Honohan doesn't have strong hand to play


ANALYSIS:PROMISSORY NOTES. Emergency Liquidity Assistance (ELA). The Target 2 payments system. How each of these works has a huge impact on the lives of every citizen of this State. How many of this State’s citizens fully understand how all three work? The answer: a mere handful. The reason: their head-hurting complexity and, in the case of ELA, its opacity.

But all three are in the news because they are hugely important, interlinked parts of the giant mess Europe has got itself into with its single currency.

Of most immediate importance from an Irish perspective is the issue of the promissory notes – the financial instrument used to prevent the disorderly collapse of the two worst banks.

In 2012, the Government has focused ever more of its attention on easing the repayment burden of the notes by financially re-engineering them (it is not clear exactly how, but creative minds can find many ways). The push has coincided with the evaporation of all hope of imposing losses on remaining senior bank bondholders. If there is any chance of giving a one-shot boost to improving the State’s debt sustainability, it rests with restructuring promissory notes.

If the Government never came near to convincing its partners and rescuers that burning senior bondholders was a risk worth taking, more progress has been made on tweaking the notes. That has been apparent at least since the last trip to Ireland by the bailout troika in mid-January. Then, the visiting technocrats acknowledged that the issue was being discussed, something that would not have happened if they had been inflexibly determined to prevent any restructuring.

Last Friday, the International Monetary Fund’s point man on Ireland went further than ever before. Craig Beaumont played up the extent of the consensus among the troika on the issue and the positive effects restructuring would have on reducing the risk of default.

Yesterday, two separate news agencies cited unnamed officials as saying that some agreement on restructuring is likely before the repayment (of €3.1 billion) falls due at the end of the month.

This morning, my colleague Simon Carswell reports that the governor of the Central Bank may raise the issue today in Frankfurt when he meets his 22 fellow euro zone central banker colleagues.

Patrick Honohan’s position is unenviable. He was among the first euro zone central bankers to have had to resort to ELA – a means of providing liquidity to banks who don’t have collateral of a sufficiently high quality to satisfy Frankfurt’s exacting standards. Although almost very little detail exists on the rules governing ELA and how it works, a very important difference with normal ECB liquidity is that the providing country bears the credit risk of ELA (the risk of non-payment of standard ECB liquidity funding is borne by the euro bloc as a whole).

Ireland is one of seven euro area member countries resorting to ELA, one of only three being bailed out and number one in the league table of broken banking systems. Honohan doesn’t have a strong hand to play in making the case for even more concessions on restructuring the promissory notes.

And if he chooses to raise the issue, the way he does so will be crucial. Most importantly, he cannot be seen as an emissary of the Government.

The Irish Central Bank’s independence is enshrined in law. It cannot take instructions from politicians. It is also part of the European System of Central Banks which falls under the umbrella of the European Central Bank. The ECB is the most independent central bank in the world. Its independence is enshrined in hard-to-change EU treaty law. Given the importance of its independence, it is hyperallergic to the merest hint of political interference in how it goes about its business.

If Honohan gives the slightest suggestion that he is doing the Government’s bidding, the temperature in the ECB’s Frankfurt tower will plummet.

And it is not as though the 23 central bankers don’t have enough tensions to be dealing with already. Last week, the head of Germanys central bank, Jens Weidmann, wrote a private-but-leaked letter to his counterpart and president, Mario Draghi. In it he raised concerns about the pan-euro area payments systems among central banks, known as Target 2.

Echoing the views of some high-profile German economists, he said that his country is massively exposed to losses in weak countries via Target 2. This is adding to the many other euro zone strains.

Central bankers are an effete lot, but so high are the stakes and so different the interests, voices could be raised in Frankfurt today.