow money in the markets. The ECB gave the ok to our Central Bank in December to print €51bn euro. I am not sure if this relates to the amounts disclosed in a newspaper last week.
The article in question is €50 billion in loans puts `solvency risk' on Central Bank | The Post
A staggering €50 billion of emergency funding to Irish banks by the Central Bank of Ireland could pose a threat to the very solvency of the Central Bank itself, a report by Citi has concluded.

The report, which examines the €50 billion in emergency liquidity assistance (ELA) provided by the Central Bank of Ireland (CBI) to Irish banks, also concluded that ``it is likely that the collateral offered (by the Irish banks) would not be accepted by the ECB''.

Citi suggested there was considerable secrecy around the precise mechanism under which this €50 billion was lent out, and the Central Bank has declined to comment.
The reports by Citi's Willem Buiter are Migeru:
Buiter has a new paper out:

Willem Hendrik Buiter - Publications

    CITIGROUP PUBLICATIONS
    1. "ELA: An Emperor without Clothes?", with Ebrahim Rahbari and Juergen Michels, Citi Economics, Global Economics View, 21 January 2011.
    2. "The Debt of Nations", with Ebrahim Rahbari, Juergen Michels and Giada Giani, Citi Economics, Global Economics View, 7 January 2011.
Other required reading from Buiter is discussed in my diary Can the Eurozone National Central Banks create fiat Euros by themselves?
In Can Central Banks Go Broke? (CEPR Policy Insight No.24), Willem Buiter asks:
Does it matter if a central bank suffers a large capital loss? Can the central bank become insolvent? How and by whom should the central bank be recapitalised, should its capital be deemed insufficient?
But he also does something else: this is one of the most accessible places where one can find a discussion of the structure of the ECB and its relationship with the National Central Banks.

While it answers many questions one might have, it also leaves a few important issues unresolved or undiscussed. In particular, the paper invites the question of whether National Central Banks can create fiat money independently of the ECB.

Buiter outlines the toolkit to understand the extent to which the combined Irish Treasury and Central Bank are solvent. This is what Jake is talking about when he says
Then you decide what level of debt you will realistically be able to honour (be pessimistic - the EU could well be looking at a Japan-style lost decade)


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 04:23:28 AM EST

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