Thursday, 1 October 2009

Two reasons to vote yes

Jim Stewart
Reason 1
The Global Financial Stability Report by the IMF published on 30 September shows that, in February/March this year, the ECB was financing 7% of total assets of domestic banks in Ireland (IMF Report Figure 1.15). This was at a time when Irish banks had great difficulty in obtaining funds elsewhere. It is larger than for any other country in the Eurozone. This financing is provided by the ECB for periods up to one year. The rate of interest is just 1%. Because of improved credit conditions, both the main banks have recently issued new bonds. In contrast to the interest rate charged by the ECB, the yield on the recent three year bond issue by AIB was 4.735% and was described as ‘expensive’ by Dolmen stockbrokers.

Reason 2
Under the NAMA process, it is proposed that loans with a book value of €77 billion will be acquired by NAMA for €54 billion. The loans will be paid for by issuing short term (six months) Government debt to the banks in exchange for the loans. The banks may then exchange these loans for cash with the ECB at a current cost of 1%. The State will pay interest of 1.5% on the bond issues, meaning the banks will make a small margin (0.5%), although the banks will lose interest income on those loans paying interest. In future years, these rates are likely to change as ECB interest rates change. Thus, the banks will exchange illiquid assets for liquid assets. There is a large implicit subsidy in this financing arrangement. It is most unlikely that the Irish State would be able to issue €54 billion in bonds yielding 1.5% which would be highly liquid and readily exchangeable for cash. For every 1% increase in yield that the State would be obliged to pay to ensure liquidity, interest costs on €54 billion would increase by €540 million per annum. The NAMA process is subject to risk and uncertainty but it is not feasible without the support of the ECB.

As pointed out by Antoin Murphy and others the difference between Ireland and Iceland is not one letter but three – ECB.


Paul Hunt said...

The implication is that EU/ECB support will cease if Ireland were to vote No again. The EU/ECB is defending the Euro, not Ireland. Lisbon is a misguided, disguised constitutional exercise that should be recast. The only, very weak, reasons to vote Yes are to prevent further international reputational damage and to prevent the likely incoming UK Tories causing unnecessary grief in the EU.

Keith O' Brien said...

Completely agree with the above poster, and I have yet to see how economicaly we are going to suffer from a no Vote? Even on they have huge problems justifying that assertation.

Apparently markets are already factoring in a 60%+ probability of us voting No, but bear in mind that there was a 0% blip in the markets when we voted No the first time.

The ECB isn't going to suddenly stop funding us. Complete fallacy.

Disappointing this was allowed on what is my favourite economics blog. Where is the real analysis from a progressive front on Lisbon 2?

Glad to hear UNITE are standing ground on Lisbon 2.

EOS said...

The ECB will supply Ireland with the same or better lending deals if we were to nationalise the banks. NAMA is a pathetic deal for the Irish people. Some have more than hinted that the ECB set up and advised on this fix up for bankers and landowners. If so - they sold our esteemed leaders a pup.

Citing NAMA as a reason to vote yes is very dangerous as those who understand the finacial consequences of NAMA's likely impact (not many on this forum, it must be noted) might well decide on another course of action.

Anonymous said...

Bear in mind that when Ireland voted no the first time it was before the collapse of Lehman Brothers and the wholesale global financial and economic turmoil that followed and before the full bursting of our own bubble economy.

Given the extent to which our overcoming the current crisis is now so dependent on what are after all discretionary policies on the part of the ECB and other European institutions (as for example so well described by Jim Stewart in relation to NAMA), it is naïve to hope that voting no again would have no influence on the exercising of these discretionary policies by the ECB and other European institutions.

What Ireland needs after all of the corruption and bad governance of the past decade and more is more of Europe not less. Biting off the hand that feeds us by voting no is an act of recklessness that borders on insanity.

paul sweeney said...

I think Keith and Paul have a point on funding by ECB. It will remain in place simply because we are members of the Euro. As a strong AYE supporter, I think that interest rates will rise - not just for Govt borrowing, for firms but for households too, if the NAYsayers win. The Charter of Fundamental Rights brings the right to Collective Bargaining closer,,,,, but it is not gaurenteed. FDI cos will switch to the big English speaking Eurosceptic state, not here, if we were to demonstate such strong Euroscepticism by voting to shoot ourselves (and European Union) in both feet!

Paul Hunt said...

Dealing with corruption and bad governance is ultimately the responsibility of the Irish people - a majority of whom consistently voted for those who, respectively, allowed and provided it. It is not the EU's responsibility - even though it can demand standards and behaviour required as a member of the EU. Voting Yes in the hope that the EU will do what elected Irish politicans have failed to do borders on relinquishing national sovereignty.

While the ECB and the EU institutions have some discretion in the exercise of their powers and duties, they are, in general, bound by the treaties governing the EU. If Ireland were to vote No the EU would have to accept it as a vote against the institutional reforms in the Lisbon Treaty and not a vote against the EU as it is currently constituted.

Slí Eile said...

@Jim Thanks for post. The hard realities of life for a small open economy in the Eurozone and politically dependent on goodwill, positive reputation and cooperation is that everything has a cost and those who make decisions about investment, direct, financial or otherwise are influenced by the outcome of this referendum. I agree with what Paul Sweeney says in relation to the economic risks of a No vote.
While in common with many on both the No and Yes sides I have questions, issues and concerns about many aspects of the EU and its direction since the 1990s I still think that the balance of the argument for yes is overwhelming. Its the only show in town and it provides a platform and a reform within which progressive forces can operate for positive change rather than fantasise about renegotiation. If the people vote no this time there can be no further versions of Lisbon. It will be a multi-speed Europe with Ireland relegated to the UK eurosceptic track. There will be serious negative consequences from this - difficult to quantify and foresee. For sure there would be questions about continuing Eurozone membership in the longrun. One option would be to adopt sterling if the economy nosedives or conduct an EFTA type treaty which I actually one Eurospectic commentator suggest recently on RTE1. The 'British Isles' in association within, or loosely attached to, a new European Union.!
Hopefully it will be a resounding yes when the boxes are opened on Saturday. Beir bua don Eoraip agus d'Eirinn!

Slí Eile said...

The Challenge, now, that the people have decided is for all progressive forces in Europe and Ireland to work together to make Europe more democratic, more accountable and more responsive to the economic and social needs of citizens. This is a massive challenge. We must unite forces and put behind us the divisions that arose during the last months setting one trade union against another, one Party against another and one country against the rest.