Tuesday, 28 April 2015


QUANTITATIVE EASING (QE): the system whereby a central bank creates money to stimulate growth in its economy  - the media were full of it lately with the news that the ECB has just embarked on a 19-month €60bn/month €1.14tn cash-creating binge.

QUANTITATIVE SQUEEZING (QS - a term coined by MEP Luke ‘Ming’ Flanagan, for whom I now work in Brussels): a system whereby a central bank destroys money, again involving the ECB but this one you won't read about in our media. 

Even as the printing presses start rolling in the new €1.25bn HQ of the ECB in Frankfurt, creating those QE billions every month, in Ireland the same ECB ordains that we must do precisely the opposite – every year for the next 17 years, up to and including 2032, we will be burning hundreds of millions of euro. Okay, this is all figuratively speaking of course; nowadays currency is created with the push of a computer button, exists mostly in cyberspace; the debt created is all too real, however.
In 2010, in collusion with the ECB and the then Irish Government, to bail out the failed creditors of two failed banks (Anglo Irish and Irish Nationwide, which subsequently became the infamous IRBC), the Central Bank of Ireland printed €31bn – that was more than our entire take from income tax, Corporation Tax and Capital Gains tax for that year.

It was also very much in line with the ECB policy of the day which held that no bank in the Eurozone would be allowed fail (and even at that stage, in the third year of the crisis, that was all the ECB had, a policy – still no structures in place to deal with failed banks).

This wasn't done to save those banks, which were neither solvent nor nationally systemic and which have both since been wound up (Feb 2013). It was done to prevent contagion, a domino effect across the eurozone had those two banks been allowed to fail, leading to a feared subsequent failure of the euro itself.

It was an understandable fear, an understandable measure in the circumstances even if it did mean the ECB turning a blind eye to its own rule on the use of the ELA fund (Emergency Liquidity Assistance – the clue is in the word 'liquidity'!) exclusively for solvent banks.

The measure had the desired effect, bought time for the euro and for the ECB to eventually come up with a more permanent solution, which it did with the 'whatever it takes' announcement in 2012 by new President Mario Draghi.

For Ireland however the good news would end there. While publicly clapping us on the back, praising us for all we've done in the last several years, privately the ECB has been insisting that because those two banks weren't themselves able to make good on the €31bn that was given to them (a fact of which the ECB was well aware back in 2010 when it allowed those billions be created and given to those two insolvent banks), Ireland, through its Central Bank, must now destroy the entire €31bn.

And so we have the ludicrous situation whereby on the one hand the ECB is creating billions by the day, ostensibly to kick-start the EU economy, on the other it is demanding that one of the smallest, most heavily indebted (government + household + SME) and most fragile of those economies, Ireland, must destroy billions; billions we must of course borrow.

Our government and our media would have us all believe that any talk of relieving the bank-debt burden is moot, that it's all a done deal – 'Move along now, nothing to see here!'

It's not. In fact, far from being a 'done deal', the process of destroying those billions – Quantitative Squeezing – is still in the early stages.

In 2011, in almost its first act after winning election, this government borrowed and destroyed €3.1bn;

In 2012, to cover the €3.1bn due to be destroyed that year, the government issued a bond, which was actually for €3.5bn (they only got 88c in the €) – last year the Central Bank sold a €500m tranche of that bond, every cent of which was then destroyed, which means they still hold €3bn from that bond;

In 2013 IBRC was finally wound up and the remaining €25bn worth of Promissory Notes was 'bought out' and the debt converted to sovereign bonds.

All those bonds must now be sold and the money thus raised – again, every cent of every billion – must be destroyed. 

Taking advantage of the low interest currently available, over the past couple of years the NTMA (National Treasury Management Agency) has issued sovereign bonds and built up a stash of billions of euro - smart thinking. 

What happens next, however, isn't so smart. Using those borrowed billions the NTMA purchases the Promissory Note bonds from the Central Bank, €500m at a time. That Promissory Note bond is then cancelled - in other words the ECB, ounce by ounce, is getting its pound of flesh, the debt to them is being cancelled. This is the element that gets a bit of coverage in our national media. 

What is NOT covered is what also happens, indeed what the entire exercise is about - the Central Bank then takes that €500m and destroys it.

This is not notional money being destroyed, it's real money already borrowed by the NTMA, real money on which we'll be paying real interest, real money that will have to be repaid when those NTMA bonds mature.

The final cost between interest and principal, when the additional €3bn remaining from the 2012 bond is factored in? We won't have much change from €80bn, an average of €2bn/yr.


YEAR                                     BOND VALUE                                     TOTAL
2014/15/16/17/18                   €500m/yr                                              €2.5bn
2019/20/21/22/23                   €1,000m/yr                                           €5.0bn
2024/25/26/27/28/29/30/31    €2,000m/yr                                           €16.0bn
2032                                       €1,500m                                                €1.5bn
                                               SUB-TOTAL:                                        €25bn
                                               Remaining 2012 bond                           €3bn
                                               AMOUNT SOLD/DESTROYED       €28bn

Since Mar 6th 2011 – more than four years – this particular injustice is part of what we in the Ballyhea Says No To Bondholder Bailout campaign have been marching against, Sunday after Sunday for 217 weeks (and counting). End the sale of those bonds now, let the ECB assume full responsibility for them, and you lift that massive burden from the shoulders of several generations of Irish people; allow the Central Bank of Ireland recreate the €4.1bn that has already been destroyed (which would now be in line anyway with the new 'creative' thinking of the ECB) and you give a massive boost to the current generation.

Given the massive QE the ECB is now engaged in it's an obscenity that one country, Ireland, should simultaneously be compelled to destroy billions. For the sake of future generations, it is time, surely, to take a stand.