January 30, 2012


I join in discussion on Irish Promissory Notes here: http://www.irisheconomy.ie/index.php/2012/01/24/interest-rates-on-promissory-note-not-the-key-issue/#comments


Here is some background to the discussion:


The scope and the merits of emergency central bank liquidity
assistance become murkier when one considers the conditions
under which the bank should lend in cases of crises, i.e.
the optimal intervention policy.
“The basis of discussion goes back to the argument of
Bagehot (1873) who expressed the fundamental, classical view
on this issue. He argues that the central bank should be
known to be ready to lend without limits to any solvent bank
against good collateral and in penalty rates, so that banks
do not use them to fund their current operations. However, a
lot of research and experience have been accumulated since
Bagehot and the points in his principle have been questioned
and re-visited. A naive onerule-Öts-all intervention policy
is no longer considered, rather, intervention policies
appear in practice to be tailor-made. The Appendix of this
project attempts to shortly review the debate on the Bagehot
principle, address a few more relevant issues (such as the
role of monetary policy and the issue of lending to the
markets versus lending to individual institutions) and
discuss the dilemma faced by policy makers with respect to
intervention policies.”

Above by Kleopatra Nikolaou Liquidity (Risk) CONCEPTS


@ Karl 2:49

Re “So what’s the liability incurred by the CBI when it created the ELA? The answer is that money it magicked out of thin air is considered a liability of the CBI. ”

Re “Really, the CBI are not borrowing from the ECB.

The truth is that the term “liability” needs to be used fairly carefully when it comes to central banks.”

Karl, I don’t wish to be naughty and disagree with you there, even though I do disagree with you:-) So I’m asking you to tease this out some more as I believe you have this wrong, but please correct me if I’m rong:-)

I agree technically the CBI is not borrowing from the ECB. But its important to understand money is not magicked out of thin air especially in relation to ELA and even more so when ELA is used to target distressed assets.

The key point you leave out is that if ELA has not a mechanism in place for the PN issued through the ELA programme, to be refunded; then, the ECB has clearly stated those ‘losses’ (note its using the word losses, not magic dust) must be shared by other CB’s.

In other words, there are contingent liabilities attached to the ELA programme, the PN issued by the ICB, and the ECB wants its money back!

But correct me if you think I’m wrong; I’ll resurrect the documents supporting that view of mine there :-)


at 2:09am on the same blog, ‘grumpy’ made the comment:


  1. @John McManus

    Everyone has at some point been confused by at least part of this (me included). That is why the politicians are essentially lost at sea and clutching their latest departmental briefing. I suspect the reference @colm brazel cannot find, about loss sharing wiith other central banks is actually this article by Karl:



    “Within the Eurosystem, the standard procedure for these loans involves banks pledging some financial assets to their national central bank as “collateral” which can be kept by the central bank if the borrowing bank does not pay back. If this collateral still does not cover the amount loaned out, the losses incurred by the central bank are shared with all the other central banks in the Eurosystem”

    discussed here:



    If you dig back on this blog for references to ELA, pro notes etc you will find lots of detail, teased out that is otherwise not generally accessioble – and it is one of several topics where “sources” or “briefings” can be off the mark because somebody hasn’t thought of everything. Open discussion of this sort rather than presentation can be illuminating, if you can (and can be bothered to) sift through and filter out the wordy but confused contributions.

    Arguments about the “legally binding”-ness of letters of comfort over ELA, the sovereign default-ness of deferred repayment of the pro notes, and the question of how the ICB would value pro notes with lower interest rates or longer repayment terms (for ELA advancement purposes) have been discussed on here before – without answers that are ether generally agreed or likely to be convincing not least to Germanic analysts. They need to be argued through much more thoroughly before Noonan and Lucinda could be expected to even try to sell them.

    Maybe the conference notes or subsequent discussion might do that.”

    Indeed, the note on the need for other CB’s to absorb losses was a point Prof Karl Whelan had made himself in one of his own articles. We do indeed require the permission of the ECB to allow us to do a default on the circa ¢30 bn of PN notes.


    It is a tragedy our negotiating position on this is so unclearly laid out before members of Dáil Éireann and the general public through the media; we need proper burden sharing meaning debt write off; not further loans to support our repayment obligations on previous loans!

    Deferred payment, extended maturity dates, to facilitate unconscionable and odious debt such as Anglo’s amounts to a pillaging and looting of the Irish economy that is not only immoral; it is economically unviable and infeasible.

    It is a failure in policy that will doom not only the Irish economy; but also the ECB. It will seal the fate of the euro.

    The current Fiscal Compact has all the hall marks of a praying mantis eating its mate, but more about that another time 🙂






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