Last night the Oireachtas (Irish parliament) held an extended sitting lasting into the night to pass emergency legislation to liquidate the Irish Bank Resolution Corporation, the successor to the Anglo Irish Bank.
The legislation was sprung on lawmakers when news of a possible deal with the ECB over the billions of debt bound up in promissory notes to the bank was leaked. (You can read more on the background to the promissory notes here). The ECB board is scheduled to meet tomorrow and will decide on a deal on some of the Irish banking debt. This sparked concerns over the bank (that its assets would be at risk and that the state would be exposed at a time when creditors and debtors knew that liquidation was coming), leading to the government launching the bill through the Oireachtas under a guillotined procedure - the Irish president flew home from a visit to Italy on short notice to sign the bill into law.
The Irish Bank Resolution Corporation Bill 2013 (the Bill couldn't be amended so the wording is identical to the Act) was passed by the Dáil (lower house) by 113 votes to 35 just before 3am before going to the Seanad for approval. It empowers the Minister for Finance to order the liquidation of the IBRC, to order National Asset Management Agency (NAMA, Ireland's bad bank) to take a number of actions, including bidding for the assets of IBRC (i.e. swap assets for NAMA bonds), and to create or issue securities under a number of circumstances, including in return for release from liabilities. The Act will also fire all of the employees of the IBRC - while NAMA will rehire some of these, it will be a particularly shocking and disruptive time for them.
The deal on the promissory notes (if any) is not yet known, so the Oireachtas had to decide on half of the deal before the ECB agreed to anything. The speculation is that the promissory notes will be turned into long term government bonds by the Minister for Finance, turning the banking debt into government debt in return for the debt to be paid off over a longer period, lessening the need for budgetary cuts. The retention of responsibility for the overall debt, with no debt write-down, will be unpopular and it will be difficult for the government to present the deal as a victory in the fight for the separation of banking and sovereign debt. However there could (should) be savings when it comes to the interest on the debt. The final deal may end up having a different shape to it, but, whatever the detail, once the deal is accepted it is highly unlikely that further concessions should be negotiated.
There is no guarantee that the ECB will arrive at a decision on this today. The order of events means that it will be difficult to know whether, whatever deal is reached, a better deal could have been possible. But unless the deal includes a write-down on the debt, it will still be seen as cementing public responsibility over private debt.
Showing posts with label ECB. Show all posts
Showing posts with label ECB. Show all posts
Thursday, 7 February 2013
Wednesday, 19 September 2012
Co-decision, European democracy and speed
European legislation is not famed for its speed. The EU's institutional triangle of the Commission, Member States in the Council, and the European Parliament means that agreement has to be made both within and between these institutions before draft laws can be passed (where the Parliament is a co-legislator with the Council).
In the "turf war" over the banking union, reported here by EUObserver, an EU diplomat said:
The banking union will centre on two pieces of legislation: one empowering the ECB as a banking regulator, and the other redefining the role of the London-based European Banking Authority. While the European Parliament has a say over the EBA, the ECB legislation is dealt with by a unanimous Council vote with the Parliament only consulted.
I think the Parliament's right to treat the two drafts as part of the same package. The banking regulation recently put in place fell under areas where the Parliament had a right of co-decision, and the Parliament should get some say over how the new regime will operate before it gives its go ahead to the EBA being changed to fit in with the new rules. It's also about how democracy is valued within the EU system: the European Council gets to set the pace of political debate, and, as we've seen in the past year with the Fiscal Compact, it's not adverse to re-hashing existing law in new, extra-EU treaties for its own political ends. The banking and Eurozone legislation is complex and controversial; we've seen this with the debate over the Fiscal Compact (a treaty that got both the causes and solutions to the crisis wrong), and the place and power of the ECB is an important issue.
This deserves democratic debate and scrutiny. The idea of the Parliament simply being a roadblock to crisis management is just plain wrong. The Council does not have the monopoly over economic or institutional wisdom (let's face it, 3 years of European Council summitry have done little to solve our current predicament), and opening debate up from diplomatic discussions and deal-making enhances the quality of decision-making by opening up the problems and solutions to scrutiny. The idea that the European Council can deliver down commandments and expect to have the Parliament either follow them or be easily ignored is insulting. As we can see from the Council opportunistically changing the legal basis of the Schengen area to exclude the Parliament, the Council is often more about protecting itself and its own interests than about creating common solutions.
And if the ECB is to be both independent as a central bank and have the power of banking regulator, there should be some democratic control and scrutiny. The Parliament may not have a strict legal right to this piece of legislation, but it has some say over financial regulation and should not be expected to stay silent while regulatory responsibility is passed to another, independent, institution.
While speed is important, having an open and more democratic debate is an important core value that shouldn't be overlooked, and which will help us come to better decisions.
In the "turf war" over the banking union, reported here by EUObserver, an EU diplomat said:
"The debate will be tense. It is not because Council defends its turf, but because MEPs take so long. We simply cannot lose another year."
The banking union will centre on two pieces of legislation: one empowering the ECB as a banking regulator, and the other redefining the role of the London-based European Banking Authority. While the European Parliament has a say over the EBA, the ECB legislation is dealt with by a unanimous Council vote with the Parliament only consulted.
I think the Parliament's right to treat the two drafts as part of the same package. The banking regulation recently put in place fell under areas where the Parliament had a right of co-decision, and the Parliament should get some say over how the new regime will operate before it gives its go ahead to the EBA being changed to fit in with the new rules. It's also about how democracy is valued within the EU system: the European Council gets to set the pace of political debate, and, as we've seen in the past year with the Fiscal Compact, it's not adverse to re-hashing existing law in new, extra-EU treaties for its own political ends. The banking and Eurozone legislation is complex and controversial; we've seen this with the debate over the Fiscal Compact (a treaty that got both the causes and solutions to the crisis wrong), and the place and power of the ECB is an important issue.
This deserves democratic debate and scrutiny. The idea of the Parliament simply being a roadblock to crisis management is just plain wrong. The Council does not have the monopoly over economic or institutional wisdom (let's face it, 3 years of European Council summitry have done little to solve our current predicament), and opening debate up from diplomatic discussions and deal-making enhances the quality of decision-making by opening up the problems and solutions to scrutiny. The idea that the European Council can deliver down commandments and expect to have the Parliament either follow them or be easily ignored is insulting. As we can see from the Council opportunistically changing the legal basis of the Schengen area to exclude the Parliament, the Council is often more about protecting itself and its own interests than about creating common solutions.
And if the ECB is to be both independent as a central bank and have the power of banking regulator, there should be some democratic control and scrutiny. The Parliament may not have a strict legal right to this piece of legislation, but it has some say over financial regulation and should not be expected to stay silent while regulatory responsibility is passed to another, independent, institution.
While speed is important, having an open and more democratic debate is an important core value that shouldn't be overlooked, and which will help us come to better decisions.
Friday, 7 September 2012
ECB lending to buy time for... what?
The European Central Bank's announcement that it would buy Eurozone government bonds is a massive boost to the Eurozone, but a lot remains to be done before we can say that the Eurozone is starting on its path out of the crisis. The banking union legislation will be a key part of the agenda over the next months (the Commission should publish a draft law on banking union next week), and it is vital in separating the link between national banks, which have grown as part of an EU-wide financial system, from national governments, many of whom are simply too small to support such large financial sectors.
However like most initiatives banking union focuses on preventing similar problems next time - in order for it to have an appreciable effect on today's crisis there would need to be a deal on old banking debt that has been taken on by national governments, in particular Spain and Ireland. (The Fiscal Stability Treaty, the six pack and the yet-to-be-passed two pack share this weakness too). Could this be agreed? Would there be joint liability for debt already generated and taken on by national governments (that the ECB pressured the protection of banks to ensure the stability of the system means that there was also a European interest in these national financial systems from early on in the crisis too)? It's a highly political area and the Irish government - and no doubt Spain too - are eager to reduce their debt as far as they can while avoiding austerity.
But it's not just in Ireland and Spain's banking case that the debt question is posed (though they raise the spectre that rigid application of public debt rules bear little relation to the ability to weather economic crises), since debt and economic growth is a European question. So what is the ECB buying time for: for an agreement on economic union? How far should economic union be extended? If debt needs to be shared to ease the burden and to provide breathing room for reforms and recovery in the most crisis-hit countries what kind of institutions do we need, and how do we make them accountable?
Merkel has signalled that she wants a convention by the end of the year to decide on the future of the EU, and apparently France and Germany are moving closer together on political union. Barroso has also called for a EU Treaty "renewal". There's very little detail on what is meant by different people about economic or fiscal union, so it's hard to get a debate going it. It's likely that the only debate we'll get is on the results of a convention - hardly a good way to build such a union or to build support for it. In any case Barroso is supposed to put forward some ideas in his State of the Union speech on September 12th. If he does put some ideas on the table, it could be one of the few opportunities for civil society to study the up-coming integration debate.
However like most initiatives banking union focuses on preventing similar problems next time - in order for it to have an appreciable effect on today's crisis there would need to be a deal on old banking debt that has been taken on by national governments, in particular Spain and Ireland. (The Fiscal Stability Treaty, the six pack and the yet-to-be-passed two pack share this weakness too). Could this be agreed? Would there be joint liability for debt already generated and taken on by national governments (that the ECB pressured the protection of banks to ensure the stability of the system means that there was also a European interest in these national financial systems from early on in the crisis too)? It's a highly political area and the Irish government - and no doubt Spain too - are eager to reduce their debt as far as they can while avoiding austerity.
But it's not just in Ireland and Spain's banking case that the debt question is posed (though they raise the spectre that rigid application of public debt rules bear little relation to the ability to weather economic crises), since debt and economic growth is a European question. So what is the ECB buying time for: for an agreement on economic union? How far should economic union be extended? If debt needs to be shared to ease the burden and to provide breathing room for reforms and recovery in the most crisis-hit countries what kind of institutions do we need, and how do we make them accountable?
Merkel has signalled that she wants a convention by the end of the year to decide on the future of the EU, and apparently France and Germany are moving closer together on political union. Barroso has also called for a EU Treaty "renewal". There's very little detail on what is meant by different people about economic or fiscal union, so it's hard to get a debate going it. It's likely that the only debate we'll get is on the results of a convention - hardly a good way to build such a union or to build support for it. In any case Barroso is supposed to put forward some ideas in his State of the Union speech on September 12th. If he does put some ideas on the table, it could be one of the few opportunities for civil society to study the up-coming integration debate.
Friday, 22 July 2011
Once again the day is saved...
...At least for now. It's hard to escape the feeling that each time an agreement is made at a European Council summit, it's only a matter of time (usually 3-6 months) before we're back in superhero mode again. Still, there seems to be something more to this deal than the simple bail-outs (or loans as they're normally called). The agreement's outline can be found here (PDF).
Greece.
First of all, Greece will get more loans - and more cheaply - to help fight its economic crisis: €109 billion. Structural funds and European Investment Bank funds will be directed towards helping Greece stimulate growth, and there will be some voluntary private sector involvement which will be for Greece only (a bizzare situation where creditors are seemly asked to take a partial default on the basis of what they can afford out of the goodness of their hearts).
And the rest...
All three countries will benefit from a interest rate reduction on the loans to 3.5% (for Ireland this is a 2% reduction), and the loans will have to be paid off in 15 years (at a minimum) rather than the previous 7.5 years. This should make it easier for the countries to implement their austerity programmes as it eases the economic and political pressure on the governments.
In Ireland the interest rate reduction is a great victory for the government. During the election campaign the (now) coalition parties had been campaigning for a negotiation of the EU/IMF deal for lower interest rates and for the burning of some bondholders. The restriction of voluntary private involvement in the scheme to Greece means that partial defaults on the private debts in Ireland are unlikely for now. I say for now because there's resentment in Ireland at having to pay back all the private debt and that the private sector is not taking any hit, and now it will be harder to argue morally, and politically, why there should be movement on this in Greece but not elsewhere. It gives the impression that being the golden pupil of the bail-out class doesn't win you any rewards. I wonder if the market will really see private investor involvement in the Greek deal as a one-off.
Also important is what Ireland might have conceded for this interest rate reduction, and hat it means for the Eurozone's economic policy. The Eurozone heads note:
Since Ireland's corporate tax rate has become iconic and synomous with Irish economic success, the scale of this concession will be heavily debated: is it just a commitment to negotiate? Does it commit us to common tax policies?
I actually think that this is a victory of sorts for Irish diplomacy (well, good use of circumstances at least). It seemed like a raise of Irish corporate tax might have been a condition for a drop in interest rates - in other words, Ireland would unilaterally raise its tax rates without European harmonisation. Since this would have been Ireland and not the EU deciding this, no referendum would need to be held. However, if it comes to a EU Directive, then the Irish government could hold a referendum on the subject, citing it as a constitutional requirement (although I doubt the extent to which it might be one). It's hard to know if that's exactly the case yet, but by having the discussion at a pan-European (or pan-Eurozone) level, Ireland's diplomatic position is improved, not least because it can try to build coalitions around its positions.
Biggest loser: ECB?
The Europeans Financial Stability Fund willbe given several new powers. It can:
If the EFSF is able to intervene in non-programme countries to be a lender of last resort to the banks,* then this would dilute the power of the European Central Bank. It's been widely noted that the ECB's loans of €120 billion to Irish banks gave it a lot of power, and that it was a big player in the events leading to the Irish EU/IMF deal. With another institution, created without treaty change, able to provide alternative credit in a crisis, it could be a way of Member States preventing the ECB gaining a strong hand in their economies during times of crisis. It will be interesting to see if this will change the institutional balance in the Eurozone.
*Technically it can't lend directly to the banks, but it lends to the Member State who then lends to the banks. This would also be done at a higher interest. It also means that there are aspects of EFSF loans to banks which make them less attractive than ECB loans, but it does show how wary the Member States are becoming of the ECB's power if they've created a way of circumventing its role as a lender of last resort, even in non-programme countries.
Greece.
First of all, Greece will get more loans - and more cheaply - to help fight its economic crisis: €109 billion. Structural funds and European Investment Bank funds will be directed towards helping Greece stimulate growth, and there will be some voluntary private sector involvement which will be for Greece only (a bizzare situation where creditors are seemly asked to take a partial default on the basis of what they can afford out of the goodness of their hearts).
And the rest...
All three countries will benefit from a interest rate reduction on the loans to 3.5% (for Ireland this is a 2% reduction), and the loans will have to be paid off in 15 years (at a minimum) rather than the previous 7.5 years. This should make it easier for the countries to implement their austerity programmes as it eases the economic and political pressure on the governments.
In Ireland the interest rate reduction is a great victory for the government. During the election campaign the (now) coalition parties had been campaigning for a negotiation of the EU/IMF deal for lower interest rates and for the burning of some bondholders. The restriction of voluntary private involvement in the scheme to Greece means that partial defaults on the private debts in Ireland are unlikely for now. I say for now because there's resentment in Ireland at having to pay back all the private debt and that the private sector is not taking any hit, and now it will be harder to argue morally, and politically, why there should be movement on this in Greece but not elsewhere. It gives the impression that being the golden pupil of the bail-out class doesn't win you any rewards. I wonder if the market will really see private investor involvement in the Greek deal as a one-off.
Also important is what Ireland might have conceded for this interest rate reduction, and hat it means for the Eurozone's economic policy. The Eurozone heads note:
"[W]e note Ireland's willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework."
Since Ireland's corporate tax rate has become iconic and synomous with Irish economic success, the scale of this concession will be heavily debated: is it just a commitment to negotiate? Does it commit us to common tax policies?
I actually think that this is a victory of sorts for Irish diplomacy (well, good use of circumstances at least). It seemed like a raise of Irish corporate tax might have been a condition for a drop in interest rates - in other words, Ireland would unilaterally raise its tax rates without European harmonisation. Since this would have been Ireland and not the EU deciding this, no referendum would need to be held. However, if it comes to a EU Directive, then the Irish government could hold a referendum on the subject, citing it as a constitutional requirement (although I doubt the extent to which it might be one). It's hard to know if that's exactly the case yet, but by having the discussion at a pan-European (or pan-Eurozone) level, Ireland's diplomatic position is improved, not least because it can try to build coalitions around its positions.
Biggest loser: ECB?
The Europeans Financial Stability Fund willbe given several new powers. It can:
"- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including in non programme countries;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion."
If the EFSF is able to intervene in non-programme countries to be a lender of last resort to the banks,* then this would dilute the power of the European Central Bank. It's been widely noted that the ECB's loans of €120 billion to Irish banks gave it a lot of power, and that it was a big player in the events leading to the Irish EU/IMF deal. With another institution, created without treaty change, able to provide alternative credit in a crisis, it could be a way of Member States preventing the ECB gaining a strong hand in their economies during times of crisis. It will be interesting to see if this will change the institutional balance in the Eurozone.
*Technically it can't lend directly to the banks, but it lends to the Member State who then lends to the banks. This would also be done at a higher interest. It also means that there are aspects of EFSF loans to banks which make them less attractive than ECB loans, but it does show how wary the Member States are becoming of the ECB's power if they've created a way of circumventing its role as a lender of last resort, even in non-programme countries.
Wednesday, 22 June 2011
The Gloom of having no Good Options
The Greek government has survived the vote of confidence, and now its next test is passing more austerity measures. Austerity has little - if any - support among the Greek electorate simply because it hasn't delivered the goods yet. It seems obvious that Greece will default at some point, but would it be better to do it sooner rather than later?
There doesn't seem to be any good solution here.
Greece cannot pay its debts, but the default and decouple option, as advocated by Daniel Hannan, among others, would be disasterous for Greece and for the EU. Defaulting would unleash a tidalwave of debt back into the European banking system and European taxpayers in the Eurozone would take a big hit at the same time that their governments (particularly in Germany, France and the UK) would be forced to decide whether or not to bail out their bad-Greek-debt-holding banks. For Greece, it would be locked out of the international financal markets (as it is now), and without an alternate line of credit. Since it takes in less in taxes than it needs to finance its expenditure, the resulting austerity could be much, much worse. Leaving the Euro at such a time could lead to extremely high inflation.
Just leaving the Eurozone (and not defaulting) is unlikely to help either, as the devalued New Drachma would make it harder for Greece to pay off its debts, most of which are in Euros.
Continuing austerity doesn't seem to be working either. Greece needs time to restructure and reform its economy, but the time-frame is extremely short for the task that faces the country, and the refrain of "tough love" from Northern Europe is not endearing for the Greek public, to say the least.
Further integration is the call of others, and interestingly also of the IMF, urging the Eurozone to integrate economically and politically. However, these calls still seem vague to me on detail, and I'm not sure how much they are aimed at solving the current crisis rather than on preventing it from happening again (or both). The blue-and-red bonds (where there are some Eurobonds and some national bonds) or the Eurobonds idea is attractive, and could ease some of Greece's problems, but it could also raise some others. Regardless, there is little political will for more integration, and as no attempt by any Eurozone government to really make the case for further integration, it doesn't look like that will change soon.
At the moment the best option seems to be to accept the bad austerity and bail-out deal and forge ahead with reforms in Greece with at least the thin cushion of EU/IMF loans rather than no loans at all and hope that either (a) the EU gets its act together; or (b) the painful austerity will help Greece just enough so that it can partially default in a more managed way in a year or two when the prospects are better for it and the EU. Neither option is an inspiring or very sellable one.
The protests in Greece will continue, but I wonder what the historical legacy would be if they won and Greece defaulted unilaterally - both for internally and in Europe?
There doesn't seem to be any good solution here.
Greece cannot pay its debts, but the default and decouple option, as advocated by Daniel Hannan, among others, would be disasterous for Greece and for the EU. Defaulting would unleash a tidalwave of debt back into the European banking system and European taxpayers in the Eurozone would take a big hit at the same time that their governments (particularly in Germany, France and the UK) would be forced to decide whether or not to bail out their bad-Greek-debt-holding banks. For Greece, it would be locked out of the international financal markets (as it is now), and without an alternate line of credit. Since it takes in less in taxes than it needs to finance its expenditure, the resulting austerity could be much, much worse. Leaving the Euro at such a time could lead to extremely high inflation.
Just leaving the Eurozone (and not defaulting) is unlikely to help either, as the devalued New Drachma would make it harder for Greece to pay off its debts, most of which are in Euros.
Continuing austerity doesn't seem to be working either. Greece needs time to restructure and reform its economy, but the time-frame is extremely short for the task that faces the country, and the refrain of "tough love" from Northern Europe is not endearing for the Greek public, to say the least.
Further integration is the call of others, and interestingly also of the IMF, urging the Eurozone to integrate economically and politically. However, these calls still seem vague to me on detail, and I'm not sure how much they are aimed at solving the current crisis rather than on preventing it from happening again (or both). The blue-and-red bonds (where there are some Eurobonds and some national bonds) or the Eurobonds idea is attractive, and could ease some of Greece's problems, but it could also raise some others. Regardless, there is little political will for more integration, and as no attempt by any Eurozone government to really make the case for further integration, it doesn't look like that will change soon.
At the moment the best option seems to be to accept the bad austerity and bail-out deal and forge ahead with reforms in Greece with at least the thin cushion of EU/IMF loans rather than no loans at all and hope that either (a) the EU gets its act together; or (b) the painful austerity will help Greece just enough so that it can partially default in a more managed way in a year or two when the prospects are better for it and the EU. Neither option is an inspiring or very sellable one.
The protests in Greece will continue, but I wonder what the historical legacy would be if they won and Greece defaulted unilaterally - both for internally and in Europe?
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