Central Bank's IOUs insolvent Anglo could KO taxpayer

Central Bank’s IOUs for insolvent Anglo could mean KO for the Irish taxpayer - Eamon Quinn -> tribune.ie/business/news/art … uld-mean-/

Is there anything new here except details, generally nothing that Morgan Kelly and other have not already flagged.

So were does it all end… how long before we need to bailout the Central Bank?

Storming it would be cheaper methinks :unamused:

No, not much new here, but well put.

Still no acknowledgement that the Irish state is responsible for the bad debts of the Irish Central Bank…

I would have to agree that the majority of the blame can be clarified as within Ireland, although their is most certainly outside complacency.
I would be interested to know your definition of “Irish state” in this instance.

You misunderstand. If the Irish Central Bank goes bust, the Irish exchequer picks up the bill.

If (and when) the Irish central bank goes bust, then the state defaults also and we get the new Irish Punt probably tied at a fixed exchange rate to the SDR.

This is currently Ireland’s single biggest problem, all of the people who are capable of leading Ireland out of this mess and running the country correctly are unfortunately driving taxis.

https://jaybose.com/wp-content/uploads/2007/10/dilbert2007114666026.gif

I assume the scale of the run is what the government was hiding in the courts last week.

Ahhh… thanks for that.
I’m always misunderstandin’ :unamused:

…and if the Irish people, if they refuse to pick up the bill? :angry:

That would be my reading of it.
Assuming there arn’t queues outside AIB from panicked depositors, then the strategy worked … so far. :wink:

Then they become a people without a means of exchange. The results of that aren’t pretty and are covered elsewhere.

Agreed, the run was clearly what they want to keep from the media. If the court case was under the public eye, it would have made the run far worse. AIB have already lost a sizeable amount of deposits since July 1st 2010, particularly in the last 4 months.

It will be difficult to hide the run when the banks publish their December 31st 2010 year end/quarter end results. The loans to deposits ratio’s will soar and it will become very clear that they are losing deposits hand over fist. This is when the run will become clear to Joe Public. AIB say they will still publish a full set of year end results despite the fact they are now in state hands.

Where is the Central Bank of Ireland liquidity coming from? The ECB. It is a sham to allow the ECB to accept worthless junk as collateral by using the Central Bank of Ireland as a proxy. There is no way the ECB are doing to see their 160 billion back from the Irish banks. Something I think the ECB are starting to realise.

I don’t believe so (that the ICB liquidity is coming from the ECB). It is essentially more government promissory notes…

What I find interesting is that the sums involved are about the same order of magnitude as the circular deposits in Anglo by the other banks that we talked about a while ago. Could AIB have been the main source of the circular deposits to Anglo when Anglo’s customer deposits walked out the door in 2007/2008?

I can just imagine how the scenario unfurled in Irelands incestuous little world of nods and winks. Anglo is hemorrhaging deposit money and to cover up all the sins that would see the light of day if Anglo goes under so someone “suggests” a green jersey solution that involves the other banks “parking” funds with Anglo to tide them over. The fact that this is little more than check kiting is neither here nor there. The CB (and the other agents in the drama) obliquely approves and makes an informal promise to cover the other banks in the off chance that things might do not return to normal soon. The CB and government agencies also make their own contribution to the Anglo kitty.

Fast forward a few years and not only have things not returned to normal but have got much much worse. The state is now locked out of the bond markets due to bank liabilities. There is a 40B hole in Anglo. The circular deposits stroke leaves the other participants with a huge hole in their public accounts to the tune of tens of billions of euros and AIB’s multitudinous sins have also caught up with them and they have followed Anglo to the knackers yard.

This might account for the governments distinct lack of enthusiasm for going after the bankers who created this mess and why they keep banging on about “international reputation”. If the government and the CB had given permission (in its typically obtuse way) for the banks to use circular deposits or an equivalent mechanism (the 6B hole in BoI’s derivative book?) then that would be a very big deal on the international financial scandal scale.

The hole these people have dug may be about to get a lot lot deeper.

Interesting comment yoganmahew.

The Central Bank of Ireland have now provided 44 billion to the Irish banks to cover the deposit withdrawals. Correct me if I am wrong, but surely this has to be genuine cash? Surely promissory notes would not ensure ongoing solvency to meet day to day requirements at the 6 Irish banks.

The Tribune has speculated that the Central Bank of Ireland liquidity is really proxy ECB liquidity. Something that sounds highly plausible to me.

Well, the constitution of the ESCB is clear that each nation state is responsible for the solvency of its National Central Bank. So if the ICB does not get cash back for the assets it has taken in collateral, it is the Irish state that has to pony up the short-fall. In the normal course of events (say a bank going bust while it has assets on repo to a NCB), this would be no biggie as the assets would just be sold to balance the books. In the case of the ‘assets’ the ICB has, it is clear they are below ECB investment grade (a fate that will befall more and more of Irish bank assets).

The money issuing powers of each NCB is a little unclear. They and the ECB can both magic up cash in return for collateral. In effect, there is a federal system of banks with the ECB operating as a federal governor. Each individual bank appears to have the money power on a reasonably autonomous basis.

If I get a chance, I’ll have a look at what is permitted - my vague memory is that each NCB is free to set its own collateral rules…

edit: the reason I don’t think it is proxy ECB per se is that there is no transfer of ECB money to the ICB, as far as I can see. What it is is ESCB liquidity - liquidity provided under the overall framework of the euro system of central banks.

Thanks yoganmahew. You make some interesting points.

However, I still think it is proxy ECB money with the ICB taking the ‘risk and reward’.

The reason I think it is proxy ECB is :

  1. Where on earth would the ICB be getting 44 billion from other than from the ECB?
  2. Promissory notes don’t add up. AIB, for example, stopped getting liquidity from the ECB a few months ago. It is clear that AIB have needed massive liquidity to meet deposit withdrawals. You can’t stack ATM’s with promissory notes.
  3. The Sunday Tribune, who have got a lot right with regard to ECB activities, believe it is proxy ECB money.

Of these, 3) is the strongest…

  1. Where do the ECB get the money? It is an electronic transfer credited to the bank (so there is a debit on the ICB balance sheet). The assets pledged for repo sit on the credit side. That’s all there is to it, as I understand.
  2. I said ‘effectively’, by which I mean that any shortfall at the ICB is the responsibility of the state - the state has ‘guaranteed’ the solvency of the ICB. If you believe that the assets pledged are only a short way about distressed (as I do) in aggregate, then the state is effectively guaranteeing any different. This is a promissory note in all but name.
  3. The reason I am unsure about this is that it implies that the ECB operates through the NCBs. Which it does to some degree, but not to others. The ECB and the NCBs together make up the ESCB. The ECB’s sole mandate is price stability while the NCBs carry out most of the activities. This document is instructive: ecb.int/pub/pdf/other/ecbhis … 2006en.pdf

p.50

p.88

The convention is to speak of the ECB as the Central Bank, but really it is only one of the CBs in the ESCB. It put in place exceptional liquidity measures which it is now trying (and failing) to withdraw. The traditional route of emergency lending is the NCB.

PS CornerTurned gets it:
blog.cornerturned.com/2010/12/10 … tral-bank/
(10 Dec 2010)

It is clear that not everyone has gotten it up 'til then (if the name in the comments is to be believed…):

PS I too believe that the NAMA bonds are being repo’d with the ICB, not with the ECB and I believe that they are likely not eligible for ECB repo operations for the same reason the promissory notes are not (they are not market traded instruments).