There is a strange similarity between the predicament of our banks and that of our Church. When you think about it, both the banks and the Catholic Church dealt in that rarest of commodities, trust. When we trusted them, they could sell us practically any old stuff. Make it up on the hoof, in some cases.
As this column has pointed out before, the origins of the word credit come from the Latin ‘credo’, which means ‘I believe’. So in the old days, before anyone could deal in credit, he had to be credible or believable.
Now that our trust in both institutions has been smashed, why are we still protecting them from the full financial ramifications of their moral bankruptcy? Let’s leave the Catholic Church to others, and content ourselves with discussing the banks and what is happening to them.
Will they be forgiven and given a second chance in traditional Catholic fashion? And if they are absolved, what are the ramifications for the rest of us?
Ironically, it looks as if the Irish banks – and also, by virtue of these unusual circumstances, the Irish government – have just found an all-forgiving priest in the guise of the European Central Bank. The ECB is keeping us afloat.
Back in January, on the Marian Finucane programme, I suggested that maybe the only thing we could do while we remained in EMU, was to threaten a default if the ECB didn’t support us by injecting liquidity into our financial system. Maybe the threat would not have to be explicit; just by looking at the desperation of our plight, the ECB would figure out that we needed serious help or else the country would go under, and deliver a huge blow to the credibility of the euro in the process.
At the time, some people ringing into the programme thought it was a reasonably radical thing to say – but there didn’t – nor does there still – seem any alternative for now.
Today, this is precisely what is happening. We have managed to shift the burden for much of the funding of the day today needs of this economy onto the ECB and, for this, our finance minister, Brian Lenihan, should be applauded. It’s not a long-term fix, but it is does give us short-term respite. More significantly, by using the ECB, Lenihan has managed to get the European Central Bank to print money for the Irish government, which breaks the first rule in the central bankers’ rulebook.
Given some of the ideologues at the ECB, that’s no mean feat. Not only that, but it surely breaks the most important stipulation of the Maastricht Treaty, which is that governments will never be financed by central banks.
Let’s have a look at how we are still breathing, and examine the rudiments of the ‘Lenihan life support machine’.
Furthermore, let’s speculate on how long we can get away with this, because there is no doubt that if the average German were fully aware of what was going on, he would freak out. His central bank was, yet again, funding what he would see as endemic Irish delinquency.
Until the liquidity crisis last September, if the Irish banks wanted money, they just issued their own paper in the market and borrowed cash. This wholesale money market financing allowed them to lend out huge amounts of cash and, as long as this market remained open to them, the Irish banks could keep rolling over their debts. At some stage, this would implode, but the view in the boardrooms was very much one of ‘‘let’s ride this thing while we can, and let someone else worry about tomorrow’’.
But tomorrow came rather quickly and suddenly after the end of Lehman Brothers and the market shut down. The Irish banks were looking at a massive funding crisis and an acute liquidity collapse leading to insolvency. If a bank can’t get money, it’s not a bank.
As you can see from the chart on the left (taken from a paper given by Professor Patrick Honohan of Trinity College last week, which can be read at www.irisheconomy.ie), the banks turned to the Central Bank for money. Before the crisis, the banks were depending on the ECB for about €30 billion in short-term finance. Today, that figure is a whopping €140 billion.
As the lender of last resort, the Central bank is obliged to give the banks money.
But the amount has increased so dramatically that now the Central Bank is no longer the lender of last resort; it is in many cases, the only lender of any resort. The Central Bank gets all its cash from the ECB, so the ECB has turned into the Irish bank’s lifeline.
But this is not where the story ends; here is where it gets interesting, because the ECB is accepting Irish government stock as collateral from the banks to release this cash. The Irish banks are buying Irish government bonds and then cashing them in for euro at the ECB’s discount window.
So, while ensuring that the banking system can continue to tick over, the Irish government is using the Irish banks as a proxy in order to get the ECB to fund our budget deficit.
Now, this is interesting and clever – in a smart-arsed kind of way. The Irish government issues bonds to pay for the dole here, and for public sector pay and services and all the other things it must pay for. The banks buy some of these bonds for cash – the rest are bought by other Irish and international investors. The state gets the cash and gives it to us. Then the Irish banks can go to the ECB and get cash, and this facilitates whatever credit they are extending. Probably more significantly, the banks are using this credit to keep builders from going bust by rolling up interest payments.
The government insists that it is not leaning on the banks to buy Irish government bonds. And it is true that, as market conditions have settled a little in recent weeks and the government has gone on the offensive internationally, a wider spread of investors has started to go back into the market for our bonds.
However, the reality is that the ECB carrot is there in front of the banks’ noses – and Dr Michael Somers, the NTMA chief, referred to this in his recent evidence to the Dáil Public Accounts Committee, when he said he suspected that banks were using bonds to access cash from the ECB.
What’s more, the bonds the banks will get from the state in return from assets transferred to the new National Asset Management Agency (Nama) will also be usable as collateral to access cash from the ECB. Senior officials, including Somers, held discussions with ECB president JeanClaude Trichet before the Nama announcement and this was, presumably, one of the key issues covered. This will provide further funding for the banks and means the ECB will effectively support the funding of the clean-up plan.
Is it sustainable? Can we just carry on like this? Perhaps not, if the average German gets wind of what’s happening.
Our Minister for Finance will know that his key job in the months ahead will be to develop a banking system which can stand on its own two feet and again start to access funding on a normal basis from the markets.
If confidence can be restored, the banks can start raising cash again from the markets, paying down the state redeemable preference shares, and returning to normal operations. But we are still a long, long way from there. In the meantime, we need our friends in Frankfurt.
I believe the German Ambassador in Dublin has a duty to inform the Home Office in Berlin that the German Taxpayer is been Blackmailed by an Irish Joker who is a Pretender.
The ecb should say NO to this arrangement. Are they stupid? Paying these banks for their own stupidity is crazy. Does anybody remember the criteria we as an economy had to meet in order to be let in to the EU in the first place? It was quite strict. But this makes a farce and a fraud of the whole system.
David, so it’s “hand-in-the-cookie-jar” economic policy that we are running now………..
It does explain one thing though.
Irelands financial health is now critical to the survival of the Yo-Yo.
I am going back to game of street bottle top throwing into the hole of a shoe box and maybe win a yo yo .It will be ecologically feasible .
Money is a state of mind .It is the Mind of the /Joker Pretender that is playing Dangerously and will Lose Our Shirts.
It’s not just the ‘average German’ who needs to be factored in. It’s the average Spaniard, Greek, Portuguese and Italian. Whilst it’s interesting to see how the ECB are ‘printing money’ without transgressing their ideological ideology, it’s hard to see how the situation can be resolved without a complete volte-face in the public position of Weber and Trichet and the rest of those clowns. What about the aspirant Euro members and the Austrian banks? What subterfuges are being enacted on the Eastern Front? I suppose when this becomes ‘common knowledge’ the Euro will join in the currency ‘race to the… Read more »
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David said “this is interesting and clever – in a smart-arsed kind of way.” Typical FF cute-hoorism? It might be a short term palliative but deepens the moral quagmire and makes me uneasy. I am disappointed that he elides so abruptly from the questions of belief and trust to bang on about saving the banks. Has he been got at? I suggested here a couple of weeks back that some support by ECB must already be happening under the table, otherwise we’d already be up the Swanee without a paddle. If this is confirmed it is part of an effort,… Read more »
Davis’s article is stunning. Ireland’s gov are embarked upon a secretive arrangement with the ECB to attain funds through the back door of corrupt banks to keep a POnzi economy afloat in order so as the status quo maintain such position until the trade off comes too pass and the Irish Gov deliver on the prerequisite date the signature signed on the dotted line too the Lisbon Treaty. Will the referendum for the Lisbon treaty be rigged….??? We have been put on a trajectory by our Gov which can only but end in one outcome, YES to the Lisbon Treaty.… Read more »
From this analysis it looks like Banks owed the ECB circa €40 billion in September 2008. Since the ‘blanket’ guarantee on all liabilities of the banks (deposits and bank ‘bonds’/loans from other financial institutions), could these banks have redeemed bonds and replaced €100 million of their €400 million liabilities with funding from the ECB, a lender with a lot more leverage than some ‘high risk’ fund ? Assume this analysis is for the 6 covered banks then they could have switched already about ¼ of the ‘risky debt ‘(used to fund ‘boom’ valued properties) of the banks to now nearly… Read more »
Well now!! I flagged this for ye on 23/4/09 @9.54 under the “two fingers ” article and expanded the plan on the 19/5/09 @2.43 am under the “why bail out …” article…Remember the game of cat and mouse with the couple of catch 22’s thrown in….So now that were all getting to the same page on the hymn sheet as to where things are at,lets move onn ahead of the curve here and see what lies in store for all the various stakeholders in Ireland.Lets start with the unemployed mortgage holders,well the Gubberment has made it clear to the social… Read more »
Maybe we should discern the cause in the results and discern the results in the cause.
Summer Guests : Have you ever seen the bluebottle fly in the kitchen and distract your attention with it’s humming noise right in front of your nose and you feeling helpless as it swings to and fro and rarely steady?Have you noticed when you try to lift your hand to catch it the fly moves away from you only to return again to tease you?This fly wants to be a challenge to your ability to win in a provoked war of steely nerves.This brave act by the fly makes you ‘think’and your eyes cannot touch it other than adding to… Read more »
The builders were the most blatantly speculative. But what about all the Firms that leveraged against income and growth. And now have neither.
That woopsy is about to hit the fans very soon.
Why do I detect a certain hostility towards Germans and the German nation, by what I perceive to be well informed Irish people on this forum?
“Once Herman realises the ECB are ‘risking Weimar’ to rescue Paddy Last, things could get nasty.” and “Weimar huggers”(Germans who fear inflation…..”
With respect, these opinions sit more comfortably with a working class British tabloid reader. Never forget how good Germany has been to Ireland since 1973, when Ireland was lifted off it’s knees of poverty.
strathspey – you are not reading the article and the notes as they are intended and what you claim is not what was written .Try again .
Dear David, Why should six property developers not have all their assets taken when they have large debt? Whats wrong with them renting a 3 bed semi-d like some of us do? I say that they are protected by the large policitial donations they made in the past…not just the official ones but the brown envelope ones. So here we all are, just waiting…waiting for injustice to happen. In order for our country to survive we need to be honest, with ourselves, with the abuse victims of the church and state, and with our banks. How much money can the… Read more »
If banks are maintaining their creditworthiness by borrowing to ensure their large “near to default” borrowers do not default (ref:Lorcan) and if NAMA is the vehicle to maintain this sleight of hand, then the game is up and someone as AndrewG points out (City of London or whatever) is going to call it by shorting it at the right time. The question is when? Is Ireland the only subprime sovereign debt (lovely analogy Lorcan)? What about Spain, Austria etc. And if we look at Germany? where does the best factory in the world sell its goods if there no buyers?… Read more »
The ECB must value our position as a conduit to the English speaking world for the Euro – we’re the only English speaking member and the smallest. Britain’s rabid opposition to the currency and the union is very much in our favour and is possibly the trump card in our pack that is enabling us extract these peculiar concessions in this crisis. We’re young, small and stupid, but they must believe that we’re capable of normal behaviour at some stage. David’s gamble has turned up trumps for now – what happens next will be interesting – will we be put… Read more »
David – I would never have imagined that they would (the authorities) would try this. I have been alerted to the fact that Spanish government did something similar last year – with the ECB buying billions of debt that was issued by Madrid against the “assets” held by the Spanish financial sector. It was a trick to fool everybody into thinking that things were not that bad, really. It pushed the weakness from the Spanish banks to the Euro. The Daily Telegraph made a big issue of it – as you could imagine. Our media never even noticed. Now we… Read more »
Ireland is been integrated into an ‘alien body-politic’. Irelands penchant for instant gratification and accompanying use of easy peasy credit to consume now what one has not earned is the hook on which Irelands political sovereignty is now dangling. LIsbon Treaty is the net in which we dare not end up in. Nation – state sovereignty is the cost at stake. Are irish people so given over to ‘instant gratification’ and their cravings so uncontrollable they are ready and willing to sign on the Lisbon treaty dotted line. It’s down too a taking the ECB money and a faustian pact… Read more »
some humour…..even the biggest fool in the room has sussed this shifty character out……
http://www.youtube.com/watch?v=e3vEOSkk5AM&feature=related
A federal takeover is now gearing up and headed our way.
A security grid system will be put in place.
Everybody’s movement will be tracked.
We are being silently walked into this. Slowly acclimatized into it as if it’s a natural part of societal evolution to hand over ones nation – state political sovereignty.
Everyone is been dumbed down into this.
So the banks get money from the ECB to buy Irish Government Bonds, which the Irish Government will pay with money from the ECB, but eventually from the Irish Taxpayer, who will pay with money borrowed from the banks, which they got from the ECB. So, more money is being borrowed that has to be paid back with interest. And this solves the problem? Smoke on.
Ireland s Nation – State sovereignty is under ATTACk.
It is being siphoned away into a non democratic federal monolithic system and the LISbon Treaty is the gravest threat to Ireland s political sovereignty holding it’s strength against the Crony politico economic infection.
It’s all about who controls the future with these EU nut jobs.
Ireland s elite interests are joining forces with this anti democratic system in their hour of need, which is in step with been a greedy leprechaun.
The EU nut jobs want to control control control.
A reinvention of the credit out of thin air system going forward into a new future market paradigm.
Center of Gravity – The Lisbon Treaty is the last gold nuggat we have to play with on the Ouija bord and if we affirm the declaration we no longer are a nation we once professed to be and instead become induced into a new Roman Empire that started a long time ago. Is our Sovereignty that good that we ignore the economic consequences and learn to think like Norweigens and fish out our wealth as a New Nation of age . I am unsure the mood of the room now in relation to the Lisbon Question and are we… Read more »
“Our Minister for Finance will know that his key job in the months ahead will be to develop a banking system which can stand on its own two feet and again start to access funding on a normal basis from the markets.” ML has just announced that he will “”provide any working capital that is required” to recapitalise Anglo who are expected to announce another shortfall of 3,500,000,000 Euro. Presumably borrowed? Why set up NAMA at all? Just rename Anglo, legalise it as the military wing of the NTMA and insert some people that know what they’re doing, if such… Read more »
“Our Minister for Finance will know that his key job in the months ahead will be to develop a country which can stand on its own two feet…”
Fixed that for ya
Hi David, But getting mney from the ECB is nothing new, this is what being part of the euro was all about and we can go to the window. Ireland’s government (ie: us) is the asset that the Irish banks are using. Us (Irish overnment) started with 25% or so debt/GDP ratio and we have signed up to have 60%. > the most important stipulation of the Maastricht Treaty, which is that governments will never be financed by central banks. Thats not true as far as I am aware, Governments have and always will be supported by central banks, its… Read more »
JohnAllen: Opening up the future to be able to continue running with the Gov bond issuance fraud on and on into the future, time keeps on ticking ticking, gov’s keep on clocking up sovereign debt, bonds continue to be means to prop up a credit based money monolith and the EU is merely further step down the line on this financial dictatorship, begun in 1694 with the inception of the bank of england and a central bank structure unleashing a credit based money system. The bond issuance is a calamitous financial wheeze and the only way gov’s get away with… Read more »
wills – thanks . So, do I understand that you are advocating a yes for Lisbon?
Somers has a letter in the Irish Times today explaining Irish Government bonds can be used to borrow money from the ECB, and listing DAVY as a bidder. Nothing more can be said, but banks buy government bonds, really. Bottom line, who pays the interest? Joe and Josephine Taxpayer. More indentured servitude for the unborn generations of wage slaves.
JohnAllen: If voting yes for Lisbon meant all citizens of all european nation – states were going to get a fair crack of the whip at prosperity you bet your bottom euro i’d vote for lisbon. But, some how it’s looking like the same old political square dance, moving a few chairs around, change the scenery a bit, freshen thing s up a little and hide in the corner the ugly truth which is wealth is not been created out of a central banking system , child sexual abuse and slavery and war is what we get, so , i’m… Read more »
wills – thanks for your honesty .I am agreeing with you too .
What’s so unbelievably screwed up about this EU business is it breaks in half the fundamental golden rule of economic no brainer common sense. lets hand it over to Adam Smith……
Good ol’ smithy said that all trades, when freely conducted, are mutually beneficial by definition. A person with this got that, which he wanted more, from a person who wanted this more than that.
Not anymore does he. Nothing like gov bond issuance with no intention to ever re-pay sovereign debt to smash this simple paradigm into dust.
Malcolm _ I always value your opinion .My issue is we as a nation are on the eve of the greatest election we may ever face and the Lisbon Treaty may be carried through , but on this site we never had a real debate about it .I think we have hacked out the money flows matter etc .When I vote on Election date I want to vote with a sense of believing in what I am doing irrespective of how I actually vote .Our opposition party is inert because it been told to by europe so to deceive the… Read more »
John ALLEN,
“When I vote on Election date I want to vote with a sense of believing in what I am doing irrespective of how I actually vote .”
That is one of the most important statements that I have ever seen.
One should always believe in what one votes for: the franchise implies a duty to be informed about what one votes for, I firmly believe.
The practice of political activists,acting on behalf of certain candidates, driving people to the poll-booths to vote for “their man” should be outlawed.
Quote from David McWilliams : “Now, this is interesting and clever – in a smart-arsed kind of way. ”
No it isn’t. The bonds being issued have to be paid back, with interest, by the taxpayer. We are failing to deal with our over-spending today, and we are passing the problem onto our children for them to deal with.
That’s unless we default on all our debt obligations in the future.
As for Lisbon and national sovereignty, well I’d have Barney the Dinasaur run the country ahead of any of our home-grown gombeens, so I’ll be voting yes.
Paddy.
Atonement is a very special thing. It disregards hurt and trusts in the future: it is At-One-ment: the making of “at ONE”.
How can this happen without trust? It cannot.
How can the Church atone?
How can the banks atone?
Well, someone has to come clean, first, and NAME the transgression.
No-one has done that yet, that I have heard. So, the question remains:
“Ok, What did you do that was wrong, that hurt people?”
Answer the question, bankers and religious………..
…… and parents!
Interesting show tonight, on quangos and chancers:
For once, a real person, with a REAL grievance was allowed to speak; of course, once he told John Bowman that he was “buggered”, it was not possible for the limited Bowman to stop him, TG.
I applaud that man.
He subdued them all, even the arrogant Minister Dempsey.
A truth bomb went off on Q n A to-night,……………………………………!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Michael O’Brien of the “Right to Peace Group”.
Fair play to him.
Its not an economic discussion, but there is money involved, and David is right, there are some parallels between the state guarantee (cap) bailot of the religious ‘reparations’ and the state guarantee/bailout of the banks. I was against the state cap on the religious at the time and was against the guarantee of the banks and this NAMA ‘lark’. In terms of the former, there are consitutional issues: Article 44 2° The State guarantees not to endow any religion. 4° Legislation providing State aid for schools shall not discriminate between schools under the management of different religious denominations, nor be… Read more »
OK… I’ll row in with the forum for now and take a kinda HSE approach to solving the current morass.We can slide Unemployed Paddy onto a trolly in the corridor and He can keep the Jugglers on their trollies amused with His tales of woe,while they wait for the Consultants to solve the bigger issues.SOOO LETS START WITH DAVIDS GRAPH ABOVE , Who wants to step forward and explain to the forum what “all the credit institutions” did with the 90BILLION (over the usual 40 billion) that they borrowed from the Central Bank in the last six months.Everybody in Ireland… Read more »
Relegated – I believe the room has conspired the art of voting in the Lisbon Treaty to the rear of the sports hall and created an agenda of non consequential damage .All the political parties are laughing .
MK1- congratulations
Worth a look. http://www.cnbc.com/id/30308959 And here’s the idiot who led us to the top of the charts. http://www.youtube.com/watch?v=DGNRA2B6pRo Then again, he was the poster boy. At least 50% of the country think the same way as the gobshite, and would steal the dinner from their neighbour’s table. Our forefathers fought the enemy, at that time the British. This time, the enemy sponsors the Heineken Cup Champions, and the GAA club championship. Their footservants could be your next door neighbour, or sitting beside you on the bus. This ‘protect our national sovereignty’ malarky is a load of cobblers in my view.… Read more »
We are borrowing to borrow and we are being forced to participate in this nonsense.