What's actually going on?? Just the facts (if possible !)

adrem

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There is a huge amount of confusion evident in the P.ie site and in the wider physical and online media about whats happening, why, whats changed since the early autumn etc. Most times threads tend to divert into anti Govt, anti opposition, anti public sector or just anti everything rants which, whilst perfectly understandable, add to the confusion.

So - on this thread - can we keep away from the ranting raving screaming shouting cursing and stick to the facts as we know them.

Here's my attempt at clarity.

At the moment our big issue is the banks. The new CB governor did a stress test exercise and established his view of their capital needs. This was released on "black Thursday" - this hasn't actually changed.

The banks have a limited range of sources of capital - depositors, shareholders and bondholders. Depositors have been withdrawing money from the banks - some of it is retail depositors moving offshore but most of it is commercial money being withdrawn as a matter of course once the bank ratings fell below thresholds. This happens because some large money managers have fixed mandates which say all deposits will be held in banks with ratings no less than "xxx" - when the rating of the bankfalls below the level of "xxx" they are obliged to withdraw that money at the next roll over.

New depositors are not out there to replace the ones leaving. Equity capital is not available. that leaves the bond market (corporate bonds) as the only source of capital. Investors buy corporate bonds (ie lend money to banks) where they feel secure that the bank can both deliver the coupon (interest rate) and repay the capital. The corporate bond market is not convinced that the stress test capital adequacy (the PCAR tests) done by the central bank are actually the full story. Its not that they disbelieve the banks - its more that they are concerned that the economic picture in Ireland could worsen, economic growth could be lower than anticipated and in that environment the assumptions used in the PCAR tests might be more optimistic than worst case scenario.

The view of the market (from a bank bond perspective) is that the €15bn over 4 year deficit reduction plan could stymie growth to such an extent that it leaves the banks needing more capital. Therefore they would be less able to repay the corporate bonds. Therefore the market won't buy the banks corporate debt. This situation was exacerbated by Ms Merkel deciding that debt markets should be forced to bear more of the costs of financial collapses (as distinct from the German taxpayer). Possibly a laudable concept but by introducing that additional risk factor into the equation she blew any possibility of peripheral (and currently at risk) countries being able to attract market finance.

The complicating factor on this market view of the 4 year plan is that the same market is adamant that Ireland Inc (the sovereign) absolutely must make these cuts if they are to be able to raise Sovereign debt in the future. So - make the cuts or we won't give you money, but if you make the cuts then we won't give your banks money.

OK so far?

Right - the banks who have been struggling to keep enough capital on their books have had nowhere in the traditional sense to go to for capital (leaking deposits, no corporate bond and no equity capital available). So they have turned to the ECB for money. The ECB maintains an emergency fund of about 400bn for banks who have short term capital needs. This was set up early on in the bank collapse and our banks have been using it extensively for the past 2 years. We had started to wean ourselves off it earlier in the year but in recent months the markets have closed their doors so the banks have now upped their use of ECB money to over c90bn - we are therefore using up close to one quarter of the entire ECB fund (we also have taken about 30bn from our own central bank emergency fund - bringing the total to 120bn from central bank short term funds).

The ECB money is provided on short term roll over and at recent roll overs we have increased our demand. The ECB doesn't like this. It is concerned about it taking on so much Irish bank exposure and also concerned about the fact that its short term facility is being used as a long term capital supply in this way. So - the ECB had (in theory) 2 options. They could have set up a long term facility for the Irish banks, put (say 150bn) out to the Irish banks on a long term facility (up to 5 years), ring fence this from the other 400bn fund and move on. The problem is this is not viewed as an appropriate response from the ECB - they are not a funding bank for private banking institutions. It also sets dangerous precedents. One can argue whether those reasons are sufficient but the point is the ECB firmly said no to this option.

So - option 2. This is what the ECB wants to happen and has won the argument so it is what will now happen. The EFSF and EFSM structures have between them c1 trillion in capital which is designed to be used where a country gets into a fiscal problem. It isn't a bailout - this isn't a political point its a fact - any monies are structured as loans. Anyway - the ECB view is that Ireland should be forced to provide for the long term capital needs of the bank. Ireland doesn't have the c100bn that would be necessary. The ECB view is Ireland therefore has a fiscal problem and should be provided with EFSF money to solve its fiscal problem. The ECB doesn't really care what terms and conditions are attached to this money by the IMF/EU - they just want to get the Irish banks off their balance sheet quickly.

Ireland argues that we don't actually have a fiscal problem (that we can't deal with). We are saying that we don't need EFSF monies and shouldn't be forced to take them just because of an aversion in the ECB to resolving a bank issue. We lost that argument !

So what is now happening. Well we won the argument about the fact that the issue is primarily the banks and that we have already stress tested them so in theory they should be ok if they could just access "ordinary" capital market structures. The IMF and ECB delegation has come over to review the PCAR stress tests and the bank balance sheets to verify that is the case. They will also review the 4 year plan to verify that sufficient austerity measures are being put in place to get back to a 3% deficit by 2014.

Now we get into politics - accessing the EFSF and EFSM mechanisms open up Ireland to possibly messing restrictions and impositions (the famous "loss of sovereignty" stuff. We are arguing that we shouldn't be subject to them because we aren't resolving a fiscal crisis we are resolving a banking crisis and are just being forced to use the fiscal crisis tools because of the ECB. Some of our EU "partners" are arguing that if we take the money we take the pain.

What we are currently negotiating is like an overdraft facility. We will get an announcement that we can draw up to €XXXbn from the EFSF funds to meet the capital requirements of the banks. This facility will be structured over (probably) a reasonable time period so we can announce that the medium term capital requirements of the banks are now met (or meetable on roll over of future debt). Its like the old adage - the bank won't give you money unless you can show them you don't need it. In this case the Market won't give our banks money unless they can see that they can definitively access the repayment of that money using the EFSF facility. Like an overdraft we will only pay for what we need. The structure is likely to be such that the State doesn't pay for it - the banks do.

In order to secure that position we have to bargain very hard and have yet to win the final argument - the lack of restrictions (loss of sovereignty) issue. The current liklihood is that we will win that argument and the current 4 year plan will be accepted as is without amendment - there will be an assumption that the €6bn budget will be passed and implemented though and it is possible that the IMF will insist on reviewing the terms if that doesn't happen.

Final bit (i never said it was going to be short !!) - what does this mean to people with deposits. Deposits in the Irish banks are 100% secure. There is no question of any risk to them. The ELG protects all deposits until at least June 2011. The purpose of this IMF/EU/EFSF/EFSM intervention is to ensure that longer term stability can be injected into the Irish banking system - in laymans terms, deposits are secure now up to next June and when this process completes over the coming days they will be secured into the long term.
 


HarshBuzz

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don't forget the 33bn from our own Central Bank for the worthless crap that even the ECB won't accept for repo
 

roc_

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You have laid out well what is happening on the surface. But it is the undercurrents, and all that lies under the surface, that is driving what is happening on the surface... A little bit like how the unconscious directs the conscious. I note that often, malign unconscious forces are handled through making efforts to bring them to the suface, and try and shine a good clear light on them. The undercurrents at work on the phenomena you have set out so well in your post above, are social and political factors... we need to bring these to the surface and shine a good clear light on them, too (the establishment is doing everything in their power to prevent this). Until we do that, the surface phenomena you enunciate will continue on their inevitable course, no matter what you try to do. There's a lot of stuff on the surface, indeed. But like an iceberg, it is only around a tenth of what's really going on.
 

ALAN42

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The ECB and the markets have copped on that Irish banks are completly bust , broken and insolvent . The Irish banks can no longer get funding . The ECB has stepped in to contain the problem before it spreads to Portugal , Italy and Spain .

FF are playing politics as they don't want the shame of having to ask for a bailout . If the ECB had any balls and even half a brain it would let Ireland sink as it is small and containable within the EU .
 

wildmind

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A good description on the surface.

More pertinent questions:

1. What exactly went on over the years in the metaphorical 'Galway races tent'

2. We have had a lot of good tribunals over the years. Why has there not been a full public tribunal on the policy decisions that have effectively sunk this version of the Republic, especially the bank guarantee?
 

Catch 22

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This is first and foremost all about the banks.

I posted this on another thread. From Robert Peston of the BBC

BBC - Peston's Picks: Ireland: How much punishment for British and international banks?

Certainly it is very difficult to see - under the current law - how the senior debt holders could be punished in the absence of some dramatic events. First the two weakest of the big banks, Anglo Irish Bank and Allied Irish Banks, would probably have to be declared insolvent. And second, almost all the many billions of euros that Irish taxpayers have already pumped into these banks would have to be written off, which would be extremely painful.

What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators. These payments would generate enormous losses for the financial institutions, including banks, which provided the CDS cover.

Ouch.

Sources close to the Irish government tell me that the US authorities are deeply concerned at the idea that CDS payments would be triggered in this way. The implication (yet again) is that insurance contracts designed to reduce risk are in fact a source of systemic instability. Which, of course, has been the hideous norm in the Frankenstein markets that have been engineered over the past decade or so.
 

ALAN42

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A good description on the surface.

More pertinent questions:

1. What exactly went on over the years in the metaphorical 'Galway races tent'

2. We have had a lot of good tribunals over the years. Why has there not been a full public tribunal on the policy decisions that have effectively sunk this version of the Republic, especially the bank guarantee?
1 . Irish Sweepstake scandal remains a lesson to us all - Analysis, Opinion - Independent.ie

Nothing has changed except that it took place in a tent instead of Ballsbridge .

2 . You cannot investigate yourself .
 

Dreaded_Estate

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We also have a very serious sovereign bond crisis.

At the current we simply cannot borrow, we may have cash until June but is very unlikely the rates will come down before we re enter the market.

I think you also mis diagnose the banking problem. The state guaranteed banks cannot borrow because the state's cresitworthiness is seriously impaired.
 

Dreaded_Estate

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We also have a very serious sovereign bond crisis.

At the current we simply cannot borrow, we may have cash until June but is very unlikely the rates will come down before we re enter the market.

I think you also mis diagnose the banking problem. The state guaranteed banks cannot borrow because the state's cresitworthiness is seriously impaired.
 

cyberianpan

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We also have a very serious sovereign bond crisis.

At the current we simply cannot borrow, we may have cash until June but is very unlikely the rates will come down before we re enter the market.
That is not why we are in crisis now, though in months to come could be an issue

I think you also mis diagnose the banking problem. The state guaranteed banks cannot borrow because the state's creditworthiness is seriously impaired.
This is why we are in crisis right now... there was a run

cYp
 

HarshBuzz

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brughahaha

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Excellent attempt but I think you miss some points in the political sphere.
Merkel is trying to reposition herself due to loss popularity with a German Public (with short memories!!) that dont want to bail out anybody
And the EU is using Ireland (hence the push coming from Brussels for us to accept help ) as a trial run for the same problems in Spain which is a far larger economy and could seriously damage the Euro
 

A view from England

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We also have a very serious sovereign bond crisis.

At the current we simply cannot borrow, we may have cash until June but is very unlikely the rates will come down before we re enter the market.

I think you also mis diagnose the banking problem. The state guaranteed banks cannot borrow because the state's cresitworthiness is seriously impaired.
BBC News - Global banks set to avoid Irish losses
 

Anglo Celt

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Hard reading

Dublin has so far ruled out doing so, saying it would lose its "hard-won sovereignty" as the move would effectively hand over its economic decision making to Brussels.

But Mr Buik says ultimately Dublin will have no choice.
He says: "The Irish government is chancing its arm, thinking that things will improve and they won't need the EU bail-out.

"I say to them, Rumpelstiltskin, in your dreams."
 

Vote_No_on_Everything

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Everyone wants to loan Ireland money, the money goes into the Irish banks, quickly does a u-turn and ends up in the pockets of the criminal elite & back in the pockets of those who funded the loan. The Irish tax payer then repays back the same loan and the interest by working harder & for longer hours paying more tax and availing of reduced services (access to health education etc. )
The criminal elite & the Irish media invent all types of complex terms to dry to confuse people and distract from the simplicity of what is basic fraud.
 

Astral Peaks

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It seems that whatever plan is put in place, this is the main man who will be dealing with it"
 

Astral Peaks

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Some of his blog posts on the IMF blog are here.

Nice to put a face on our new de-facto Taoiseach?
 

adrem

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Excellent attempt but I think you miss some points in the political sphere.
Merkel is trying to reposition herself due to loss popularity with a German Public (with short memories!!) that dont want to bail out anybody
And the EU is using Ireland (hence the push coming from Brussels for us to accept help ) as a trial run for the same problems in Spain which is a far larger economy and could seriously damage the Euro

yeah - I skimmed the Merkel issue - to an extent I reckoned the OP was getting too long anyway so just put in that she did it rather than the detail on the domestic issues on why she did it

Disagree slightly with your second point - Spain and Portugal are in a fiscal mess with reasonably immediate requirement for additional funding. Their banks aren't the problem. Agree though - the big plan is to fix Ireland's problems get the bond markets to calm down which would allow Portugal and Spain to fund themselves at a more "reasonable" interest rate
 

adrem

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The ECB and the markets have copped on that Irish banks are completly bust , broken and insolvent . The Irish banks can no longer get funding . The ECB has stepped in to contain the problem before it spreads to Portugal , Italy and Spain .

FF are playing politics as they don't want the shame of having to ask for a bailout . If the ECB had any balls and even half a brain it would let Ireland sink as it is small and containable within the EU .
Thats the kind of confused post I mentioned in the OP
 

adrem

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don't forget the 33bn from our own Central Bank for the worthless crap that even the ECB won't accept for repo
Ah HB, I'm disappointed !!! It's in there - specifically mentioned in para that talks about the amount our banks have been taking off the ECB
 


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