Good post by Nama Wine Lake on revelations of ECB demands on the lead up to the bailout (Irish taxpayer bailout of EU bondholders that is). It raises legitimate questions about the ECB’s mandated function as lender of last resort. However, it seems to treat the ECB and the Irish Central Bank as one. It must be noted that 70 billion of the total liquidity provided by the Irish Central Bank was backed by dodgy assets (see earlier post).
……Taking a step back from the details of the bailout, the reason the ECB’s position is relevant is that it is the ECB that is stopping Irelandfrom forcing bondholders with €36.5bn of bonds in insolvent Irish banks – banks which depend on the support of funding from citizens via the bailout – from taking haircuts. But is the ECB providing a premium service to Irelandin return for a commitment not to “burn” unguaranteed senior bondholders? After all, Irish banks are in receipt of some €117bn (at the end of March 2011) from the ECB which only charges the banks 1.25% for accessing these funds so doesn’t Ireland owe some debt of gratitude to the ECB? Absolutely not – in return for this €117bn of funding, the ECB is provided with collateral by the banks and the ECB has high standards for the collateral it will accept, set out in some detail here. So all the ECB is doing is its job and no more.
This issue was touched upon on here, two weeks ago & it seems lamentable that there hasn’t been any challenge fromIreland about the ECB’s apparent extortionate threat to withdraw its role as lender of last resort. Although membership of the euro constrains our monetary policy, membership was also supposed to give us a colossus of a central bank inFrankfurt to provide a lender of last resort service. So as long as the assets in Irish banks were eligible then the ECB had to, that is, didn’t have discretion, provide liquidity funding to those banks. There seems to be an acceptance inIreland that we are somehow getting a premium service from the ECB in it providing a lender of last resort service – this isn’t the case at all, it is the role of a central bank to provide a lender of last resort service on eligible assets. But in return for this perceived premium service, we have promised, in return, not to burn bondholders. If we hadn’t joined the euro and relied wholly on the Central Bank ofIreland, I cannot imagine that institution demanding that bondholders in insolvent Irish banks be repaid with funds provided by Irish citizens, in return for providing a national lender of last resort service.
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mer O’Siochru is a qualified architect and valuation surveyor. She was a founder of Feasta and served on its executive committee for many years. She is director of EOS Future Design which designs and develops sustainable systems and settlements. She also manages the Feasta-led Smart Tax Network which is funded by the Department of the Environment, Heritage and Local Government to develop tax policies in areas related to the environment. She lives in Dublin.