The ECB has released its annual accounts for end of year, 2011. Expect to read lots of excitable commentary that focuses on the small size of the ECB’s “Capital and Reserves” of €6.5 billion relative to over €1 trillion that has been loaned out in long-term refinancing operations and the €284 billion in sovereign bonds purchased under the Securities Market Programme .
This kind of commentary misses a number of important points.
First, the ECB also has revaluation accounts and provisions, both of which can cover losses, worth €30 billion.
Second, and most important, the ECB does not actually do any direct lending to banks. As I discuss on page 7 to 9 of this paper, monetary policy operations in the Euro area are done on a decentralised basis and the ECB Governing Council interprets Article 32.4 of the ECB statute as implying the losses on these operations should be shared among Eurosystem central banks according to their capital share.
So what matters when thinking about whether there is loss-bearing capacity in relation to the LTROs is the size of the Eurosystem’s capital resources. A Eurosystem financial statement is released every week. It shows capital and reserves of €83 billion and revaluation reserves of €394 billion. LTRO losses would need to be enormous to wipe €477 billion off the Eurosystem balance sheet.
Finally, while internet banter about poor quality Eurosystem collateral is a popular sport, the Eurosystem applies haircuts when lending, meaning the value of the underlying collateral is larger than the value of the loan. And the haircuts applied to the newly-eligible “credit claims” (i.e. bank loans) are huge.
All told, the prospect of recapitalising the Eurosystem should be very low down anyone’s list of worries about the European economy.
I gave a talk this morning on the outlook for the Irish economy to IBEC‘s national council. You can find the slides here as a PowerPoint slide show and here as a grimier PDF. Some charts were borrowed from NTMA’s recent (very green!) presentation and also one from a Citi report. Imitation, flattery and all that.
I don’t claim to have the time or expertise to do short-term forecasting of the Irish economy but I’ll note that one data point that is more positive than I had assumed when giving the talk this morning was the increase in seasonally-adjusted employment in the QNHS release.
People outside Ireland wondering how the Treaty referendum campaign is going to go could do worse than to check out the Vincent Browne show from last Wednesday. I was one of three people who appeared alongside Eamon O’Cuiv from Fianna Fail but didn’t get to say much.
Not to worry, Eamon’s comments were interesting. He has resigned as Fianna Fail’s Deputy Leader because he cannot back a Yes vote for the Treaty. While I will be supporting a Yes vote, it can’t be denied that Eamon made a number of cogent points in his appearance. Despite early polls indicating more people supporting Yes than No and despite the potentially serious consequences of a No vote, this is not going to be an easy treaty to pass.
To offset the bad taste of that nasty green jersey article, I’ll note some good news about the Irish economy. On a seasonally adjusted basis, employment rose by 10,000 or about 0.6%, the first increase since 2007:Q4.
See that slight uptick at the bottom of the graph below? it’s not much but perhaps it’s the start of a long road back. Anyway, at a time when most economies in Europe contracted, this is fairly surprising news. Perhaps the fourth quarter GDP figures might not be so bad.
Here‘s a (slightly crankier than usual) piece I wrote for Business and Finance. (I didn’t supply the picture). The article echoes a point that my colleague, Colm McCarthy, has been making for some time. The Irish government’s insistence that all is fine and sure we’ll be returning to the bond market soon tends to undermine its bargaining position in relation to looking for relief on its debt burden from the European Union.
Here‘s an article I wrote on the Fiscal Compact for VoxEU. It’s an amended version of this article published in the Irish Times (which in turn is a copy of my comments at this Oireachtas commitee–hey, it’s a low marginal cost business.)
The amended version changes the last few paragraphs with a view to VoXEU’s EU audience. I think the balance of arguments favour Ireland signing the Treaty and retaining access to the ESM and an Irish No vote is unlikely to have much influence on changing the flaws in the Treaty.
However, I think we still need a wider European debate about the Compact. It has not come in to force yet and it should not be too late to amend some of its more restrictive aspects.