Tuesday, May 10, 2011

Another thought on the Doom

Last night, watching Vincent Browne on TV and Twitter, a thought came to me about the financing problems that Morgan Kelly's article highlight. As outlined yesterday the theory goes that if we dump the banks back on the ECB and ditch the bailout that we immediately have to balance the books as we will have no credit. But is that true?

According to Kelly, in the run up to the bailout, the EU and the IMF had strongly different views as to how the bank debt should be treated. The IMF were all in favour of hair cuts for bank debts, the EU not so as the ECB would be the one taking the hair cut in the long run. In this discussion it also appears that the UK were generally on the IMF side with the US lined up alongside the EU.

The composition of the bailout fund is as follows: €22.5B from the IMF, €45B from the EU through EFSM and EFSF and €17.5B from our own funds (how this gets counted as part of the bailout I'm not really sure since it is already our money, probably borrowed on the market). I'm also not sure whether the roughly €4B in the bilateral loan from the UK is included in the EU funds but it probably isn't.

Now my proposition is that if we followed the Morgan Kelly route, would the UK and IMF money still be on the table? Obviously the EU would withdraw as the ECB would be left holding Irish bank debt but the other two seemed to indicate last November that pushing debts back on the private banks was the preferred route. Now Kelly is suggesting a complete ditching of the banks rather than haircuts but I wonder how far apart the two really are.

If this is possible, then assuming we have already drawn down 1/3 of the bailout (€28B) and that our own resources were burned first, then we have probably only taken about €3.5B of the IMF's funds. That may leave us with a line of €23B in credit, €19B of IMF funding and the &euro4B from the UK. That might allow us take an 18 month adjustment period rather than chopping the €20B overnight.

Obviously any such plan would need to be approved by Mr Chopra and his band of merry men, but is it even feasible? Again, like Kelly's plan, probably not but it might be worth investigating.


  1. A potential problem is that the IMF gets its money from its members who are US and big EU countries and so that money might disappear from the table.

    Worth a try though. The idea that we can be totally boned and yet still running a massive deficit and maintaining, as Kelly points out, people like him at twice their EU salary is just bizarre. I have no idea why we are being permitted to do that. If it's because the ECB are clueless or in denial then we're going to get screwed. If it's because they know exactly what they're doing then we're going to get screwed.

  2. As I have mentioned probably more than once, I know very little about economics so any of my suggestions are probably insane. But that won't stop me putting them out there :)