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Ireland to Borrow from US Fed Instead?

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.

Perhaps Jerome, having pulled a few Billion from the Fed for Dexia, you could persuade the Fed to provide a few Billion to turn Ireland into a giant wind farm? :-)

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Apr 9th, 2011 at 07:33:56 AM EST

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Apr 10th, 2011 at 07:52:24 AM EST
[ Parent ]
See the smiley face.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 03:16:49 PM EST
[ Parent ]
Nudge, nudge, wink wink.

If it was a joke I didn't find it funny (is that allowed?), if it wasn't a joke I found it outrageous.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 04:04:35 AM EST
[ Parent ]
Feel free to laugh, or to be outraged: there was certainly no offence intended. The Irish and Eurozone economic/political situations are being managed so outrageously badly at the moment, that those are possibly only two responses: Outrage, or a certain gallows humour. The latter was the intention but I can understand why it might have been open to misunderstanding.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 11th, 2011 at 07:37:14 AM EST
[ Parent ]
Obviously Jerome wasn't personally involved in arranging Fed Loans for Dexia, put perhaps he knows the guys who were...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Apr 10th, 2011 at 06:10:47 PM EST
[ Parent ]
"The North Atlantic is important to Scandinavia, the US and Britain. This is a fact these countries now seem to ignore. Then, Iceland should rather get some new friends"

- Ólafur Ragnar Grímsson, then President of Iceland, 2008

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 9th, 2011 at 09:38:32 AM EST
EU, IMF hear new Government's views - RTÉ News
Meanwhile, Taoiseach Enda Kenny has again raised the possibility of Ireland's Central Bank borrowing money from the US Federal Reserve.

The issue was first raised during the election campaign by Michael Noonan, who said other countries with assets in American banks were able to borrow from the Federal Reserve on the strength of those assets.

Asked if he would raise this issue when he meets US Treasury Secretary Timothy Geithner in Washington this evening, Mr Kenny indicated it was a matter for the Central Bank to pursue.

Government sources said there was no role for political involvement in discussions between the Central Bank and the Federal Reserve, but that the issue may be mentioned in this evening's discussions.

Mr Kenny said he would use his meeting with Mr Geithner to discuss the 'bigger issues', to open a new connection and build on that.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Apr 9th, 2011 at 10:28:08 AM EST
A modest proposal, along the lines of one I made for Greece in Talos' current diary: Make a deal with one or more high net worth individuals that gives them free money and Ireland lower rates. The HNW individuals purchase Irish debt at the best price possible, say 70% For long term debt they repo the debt with the Irish Central Bank for a >70% haircut and get back ECB Euros or freshly printed euro denominated Irish Bonds at a lower interest rate. It would probably be possible to adjust the repo rate to cover the coupons due on the original debt. With the long term debt mostly dealt with, the Irish Central Bank could then quietly retire freshly purchased short term bonds and tell the ECB to sue them.  Or, if the ECB prefers, they could just default. Prior to doing this the HNW individuals could also play games with the credit default swaps market that should prove profitable. Hiding this from ECB monitors should not be too much harder than "normal" secrecy with respect to central bank operations and the general public. And they could threaten to make public details damning to the ECB and others if they are required to confirm the repos to the ECB.

Alternatively, they could just retire the bonds and bring suit against the ECB for anti-competitive action. By the time the suit was resolved the issues would be moot. There is a good argument to be made that any agreement not to repurchase the bonds at discount was entered into under coercion by the ECB for the benefit of German and French banks and should not be honored. Get the cards out on the table.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 9th, 2011 at 01:06:32 PM EST
It seems on the face of it to be an upfront looting in favor of the bond market.
by rootless2 on Mon Apr 18th, 2011 at 04:43:21 PM EST
No bondholder haircuts until 2013. "Market manipulation."

You may be expecting too much intellectual rigour from an EPP that runs Europe on talking points and goldbuggery.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 18th, 2011 at 05:10:35 PM EST
[ Parent ]

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