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Beggars can't be choosers

by Frank Schnittger Sat Nov 20th, 2010 at 04:23:23 AM EST


Ajai Chopra, deputy director of the European department of the International Monetary Fund, and an unidentified colleague pass a beggar as they make their way to the Central Bank of Ireland for crucial talks with the Government in Dublin yesterday. Photograph: Peter Morrison/AP

Meanwhile...

Trading surplus widens in September

Preliminary figures for September showed the surplus rose to € 3.91 billion, compared to € 3.8 billion in August. Exports increased 2 per cent to € 7.8 billion over the month, while imports rose 1 per cent to almost € 3.9 billion.

In other words, Irish exports continue to be about double Irish imports, and still Ireland needs a bail-out? Go figure.


The reason the Irish Government has to talk with the IMF/ECB (apparently a newly merged entity) is that Irish banks are haemorrhaging money and are more and more dependent on the ECB for liquidity:

AIB loses €13bn in deposits due to Irish debt fears

ALLIED IRISH Banks has lost about €13 billion in deposits since the start of the year due to concerns about the financial difficulties of the Government and the banking system, the bank said in a trading statement yesterday

---<snip>

The run on deposits at AIB pushed up the bank's loan-to-deposits ratio - the key barometer of a bank's reliance on money market funding - to 159 per cent at the end of September from 151 per cent from three months earlier.

This means the bank has €100 on deposit for every €159 it has lent out.

---snip>

The bank later said its reliance on monetary authority funding had risen to €27 billion from less than €10 billion at the end of June, while the level of collateral it use to borrow from these sources had fallen to about €11 billion from about €24 billion.

Of course the banks inflicted most of this damage on themselves by their profligate lending policies, but matters were not helped recently by Chancellor Merkel:

Merkel hit below belt but Ireland was already on ropes

Matters escalated following Angela Merkel's proposal for a permanent rescue mechanism as of 2013 that would entail debt restructuring with losses for private holders of sovereign bonds. The German chancellor stated: "We must keep in mind the feelings of our people, who have a justified desire to see that private investors are also on the hook, and not just taxpayers."

Merkel's statement of intent threw petrol on the fires that were already burning in the euro zone's periphery, and the subsequent mayhem forced the finance ministers of Germany, France, Italy, Spain and Britain to issue a communiqué at the G20 summit in Seoul. This stated that consideration for private sector participation, "does not apply to any outstanding debt and any programme under current instruments. Any new mechanisms would only come into effect after mid-2013 with no impact whatsoever on current arrangements."

Merkel's comments were, of course, entirely reasonable, but neither should we be surprised when the markets price in an increased risk of default if senior politicians start speculating about them sharing the pain of default.  

The problem with the EU, as usual, is that there is an awful lot of talk and very little by way of quick or decisive action.  If you are going to make bondholders share the pain of default you do it overnight or over a week-end  - you don't waffle vaguely about such possibilities and then wonder why the price of borrowing for peripheral EU members goes up to unsustainable levels exacerbating the very crisis you are supposed to be trying to avert.

Obviously Merkel has to prepare her own political base for any action she may ultimately decide to take and her primary reference point is always going to be the German electorate. However comments intended for a domestic audience can have far reaching oversees consequences, and this is but one more reason why Ireland is negotiating a bailout with the IMF/ECB at a time when its own economy is going strong.

Beggars can't be choosers, and, once you lose control of your own destiny, you are subject to the agendas of others.

The Irony is that the Irish Government has 20 Billion cash-in-hand and doesn't need to borrow until the middle of next year.  However the ECB could turn off the liquidity taps to the Irish Banks at any time thus effectively bankrupting them whatever the Irish Government might do.

So is the ECB exercising that threat?

EU seeks deal in days as rescue talks intensify

Diplomatic and other sources say, however, that ECB chief Jean-Claude Trichet has been pressing for a decisive response to deterioration in the position of the Irish banks.

As Sarah Palin might say, 'You Betcha!'

The Irish situation is a classic lesson of how an otherwise relative sound economy and polity can be brought to its knees by a banking sector gone wild.  Ireland and the EU have been financialised to the point where ethics and democracy no longer matter.

Ireland has been hijacked and the ransom has to be paid to allow it to continue as much diminished player in a new EU Financiality.  The EU is a polity no more - as evidenced by the almost complete irrelevance of all other EU institutions - and can now perhaps be best referred to as a "Financiality" - subject to the whims of the markets rather than its people.  Markets which first pumped the Irish property market to completely unsustainable levels - helping to render the real economy uncompetitive - and then dumped the property to crash the system.  Markets which are then declared the saviours and arbiters of the fate of those they pumped and dumped.

However, whatever about the fate of a small polity like Ireland being taken for such a ride - it is even sadder to see a great political project like the EU - perhaps one of the greatest political projects of all time - to surrender so abjectly to the global financial behemoths - at a time with the EU polity and economy is otherwise in relatively sound shape.  The neo-lib ideological capture of the EU is complete. Who needs armies when your enemies acquiesce so obsequiously?

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Perhaps other contributors here can offer a more informed view as to why the ECB is pressing so hard for the Irish Government to accept a bailout.  Is it because:

  1. It wants the Irish Governemnt (and by extension Irish taxpayers) to take more direct responsibility for the Irish banks?

  2. Is it an ideoplogical opposition to the quantative easing being employed elsewhere to keep banks afloat?

  3. Is it to help prevent "the Irish Disease" spreading to other peripheral EU members?

  4. Is it to help create greater stability for the Euro and the Eurozone generally

  5. Is it to enhance the ECB's and the Euro's credibility as a world currency vis a vis the Fed and $?

  6. To avoid an Irish Bank failure putting pressure n other Eurozone banks?

  7.  Out of the kindness of its heart it wants to help Ireland?


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Nov 20th, 2010 at 05:04:45 AM EST
government knows what the hell they are doing and, given their cronyism and refusal to make the upper income scales pay for their bailouts (in the form of, say, a reasonable corporate tax rate, reasonable meaning well more than double the pittance it is now)...the response by the Irish government so far has been a fraud, putting Irish workers in hock to bail out their banking friends, the regulatory environment around whom was something a Suharto-era Indonesian would recognise.

I don't think Trichet gives two hoots and a holler about workers of course, but the Irish ruing elite, even less it would seem.

by redstar on Sat Nov 20th, 2010 at 08:50:45 AM EST
[ Parent ]
The proper thing to do would be a Good Bank solution where
the state creates a new bank, the Good Bank, which gets the deposits and the clean assets of the old banks. The old bank gets compensation equal to the difference between the (known) value of the clean assets it loses and the value of the deposits it gives up. The state may also inject additional public capital into the Good Bank, or it may invite in additional private capital. Government financial support is given only to new lending, new investment, and new funding by the Good Bank. The legacy (ex-)bank has its banking license taken away and simply manages the existing stock of toxic assets. The legacy (ex-)bank does not get any further government support.
The "problem" is that the old bank's liabilities, particularly senior unsecured debt, stays with the "legacy (ex-)bank" and so the creditors of the original bank suffer a loss. The ECB is defending these creditors.
The holders of bank debt, with the possible exception of perpetual subordinated debt (which counts as tier one capital in some countries), have become the sacred cows of this financial crisis. Regulators, central bankers, and Treasury ministers are quite willing to see shareholders wiped out. After the demise of WAMU and Lehman Brothers, however, the unsecured creditors have become inviolable. Somehow, those in charge of macro-prudential stability, notably the Fed, have bought into the notion that if there is either a further default on bank debt, or a restructuring involving a significant debt-to-equity conversion, or a significant write-down of the claims of bank bond holders, this will be the end of the world.
It could still be the case that the Irish banks are restructured in this way and that the necessary recapitalization still comes from the IMF/EU. But I suspect the "Good Bank" solution won't be used.
But even if it had been Lehman that triggered the financial upheaval, that was then. This is now. Banks, counterparties, investors and policy makers have had 6 months to adjust to the new reality and prepare for the eventuality of default on zombie bank debt and even on AIG debt. The bonds of large zombie banks trade at spreads over government yields comparable to those of automobile manufacturers (600 - 650 basis points). Their CDS spreads put many of these banks well into the default danger zone. Their stock market valuations are consistent with those of institutions not a mile away from insolvency and default.
(quotes from Willem Buiter's Good Bank vs Bad Bank: Don't touch the unsecured creditors! Clobber the tax payer instead. Not. at VoxEU on 14 March 2009)

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Sat Nov 20th, 2010 at 10:12:36 AM EST
[ Parent ]
because he is the chief economist of Citibank, the biggest of the zombie banks.

His silence is cheap for the price Citi is paying...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Nov 20th, 2010 at 11:56:48 AM EST
[ Parent ]
That article was published on VoxEU 3 months after he joined Citi.

In any case, I would still "draft" Buiter for ECB President. He's written the most cogent stuff I've read about Central Banking and his report with Ann Sibert on Iceland (6 months before the crash) is a must-read for the qualitative discussions of banking and systemic risk.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Sat Nov 20th, 2010 at 12:47:20 PM EST
[ Parent ]
Are you - or is anyone else - aware of similar thinking in Germany?  Because, frankly, what the Brits think right now probably doesn't matter a whole lot...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Nov 20th, 2010 at 02:56:07 PM EST
[ Parent ]
thanks. Still, his voice is less heard now (at least on ET).

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Nov 20th, 2010 at 05:09:28 PM EST
[ Parent ]
Migeru:
That article was published on VoxEU 3 months after he joined Citi.
I just realised I had back-dated his joining City by 1 year...

So, you're right, he's a lot quieter in 2010 after joining Citi.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Mon Nov 22nd, 2010 at 06:41:36 AM EST
[ Parent ]
European Tribune - Beggars can't be choosers
However the ECB could turn off the liquidity taps to the Irish Banks at any time thus effectively bankrupting them whatever the Irish Government might do.

Can it? How would it work?

If yes, could not the Irish government issue scrip in such a situation?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Nov 20th, 2010 at 07:18:24 PM EST
In that case the Irish banks would be insolvent and would have to be intervened by their regulator or national deposit insurance scheme. The assumption would be that the Irish government doesn't have enought cash even for a "Good Bank" resolution of its banks.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Sat Nov 20th, 2010 at 07:34:19 PM EST
[ Parent ]
But that is ridiculous. Surely they have enough liquid assets to cover all domestic depositors?

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 20th, 2010 at 08:27:48 PM EST
[ Parent ]
They have 20 Billion cash in hand but will have to borrow again mid next year as loans mature.  Presumably they think borrowing will be impossible if they allow the banks to default.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Nov 21st, 2010 at 02:11:44 AM EST
[ Parent ]


Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Nov 21st, 2010 at 03:12:55 AM EST
[ Parent ]
Given the current budget deficit is ecpected to be c. 12% of GNP next year, not being able to borrow would mean a severe deflationary shock to the system - either by dramatic tax increases or expenditure reductions or both.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Nov 21st, 2010 at 12:38:27 PM EST
[ Parent ]
Ireland has a positive balance of trade, so it does not need to roll over its debt. So nothing prevents Ireland from presenting its current bondholders with an ultimatum: Either you buy every single bond we issue, at the price we decide, or you get not one penny back.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Nov 21st, 2010 at 01:34:20 PM EST
[ Parent ]
I don't know how much of Ireland debt matures in the next 12 months, but it may be more than the balance of trade surplus. Also I don't know how directly a balance of trade surplus translates into Government cash flow to pay off maturing debt.  

So unless you are advocating defaulting on currently maturing Government debt - much of which probably predates the banking crisis and was thus lent in good faith to a Government with a c. 25% debt/GDP ratio - this is debt which should be repaid.

The people who lent to Ireland in the last 10 years are propably quite different to those who bought bank bonds, and so you would be making one set of (arguably responsible low risk creditors) responsible for the sins of those who invested in the dodgy banks.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Nov 21st, 2010 at 02:41:20 PM EST
[ Parent ]
I don't know how much of Ireland debt matures in the next 12 months, but it may be more than the balance of trade surplus. Also I don't know how directly a balance of trade surplus translates into Government cash flow to pay off maturing debt.

Doesn't really matter, as long as the Irish government is able to tell the largest single creditor to fuck off. Its creditors are unlikely to form a coherent block if it starts taking them down one by one.

So unless you are advocating defaulting on currently maturing Government debt - much of which probably predates the banking crisis and was thus lent in good faith to a Government with a c. 25% debt/GDP ratio - this is debt which should be repaid.

And it will be... if they keep rolling it over until the bad bank debt has been resolved. The alternative is to simply default on all Irish sovereign debt and set up a shadow central bank to fund the deficit. That would be far worse for these creditors.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Nov 21st, 2010 at 02:58:21 PM EST
[ Parent ]
JakeS:
And it will be... if they keep rolling it over until the bad bank debt has been resolved. The alternative is to simply default on all Irish sovereign debt and set up a shadow central bank to fund the deficit. That would be far worse for these creditors.

So how is this different from the ECB/IMF bail-out fund - which enables Ireland to access capital at cheaper rates until such time as it can fund its own borrowing on sovereign debt markets again?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Nov 21st, 2010 at 03:22:44 PM EST
[ Parent ]
Fewer sticky strings.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Nov 21st, 2010 at 03:44:41 PM EST
[ Parent ]
We don't yet know what the strings will be. So far the Irish Government has been making all the running in tying itself up in knots all by itself with no need for help from anyone else - as in the 15 Billion cuts in public expenditure programme it is about to announce and which pre-dates ECB/IMF involvement (if not consultation).  

The IMF may turn out to be a convenient bogeyman to frighten the public sector unions, but the sense I have is that the Irish Govt. has been leading the charge to rein in public expenditure, and particularly public administration costs as well as the value of income transfer and resource entitlement programmes.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Nov 21st, 2010 at 04:35:51 PM EST
[ Parent ]
Jake

as long as the Irish government is able to tell the largest single creditor to fuck off. Its creditors are unlikely to form a coherent block if it starts taking them down one by one.

i can't evaluate your strategic path, but this tactical path seems highly hypothetical, if not unworkable.

Doesn't this all come back to which interest group is best recognized by the ECB/Irish sklaven, and there's no voice for what might be termed a sensible course of action?

"Life shrinks or expands in proportion to one's courage." - Anas Nin

by Crazy Horse on Sun Nov 21st, 2010 at 03:24:39 PM EST
[ Parent ]
Doesn't this all come back to which interest group is best recognized by the ECB/Irish sklaven, and there's no voice for what might be termed a sensible course of action?

The ECB is largely irrelevant to the Irish situation - if Ireland wants to implement a solution that would work, then the ECB does not have enough divisions to stop it from doing so.

It is true that the Irish political class isn't going to do this, but that does not mean that it cannot be done.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Nov 21st, 2010 at 04:06:21 PM EST
[ Parent ]
After all we've seen in the last 3 years, I wouldn't bet my life savings on that surely...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Mon Nov 22nd, 2010 at 05:55:43 AM EST
[ Parent ]
BBC - Newsnight: Paul Mason: Euro: Two down. Two to go.

Dublin, 2300 ish: I'm listening to Irish politicians shouting at each other on RTE's The Week In Politics Show. But there is not much left to shout about.

Shortly before 9pm Taoiseach Brian Cowen held a press conference at which he announced Ireland would seek a bail out from the IMF, Eurozone and ECB, with some bilateral money thrown in by Britain and maybe others.

It will go for the full monty: the EFSF, the EFSM (which Britain could contribute £6bn to) and the IMF (Britain is exposed to the tune of 5%). All Mr Cowen failed to tell us, and the Irish people listening in to the impromptu press conference, was the two main facts: how much will Ireland borrow and what will be the conditions imposed.

Ludicrously, giving the whole thing a Passport to Pimlico atmosphere, the IMF team that will dictate the terms is actually billeted in Dublin's most expensive hotel, right opposite the taoiseach's office, and right above the glaring arc lights of the news crews, which will now probably go into 24-hour rolling mode.



Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Nov 22nd, 2010 at 06:46:41 AM EST
The Post - Breaking news
The only way out of this banking mess is to have a bank resolution or law passed which turns the existing creditors of the banks into shareholders, whether they like it or not.

At a stroke, the huge debts of banks disappear and are borne by the creditors - which they should be - and we start again.

The Irish taxpayer is no longer on the hook and we do what the US did in the savings and loans debacle in the early 1990s: we apply a market solution to a market problem.

This will not be pretty, but it will work.

Are we too far down the `pay all bondholders' road to do this?

No, we are not; in fact, the arrival of the IMF makes a reversal of the financially suicidal policy easier.

Why might that be?

There are four reasons: one based on law, a second on the reality of the bond market, the third based in the reality of corporate finance and the fourth based on personal vanity and ambition.

The personal vanity he refers to is that of Dominque Strauss-Kahn's French Presidential ambitions.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Nov 22nd, 2010 at 10:41:31 AM EST
I hope he's right, but the history of the IMF gives me little confidence that he is.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 22nd, 2010 at 03:03:43 PM EST
[ Parent ]
A debt/equity swap was precisely what I was proposing in Dublin two years ago.

Just not equity as we know it, Jim.....

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

by ChrisCook (cojockathotmaildotcom) on Mon Nov 22nd, 2010 at 07:25:56 PM EST
[ Parent ]


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