Query: Can the government print money?

The Central Bank
#1

I used to think the government couldn’t print money. And then they announce that they are going to swap newly minted treasuries for bank assets. And recapitalise the banks with same newly minted treasuries. And that the ECB had approved the arrangement.

Now, there is a limit to how much they can do of this, but they are already talking about 100+% of GDP.

If they can issue them as zero coupon/very low coupon just for their repo value at the ECB, and then have the banks use them to pay the various levies/capital injections over time, it could be a little to no cost to the government. This would, in effect, be quantative easing as there is no recourse to the markets - no money is being taken out of circulation. I know that the toxic loans will be locked away in NAMA, but they have a lower repo value (the haircut is higher) if they can even be repo’d - I doubt any counterparty would take them even at a substantial haircut.

#2

I don’t see it that way. The bonds will have to be repaid. The coupon is open to manipulation, though I wouldn’t be surprised if the ecb gets a say.

#3

Mmmm, but if the banks repay their recapitalisation money (treasuries) with those same treasuries, their guarantee money with, eh, treasuries and their new recapitalisation money with, um, treasuries, then the state has basically borrowed its own money from the banks?

#4

I find treasuries, drawing rights, bond coupons and the kind of stuff central banks are doing at the moment very confusing. Is there a decent resource that lays it all out?

#5

Especially when you consider who has been buying the recent NTMA offerings!!! 8)

#6

If you assume those toxic loans become redeemable at their face value in ten or 15 years time.
Even if no real money exchanges occur (bonds) between ECB and nama the risk remains to the State as it has guaranteed the loans .All it would be doing is moving them off the balance sheet in that neat little way that CDO’s and MBS’s were accounted (sorry not accounted for) by moving them off balance sheet.

Unfortunately that game is up,so whoever purchases government bonds from now on for current spending will likely factor that into whatever interest rate will be demanded and what rates will be paid for insurance.

sidewinder is right,I think,the jig is up…nowhere to hide now.

The statement that lenihan made that these toxic loans will not cost the state anything by issuing its own bond is nonsensical .We cant print our own money,all we can do is borrow.

One other point.As the economy contracts and deflation sets in with a vegeance the real cost to the state of those toxic loans will increase as will the real interest rate paid on bonds.

#7

Who purchased 76% of the last bond offering?

#8

I dont know .WhO did?

Last time I checked 80% of Irish bonds are purchased by foreign investors .
let me take a wild guess …the ECB?

#9

Here’s your starter for ten…

tribune.ie/article/2009/mar/ … eland-inc/

EDIT: Myself and YM discussed this the other day, the beauty of this system is you can always start a new bank… 8)

#10

So FF borrows billions on the bond market to recapitalise AIB which then uses the money to purchase government bonds and then the government uses this on current spending.

This is akin to acquiring a new credit card to pay off the two old ones you just maxed out on.

This is I believe called negative marginal productivity of debt.Each new unit of debt decreases GDP when its negative.
It means certain bankruptcy and thats not even dealing with the toxic assets.

#11

If they can stay one step ahead of you Windy, maybe not! :wink:

#12

I still don’t see the printing money element. This is how I see it.

Typical debt issue: Government issues bonds to get money – bondholders get promise that the government will pay interest and principle.

FF/CIF debt issue: Government issues bonds to get developer debt – bondholders get promise that the government will pay interest and principle.

As the debt will be repaid by the government, I don’t see it as printing money

If the government used the typical approach, there’s a real risk of default as investors probably wouldn’t have the appetite to buy such a large amount of Irish debt. The coupon (interest rate) would be very high.

By swapping bonds for toxic assets, the government should find it easier to get away with a lower coupon. Though this is not without risks for the banks. If the banks accept a 15yr bond with a fixed 3% coupon, they’re exposed to ECB rate increases over the term. For example, if the ECB rate goes to 4%, you might find Rabo (etc) can offer depositors 5% whereas AIB will have a good portion of its assets yielding only 3%. i.e. banks with such bonds would be exposed to future funding problems.

In terms of recapitalization, banks aren’t allowed lend themselves capital. So they either go to the market with a new share issue or the Government invests. I guess they may be able to do part of this by bonds, though I suspect there are rules as to what banks have to hold capital in.

#13

Yeah thats how I see it too.If these bonds are to replace toxic assets then they are only in effect replacing ‘bad money’ with ‘good money’.The toxic assets are parked.
The actual supply of money has nt increased,it wont allow banks increase their lending capacity as their reserves remain the same.

yogmanhew ,you seem to be knowledgeable in this area ,whats your assessment?

#14

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.

#15

I see it like YM and it’s as Baldrick would say, a cunning plan.

I think that you will still have zombie banks and relatively little private sector lending compared to what has gone before but it might be enough to keep things ticking over.

So there is definitely money being created but it isn’t seeping into the real economy if you will and thus deflation continues relatively alongside and accompanied by real wage deflation.

It’s the natural logic of the Euro, the only wildcard is ECB support and as YM notes, it appears to be forthcoming.

NAMA remains as toxic a pile of shit as you could imagine but of course, you could always sell the new NAMA debt products off to the Irish Banks again, might even be able to recapitalise them with it!!! :laughing:

#16

My understanding of this is similar to YM and TUG and could equally be wrong. Here’s a couple of additional comments.

The assumption and association with QE is that it is a means of avoiding deflation by increasing the money supply. In the case of the Irish banks, it might be seen differently. The banks have huge short term borrowings in excess of their customer deposits, this is one of the ways they financed the bubble. We hear how the banks are deleveraging, reducing this exposure to short term funding.

When the banks get the government bonds and lodge them at the ECB, they get cash in return. If they lend this cash out again, then you are increasing the amount of credit in the economy and as YM said above you have QE. If they use this cash to pay off loans and short term debt, then you have a whole lot of deleveraging going on at once, and you might be looking at a deflationary effect, a la TUG.

Anyhoo, this all works because the ECB is acting as a very friendly buyer for Irish Government debt. You might ask where the ECB gets the cash from that it gives to the Irish Banks. That’s where the printing press is to be found.

#17

Great post, thanks for clarifying some of the murkiness of the NAMA bailout! I’d love to see a graphic-based explanation of the scam…

Can a bank lend a multiple of the cash that it gets from the ECB?

#18

Yes. The way it works is that they get the money from the ECB, lend it out so it forms new assets (loans) which they can then repo at the ECB at reducing percentages (the bank have to maintain a capital ratio, so they can’t loan out all the repo that they get and there is also the ECB haircut to consider - if you have a government bond, you repo it to the ECB at face value and the ECB gives you x% of that value back (100-x = the haircut)).

I’ll apologise here for having the figures for government bonds wrong, y’all may apply it to where-ever else I said it. I don’t know what made me think it was 12.5%!:
ecb.int/press/pr/date/2008/h … _2.en.html

[code]Levels of valuation haircuts applied to eligible marketable assets in relation to fixed coupon
and zero coupon instruments (percentages)
Liquidity categories
Category I Category II Category III Category IV Category V
Residual
maturity
(years) Fixed Zero Fixed Zero Fixed Zero Fixed Zero Fixed or zero
0-1 0.5 0.5 1 1 1.5 1.5 6.5 6.5 12*
1-3 1.5 1.5 2.5 2.5 3 3 8 8
3-5 2.5 3 3.5 4 4.5 5 9.5 10
5-7 3 3.5 4.5 5 5.5 6 10.5 11
7-10 4 4.5 5.5 6.5 6.5 8 11.5 13

10 5.5 8.5 7.5 12 9 15 14 20[/code]
Treasuries are Category I, ABS (asset backed securities) are Category V, so instead of getting 88% back for a securitized package of C&D loans, the banks get back 96.5% for a 5 year zero coupon bond, a 10% increase.

#19

I still ain’t digging it, YM. I’ve worked through your example and I’m not seeing a big lump of printed money. Feel free to correct me.

OK. So this creates a write-off of 45bn of the banks assets. (the liabilities side needs to adjust)

To cover off this, the banks use up loss reserves and capital. (using your numbers, though I think they’re a little low) they now require an additional 10bn of capital. This recapitalization will be done by the government purchasing shares. Let’s assume the banks accept bonds instead of cash for the new shares.

True, 45bn as assets, 10bn as capital

The only bit they can payback is the 7bn of preference shares. The government has to pay the banks money for the 55bn when the bonds mature.

I’ve read this a couple of times, so forgive me if I’m taking you out of context. If the government needs to borrow money, exchanging new bonds for existing bonds gives them nothing.

For example, say you hold a “CaveCanem owes you 1 pint token”. Now I’m gumming for another pint and issue a new “CaveCanem owes you 1 pint token”. If I exchange the new one for the old, I won’t have raised any funds for my pint.

Such an exchange could increase/decrease the debt servicing cost, but that’s about all.

Yes, this arrangement is open to manipulating the bonds yields. But I’d argue that no money has been created yet.

What you outline after this point is between the banks and the ECB. And so I deduce the Irish government has not printed money. That’s my QED, not QE.

It’s true that the haircuts are lower on government bonds, which means that banks need to pledge fewer assets to cover reserve requirement shortfalls. I see this facility filling the role the interbank lending market used to do. As the repo facilities rollover quickly, I think there’s a case to be made that any increase in money supply is temporary. I’d expect banks to continue to deleverage ~ though, perhaps, Ireland is different.

I’m shaky on some of this stuff, so let the debate begin! Show me the money :wink:

#20

That’s an excellent point. The government has to have ‘real’ cash to pay its bills.

So they would need a bank or something to be able to repo those special bonds? Nah, can’t see the government having a bank handy! So even though the bonds were originally issued to private entities, they end up being repo’d from public ones?

But you are right, it is unlikely that the banks can use these special bonds to buy government debt with.

Alternatively, I suppose, the whole thing could be a holding strategy - “look, our banks aren’t insolvent anymore” until such time as the banks can swap back the bonds for their property loans (suitably ‘cleaned’) and buy-back their equity and so undilute their shareholders. So the special bonds are more a holdable asset on the balance sheet to plug the insolvency hole?

In terms of cost, I’m mostly talking about zero-coupon type bonds, so there isn’t, strictly speaking, an ongoing cost, just a cost at the end.

In case anyone is wondering why I’m banging on about this, there are other losses for the banks coming (commercial in particular) that are going to require similar strategies. The EU know this, the ECB know this, hopefully by now the government know this, so there has to be some sort of gaming going on for Ireland to afford this. Debt:GDP will be near 100% by the end of the year, so the bond market is an increasingly unlikely source for bank recapitalisation. So what game is being used?

The dilithium crystals will be nearly exhaused and there’s a klingon battle-cruiser approaching, luckily Scottie knows how to break the laws of physics…