Insofar as the budget goes, this is actually fair enough: you cast your vote, your representatives emerge and your government is formed to govern until the next election. In between, to try to govern by some imagined public consensus, to steer a course by the uncertain stars of opinion poll and Twitter trend, is a receipe for populism and executive paralysis. Our TDs, for well-canvassed psephological reasons, have always inclined to the view that opinions are for voters to express - via Joe Duffy, the Irish Daily Mail and misspelled constituents’ letters - and for parliamentarians to run with. But the baying of the mob is not a sound basis for good governance.

Irish public figures could have benefitted over the years from listening more closely to one of their illustrious forebears, Edmund Burke, whose Speech to the Electors of Bristol remains the classic statement of the MP’s right and duty to be guided by his own, informed opinion, even if this conflicts with the express wishes of his electorate. A little more aloof paternalism might have brought a crop of TDs more willing to challenge the doomed consensus that helped inflate the bubble.

But this can only go so far, and the Irish Times (naturally) would take judicious flouting of the popular will beyond the Pale. Stephen Collins, discussing the ramifications of a eurozone exit, makes the following extraordinary statement:

“Over the next few months, if all goes well, there will be agreement at EU level to a series of binding budgetary disciplines. This will probably require treaty change and, even though that may result in a bitter referendum, it is very much in Ireland’s interest that it happens. In the long run, such a development will ensure the Irish people will be saved from a repeat of the economic indiscipline and political incompetence that characterised the Bertie Ahern years.”

Now, the government led by Bertie Ahern may well have been indisiplined and incompetent. But the implication of this passage is that submitting our financial affairs to the scrutiny and (possible) veto of the EU is the best – perhaps only - way to avoid a repeat meltdown ”in the long run”. The future financial policy of any Irish government is presented as a ticking timebomb.

This presupposes a complete inability of Irish people to run their own country properly. In effect, Collins would have us transfer significant new powers – amounting perhaps to a complete and permanent surrender of economic sovereignty – to the EU, not because this serves the greater good, but because, left to ourselves, we’ll only bugger it up.

It’s a sinister implication, anti-democratic and cynical. A country cannot realistically be governed by popular will alone, but nor can it be legitimately governed by giving up on representative democracy and handing the hard decisions over to centralised European control. 

Even if we shrug aside these fundamental objections, it’s hard to say whether or not we would be better off in or out of a new, financially integrated eurozone. Certainly, as Collins notes, attempting to pay off our load of euro-demoninated debt in some devalued punt nua would be extremely costly, and therefore exiting the euro would have to happen simultaneously with another radical move: default on sovereign debt, à la Argentina in 2002.

As I noted at the outset, these arguments are complex, and if such are the stark choices that are going to emerge out of this week’s discussions, politics isn’t going to get any simpler for a while yet. I would simply hope that our decisions flow freely, not from fear of our own inherent incompetence.

A number of fundamental structural reforms, including the transition to a VAT-like consumption tax and reform of the highly inequitable and costly system of subsidies, are needed to improve the efficiency of public spending and help reduce the fiscal deficit in the medium term. We share the government’s view that immediate implementation of such reforms is not feasible in the context of this arrangement as additional preparatory work is needed to ensure that an effective safety net is in place to protect the low income households. The government intends to prepare a road map to facilitate implementation of these reforms in the future.

Is it possible that if the people of Ireland, Greece and Portugal seemed angrier, the countries could have gotten to kick to touch on “fundamental structural reforms” as conditions of their IMF loans?

Last fall, the [UK] FSA [Financial Services Authority] successfully pushed the Bank of Ireland to convert its U.K. operations from a branch into a subsidiary that required more capital, according to people familiar with the matter. The agency also required the U.K. subsidiary of Allied Irish Banks PLC to beef up its capital cushions and liquidity pools, these people said. The mandate rankled some Irish officials, because it further strained the banks’ financial resources at a time when they already were battling for survival. Since then, the Irish government has had to bail out both banks.

 The timing was indeed probably awkward but this suggests that the current Brian Lenihan narrative — we only had to do a bailout because Trichet bounced us into it — is not the full story.  Strains were coming from other directions too.  Incidentally, at least for the case of Bank of Ireland, the UK move had several effects: yes, it forced B of I to put up more funds to capitalize its new UK subsidiary (which has the UK Post Office deposit business) but it also brought those deposits under the UK deposit insurance scheme, relieving some potential burden on Ireland’s scheme.   That structure — full subsidiary instead of branch — could have saved Iceland a lot of pain.

People should not be surprised that there’s a huge erosion of trust in the Irish banking system when we’ve an endless debate on whether we should be defaulting on the payment of our obligations,” he said.  “A small country like Ireland cannot default without the support of a central bank because you have to have the bank loaded with cash while you’re engaged in such a default and it’s not feasible for us to do this.” “We really need to face up to this because we’ve allowed public discussion to become dominated by it and it has done huge damage to the country,” he added.

ECB board member Lorenzo Bini Smaghi –

Whereas Cowen and his ministers had responded swiftly during 2009 as fiscal conditions worsened, Bini Smaghi says there was no comparable action to reassure markets when the heat came on last year. Ireland was listing from the summer, its position worsening all the time as investors took fright.

“Markets waited and waited and since they saw no policy reactions they started to lose confidence in the course of the summer. Remember there was a downgrade – in August – but there was no policy reaction, no announcement that a tough budget was in preparation and no announcement of the measures. The loss of confidence also affected the banking system and this created a spiral which led to the crisis and in the end the request for financial assistance.”

August was the month that the estimated cost for Anglo was bumped up another couple of billion, but there was no one around from the government to explain what had happened.  Among the questions coming from this blockbuster interview is: who decided to keep Anglo out of the June EU bank stress tests?

When an Italian is wondering why a country was asleep in August, you know you’ve got a problem.

The question is prompted by a perusal of the European Central Bank (ECB) website, since the first indicators of Ireland’s 2008-2010 economic descent were often seemingly technical in nature.  The ECB has published their 2011 rules for the Correspondent Central Bank Model – this is the system that allows debt instruments issued in one country to be used in another country as collateral to get funds from that other country’s central bank.

It’s mostly a procedural document but it does contain a discussion of something called “The Irish Variant” (p12), which refers to how Irish Mortgage-Backed Promissory Notes should be handled.  These appear to be a form of IOU which Irish financial institutions can write and have them backed by their pool of mortgages — but to be able to sell the IOUs to anyone else, they need to have them further backed by the Central Bank of Ireland so they will be taken by other Eurozone central banks for credit to whoever buys them.

This facility is no doubt useful for the Irish institutions during the crisis and it appears to be an additional channel of liquidity for them on top of the guarantee scheme and the NAMA bonds.  But among the interesting points about the facility is that it is not new — there are mentions of it going back to at least 2002.  Here for example is the Irish Central Bank’s annual report for that year –

In 2002 domestic credit institutions collateralised Eurosystem operations mainly through the use of Tier One eligible assets. Significant use was made of domestic Tier One collateral; in addition the use of Tier One assets issued in other member states continued to increase. The use of Irish mortgage-backed promissory notes which are included on the Tier Two list also increased, underlining their importance to the local market.

With persistence, we know a little more about these instruments.  A 2006 ECB document describes the following class –

NON-MARKETABLE RETAIL MORTGAGE-BACKED DEBT INSTRUMENTS (RMBDs)

The following eligibility criteria are applied to RMBDs (see also Table 4):

Type of asset: It must be a debt instrument (a promissory note or a bill of exchange) that is secured by a pool of residential mortgages and that falls short of full securitisation. Substitution of assets in the underlying pool must be possible and a mechanism needs to be in place to ensure that the Eurosystem enjoys priority over creditors other than those exempted for public policy reasons.

Irish mortgage-backed promissory notes are currently the only instruments in this asset class.

A 2005 ECB document (p17) tells us more about the procedures –

The assets concerned are non-marketable debt instruments in the form of residential mortgage-backed promissory notes secured by a deed of charge (floating) over a pool of residential mortgage assets held by the issuer. The issue of promissory notes (by the original issuers) is envisaged as and when required in the context of Eurosystem monetary policy operations or intraday credit operations; these assets are not listed on a regulated market.

The risk control measures applied prescribe a loan-to-value ratio of 80%. This is the ratio, expressed as a percentage, of the balance of a loan to the last professional valuation of the relevant property. In addition, a haircut of 20% is applied, together with a margin of 1% for intraday and overnight transactions and 2% for transactions with an original maturity of more than one business day.

This sounds like a pretty good deal for Irish mortgage providers.  They could write an IOU based on on a floating pool of mortgages, avoid all the hassles of having the IOU traded on any market, get a certification that the mortgages had a LTV of 80 percent, and hey presto, they had de facto ECB funding for those mortgages.  Yes there was a haircut but that could be easily covered through deposits, bonds, and other funding sources.

Now as the USA experience shows, bundling the mortgages into proper mortgage-backed securities doesn’t guarantee that the securities will be better quality.  But remember, no other Eurozone country had access to this ad hoc mechanism for ramping up funding for mortgage loans.

So we close with 2 more questions.  Where did the facility for the Irish mortgage-backed promissory notes originate, and who was in charge of making sure that it didn’t become a massive back-door funding mechanism for a property bubble?

With the 4 billion euro Treasury loan and the 10 billion swap line, Ireland’s financial relations with the UK will be much more with the government and much less with business and financial interests than it was in the past.  A friend in need and all that.

The IMF is lending under the Extended Fund Facility (EFF), and not the more common Standby Arrangement.  The EFF is meant for countries with serious medium-term balance of payments imbalances.  That’s the one thing that Ireland — courtesy of its strong export performance — doesn’t have.

Here’s our summary of the program: EU is telling us that you can have your banks or your public pensions, but not both.

RTE says the rate on a fully drawn facility would be 5.8 percent.

The EU finance ministers news conference should stream live here, Brian Cowen news conference streaming here.  Jean-Claude Juncker speaking now.  Statement is bland so far: staff-level agreement, 3 pillars — now the meat: immediate overhaul of banking, ambitious fiscal adjustment, 2015 for deficit target now?, growth enhancing reforms especially in labour market.  10 billion for recap, 25 billion for contingency, 50 billion fiscal.  NPRF and NTMA cash buffer is part of program.  UK, Denmark, Sweden will also lend.  IMF component is 22.5 billion.

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Here’s the Irish government statement on the state of play prior to the European Union and Eurozone finance ministers meetings.  And here’s a statement from the European Council prior to those meetings –

In preparation of the meetings of Ministers of Finance this afternoon, telephone consultations have taken place between the President of the European Council Herman Van Rompuy, the President of the European Commission José Manuel Barroso, the President of the Eurogroup Jean-Claude Juncker, the President of the European Central Bank Jean-Claude Trichet, Angela Merkel, Chancellor of the German Republic and the Nicolas Sarkozy, President of the French Republic.

So the respective institution heads (although not the European Parliament) and just two heads of state in their own capacity, Angela and Nicolas.

Anyone doubt that Germany and France have shared the driving on this one from the start?

Highlight of statements from the arriving ministers: George Osborne saying that they have to “sort out Ireland”.

There still remains doubt, however, as to whether other courts, in the U.S. or abroad, will follow the interpretation adopted by the Belgian appellate court in that ex parte proceeding, namely, that instruments containing pari passu clauses require ratable payments to all creditors of the same class, whether or not the debtor or issuer is in formal bankruptcy or liquidation proceedings.

In other words, there is no consensus on whether new payments have to be made equally to all creditors of the same rank even if the debtor is not in liquidation.  What pari passu certainly does mean is that all equally ranked creditors have to get the same shares of a debtor in liquidation.  Without Irish exchequer support to, e.g. Anglo, that would be an equal share of not very much.

But the Department of Finance has actual fee-charging lawyers working on our case, so presumably they can come up with better than that.

We believe that there is a clear duty on all members of Dáil Éireann to facilitate the passage of these measures in the uniquely serious circumstances in which we find ourselves. The political and financial stability of the State requires no less.

So again ministers who couldn’t have cared less about the Dail in the day-to-day running of the country suddenly want all its members aboard for a budget which they have no hand in creating.  Perhaps if you like parliamentary government, it should be seen as a good news that the days of the country being run through social partnership meetings and quangos have been put to one side.   But is it really the function of the parliamentary opposition to wait every 2 decades until the country is in a real shambles and then be called upon to vote with Fianna Fail for the sake of the country?   If, as periodically comes up for discussion, you take the view that there’s a dearth of talent in Irish politics, it doesn’t help when that’s the basic job description.

“So the sovereign, if you like, has that funding arrangement in place. We don’t have to borrow any money in respect of the sovereign issues that affect the Government . . .’’

From the FAQs for the European Financial Stability Facility –

A16 – Will the EFSF bail out banks?
The EFSF provides loans to countries in financial difficulties. But it could be agreed with a Member State that receives funds to use them partially for financial support to banks in accordance with the agreed country programme.

It’s possible to read too much into an off-the-cuff statement from Brian Cowen.  But his apparent fixation with ruling out a need for the sovereign to borrow doesn’t preclude him saying that he never excluded the possibility of borrowing to “finance” the bank bondholder bailouts.