The rescheduling of promissory notes is monetary financing in all but name, comments Münchau in his FT column.
[Irish economist Karl] Whelan calculated last year that a 40-year bond would bring a reduction in the net present value of the Ireland’s obligations by some 43 per cent. The result of the new deal is probably a bit less, since the average maturity is only 34 years. Ireland will have to be in a fairly healthy position before it can start repaying the money. A future Irish government may choose not to repay the loan, or only parts of it, or demand a further extension. My best guess is that one of these things will happen, which means that the reduction in net present value will approach 100 per cent.
This is monetary financing for all intents and purposes. The whole structure of this agreement is so convoluted that newspapers do not report all the relevant details. As always, convolution has a purpose. It renders legal what would otherwise not be, and it allows for obfuscation.
In this case, the purpose of obfuscation would be to hide what would otherwise be a contradictory message. You cannot admit publicly in the creditor countries that monetary financing is taking place – this is sacrilege. But then this is what it takes to save Ireland from a debt trap. It was then considered the best strategy to put back the debt repayment by a generation or two.
I am marginally encouraged by this, not so much because I believe that monetising is a good thing in principle, which I do not. What encourages me is that I can see this as one of several components of an ultimate solution of the eurozone crisis. Without some form of arbitrage between debtors and creditors, this would be hard to achieve.
In an ideal world, there would be a political deal on bank resolution and deposit insurance, a eurozone bond, and on economic adjustment. Back on earth, the ECB is all we have.
When Mario Draghi, president of the ECB, gave his now famous “whatever it takes” lender-of-last-resort pledge last year, I wrote that this would slow down the political process. Last week, the ECB went even further by acquiescing to a hidden form of monetary financing. The ECB will probably not compromise over inflation soon. But then again, I cannot really see the ECB resisting the ongoing changes that are currently taking place in global central banking either.
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