European Central Bank Governors Meeting; Mario Draghi Goldman Sachs Trilateral Bilderberg Bankster Boy ECB President Press Conference Transcript by Christopher T. Mahoney Ex-Vice President Moody's

Transcript Of Draghi's Press Conference: For the convenience of readers, Christopher T. Mahoney Ex-Vice President Moody's, have cleaned up the ECB's transcript of Draghi's Goldman Sachs European Central Bank President press conference, which followed the monthly meeting of the governing council.

Transcript in Portuguese: Transcrição da Conferência de Imprensa do Concelho de Governadores do Banco Central Europeu em Mario Draghi defende a política de estabilização de preços

Christopher T. Mahoney, ex-vice presidente da agência Moody's diz que os países do Sul da Europa deve revoltar-se contra a política de estabilização de preços defendida pelo Conselho de Governadores do Banco Central Europeu

Introductory statement to the press conference and subsequent Q&A

Mario Draghi, President of the ECB,

Slovenia, 4 October 2012


Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Kranjec for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2% throughout 2012, but then to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon.

Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term.

Economic growth in the euro area is expected to remain weak, with ongoing tensions in some euro area financial markets and high uncertainty still weighing on confidence and sentiment.

Our decisions as regards Outright Monetary Transactions (OMTs) have helped to alleviate such tensions over the past few weeks, thereby reducing concerns about the materialisation of destructive scenarios. It is now essential that governments continue to implement the necessary steps to reduce both fiscal and structural imbalances and proceed with financial sector restructuring measures.

The Governing Council remains firmly committed to preserving the singleness of its monetary policy and to ensuring the proper transmission of the policy stance to the real economy throughout the euro area. OMTs will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat again what I have said in past months: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

We are ready to undertake OMTs, once all the prerequisites are in place. As we said last month, the Governing Council will consider entering into OMTs to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected. We would exit from OMTs once their objectives have been achieved or when there is a failure to comply with a programme. OMTs would not take place while a given programme is under review and would resume after the review period once programme compliance has been assured.

Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP contracted by 0.2%, quarter on quarter, in the second quarter of 2012, following flat growth in the previous quarter. Economic indicators, in particular survey results, confirm the continuation of weak economic activity in the third quarter of 2012, in an environment characterised by high uncertainty. We expect the euro area economy to remain weak in the near term and to recover only very gradually thereafter.

The growth momentum is supported by our standard and non-standard monetary policy measures, but is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.

The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to ongoing tensions in several euro area financial markets and the potential spillover to the euro area real economy. These risks should be contained by effective action by all policy-makers in the euro area.

Euro area annual HICP inflation was 2.7% in September 2012, according to Eurostat’s flash estimate, compared with 2.6% in the previous month. This is higher than expected and mainly reflects past increases in indirect taxes and euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could remain at elevated levels, before declining to below 2% again in the course of next year.

Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate. Current levels of inflation should thus remain transitory and not give rise to second-round effects. We will continue to monitor closely further developments in costs, wages and prices.

Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation. The main downside risks relate to the impact of weaker than expected growth in the euro area, in the event of a renewed intensification of financial market tensions, and its effects on the domestic components of inflation. If not contained by effective action by all policy-makers in the euro area, such intensification has the potential to affect the balance of risks on the downside.

Turning to the monetary analysis, recent data confirm the subdued underlying pace of monetary expansion. In August the annual growth rate of M3 decreased to 2.9%, from 3.6% in July. While this decline was mainly due to a base effect, monthly inflows were also relatively contained. Conversely, strong monthly inflows into overnight deposits contributed to a further increase in the annual rate of growth of M1 to 5.1% in August, compared with 4.5% in July. This increase reflects a continuing high preference for liquidity in an environment of low interest rates and high uncertainty.

The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) declined in August to -0.2% (from 0.1% in July), reflecting a decrease in the annual rate of growth of loans to non-financial corporations to -0.5%, from -0.2% in July. By contrast, the annual growth of loans to households remained unchanged, at 1.0%, in August. To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. At the same time, in a number of euro area countries, the segmentation of financial markets and capital constraints for banks restrict credit supply.

The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels, thereby contributing to an adequate transmission of monetary policy to the financing conditions of the non-financial sectors in the different countries of the euro area. It is thus essential that the resilience of banks continues to be strengthened where needed.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

Other economic policy areas need to make substantial contributions to ensure a further stabilisation of financial markets and an improvement in the outlook for growth. As regards fiscal policies, euro area countries are progressing with consolidation. It is crucial that efforts are maintained to restore sound fiscal positions, in line with the commitments under the Stability and Growth Pact and the 2012 European Semester recommendations. A rapid implementation of the fiscal compact will also play a major role in strengthening confidence in the soundness of public finances.

At the same time, structural reforms are as essential as fiscal consolidation efforts and measures to improve the functioning of the financial sector. In the countries most strongly affected by the crisis, noticeable progress is being made in the correction of unit labour cost and current account developments. Decisive product and labour market reforms will further improve the competitiveness of these countries and their capacity to adjust.

Finally, it is essential to push ahead with European institution-building. The ECB welcomes the Commission proposal of 12 September 2012 for a single supervisory mechanism (SSM) involving the ECB, to be established through a Council regulation on the basis of Article 127(6) of the Treaty. The Governing Council considers an SSM to be one of the fundamental pillars of a financial union and one of the main building blocks towards a genuine Economic and Monetary Union.

We will formally issue a legal opinion in which we will, in particular, take into account the following principles: a clear and robust separation between supervisory decision-making and monetary policy; appropriate accountability channels; a decentralisation of tasks within the SSM; an effective supervisory framework ensuring coherent oversight of the euro area banking system; and full compatibility with the Single Market framework, including the role and prerogatives of the European Banking Authority. As the Commission proposal sets out an ambitious transition schedule towards the SSM, the ECB has started preparatory work so as to be able to implement the provisions of the Council regulation as soon as it enters into force.

We are now at your disposal for questions.
_____________________________________________________________

Question:
Two short questions, Mr Draghi. The first one: you mentioned downside risks to the economy again. Have there been any discussions today about a possible rate cut in the months to come?
And the second one on Spain: do you find Spanish bond yields appropriate at the moment or are they still hampering your monetary policy transmission?

Draghi:
On the first question the answer is no and on the second question, I will not comment.
But let me say one thing I forgot; Marko will answer questions about Slovenia today, so you will have to ask him about Slovenia.

Question:
Mr Draghi, was the decision to leave rates unchanged unanimous? That is the first question.
And the second is: what do you think about publishing the minutes much sooner than 30 years after the respective meetings?

Draghi:
On the first question, I would say that there was no discussion. So it was a unanimous decision about interest rates.

On the second question, clearly there have been statements by several Governing Council members and by myself showing an open mind with regard to this point; but it is a complex process and we are actually thinking about how to proceed. There are pros and cons. What you have to keep in mind is that the ECB is already a very transparent institution; just think about this press conference every month. There are also hearings in Parliament, interviews, speeches… I think that there are some benefits, as far as communication is concerned, to having greater transparency. At the same time, we have to evaluate and assess what this means in our specific context, the European context, which is different from that of the United States and the United Kingdom.

Question:
Mr Draghi, last month when you announced the OMTs, you said that matters were now effectively in the hands of governments. How concerned are you by the way that governments have responded? Some finance ministers have suggested that the ESM might not be covering legacy bank debts for instance, and Spain has still not applied for a bailout.
And my second question is on Greece: how would the ECB feel about rescheduling the repayments on the Greek bonds? Would that qualify as monetary financing?

Draghi:
On the second question, the answer is yes, it would qualify as monetary financing. We have said several times that any voluntary restructuring of our holdings would be monetary financing.

On the first question, I could say that today we are ready with our OMTs. We have a fully effective backstop mechanism in place, once all the prerequisites are in place as well. Governments have made substantial progress on a variety of fronts, both in what I call “vulnerable countries” and in countries that are under a full IMF programme. You can actually see this progress across the board as far as fiscal consolidation, structural reforms and also repairing some of the flaws of the banking sector are concerned. So, at this point, it is really up to the governments to decide what they want to do. The mechanism is in place.

Now to your question about the ESM: we will have to assess exactly what it means, and I do not want to prejudge the technical discussion that will take place. But we have to remember that this is not a matter for the ECB, it is a matter for the governments concerned; it is governments’ money, it is taxpayers’ money. So, they will have to discuss and take a stance on exactly what is meant by legacy assets.

Question:
Back to the OMT, you mentioned that there are steps that need to happen before the ECB would activate it. It is in the governments’ hands. Does that weaken the effectiveness of the OMT because you make yourselves part of the political process, which can be time-consuming and complicated?

And my second question is on the continued rise in youth unemployment in Europe and anti-austerity protests. How concerned are you about unemployment, youth unemployment and is austerity making the problem worse? Thank you.

Draghi:
The first question is about conditionality. We view conditionality as an essential part of the activation of the OMT. I have made this point since the very beginning. Conditionality will actually have several roles. First of all it will reduce the moral hazard by governments. The second role it will have is that it protects the independence of the ECB. Without conditionality you would certainly have what people call fiscal dominance. With conditionality the independence of the ECB is protected. There is also a third angle to this. You can look at conditionality as a way to create credit enhancement on the bonds of the country that is actually the object of conditionality. So, it is an incentive to pursue the right economic policies, which have benefits for all parties concerned. Now, there are going to be, and rightly so, some political processes, but look at this from another angle. You know that one of the conditions is the signing of a memorandum of understanding with the Eurogroup. Once you have that, you have unanimity. And you have the whole of Europe that is supporting this programme politically. By itself, this is an extremely forceful ingredient in the programme.

The second question was about youth unemployment. We completely share the concerns of the situation. And, as a matter of fact, in independent speeches several members of the Governing Council have raised the issue of high unemployment and especially focused on youth, on the young part of the population. It is an incredible waste of resources and it will have to be addressed and it can be addressed by properly reforming the labour market so as to decrease the dual nature the labour markets have taken, I would say in the last seven to ten years, in some European countries. The challenge, of course, is to address the dual nature of the labour market, while keeping it flexible overall.

Question:
Would a rate cut even be conceivable at the moment given that the transmission mechanism is broken and would there be any point in conducting such a thing until the OMT has been used or there has been a sustainable and significant drop in the bond yields of the countries that have distressed bond markets? Or is that an over-emphasis of the way you see this broken transmission mechanism?

And my second question. We are in Slovenia, at the spot where George W. Bush had his first ever summit with Vladimir Putin, after which Bush said he looked into Putin’s eyes and could see his soul and knew this was a man he could do business with. I was wondering if there was any such moment today between you and Mr Weidmann?

Draghi:
I would like to know from you who is Putin and who is George W. Bush?
Question:
I leave that to you.

Draghi:
On the first question, in a sense it is a purely hypothetical question. But it can be addressed by saying that non-standard monetary policy measures are being designed and implemented when the standard ones are not fully effective. Otherwise, we would simply stay with the standard policy measures. So, in a sense, this answers your question.

Question:
Can you carry on using standard measures at the same time as having to deploy non-standard ones?

Draghi:
Well, we have to see if we can repair the monetary policy transmission channels. We do not speculate on future changes in interest rates. I think that the Governing Council has assessed that the price level and the rate of change of prices is in line with medium-term price stability, according to our definition. So, that is the assessment we made about the interest rate and, as I said, there was no discussion.
But to answer your second question, while I do not want to comment on individual positions, of course, I can say that the discussion was very constructive across the board.
Question:
Mr Draghi, you keep encouraging banks to repair their balance sheets. Do you think that they should be able to use ESM funds for that, for their existing problems as well?
And my second question regards Spain: do you think that precautionary credit lines for Spain should be sufficient to solve Spanish financial problems?

Draghi:
On the first question: when I said there has been significant progress, I included the repair of bank balance sheets. The statement the President of the European Banking Authority (EBA) gave yesterday, when he presented the figures on the recapitalisation that has taken place so far, was reassuring in this respect. So, the capitalisation gap that was rather large until two years ago has been reduced significantly by the euro area/ European banks.
On Spain: it is one example where significant progress has been made. Significant challenges remain ahead as well, but the progress made on the front of fiscal consolidation, structural reforms (with the announcement of a very large reform programme), and on the front of the banking sector, with the conclusion of the stress test, is really remarkable if you think of just how many measures have been announced, legislated and implemented in such a short period of time.

Question:
Mr Draghi, just to follow up on that question. Does that mean that it would be enough for Spain to continue on its reform progress for the ECB to start buying bonds or would Spain actually have to commit to much harsher reforms for you to intervene?
And my second question would be: about a year ago, you said in a similar press conference that you would make periodic checks on whether you are in sync with the tradition of the Bundesbank or whether you are deviating from it. I was wondering what your assessment is today, whether you are in sync, or how close are you?

Draghi:
On the second point, I can answer right away that if the tradition of the Bundesbank was to ensure price stability, the ECB is fully in sync with that tradition.
On the first question, there is a tendency to identify conditionality with harsh conditions, as you said. Conditions do not necessarily need to be punitive. Actually, many of the conditions are related to structural reforms, which have social costs, but also great social benefits. And if the reforms are well designed, the latter are going to be greater than the former. So, whether this is enough is up to the Spanish Government to decide. It is for the other euro area governments to decide whether the programmes suffice – you know what the conditions are, you know that it is necessary to submit a request for an EFSF/ESM programme. We would actively seek the IMF’s involvement in the process. Having said that, we now have a mechanism in place that is a fully effective backstop if such a request comes and if the assessment of the Governing Council regarding the monetary policy transmission channels allows action to be taken.

Question:
I was wondering whether you could explain your thinking with regard to Portugal, because Portugal does look as if it has fulfilled the prerequisites for the OMT to work. So, why hasn’t the European Central Bank bought Portuguese debt on the secondary market?
And then one other question, because we are in Slovenia: the Slovenian Government is going ahead with the setting up of an institution to take over the non-performing loans from the banks in return for providing them with government bonds. Will those government bonds be eligible as collateral if the banks present them?

Draghi:
Portugal is an example of the significant progress that I have hinted at before, of the very, very significant progress that has been achieved. Moreover, the overall situation, politically speaking, is a strong situation. Obviously, we also fully share the concerns that have been expressed about the difficult social situation, but the reform agenda is firmly in place. The OMT would not apply to countries that are under a full adjustment programme until – and that is what I believe I said last time – until full market access, complete market access has been obtained. And this is because the OMT is not a replacement for a lack of primary market access. By the way, on this front, among several pieces of positive news that we have had in the last few days, we had one piece on Portugal, namely that, yesterday, for the first time, a three-year bond was issued, which is not complete market access, but it marks the beginning of complete market access, so that it is actually a reassuring bit of news.

Kranjec:
On Slovenia, you are right. The Parliament has adopted a law on the agency that will try to carve out bad assets from the banks. But the precise modalities for the eligibility of these bonds has not been decided yet, so that I am not able to tell you whether this would be acceptable or not. I can only tell you that the pool of collateral that is available to Slovenian banks at the moment is sufficient and that it is not an urgent matter. I understand that it will be elaborated in further steps on this law.

Question:
Have you seen any signs that the pure announcement of the OMT framework has affected the easing of credit conditions in the weak countries?
And my second question is, have you discussed what could be a good measure to decide what is an acceptable level of financial fragmentation and what is an unacceptable level?

Draghi:
On the first question, the answer is yes.

Question:
Sorry, because the figures of today, the August figures, show that especially in Spain it is getting worse.

Draghi:
There was a substantial, significant improvement all across financial markets and then there was a correction. If we take a snapshot now with respect to the beginning of August we see that the various interest rate spreads are still at a level way below where they were in July. We see one comforting piece of news, as I said before, about Portugal, having issued the first three-year bond. The second piece of good news actually concerns Spain, that Spain has completed almost 90% of its funding programme for the sovereign. There has been sizeable issuance by corporations and banks since then and, something that is dear to our eyes and we always look at: TARGET2 balances (or imbalances) have stabilised. All in all, the effect has been positive. There have been sizeable inflows of bank deposits in Italy. Spain’s recourse to central bank financing has gone down in the last month. Not bad, but at the same time we also have to express a note of caution. First of all, volatility is still relatively high and, secondly, governments will have to persevere in their reform action on all fronts: fiscal consolidation, structural reforms, the banking sector and more generally the financial market sector.
What is an acceptable level of fragmentation? Well, it is hard to say. But certainly when you see two subsidiaries of the same company located in two different countries and paying completely different interest rates for their borrowing, when you see exactly the same individual borrower, say a young couple that wants to buy a flat, and paying a completely different interest rate on mortgages, then you start asking yourself, maybe there is a problem here. Then you look around and you see that credit flows are normal in one part of the euro area, are non-existent in another part, falling and have been falling precipitously in yet another part. When you see that you have widespread credit rationing in some parts of the euro area, when you see that there is a very strange correlation between the movements in the exchange rates and the interest rates; namely that the exchange rate appreciates when the interest rates go down, and vice versa. When you see that the bid-ask spreads reveal a profound lack of liquidity in certain markets, when you see that levels of volatility are abnormally high and when you see that you have the inversion of the yield curves all of a sudden, which then disappears right after an announcement, then you say that you have a reasonable and possibly unacceptable level of fragmentation in the euro area. But the issue is really that the level of fragmentation becomes unacceptable when the singleness of the monetary policy in the euro area is being put into question. Because that is the time when we cannot achieve our primary objective, namely maintaining price stability in the medium term across the euro area.
Question:
I would like to return to the question of bad banks. The ECB had some concerns regarding the establishment of this agency or bank and I would like to ask you,
Mr. Draghi, whether this remark still stands or you support this, let’s say, resolution for Slovenia?
And the second question is, what are your recommendations for Slovenia regarding fiscal consolidation? Do you think that Slovenia needs a bailout?

Draghi:
I think Marko will respond best to both questions, but by and large let me say that we agree with the overall assessment of the IMF.

Kranjec:
Just to say a few sentences. The ECB made an assessment of the law that was adopted and we understood it in a sense that the view was that the agency, the government and the central bank should cooperate closely in deciding how to make the banking sector more resilient.
As to the second question regarding the bailout, I think it is much too early to say anything about it. All macroeconomic indicators at the moment point to the fact that if a country adopts decisive stabilisation measures in fiscal consolidation, in labour markets, in pension reforms and of course in the banking sector, it will not need to apply for a programme, but in the end, as the President also said, in many countries that is primarily a political decision. The central bank cannot operate in an environment which is inherently unstable from a macroeconomic point of view.

Question:
As a member of the Slovenian press, my question is rather similar. The decision on the OMT programme has contributed enormously to calming the situation in the markets. However, the yields on Slovenian government bonds remain rather high and surpass the yields of the Spanish government bonds. What do you believe are the factors that could calm this situation, which is very worrisome for Slovenian citizens?

Kranjec:
The spreads that you have noticed in the markets in our opinion do not reflect the fundamentals. You should take into consideration that the capital markets for Slovenian paper are very shallow, the transactions are rare and one cannot judge the underlying fundamentals from two or three transactions. We believe that with the adoption of the stabilisation measures that I mentioned before, spreads will go down and I understand – no I do not only understand, you can verify yourself – that spreads have gone down. With the adoption of further measures I believe that spreads will go down as they have done in other euro area countries.

Question:
Two questions. The first one: How concerned are you that if the OMT programme actually comes into action it might rearrange the yield curve and denaturalise the yield curve, as it were and frontload the short-end of the maturity spectrum?
The second one is on the OMT per se: If the OMT is a purely monetary measure for repairing the dysfunction of a fragmented market, how can you set political preconditions? Is it not a little bit like the local fire brigade telling me “ I can only turn on the water if you show me that you have a roof improvement programme”?

Draghi:
On the first point, we will certainly monitor the strategic response of the issuers to our programme. The OMT is not meant to induce a strategic response in favour of issuing short terms.. So this will be monitored. By the way, I think, and that is my purely personal perception, that all of the countries that may need an OMT have now reached, after many years of a difficult, very difficult process, reasonable maturities, reasonable durations in their stock of public debt. It is very unlikely they will change these durations in favour of a short-term issuance. First, because they have market access. It is not that they do not have market access. These countries do have market access. So there is no reason really to change the duration, and you know there are not only pros if you change the duration, you also have some serious cons. So all in all, I think it is unlikely. In any event the ECB will closely monitor this possible strategic response by issuers.
As to the second point, I think it is just the other way around. I think I did say something about this last time we had this press conference. When the OMT was designed, we had the perception and the evidence that there were tail risks in the euro area, namely that there was a bad equilibrium for certain countries in certain markets. It means that expectations were self-perpetuating and in the end would create disruptive scenarios. So then it is opportune for the policy-maker, which in this case is the ECB, to step in with a programme. At the same time, we should not forget how these countries got into a bad equilibrium to begin with, namely with bad policies, or in some cases no policies at all for a long period of time, while the rest of the world was changing completely. So the first conclusion was that any monetary policy would have no effect if the other policies did not change. That is why conditionality is so important. Eventually, as I said at the beginning, it is what makes the monetary policy effective and it is what protects the independence of the ECB. So I would not buy the example you have given, I think it is really an integral part of this.

Question:
Are you comfortable with the current situation in which Spain – and even Germany – has doubts about the rescue? Or did you expect a more rapid reaction from the political side?
And second, do you think that Spain has the possibility to resolve its crisis without European aid?

Draghi:
Unfortunately, I cannot comment on either of the questions, because stopping this process is very much a decision that is entirely in the hands of governments. As I have said over and over again, I think that through the OMT programme, the ECB has done everything possible and it could certainly create an environment which is conducive to reforms because it could remove what we call the redenomination risk. So, it could remove tail risks but ultimately, the initiative is in the hands of governments.

Question:
You spoke several times about risks and now redenomination risks. Yields have calmed down since your announcement in July and then your further announcement. How much of these risks have been removed and do you think it is just a temporary effect which will be reversed in the event that the OMT programme is not applied?
And second, as you made OMTs dependent on a request and the governments seem to be extremely reluctant to make such a request, and given that the monetary policy transmission mechanism is still broken, have you thought about any other solution that you could apply in this event?

Draghi:
Well, on the second question: for the time being, no. I think we have the sense that it was a very important decision which has many dimensions. We had to cope with all of these and it is now in place. We are ready and we have a fully effective backstop mechanism in place. Now it is really in the hands of governments and, as I said many times, the ECB cannot replace the action of governments.

With regard to whether the level of interest rates reflects redenomination risks, as I said before, we are considering a variety of indicators here, one of which is the interest rates and then we are also considering those I mentioned, namely the bid-ask spreads, liquidity, the shape of the yield curves and volatility. So there are a variety of indicators which will certainly inform our monetary policy assessment.

Question:
With regard to the recapitalisation of banks through the ESM, do you see any possible way out and if so, what is it?
And second, the markets are already discussing the point at which you could intervene in the markets in the event that Spain or another country asks for aid. Do you have a particular target or target range?

Draghi:
On the second question, the answer is no. As I just said, we are looking at a variety of indicators. And we will look at all of them because we have to carry out monetary policy assessment. What is the degree of disruption to our monetary policy transmission channels? That is simply a question we have to answer.
On the first question, as I said before, it really is very much in the hands of governments. They took the initiative a year and a half ago to create the ESM. Now that it is about to enter into force, there are certain limitations that are being brought to the table. There is going to be a political discussion and frankly, it would not be right for the ECB to prejudge the outcome of this discussion, nor to express views on it.

Question:
I would like to ask you a question on the supervision of banks: how do you plan to ensure that the two tasks to be performed by the ECB will be separated? In Germany at least, there are still important people who have many concerns about this potential conflict of interest. Jens Weidmann recently raised these concerns in an interview, so what would be your response?

Draghi:
I think there are very important concerns that we are addressing by means of a proper internal organisation. The proposal doesn’t give us much of an option on this. I think one of the principles I stated at the very beginning of this discussion was that, if in the end the ECB is involved in the single supervisory mechanism, we have to make sure we have an organisation which de facto assures the separation of monetary policy from supervision. And this can be done by fully delegating the task to the Supervisory Board. Fortunately, the Commission’s proposal does foresee the possibility of the Governing Council delegating all the supervisory tasks to the Supervisory Board. So, the management and internal organisational means are there. I believe it can be achieved.


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Living Europe’s Nightmare

NEW YORK – Losing a long war is always hard to accept. Hemmed in by the Americans and the Russians in the final days of World War II, Hitler convinced himself that he had two armies in reserve to mount a counter-attack and win the war. Meanwhile, having lost the entire Pacific, Japan’s Imperial Cabinet believed that no enemy could set foot upon the country’s sacred soil. When the truth is unimaginable, human psychology finds an alternative reality in which to dwell.

That describes the global situation today. The entire planet seems to be in denial about what is about to occur in the eurozone. Pundits keep expecting Germany to pull a rabbit out of the hat and flood the continent with Eurobonds, or that Mario Draghi will mount a coup at the European Central Bank and buy up every deadbeat country’s bonds.

Either could happen, but both are extremely unlikely. Germany cannot guarantee the eurozone’s debt without control over the eurozone, which no one has offered, and Northern Europe will not permit the ECB to be hijacked by “Club Med” and turned into a charity organization. It is not just a matter of politics; it is also – as the Germans keep pointing out – a matter of law.

Europe has a Plan A, whereby each country would reform its economy, recapitalize its banks, and balance its budget. But Plan A is not working: its intended participants, most notably France, are rejecting it, and there is an emerging southern European consensus that austerity is not the solution.

Greece’s recent election has put it in the anti-austerity vanguard. Italy and Spain (which does not have enough money to bail out its banking system), have similarly called for an end to austerity, and Ireland will be voting on it soon. All have lost access to the bond market, and Portugal is so far beyond hope that its sovereign debt is trading for cents on the euro.

There is no well-thought-out plan for the orderly exit of the eurozone’s insolvent countries. There are no safeguards, no plans, no roadmap – nothing. The Maastricht Treaty, like the United States Constitution, did not provide for an exit mechanism. So, instead of realism and emergency planning, we get denial and more happy talk. But, just because something is “unthinkable” doesn’t mean that it can’t happen.

In fact, it already is happening. Greece is rapidly running out of money; its residents are withdrawing their deposits and have stopped paying their taxes and utility bills. Even if the country can stay afloat until the June 17 election, a disorderly eurozone exit, default, and currency redenomination will follow. Greece will be dependent upon foreign aid for essential imports such as petroleum and food. Civil order will be difficult to maintain, and the army may be forced to step in (again).

Once Greece goes, runs on bank deposits are likely to follow in Spain and Italy. There is nothing to stop Spanish and Italian depositors from wiring their euros from their local bank to one in Switzerland, Norway, or New York. At that point, the only thing still standing between the eurozone and financial chaos will be the ECB, which could buy government bonds and fund the bank runs. The scale of such an operation would be enormous, and would expose the ECB to huge credit risk. But it could, in principle, step in – if Northern Europe permitted.

If the ECB does not step in, Italy and Spain, too, will be forced to exit the eurozone, default on their euro-denominated sovereign and bank obligations, and redenominate into national currency. Massive losses would be imposed on the global financial system. Given the opacity of banks’ exposures, creditors would be unable to discriminate between the solvent and the insolvent (as was the case in September 2008).

The US banks most likely to be affected by such a scenario would be the globalists: Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, and Morgan Stanley. They would require a rescue package similar to the US Troubled Asset Relief Program, created after Lehman Brothers’ collapse in 2008. The US can afford a second TARP, but it would require Congressional legislation, which is not guaranteed (though the US Federal Reserve can, of course, keep the system funded no matter what).

Massive wealth destruction, combined with global financial chaos, would pose a challenge to monetary policymakers worldwide. Central banks would be tasked with preventing deflation, implying a major round of quantitative easing. But, since banks are the transmission mechanism for monetary stimulus, this presupposes functioning banking systems. Each country would need to restore confidence in its banks’ solvency, which would most likely require a blanket bank guarantee and a recapitalization scheme (such as TARP).

The US financial system can withstand any shock, because the US can print the money that it needs. The Fed can maintain nominal prices, nominal wages, and growth if it acts heroically, as it did in 2008. The stock market will react negatively to the level of uncertainty caused by the collapse of the European financial system (as it did in 1931), and the dollar, yen, and gold should benefit. The fate of the British pound and Swiss franc is impossible to say; they could benefit as safe havens, but their banks are highly exposed to the eurozone.

It is bad enough that the world is utterly unprepared for the future that can be foreseen. The unanticipated financial, economic, and political consequences of the coming crisis could be even worse.

Em Português:

Reunião do Conselho de Governadores do Banco Central Europeu: Transcrição Conferência de Imprensa do Presidente  do BCE Mario Draghi  Goldman Sachs; Transcrito Por Christopher T. Mahoney Ex-Vice Presidente Moodys

American GAP National Taxpayers Union Petition: No International Bank Bailouts without Whistleblower Protections! by Shelley Waldenon on The Whistleblogger

Petition: No International Bank Bailouts without Whistleblower Protections!


by Shelley Waldenon March 02, 2012 ( The Whistleblogger / 2012 )

Dear GAP Supporter:

Last December, while US taxpayers were doing their holiday shopping, Congress quietly approved more than $35 billion in bailouts to international development banks. These multilateral development banks (MDBs) are immune from national oversight and laws, both here and abroad. They are riddled with corruption and blatantly resist any meaningful internal governance reform. Experts estimate that $26 – $130 billion have been lost to corruption at the World Bank alone since its founding, to say nothing of the other MDBs.

Fortunately, Congress hasn't issued a blank check. According to a federal law that was passed in December, before the U.S. can contribute tens of billions of dollars in cold cash and guarantees to the World Bank, the Inter-American Development Bank and the African Development Bank, the Treasury Department must report that each institution is making substantial progress toward implementing certain reforms – including best practice whistleblower protections. That's where you come in.

Please sign our petition to demand the Treasury Department to conduct – and release for public comment – a credible review that details the implementation of the MDB's whistleblower protections!


The Treasury Department is required to submit a report to Congress about the MDBs' progress on these reform measures. Without oversight from the American people, Treasury is expected to quietly issue a report that rubber-stamps MDB practices that have condoned retaliation against whistleblowers. The report may well approve the bailouts, although the Banks have yet to even adopt best practice whistleblower protections, let alone implement them.

A comprehensive survey of more than 5,400 executives worldwide found that whistleblowers detect more economic crimes than corporate security, internal audits, fraud risk management and law enforcement combined. And why wouldn't they? Workers on the inside are often the only individuals with knowledge of corruption who aren't involved in the scheme. Strong whistleblower protections are crucial to ensuring that economic crimes are detected and that the billions of American taxpayer dollars flowing into them are spent appropriately. Together, we can ensure that before another penny of taxpayer money is distributed, the MDBs are held accountable for implementing strong whistleblower protections.

Please sign our petition to demand the Treasury Department to conduct – and release for public comment – a credible review that details the implementation of the MDB's whistleblower protections!


This petition is a joint project of GAP and the National Taxpayers Union.


Shelley Walden is International Officer for the Government Accountability Project, the nation's leading whistleblower protection and advocacy organization.

Read Full Article at: The Whistleblogger - Petition: No International Bank Bailouts without Whistleblower Protections! - Government Accountability Project

Find Government Accountability Project GAP Facebook

Revolution Reasons: IMF World Bank International Mafia Federation Creating Poverty! Economic Frau!d BBC Newsnight Economy Documentary by Greg Palast

BBC NEWS | Greg Palast | IMF World Bank 'fails poor' says Stiglitz - FIRST BROADCAST 27 APRIL 2001

IMF World Bank International Mafia Federation Creating Poverty! BBC Newsnight Economy Documentary

IMF and World Bank meet in Washington - Greg Palast reports for BBC Television's Newsnight.
 James Wolfensohn, President of the World Bank, was supposed to appear on CNN, and he told CNN that if I showed up and they put me on the air he would not appear; he would remove all tapes of his interviews if Greg Palast were allowed on the air. And CNN did the courageous thing and yanked me out of the studio. Now we're going to find out why.
featuring:



Joseph Stiglitz(fmr chief economist World Bank)

GIABO Revolution: Global Insurrection Against Banksters Organizations

Revolt Against IMF ECB WORLD CRIMINAL BANKS
Creating Poverty: World Bank's Latest Passion

The World Bank has strange ways of eradicating poverty. Considering that sustainable agriculture is the established link to poverty eradication, the World Bank/IMF forced developing countries to shift from staple foods (crucial for food security needs) to cash crops that meet the luxury requirement of the western countries.

By: Devinder Sharma ~ STWR

In tune with the world's latest fad, the World Bank prominently displays a slogan in its Washington DC office: 'The purpose of the World Bank is to fight poverty with passion'. In fact, such has been the global effort to eliminate poverty and resulting hunger that over the past 25 years, despite every international treaty and agreement swearing in the name of poor and downtrodden, the number of absolute poor continues to grow unabated. World Bank is no exception

If statements and slogans could translate into action against poverty and hunger, the world would have emerged from the glaring inequalities long ago. Poverty could have been easily eclipsed from the face of the globe. Even the World Bank has very conveniently used the emotive appeal of fighting hunger to push in reality the commercial interests of the private corporations

OWS, OccupyMN, Anonimous Message America: Occupy Minneapolis Federal Reserve Bank! World Revolution

Message from anonymous - #OcuppyMN Occupy Mineapolis

Occupy Wall Street AntiBanks Movement

Greetings citizens of the world.


This is a message from anonymous.

On October 7th we will stand in support with our brothers and sisters as they occupy the Federal Reserve Bank of Minneapolis.
We have watched the actions of law enforcement during Occupy Wall Street and find the police arrests completely unacceptable.
We the people have the power and, will use it.
Our one demand we have ever had is Freedom.
Simple yet so complicated, or so it seems.
We will be pulling back the veil of deception that has been placed over the people's eyes now for far too long.
The Federal Reserve Banks have a stranglehold over the citizens.
Now most people go to work every day to make someone else wealthy while they are, through no fault of their own, pushed deeper and deeper into debt each day.
People are all now considered a piece of property.
An asset to be used as collateral in world financial markets.
Drone tax payers.
Fodder for the machine which devours a man's soul with little care or respect for anything besides profit and outlandish bonus payments.

people must begin to see your situations clearly and without fear.
For without action now,.... the machine will destroy what is left of our children's future on this most excellent planet.

This is a call from anonymous.
For non-violent resistance movements.

As We do not condone violence in any way.

We will march from 90 Hennepin Avenue Minneapolis, on October 7th at 9:00 AM and our voices will be heard.


We are Anonymous.
We are legion.
We do not forgive.
We do not forgive.
Minneapolis expect us.

If you need trillions of dollars and don' t feel like earning it this is the place for you! Normally they call this "counterfeiting" but these guys are legit and can do it for all for free! Do you have credit card debt? It's free money! Need to start a war in the Middle East? Free! Bailing out your multi-national bank? FREE!* *Offer only applicable if you are in cahoots with the Federal Government thus the name "federal reserve"

USDOR Antibanks Resistance Movement: Boston People Protests Against Bank of America

Global Economic Crisis. Antibanks Bailouts Global Resistance World Revolution Movement.
People Against NWO New World Order Criminal Bankers

American Citizens Protestors descend on Boston Bank of America, ramp up to fall excitement

Dozens of protesters descended on Boston Bank of America branches today, following the company’s announcement that it will slash more than 30,000 jobs in the coming months. This was the first, exciting, taste of dozens of actions, events, trainings and more happening this Fall targeting the big banks for draining wealth from our communities and crashing the economy.

With shouts of “Bank of America: Bad for America” and “We can see your greedy side!,” local residents stormed bank branches in Fields Corner and Grove Hall, presenting three core demands of the financial giant:

Pledge to renegotiate underwater mortgages and stop foreclosures
Resume lending to small businesses
Stop layoffs
Despite its claims of financial hardship in the media, Bank of America posted a $10.2 billion profit in 2010 – and raked in an additional $1 billion federal tax refund. The company pointed to fallout from the housing bust as the rationale for its latest round of mass layoffs. Bank of America holds the largest number of foreclosed properties in the country, but refuses to renegotiate with many former homeowners.

Stay tuned for more information on how the big banks will come head-to-head with their most formidable foe yet-you.

GlobalRevolution: OCCUPYWALLSTREET Antibanks Protests: Man Igniting Himself in Front of Greek Bank

Man Igniting Himself in Front of a Greek Bank

World Revolution People Struggle Anti NWO Riots Protests David Against Golias Reasons: The Bankers Manifesto

"If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied."
Thomas Jefferson

World Revolution People Struggle Anti NWO Riots Protests David Against Golias Reasons: The Bankers Manifesto

Are we seeing the culmination of Jefferson’s fear in 2011?

"We [the bankers] must proceed with caution and guard every move made, for the lower order of people are already showing signs of restless commotion. Prudence will therefore show a policy of apparently yielding to the popular will until our plans are so far consummated that we can declare our designs without fear of any organized resistance. The Farmers Alliance and Knights of Labor organizations in the United States should be carefully watched by our trusted men, and we must take immediate steps to control these organizations in our interest or disrupt them.



At the coming Omaha Convention to be held July 4th [1892], our men must attend and direct its movement, or else there will be set on foot such antagonism to our designs as may require force to overcome. This at the present time would be premature. We are not yet ready for such a crisis. Capital must protect itself in every possible manner through combination [conspiracy] and legislation.

The courts must be called to our aid, debts must be collected, bonds and mortgages foreclosed as rapidly as possible.

When through the process of the law, the common people have lost their homes, they will be more tractable and easily governed through the influence of the strong arm of the government applied to a central power of imperial wealth under the control of the leading financiers. People without homes will not quarrel with their leaders.

History repeats itself in regular cycles. This truth is well known among our principal men who are engaged in forming an imperialism of the world. While they are doing this, the people must be kept in a state of political antagonism.

The question of tariff reform must be urged through the organization known as the Democratic Party, and the question of protection with the reciprocity must be forced to view through the Republican Party.

By thus dividing voters, we can get them to expand their energies in fighting over questions of no importance to us, except as teachers to the common herd. Thus, by discrete action, we can secure all that has been so generously planned and successfully accomplished."

In order to warn Americans, the1892 Bankers’ Manifesto was revealed by US Congressman Charles A. Lindbergh, Sr. from Minnesota before the US Congress sometime during his term of office between the years of 1907 and 1917.

THE BANKERS’ MANIFESTO OF 1934

"Capital must protect itself in every way, through combination and through legislation. Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law, the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of wealth, under control of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principal men now engaged in forming an imperialism of capital to govern the world. By dividing the people we can get them to expand their energies in fighting over questions of no importance to us except as teachers of the common herd. Thus by discrete action we can secure for ourselves what has been generally planned and successfully accomplished."

The Bankers’ Manifesto ties in with the U.S. Senate Document No. 43, 73rd Congress, 1st Session (1934), which states: "The ultimate ownership of all property is in the State; individual so-called ‘ownership’ is only by virtue of Government, i.e., law, amounting to mere ‘user’ and use must be in acceptance with law and subordinate to the necessities of the State."

The 2005 Supreme Court Ruling on Eminent Domain also ties into the above U.S. Senate Document.

----------------------------------------------------------------------------------------------
"People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd."


- J. P. Morgan
TOP BANKSTER

BANK GANG MAFIA GANGSTERS

UniCredit Banca Vatican Bank Accused Of Money Laundering: Corrupt Dirty Money Blessed By Vatican Bank Washing Machine Turns Holly Sacred Money

Russia Today: Vatican bank accused of laundering


The Vatican is facing some awkward questions after an investigation was launched into its alleged involvement in a money-laundering scheme.
The financial scandal was triggered by a report in an Italian magazine that claimed the Vatican bank laundered some $200 million.


The alleged secrets of the Vatican have often provided rich material for fictional works, such as blockbuster film Angels and Demons, but the Holy See now has to deal with a case equally shrouded in mystery.
The Vatican Bank has been accused of laundering $200 million through the accounts of Italy’s UniCredit Bank, one of the world's largest financial institutions.

The London Telegraph recently reported that the Vatican Bank is the eighth most popular destination for laundered money, ahead of the Bahamas, Switzerland and Liechtenstein. The reason for this is that you cannot trace any movement of cash within the bank.

“I had the privilege to walk inside this bank. It’s nothing like a bank,” shared lawyer Massimiliano Gabrieli. “If you go there you deposit or withdraw money without limit, without any kind of receipt for the bank and for the client. All you have is a single card with a number.”

Download

Source: Russia Today Vatican bank accused of laundering

Reasons For WorldRevolution: Money As Debt Full Length Documentary Debt Money World Bank Slavery

Money As Debt-Full Length Documentary

Money As Debt is a fast-paced and highly entertaining animated feature by artist & videographer, Paul Grignon. It explains today's magically perverse DEBT-MONEY SYSTEM in terms that are easy to understand.

Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal, there is no human relation between master and slave. Debt- government, corporate and household has reached astronomical proportions. Where does all this money come from? How could there BE that much money to lend? The answer is...there isn't. Today, MONEY IS DEBT. If there were NO DEBT there would be NO MONEY.
If this is puzzling to you, you are not alone. Very few people understand, even though all of us are affected.

Portugal and Spain Alert: Ireland Bankruptcy Danger After EU ECB IMF European Central Bank Bailout

Ireland's future depends on breaking free from bailout

"National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately."  

This is the crux of it and we had better get on with it. Dissolve NAMA now and let the ECB swing in the air instead of going along with their dastardly plan to grab our national assets before making us a pariah bankrupt state.  
Serves them right. Thank's Morgan you figured it out, others could only talk about asymmetric risks. As a reward I am going to vote for you to deliver the speech from the steps of the GPO in 2016.
OPINION from Irish Times: Ireland is heading for bankruptcy, which would be catastrophic for a country that trades on its reputation as a safe place to do business, writes MORGAN KELLY
WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.
Ireland is facing economic ruin.

While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

As a respected academic expert on banking crises, Honohan commanded the international authority to have announced that the guarantee had been made in haste and with poor information, and would be replaced by a restructuring where bonds in the banks would be swapped for shares.

Instead, Honohan seemed unperturbed by the possible scale of bank losses, repeatedly insisting that they were “manageable”. Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s.

Rising dismay at Honohan’s judgment crystallised into outright scepticism after an extraordinary interview with Bloomberg business news on May 28th last year. Having overseen the Central Bank’s “quite aggressive” stress tests of the Irish banks, he assured them that he would have “the two big banks, fixed by the end of the year. I think it’s quite good news The banks are floating away from dependence on the State and will be free standing”.
Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person. Armed with Honohan’s assurances that the bank losses were manageable, the Irish government confidently rode into the Little Bighorn and repaid the bank bondholders, even those who had not been guaranteed under the original scheme. This suicidal policy culminated in the repayment of most of the outstanding bonds last September.

Disaster followed within weeks. Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion. Despite aggressive cuts in government spending, the certainty that bank losses would far exceed Honohan’s estimates led financial markets to stop lending to Ireland.

On November 16th, European finance ministers urged Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.

At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.

Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.

Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.

In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.

The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy.

Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.
Six months on, and with Irish government debt rated one notch above junk and the run on Irish banks starting to spread to household deposits, it might appear that the Irish bailout of last November has already ended in abject failure. On the contrary, as far as its ECB architects are concerned, the bailout has turned out to be an unqualified success.

The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

But why was it necessary, or at least expedient, for the EU to force an economic collapse on Ireland to frighten Spain? The answer goes back to a fundamental, and potentially fatal, flaw in the design of the euro zone: the lack of any means of dealing with large, insolvent banks.

Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans. Had the collapse been limited to Irish banks, some sort of rescue deal might have been cobbled together; but a suspicion lingers that many Spanish banks – which inflated a property bubble almost as exuberant as Ireland’s, but in the world’s ninth largest economy – are hiding losses as large as those that sank their Irish counterparts.

Uniquely in the world, the European Central Bank has no central government standing behind it that can levy taxes. To rescue a banking system as large as Spain’s would require a massive commitment of resources by European countries to a European Monetary Fund: something so politically complex and financially costly that it will only be considered in extremis, to avert the collapse of the euro zone. It is easiest for now for the ECB to keep its fingers crossed that Spain pulls through by itself, encouraged by the example made of the Irish.

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.

Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.

The ECB applauded and lent Ireland the money to ensure that the banks that lent to Anglo and Nationwide be repaid, and now finds itself in the situation where, as a consequence, the banks that lent to the Irish Government are at risk of losing most of what they lent. In other words, the Irish banking crisis has become part of the larger European sovereign debt crisis.

Given the political paralysis in the EU, and a European Central Bank that sees its main task as placating the editors of German tabloids, the most likely outcome of the European debt crisis is that, after two years or so to allow French and German banks to build up loss reserves, the insolvent economies will be forced into some sort of bankruptcy.

Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off.

Worse still, a bankruptcy can do nothing to repair Ireland’s finances. Given the other commitments of the Irish State (to the banks, Nama, EU, ECB and IMF), for a bankruptcy to return government debt to a sustainable level, the holders of regular government bonds will have to be more or less wiped out. Unfortunately, most Irish government bonds are held by Irish banks and insurance companies.

In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico.

Suppose that we did not want to follow our current path towards an ECB-directed bankruptcy and spiralling national ruin, is there anything we could do? While Prof Honohan sportingly threw away our best cards last September, there still is a way out that, while not painless, is considerably less painful than what Europe has in mind for us.

National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.

First the banks. While the ECB does not want to rescue the Irish banks, it cannot let them collapse either and start a wave of panic that sweeps across Europe. So, every time one of you expresses your approval of the Irish banks by moving your savings to a foreign-owned bank, the Irish bank goes and replaces your money with emergency borrowing from the ECB or the Irish Central Bank. Their current borrowings are €160 billion.

The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.

So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.

Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position. By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions. Just as importantly, it sends a signal to the rest of the world that Ireland – which 20 years ago showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers – is back and means business.

Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival. It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy.

The destruction wrought by the bankruptcy will not just be economic but political. Just as the Lenihan bailout destroyed Fianna Fáil, so the Noonan bankruptcy will destroy Fine Gael and Labour, leaving them as reviled and mistrusted as their predecessors. And that will leave Ireland in the interesting situation where the economic crisis has chewed up and spat out all of the State’s constitutional parties. The last election was reassuringly dull and predictable but the next, after the trauma and chaos of the bankruptcy, will be anything but.

Morgan Kelly is professor of economics at University College Dublin

Source: Irish Times