Business Irish

Wednesday 13 December 2017

Emmet Oliver: ECB made mistakes, but 'bouncing' Ireland into the bailout was not one

While there is still disagreement over what the ECB did or said in November when Ireland hovered dangerously close to a bailout, there is no disagreement that the Frankfurt-based bank was right to be concerned by November 2010 about the sheer size of its exposures to the Irish financial system.

By the end of October 2010 the ECB had an exposure of €130bn to Irish banks, with our own Central Bank lending €34bn on top of this.

The Irish central bank is part of the Eurosystem, the system of European central banks, which has the ECB itself at the core.

This system had a total exposure to Ireland by the end of October of €164bn, which ironically happens to be equal to the entire GDP of Ireland.

The size of the exposure alone was enough to give Jean Claude Trichet nightmares, but the form of collateral underpinning such an enormous sum was also what presumably agitated ECB hawks during this period.

Stripped down, huge amounts of the collateral underpinning the Irish ECB loans are property based, using either Residential Mortgage Backed Securities (RMBS) or Commercial Mortgaged Backed Securities (CMBS).

To give a sense of how dangerous the exposure of the ECB to Ireland was by November, think of the concentration risk in US terms. Ireland makes up less than 2pc of eurozone output.

In that context it would be the equivalent of the Federal Reserve lending banks in Colorado a huge amount of its entire balance sheet, based on security consisting of mortgages on houses and office blocks in Colorado.


This kind of lending, if done in the US, would put huge pressure on Ben Bernanke and there would be lots of talk about the Fed debasing its own balance sheet and abusing its position as a lender of last resort.

The ECB's vulnerability on Ireland over recent months has grown even beyond these concerns, with the Frankfurt-based bank accepting €20bn of what the banks call "own-use government-backed uncovered bank bonds''.

In other words, bonds they have issued to themselves, which are not secured on their own assets.

The ECB has also effectively scrapped other eligibility criteria to facilitate Ireland after recent downgrades from the ratings agencies.

Against all of this background, it was right and proper for the bank to "bounce'' politicians into doing something about Ireland in November/ December of last year.

For the politicians it seemed there was too much of wishful thinking before the ECB moved, too much "waiting for something to turn up''.

Where the ECB was wrong was insisting in September 2008 that the Irish government rescue all six lenders, even those with no systemic basis like Irish Nationwide and Anglo Irish.

Instead it should have been pushing to make the guarantee more selective and should have persuaded the Irish government to pass emergency powers to wind down non-systemic institutions.

There is no record that it did this, and on that score it failed, but the other criticisms of its conduct in November seem wide of the mark.

Gold party looks to have run its course

Have ordinary buyers of gold arrived just as the party is drawing to a close and the guests are being shown the door? It looks like it.

Yes, some of the cleverest people in global investing have staked big bets on gold, most notably US hedge fund chief John Paulson, but he started taking those positions in early 2009 when demand for gold was a lot more modest than now.

The gold mania of 2011 is visible in virtually every small town in Ireland as gold shops spring up from nowhere and cater to those who fear the end of the world (or at very least hyper inflation and dollar collapse).

But at prices during this week of $1,519 an ounce, gold looks to be getting very bubbly. Its sister metal, silver, appears to have moved even further into the danger zone where a rapid and painful correction is inevitable.

Gold price manias are all about timing. The precious metal, at least historically, is not a stellar investment performer. Between 1970 and 2009 the rate of return for gold was just 4.5pc, whereas the S&P 500 returned 12.5pc and 10-year US Treasury bonds returned 9.1pc.

But equally when gold catches the imagination and inflation worries seem everywhere, there is huge money to be made, hence the hedge fund interest. With interest rates remaining low in the US thanks to Fed chief Bernanke's ultra loose policies, gold has momentum behind it for now.

But the advice of cautious Swiss bankers still should prevail; gold should never be more than 5 or 10pc of a diversified portfolio. Unfortunately some people think gold is a one way bet, even though everyone in this country knows what eventually happens to one way bets.

Quinn deal will leave the other insurers quite upset

The disclosure that Quinn Insurance will need over €600m to mop up its leftover legacy claims must really stick in the craw of other insurers in the market.

Apart from losing about 2pc of your premium income to a government scheme, non-life insurers have to reflect on all the business they lost over the years to Quinn Insurance.

We are now effectively being told (by the Quinn administrators, though the Quinn family strongly dispute this) that in some way these policies were written without sufficient reserves behind them, effectively Quinn built market share by selling below-market rate policies.

That was great for the companies who bought the policies, but bad for Quinn's competitors.

Gracefully, Quinn competitors never voiced their suspicions about this in public, only mumbling in private that something 'wasn't quite right' about the way Quinn was able to undercut them on price.

Now this quiet approach has landed them with a big bill, where they are effectively punished for being solvent.

Meanwhile, they face a new competitor in Liberty Mutual which gets an Irish business shorn of the worst of the old Quinn claims, and a government, who for its own reasons, wants to see this new Liberty-led company succeed.

While many of the Quinn arrangements are now necessary, there is an awful lot not to like in the way the Quinn saga has unfolded.

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