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Did the Irish just end Globalization?

by ManfromMiddletown Thu Oct 2nd, 2008 at 02:30:43 PM EST

Bailout legislation protecting domestic deposits in Irish national banks was signed into law by President Mary McAleese at 3:30 PM (Irish time).

President Mary McAleese has this evening signed legislation giving effect to the Government's €420 billion bank guarantee scheme.

A single-line statement from Áras an Uachtaráin just after 3.30pm said Mrs McAleese had signed the Credit Institutions (Financial Support) Bill 2008 into law.


Unlike the US FDIC or the British Financial Services Compensation Scheme,  Ireland has had, until today, a deposit insurance scheme to protect only something like the first €20,000 deposited by individuals into banks.

Key to the new scheme developed by the Irish government is the exclusion of non-Irish national banks operating in the Republic of Ireland.  For example, although San Francisco based Bank of America operates in Ireland, they are not covered by the deposit insurance scheme.  Which means that while deposits held in a Dublin branch of the Bank of Ireland are covered, those in a Dublin branch of the Bank of America are not.

This creates a massive incentive for a bank run on the Irish subsidiaries of international banks, creating the possibility of more US and UK bank failures if a run occurs on their Irish operations.  As well, bank executives from Irish national banks apparently went on BBC Radio 4 joking that British citizens should deposit their money into Irish banks.  

Because, while this Irish deposit insurance apparently does not cover deposits held by Irish citizens in non-Irish banks in Ireland, it does apparently cover the deposits of non-Irish citizens held in Irish banks outside of Ireland. The British insurance scheme only covers the first £35,000 (roughly $70,000).  Which means that the Irish just created a huge incentive for all British citizens holding accounts in excess of that to transfer their funds to Irish banks.  That seems like a good way to start an economic war.

One possible exception to the "Irish only" rule may be Ulster Bank, a bank domiciled in Belfast but operating on an all Ireland basis.  Brian Lenihan, Irish Finance minister, explained why only Irish banks were being covered:

Mr Lenihan emphasised that the Government had responsibility for the six domestic financial institutions, but other financial institutions owned by companies outside the State were the responsibility of other sovereign states.

And as for the economic distortion that this promises?  

The guaranteed banks received inflows of deposits from the UK, with one Irish bank receiving a single corporate deposit of €500 million after the guarantee was announced.

This is direct assault by the Irish on the financial primacy of the City of London, and it's only a matter of time before the boys on Wall Street find their Irish roots.

The irony (one of the) of this situation is that this whole move may have been precipitated by a potential takeover for the Bank of Ireland by Spain based Santander bank.

Now though the bug has spread, and European nations are acting to make guarantees similar to that made in Ireland to prevent deposit outflows to Ireland.  There appear to be two schools of thinking on this.

1) Follow the Irish

If the French follow the Irish, as they are believed to be considering, bankers said it would inevitably force all governments across Europe to follow suit. Depositors would then have to decide which sovereign guarantee was safest. Credit default swaps, effectively the cost of insurance against going bust, on Ireland's government bonds almost doubled yesterday after the announcement, indicating the level of risk transfer.

That article also notes that the European regulators have opened an anti-competition case against the Irish.

2) Spain is acting to pressure unified European level action to harmonize deposit guarantees.

Spain today joined the call for an increase in the guarantee limit on bank deposits across Europe, piling further pressure on UK Prime Minister Gordon Brown to support an ambitious plan for a €300 billion (£237 billion) bailout fund to rescue crippled banks.

The Spanish Treasury indicated today that it would support an EU move to lift guaranteed savings, but would not act unilaterally and copy Ireland's move to only guarantee domestic banks.

Again, Spain's Santander was heavily involved in supporting UK banks during their problems, and this declaration from the Spanish government is being interpreted as Spanish pressure on the Brits to join a European bailout scheme.

It's going to matter a great deal which side wins, because if the Spanish win, then the potential for crossborder mayhem is minimal.  But if other European countries follow the Irish, there is going to be the potential that this could trigger multiple bank failures as money chases bank guarantees across national borders.  

And this danger includes US corporate deposits.  So we could see runs on any number of banks that either have exposure in Europe, or have corporate accounts that can be shifted abroad.

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crossposted from Economic Populist.

As I was saying over there it seems like a time limited Tobin Tax to prevent capital flight may be in order.  A 5-10% tax on capital transfers out of countries could prevent a great many bank runs.

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 02:32:57 PM EST
like a time limited Tobin Tax to prevent capital flight may be in order
5-10% seem a bit high for the long run, but why time limit?
I think a Tobin tax may be among the best things, which can be done to reduce the likelyhood of future bubbles.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Thu Oct 2nd, 2008 at 02:59:45 PM EST
[ Parent ]
The time limit is thinking that it has to be really high to work in the short term.

In Europe the problem with a Tobin tax is that the Commission will take it out.  What's needed in the EU is European regulation, not national regulation.  

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 03:17:55 PM EST
[ Parent ]
Why would Santander taking over BofI precipitate this? They've been sniffing around for ages.
by Colman (colman at eurotrib.com) on Thu Oct 2nd, 2008 at 02:47:47 PM EST
What I'm suggesting is that Dublin saw what happened in the banking crisis in Britain, and that this whole affair has less to do with protecting deposits than keeping Irish banks Irish.  Nationalism at work.  Which doesn't play well in a common market.

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 03:15:16 PM EST
[ Parent ]
They're not protecting "the Nation". They're protecting the management of the banks in a first instance. Then then the shareholders, and finally the creditors as well as people with more than €20k in 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 Thu Oct 2nd, 2008 at 04:42:45 PM EST
[ Parent ]
I'm not going to argue with you.  But I think that the heart of it is naked greed dressed up in nationalism.

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 04:47:04 PM EST
[ Parent ]
Precisely.

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 04:50:58 PM EST
[ Parent ]
Don't you want to help me guard me pot o' gold?

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 05:00:22 PM EST
[ Parent ]
That would be bad for the management of BofI. How cozy are they with Cowen?

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 04:24:17 PM EST
[ Parent ]
An Irish Government bailed out AIB before- in the 1980's when they bought an insurance company which turned out to have huge unquantified liabilities.  That left a very bad taste because AIB promptly upped dividends and top salaries etc. and the taxpayer got nothing.

I think ANY Irish Government would be v. uncomfortable with either AIB or BofI - the top two - being taken over by foreigners because there is a residual sense that they are committed to the Irish economy.

I think we may be coming close to the limits of what the Govt. would regard as a vital national interest and would be unwilling to defer to Brussels on.  Not sure what the legalities are, but collegial it ain't.

However there is also a sense that - e.g. the French would also act in their national interest if push came to shove - the difference is that smaller states are expected to be more deferential.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 04:51:45 PM EST
[ Parent ]
Speaking of banks and dodgy insurers ... I was strolling through me comments earlier today when I came across this curiosity. Eh? says I (to myself). What a coincidence!  

Diversity is the key to economic and political evolution.
by Cat on Thu Oct 2nd, 2008 at 08:32:09 PM EST
[ Parent ]
I read the Irish guarantee had been extended to Irish banks owned by non-Irish companies. Is that correct?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 2nd, 2008 at 04:14:32 PM EST
National Irish Bank is owned by Danske Bank and they applied to have the guarantee extended to them. Same thing with RBS's Irish subsidiary.  
As pressure mounted, the Irish government said it may extend the scheme to foreign banks with retail units in Ireland and that applications would be considered on a case-by-case basis.
This is rich, though:
In an editorial on Thursday, the London-based Financial Times accused Ireland of "economic nationalism".

"The government has behaved anti-competitively and the protection it is offering could even destabilise other banks," it said.

Economic nationalism is okay when the UK uses it for its own race to the bottom, but when the City bankers are threatened by someone else's nationalism it's not okay.


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 04:22:50 PM EST
[ Parent ]
Quotations from the IHT.

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 04:32:34 PM EST
[ Parent ]
I think its a matter of where the bank, not the owner, is domiciled.  So the Irish government is saying that they have a responsibility to Irish corporations, which goes straight to the heart of what a corporation is, a grant that limits liability issued by the national state.

The multinational corporation is ultimately dependent on their country of origin.  There is no Free Dollarstan.

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 04:39:03 PM EST
[ Parent ]
Off-Topic: MfM, did you see the numbers on unionization out today?  Went up for the first time since 1979, from 12% to 12.6%.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Oct 2nd, 2008 at 04:25:06 PM EST
Just saw it.

There ain't nothing soft about hard times.  And it's in these hard times that people start to question why some work so little and have so much, and others suffer while they work themselves to the bone.

Hard times shatter the illusion that the middle class aren't working class.  Economic hardship does wonders for class consciousness.

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 04:33:23 PM EST
[ Parent ]
That was my take as well.  Still, much as I don't wish to see hard times, glad to see that number.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Oct 2nd, 2008 at 04:41:42 PM EST
[ Parent ]
Bailout legislation protecting domestic deposits in Irish national banks was signed into law by President Mary McAleese at 3:30 PM (Irish time).
Only deposits? Which part of the original press release didn't make it into the law?
The Government has decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II), with the following banks: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society and such specific subsidiaries as may be approved by Government following consultation with the Central Bank and the Financial Regulator.
(my emphasis)

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 04:30:21 PM EST
You may be right.  I think that this is more than simple deposits, but alas, that's where the potential to spark bank runs is at.

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 04:35:01 PM EST
[ Parent ]
In that context, this is hilarious, too:
On State involvement in the banking sector, Mr Lenihan said he did not favour taking shares in banks if it could be avoided.

"I don't believe the State should be taking risks on private enterprise. If there's a need for rationalisation in the banking industry then lets get on with that," he said.

Right, guaranteeing debt and deposits is not "taking risks".

Only the shareholders take risks, well known fact.

Who the fuck do they think they're kidding? (Apart from the Dáil)

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 04:39:45 PM EST
[ Parent ]
the current spin is that the eurozone is imploding and that Europe is falling back to petty nationalism, thereby showing that its "ideals" were bunk.

Some people don't like the Schadenfreude they've been subject to recently...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 2nd, 2008 at 04:31:28 PM EST


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 04:39:56 PM EST
[ Parent ]
sorry, that must be the autofill feature. I only wrote "of course".

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 2nd, 2008 at 04:42:33 PM EST
[ Parent ]
It's going to matter a great deal which side wins, because if the Spanish win, then the potential for crossborder mayhem is minimal.  But if other European countries follow the Irish, there is going to be the potential that this could trigger multiple bank failures as money chases bank guarantees across national borders.

Spain rules! (Or should)

Excuse the economic nationalist moment.

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 04:48:08 PM EST
Living in a former Spanish colony as I do ...

If you guys promise to chuck-out the Texans the idea has a certain appeal.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Oct 2nd, 2008 at 04:57:38 PM EST
[ Parent ]
Viva Espana......

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 05:01:33 PM EST
[ Parent ]
Maybe this is why McCain has refused to talk to Zapatero - and referred to Spain as being in Latin America....

(He even erroneously referred to Ireland having an 11% corporate tax rate in the great debate - something I haven't seen corrected anywhere - including all the US fact check sites.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 05:08:21 PM EST
[ Parent ]
that the banking sector will be nationalized on dKos.


Bank markets are frozen (and notwithstanding articles that pretend it's not a big deal, it IS a big deal, as I discuss here) and carried over from day to day by the central banks, which are effectively the only lenders to banks, apart from depositors. It has gotten to the point where banks have more cash on their hands than they need, but refuse to use it for anything.

  1. This can last for a while (the central banks can roll over their loans on a daily basis for as long as they want), but it's clearly not sustainable in the long term, and will soon have very real impacts on the economy, as loans become increasingly restricted;

  2. the $700 billion from the Paulson Plan will go in that pile of hoarded cash, but will not change behaviors, becasue nobody is sure that that amount is enough to plug the holes in banks' blanes sheets, and, givne the prevailing lack of trust in the market, nobody will take any risk to bet that it might be enough.

So we'll end up with cash-rich but potentially insolvent banks not lending money. A rather unexpected outcome, to say the least... and not an acceptable one.

At this point, I don't see any other solution than the de facto nationalisation of the whole banking sector to put it back in a position to actually make loans.

And my bet is that this could very well happen before the election...



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 2nd, 2008 at 05:17:22 PM EST
so you favour the Irish solution?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 05:25:58 PM EST
[ Parent ]
For certain values of 'solution' ;-)

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 05:38:01 PM EST
[ Parent ]
Is this solution final?

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 06:18:24 PM EST
[ Parent ]
He's trying to cover for the boss...

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 2nd, 2008 at 06:36:09 PM EST
[ Parent ]


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