Well, there are mostly two ways to handle a sovereign default:
The second method is unfortunately not possible when your debt is in a currency you cannot print (eg: Asian crisis, Argentina...)
So the cabinet is left with two unusual options:
Of course, it still means those investors are likely fucked: the first in line to redeem their bonds will get their money back (earliest maturities will get served), and the last in line are stuck with securities that they cannot resell and that may default one way or another. Pierre
foreign investors in bonds of the Irish treasury or the Irish banks, are like, totally mega-cluster-fucked
Sounds like your hedging your bets here... Vote McCain for war without gain
What happened to the CDS spread of Irish government debt relative to other Eurozone governments? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
This is quite a high level, France looks like: 3m 0 6m 0 1y 0.23 2y 0.16 5y 0.24 7y 0.29 10y 0.25
Note however that absolute yields of sovereigns of Ireland (like all sovereigns) are still going down, as investors run for cover worldwide. They are also unexpectedly volatile. We cannot infer much from these until the dust settles, will take a few more months at least, when all banks are gone or public. Pierre
LOL A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
The first country to go will be Iceland, and the Scandinavians will bail them out. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
We've been hearing all about how these Icelanders with all their money have been on a buyout spree all over Scandinavia. Imagine the public reaction if we're then told "uh, dudes, those liberalist superheros on Iceland... Well, they kinda bought our stuff on borrowed money. And, well, now they can't repay. And - uh - need to be bailed out."
Not gonna happen. Nordic solidarity is not nearly as strong as I'd like it to be, even when we're talking justified aid, and our government is taking enough flak for bailing out our own banks without first checking how much it'd cost... I honestly can't see them bail out foreign banks to the tune of a substantial fraction of our GDP.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Seriously though, the Scandinavian banks do not really seem to have insolvency issues, just liquidity issues.
But I might just have to regret what I just said. Peak oil is not an energy crisis. It is a liquid fuel crisis.
Pretty much all the doomsday scenarios for the euro start with Italy leaving. If Ireland leaves first, it will only destabilise matters further.
The ECB knew that other banks would get into troubles via other, more complicated ways (derivative couplings, off-balance sheet investments that where not as obvious to spot as those domestic loans...), but there was no other way to handle those troubles than to "wait and see" which would go wrong first. Pierre
I think the Danish bank failures are a separate beast from all the other ones we've seen so far. As far as I have been able to tell, all the banks that failed were strictly local ones, who failed not because of exposure to foreign hot money (they didn't have much, if any at all), but because they issued bad loans to local, Danish costumers. To use your own term of art, they accumulated a purely Danish Shitpile(TM), without needing any help from abroad.
But the flip side of this is that even if the international markets go into a tailspin, it wouldn't directly cause Danish banks to fail. A nasty recession probably, which may combine with a popping of the Danish housing bubble to push banks over the edge, but I see very little direct effect so far.
I like to point this out, because the Danish press is in full denial that this had anything at all to do with the fact that the Danish economy has been run like a pyramid scam for at least seven years. It's being played as a crisis that was caused by Wall Street having a hiccough - one of those things that just happen to happen from time to time - despite the first two Danish bank failures happening long before the big bust.
Let's play narrative bingo: How many outright lies have been packed into Danish Conventional Wisdom? I spot two: That the crisis is caused by Wall Street and that the meltdown on Wall Street was a fluke, not the predictable consequence of the (American) casino economy.
I suggest Royal Danish Shitpile as an alternative. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
That is, a domestic subprime crisis?
I don't think so. Sure there has been some stupidity in giving out loans to people who shouldn't have been given them, but we had this shit 15 years ago, and memories are not that short.
On the other hand, the Swedish banks have been doing their best to exactly repeat their old mistakes in Estonia, Latvia and Lithuania, where Swedbank and SEB dominate so completely they can probably affect those nations economies more than the local central banks can, especially as they have pegged their currencies to the Euro.
And when Swebank denies having given bad loans on the other side of the Baltic pond by saying "we have had the same high levels of lending scrutiny over there as we have in Sweden", that makes a lot of people go uh-oh... over their Swedish loans. Peak oil is not an energy crisis. It is a liquid fuel crisis.
So, will we get a Royal Swedish Shitpile(TM) too? That is, a domestic subprime crisis?
I don't think it'll be a subprime crisis as such, no. Too much regulation and oversight for that. And we'll probably not see any derivatives scams blow up too messily either, judging by the bank failures in Denmark so far.
But Sweden does have a liberalist government that's giving handouts to homeowners and blowing hot air into a housing bubble (or at least were before the summer break - things might be a tiny bit different now).
In Denmark (recall that we've had a liberalist government for the last seven years instead of the last two, so the process is far more advanced here than in Sweden), it's the commercial borrowers that have killed the bankrupt banks.
The logic goes something like this: Liberalist governments downsize property taxes and deregulate casino loans. That creates a bubble on the real estate market. Various and sundry real estate developers base their business model on the bubble continuing (in some cases by mistake, in others by deliberately engineering outright Ponzi scams). Banks see the huge growth in these firms during the bubble years. Banks lend huge sums to dodgy firms. Bubble bursts. Banks go belly-up.
This is, I think, a somewhat different beast from what happened in the US and UK. As far as understand, in Anglo-land, the story goes: Governments remove the rules forbidding banks from engaging in pyramid scams (or just systematically fail to enforce them). Banks engage in pyramid scams. Bust happens. Banks go belly-up.
So the Shitpile(TM) appears to be at one remove from the Scandinavian banks themselves, whereas it's been injected intravenously into the Anglo banking system. Which would explain why it's only the small and poorly run banks who go belly-up in Denmark at the moment.
The fact that this could end up costing a lot more if there are major bank defaults is a problem for another day, and as you know, politics is a very short term business.
The Irish move will be hailed as sheer genius if they squeeze the banks for 0.2% p.a. of their deposits and end up paying out nothing.
If big banks go down and the Irish debt multiplies we will blame it on Wall Street/ EU inaction/ irrational international finance and the Government will talk tough about global financial Governance.
Either way, it won't be our fault... Vote McCain for war without gain
But to guarantee corporate deposits and debt is a bailout of the bank management and the shareholders and the creditors.
The proper course of action is to take over the bank as it fails: dismiss the management, appoint an administrator, guarantee the deposits and wipe out the shareholders (likely) and creditors (less likely).
But you can't do that when the management have political connections and the government thinks it needs to keep those creditors happy to preserve the Foreign Direct Investment. In fact, as soon as any crisis action is taken mobile capital will flee regardless. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
But to guarantee corporate deposits and debt is a bailout of the bank management and the shareholders and the creditors
Oh no no no. That's just to keep the wheels of business turning and jobs and tax bases etc... we're all in this together.... you don't sack people in public sector Ireland, you promote them and give them guaranteed pensions...
Its all a matter of confidence...if we could just convince people that property values will soon return to their previous levels or something close to that all of this ill go away.... <sound of banker crying into his Vichyssoise> Vote McCain for war without gain
