Missing elements of Irish bank deal suggest Eurozone itself is under severe stress test
The numbers were already big and got bigger. People inured to millions, billions and trillions can be nonetheless horrified by a nation that needs to shove nearly half its GDP into the banks. But the Irish bank stress tests are important for what was missing.
The suggested hit to the people that provided the kerosene for AI, AIB, and BoI to fire into the Irish property sector did not happen. The senior bondholders were spared. Yes Michael Noonan, Ireland’s new finance minister, muttered something about sharing the burden with “subordinated bondholders”. Well that’s already happened after some coercive tenders under the previous government. A new effort “will generate low billions” said one bond trader I spoke to, who added “senior bonds are up big tonight, the holders are happy”.
Another absent friend was some sort of medium term help from the Frankfurt-based European Central Bank. That had been suggested as part of a deal between the ECB and Ireland to spare the senior bondholders and keep investor faith in eurozone periphery markets. It would have helped Ireland’s new banking system transition away from the life support of the ECB’s €150 billion short term liquidity assistance. But no, didn’t happen. That’s significant if you believe Reuters well-sourced account that “Euro zone official sources told Reuters on Thursday that due to internal disagreements within the ECB’s Governing Council, plans to announce a new liquidity facility for Irish banks had been scrapped.” http://reut.rs/f8vTrG
The ECB General Council features representatives from all Eurozone countries aswell as executive members. The ECB is a fiercely independent institution but there is something big occurring in the background as regards Ireland and the other bailouts.
I just got quite an interesting internal account of what happened between Irish leader Enda Kenny and President Sarkozy/ Chancellor Merkel at the Euro Summit two weeks ago. Finance ministers decided that Michael Noonan’s attempt to renegotiate the bailout deal (lower interest rates) was a matter for heads of state so kicked upstairs to the European Summit.
Enda Kenny turned up and “he was very cocky. He sat down and told everybody ‘this package isn’t working, we are a new government, it has to change’. Both the content and the attitude was a stark contrast to the much more humble approach of [Georges] Papandreou, [the Greek PM]. It had a terrible impact. Merkel and Sarkozy were very upset. They said: “We went to our parliaments and got billions and billions at huge political cost – forget it”
If there was one saving grace for Ireland it is that in Brussels and Frankfurt there is a recognition that the real economy is showing underlying competitiveness and growth potential. There’s been a reduction in real wages and salaries, and increase in productivity, and exports have gone up. So the ECB and Commission are “more positive on Ireland than Portugal, where there is no growth, or Greece where tax revenues are much below forecast”.
“Merkel is under terrible pressure at home. I was surprised she was much softer than I thought she would be given that she cannot give in to the Irish”.
A leading EU finance ministry reiterated the point: “Ireland and Greece are not comparable. They are a different set of problems. Ireland is a surplus country, with no competitiveness problems, but a fiscal problem”.
There is a consistent reference in the main Euroland powers to Ireland “not putting anything on the table”. For France that is clearly some rethink on the 12.5% corporation tax. his may be unthinkable for Ireland, but then it needs to come up with something else fairly quickly. I fear the lack of explicit ECB support is connected to this rancour. Could it mean even more tax rises and spending cuts for the hard-pressed Irish?
More generally, the two main tectonic plates in the Eurozone, between Austere Donor nations fearing a “Transfer Union” (Germany, Finland etc) and the Profligate Recipients nations becoming angry at austerity, are at a significant stress point. Throw into the middle of that the notion that the ECB might raise interest rates next week at a time when Portugal, Ireland, Spain, and Greece are dying and Germany is booming away, and you have a recipe for a backlash. The Irish economist David McWilliams talked about a referendum on the EU/IMF bailout deal today. Meanwhile in Finland an election might see the election of an anti-bailout populist campaigning against giving money to Greece.
It’s not just the Irish banks facing the stress test. right now it’s the whole political economy of the eurozone.