Table 4 - uploaded by Karl Whelan
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This is a briefing paper the author distributed to the Irish parliamentary committee responsible for finance and public expenditure. It describes the balance sheet of Irish Bank Resolution Corporation, the organisation that was formed by combining Anglo Irish Bank and Irish Nationwide Buildings Society. The nature of the long-run cost to the Irish...
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Citations
... ELA offered a cheap way of keeping banks afloat, but required ongoing approval by the ECB's Governing Council (Whelan 2012, p. 655). When Anglo ran out of good collateral in August 2010, the government sidestepped bond markets and furnished more collateral by offering promissory notes, effectively a government IOU, which the bank used for ELA (Whelan 2012). Servicing these promissory notes would cost the government 2% of GDP annually for ten years (Eichengreen 2015). 1 The liability guarantee notwithstanding, foreign creditors successively reduced their exposure to Irish banks. ...
... Servicing these promissory notes would cost the government 2% of GDP annually for ten years (Eichengreen 2015). 1 The liability guarantee notwithstanding, foreign creditors successively reduced their exposure to Irish banks. They refused to renew maturing bank bonds after they had been redeemed by the government under the guarantee, which lead to a net outflow of liquidity (Whelan 2012). As can be seen in the diagram below this outflow was somewhat compensated by ELA and Eurosystem financing. ...
During the financial crisis of 2008–2010, governments have had varying success in containing the fiscal costs of stabilizing their financial sectors. This article challenges the existing literature that attributes these differences purely to national factors and contends that the international dimension affects a government’s capacity to share the costs across borders. Specifically, if a country shares a leveraged creditor with other countries, concerns about regional contagion will drive decisions by outside actors to participate in or prevent external burden sharing. A comparison of the role of the Swedish government during the financial crisis in Latvia and the ECB’s influence on Ireland shows that these decisions can both facilitate or prevent international burden-sharing. While Latvia benefited both from maintained exposure by Swedish banks and an internationally coordinated response to its crisis, the Irish government accumulated losses because foreign banks reduced their exposure and the European Central Bank vetoed “bailing in” bondholders of bankrupt banks. Future research on financial stabilization should therefore more explicitly consider possible contagion effects from bailing in foreign creditors.
... The ECB (bolstered by the US Treasury Secretary and by the European finance industry) resisted imposing losses on senior bank bondholders, and required that national public finances assume the burden of full restitution, the better to protect the fragile balances of banks in Germany and France (Kalaitzake 2017, Kyriakidis 2016, Porzecanski 2013. And even though a later renegotiation yielded some relief on the costs of bank recapitalisation for Ireland, the damaging perception persisted that this had been a punishing deal (Whelan 2012). The IMF later acknowledged that its acquiescence on these issues had been a mistake and that it had sacrificed too much of its independence to the ECB and the EC (Donovan 2016: 28, IMF Independent Evaluation Office 2016). ...
... The ECB (bolstered by the US Treasury Secretary and by the European finance industry) resisted imposing losses on senior bank bondholders, and required that national public finances assume the burden of full restitution, the better to protect the fragile balances of banks in Germany and France (Kalaitzake 2017, Kyriakidis 2016, Porzecanski 2013. And even though a later renegotiation yielded some relief on the costs of bank recapitalisation for Ireland, the damaging perception persisted that this had been a punishing deal (Whelan 2012). The IMF later acknowledged that its acquiescence on these issues had been a mistake and that it had sacrificed too much of its independence to the ECB and the EC (Donovan 2016: 28, IMF Independent Evaluation Office 2016). ...
Portugal and Ireland exited Troika loan programmes; Greece did not. The conventional narrative is that different outcomes are best explained by differences in national competences in implementing programme requirements. This paper argues that three factors distinguish the Greek experience from that of Ireland and Portugal: different economic, political, and institutional starting conditions; the ad hoc nature of the European institutions’ approach to crisis resolution; and the very different conditionalities built into each of the loan programmes as a result. Ireland and Portugal show some signs of recovery despite austerity measures, but Greece has been burdened beyond all capacity to recover convincingly
... The government's standing in the opinion polls fell sharply in the wake of the further tough measures they took in subsequent budgets. And notwithstanding some success in renegotiating some of the terms of the refinancing of Anglo Irish Bank, now a zombie bank with massive liabilities but no future as a functioning financial institution (Whelan, 2012), the government did not manage to gain any traction with the main issue on which it had campaigned originally, that is, retrospective European support for direct refinancing of the Irish banking sector. ...
National governments within the eurozone have had to face tough choices between the need to devise policy responses to stabilise market expectations and the pressure to maintain responsiveness and accountability to their own voters. As Hindmoor and McConnell argue in Chapter 1 of this volume, the dynamics of political competition between the main political parties are central to accounting for what governments choose to do. We wish to show that crisis conditions heighten the difficulties governments experience in bridging the twin demands of economic stabilisation and political legitimacy, and this plays out rather differently depending on the nature of the political cleavages and the degree of policy convergence across the main political parties.
This paper explores how the uneven recourse by national banking systems in the euro area to the ECB’s unconventional refinancing operations that led to the accumulation of large TARGET2 balances at the NCBs has contributed to the evolution of aggregate economic activity in important member states of the euro area. For the period between 2008 and 2014 we estimate a panel VAR model and identify the structural shocks by means of sign restrictions. Our results suggest that the build-up of TARGET2 balances was driven mainly by capital flow shocks while being barely responsive to other aggregate shocks. Furthermore, on the basis of counterfactual experiments we find that the ability to build up sizeable TARGET2 liabilities has contributed substantially to avoiding deeper recessions in the distressed euro area member countries like Spain, Italy, Ireland and Portugal, while to a smaller extent depressing aggregate economic activity in core member states such as Germany, the Netherlands and Finland.
TARGET2 is the intra-euro area payment system. Before the outbreak of the euro crisis, the TARGET2 balances of the individual euro area member countries have always been fluctuating closely around zero. Thus, current account transactions have been financed by corresponding private financial account transactions. At the height of the euro crisis in 2012, TARGET2 liabilities of the five major crisis countries accounted for the first time to roughly 1 trillion euros. At that time a massive capital withdrawal from the crisis countries was cushioned by the Eurosystem through almost unlimited lending to crisis-struck banks. Currently (in 2017), TARGET2 imbalances are reaching a second height, in which for many countries, the 2012 levels are exceeded. The narrative of this episode however differs from the capital flight story of 2012. This time the Eurosystem is actively buying government bonds of euro area member countries within its large-scale asset purchase program. The majority of these bonds are purchased by the national central banks from banks located outside the eurozone which are connected to TARGET2 through an account at another national central bank (such as the German Bundesbank). This chapter aims at giving an economic interpretation to these two episodes. On the one hand, it will be argued that the Eurosystem’s role as lender to banks and governments of distressed economies is responsible for the increase in TARGET2 imbalances and that in both cases the increase in TARGET2 liabilities is an indicator for the unwillingness of financial markets to continue lending to these borrowers. On the other hand, in the absence of such lending, the euro probably would not have survived the crisis.
During the years 2003 to 2008, the Irish domestic financial sector experienced a very fast and poorly controlled expansion, followed by a dramatic collapse. The causes of the Irish credit bubble and bust have been exhaustively examined; see for example Connor et al. (2012), Honohan (2010), Nyberg (2011), Regling and Watson (2010) and additional references therein. Over the next six years, from late 2008 to 2014, the Irish financial sector went through a painful restructuring and slow, modestly successful, recovery. This paper provides an economic analysis of the Irish financial sector’s restructuring and recovery period. The paper considers both domestic and foreign banks operating in Ireland, household and corporate debt, property and other asset markets, and business investment. We analyse what the Irish experience tells us about the economic theory of post-crisis financial sector restructuring and recovery strategies.
Despite verbal assurarces that Europe was committed to separating Ireland's banking and sovereign debt, Ireland is now very much isolated in its stance to get bank recapitalisation via the ESM retrospectively. The debate over whether Ireland was forced to bail in the senior bondholders is discussed in this paper. The likelihood of support from Eurozone countries is also discussed and the conclusion is that almost 60% support is likely. Ireland may be able to argue that it is a special case as it could not apply the 8% loss to bondholders in 2010, because it was not permitted to do so.
