The IMF/EU bailout :
Two months ago as speculation grew about an IMF bailout, there were calculations on here which suggested that any eventual bailout would need be in the €200bn range. And there was no little surprise therefore when on 28th November, 2010 the bailout was announced with a quantum of €85bn. Just seven weeks later it is becoming obvious that not only is a €200bn bailout needed but the mechanics of that enlarged bailout are taking shape with the Central Bank of Ireland apparently providing funding to support promissory notes used to fund the bailout banks and both the CBI and ECB continuing to provide exceptional funding to replace fleeing deposits. This entry examines the true quantum and funding of the bailout.
At the end of November, 2010 the question on everyone’s lips was how much of a bailout did the State need and Minister for Finance Brian Lenihan was telling us to work it out for ourselves. And on here the stab was €207bn composed of the following:
(1) NAMA development funding of €5bn
(2) Deficit funding for 2011-2014 of €43.25bn
(3) Funding of the promissory notes used to bailout the banks – €31bn
(4) Repayment of national debt (maturing of existing bonds and treasury bills) in 2011-2014 – €38bn
(5) Replacement of ECB Emergency Liquidity Assistance – €90bn +
So imagine the surprise when on 28th November, 2010 the announced bailout was only €85bn with €50bn earmarked for deficit funding and up to €35bn set aside for the banks. The deficit funding of up to €50bn was in the same ballpark as the deficit funding identified by the government for 2011-2014. Add in an extra year’s deficit funding for 2015 and you’re pretty much up to €50bn so that component of the bailout made sense.
But what about the other components of the estimate on here? They haven’t gone away you know. It seems likely that one of the main reasons for the ballooning “Other Assets” (€51bn at the end of December 2010) being recorded by the Central Bank of Ireland (CBI) might be that the CBI is exchanging promissory notes from Anglo, Irish Nationwide Building Society and the Educational Building Society with brand spanking new funding. These promissory notes of course are the product of essentially Minister Lenihan writing IOUs up to the amount approved by the EU for bailing out the banks. And the CBI is also apparently helping to shore up fleeing deposits.
But what about the other three components? How exactly will Ireland repay maturing bonds and treasury bills this year and beyond? We are still close to historic highs on the bond market so presumably that avenue is still practically closed to us. So either we reallocate some of that €50bn-earmarked deficit funding or we return to draw from the seeming bottomless well that is the CBI’s “Other Assets”. Of course the government might issue more directions to the NTMA and NPRF to invest in the rollover of maturing debt and pressure might also be brought to bear on the banks, particularly the State-guaranteed banks to substitute existing investments with Irish state debt. Ditto with pension fund operations in the State. It would be helpful to know though what the government’s plans are in this area.
The ECB’s “non-standard” liquidity measures, y’know the ones it has been “non-standardly” using since September 2008 when Emergency Liquidity Assistance (ELA) first exceeded €50bn. And ELA funding has not once been below that level since and according to news sources the ELA balance to Irish banks at the end of December 2010 stood at €132bn though that would represent the first month-on-month fall since July 2010. The ECB or CBI apparently didn’t release figures for ELA funding of the 20-odd domestic Irish banks and of course they never release funding figures for just the six State-guaranteed banks. If deposit flight had halted however I would have expected high-profile announcements by the CBI and ECB – after all our banks are crying out for confidence at present and you might expect officials to dispense with formal reporting schedules if we had some good news. So how much longer is the ECB going to make available 24.1% of its total support to Eurosystem banks to Irish banks? Deleveraging options for Irish banks seem confused (NAMA 2 but who would fund it? Selling loan books but providing insurance against losses? Attracting foreign capital into a toxic Pandora’s box of a banking system?). At what point can we economically convert the perception of ELA funding from an overdraft to what it has practically become – a term loan, AKA a bailout?
NAMA’s €5bn development funding of a maximum of €5bn allowed by the NAMA Act is small beer compared to the totals under the other headings but as NAMA is a key theme on here the question needs to be asked – where is NAMA getting its much vaunted development funding? According to NAMA’s website : “Programme details [of the €2.5bn medium term note funding] will be published in Q4 2010” which plainly hasn’t happened and as far as I can tell NAMA’s €2.5bn short term euro paper programme has been effectively scrapped though the Q3, 2010 NAMA Report and Accounts (which are nearly three weeks overdue) might shed further light on the subject. NAMA may end up using loan repayments to help fund future developments but that is not how NAMA was intended to operate. So for the time being the source of that €5bn funding is unclear.
And what is the significance of the bailout being €200bn+ rather than €85bn? Firstly there is the risk that the additional funding might not continue – step forward Mr Trichet and the ECB, and it is unclear how the CBI can continue to quantitatively ease itself towards €100bn+ of “Other Assets”. Secondly there is the risk that even if funds are forthcoming they may be tied to the Irish sovereign and to assets which might eventually fall in value – step forward further bank losses. And thirdly there is potential debt servicing which might more than double the annual €10bn-odd presently being contemplated.
So at this point the bailout is looking more like €300bn composed of the following sources – IMF (€22.5bn), EFSF (€22.5bn), EFSM/bilaterals (€22.5bn), NTMA/NPRF (€17.5bn), ECB (€100bn), CBI (€95bn). The €90bn from the CBI is composed of €50bn of existing “Other Assers” plus €40bn of redemption of debt plus €5bn of NAMA funding. The €100bn of ECB funding is the estimated ELA being provided to the domestic Irish banking system (as opposed to the €132bn which is provided to all Irish-located banks including those in the IFSC which don’t service the Irish economy). Plainly much of the bailout is for shoring up fleeing deposits and is apparently underpinned by assets held by banks.