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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?

Vote McCain for war without gain

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 ]

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