Anglo irish bank simple question

Liam Byrne

FreudianSlippers wrote: »

hatrickpatrick wrote: »

You mean a precedent that if you choose to gamble and your horse doesn't win, it's not anyone else's responsibility to refund your stupidity?

"Dangerous" indeed. Shocking.
Remind me of that the next time I'm in Paddy Power. If my horse doesn't win, I presume I have the right to walk out into the street and take money out of the pockets of everyone out there to pay for my mistakes?

Scofflaw wrote: »

A vapid and hackneyed comparison of no real relevance.

regards,
Scofflaw

In his own way he has highlighted the ECB's concern though. If they were to allow Ireland to burn its senior bondholders, akin to allowing hatrickpatrick being allowed to "walk into the street and take money out of the pockets of everyone out there to pay for my mistakes", then everyone would start doing that. Mayhem!

You have that backwards.

Anglo lost, therefore its bondholders lost.

Because of sickening FF & Green decisions we are stuck with the guaranteed bondholders but should have no obligation to pay the unguaranteed ones.

And does anyone know whether we're even reducing their rate of return, given that they are now essentially guaranteed ?

i.e. if a guaranteed guy got 2% because of his safe bet and an unguaranteed guy got 8% because of the risk, shouldn't the second guy now be getting 2% or less ?

Scofflaw

FreudianSlippers wrote: »

Heard Noonan on Pat Kenny briefly this morning and he appeared to be advancing the proposition again that it is the ECB that does not want us to burn the senior bondholders (again citing the "contagion" argument on behalf of the ECB). It was put to him that IBRC has enough in assets to cover bondholder repayments if it were totally closed down today and they were told to come and get their money.
The only people there would not be enough money to pay would be the ICB. Noonan didn't seem to disagree with this, and basically restated that the ECB doesn't think we should do this.

It was also put to the Minister that the argument would make sense if it were discussing AIB or an actual operating bank and that the contagion argument and it's parallel "why should we fund banks you're unwilling to fund" statement but makes no sense in discussing Anglo/IBRC.

It seems to me like a logical enough step to assume it is safe to ignore the ICB debts, but I must be missing something.

It's not strictly a case of "repaying" the ICB. The ICB created the money to match the promissory notes, which it took as collateral. The ICB has to get that money back and destroy it again, and there will presumably be a real agreement covering that transaction, because the ICB could only create the money with the ECB's permission, and the ECB will presumably only have agreed if the money was destroyed again afterwards - otherwise the ICB has effectively been allowed to inject €30bn into the eurozone monetary system. That's not a lot compared to the size of the eurozone, obviously, but if Ireland's central bank is allowed to print money on behalf of the Irish government and not have to destroy it again afterwards, why can't Italy do the same, or Spain?

The promissory notes, in effect, boil down to doing what we would have done in extremis if we had our own currency - printing money. Printing money has an inflationary effect, of course, and offers only a very temporary advantage, even with your own currency - the effects come back in exchange rate reductions and heightened domestic inflation, so the general public and businesses wind up picking up the tab.

What has happened here instead is that the Irish government has been allowed to print money, but to prevent the inflationary effect (and to prevent others wanting to do the same) they're being required to destroy the same amount of money again over the next 10 years. We can argue for a longer term, which is purely to our benefit, because the small amount of inflation the €30bn produces isn't borne by Ireland alone, but spread out across the whole eurozone.

So the ECB, whose only real mandate is to control inflation in the eurozone, genuinely can't allow us to renege on the promissory notes, and must be cautious even about extending the term of them, because the longer the money is in the system the more prolonged the inflationary effect it has.

cordially,
Scofflaw

FreudianSlippers

Scofflaw wrote: »

It's not strictly a case of "repaying" the ICB. The ICB created the money to match the promissory notes, which it took as collateral. The ICB has to get that money back and destroy it again, and there will presumably be a real agreement covering that transaction, because the ICB could only create the money with the ECB's permission, and the ECB will presumably only have agreed if the money was destroyed again afterwards - otherwise the ICB has effectively been allowed to inject €30bn into the eurozone monetary system. That's not a lot compared to the size of the eurozone, obviously, but if Ireland's central bank is allowed to print money on behalf of the Irish government and not have to destroy it again afterwards, why can't Italy do the same, or Spain?

The promissory notes, in effect, boil down to doing what we would have done in extremis if we had our own currency - printing money. Printing money has an inflationary effect, of course, and offers only a very temporary advantage, even with your own currency - the effects come back in exchange rate reductions and heightened domestic inflation, so the general public and businesses wind up picking up the tab.

What has happened here instead is that the Irish government has been allowed to print money, but to prevent the inflationary effect (and to prevent others wanting to do the same) they're being required to destroy the same amount of money again over the next 10 years. We can argue for a longer term, which is purely to our benefit, because the small amount of inflation the €30bn produces isn't borne by Ireland alone, but spread out across the whole eurozone.

So the ECB, whose only real mandate is to control inflation in the eurozone, genuinely can't allow us to renege on the promissory notes, and must be cautious even about extending the term of them, because the longer the money is in the system the more prolonged the inflationary effect it has.

cordially,
Scofflaw

Ah that makes sense now. To put it in very simple terms, the ECB said you can pretend to have €30bn which you can "loan" on the condition that when you are paid back you effectively destroy the €30bn (but presumably are allowed to keep any interest made from it?)

Scofflaw

FreudianSlippers wrote: »

Ah that makes sense now. To put it in very simple terms, the ECB said you can pretend to have €30bn which you can "loan" on the condition that when you are paid back you effectively destroy the €30bn (but presumably are allowed to keep any interest made from it?)

That seems to be it in a nutshell, except there's not really any interest to keep, because the interest is only there to ensure that amount we pay back and destroy in, say, 2020, is worth €3.1bn in current terms.

So when someone says that the total cost of the promissory notes is "much greater than the €30bn", they're mixing up current and future values of money. The total we destroy over the lifetime of the notes, including interest, has to match the €30bn created in 2010 - so while the number is bigger on paper, the value is the same.

It's a bit like a magic purse in a fairy tale, where you can take any amount out as long as the same amount goes back in - but adjusted for inflation, which admittedly isn't usually a part of the fairy tale...

I'd still like such a purse, mind you.

cordially,
Scofflaw