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.
The 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 them.
This 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 quickly.
- Is Ireland going to be punished by the EU for printing on demand?
- Can Ireland stay on the Euro, if Germany stays?
- Can Ireland escape the bailout clauses?
- Can the EU survive Ireland leaving?
- Is the EU going to join the US domestic form of economic unity?
- Euro Bonds?
- European Elected President?
- Euro Treasury Minister?
- Is Germany willing to be held hostage to foreign printing presses?
- How will Germany publicly respond to this?
- How will CDS markets respond to the BUND now?
- 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 www.jackhbarnes.com