Brendan Keenan: Drastic step shows something is afoot
Banking legislation rushed through last week points to another chaotic year ahead -- if your heart can handle it
ALL that is missing in this legislation, said the lawyer, are the special courts and firing squads.
He was talking about the banking legislation rushed through the Oireachtas last week. Having ignored calls for laws to deal with the winding-up of banks for three years, the Government has produced emergency legislation so drastic that it will automatically lapse in 2012. Which, as new year looms, is a very short period.
Something is afoot. We can guess that these powers are being taken because it is intended that they be exercised, and exercised quickly.
We can also guess where all this is coming from. It follows hard on the heels of the EU/IMF rescue package. That was enforced by the European Central Bank, which could no longer tolerate the enormous demands for support from the Irish banks, backed by ever poorer quality loans as security.
When things happen so fast, it is sometimes difficult to realise how far you have travelled. On Thursday, the ECB asked its member central banks to double its capital to €11bn. The amounts involved are small -- the Irish central bank alone is exposed for €40bn to the Irish banks -- but it was not supposed to be like this.
The ECB was intended as little more than an inflation-fighting machine. Instead, it has ended up buying the government bonds of countries such as Ireland and Greece which carry a risk of not repaying in full, and lending huge amounts against bank assets which may not be worth their official value.
The ECB will have to make provisions against such possible losses, but these cannot exceed its reserves and capital. The top-up in capital will cover possible losses of €20bn. The prospect of having to do such a thing would have been unthinkable just a short while ago.
Like the worst of Chinese curses, it begins to look as if next year could be even more interesting than 2010. Hard to believe in the Year of the Bailout. But the Year of the Bank Break-Up has lots to offer.
The betting is on some kind of split into good banks and bad banks. There was not supposed to be any bad bank left after loans, originally valued at €90bn, were taken over by Nama. But there are worries about mortgages and loans to small business.
These worries explain the shock five-notch downgrade of Ireland's credit by the Moody's agency. As everyone said at the time, the "bailout" adds to contingent Irish debt, rather than reducing it.
It looks like next year could be even more interesting
The taxpayer will have to provide new bank capital. The taxpayer, presumably, will stand over the losses in any new bad bank. The good bits may well be sold to foreign buyers. That would get some of the capital back, but we can be sure that critics will say it is not enough.
Who will the critics be, though? Media commentators and analysts, obviously, but the current political critics will be in government by then. The new Sinn Fein TDs will have a field day. It is difficult to imagine what the remaining Fianna Fail TDs will say -- assuming they have the nerve to say anything.
For the moment, the argument swirls again round the protection of the senior bondholders.
It looks as if their protection is at the expense of their junior colleagues. No law was needed to make junior lenders take 20c in the euro on a complete dud like Anglo, but it may be used to cut them out of the remaining good bits of the remaining banks.
Before one gets too worked up about senior bondholders, one should take a look at last week's EU summit which approved, with remarkable speed, a new permanent rescue mechanism to come into force in 2013.
German Chancellor Angela Merkel has so far won almost all the arguments over what to do about bank and sovereign rescues. The one she has lost is the idea that lenders to governments, and senior lenders to banks, should take losses as part of any rescue.
If she could not get it through, the idea that Ireland could renege on some debts without the approval of the ECB and the rest of the EU cease to be a matter of opinion. It is a matter of fact that it could not.
The European debate is far from over. For the moment, the new mechanism contains only more surveillance and harsher punishment for euro countries which do not stick to fiscal rules.
But there is mention of financial aid, as a last resort, and just a hint of losses for lenders.
It is all still to play for. The only firm conclusion is that the landscape will be very different by 2013 -- though I am not sure I could stand two interesting years.
Originally published in
