Fianna Fáiled: Ireland Prints 25% of its GDP in German Euro's

Jack H Barnes's picture

The Celtic Tiger has been on the economic ropes since the crash of 2008.  In the first hours of the crisis, the US Federal Reserve provided emergency funding to Irish banks, pouring 10’s of Billions of US dollars into the Irish Banking system, providing funds as needed.  These funding events helped stabilize the banks, during the winter of 08-09.

“The scale of AIB’s borrowing from the scheme is enormous
given its relatively small size in the US. Barclays Bank, which bought
Lehman’s US operations out of bankruptcy, borrowed $232bn (€174 bn) from
the Fed scheme.”

AIB’s biggest single loan — $3.3bn (€2.48bn) — was borrowed from the Fed on July 2, 2009.

The ECB setup a unique Sovereign bond carry with Irish banks,
allowing support for their financing needs via deposits of Irish
Sovereign bonds held as collateral.  This mechanize broke down in the
fall of 2010 as liquidity dried up beyond the capacity of the ECB to
help out.

The Washington Post has a great graphic that shows Europe’s Financial contagion as cross holdings through both Banking and through Trade .  The implications are clear, the cross holdings are significant.

The ECB is reported to have provided up to 130+ Billion Euros in
direct support to the Irish banks, by allowing the banks to park Irish
Sovereign debt at the ECB for collateral.  This has driven up the
internal leverage of the ECB enough that it needed to be recapitalized
with new funds in December 2010.

The fact that the ECB needed to be recapitalized
just as the impact from the Irish bailout of November hit home to the
political leaders, though the real context of it was missed by the main
stream media.  The EU appears to have been caught in a situation that
it could not contain the Irish funding needs, while needing to
recapitalize the ECB Balance sheet to continue operations.

“The capital increase was deemed appropriate in view of
increased volatility in foreign exchange rates, interest rates and gold
prices as well as credit risk,” the E.C.B. said in a statement.

Ireland Central Bank was allowed, with or with out permission, to
print up up new Euros without new sovereign debt issued behind them.  By
December of 2010, the EU appears to have been more worried about the
appearance of the ECB balance sheet as a whole, than of rogue individual
activity by its member states.

Publicly, the EU core nations agreed that the ECB was great
candidate for recapitalization due to the support it has been providing
the PIIGS. In hindsight, the attention of the market moving to Portugal
or Spain was a misdirection of where the real attention needed to be,
and that is Ireland still.

The bail out of Ireland, funded currently from their own retirement
savings, has not been ratified by their government.  The ECB has not
started to poured funds from the Stabilization fund into Ireland yet, as
they await ratification of the bailout.

The bailout, like a ticking time bomb has not been ratified yet, and
if Fianna Fail’s 1 vote coalition collapses before the vote, all bets
are off as to it ever being passed.

current party in power, Fianna Fáil has been in charge of the country
for 53 of its 84+ years of official existence.  A series of No Confidence votes has been called on its leadership of the nation.  The first vote is tomorrow, when an internal vote for leadership of the party is expected to be held.

A second vote of No Confidence has been called in the Parliament
meeting that is scheduled for next week.  While the coalition is
expected to hold together through both votes, it is possible that the
Irish bail-out will be held up by a collapse of the current caretaker
coalition in Parliament.  If this happens, all bets are off concerning
ratification or even continuation of the bail out.

The above is all said, to preface what is next.

The Irish Central Bank has crossed the Rubicon
in European Union currency terms.  They have printed up about 25% of
their GDP in electronic credits, and stuffed those credits into their
banks.  These deposits, if you will, do not have new debt issued behind

is a form of hyperinflation if you will, at least in context that a
Central Bank, with no actual printing press, or a functioning bond
market, has now electronically printed up new currency units for their
banks without issuing debt behind these actions.

While this has happened before in history, it has not happened in
the Euro currency project officially before today. This act is going to
move the monetary policy of the union, to the individual capitals.  The
capacity to print electronic credits, with out the creation of cash
currency or debt, is a new wrinkle in the economic landscape.

The implications and ramifications will take a while to appear, but
“Mark” my words, Germany both as a people, and as a political
organization will notice this event.  The German people now find
themselves captured in a currency where neighbors who are in political
and financial stress, have the capacity to print up German Euros on
demand.  This is Germany’s worse nightmare as both a nation and a
people.  I dare say, you could not design a more frightening prospect
for the “United German States”, than to find their currency diluted on
demand by reckless neighbors.

In the coming weeks, and I say that because thing rarely happen
quickly in life, Europe is going to have a Sovereign crisis of epic
size.  They will have to decide what happens next, and do so rather

  1. Is Ireland going to be punished by the EU for printing on demand?
    1. Can Ireland stay on the Euro, if Germany stays?
    2. Can Ireland escape the bailout clauses?
    3. Can the EU survive Ireland leaving?
  2. Is the EU going to join the US domestic form of economic unity?
    1. Euro Bonds?
    2. European Elected President?
    3. Euro Treasury Minister?
  3. Is Germany willing to be held hostage to foreign printing presses?
    1. How will Germany publicly respond to this?
    2. How will CDS markets respond to the BUND now?
    3. Are all Euros equal?

If Ireland can get away with this printing operation, let’s consider
some of the ramifications of their actions when scaled to other
economies of larger size.  The Irish have printed up the equivalent of
25% of their GDP.  If we accept that GDP is equal across economies,
their actions are the equivalent of…

  • Germany with a GDP of $3.3 Trillion printing up $850 Billion
    dollars worth of new currency units, and shoving them into Landesbanks
    to recapitalize their loans.
  • United States with a GDP of $14 Trillion printing up 3.5 Trillion in new currencies and depositing into our To Big To Fails.

EU politicians have known about Ireland’s decision to print currency
for weeks now.  They have had time to consider their response to
Ireland’s dilution of the Euro.  I do not expect an initial reaction in
the currency markets, as this kind of event takes time to be absorbed
by all stakeholders in the Euro.

The Celtic Tiger has made their move and resorted to naked currency
printing, to support its banks.  The next move belongs to Europe and
it’s going to be interesting to see how this plays out in the public
arena’s.  We know who is first now, what CB will be second?


Confessions of a Macro Contrarian