by Frank Schnittger
Sat Apr 9th, 2011 at 07:25:26 AM EST
As the dispute over the interest rate of 5.8% being charged on Ireland's ECB loan rumbles on, a little birdie tells me that Ireland is considering other options, including to borrow from the US Fed instead.
Quelle Surprise! Fed Lent Over $110 Billion Against Junk Collateral During Crisis
Former central Banker Willem Buiter once remarked that the Federal Reserve's "unusual and exigent circumstances" clause, which enables it to lend to "any individual, partnership or corporation" if it can't get the dough from other banks, allow the Fed to lend against a dead dog if it so chooses.
And who has the Fed lent to in the past?
Foreign Banks Used Fed Secret Lifeline Most at Crisis Peak
U.S. Federal Reserve Chairman Ben S. Bernanke's two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.
Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed's "discount window" lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.
Pending a resolution of the interest rate dispute, Ireland has steadfastly refused to draw down any on the ECB loans to recapitalise the banks. There are also rumblings about the strings attached to those loans, which, for instance, prevent Ireland from restructuring its banks debts or buying back its own debt at discount rates on secondary debt markets - thus effecting a de facto partial restructuring of it's debt portfolio, and reducing the total amount outstanding. Ireland's debt is currently available at up to a 30% discount on secondary markets because of the risk of default.
The critical argument is that Ireland should not be taking on an unsustainable burden of debts at rates it will not be able to service. That is just beggaring the Irish economy to delay an inevitable default. The economic growth assumptions underlying the ECB/IMF deal have already been shown to belong to ECB/IMF fantasy land with various independent forecasters progressively downgrading their growth forecasts. This argument is reiterated by Nobel prize winning economist, Joe Stiglitz in today's Irish Times:
ECB-IMF deal is a noose that will strangle economic recovery
Even in more optimistic scenarios, Ireland's debt to GDP ratio is expected to soar to 125 per cent in 2013, up from 25 per cent in 2007. Low growth could make things worse, as stagnant GDP offsets the reduction in Ireland's debt. If Europe continues to falter - 2011 growth is projected to be lower even than last year - this will make Ireland's recovery all the more difficult.
Even the EU is now anticipating that projections made just a short while ago were too rosy. But the EU recipe for recovery is more of the same: to meet the deficit reduction targets, more austerity - which in turn means still lower growth and still higher unemployment.
In effect, the International Monetary Fund (IMF) and European Central Bank (ECB) are asking ordinary Irish workers and citizens to bear the burden of mistakes that were made by international financial markets. But it is important to recognise that these mistakes are at least partly attributable to following deregulation and liberalisation policies that were advocated by the IMF and ECB and that these policies provided significant benefits to the financial sector.
Merkel and Sarkozy have been playing hardball with the Irish Government, demanding concessions on Ireland's Corporate tax rate even though Ireland's effective rate of corporate tax is already below that of France. But they may have overlooked one little factor in Ireland's geo-political position: Ireland has always been on a political continuum somewhere between Boston and Berlin.
Ireland has always had access to the highest levels of US and UK policy makers and guess who's coming to visit next Month? President Obama and Her Majesty the Queen - one to look up his Irish roots ahead of his re-election campaign, and the other to apologise for some of her roots in centuries of strife. Do not be surprised if some other little business is done in deep background. Ireland may be less than 1% of the EU but it has enormous popular and political ties with the US and UK.
Merkel and Sarkoxy may not have this little Isle to kick around for that much longer - if we say goodbye to the IMF/ECB and hallo and to funds from the Fed. It will also draw into question Ireland's continued participation in the Eurozone, if the ECB withdraws it's liquidity funding to Irish banks, and Ireland's Central Bank is forced to issue replacement Euros in breach of its covenants to the ECB. Ireland's trade with the US is is second only to it's trade with the EU and ultimately Ireland may have to decide which relationship is more in it's best interests.
We may be a very long way from such hard choices having to be made, but don't be surprised if the debate around Ireland's membership of the Eurozone - up until now very muted - becomes much more animated in the future. Birdies sometimes have a very good view of a changing landscape.