Cantillon

Inside The World Of Business

Athens account-keeping exposes euro faultlines

WHEN THE euro zone was formed, Greece was not considered sufficiently economically fit to take part. With a long history of economic volatility, it was felt that Greece’s inclusion would unnecessarily weaken the new European single currency, a step that would not be tolerated by the German Bundesbank, then the strong member of European central banks.

Two years later, however, Greece’s socialist government was boasting some of the best economic figures in the EU, more than enough for it to be assured entry in time for the physical appearance of euro notes and coins at the start of 2001. The EU accepted Greece’s evidence of its economic stability at face value.

In 2004, the incoming conservative government let it be known that the figures had been fudged to ensure they produced the required result for euro entry.

Ten years on from that original decision, the socialists are once again in power and revealing that the conservatives had gravely underestimated the scale of the country’s deficit in 2008 and 2009.

The EU is again talking about disciplinary action and closer monitoring of how Greece compiles its figures. However, the fiasco has already exposed the faultlines in the euro experiment.

Clear manipulation of the rules for political and economic expediency and a failure to consolidate its position has been a recurring theme as the EU has rushed to expand its border and those of its euro zone.

As EU heads of state and European Central Bank president Jean Claude Trichet gather in Brussels today, they would do well to consider the wider problem inherent in expansion.

The question of a €103bn tab 

THE VALUE of State-guaranteed Irish bank debt owed to bondholders has been the subject of much debate since the Government guaranteed the banks in September 2008.

Internal Department of Finance documents – released to The Irish Times – show the breakdown of debts across the banks at December 31st, 2008. The department provided the figures to the International Monetary Fund last April to set it straight on the State’s exposure.

At the end of 2008, the Government was guaranteeing a total of €351 billion of liabilities across the domestic financial institutions.

This figure excludes intergroup debts or sums owing to the European Central Bank. It includes €168 billion of retail and corporate deposits, and €48 billion of interbank deposits.

Some €3 billion was guaranteed on financial instruments and €15 billion on asset-backed securities. A further €103 billion is owing to bondholders who invested in the banks’ senior unsecured debt and a further €12 billion of subordinated debt was being guaranteed at this stage. This is the debt which many have argued should have been left out in the cold by the Government given the high rates of interest investors were paid for the risk.

Some of the €12 billion has been swapped for higher-quality debt or bought back since then, but the €103 billion is a chunk of change many Government critics believe should not be repaid to help restore the banks’ capital.

Dithering while bank shuts down

THE DECISION by Lloyds to close its Halifax business in the Republic highlights the lack of progress on the mooted third banking force to rival the State’s big two banks.

The notion of knocking the second-tier banks together has been circulating for well over a year and was first raised in the context of the rescue of Irish Nationwide and the EBS building society. The initial proposal, of combining the societies with Permanent TSB to form some sort of supermutual, withered on the vine. The main drawback seemed to be a lack of scale, and the idea of combining them with Bank of Scotland (Ireland)/Halifax as a possible alternative surfaced last autumn.

The proposal had its attractions, not least the ongoing involvement of Lloyds in the Irish market, which would have helped to maintain some competition. But that proposal also seems to have fallen of deaf ears and this week’s announcement can be interpreted as Lloyds running out of patience.

The Government’s failure to engage on the third force in any serious or formal fashion is disappointing. There seemed little to lose and much to gain from exploring consolidation involving Lloyds’ Irish operations.

The decision to step back from the issue of consolidation would appear to be the result of a number of factors. One is a reluctance to further antagonise the European Commission by interfering in the banking industry any more than is necessary. But given that inaction has lead to the exit of a significant player, this reluctance was misguided and has backfired.

A more worrying explanation for the lack of progress is that encouraging competition is not necessarily compatible with helping AIB and Bank of Ireland rebuild their balance sheets. More competition could reduce the amount of capital that the Government would have to inject into the two banks later this year.

In the first instance, the Government is focused on restoring the domestic banks to full health, not on creating a competitive long-term landscape in Irish banking.

Today

EU leaders will discuss the Greek economic crisis at a special Brussels summit, Greencore holds its agm and the CSO will issue January inflation figures.

Podcast

Listen to the The Irish Timesbusiness podcast at www.irishtimes.com/business/podcast