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Message to Europe: Ireland was never bailed out

by Frank Schnittger Wed Oct 10th, 2012 at 04:51:09 AM EST

It's not often I praise the contributions of Irish politicians. However my local independent TD (Member of Parliament) deserves an honorable mention. Both in public and private he has offered a very cogent explanation of Ireland's currently very dysfunctional relationship with the EU. Here he is addressing Martin Schultz, President of the European Parliament.

The essence of his argument is that Ireland did not receive, and does not want a bail-out. It got €64 Billion from the Troika which it gave to banks which are now either defunct or intent on squeezing the remaining lifeblood from Irish consumers to cover their losses. This was done at the insistence of the EU Commission and ECB regardless of whether or not those banks were included in the Irish state bank guarantee scheme. These banks in turn gave that money to other (mostly European) banks, investors and bondholders - despite the fact that they were otherwise insolvent.

front-paged by afew


Under normal business circumstances those investors (who were getting a risk premium for investing in those banks) would simply have lost their money or had their bonds converted into almost worthless shares in the banks. By paying them in full (note not 50%, as in Greece) the Irish state saved the EU from the contagion which would have spread had there been a complete Irish banking system collapse and a default on payments to other banks resulting in a much wider EU banking system collapse. In essence Ireland "took one for the team".

However Ireland now needs that money back - both to reflate its own economy and to contribute to a much broader EU recovery. Good luck with that. But the message that Ireland was never bailed out - rather that it was professional European investors who took risks in investing in private companies that went sour - who were bailed out cannot be repeated often enough, if only to deflate the absurd nationalist propaganda currently being used to undermine EU solidarity.

This was not a case of virtuous Germans bailing out profligate Greek, Portuguese, Spanish and Irish Governments. Rather it is a case of Greek, Portuguese, Spanish and Irish Governments bailing out profligate German, French, British (and other) private banks, hedge funds and investors.

Meanwhile the Irish Government fiddles while the country burns and enjoys lying on it's back having it's tummy tickled by the titans of austerity economics.

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The body of this post, slightly reworked, would make an excellent LTE.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 9th, 2012 at 05:29:48 PM EST
About that 50% cut in Greece, it's not that simple: Foreign banks held 143 billion euros worth of Greek government bonds before the crisis. By the time the PSI deal happened, that amount had shriveled to 23 billion Euros. 50 billion of these bonds were bought by Greek Pension funds when bankruptcy was easily foreseeable, and Greek banks. Greek banks are recapitalized through loans that burden the Greek tax-payer (though not public banks). Greek pension funds bought ~10 billion Euros worth of bonds (and lost something like 50% at least of their value), another 5 billion went in the hands of private persons and organizations in Greece. Thus the net effect was the same: the Greek state saved the EU from the contagion that would have resulted had the EU banking system had to face 80 billion worth of write-offs at that stage....

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Tue Oct 9th, 2012 at 06:53:00 PM EST
Fair comments. I referenced the 50% because it was mentioned by Stephen Donnelly in his speech and because it was the headline figure that received much media prominence here. In general, it has been noteworthy that creditor banks were allowed to unwind their positions even when it was clear the debtor banks were insolvent and the nation state/taxpayers were expected to take up most of the tab. The dominant response to the crisis has been to save creditor banks by using public assets and then hanging the public out to dry. Rather optimistically, Stephen Donnelly wants to unwind that position but at least he changes the frame from virtuous Germans bailing out profligate Greeks/Irish to one of Greeks/Irish bailing out profligate German banks.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 10th, 2012 at 04:49:42 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Oct 10th, 2012 at 08:42:59 AM EST
Thanks. For a variety of reasons I haven't been around on ET much recently which means I am a little out of touch with discussions here...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 10th, 2012 at 06:08:44 PM EST
[ Parent ]
A nationalistic myth.

And it isn't even a well crafted one.

There is a large time gap in this myth:

What was happening according to this accounting between autumn 2008 and autumn 2010?  

by IM on Sat Oct 13th, 2012 at 05:10:40 AM EST
is short post on fistful of euros on the forced into bailout myth:

http://fistfulofeuros.net/afoe/every-unhappy-peripheral-is-unhappy-in-its-own-way/

"The ECB's reluctance to release all its communications with the Irish Department of Finance in that month has fed the suspicions, but the chart above should lay to rest to notion that Ireland was singled out by the ECB for special treatment. Ireland singled out itself."
 

by IM on Sat Oct 13th, 2012 at 09:29:27 AM EST
[ Parent ]
Could you explicitly state what myth you are trying to refute?

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Sat Oct 13th, 2012 at 10:54:52 AM EST
[ Parent ]
The forced into bailout myth, complete with the excision of two years between 2008 and 2010. That should be really clear in context.
by IM on Sat Oct 13th, 2012 at 11:01:27 AM EST
[ Parent ]
Then I don't follow. Doesn't the claim in the diary separate Central Bank and ECB contributions, while the diagram at Fistful of Euros is showing the sum?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat Oct 13th, 2012 at 12:09:13 PM EST
[ Parent ]
the diary doesn't mention any borrowing from the euro system (ECB and CBI) at all. Actually nothing prior to the bailout is mentioned. The fistful post on other hand says:

"Exposure to the central bank system (ECB + Central Bank of Ireland) was rocketing from late summer 2010, as the 2 year blanket guarantee of September 2008 expired and Irish banks could find nowhere else but central banks to refinance their bond cliff of September 2010."

by IM on Sat Oct 13th, 2012 at 01:06:08 PM EST
[ Parent ]
No one is disputing that the Irish Banks were insolvent and became increasingly dependent on the ECB for funding. They should have been put into receivership, with the shareholders wiped out and the bondholders receiving, at best a share of the remaining business.

However the ECB refused to allow that option for fear of the contagion that would spread throughout Europe if the Irish banks were allowed to default/fail/ go bankrupt. The Government was panicked/forced to go along with this by the ECB threat than any reconstituted banks would also not be allowed to participate in Euro funding mechanisms and that thus the ATMs would cease to function and general public panic would set in.

Of course the Irish Government was also grievously at fault - Stephen Donnelly doesn't dispute this - first in believing the banks spiel that their's was a liquidity rather than insolvency problem, and then in issuing a far too broad bank guarantee. However it never made any sense for any Irish Government to spend €35 Billion or so rescuing Anglo-Irish bank - it was obviously insolvent from the get go,  was purely a developers/speculators bank, and had no retail presence or ATMs and was not of immediate systemic importance to the Irish economy.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Oct 13th, 2012 at 02:09:09 PM EST
[ Parent ]
>However the ECB refused to allow that option for fear of the contagion that would spread throughout Europe if the Irish banks were allowed to default/fail/ go bankrupt.<

When?

 >The Government was panicked/forced to go along with this by the ECB threat than any reconstituted banks would also not be allowed to participate in Euro funding mechanisms and that thus the ATMs would cease to function and general public panic would set in.>

When was that supposed to happen?

Give me a timeline.

As far as I remember the guarantee was a very own irish invention, nastily surprising the rest of europe, including the ECB.

And this now very popular distinction between bad anglo-irish and the good other banks is very much a distinction made much later.

by IM on Sat Oct 13th, 2012 at 02:18:59 PM EST
[ Parent ]
IM:
When was that supposed to happen?

According to Patrick Honohan, the governor of the Central Bank of Ireland, appearing on Tonight with Vincent Browne, that would be September 2010. At least if I am understanding correctly which part of bank guarantees you are talking about.

Governor of Central Bank of Ireland claims Lenihan was "crestfallen" by EU stance on bondholders « NAMA Wine Lake

PH: Yeah, let me make that clear. It was, the magnitude of the cutbacks was negotiated in Brussels[beforehand], but not in the context of the programme. It was negotiated, I can't remember precisely the date, it was sometime in September I would think, probably September. When they said "this will do it, this will allow you to be compliant with the excessive deficit procedure" It wasn't in terms of the programme but that was negotiated. And by the time the EU/IMF discussions were held, there was a question "oh, well maybe it should be tougher" but the answer was "no, that's what's been agreed". We just stay with that.

VB: He seemed to me that he was crestfallen after that thing had happened.

PH: Yes. I think he had expectations. I think we all had expectations that we would discuss this over a longer period of time, that we would come up with something more sophisticated in terms of a financing programme that would have more of a risk-sharing element. But instead it was a sort of plain vanilla, "yeah, continue what you're doing, we'll give you money for two years, and you'll convince the market"

VB: And then of course that- On top of the EU/IMF deal they said to you that in addition to that you cannot default on even the unguaranteed debts of the banks. 

PH: I think that's the main reason he was crestfallen.

[moment of silence]

VB: And why did that -

PH: It wasn't part of the negotiations as such. There was no deal. There was no agreement on that. But there was talk around, about that [gestures circular movement with hands] And eventually the decision was [resolute tone] "No". I think he was quite discouraged by that.

VB: Was there no room for us to say "Well sorry, we're not going to finance the unguaranteed debts"

PH: It's not in the agreement. It's not in the agreement. I mean you know the way the world works. There's political room. There's no political room. No political room was offered to him by the people.

Unfortunately, when pressed on what the alternatives were, Honohan evades teh questions.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Oct 13th, 2012 at 03:28:16 PM EST
[ Parent ]
Let's interpret these rather evasive words as an assertion that "us" the irish government was indeed forced - by whom isn't Honohan a part of the ECB? - to not default on everything.

But this is September 2010.

What did the irish government do between September 2008 and September 2010?

It could have defaulted to it's heart content in this space, couldn't it?

by IM on Sat Oct 13th, 2012 at 04:16:29 PM EST
[ Parent ]
No, we have the ECBuBa on the record as early as 2009 blackmailing Greece with a threat to fail to rediscount its bonds following a sovereign default.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 13th, 2012 at 04:46:20 PM EST
[ Parent ]
a) we are not talking about Greece

b)ECBuBa we are talking about fictional entities now?

by IM on Sat Oct 13th, 2012 at 04:48:57 PM EST
[ Parent ]
Your contention is that Ireland could have defaulted between 2008 and 2010. Implicit in that contention is the claim that the ECBuBa would not have blackmailed Ireland with the threat of refusing rediscount facilities to Irish banks following an orderly default and dismantling of insolvent banks in 2008-10.

Their behavior towards Greece is evidence that the ECBuBa would, and that Ireland therefore did not have the option to default in 2008. That it did not attempt to exercise that non-existent option until 2010 does not magically make the ECBuBa unprepared to deny the option in 2008 - as all available evidence suggests that they would have.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 14th, 2012 at 04:49:40 AM EST
[ Parent ]
The evidence is that they would have threatened to cut off liquidity. Is there evidence that they would actually have done it?
I doubt the Irish government needed convincing in 2008. At least they very much owned the policy. Up to suggesting that everyone should move their deposits to Irish banks.

And even in 2010 odds are that the ECB was bluffing.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter

by generic on Sun Oct 14th, 2012 at 05:53:10 AM EST
[ Parent ]
Nobody's calling the ECB's bluff, 3 1/2 years into the crisis.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Oct 14th, 2012 at 06:00:24 AM EST
[ Parent ]
And even in 2010 odds are that the ECB was bluffing.

Odds are that the Soviets were bluffing in 1962, at least in the sense that if it came to pushing the Button over Cuba they would have backed down.

When you have to make an actual decision in the real world, you don't want to make that bet.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 14th, 2012 at 06:46:36 AM EST
[ Parent ]
Well, the Irish bank guarantee in 2008 happened after Lehman and was more of less simultaneous with Dexia, Fortis and Icesave. I'm not sure the ECB had any particular role in forcing the governments of France, Belgium and the Netherlands to bail out Dexia and Fortis.

What we do know is that Iceland got applied the anti-terrorist act and had its state assets seized by the UK for refusing to guarantee nonresident deposits.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Sun Oct 14th, 2012 at 05:55:03 AM EST
[ Parent ]
The ECBuBa couldn't have vetoed a restructuring of Dexia and Fortis without threatening to withdraw rediscount facilities from banks and assets that had never been restructured.

In the Irish and Greek cases, the threat of withdrawal of rediscount facilities from banks that had been restructured amounted to a threat to withdraw rediscount facilities from the entire banking system.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 14th, 2012 at 06:50:03 AM EST
[ Parent ]
The real issue is that, without a proper banking resolution scheme in place (and Europe - or the member states - by and large doesn't have one now, let alone 4 years ago), the ECB cannot withdraw support from a bank without causing a crash.

And "proper resolution scheme" for banks means being able to summarily restructure a bank without going through bankruptcy court. The FDIC has been doing that for 80 years, and making that possible in 1933 is what allowed the 1930s financial crisis to touch bottom (the real economy was a different matter, but it also touched bottom in the first year of the Roosevelt administration).

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Sun Oct 14th, 2012 at 07:17:16 AM EST
[ Parent ]
Question: Would it be legal - meaning allowed by the relevant treaties and rules governing the ECB - for the ECB to withdraw rediscount facilities from banks, because the government of the state they are established in, refused to follow a particular fiscal policy?

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Sun Oct 14th, 2012 at 06:09:43 PM EST
[ Parent ]
I think Draghi has been asked questions along these lines since early August when he announced the OMT programme and described its link with fiscal policy conditionality. See, for instance There Was An Amazing Exchange Between Mario Draghi And CNBC's Silvia Wadhwa (Business Insider October 4, 2012)
In other words, Draghi basically acknowledged the concern Wadhwa raised about political leverage by saying that it was justified in pursuit of the repair of monetary policy. And the monetary transmission mechanism is, of course, an ongoing concern.

The upshot is that it should be perfectly clear now that if the ECB's intent is to repair the mechanism, it is more than willing to discard notions of popular sovereignty to do it.

So, it may be reasonable to expect the ECB to wield more of its influence in Europe going forward as democracy becomes increasingly subverted by supranational policies and negotiations.



I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Sun Oct 14th, 2012 at 06:25:09 PM EST
[ Parent ]
"Your contention is that Ireland could have defaulted between 2008 and 2010. "

The popular contention in Ireland right now is that the irish government now and back then wants to default on unsecured senior debt of certain banks, namely Anglo-Irish. But the ECB somehow doesn't permit that.

I tend to point out that this is a myth. In 2008 the Irish government happily guaranteed everything in any bank, forcing the rest of Europe to follow suit. Nobody talked about defaulting on unsecured senior debt then and nobody differentiated between good "pillar banks" and evil anglo-irish then.

Even if in September 2010 a non-default on unsecured senior debt was a condition, that still leaves two years.

so my contention is: Ireland had two years to default on unsecured senior debt in aglo-irish and irish nationwide.      

by IM on Sun Oct 14th, 2012 at 05:04:20 PM EST
[ Parent ]
And I'm saying that unless you want to argue that Ireland Is Not Greece, it had at the very most only one year, since the ECB is on record blackmailing Greece since early 2009. And I have no particularly compelling reason to believe that it was an option that Ireland could have actually exercised in 2008, without running into a wall of scurrilous blackmail from the ECB.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 14th, 2012 at 05:12:47 PM EST
[ Parent ]
Turtles all the way down. Now unsupported claims about the ECB and Ireland are based on unsupported claims about the ECB and Greece.

The irish goverment didn't default on (some) creditors of (some) banks because they didn't grasp the necessity or desirability until years into the crisis.

Even now, if you lent money to e. g. AIB you are in the clear. Because it is a good pillar bank.  

by IM on Sun Oct 14th, 2012 at 05:21:27 PM EST
[ Parent ]
And when the Irish government realized the mistake and wanted to default on the guarantees and the bonds issued in support of those guarantees, they were told no by the ECB.

Oh, and the ECB's threats to crash the Greek banking system following a strategic default are well and widely documented. Do you want me to find the relevant news items for you?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 14th, 2012 at 05:27:22 PM EST
[ Parent ]
and Ireland is indeed not Greece.
by IM on Sun Oct 14th, 2012 at 05:21:59 PM EST
[ Parent ]
The whole now popular idea that there are good bank to be saved and bad bank that were somehow saved only at the order of the ECB or another foreign influence is an later invention.

The whole pillar bank concept wasn't developed until spring 2011(!):

http://www.breakingnews.ie/ireland/just-two-pillar-banks-to-be-left-after-restructuring-499434.html

>In an attack on the State banking guarantee scheme, which tied the debts of six Irish lenders to the taxpayer two-and-a-half years ago, Mr Noonan said the date of its introduction would remain forever notorious.

"Tuesday the 30th September 2008 will go down in history as the blackest day in Ireland since the civil war broke out," he said.

Mr Noonan added: "The banks were too big for the economy."<

And on Tuesday the 30th September 2008 was the ECB involved exactly how?

by IM on Sun Oct 14th, 2012 at 05:08:57 PM EST
Regarding the 2008 Irish bank guarantee, it wouldn't be a bad idea to look back at the diary: LQD: Put your money into Irish Banks [Updated] by Frank Schnittger on October 2nd, 2008, and the opinions and informations in the comment thread.

The consensus back then was that the Irish government wasn't thinking and that the European Commission and the ECb would be pissed off at Ireland's actions.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Sun Oct 14th, 2012 at 05:30:15 PM EST


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