ELA is Printed, Not Borrowed

A member of the fourth estate passed on to me a “Background Briefing” from the government on promissory notes.

It contains the following sentence: “The Central Banks (sic) had to borrow this Cash to give to Anglo and has a resultant liability that it must repay.”

This is not true. ELA funds were not borrowed by the Central Bank from the ECB or the rest of the Eurosystem. They were created by the Central Bank of Ireland and provided as a credit to Anglo’s reserve account. To the extent that Anglo used this money to pay off people with foreign bank accounts, the liability will have switched from being a reserve liability to an Intra-Eurosystem (i.e. Target2) liability.

Furthermore, as central bank economists throughout Europe have been saying time and again over the past year (e.g. this piece by two Bundesbank economists) Target2 balances simply reflect the outcome of private decentralised transactions and there is no system whereby a Target2 creditor is under an obligation to “repay” the Target2 liabilities under any particular time-frame.

The long-winded version of this point is on page 14 of my recent briefing paper:

The reason I have described Intra-Eurosystem transactions in such detail is that there has been some confusion in media and political circles in relation to the nature of the ELA issuance.  A number of media stories have reported that “the ELA money was borrowed from the ECB”. This is not the case. The ECB does not issue money at all as this task is delegated in the Eurosystem to national central banks.

A more subtle version of the “ELA was borrowed from the ECB” claim was provided in an answer to a parliamentary question by the Irish Minister for Finance, Michael Noonan, on January 31, 2012. Mr. Noonan stated that “ELA is itself funded by the CBI through Intra-Eurosystem liabilities”.

The word “funded” can have an elastic meaning. However, this answer suggests an interpretation in which the appearance of an ELA asset on the Central Bank of Ireland’s balance sheet is accompanied by an increase in Intra-Eurosystem liabilities. It is my understanding that this is not the case. At the moment of “conception”, so to speak, of the ELA, the corresponding increase in liabilities is a credit to the reserve account of the bank receiving the ELA loans.  Only if that bank then uses its ELA funds to transfer money to bank accounts outside Ireland does the Central Bank of Ireland’s balance sheet start to show an increase in Intra-Eurosystem liabilities.

Because the IBRC appears to have used the vast majority of its ELA loans to pay off foreign bondholders and people moving their deposits outside of Ireland, there is little doubt that the issuance of ELA has led to a significant increase in the Central Bank’s Intra-Eurosystem liabilities. However, it is not accurate to describe the ELA as having been either “borrowed from the ECB” or to describe an increase in “Intra-Eurosystem Liabilities” as the source of the funds.

There are lots of reasons why the ELA needs to be repaid, so why persevere with this false one? As far as I can see, there are two possible explanations for the continued use of  this talking point. Either the officials who draft these briefing notes don’t understand how ELA works or else they do understand but feel that the “money was borrowed from the ECB” line will provide a good excuse on March 31.