Friday, June 29, 2012

29/6/2012: The 'deal' - preliminary reaction

Overnight statement from the EA [emphasis mine]:

"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution- specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. 

The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.


We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.
We task the Eurogroup to implement these decisions by 9 July 2012."


I note that there is NO retrospection in the above - a negative for Ireland. So far we have a statement from some Irish Government members not present at the summit who claim there is retrospective applicability, but as far as I am aware, this is NOT confirmed in any documentary evidence.

I also note that transfers to ESM from EFSF will be carried out "without gaining seniority status" de jure, although it will most likely still be de facto super-senior debt - a positive for Ireland.


It is worth noting furthermore that countries entering ESM without first obtaining funding via EFSF might be able to avoid facing a Troika-imposed set of conditionalities, but will be required to comply only with the internal EU rules (see here). This, however, does not seem to apply to countries like Ireland who will enter ESM from EFSF and, potentially (based on reading of the official statement) to countries that have obtained funding not solely for the purpose of recapitalizing their banks 9again, precluding Ireland from softening of conditionalities).



Per Enda Kenny (via RTE):

  • Ireland's government debt (not only banks-related) will be 're-engineered' in other words - it will be restructured (effectively a soft default). "Mr Kenny said the new deal means Ireland's overall debt burden, including the bank debt, can be re-engineered in a way which will give Ireland equal treatment to Spain and any other countries which avail of the new system."
  • "where funding is made available through the EFSF it will later be transferred to the ESM" so it is now the Government position that we will have a second bailout. 


So the Irish Government is de facto 'defaulting' and welcomes this. And it is going into the second bailout despite repeated claims that it will be funding itself via markets post 2013. And it welcomes this too. Reverse gear has not been used as much for some time on Merrion St.


I have consistently called both events as inevitable for Ireland. Hence, in my view, the 'deal' is a net positive. However, we cannot tell how positive it is yet.



One area of concern will be the treatment of the banks debt under ESM - with respect to seniority and any attached Government guarantees. In particular, in my view, if ESM were to assume directly unsecured banks debt, even with an attached explicit sovereign guarantee, such debt will have to adversely impact ESM cost of funding.

The biggest issue with the above statement is that it will NOT reduce overall economic debt carried by the EU states, including Ireland. The potential reduction in the cost of financing this debt is good news. The fact that this economy (not banks or some rich uncle in America) - aka us - are still on the hook for debts of insolvent banks remains.

Ditto for Euro area as a whole. You might call it 'Government Debt related to the banks', you might call it 'quasi-Government Debt related to the banks' or 'Non-Government Debt guaranteed by the Government to the super-senior lender related to the banks' or indeed a 'Pink Teddy Bear that stinks up the room' - the debt is... err... still there and there will be more of it post this 'deal'.


Update 1: some interesting thoughts - it appears from the EU statement that any euro area member state in compliance with fiscal constraints can apply for ESM funding of the banking sector measures. Now, if - as the Irish Government are claiming - such funding can be applicable to restructuring past sovereign exposures to banking sector, then:

  • As Belgium is already starting to signal, it can be applied  to €4 billion spent on Dexia Banque Belgique plus €54 in guarantees extended to the bank (link covering more current exposures potential), plus €6 billion in Franco-Belgian assistance the bank received back in 2008 (link).
  • Germany's €150 billion 'rescues' of Hypo and other banks via FMS (link here)
  • Austria - same Hypo (link here) but peanuts so far
  • Dutch Government pumped some €32 billion into its banks (link)
  • and so on...
Now, give it a thought - ESM is supposed to run at €500 billion absorbing existent EFSF up to €700 billion. So even if Spain just caps EFSF and it transfers to ESM, we have - before Italy comes waltzing in - ESM full capacity potential left after the banks bailouts are retrospected into it - of what? Some €200 billion max?.. or absent EFSF - at the announced running volume - nil.


This sort of suggests there is serious problem with an idea of allowing retrospective roll-backs of banks-related debt and measures to ESM...




Update 2: It appears that Enda Kenny's alleged contribution to the summit ('winning the deal for Ireland') is not a part of the record of the summit, at least as far as I can see (one example - here).


Update 3: H/T to Brian Lucey: this is just in - Germany apparently/allegedly wants ESM bank aid to be tied to acceptance of the Financial Transactions Tax. I suppose compliance with a harmonized corporate tax will be the condition too. In the end, the 'Enda deal' might just become a seismic event... So the logic of FTT link is therefore, in Irish context will be:
Step 1: EA leaders use Irish taxpayers to rescue own speculators and banks from Anglo/INBS etc default on bonds.
Step 2: EA leaders use FTT to demolish jobs in Dublin IFSC, so they can finance their 'growth package'?
The sort of the 'deal' we've been waiting for from our 'European partners'?


Update 4:  Citing Spiegel source, Global Macro Monitor blog states [emphasis is mine]: "What happens to the countries that have already received money from the temporary rescue fund, the EFSF? Officials in Brussels said that the new decision did not change anything about the programs for Greece, Portugal and Ireland. All the agreed goals will continue to apply and be monitored by the troika. But those countries might also start clamoring for the terms of their deals to be relaxed. The summit’s decision gives the Greek government in particular more ammunition for renegotiating the terms of its bailout, a step that new Greek Prime Minister Antonis Samaras has already said he wants to take."


11 comments:

Anonymous said...

hang on. Isn't the deal basically that the Europeans are taking over the banking debts. ie when the detail is sorted Ireland will be no longer responsible for the 60+ billion put into the banks, it will be on the EU's books !! Therefore Ireland's total debt will be massively reduced. Ireland will still have to cut their deficit, but when we balance the books, at least we won't have the massive total debt that we would have had if the bank debts were included. So isn't this brilliant news ????

Tony Duffy said...

Constantin , Does this mean that there is NO reduction in Sovereign debt for Ireland AND No escape from assumption of private Bank debt as well ? Are we back into the realms of lower interest rates and longer time period to pay EVERYTHING off ? The debt is unsustainable as we all know - no reduction - no recovery !
Tony

Dr. Constantin Gurdgiev said...

Short answer is no. This is NOT what is happening.

First, there is no retrospectivity - existent debt is debt and it will not change. What can potentially be gamed is the Promissory note which is, courtesy of Michael Noonan's shenanigans this year is worth less than 28 billion. This might or might not move off the quasi-Governmental debt designation to pure bank designation relative to IBRC directly and then it will still be ultimate Government liability.

In my view, we will not be able to reclaim NPRF funda committed to banks, nor any equity purchases in banks.

Second, we do not know how this will be structured under the ESM. It is most likely remain state-guaranteed debt, but it will notionally be moved off Government balancesheet. Improvement thus will be marginal in real terms as the debt will still have to be repaid out of exactly the same funds as currently - the funds of Irish people.

gar ocos said...

I think what is intended - the only thing that makes sense - is that the ESM will pool together the bank bailout liabilities + matching nationalised ownership/equity, secure ultra-cheap borrowing from ECB (specific to banking resolution) to cash-flow the bank resolution problem and base their programme on a working assumption that in the medium term the result will be a break-even. In Ireland's case, a net gain on the not-so-bad banks (Aib/Ebs, IL&P, BofIre) will, in the first instance, balance or partly-balance the AngloNationwide loss; the remaining residue will pool with all the other banks. With Hollande prominent, a longer medium-term bank equity will rest with ESM, enhancing the possibility of capital gain + dividends to offset bailout cost, i.e. effective break-even mutualisation of banking losses.

gar ocos said...

I think what is intended - the only thing that makes sense - is that the ESM will pool together the bank bailout liabilities + matching nationalised ownership/equity, secure ultra-cheap borrowing from ECB (specific to banking resolution) to cash-flow the bank resolution problem and base their programme on a working assumption that in the medium term the result will be a break-even. In Ireland's case, a net gain on the not-so-bad banks (Aib/Ebs, IL&P, BofIre) will, in the first instance, balance or partly-balance the AngloNationwide loss; the remaining residue will pool with all the other banks. With Hollande prominent, a longer medium-term bank equity will rest with ESM, enhancing the possibility of capital gain + dividends to offset bailout cost, i.e. effective break-even mutualisation of banking losses.

Norman said...

Constantin,
I think there will be retrospectivity. There is no way they would treat Spain one way and Ireland another way.
Secondly, I heard Michael Noonan on the 6 o'clock news and the message I got from him was that the banking debt would be transferred away from Ireland to the overall Eurozone, but it would take time to sort how it would be done.
Also they talk about a huge reduction in debt to GDP ratio. If this banking debt was not taken off our total national debt, then there would be no reduction in debt to GDP ratio.
So if there is a reduction in debt to GDP ratio, the idea must be to remove the banking debt !!

Dr. Constantin Gurdgiev said...

As I said, I don't see retrospectivity there so far. If it is put in later, fine.

I am skeptical - the idea of retrospectivity for Ireland as being equalizer for the playing field will require exactly same applying to all other countries that bailed out their banks, e.g. Germany etc, which will blow ESM out of the water.

Anonymous said...

So let me get this straight. The bank debt will be off the national balance sheet but we the Irish taxpayer will still be liable for it. How is that a good deal especially if it comes with conditions such as FTT & CCCT ! Surely the only way left to us to truly reduce the cost of bailing out the banks is to renege on the prommisory notes or unilaterally announce we will repay them over a longer period. 100 years for example. Now would be the time to do it as the euro authorities are in a weakened position and couldn't risk facing us down.

jeriakis said...

At the moment update 4 appears to be correct as Juncker has stated that Greece is already in a programme on the terms for Spain/Italy will not apply to it. One assumes that the same goes for Ireland ?
http://www.athensnews.gr/portal/11/56640

Anonymous said...

Maybe the plan is to mutualise the bank debts on a european level in principle but not factual, with the idea of bank debts diminished over a longer period of time (with conditions), if at all, to make the markets believe their investments are secure, to boost confidence and to drive down borrowing costs for individual countries, so they can get back to the market to borrow more money, to prolong their agony and keep them in a long term debt situation. I think both Michael Noonan and Enda Kenny hinted at that. So no debt forgiveness then. Again, it's those terms and conditions that will bite, especially without european growth.

Dreaded_Estate said...

There is no retrospective stated explicitly in the deal but isn't it true that Spain will have to initially recapitalize the banks through the sovereign?

If this is true then the only way Spain will get European coverage of its banking costs is when the deal is applied retrospectively?

This significantly strengthens the Irish case as if Spain needs the debts reversed retrospectively, even if only from a deal only a few months old, Ireland getting retrospectively from a deal a few years should be easier to achieve.