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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 ]

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