'No More Secrets' and the 51 billion loan

later12

A long awaited matter of significant economic importance for Europe occured in Dublin today, although you probably wouldn't be aware of it by browsing through any of the national media.

Dublin today broke the secrecy that has traditionally surrounded Emeregency Liquid Assistance from the Irish Central Bank towards the states banks by announcing that the figure currently onlent to its banks stands at 51 billion euro.

This is a considerable amount of funding when one considers that it is only in addition to the 140 billion or so also lent in emergency liquidity assistance (according to freely available figures) provided directly by the ECB.

The current emergency loan held by the Irish banks stands at just under 200 billion euro.

The reason this was announced today is in keeping with Patrick Honohan's policy of transparency and honesty in Irish banking. A praiseworthy effort on some level, of course. But is this figure not so worrying that it can actually do more harm than good? If there's one thing worse than oweing 50 billion euro that the markets weren't already aware of, surely it must be issuing a press release to announce it in time for the weekend papers?

More on the story here

http://www.rte.ie/news/2011/0114/central-business.html

And graphically here:

ei.sdraob

we had a thread about this in November when it was about 20 billion, seems it has grown rapidly since

later12

In fact it was higher than that thread suggests, it was about 45bn at the end of November, and about 35 billion a month before. It has been rising significantly, and will only add to worries about a run on the Irish banks.

I'm glad that Prof Honohan has decided to be so transparent on one level, but it is quite a gamble to highlight this sort of figure.

Having said that, it was clear before today that it would have risen significantly, as a condition of an increase in emergency liquid funding facility from the ECB is understood to have been that Ireland would accept the EU IMF bailout.

Liam Byrne

If people had been more transparent up to now, we might all be better off.

Treehouse72

later10 wrote: »

The reason this was announced today is in keeping with Patrick Honohan's policy of transparency and honesty in Irish banking. A praiseworthy effort on some level, of course. But is this figure not so worrying that it can actually do more harm than good? If there's one thing worse than oweing 50 billion euro that the markets weren't already aware of, surely it must be issuing a press release to announce it in time for the weekend papers?

I do see your point, but isn't the reality that everyone knows deep down that everything is a lie and that at some point you simply run out of road and have to start facing up to reality. I think the catharsis of transparency, and the impulse for moving forward it might bring, trumps the need to appear in control.

later12

Treehouse72 wrote: »

I do see your point, but isn't the reality that everyone knows deep down that everything is a lie and that at some point you simply run out of road and have to start facing up to reality. I think the catharsis of transparency, and the impulse for moving forward it might bring, trumps the need to appear in control.

That's quite true, I just think it is a bit of a gamble.

On one hand our new found policy of honesty and transparency might comfort the markets, on the other hand that is an extraordinary figure: it is almost the amount of the EFSM bailout fund fopr Europe, and it will probably reach the total of the Irish bailout loan based on its growth pattern.

In fact the total Emergency liquidity assistance currently forwarded to the Irish banks from the ECB actually dwarfs the EU IMF bailout figure by about 100 billion euro.

This worries investors because it relates to the banking industry's confidence in Irish banks and Irish people's confidence in their own banks: those are two factors that would be taken extremely seriously.

It does, in my opinion, somewhat seem to overshadow the benefit of transparency when so much of the global banking and capital market is built around smoke and mirrors, not truth and honesty.

Now isn't the time to be a hero.

ei.sdraob

http://www.independent.ie/business/irish/central-bank-steps-up-its-cash-support-to-irish-banks-financed-by-institution-printing-own-money-2497212.html

So its a form of "quantative easing" aka money printing? how did was this allowed by ECB?? maybe our cute whoors thought 50 billion can go unnoticed.

later12

ei.sdraob wrote: »

http://www.independent.ie/business/irish/central-bank-steps-up-its-cash-support-to-irish-banks-financed-by-institution-printing-own-money-2497212.html

So its a form of "quantative easing" aka money printing?

Yes it's a form of QE, there are many similarities. The thing is that QE is generally supposed to have deeper beneficial ramifications before you rein in your economy: this policy doesn't really have any structural benefit, in that it's just emergency liquidity, but it does have the potential to bear an enormous structural burden on the economy.

how did was this allowed by ECB?? maybe our cute whoors thought 50 billion can go unnoticed.

No the ECB fully encourage this. They tend to favour secrecy around ELA as well, for once it is our Central Bank blowing off the cobwebs here.

It is the most interesting aspect of the European bailout, and possibly the most under appreciated in terms of the harm it can do.

ei.sdraob

Its interesting how the normal media is picking up on something we noticed here about 2 months ago go boards

later10 wrote: »

It is the most interesting aspect of the European bailout, and possibly the most under appreciated in terms of the harm it can do.

Any losses by the CentralBank will have to be covered by the state

what.could.possibly.go.wrong!

micro_dot

is it possible it's a bit of blackmail on our part towards the ECB? A reminder that we could still default on German money?

Scofflaw

The figure is certainly a reflection of the size of the Irish banks, and the market's loss of confidence in them. Normally, the Irish banks would be supplied with liquidity by other banks - the reason for the large sums provided by the ECB is that other banks won't touch them in case they go belly up.

What would the normal amount of liquidity being provided to Irish banks by other banks be?

cordially,
Scofflaw

ei.sdraob

Scofflaw wrote: »

The figure is certainly a reflection of the size of the Irish banks, and the market's loss of confidence in them. Normally, the Irish banks would be supplied with liquidity by other banks - the reason for the large sums provided by the ECB is that other banks won't touch them in case they go belly up.

What would the normal amount of liquidity being provided to Irish banks by other banks be?

cordially,
Scofflaw

There is also an ongoing slow bank run on Irish banks that money is leaving the country for greener pastures, another 6 billion left the country in December alone according to centralbank.

Scofflaw

ei.sdraob wrote: »

There is also an ongoing slow bank run on Irish banks that money is leaving the country for greener pastures, another 6 billion left the country in December alone according to centralbank.

Same explanation, though - people think the Irish banks will go belly up, and that if that happens, anyone not under the standard €100k deposit guarantee limit will lose money.

Still, that's a capital issue rather than a liquidity one as such. Any idea what the level of liquidity normally being provided to Irish banks would have been pre-crisis?

cordially,
Scofflaw

ei.sdraob

Scofflaw wrote: »

Same explanation, though - people think the Irish banks will go belly up, and that if that happens, anyone not under the standard €100k deposit guarantee limit will lose money.

Still, that's a capital issue rather than a liquidity one as such. Any idea what the level of liquidity normally being provided to Irish banks would have been pre-crisis?

cordially,
Scofflaw

I dont know how much the banks needed, any stats if available would probably be on the centralbank site and heavily distorted by the boom, when was the last time there was anything "normal" about our banks.

Its been a while since anyone was willing to lend to Irish banks and one figure I did find is the 136 billion extended from ECB over last year before they said "enough" and called the IMF in and gave go ahead for this.

FT wrote:

Irish banks’ need for liquidity support grows
By John Murray Brown in Dublin and Patrick Jenkins in London
Published: December 10 2010 16:41 | Last updated: December 10 2010 16:41

Irish banks last month borrowed nearly 30 per cent more emergency funding from their national central bank and increased their reliance on the European Central Bank to a record €136bn.

The figures, released on Friday, shed more light on the scale of the crisis facing Ireland’s domestic lenders in the run-up to last month’s international bail-out.

The Central Bank of Ireland confirmed it provided an additional €10bn of emergency liquidity assistance to Irish banks in the four weeks leading up to November 26, taking the total for the period to €44.67bn, up from €34.6bn in the previous month.

Usage of the closely watched ECB liquidity regime rose from €130bn to €136bn, the highest level in Europe, reflecting the banks’ inability to borrow money in the commercial markets. As part of Ireland’s €85bn bail-out by the European Union and the International Monetary Fund, the banks promised to accelerate the sell-off of portfolios of assets in return for being allowed continued access to the ECB facility in the short term.

Maybe the ECB could not lend any more for some legal reason and they came up with this loophole of the Irish centralbank continuing from where they left off, either-way thats 180 billion in all between the 2 of them :eek:
Maybe they hope the problem resolves itself?

later12

Scofflaw wrote: »

Still, that's a capital issue rather than a liquidity one as such. Any idea what the level of liquidity normally being provided to Irish banks would have been pre-crisis?

I'm not aware of a figure on public record.

Needless to say their liquidity requirements were extremely heavy mid-boom, but sleepover and short term (week - week) borrowing in terms of even the most prudential liquidity ratio obligations were easily met, and were never an issue until Lehman's and Northern Rock, leading to the September Guarantees.

In fact I believe that it was not was until much later, in early 2009 that a picture of ECB Emergency Liquidity Assistance even started to emerge; there would have been very scarce disclosure of private liquidity provision within the Irish banking system before that time, as far as I am aware.

later12

ei.sdraob wrote: »

Maybe the ECB could not lend any more for some legal reason

The ECB are quite publicly concerned of 'addiction' (as they put it) to the provision of ELA and have simply decided to wean the banks who use the facility off of the shortest terms of lending. I think the minimum lending period is now 3 months as opposed to a day to day lending facility that had existed, of course this will itself distort the figures.

ei.sdraob

Ugh this is getting ugly now and the world is taking note

City Report - ELA: An Emperor without Clothes

As noted above, ELA extended by the CBI amounted to around €49bn by
January 2011. The OECD estimates GDP in Ireland for 2010 to be €157bn, so
ELA would amount to around 31% of GDP.
The central bank is not included in the conventional definition of the general
government sector (central, state, local plus social security and similar state
funds)
...

This would be very clear if, as we assume to be the case in Ireland, the
exposure to the banks incurred by the CBI through the ELA carried a full,
explicit guarantee from the Irish sovereign. The inclusion of the CBI’s ELA on
the Irish general government balance sheet would increase the gross general
government debt by about €49bn, or 31% of GDP.

So we are trying to move/hide debt around so it doesn't appear on the country debt/gdp stats, gold star to anyone who tells us how cooking the books ended up for Greece before :P

Atilathehun

Looks, like Honahan, has oiled up tha auld printer underneath the central bank, if you go by this report! Or am I understanding it correctly?

http://www.bloomberg.com/news/2011-01-28/irish-give-51-billion-more-reasons-to-avoid-bonds-euro-credit.html

Irish Give 51 Billion More Reasons to Avoid Bonds

Irish bondholders may have another 51 billion reasons to worry.
Figures published by the central bank this month showed it lent as much as that sum in euros, equivalent to $70 billion, to commercial banks. Unlike the 132 billion euros the European Central Bank is using to prop up the country’s financial system, the government may be on the hook for it. Ireland has the fourth-highest debt level in Europe.
“The increased liability of the state makes it more likely that senior bank bondholders will be forced to take a hit,” said Juergen Michels, lead euro-region economist at Citigroup Inc. in London. “While we don’t currently see a restructuring of sovereign bonds, the risk increases the higher the aggregated general government debt level goes.”
Investors are shunning Irish government and bank bonds because of concern that the bill for saving the financial system is still untallied. The extra yield investors demand to hold Irish 10-year bonds rather than German securities of similar maturity climbed 18 basis points to 593 points yesterday. That’s nine times the average of the past decade.
Citigroup said in a Jan. 21 report that loans from central banks across Europe to their lenders are surrounded in “secrecy.” The program is called the exceptional, or emergency, liquidity assistance, or ELA.
“Similar to other central banks, the Central Bank of Ireland can supply exceptional liquidity assistance to institutions that is judged necessary,” Nicola Faulkner, a spokeswoman at the bank, said in an e-mailed statement. “The bank does not, however, comment on these operations.” The Finance Ministry and ECB also declined to comment.
‘Other Assets’
The central bank’s “other assets” rose to 51.1 billion euros from 44.7 billion euros on Nov. 26, according to figures published Jan. 14 on its website. Such assets include “exceptional liquidity assistance lending” for Irish banks, it said. Those loans make up the bulk of the money, according to a senior central bank official, who declined to be identified.
Commercial banks increasingly are resorting to borrowing from the authorities to fund their activities. The loans are designed to be short-term.
The assistance has the “potential here to expose the Irish state to further losses from the banking system,” said Brian Lucey, associate professor of finance at Trinity College Dublin. “While all euro-member countries are responsible for any losses on funding from ECB lending operations, the Irish government is left with any losses from the central bank’s scheme.”
Cost of Rescue
The cost of insuring Irish government debt against default has gone up 450 basis points to 632 points over the past year, according to CMA prices for credit-default swaps. The price of the swaps rose as the government stepped in to save the banks after a decade-long real estate boom collapsed in 2008. Finance Minister Brian Lenihan introduced a guarantee for all deposits and most bank securities that year following the bankruptcy of New York-based Lehman Brothers Holdings Inc.
Since then, the government has injected 46.1 billion euros into the lenders, and taken control of Anglo Irish Bank Corp., Irish Nationwide Building Society and EBS Building Society, with Allied Irish Banks Plc about to come under state ownership.
Deposits are flowing out of the system, forcing the ECB and Irish central bank to step in. Deposits fell by about 25 percent to 340 billion euros in the past 18 months, according to a report published last week by Citigroup. Support from the central bank more than tripled during the past year.
Needing Help
“If the ECB governing council did not permit the Irish central bank to provide the assistance, the Irish banks would not have sufficient funds to operate,” said Ciaran Callaghan, a Dublin-based analyst at NCB Stockbrokers, in a Jan. 24 note. “The ECB couldn’t and wouldn’t let this happen.”
Central banks in the euro region are allowed to aid banks, so long as two-thirds of the ECB’s governing council doesn’t object. At the height of the credit crisis in 2008, Belgium’s central bank lent its banks 51.3 billion euros, Citigroup said.
It’s not clear, though, how much each country provides to their banks, what collateral is provided by the banks or how the lending is financed, according to Citigroup.
The ECB said last year detail of emergency aid to banks needs to be kept confidential to maintain financial stability. Patrick Honohan, governor of the Irish central bank, said in an interview on Nov. 18 with Dublin-based broadcaster RTE Radio that he wasn’t allowed to discuss the measures.
Bailout Agreement
Any danger to the Irish central bank may be offset by the government’s plan to give lenders more capital. As part of the International Monetary Fund and European Union bailout agreement reached in November, the banks are getting an extra 10 billion euros, with a further 25 billion euros available if needed.
Citigroup said the central bank loans should be added to the country’s gross national debt, which stands at 148.6 billion euros. Ireland’s gross general government debt has risen to 94.2 percent of the economy, as it bailed out the banks, from about 25 percent in 2006. That figure doesn’t include cash the state has on hand.
“You have to look at the aggregated debt figure in order to get a true picture of the extent of the state’s liabilities,” said Michels, the Citigroup analyst.
The strain may worsen as the ECB seeks to wean Irish banks off financial support, said Karl Whelan, a professor at University College Dublin and a former economist at the Federal Reserve in Washington.
Borrowings by banks operating in Ireland from the ECB fell 4.4 percent in December to 132 billion euros. That includes all lenders operating in Ireland, including non-Irish banks. Reliance on Irish central bank lending rose as much as 14.3 percent, according to the lender on Jan. 14.
“The system is under enormous stress,” Whelan said in an interview. “Any further increases in monetary authority reliance is going to be borne by the Irish ELA.”
To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net