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So a default of the Irish banks would hit a) The Irish state
a) The Irish state
The Irish state already took this hit a couple of years ago, when it took leave of its senses and issued a blanket guarantee of all Irish private bank debt. This is about the Irish state saying "yeah, about that guarantee? Go suck on it."
b) The ECB. I am not sure you are in a strong position with the threat: I will just default and hit myself and my own central bank.
I am not sure you are in a strong position with the threat: I will just default and hit myself and my own central bank.
A rather important subplot in this story is that the ECB is behaving more like a hedge fund than like Ireland's central bank. Even if it were true that most of the debt would hit the ECB and EFSF, that wouldn't be that bad an outcome, all things considered.
- Jake Friends come and go. Enemies accumulate.
Who will suck on it? The irish depositors? Or the capital owners - that would be the government and the pension fund. Leaves the ECB. A hegde fund? the ECB has given 100 Billion Euro or so to the irish banks. at 1.00%. Have you ever heard of a hedge fund acting like this?
If that's true, it's the repo rate, at one-week maturities.
If it's been overnight lending at the punitive "marginal lending facility" rate, it's 1.75%, when the overnight interbank lending rate is not much higher than 0.25%
All of this lending is overcollateralised, as it is "against eligible assets" at a discount set by the ECB itself at its discretion.
Anyway you look at it, the ECB is making a lot of money on this lending. It's called Seigniorage. Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
And why should the european and irish central bank not enjoy seignorage?
Also, the Eurozone monetary authority shouldn't be the leading driver of the push to bring in the IMF to lend Euros to a Eurozone treasury.
Something really bizarre happened in November. Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
Who will suck on it?
The people who are holding the Irish government bonds that they got in exchange for the toxic debts of Irish banks.
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