The mechanics of Irish euro-printing

The Irish Independent last week drew attention to a much-missed detail in the  execution of Ireland’s emergency loan programme.

As it turns out, the Irish central bank has been partly financing the programme’s loans with the printing of its very own euros.

As the Irish Independent stated:

EMERGENCY lending from the ECB to banks in Ireland fell in December, the first decline since January 2010, but only because the Irish Central Bank stepped up its help to banks. The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money. ECB lending to banks in Ireland fell from €136.4bn in November to €132bn at the end of December, according to the figures released by the Irish Central Bank yesterday.

According to the ECB, the Irish central bank is perfectly within its rights to create its own funds if it deems it appropriate — providing that the ECB is notified.

A hat tip to eurozone blogging maestro Edward Hugh for drawing our attention to the following extracts of the ECB’s opinion on the emergency stabilisation of credit institutions, dated December 17 — which outlines the ECB’s position on the prohibition of monetary financing by the Bank of Ireland (and other member banks):

This provision should also specify that nothing in the draft law will prejudice the compliance by the Central Bank with the prohibition on monetary financing under Article 123 of the Treaty13.

- —-

The monetary financing prohibition in Article 123 of the Treaty is further clarified in Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the application of prohibitions in Article 104 and 104b(1) of the Treaty (OJ L 332, 31.12.1993, p. 1) according to which overdraft facilities or any other type of credit facility with the ECB or the national central banks (NCBs) of Member States in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States are prohibited, as is any purchase directly from these public sector entities by the ECB or NCBs of debt instruments.

In other words, providing that the Central Bank of Ireland is not buying debt directly from government or quasi-government institutions — it is perfectly able to buy debt or create overdraft facilities for private credit institutions.

And if you dig deeper into Article 123 of the Lisbon Treaty you also get this point:

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

So publicly-owned credit institutions can, indeed, be supported with money-printing — and anywhere in the eurozone.

In the Central Bank of Ireland’s case the details slipped out via its financial statement, which showed a fine-tuning reverse operation valued at €12.33bn on its asset side for the first time since at least 2003:

Interestingly, the ECB’s own consolidated statement showed a fine-tuning reverse operation of €20.62bn on its asset side in December too. It was since removed in January.

Falling on the asset side, and not balancing out, means the fine-tuning operation was not intended to sterilise the Securities Market Programme (a liquidity absorbing operation) as other fine-tuning operations specifically have. It was instead a liquidity providing imbalance.

(Update 16:49 – Reader Lorcan points out that that the fine-tuning was actually scheduled to provide cover for the expiry of the ECB’s LTRO financing on December 23.)

Curiously, though, the ECB’s November 16 statement also shows a positive imbalance on its asset side valued at €12.55bn.

Some background, the ECB states in reference to fine-tuning reverse operation procedures that:

… these operations are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, bilateral fi ne-tuning reverse operations may be executed by the ECB);

And specifically :

… foreign exchange swaps and the collection of fixed-term deposits are available for the conduct of fine-tuning operations

Readers may remember that the ECB announced in December that it would be adding fixed-term deposits from eligible counterparties with the eurosystem to the list of assets eligible as collateral for eurosystem operations from January 1, 2011.

Related links:
Central Bank steps up its cash support to Irish banks financed by institution printing own money – Irish Independent
Buiter’s €2,000bn solution for the Eurozone – FT Alphaville