17/10/2013: To Deal or Not To Deal? ESM and Irish Banks

Few interesting signals coming out of Europe in recent days. All relate to the fallout from the German elections.

I suggested that the outcome of the German elections will result in coalition talks in which Ireland's bailout (or rather the feasibility of our ex post bailout unloading of banks legacy debts onto the ESM or some other European fund) will be demoted (link here: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html). Further more, I recently wrote about the pressures building up in Germany and the ECB on this issue as well (link here: http://trueeconomics.blogspot.ie/2013/10/11102013-whats-new-in-german-coalition.html )

Now, another set of pronouncements on the same topic.
1) German finance minister Wolfgang Schäuble restated German opposition within the Euro finance ministers meeting to using the ESM fund to directly recapitalise Irish banks. link: www.irishtimes.com/business/sectors/financial-services/schäuble-pours-cold-water-over-idea-of-esm-relief-for-ireland-1.1561748

2) In a separate report, the Irish Independent reported that SPD - Germany's second largest party and one currently acting as a king-maker in coalition talks with Angela Merkel - staunchly opposes banks recapitalisation roll over from Ireland to ESM and continues to insist that Ireland must raise corporate tax rate. Link here: www.independent.ie/business/irish/germanys-coalition-talks-snagged-on-irish-issues-29658771.html. Do note, the statement is about raising the actual rate, not closing off the loopholes.

Not exactly encouraging, eh?..

But never mind, Minister Noonan thinks none of the above counts for much: http://www.irishtimes.com/news/politics/noonan-insists-esm-money-for-banks-still-possible-1.1562772 I mean, why on earth would anyone listen to anything that Schäuble or Draghi or Merkel or SPD or leaders of CDU/CSU or Asmussen or the Dutch, Austrian, Finnish governments or anyone else for that matter has to say on the topic?

Run by me this: if Minister Noonan is so certain he can get the ESM to pay us cash for banks equity we hold, then:

• Why do we still talk about 'regaining our independence'? Seems like Minister Noonan already has loads of it - enough to tell Schäuble to pack it; and
• Why don't we have the ESM 'deal' yet? Who's holding it up? Surely not Mr Schäuble who's opinion doesn't quite matter...

Of course, there is a major problem in Minister Noonan's selective referencing of memory. As I recall, the reductions in our interest rates or the extensions to maturity of our debt were granted to us because Portugal demanded them on foot of Greece receiving its own bailouts. As per Minister Noonan's claim on the Promo Notes debt swap 'deal', may be it was made possible by the fact that it wasn't much of a 'deal' in the end? We gave up quasi-sovereign debt for full-blown sovereign debt and got few shillings up front in cash flow relief... The equivalent of such a 'deal' for banks would be what? Allowing to repo our banks equity at the ECB for more loans?..

I am uncertain as to whether any ESM deal on retrospective recapitalisation of Irish banks via European funds is possible or not. It might be or it might be not. I am uncertain as to whether such a deal is even desirable, since we do not know the feasible terms and conditions of the deal. All I know is that over two years of negotiations and seismic announcements behind us, Minister Noonan so far:

• Has not a single open supporter of the idea of Ireland getting such a deal anywhere in the EU's upper echelons of power; 
• Has secured not a single open supporter for such a deal in the EU Parliament or the Commission (it seems that folks from Ballyhea-Charleville SaysNo campaign got more mileage on this); and
• Has plenty o very weighty opponents to such a deal all on public record.

I am sure Minister Noonan is working very hard attempting to secure a good deal for us with ESM. I hope he succeeds.


Updated: A related set of news out of Germany: http://www.spiegel.de/politik/deutschland/macht-der-eu-kommission-widerstand-gegen-merkels-europa-plaene-a-928918.html
In basic terms, Merkel is pushing for more oversight over national budgets for Europe... which, of course, means it is a good thing that Angela is such a close friend for Minister Noonan, right?

23/12/2012: Not another cent?.. Irish banks state aid 2011

In the previous post, amidst the excitement of the aggregate figures reporting, I forgot one small, but revealing chart.

Now, recall the FG/LP election campaign promise of 'not another cent' for the banks?..

23/12/2012: State Aid in EU27 & Ireland

Yesterday, the EU Commission released updated analysis of state aid expenditures, covering 2012 data. The document, titled "State aid Scoreboard 2012 Update Report on State aid granted by the EU Member States - 2012 Update" is available here.

Here are some interesting bits:


"Between 1 October 2008 and 1 October 2012, the Commission approved aid to the financial sector totalling €5,058.9 billion (40.3% of EU GDP). The bulk of the aid was authorised in 2008 when €3,394 billion (27.7% of EU GDP) was approved, mainly comprising guarantees on banks’ bonds and deposits. After 2008, the aid approved focused more on recapitalisation of banks and impaired asset relief rather than on guarantees, while more recently a new wave of guarantee measures was approved mainly by those countries experiencing an increase in their sovereign spreads, such as Spain and Italy.

Between 2008 and 2011,  the overall amount of aid used  amounted to  €1,615.9 billion (12.8% of EU GDP).  Guarantees accounted for the largest part amounting to roughly €1,084.8 billion (8.6% of EU GDP), followed by recapitalisation €322.1 billion (2.5% of EU GDP), impaired assets €119.9 (0.9% of EU GDP) and liquidity measures €89 billion (0.7% of EU GDP)."


In other words, keeping up the pretense of solvency in the legacy banking system of the EU (primarily that of the EA17) has created a cumulated risk exposure of €5.06 trillion (over 40% of the entire EU27 GDP). With such level of supports, is it any wonder there basically no new competition emerging in the sector in Europe.


"In 2011, the Commission  approved aid to the financial sector  amounting to  €274.4 billion (2% of EU GDP). The new aid approved was concentrated in a few countries and involved guarantees for €179.7 billion, liquidity measures for € 50.2 billion, recapitalisations for €38.1 billion and impaired asset relief for € 6.4 billion.

The overall volume of aid used in 2011 amounted to € 714.7 billion, or 5.7% of EU GDP. Outstanding guarantees stood at € 521.8 billion and new guarantees issues amounted to €110.9 billion. Liquidity interventions amounted to € 43.7 billion and new liquidity provided in 2011 stood at €6.5 billion. Recapitalisation amounted to € 31.7 billion. No aid was granted through the authorised impaired assets measures."

Some illustrations of historical trends.

First non-crisis aid:

Amongst the euro area 12 states, Ireland has the fourth highest level of state aid over the period 1992-2011 and this is broken into 5th highest in the period of convergence with the EA12 (1992-1999), 5th highest for the period of the monetary bubble formation (2000-2007) and the second highest for the period of the crisis (2008-2011).

Relative to EU27, Irish state aid was above EU27 average in 1992-1994, 1998-2002, 2007-2011. In other words, Ireland's state aid was in excess of EU27 for 13 out of 20 years. And that despite the fact that our income convergence to the EU standards was completed somewhere around 1998-1999.

In terms of financial sector supports during the crisis, we are in a unique position:

The overall level of supports for financial sector in Ireland is so out of line with reality that our state aid to insolvent financial institutions stood at 365% of our GDP in 2011 or roughly 460% of our GNP. In other words, relative to the size of our economy, the moral hazard created by the Government (and Central Bank / FR) handling of the financial crisis in Ireland is now in excess of measures deployed by the second and third worst-off countries in EU27 (Denmark and Belgium) combined.

The chart above shows that Guarantees amounted to 246.7% of GDP in Ireland, almost identical to 245.7% of GDP in Denmark. Which means that our Guarantees were basically equivalent to those of seven worst-off Euro area countries combined.

However, stripping out the Guarantees, the picture becomes even less palatable for Ireland:

Ex-Guarantees, Irish State supports for the financial sector were more than 10 times the scale of EU27 supports and at 118.4% of GDP amounted to almost the combined supports extended by all EA12 states (123.2% of GDP).