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