Friday, April 1, 2011

Ireland: Bank Stress Tests Results-Time to drop the negativity.

Irish banks have undergone the most stringent stress tests of any banks in Europe. The results announced yesterday indicate that in a worst case scenario €24bn more will be required to recapitalise the banks.
The European Central Bank is expected soon to produce a new loan package specially designed for Ireland involving medium-term loans in excess of €60 billion fashioned to replace most short-term funding for Ireland.
Finance Minister Michael Noonan said he hopes to progress the plan at an EU finance ministers meeting in Hungary next week.

The decision of the government not to burn the senior bondholders has been greeted with hysteria in many quarters. FG and Labour in opposition certainly implied that in government they would take a hard line on this issue. Burning the senior bond holders MIGHT save €8 billion at best after intense negotiation and legal challenges. This would result in a maximum annual saving of approx €500 million in interest payments. This would not solve our economic crisis. In addition burning of senior bondholders in AIB and Bank of Ireland would stymie funding of the new pillar banks announced by the government yesterday. Certainly the country will be put to the pin of its collar to meet debt repayments(socialised bank debt and sovereign debt).

It is time to jettison the negativity. Some people are making a living spewing out negativity. The country has booming exports. It will come out of this.

I have listened to consumers quoting the prophets of doom and decide to cut spending based on this and for no other reason. I have listened to people complain who have taken their money out of Irish banks often based on stupid scare stories. This further exacerbates the banking problem. Wake up Ireland.

The constant negativity in some elements of the media is definitely causing consumer sentiment to nosedive thereby reducing economic activity and tax revenue.

There is no easy way out of this. The government bank guarantee of 2008 has socialised bank debt and placed it on the backs of Irish taxpayers. This now has the status of sovereign debt. Decoupling government debt from bank debt is no easy task. The Irish banks are almost totally reliant on the ECB for funding thanks to an outflow of bank deposits. I would love to see the senior bondholders burned but AT THIS JUNCTURE it would be unwise. I think the government has judged correctly on this for the present. The ECB has provided €150 billion in funding at 1% interest rate for Irish banks and is resolutely opposed to a burning of bond holders. It has promised maintain this funding.

The idea of two new strong pillar banks is fundamentally sound. Business is starved of finance. If lending to small businesses can be increased the country has a great future. The government is introducing a jobs budget. Hopefully it can come up with worthwhile ideas to help business.

Ireland must attempt to grow itself out of the crisis and with the right pro business policies it can. Now if the growth is insufficient a STRUCTURED DEFAULT is then an option not to be ruled out.

It is time to get on with it and drop the negativity. Perhaps if we lived in Japan we would have something to complain about. It is time to stop wallowing in self pity. Ratings Agency Standard and Poor's believes that the sharp contraction in Ireland's nominal GDP and gross national product since 2008 is at an end, and that the Irish economy will now gradually recover.
We believe that the Irish economy has stronger growth prospects than the Portuguese and Greek economies considering its openness (Ireland's exports are forecast at 107% of GDP for 2011 compared with Portugal's 30% of GDP), its flexibility, and its competitiveness. We anticipate that Ireland's current account will post a full-year surplus of more than 2% of GDP during 2011, for the first time since 2003, while net exports will continue to be the major contributor to headline GDP performance.
Finally the editorial in today's Irish Independent strikes the right note. It may be accessed here


rainywalker said...

Sound commitment and informative blog. Are the Irish people guaranteed that the Euros coming off the press are real funds backed up by gold/silver/etc., or just worthless like the Dollar?

John Barry said...

The ECB (European Central Bank) runs a tighter ship than in the US. It has not engaged in massive printing of currency. The German influence on the ECB has ensured that.

However there are problems in the Euro zone as different countries can have different rates of growth so ECB monetary policy may suit some but not others. From 2,000 upwards the ECB pursued a low interest rate policy. This boosted the sluggish German economy but set fire to the Irish economy which was already growing strongly. A flood of low interst rate German money poured into Irish banks which promptly loaned out the money frequently without proper checks. This triggered a massive building boom in Ireland with skyrocketing property prices. The bust in Ireland came in 2007. The banks ran into trouble in Ireland in 2008. The last government guaranteed the senior bondholders as well as all bank deposits when this happened. When it guaranteed the senior bond holders their debt became sovereign debt also(ie was added to the national debt) This was a huge blunder as it meant that the ordinary taxpayers would have to shoulder the burden. This is part of our problem at present as Germany (many of the bondholders are Germans) and the ECB are insisting that Ireland must honour the undertakings to the senior bondholders given by the last government. Hence the new government is boxed in and is now being criticised in ireland having promised to tackle the issue of the bond holders.

Inflation in the Euro zone is now beginning to grow so the ECB intends to push up interest rates to curb it. This is ideal for Germany which is now booming but does not suit Ireland at present.
ECB policy generally suits Germany, France and Holland and not peripheral countries such as Ireland, Portugal and Greece.
The stress tests on Irish banks have factored in rises in Euro interest rates and possible defaults by some mortgage holders.
It is anticipated that an extra 24 billion Euro loaned by the ECB to Irish banks will tide them over the worst possible crisis that is assumed could occur.
The UK did not join the Euro eventhough it is a member of the European Union. It can fashion monetary policy to suit itself unlike Ireland which abide by the dictates of Frankfurt(the ECB)

rainywalker said...

Ireland in the past few years from my reading over here has been railroaded by the giants with the money. A tight ship is what was needed here about 10 years ago. The UK was wise not to get in over their heads in the EU. The EU like other countries coming together for mutual benefit is likely a good thing. Just as long as everyone in the partnership is on the same page and plays fair.

John Barry said...

That is 100% correct.