Tuesday, 16 November 2010

The Banking Crisis is Unresolved

Nat O'Connor: Today's 'crisis' seems to be more about the timing of key EU meetings than about anything of substance that requires Ireland to tap into the EU/IMF fund this week, or even this year. One key question is what is the ECB's attitude towards the Irish banks.

We know that Ireland is fully funded until mid-2011. And we could then tap the NPRF if we really needed to, which would fund us up to Christmas 2011. So, in terms of borrowing to bridge the current deficit, there is no crisis that requires Ireland to tap the EU/IMF fund today or tomorrow.

The problem is the banks. Our banks can't borrow money from the bond markets, so they are borrowing from the ECB - using the promissory notes our Government has issued them. The situation is not clear, but it seems plausible to suggest that the ECB is not happy with lending so much money to Ireland's banking system. In a similar way to the Austrian announcement that they won't make their €190 million share of the next EU/IMF fund payment available to Greece due to a lack of reform (Guardian report at 2.24pm), we could speculate that the ECB does not like giving money to the Irish banking system without seeing a strategy for the restructuring and reform of that sector.

And hiding behind the current problems of the Irish banks is the personal debt crisis that could trigger a second wave of problems, that would require further bank bailouts.

Of course, since the bank guarantee, the banks debts have become part of the sovereign, national debt. Although we can credibly make the annual interest payments on this for the next few years, it may make our overall national debt too big for us to ever pay back. And that spooks the bond markets from lending to Ireland at all. Which brings us back to contemplating the need to use the EU/IMF fund again. But is there any point in using the fund if we don't reform our banks?

And what should we do with the banks? With another wave of recapitalisation we could own all of them. Should we restructure them into good/bad, household/business or retail/investment? Should we be inviting a foreign-owned bank to buy one of the main banks - or at least its branch network and performing assets?

There are a lot of jobs at stake here, both directly in the banking sector and indirectly in the wider economy that needs a resolution to the banking crisis. The ECB may not be forcing Ireland to take a bailout. But they may be forcing us to make some decisions to resolve the banking crisis in a more definitive way, once and for all.


Nat O`Connor said...


Morgan Kelly explained all the problems with the banks very clearly on 22 May in the Irish Times.

He rightly quotes Hemingway, who put it, bankruptcy happens “Slowly. Then all at once.” That description might well describe how the banking crisis has unfolded over the last months, and now today.

Nat O`Connor said...

The situation is perhaps becoming clearer.

Technical talks begin tomorrow between the Government, the International Monetary Fund, the European Commission and the European Central Bank. This will examine Ireland's overall fiscal position, but also the need for restructuring in the banking sector.

Professor of banking and financial services at University College Dublin, Ray Kinsella, said the IMF wanted to "quarantine Ireland".

"They want to take out the Irish problem," he said.

Why might that be? Well, the latest IMF Fiscal Monitor (i.e. report on global fiscal policy) makes a number of references to Ireland's exceptional position.

For example, on page 20, ongoing states support for banks is discussed: "there has been in general limited new direct financial sector support, with the striking exception of Ireland".

Colm Keena in the Irish Times confirms that the ECB's goal is to scale back funding of European banks generally. In brief, the ECB believes the Irish banks' "business model is broken" and is unhappy "with its increasing exposure to Irish banks".

The only problem is that Ireland cannot access the 'facility' to borrow money for the banks directly, the Irish taxpayer has to take on the debt and lend it to our banks.

At this point, we should be really concerned if there the talks do not come up with a plan for massive - and highly visible - bank reform.