Ireland

The European Central Bank has expressed concern that Ireland’s rushed bank rescue package may interfere with the Frankfurt institution’s operations to provide funds in support of the eurozone financial system. The euro’s monetary guardian has “serious concerns” that flaws in the Irish bail-out legislation would usurp the ECB’s rights over the collateral proffered as security for liquidity, according to a position paper posted on the ECB’s website.

The warning reflects ECB fears of the risks involved in providing liquidity to Ireland’s banks. The most recent data show Irish banks having €136bn ($179bn) in loans outstanding from the ECB – a quarter of the total in the eurozone – and €45bn in emergency liquidity assistance from the Irish central bank. To obtain liquidity, eurozone banks have to put up assets as collateral. Read more

It jumped last but – not to be outdone – Moody’s has slashed five notches off its Ireland rating, taking it to Baa1 (which is equivalent to Fitch’s BBB+ and about three notches above junk). They’ve also slapped a negative outlook on it, meaning a further downgrade is likely in the next two years if there is no improvement. A multi-notch downgrade was likely – the ratings agency said so itself – though it has come relatively late in the game, after similar cuts by S&P and Fitch.

S&P now offers Ireland the highest rating at A, two notches above Fitch and Moody’s. Under the original ECB collateral requirements of A-, this would mean Ireland’s bonds could still be used – just – as collateral at the central bank. As it is, the “temporary” lowering of collateral requirements to BBB- is still in force, so Ireland need not worry. (As with Greece, the ECB would probably make an exception for Ireland even if its ratings were cut below this level.) Read more

S&P jumped first, but Fitch has jumped further: the ratings agency has just knocked three notches off its credit rating for Ireland, placing the outlook at stable. Fitch’s rating is down to BBB+ from A-. S&P cut its rating two notches from AA- to A on November 24. Fitch is now two notches below S&P.

Moody’s, which has threatened a multi-notch downgrade, is again the last mover. Its rating remains at AA. So – for now – the chance of an Irish default is roughly equal to that of Russia or Japan, depending which rating agency you follow. This is likely to be temporary: Moody’s will probably join Fitch in a three- or even four- notch downgrade within a couple of weeks.

This might be described as an anti-riot Budget: the pain is fairly equally spread. Wealthy pensioners are penalised. Benefits are reduced by €5-€10 per person per week, across several types including maternity pay, child benefit, jobseekers’ allowance and unemployment. Buying and selling homes is encouraged with a big reduction in stamp duty across all home values.

  • €6bn spending cuts in 2011; roughly €4bn in spending cuts and €2bn from tax adjustments;
  • Of €2.2bn costed gross savings, €1.6bn will come from the Health & Children, and Social Protection budgets;
  • HOUSING: Stamp duty will be 1% on properties up to €1m; 2% on the balance (down from 7% and 9%);
  • PUBLIC SALARIES: Ministers to take €10k pay cut; PM’s salary down €14k; public sector pay capped at €250k;
  • WEALTHY PENSIONERS: Pension tax relief limit falls from €150k to €115k; maximum allowable pension fund for tax purposes more than halved to €2.3m; life-time limit of tax-free pension drawdowns reduced to €200k. All these will save about €35m next year;
  • PENSIONS: No reduction in state pension this year; reduced tax exemption for employers and employees for pay-related social insurance (PRSI, like PAYE) contributions. Due to save €80m next year;
  • TAX: Reduce the value of tax bands and credits by 10 per cent; top marginal tax rate of 52%; corporation tax to remain 12.5%; workers on the reduced minimum wage will be tax exempt.

Irish shares have risen on the announcements Read more

This isn’t what was meant to happen. The euro is falling sharply today. Equities are also down and credit spreads have widened since the weekend. Peripheral debt is falling in value, so yields are rising (see four charts, below).

These are classic stress reactions in the markets… which the Irish bail-out was meant to stop, if not reverse. The worry is that politicians will continue to look for – and find – problems in domestic economies. (Portugal is lined up next, and then Spain.) The lack of reaction to Ireland’s bail-out tells us very clearly to look for a Europe-wide problem and a Europe-wide solution. Read more

Ralph Atkins

Tensions in the eurozone banking system are not going away. At least one bank, maybe more, has been borrowing heavily from the European Central Bank’s “marginal lending facility” in recent days – a backstop mechanism for those banks who find themselves suddenly short of funds. Use of the facility, which incurs a penal 1.75 per cent interest rate, has been above €2bn for 11 consecutive days now and this morning rose above €3.6bn.

The level of borrowing is not yet at record levels but, interestingly, use of the facility has been heavier than in early May, when the crisis over eurozone’s public finances was at its most intense – and before the European Union’s bail-out system was put in place. Read more

If the Irish bail-out was intended to calm markets, it has failed. Yields on Irish debt are the most stable they have been for weeks, shifting a few basis points and staying above 8 per cent. The cost of credit insurance has risen and the ECB is apparently still buying Irish bonds.

Euro officials will be worried, and Irish officials furious. This suggests that Ireland’s lack of funds was not what was driving bond yields up. Did EU officials pressure Ireland to accept a bail-out for nothing?

Ireland is not Greece, and the markets know it. After the Greek bail-out, there was a dramatic, if temporary, fall in yields of about 4 percentage points. Of course, relief centred on more than just Greece’s small economy: the bail-out proved that eurozone members would stick together.

The Irish bail-out – arguably not needed – was different. Read more

Ralph Atkins

Ireland’s bank bail-out plans came as a relief to the European Central Bank, after providing another example of the increasingly political role being played by the euro’s monetary guardian. Alarmed at the massive amounts of liquidity it was pumping into Irish banks, the ECB lobbied hard behind the scenes for action to shore up the country’s financial system.

A successfully completed rescue, helped by the International Monetary Fund, would reduce the immediate pressure on the ECB, which welcomed Dublin’s decision in a statement late on Sunday – but not allow the Frankfurt-based institution to escape the political area. It is pushing hard for bolder reforms of the eurozone’s system of government – demanding tougher surveillance of fiscal and other economic polices, backed up with sanctions, to prevent crises from erupting.

Fresh ECB involvement would be required were the eurozone’s financial crisis to engulf Portugal or Spain. Even if it does not, the ECB is still likely to be active in buying government bonds under an emergency programme launched when the eurozone crisis was at its most intense in May. “The ECB has become part of the game to an extent it was not before,” said Jörg Kramer, chief economist at Commerzbank in Frankfurt. Read more

Moody’s isn’t going to get caught out this time. The ratings agency has said today that its review of Irish sovereign debt is likely to end in a multi-notch downgrade. If we take “multi” to mean three or more, the current Aa2 rating will probably end up below those of S&P and Fitch.

Curious timing. All three agencies have stayed mute about Ireland in recent weeks. S&P and Fitch are yet to say anything and Moody’s has waited for the announcement of the aid package.

Perhaps there were burnt fingers over Greece. In the Spring, S&P and Fitch downgraded Greece as market fears intensified, adding to the commotion and leaving Moody’s in a very awkward place (had they downgraded Greece, they might single-handedly have disqualified Greek assets from being accepted as collateral at the ECB).

Rating agencies were heavily criticised for aggravating matters in April and May, Read more

Felix Salmon asks whether €90bn will be enough for Ireland. By his methodology, he is right to ask. He assumes the status quo will continue, and that the bail-out funds will be all that Ireland can access.

Ireland’s annual budget deficit is €19bn and this is a three-year plan, so that’s €57bn, he argues. Let’s call it €60bn. That leaves €30bn for the banks, by this thinking. The black hole in commercial real estate is valued at €20-25bn alone, he says. And that’s before we consider residential mortgages.

But this isn’t Argentina. Ireland is not defaulting on its debt: it is choosing not to raise money in the markets at punitive rates. There’s no reason why it couldn’t approach markets in June next year, when the state next needs to auction debt.

In addition to raising money in the markets, Ireland will be raising more in taxes and spending less. Read more

It’s official. European and IMF officials have convinced Ireland to apply for funds; the application has been approved; Ireland’s corporate tax rate is safe; and Reuters puts the size of the bail-out at about €85bn, attributing to a “senior EU source”. Negotiations on amounts and interest rates haven’t yet happened. Outside the eurozone, funds have also been offered by Sweden and the UK – the BBC reports the UK’s contribution to be about £7bn. All loans and funds are expected to be repaid.

Speaking in Brussels, EU economic and monetary affairs commissioner Olli Rehn said eurozone finance ministers welcomed the government’s application. “Providing assistance to Ireland is warranted to safeguard the financial stability in Europe,” he said. The ECB has issued a statement welcoming the move, BBC television reports, saying they are confident the aid will contribute to a more stable banking sector in Ireland.

Irish finance minister Brian Lenihan told RTE radio on Sunday afternoon that available funds would probably split into two: a loan to the government and a “very large contingent fund” for Irish banks, which won’t necessarily be drawn upon. The size of the latter would be “tens of billions” but “certainly will not be a three-figure sum [in billions]“. Read more

Ireland is “likely” to ask for loans running to tens of billions – but only for display purposes. As an EU-IMF technical mission heads to Dublin, the Irish central bank governor told local radio the money would be “shown but not used”.

Having the money physically at hand but not required must surely rank as one of the most market-reassuring options available – assuming, of course, that market volatility is caused by the possibility of default. But what if volatility is caused by uncertainty over what happens in the case of default? Does family friction subside when the patient is pronounced cured but their will is in disarray?

The ECB – which has been medicating the patient for weeks at considerable expense – is keen for a cure, with or without the will being sorted. Read more

Are politicians enslaved to the markets? EU officials are falling over each other to reassure bond markets, in particular, that there is plenty of money should Ireland need it. Ireland has not requested aid, and it is Irish banks rather than the Irish government that are likely to need funds. Irish banks, like all eurozone banks, would approach the ECB and not the Irish government for their regular liquidity needs.

But no matter. Irish politicians find themselves surrounded by hands thrust forward, stuffed with cash, which at present they politely refuse. It is a sensible strategy, on the face of it. Given Irish ministers’ refusal to accept cash they don’t need, continued offers should surely reassure markets that cash is readily available.

Problem is that the clamour creates both momentum and fear. Fear without momentum can ebb away, but fear with momentum demands a climax. A climax in this case would probably be a bail-out of Irish banks. But would it really help? Read more

Ralph Atkins

If Dublin successfully avoids using the European Union’s rescue fund to resolve its banking and fiscal problems, it will probably win friends in Berlin. Germany’s exact view on what Ireland should do is murky, but officials are adamant that Berlin has not pressed for outside intervention.

That makes sense. For Angela Merkel, chancellor, and Wolfgang Schäuble, finance minister, an EU bail-out for Ireland would undoubtedly mean more unwelcome headlines in Bild of the sort the mass-market newspaper ran earlier this year over profligate Greeks and how German taxpayers were paying for the excesses of other eurozone countries.

But the view in Frankfurt is different. Read more

No surprise: the ECB stepped up its bond purchases last week as Irish yields soared in the resale market, and Greece and Portugal issued new debt at inflated yields. Quite how high the yields would have been in all three cases were it not for ECB intervention, we can’t tell. But the ECB bought €1,073m bonds in its security market programme, the highest since 2 July, barring one episode in October (see chart).

More PIGS* woes today, as the Greek budget deficit worsened. In line with last week’s rumours, the deficit is now projected to reach 9.4 per cent of GDP, missing the 7.8 per cent target by some margin. In Portugal, the finance minister spoke on the possibility of a bail-out – judging the risk to be “high” for external, not domestic, reasons. Contagion was spreading like ‘wildfire’, he said, and no eurozone member could feel safe.

Dublin is still resisting aid, while the debate is shifting to deposit outflows from Ireland’s largest banks. Read more

Dublin is resisting pressure to accept aid. Discussions have been taking place over the weekend, with European officials making the case for aid, and Irish officialsdetermined to get out of the financial difficulties [they] are in.”

Little has changed in the fundamentals of the Irish economy. Market pressures were prompted by discussions of the eurozone rescue fund a few weeks ago, in which it seemed bondholders would lose money in the case of default. Debt prices fell, and yields soared. This tempered considerably on Friday, after finance ministers from Europe’s five largest economies suggested the loss on bonds would not be retrospective and the entire thing might be voluntary. Read more

Irish bond yields have dropped back as European officials have dramatically scaled back the impact of a sovereign default on bondholders.

Bondholders had been selling off peripheral eurozone debt – particularly Irish – since Brussels announced they might need to accept a loss – or haircut – in the value of their holdings should a default occur. This effectively reduced the future value of bonds held. The precise nature of who would lose what has remained unclear, as the sell-off sent bond prices down and yields above 9 per cent yesterday for Irish 10-year debt.

Now finance ministers appear to have backtracked, saying Read more

Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.

Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down. Read more

The key level of 8 per cent has been rapidly passed today by rising Irish ten-year bond yields. London clearing house LCH.Clearnet has now moved to protect itself from any possible restructure, by making it more expensive to trade Irish debt.

LCH.Clearnet, the world’s second largest fixed income clearing house, said an additional 15 per cent margin requirement would be charged on investors’ net exposure to Irish bonds because of the increasing risk of a sovereign default. It’s another blow, following news that some SWFs were divesting Irish and Portuguese debt. The ECB is apparently buying Irish debt yet again.

Tension rose today following a Portuguese debt auction. Lisbon did sell €686m 10-year bonds and €556m 6-year bonds, less than the guideline range, which was €750-1250m in both cases. (Selling less than the guideline amount has been a feature of Portuguese debt auctions since July.)

Yields, however, were punitive. Lisbon will pay 6.81 per cent Read more

Three rumours doing the rounds this morning. First, that China might be about to raise reserve requirements again. The People’s Bank of China will raise reserve requirements for “several” banks, including key lenders, by 50bp on Monday, Dow Jones newswires reports via AFP. Chinese prices rose significantly between August and September, with year-on-year consumer price inflation standing at 3.6 per cent in September. China has recently employed other tightening measures, such as raising a key interest rate by 25bp last week.

Second rumour: that the Bank of Japan’s contributions to the Treasury will be waived or reduced if the central bank incurs losses in its asset purchase programme. Nikkei English News reports, via Bloomberg, that finance minister Yoshihiko Noda may soon make an official announcement. Read more