Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 7 February 2013

Does Irish Prom Night Start Euro Debauchery?

In the end it became quite hurried but swapping promissory notes for long-dated, low-interest debt is clever financial engineering. However, there is one problem - Article 123 of the Lisbon Treaty which states (emphasis added):

"Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments."

How does NAMA issuing bonds to the Central Bank of Ireland (CBI) in exchange for promissory notes and other Irish Bank Resolution Corp. (IBRC) assets square with the above?

Well, the bonds are being issued by the cleverly engineered NAMA Investment company which is majority privately owned (51%) and thus treated outside the government sector (see NAMA structure). Viola, no monetary financing.

So then why was the ECB being so cussed about restructuring the promissory notes? I guess they were concerned about the spirit of the law at some point. However now they've "taken note" and turned a blind eye. Chalk up one more victory for political will.

If you're German or a believer in strong currency don't be alarmed. This is all temporary; give or take 40 years. Meanwhile take some palliatives from the Irish Department of Finance presentation:

"The Central Bank of Ireland will sell the bonds but only where such a sale is not disruptive to financial stability. They have however undertaken that minimum of bonds will be sold in accordance with the following schedule: to end 2014 (€0.5bn), 2015‐2018 (€0.5bn p.a.), 2019‐2023 (€1bn p.a.), 2024 and after (€2bn p.a.)"

The question is whether this is a template for other nations to reduce their deficit and debt through implicit monetisation by using "privately owned" SPVs or is this another European 'unique case'?

It looks like the ECB has decided to fix that exchange rate which Monsieur Hollande has been complaining about.

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