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LQD: Put your money into Irish Banks [Updated]

by Frank Schnittger Thu Oct 2nd, 2008 at 05:17:52 AM EST

I've been waiting for one of our esteemed bankers or economists to cover this story because it seems to have major ramifications for Ireland, the EU and even the World.  In the absence of someone more qualified than I to comment - I offer up this lazy quote diary to raise what seems to be a very important issue.  Ireland has sometimes been accused of engaging in tax competition, but this seems to herald a new era of competition in trust and confidence.

The Irish Government has just guaranteed all deposits of Irish banks operating in Irish and foreign markets - but not foreign banks operating in Ireland - thus placing them at a major competitive disadvantage.  It also places Irish taxpayers in some jeopardy.  As a LTE to the Irish Times notes:

State guarantee for bank deposits - The Irish Times - Wed, Oct 01, 2008

Madam, - The value of the proposed bail-out in the US is equivalent to $2,000 per US citizen. The Irish bail-out could be worth up to €125,000 per man, woman and child. If US citizens won't accept their bail-out, why should we accept something a hundred times larger?

The Government's action is nothing more or less than a huge reward, underwritten by taxpayers, to banks for foolish lending, to the Financial Regulator for failing to regulate, and to its beloved construction industry.

It does absolutely nothing to address the underlying problems which the banks, Government and construction industry jointly created over the last five years by building, selling and financing grossly over-priced houses and commercial property.

This is the AIB and ICI rescue repeating itself. Where are the restrictions on bankers' remuneration? Where are the equity stakes? Why should Irish taxpayers guarantee to bail out a bank that stupidly financed an overpriced property development in Dublin, London or Germany or made billions by conspiring with house builders to lock hundreds of thousands of young purchasers into huge mortgages for the rest of their working lives?

Irish households are among the most heavily borrowed in the world but, instead of helping them, the Government is giving guarantees worth a multiple of the Irish economy's annual output to the Irish banks. This, on top of the hammering that households can expect in the coming budget. - Yours, etc,

More discussion of European banking problems - afew


Normally what happens in Ireland rarely causes a ripple amongst financial commentators world-wide, but this step seems to have really caught worldwide attention:

World media reports Government's 'extraordinary step' - The Irish Times - Wed, Oct 01, 2008

Speculation is growing that other EU member states, in particular Britain and France, could follow in Ireland's footsteps by deciding to guarantee savers' bank deposits.

Newspapers around the world have reported on yesterday's announcement with many suggesting that other nations will now have no choice but to take similar steps to safeguard their banking systems.

Many British newspapers claimed today that UK savers could benefit from the Government's decision to guarantee all savers' deposits, with most reporting that Post Office accounts in Britain are provided by the Bank of Ireland, while AIB and Anglo Irish Bank also operate there.

Will Hutton, writing in the Guardian, said that Britain is dithering and needs its own plan.

"Britain still does not have a comprehensive system of deposit insurance for retail depositors, let alone some temporary guarantee for wholesale depositors as announced yesterday in Ireland - largely because the government has genuflected towards bankers' concern at its expense," said Hutton.

The London Independent reports that the UK government is being called on to fully guarantee savers deposits following yesterday's move by the Irish Government.

Among those calling for steps to be taken, according to the newspaper, are the country's third biggest political party, the Liberal Democrats, and the Financial Services Consumer Panel, an independent body set up to represent consumers by the Financial Services Authority, the City watchdog,

In the same paper, Jeremy Warner noted that Britain and other EU members are slowly moving towards a decision to guarantee deposits but adds that "only Ireland has so far gone the whole hog and made something that was always implicit legally explicit".

However, he warns: "The potential is there for Ireland's actions to spark a beggar thy neighbour round of similar guarantees. In these markets, money will chase the safest havens. Bank deposits that are guaranteed by the taxpayer take on the characteristics of government bonds.

"Unless everyone else does the same thing, Ireland therefore becomes the safest place in Europe to keep your money. As such, it amounts to a form of unfair, or even illegal, state aid. As it is, there are bound to be concerns that the guarantee applies only to Irish banks, and not foreign-owned deposit-takers in the same jurisdiction.

Mr Warner suggests that Ireland may ensure a chain reaction of similar guarantees across Europe.

"Yet though others may eventually be forced to follow, they won't be keen," he claims.

"To them, Ireland looks like a special case. The country is already in recession after the end of a long property boom, and all its major banks are highly exposed to the domestic mortgage market, for which at present there is virtually no funding outside retail deposits."

Meanwhile, the Daily Mail warns that the two-year unlimited guarantee on all deposits is "expected to cause anger" among the many UK banks operating in the country.

"Ulster Bank, an offshoot of Royal Bank of Scotland, is Ireland's third biggest lender but it is not covered by the new rules. However, since all overseas branches are also covered by the safety net, Irish banks are at a significant advantage to their European rivals," it said.

The Financial Times claims that yesterday's move "is not so much the proverbial Irish solution to an Irish problem as an Irish solution to what is a global problem".

"Tuesday's guarantee offered by the Irish government to its six national banks to safeguard €400 billion of deposits and bank debt is causing ructions in Brussels, where there is concern the Irish move shatters any hope of pan-European regulatory response to the turmoil," the paper said.

The Daily Telegraph describes the Government's plan as the most dramatic and comprehensive bank bail-out in Europe since the Scandinavian rescues of the early 1990s" and adds that it "may serve as a model for Britain and other countries that so far have been muddling through from one mishap to another with a mish-mash of ad hoc policies".

BBC News Online notes that the move "has huge ramifications" for Britain. Robert Preston writes:"Potentially it puts British banks at a massive competitive disadvantage - especially since other European governments are also taking urgent steps to reassure their citizens that their bank deposits are safe."

El Pais described the Irish Government's plan as "a dramatic decision", while In the US, the Wall Street Journal said the move was "an extraordinary step" which was "one of the most ambitious measures taken by a government since the [credit crunch] crisis began more than a year ago."

The EU Commission is said to be very concerned at the Irish move as it could cut across attempts to craft a Pan-European response.  It didn't consider the Fortis bail-out to constitute "state-aid" but this latest move could change the whole ball game and raise the bar for everyone else.

[Update]Following on from the Lisbon Treaty debacle, this is not going to make the Irish Government any more popular with their EU partners. In fairness, the Irish Government was in an unprecedented dilemma: The Irish Stock market lost 13% on Friday and the banks have lost c. 75% of the value in recent months, and were having great difficulty raising funds. Cowen met Sarkozy today to talk about the Lisbon Treaty. After wards the Irish Times reported:

Cowen says Sarkozy 'understands' bank plan - The Irish Times - Wed, Oct 01, 2008

The Taoiseach Brian Cowen said he believes French President Nicolas Sarkozy supports the Government’s decision to guarantee the deposits and borrowings of six Irish-owned lenders.

Speaking after a meeting with President Sarkozy in Paris the Taoiseach said: “Yes, I think the president understands precisely why the Irish government had to act and the circumstances in which we found ourselves. There is a full understanding of the Irish government's position.”

Mr Cowen said the move was and effort to “bring stability in our own system in a way that was available to us”.

Commenting on the reaction from the British government Mr Cowen said the stance taken by Prime Minister Gordon Brown “obviously would be reflecting some concerns by other banks in Ireland that are not incorporated in the state”.

“Every state is responsible for its own bank centre incorporated in their respective state,” Mr Cowen said.

In the meantime, I am happy to accept cheques from ET members who wish to deposit their funds in an Irish Bank.  Just make them payable to Frank Schnittger....:-)

Display:
Representatives of Irish banks managed to get themselves on both BBC Radio 4 and Radio 5 talking about htis and "jokily" promoting the idea that UK citizens should move their money to Irish banks. I was amazed at how readily the BBC allowed this promotion and..well advertising really...to take place as "News".

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Wed Oct 1st, 2008 at 10:35:11 AM EST
They really are taunting the Commission's Competition authorities... Which luckily is not Irish (McCreevy: Internal Market) but Dutch (Neelie Kroes). And she tends to get into conflicts with McCreepy on a regular basis, oddly enough.

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 10:57:16 AM EST
[ Parent ]
Yes, this may not be popular at EU/ECB level, but it comes back to natinal interests trumping international co-operation. I'm not saying the Irish are being selfish, I suspect they are simply taking advantage of an obvious business opportunity which will be highly profitable.

Rather we are seeing the results of natural reluctance by individual governments to cede all control of financial levers. The UK's refusal to join the euro being simply the most obvious. This is tolerable and promotes "competition" in good times, but means that co-operation can be sluggish and counter-productive when things start going wrong.

But it underlines that in an era of glabalisation, regulatory institutions have to be international as well and running at the pace of the strictest, not the slackest. And also, financial agents who choose to operate outside of such regulation should be subject ot restriction and censure. If comanies or individuals want to run to tax havens, then all of their revenues must be treated as suspect and they be subject to legal restraints on their transactions within the regulatory boundary.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Oct 1st, 2008 at 10:44:56 AM EST
Yes, this may not be popular at EU/ECB level, but it comes back to natinal interests trumping international co-operation.

No, it comes back to cooperation, not market-fundamentalist race to the bottom and ill-thought deregulation or liberalization.

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 10:55:06 AM EST
[ Parent ]
Helen:
Yes, this may not be popular at EU/ECB level, but it comes back to natinal interests trumping international co-operation. I'm not saying the Irish are being selfish, I suspect they are simply taking advantage of an obvious business opportunity which will be highly profitable.

I think there was near panic in Irish Government circles when the banks went into freefall, so this is probably more a case of a national Government being able to act much more quickly than the EU when national interests are seriously threatened.

The banks are being very silly and short-sighted if they now seek to use this for competitive advantage vis a vis other banks.  The Irish Government will come under extreme pressure to restrict the guarantee to bank accounts set up in Ireland or by Irish residents or in some other way to prevent a tsunami of money washing over Ireland and leaving everyone else high and dry.

The US has the advantage of having institutions - like the FED - which can act very dramatically and rapidly in response to a crisis.  The EU Commission and Central Bank are a joke by comparison.  The Irish Government probably had little option but to act quickly - but now needs to modulate its response more finely.

In the meantime the EU needs to come up with a more concerted response - or else national interests will take priority.  

What a fine mess the US got us all in!  However if it results in a more dynamic EU decision making structure and process then some good will come of it.  Lisbon is beginning to look inadequate and unt of date already!

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:01:46 AM EST
[ Parent ]
As far as I can tell the ECB has been doing a pretty good job within its powers and scope. What's it done wrong?
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:05:23 AM EST
[ Parent ]
The problem is that its powers and scope are so limited.  What does it do besides set interest rates to target a (sightly) less that 2% inflation rate?  Could the Irish Government have relied on the ECB to secure the Irish banking system?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:10:47 AM EST
[ Parent ]
Issue loads of liquidity to the banks?
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:14:13 AM EST
[ Parent ]
It didn't stop the banks going into free-fall.  And if, as you say, one was on the point of failing, what was to prevent a domino effect?  They are all hugely exposed to the property market.

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:26:16 AM EST
[ Parent ]
Um, so the problem was one of solvency? Did the Irish government just guarantee the debts of 6 insolvent banks?

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 11:30:20 AM EST
[ Parent ]
I don't know.  At least they weren't hedge funds, or sub-prime mortgage providers or "investment banks" trading in derivatives big time - but a lot of their loans are secured on property which is now of dubious value.  It all depends on how far down the property market goes....

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:39:03 AM EST
[ Parent ]
They weren't? So who were they? And why did they need the liquidity?

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 11:40:49 AM EST
[ Parent ]
A "crisis of confidence" and apparently foreign hedge funds betting against them. The small scale of the Irish market makes it very vulnerable to manipulation by the big boys...

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:53:32 AM EST
[ Parent ]
So the Irish government stepped in to prop up the share value?

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 12:03:37 PM EST
[ Parent ]
That's not really the way to behave for the state. Our banks were down 10-20 % that fateful day, but that's just life you know? Sucks to be a shareholder, but no reason for the state to step in.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Oct 1st, 2008 at 12:10:43 PM EST
[ Parent ]
Apparently so.

IHT: Ireland 'blank check' to banks raises questions (October 1, 2008)

That Irish blank check amounts, in a doomsday scenario, to a maximum estimated liability of €400 billion (US$560 billion) -- just to repay the debts and deposits of six banks. That's double the country's annual gross domestic product, nine time the national debt and €95,000 ($135,000) per citizen.

But Ireland's government leaders themselves have stressed that they made the unprecedented promise only because they calculated, by doing it, shares would rebound, foreign capital would flow in, and they would never have to spend a cent of taxpayer's money bailing out a bank.

Prime Minister Brian Cowen said he had "not handed over any money to any bank. I have provided the reputation of this state to the banks."



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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 05:22:23 PM EST
[ Parent ]
Financial Times is saying that the French are now looking to the Irish model for a bailout.

I think that Globalization just ended. And unless the ECB steps in to clean up the mess, I think that the single market just got torn into several dozen pieces.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Oct 2nd, 2008 at 01:39:48 PM EST
[ Parent ]
Bloomberg: European Officials Squabble Over Response to Crisis (Oct. 2)
European officials squabbled over how to respond to the global credit crunch, with Germany opposing a coordinated approach and the Netherlands calling on states to set aside funds to help troubled banks.

French President Nicolas Sarkozy distanced himself from comments by his finance minister Christine Lagarde over the need to set up a ``rescue fund.'' Luxembourg Prime Minister Jean- Claude Juncker told DeutschlandRadio today he didn't ``see the need'' for an effort to emulate the $700 billion rescue package that U.S. senators passed yesterday.

...

Lagarde told the German newspaper Handelsblatt in an interview today that a ``rescue package'' was needed to help ``smaller'' European states ``threatened with a banking failure.'' Germany opposes the proposal ``based on its current assessment of risk,'' said Finance Ministry spokesman Stefan Olbermann.




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
by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 01:48:32 PM EST
[ Parent ]
Whatever the merits of the Irish actions, it seems that waiting for a coordinated EU response was not an option...

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 01:57:13 PM EST
[ Parent ]
They didn't even bother consulting the Commission - considering the Fortis deal went through the Commission in 24h...

In addition, central bank intervention of a failing retail bank can be swift. They just didn't have stomach to do their job.

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

by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 01:58:54 PM EST
[ Parent ]
"they" being the Irish authorities?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 02:02:49 PM EST
[ Parent ]
The Irish Central Bank.

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
by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 03:12:10 PM EST
[ Parent ]
Check out my diary.

Zaptero has got into the act, and Santander looks to be playing a major role in pressuring Brown into doing the right thing.

That and the possibility that the City of London may re locate to Dublin if he doesn't act.  Wouldn't that be ironic given the talk about keeping the City happy?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Oct 2nd, 2008 at 02:35:15 PM EST
[ Parent ]
Santander owns 3 of 10 demutualised UK building societies (now all 10 of them are failed banks).

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
by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 03:13:13 PM EST
[ Parent ]
The banks are being very silly and short-sighted if they now seek to use this for competitive advantage vis a vis other banks.  The Irish Government will come under extreme pressure to restrict the guarantee to bank accounts set up in Ireland or by Irish residents or in some other way to prevent a tsunami of money washing over Ireland and leaving everyone else high and dry.

I expect this to trigger an "Illegal State Aid" procedure from the Commission... Stoopid bank executives...

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 11:05:42 AM EST
[ Parent ]
I have good reason to believe, independent of media reports, that the choice was between this or nationalising one or more of the six banks.
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:08:38 AM EST
[ Parent ]
Okay, in that case
  1. the government would have gotten equity in the banks it bails out;
  2. moronic bank executives would be out of a job and couldn't go out using the bailout for competitive advantage, creating a political problem for their government;
If the guarantee is worth €10bn as Pierre suggested, why didn't the Government acquire that much new equity in the banks? By how much has the market capitlisation of the 6 Irish banks increased since the guarantee was announced?

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 11:39:31 AM EST
[ Parent ]
Yes, I know. Unfortunately(?), nationalising banks is not seen as acceptable. We had an opposition spokesman stating that it was never the correct thing to do.

THere's also the danger that they'd cause a chain reaction and end up nationalising the lot, which isn't obviously better than the current plan.

by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:41:37 AM EST
[ Parent ]
THere's also the danger that they'd cause a chain reaction and end up nationalising the lot, which isn't obviously better than the current plan.

Just wait...

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 11:43:28 AM EST
[ Parent ]
Perhaps.
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:44:12 AM EST
[ Parent ]
Depends what happens globally.
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:44:55 AM EST
[ Parent ]
nationalising the lot, which isn't obviously better than the current plan.

I think it is because if they nationalised them, they might not have to guarantee the debt on top of the deposits.

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 04:10:41 PM EST
[ Parent ]
Mig:
if they nationalised them, they might not have to guarantee the debt on top of the deposits

I agree, ironically; if the government "nationalizes" the 6 "national" (charter, i.e. licensed) banks, meaning purchase equity or bonds, the government will in deed own the banks' debts. The government need not "guarantee"; it is obligated to repay the banks' debts. In general, in legal terms, any "guarantee" otherwise is not executable.

Irish Times:

Tuesday's guarantee offered by the Irish government to its six national banks to safeguard €400 billion of deposits and bank debt

The ratio of deposits (retail plus commercial) to debt is not given. I assume there is a government sponsored agency that reports this aggregated data to the public.

The correspondent implies two distinct insurance mechanisms. One guarantees the banks' demand depositors in the fashion of the FDIC; premiums paid by banks may be calculated to some ratio of non-borrowed level of funds. The second guarantees the banks' debts,  their borrowed funds, in the fashion of the Bailout Bill or commercial, monoline insurance of third-party transactions.

It is the latter case rather than the former, I imagine from which arises claims of competition, especially "first mover" advantage across the pond. As you know, all depositors, foreign and domestic, to US FDIC-insured banks are protected, so to speak.

I'm embarrassed to say that I am surprised that EU banks don't offer depositors insurance. As for debt (bond) insurance, is it possible the government merely means to imitate the US Bailout Bill by offering an extra-layer of protection and incentive to firms to preserve their deposits in Ireland?

Diversity is the key to economic and political evolution.

by Cat on Thu Oct 2nd, 2008 at 08:31:08 AM EST
[ Parent ]
Each EU country has its own guarantee scheme.
Until Northern Rock, the UK was probably the most lousy of all: only 2k£ fully covered, then a 10% haircut up to 30k£, then barenaked.

Most EMU countries have a simple cap at 20k€.

France has a cap at 70k€, I think it's the highest in the EMU. It doesn't need changing I think (and actually sarko has only done talktalktalk, no actual legislation or decree has passed that would raise the cap).

Pierre

by Pierre on Thu Oct 2nd, 2008 at 08:42:59 AM EST
[ Parent ]
Irish Times:

Britain still does not have a comprehensive system of deposit insurance for retail depositors, let alone some temporary guarantee for wholesale depositors as announced yesterday in Ireland

So this PR is a truly about legitimizing insurance for brokered deposits and €400B is estimated flow of money markets through these banks?

Diversity is the key to economic and political evolution.

by Cat on Thu Oct 2nd, 2008 at 09:26:16 AM EST
[ Parent ]
The ratio of deposits (retail plus commercial) to debt is not given.

I think it's about 2:1.

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

by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 11:35:36 AM EST
[ Parent ]
The market as a whole has recovered c. 9% of the 13% in lost on Friday.  I don't know where the €10B figure comes from.  The deposits as a whole subject to guarantee are worth c. €400B - .,e. a multiple of Ireland's GDP - so I am not even clear how credible the guarantee is.   The Government claims it will charge the Banks "a commercial rate" for the deposit insurance it is providing, but precisely how that will work, no one seems to know.

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:46:08 AM EST
[ Parent ]
The Government claims it will charge the Banks "a commercial rate" for the deposit insurance it is providing, but precisely how that will work, no one seems to know.

CDS Spreads?

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 11:48:37 AM EST
[ Parent ]
How reliable are they as a pricing mechanism? Aren't they part of a market that has clearly failed?
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:51:00 AM EST
[ Parent ]
They're not reliable anymore.

This market is broken, with only near-bankrupt firms selling protection (backed by over-collateralization from their remaining assets, performing or not), to other near-bankrupt firms seeking regulatory arbitrage (protect your risk-weighted assets from a downgrade of your asset, by having it protected by someone who, you hope, will be downgraded only somewhat later).

But still, distressed banks including my own have spreads, for what they're worth, of a few % of protected amount. This spread is a fee that the buyer of protection has to pay each year. Hence a "market" price of 10 B€/year. Over 5% of Irish GDP, which is now closer to 200 B€ actually according to Wikipedia.

Pierre

by Pierre on Wed Oct 1st, 2008 at 12:10:16 PM EST
[ Parent ]
They're a proxy for default probability - given the experience of the past 14 months, that's a part of the market I don't see as obviously failed.

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 12:11:20 PM EST
[ Parent ]
I'm guessing the commercial rate is whatever the lowest rate the the EU competition authorities will allow them to get away with is.
by Colman (colman at eurotrib.com) on Wed Oct 1st, 2008 at 11:50:09 AM EST
[ Parent ]
Banks gain on guarantee and hopes of US deal - The Irish Times - Wed, Oct 01, 2008

Although the gains and volumes were not as high as yesterday, Irish banks stocks enjoyed strong gains by mid-afternoon with Anglo Irish Bank adding 16.7 per cent to €4.48, bringing its shares back to levels held on September 22nd.

Irish Life and Permanent was also higher, adding 72 cents to €5.35, a rise of 15.8 per cent. Bank of Ireland added 52 cents to €4.47, a rise of 13 per cent while AIB added 25 cents to €6.15, a rise of 4.2 per cent.



Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 11:51:21 AM EST
[ Parent ]
I don't think anybody outside of Ireland will put any money in Irish banks, quite the contrary.

Have a look at it another way: zoom out to the entire eurozone. The GDP is something like 10-15 trillion €. There are big banks with liabilities in the trillion euros, but they are few. And medium banks with hundreds of billions. Overall, the liabilities amount to roughly the GDP. Governements guarantee deposits of individuals, which are only part of the liabilities (but a big part for traditional universal banks on the continent). This guarantee looks plausible on this scale: govies can pay for a bankruptcy once in a while, because it's only a liquidity issue (assets will cover the deposits, bond holders will be burned, treasuries only have to cover for the time to liquidate).

In a general downturn, it looks a bit shaky, but can still be handled by combining:

  • a little bit of printing,
  • burning select bond holders and derivative counterparties.

OK, this prevents bank runs in "most" of Europe (the UK had no decent deposit guarantee at the time of the Northern Rock debacle). A general downturn will be paid for by the community, in the form of inflation and broken bucks on some money market funds.

No significant capital flight to non-EMU money zones for domestic investors, because in these times, you can be burn by forex moves, all currencies appear shaky, so better stick to the one applying where you will retire...

(BTW, note that this new feature in the landscape means most tax-loopholes are now self-defeating: they include a terrifying forex risk and/or a counterparty risk in countries with untested guarantee systems, and of course you wouldn't get any public assistance if you sued cross-border to recoup the product of a tax scam)

*

Now zoom back to Ireland. Now we have a tremendous asset bubble, in a country that has only recently acquired good living standards. This means there is no domestic accumulation of wealth an savings. The asset bubble actually is on the bank balance sheet, and the corresponding liabilities are not domestic deposits, but mostly bonds in international capital markets. EMU integration made it easy to tap these markets even for small Irish banks, and now the gov't is coming to realize that this was actually a disservice.

The Irish gov tried to prevent a run, not by Irish people, but by foreign bondholders. And that is an amount of debt that they cannot guarantee (alone), as it is bigger than GDP. Unless they get help from the rest of the EMU/ECB, the Irish treasury is going to default on this guarantee !

More in another comment, must leave PC

Pierre

by Pierre on Wed Oct 1st, 2008 at 12:05:08 PM EST
Now that it has bought itself a little time with this foolish guarantee, how is the Irish cabinet going to dig itself out of this hole ?

Well, there are mostly two ways to handle a sovereign default:

  • explicitly (tell your creditors to % #$§ themselves)
  • smoothly, by inflating the currency in which you pay back.

The first method is messy and is usually undesirable.

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:

  • beg Germany and other major EMU countries. Not good when you just fucked up their institutional pet projects. expect demands for putting the entire country in a conservatorship, à la IMF.
  • leave the EMU, declare that all liabilities of domestic entities are to be converted to "New Irish Pound" (NIP), and print like crazy. Shout out loud that this was done to protect the citizenry against ugly invaders from Frankfurt, Berlin, etc...

Of course, you realize that in the first and last outcomes (default and devaluation), foreign investors in bonds of the Irish treasury or the Irish banks, are like, totally mega-cluster-fucked. And since nobody knows whether the Germans will bother putting Ireland in a nice conservatorship (they could as well say: print NIP and farewell guys, we already have Deutsche Bank to rescue, a smaller EMU is just fine for us...) bond investors are going to be worst than careful in their dealing with Irish banks.

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

by Pierre on Wed Oct 1st, 2008 at 12:23:02 PM EST
[ Parent ]
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

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 12:28:19 PM EST
[ Parent ]
Reportedly the CDS spread of the Irish banks dropped as a result of the guarantee.

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 12:29:46 PM EST
[ Parent ]
I'm not betting. As I said, it depends on political decisions, so I stay away from it. But the spread of Irish sovereign bonds to Bunds shoud have widened, at least in the short part of the yield curve (because arbitrageurs could lock in an instant profit it there was a yield difference between the spreads of state and banks during the guarantee period: they could book it at no regulatory capital cost, in some irish-based subsidiary to eliminate future forex risk - hell, we even have one for that kind of purpose, with all kinds of lousy investments in it)

Pierre
by Pierre on Wed Oct 1st, 2008 at 12:58:01 PM EST
[ Parent ]
I should have added a :-) to my comment above!

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 01:05:30 PM EST
[ Parent ]
maturity/ZC spread in percent
3m   0
6m   0
1y  0.68
2y  0.5
5y  0.35
7y  0.45
10y 0.49

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

by Pierre on Wed Oct 1st, 2008 at 01:09:23 PM EST
[ Parent ]
will take a few more months at least, when all banks are gone or public.

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

by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 01:10:48 PM EST
[ Parent ]
I see very few survivors in the US, UK, Ireland and swathes of the EU.  Spain may be patting themselves on the back now, but they'll be in the next wave IMHO.

The first country to go will be Iceland, and the Scandinavians will bail them out.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 1st, 2008 at 01:20:18 PM EST
[ Parent ]
Oooh, I'd love to see that happen. Might give us a new government.

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

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 2nd, 2008 at 03:01:18 PM EST
[ Parent ]
Looks like this EU thing could be a good idea after all?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 03:04:34 PM EST
[ Parent ]
The EU is a great idea. But I'd prefer that the Union didn't bail out irresponsible banks under its jurisdiction until and unless it starts taking an active interest in squashing irresponsible banks before they need to be bailed out.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 2nd, 2008 at 03:24:50 PM EST
[ Parent ]
There is lots of talk about Scandinavian banks buying the Icelandic banks (and remember Nordea has quite large state ownership... makes for a "hidden" bailout) - that is, if the Scandinavian banks don't fail first. ;)

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.

by Starvid on Mon Oct 6th, 2008 at 11:24:17 AM EST
[ Parent ]
The big Scandinavian banks don't appear to have solvency issues. The little local ones... Well, they're at four bankruptcies and counting in Denmark alone.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 6th, 2008 at 04:44:04 PM EST
[ Parent ]
Actually, I suspect that a lot of the EU political establishment would not want to risk Ireland being forced out of the euro. After all, Italy would follow almost immediately and then the wolves would be out for the currency following that.

Pretty much all the doomsday scenarios for the euro start with Italy leaving. If Ireland leaves first, it will only destabilise matters further.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Oct 1st, 2008 at 01:41:02 PM EST
[ Parent ]
Forget Italy, the race is now between Ireland and Spain (which is pretty much in the same situation as Ireland)

Pierre
by Pierre on Wed Oct 1st, 2008 at 02:08:18 PM EST
[ Parent ]
That just adds to the picture. Either defend Ireland, or Ireland, Spain and Italy will go. High stakes for the eurozone.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Oct 1st, 2008 at 02:09:55 PM EST
[ Parent ]
I guess I should point out that Spanish or Italian banks are yet to fail, unlike British, French, German, Danish, Belgian....

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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 07:19:43 PM EST
[ Parent ]
Part of the reason is that their problems where easy to foresee, and the ECB has put the cajas on life support immediately, almost a year ago, by allowing them to securitize and repo' dozens of billion euros in non-performing spanish mortgages (same for Ireland: back in Q2, they already had something like 30k€ in repo at the ECB for every man, woman and child in Ireland).

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

by Pierre on Thu Oct 2nd, 2008 at 04:56:39 AM EST
[ Parent ]
I'll PN you on the Danish bank failures.

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.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 2nd, 2008 at 03:13:16 PM EST
[ Parent ]
purely Danish Shitpile(TM)

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

by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 03:16:24 PM EST
[ Parent ]
So, will we get a Royal Swedish Shitpile(TM) too?

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.

by Starvid on Mon Oct 6th, 2008 at 11:31:40 AM EST
[ Parent ]
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.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 6th, 2008 at 04:57:54 PM EST
[ Parent ]
What the fuck were Dublin thinking? Now they are in an impossible situation just because they chose not to do the reasonable thing everyone else has been doing when their banks began crumbling.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Oct 6th, 2008 at 11:20:52 AM EST
[ Parent ]
It is so much more politically palatable to guarantee saver's deposits (that's you and me) than to bail-out banks with their massive bonuses and dodgy practices - that's them, the elite.

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

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 6th, 2008 at 12:11:08 PM EST
[ Parent ]
It is so much more politically palatable to guarantee saver's deposits (that's you and me) than to bail-out banks with their massive bonuses and dodgy practices - that's them, the elite.

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

by Migeru (migeru at eurotrib dot com) on Mon Oct 6th, 2008 at 12:15:33 PM EST
[ Parent ]
Migeru:
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

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 6th, 2008 at 12:29:09 PM EST
[ Parent ]
Q & A - The Irish Times - Wed, Oct 01, 2008

What has the Government just done?

It has guaranteed the deposits in the six Irish-owned banks and building societies, as well as all their borrowings, for two years.

The guarantee is being provided at a charge, as yet unspecified, to the banks and will be subject to terms and conditions, also unspecified.

Why is the Government taking this action?

Minister for Finance Brian Lenihan says the measure is designed to safeguard the Irish financial system. Banks have been falling like dominoes in the US and Europe in recent weeks, and many observers felt the contagion would spread to Ireland.

Large overseas investors, concerned about the stability of the Irish banking system, were withdrawing funds, while hedge funds involved in short-selling had a vested interest in seeing Irish bank stocks fall until the practice was banned almost two weeks ago. By guaranteeing the debts of the Irish-owned banks and building societies, the Government believes it will make it easier for them to raise money.

This will take a huge amount of pressure off these lenders as the funding markets where they raise money have closed in recent weeks due to financial turmoil.

Mr Lenihan has warned that we cannot afford to let the "financial bloodstream" of the State dry up. "Were liquidity to dry up in the Irish banking system in the weeks ahead, the inevitable result would be economic catastrophe for this country."

What are the risks involved?

Mr Lenihan says he does not see a hazard or exposure arising from his decision. However, the total liabilities of the banks come to €400 billion and their assets stand at €500 billion, sums that dwarf the Irish economy. If the banks were all to collapse, the amounts involved would make the current budget deficit of about €7 billion seem minuscule.

When does it take effect?

The Government was last night seeking to rush the necessary legislation through the Oireachtas.

What banks are covered?

The guarantee covers Bank of Ireland, AIB, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.

All deposits in these banks are guaranteed by the Government. Subsidiaries of the six lenders can be included in the guarantee following consultation with the Central Bank. The guarantee also covers any deposit-taking businesses fully owned by these lenders, including Bank of Ireland's joint venture with the Post Office in the UK.

How does yesterday's announcement differ from the Deposit Protection Scheme introduced two weeks ago?

That scheme provides up to €100,000 compensation to depositors if a credit institution goes bust. The new guarantee covers all deposits in the six institutions concerned.

Are the loans to property developers and builders covered?

No. Only the six banks' own debts to investors, holders of bonds and other financial institutions are guaranteed.

Which bank offers the best protection for my money?

The Government guarantees all deposits with the six banks. Savings with the Post Office (not Postbank) are also 100 per cent guaranteed to any limit.

Savings at the following institutions are guaranteed up to €100,000 under the Deposit Protection Scheme: ACC Bank, Halifax [owned by Bank of Scotland (Ireland)], National Irish Bank (owned by Danske Bank), First Active, ICS Building Society (owned by Bank of Ireland), IIB Bank, Pfizer International Bank Europe, Postbank (owned by An Post and Fortis), Ulster Bank, and the credit unions.

The following foreign-owned banks are subject to the deposit protection schemes of the countries in which they are headquartered: Rabobank (subject to the Dutch compensation scheme of 100 per cent of the first €20,000 and 90 per cent of the next €20,000), Investec Bank (UK) and Leeds Building Society (subject to the British scheme of 100 per cent compensation for the first €35,000) and Northern Rock (all deposits guaranteed by the Bank of England since it was nationalised last year).

Who is going to pay for the guarantee?

Initially, the banks, which will be charged commercial rates. Ultimately, though, at least some of the costs are likely to be passed on to the consumer. Irish banks and building societies have been passing on their higher funding costs to customers.

Compiled by Paul Cullen and Simon Carswell



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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 12:17:26 PM EST
Sorry guys, I have to run.  Nice to see we've stirred the pot a little...

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 01:13:52 PM EST
More details emerging...

Irish Times: Bill allows State to take stake in any financial institution given aid (October 1, 2008)

THE GOVERNMENT'S emergency legislation to guarantee the Irish banking system will allow the State to take a stake in any financial institution that receives financial support from the exchequer.

The Bill gives the Minister for Finance wide-ranging powers to protect financial institutions and allows for competition law to be set aside to allow bank mergers, if deemed necessary to protect the stability of the financial system.

...

The aim of the move, which guarantees the banking system for two years, is to improve the banks' access to international funds frozen by the global credit crunch.



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
by Migeru (migeru at eurotrib dot com) on Wed Oct 1st, 2008 at 05:52:56 PM EST
Brian Lenihan is new to the job of Minister for Finance - and also relatively new to the cabinet.  He has not yet built up much of a reputation for particular competence in any sphere - although I don't, personally, doubt his political smarts.  But he really seems to have set the cat among the pigeons as to what regulatory arrangements should be put in place world wide.  It was really quite a radical move - out of keeping with Cowen's extremely cautious nature.  

I've no idea whether the nation's future financial well being has just been put in hock to a particularly nasty set of pawnbrokers who will demand an extortionate ransom in return or whether this will turn out to have been a stroke of genius which points the way forward for other Governments  Either way it demonstrates the extent to which the current system is broken and will never be the same again.

The Irish banks have a long and very profitable track record.  If it is true that they have effectively be nationalised then we could almost say that Ireland is no longer a capitalist country because they comprise a very large part of the economy.  We live in interesting times.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 1st, 2008 at 08:01:31 PM EST
I heard that irish people were moving their money out of banks and into post offices so the potential run wasnt just from foreign speculators.

apparently one post office in tallaght (not so affluent dublin suburb) took 900,000euro in deposits on one day

by darragh on Thu Oct 2nd, 2008 at 07:11:18 AM EST
I'm tempted to leave this discussion to the experts, but there is one question I would like to ask.

If the Irish rescue plan is an exercise in competition in trust and confidence - as suggested by my diary, do we now need a new set of metrics to determine what a sovereign guarantee is worth?

E.f. the Irish guaranteed deposits worth slightly more than 2x GDP.  How credible is that, and how does it compare to the Brits, French etc. guaranteeing their deposit bases as well?  Would a deposit guarantee based on only 1.5xGDP be more credible and would national bonds be priced accordingly? Would we have new international league tables of how credible/valuable  each nations loan guarantee scheme is?

Answers in a language the simple can understand please!

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 03:38:47 PM EST
The irish guarantee is an exercise in futility - they just nationalised six banks without using the 'n' word, but "guaranteeing their debt" is exactly that. They would not have done this without at least one of the banks being insolvent. In the process they have probably pissed off the European competition authorities (by not consulting let alone informing them of their impending action) and the European System of Central Banks (I am curious about the tone of any ESCB conference calls that may have taken place this week) which will have to bail out the Irish Central Bank when the insolvency of the Irish banks catches up with it.

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
by Migeru (migeru at eurotrib dot com) on Thu Oct 2nd, 2008 at 03:50:34 PM EST
[ Parent ]
Sounds a much bigger rift with the EU than Lisbon ever was - I'm not sure there is a public awareness of that here yet...  I see an Irish bank is now advertising a "safe haven" fund guaranteed by...

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 04:05:26 PM EST
[ Parent ]
To be "credible", a guarantee must be structured so as to burn a large enough share of the bank's creditor, so that the good assets in the overtaken bank eventually pay for the takeover.

Typically, bond holders should be burned, because they are smart investors who should know better than pour their money into a shit pile (tm).

Retail depositors and SMB are financially uneducated (relatively speaking), and checking accounts are a necessity of a functional daily life. Therefore they should be protected.

The only remaining question is that of the per-account cap on the guarantee. A lower cap adds to the credibility that the guarantee will work for what little is has promised. But it has been noted that many SMB should benefit of much larger caps than 100k€/$ to meet payroll obligations without anxiety.

Pierre

by Pierre on Fri Oct 3rd, 2008 at 03:45:02 AM EST
[ Parent ]
To be "credible", a guarantee must be structured so as to burn a large enough share of the bank's creditor, so that the good assets in the overtaken bank eventually pay for the takeover.

If, instead, you guarantee the bank's debt down to junior subordinated debt...

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

by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 03:46:53 AM EST
[ Parent ]
So what is the logic of the Irish Government guaranteeing virtually all debt, and does that not undermine the credibility of the guarantee - not top mention the safety of Irish Government Bonds?

Given a current debt/GDP ration of c. 30%, - you could see a situation where the Government could survive that going up to (say) 50% - though not without a lot of pain for taxpayers and at some cost to future growth,  But that would fund only 10% of the liabilities being taken on - and wouldn't cover a situation where those liabilities became much greater because of - say - property markets going down by another 50%.

So aren't Irish citizens now not exposed to a massively higher level of risk - indeed Ireland Inc. has been turned into a massive insurance company - which is fine and profitable when claims are at a "normal" level but has the potential to bankrupt Irish citizens rather than just the shareholders in those companies?

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 3rd, 2008 at 07:51:20 AM EST
[ Parent ]
Logic? Wud?

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
by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 07:52:36 AM EST
[ Parent ]
C'mon mig, we need more analysis here.  Cowen sold this as being almost risk free and that Ireland was merely lending the banks its "good name" and would extract a commercial charge for the service.  Given all the "good names" which have disappeared in recent times in the banking/insurance sectors, that is not a very reassuring position to be in.

Is there some implicit underwriting to the effect that the EU/Eurozone wouldn't let Ireland go bust?  I could see this as becoming a very serious and central issue for the EU - perhaps requiring another Treaty - or a revamp of Lisbon to address.  When was the last time a nation defaulted on its sovereign debt - Germany/ Argentina/ (African countries?)

It seems to me we are redefining the role of the state here - into something that is neither free market capitalist nor socialist  - and which has the potential to do great harm - but also perhaps some good if managed correctly.  

Whatever the logic, we have to look at the consequences - and ET should be able to get there ahead of the MSM.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 3rd, 2008 at 08:36:22 AM EST
[ Parent ]
I thought the following was clear from my various comments in this and other threads.

In my opinion the beneficiaries of this move are the management of the banks. I allso think the banks will take the Irish Central Bank down with them.

Here's the most plausible scenario.

An Irish bank was on the brink of collapse. If the Irish Central Bank had intervened in the standard way, they would have dismissed the management, appointed an administrator and reorganised the bank's debt. Losers would be: the management, the shareholders, the creditors and those with over 20k in deposits, in that order. The bank would sooner or later be sold off, in one or more parts.

Instead, the government decided (without informing, let alone consulting, the ECB or the Commission's competition authorities) to guarantee the debt of all 6 Irish banks.

You do the syllogisms.

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

by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 12:31:06 PM EST
[ Parent ]
Here is another possible scenario:

An irish bank had seen its share price drop so much that it was vulnerable to a takeover bid (presumably by Santander). The losers in this case would have been: the management (in that order).

The government decided (without informing, let alone consulting, the ECB or the Commission's competition authorities) to guarantee the debt of all 6 banks by announcing the guarantee.

This scenario makes the Irish government look even worse.

Can you think of a scenario that makes the Irish government look good and in which the management of the banks is not the primary (or sole) beneficiary?

In any case the government is disingenuous as they claim they are not "taking risks in public enterprise" as if guaranteeing debt were not exactly that.

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

by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 01:12:15 PM EST
[ Parent ]
So the question becomes - was the Government just plain stupid, or why did the Bank managements hold so much influence over them.  You could argue that the management did a good job for their shareholders as well, and the Irish government (and more particularly, the Civil Service,  is ideologically opposed to dismissing management or senior staff except in the case of moral turpitude (and even then, not really).

So it comes down to one great big bet that we can ride out the storm - in which case taxpayers may get some marginal benefits in the form of debt insurance payments - in return for taking on enormous risk.

Ireland is probably getter placed to take on this risk - with a 30% debt/GDP ration - and becoming very dependent on international financial services.  So it was probably also a calculation that the guarantee would give Ireland a competitive advantage vis a sis (say) Greece with a much higher national debt.

The really interesting question is the impact on the big boys - UK, Germany, France - who are probably extremely annoyed at the substance, never mind the manner of the move.  It puts them in a very difficult position.   One more example of how globalisation has moved ahead of the Global regulatory frameworks required to manage it.

Somebody could get seriously hurt here - and it will probably be the financially smallest and weakest (as usual).  It certainly looks like high stakes poker.  What's to prevent the Irish Banks from investing their huge inflows of money in a speculative way?

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 3rd, 2008 at 01:44:39 PM EST
[ Parent ]
AIG  also was an insurance who forayed into financials claiming it was only 'lending its good name', and it was 'for the sake of regulatory capital arbitrage rather than actual risk mitigation'.

Now the insurer is being dismembered, and the clients are going down one after the other for lack of anyone else to cover their risk...

Pierre

by Pierre on Fri Oct 3rd, 2008 at 05:37:55 PM EST
[ Parent ]
European bank rescue plan in tatters amid savings stampede - Times Online

Plans for a pan-European response to the global financial crisis lay in tatters last night as Greece followed Ireland in unilaterally guaranteeing all bank deposits.

Amid reports that Greek depositors were rushing to withdraw their savings, Greece's Cabinet agreed to protect all deposits whatever their size. Previously the maximum guaranteed was €20,000 (£15,600).

A proposal by President Sarkozy of France to create a European €300 billion bailout fund also collapsed, leaving attempts on this side of the Atlantic to calm investor panic and lubricate the money markets in chaos.



Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 3rd, 2008 at 10:15:13 AM EST
European bank rescue plan in tatters amid savings stampede - Times Online

The latest chapter in the story of this piecemeal approach to stabilising the banking system began on Monday evening, when a group of Ireland's most senior bankers trooped into Government Buildings in Dublin.

It had been a terrible day in markets worldwide and a catastrophic one locally. One bank, Anglo Irish, had seen its shares plummet by 46 per cent. There were rumours of large depositors demanding their money, including one German customer wanting an immediate €1.5billion. Then came the horrendous news that Congress had rejected the US bailout plan.

The shaken Irish bankers were grave as they poured out their story to the Taoiseach, Brian Cowen, and the Finance Minister, Brian Lenihan. Liquidity was drying up, they said, other banks were refusing to lend to them except for the shortest periods. According to one source: "They basically said, `Look, tomorrow two of our banks won't survive'."

Thus began the hatching of the explosive plan for a guarantee of all Irish bank deposits. Irish officials worked through the night to cobble together a credible plan.

There was no time to consult other governments, the European Commission or even the European Central Bank. A guarantee had to be in place before ordinary bank branches opened on Tuesday. At 4.15am the plan was completed. The promise would apply to six home-grown banks, and to no one else.

A couple of hours later Alistair Darling rose from his slumbers to be told the bad news. The Chancellor had for once had a full night's sleep, having spent most of the weekend stitching together the Bradford & Bingley deal.

Mr Darling immediately spoke by phone to Mr Lenihan. Why hadn't he been told? Why was there no consultation with other EU states? Mr Lehinan explained that there had been no time.



Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 3rd, 2008 at 10:20:20 AM EST
Wow - talk about being resuscitated from the grave.  This diary has suddenly re-emerged on the recommended list - does that mean large scale deposits are heading my way?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 6th, 2008 at 06:29:06 AM EST


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