Knowledgeable my arse! Please don’t mistake talking a lot about something for knowing about it, otherwise I’ll end up in the Green Party… I’m guessing like everyone else!
My point is that the government have whacked a load of money in the banks that needs to be repaid at some stage. What better way to repay the government than with the government’s own money.
To make them solvent, the banks need assets that are liquid (repo-able), not likely to be downgraded hugely (ahem!), and will make their balance sheets look good. When the banks issue their annual reports, all they say is the class of assets they have, not the makeup. So they don’t have to say that 80% of the treasuries they hold are zero-coupon inflation-linked Irish government bonds (as a makey-uppy example). The situation then is:
Banks swap 90 bn of C&D loans for 45 bn special government bonds.
Government recapitalises the banks with 10 bn more special bonds in return for equity stakes.
The banks now have 55 bn special bonds that the government owes them for.
They also have 7 bn preference shares that they owe to the government.
They also have an equity partner they don’t want.
They also have an insurance liability for the guarantee.
So, the banks start paying back the government back with the special bonds as they make operating profits. So, no dividends, but the banks work their way back to solvency bit-by-bit.
Add to this the continuing need for normal funding for the government (approx 50 bn (?) over the next few years). The banks buy the new bonds at bottom end yield (top of the current market price) and pay the government with their special government bonds replacing their non-paying debt with paying debt.
The banks now have a host of government bonds paying debt, cleaner balance sheets, the government has the NAMA loans, but this has all been done without the government or the banks having to pay full price for the bonds, i.e. they haven’t had to go to the market and get slaughtered as the Irish debt:GDP ratio climbs above Italy’s.
Is this how it will work? I have no idea, but it is an attractive proposition. Will it work? Who knows. To me, it invites speculation on existing Irish government debt, but given that whatever plan is in place appears to have ECB backing it is going to be hard to bet against it. Is it QE? Yes, I think so, but not massive and with a limited timescale - the C&D loans that have a high ECB repo haircut (therefore a small liquidity and money value for further lending) are replaced by government bonds that have a small repo haircut (therefore a higher liquidity and money value for further lending).
So, because the supply of credit in the economy is likely to be increase, I reckon this is QE.