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Interesting Times in Eurozone Banking.

by Colman Tue Sep 30th, 2008 at 04:40:35 AM EST

After a spate of bank rescues in the Eurozone yesterday - Fortis, Dexia, Hypo - the Irish government has come to the assistance of the Irish banks by guaranteeing all their deposits, bonds and debt.

It is claimed that this is being provided as a service to the banks on a commercial basis - they're getting a bill for it in other words - though the terms of that aren't clear yet.

This is after the worst day for the Irish stock market in twenty years or so.

The decision has been taken by Government to remove any uncertainty on the part of counterparties and customers of the six credit institutions. The Government’s objective in taking this decisive action is to maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy. (Text of government statement via Irish Times)
They're probably right: anecdotally, stock market sentiment seems at odds with the ways the banks are behaving with their customers - some that have been badly hit appear to be looking to do business and seem to have cash available while some who have been punished less by the stock market would appear to be trying to keep hold of every last cent they can.


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anecdotally, stock market sentiment seems at odds with the ways the banks are behaving with their customers - some that have been badly hit appear to be looking to do business and seem to have cash available while some who have been punished less by the stock market would appear to be trying to keep hold of every last cent they can.

What kind of "business" are we talking about? Offering high interest rates for new deposits, for instance, is "looking to do business" but might be a sign of distress.

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 Tue Sep 30th, 2008 at 05:04:21 AM EST
Offering loans for investments.
by Colman (colman at eurotrib.com) on Tue Sep 30th, 2008 at 05:07:44 AM EST
[ Parent ]
My son has just gotten mortgage approval from a big Irish bank.  (Although I'm not sure I want him to close the deal at the current stage of the housing price cycle!)

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 30th, 2008 at 09:33:56 AM EST
[ Parent ]
Good Morning Europe!

Are we still alive?  Are we still breathing?

Get back to me on that one.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Tue Sep 30th, 2008 at 05:23:08 AM EST
Think I'll just talk to myself for a bit.

Watching a crappy A.M. show on MSNBC "Morning Joe"; just had a report on the European stock market and the rest of the world; after an initial down, the world markets are coming back.

  1. Expecting US Congress will eventually DO SOMETHING?

  2. Saying to themselves "Fuck the US!  Who needs 'em.  We're fine.  Bye Bye America.  Sink in your own shit.  You're getting your just-desserts."

Hmmm, or a different read?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Tue Sep 30th, 2008 at 06:33:07 AM EST
[ Parent ]
Is that your read, or the programs conclusions?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 30th, 2008 at 09:29:54 AM EST
[ Parent ]
1. was their voiced speculation; 2. was my "What about this?" scenario.

Anybody else?

P.S. US DOW now up a couple hundred.  Big boys better not let that continue or the US public might think that this whole mess was contrived in order for the Repubs to loot the US Treasury ONE LAST TIME before Bush gets the boot.

Where is MY CRASH?

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Tue Sep 30th, 2008 at 10:53:44 AM EST
[ Parent ]
Here, in France, deposits are guaranteed by the government up to 70000 EUR per account (seventy thousand euros).

However, if I understand correctly, the total amount currently set aside in the guarantee fund is 2 billion EUR -- less than 100 EUR per household.

Feeling safer already?

by Bernard on Tue Sep 30th, 2008 at 06:31:42 AM EST
The real comparison number shouldn't be the €70k per account but the total amount of bank 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 Tue Sep 30th, 2008 at 06:35:46 AM EST
[ Parent ]
La garantie des dépôts The deposit guarantee
Les dépôts couverts par le mécanisme de garantie des dépôts sont définis comme tout solde créditeur résultant de fonds laissés en compte ou de situations transitoires provenant d'opérations bancaires normales... Le montant maximum de la garantie offerte est fixé à 70 000 euros par déposant. Il s'applique à l'ensemble des dépôts d'un même déposant auprès du même établissement de crédit, quels que soient le nombre de dépôts ou leur localisation dans l'Espace économique européen dans la limite du plafond précité.Deposits covered by the guarantee mechanism : deposits are defined as any credit balance resulting from funds left in transitional situations or from normal banking operations... The maximum amount of the guarantee shall be 70 000 euros per depositor. It applies to all deposits of one depositor with the same institution, regardless of the number of deposits and their location within the European Economic Area, within the upper limit cited above.

Not quite clear whether "per depositor" means €70K is all you can get, or if it's €70K per banking institution you may use.

But if there's only €100 each in the kitty, it looks theoretical...

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 30th, 2008 at 07:19:25 AM EST
[ Parent ]
TV news were saying it was  €70K per banking institution, but then they may have just been trying to paint the French as throw-money-everywhere socialists.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 30th, 2008 at 07:24:38 AM EST
[ Parent ]
It is at least €70k per banking institution (because it is about a bank failing. The law is with regards to what you do when one bank fails, so if two fail it applies twice).

The question is what happens if you have over 70k€ with one bank but less than 70 on each individual account. I had assumed that then you'd lose but they were saying otherwise on TV this morning.

The fraction with more than 70k at any given bank is rather small in any case. And most of them get a personal guarantee for being pals with Sarkozy.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Sep 30th, 2008 at 07:48:13 AM EST
[ Parent ]
I have to correct myself:
TV spoke rubbish as usual, it is obviously capped at 70k€ for the accounts as a whole.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Tue Sep 30th, 2008 at 07:49:41 AM EST
[ Parent ]
I can confirm it is 70k€ per person and per bank. If your wealth is 140 k€, split in two different banks and you get 100% coverage.

The amount in the guarantee fund is irrelevant: it will be refinanced by govt' or ECB at first sign of trouble, with newly printed money if need be.

Pierre

by Pierre on Tue Sep 30th, 2008 at 10:49:00 AM EST
[ Parent ]
What fraction of the depositors have €70k?

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 Tue Sep 30th, 2008 at 07:27:26 AM EST
[ Parent ]
not many, it's already withdrawn and buried under the mattress...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Tue Sep 30th, 2008 at 08:01:15 AM EST
[ Parent ]
€70K is damn lumpy, I can tell you. <red eyes>
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 30th, 2008 at 02:36:57 PM EST
[ Parent ]
well, if you insist on the gold nuggets!

140 €500 notes would hardly bother even a persnickety princess.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Sep 30th, 2008 at 10:11:04 PM EST
[ Parent ]
I guess every small or medium sized enterprise with at least 3 workers has deposits of more than that in the bank. You just can't handle the cash flow for employees, tax requirements etc. otherwise if you have not at least temporary (say two days before the pay check for the workers has to be paid) more money in your account.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Tue Sep 30th, 2008 at 08:08:45 AM EST
[ Parent ]
But if there's only €100 each in the kitty, it looks theoretical...
And here we see the beauty of the State: as it has a monopoly on violence, it can always raise more money from the population, as long as said population has got any money.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Sep 30th, 2008 at 10:45:45 AM EST
[ Parent ]
As with the FDIC, European government aren't going to let those funds fail. Governments are not interested in public insurrection.

you are the media you consume.

by MillMan (millguy at gmail) on Tue Sep 30th, 2008 at 01:12:58 PM EST
[ Parent ]
Reuters: Dexia gets bailout, Europe tries to calm bank fears
Belgium and France stepped in to help Dexia with a capital injection and Ireland pledged upto 400 billion euros to guarantee bank deposits as the rejection of a $700 billion U.S. rescue plan sent shockwaves through financial markets on Tuesday.

...

"The domino effect of bank failures has started and is now spreading to Europe, just look at Fortis and Dexia," said Sebastien Barthelemi, analyst at Louis Capital Markets in Paris.

"For a long time, we feared the systemic risks, now we're watching the dominos collapse one after another. It's scary," he said.

...

"The failure of the U.S. Congress to approve the Paulson plan was not in the script," said Gerard Lyons, chief economist at Standard Chartered. "A deep and long U.S. recession should not be ruled out."

...

"There is no reason to be frightened and to give in to panic," European Central Bank council member Christian Noyer said on RTL radio, following talks with President Nicolas Sarkozy.

Sarkozy is due to meet the heads of the main French banks and has arranged a meeting in Paris this week with Britain, Germany, Italy, Luxembourg and ECB President Jean-Claude Trichet to discuss Europe's response to the crisis.

Maybe a bit of misplaced national pride here, but Italy and Luxembourg will be in the meeting, but not Spain?

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 Tue Sep 30th, 2008 at 10:12:29 AM EST
Ireland GDP is around 150 B€. The liabilities now put under guarantee are about 400 B€. If this had to be priced at market rates (CDS spreads on distressed irish banks), it should cost the banks something to the tune of 10 B€/year.

I doubt the banks have any remaining cash flow before the bailout (hence the bailout), so they are not going to pay gov't that 7% of GDP for the guarantee. It will obviously be underpriced.

And it will not prevent the collapse of interbank/securitized/bond funding for these banks anyway (nobody in their right mind would trust the gov't to live up to its promise, at least among the educated global finance guys). This leaves the irish banks with their sole depositors as funding, when the irish GDP has already started contracting. Recession will accelerate, house prices fall further, Irish household will default en masse, and the banks will default on tens of B€.

Irish gov't will be left holding a bag that could end up just as big as the GDP, itself down around 100 B€, a couple of years down the road. Lucky, the public debt is presently just 25% of GDP, but still, it's a commitment to make it over 100% almost overnight.

Puzzle #1: how long will it take for the Irish "mass affluent" market segment to realize this and move it's saving to any other bank in the eurozone ?

Puzzle #2: faced with the prospect of 100 B€ or more of capital flight (and more losses for the banks it guaranteed), how long do you think Ireland can remain in the EMU/have free capital flows ?

Absent some quick explosion from the Spanish Cajas (a very bad situation that keeps developing pretty much under the radar), I think we have winner here: I introduce to you the leading country in the race to the currency bottom and to fall out of the euro ... Ireland !

Pierre

by Pierre on Tue Sep 30th, 2008 at 10:59:35 AM EST
[ Parent ]
I take it that you're one of these educated global finance guys?
by Colman (colman at eurotrib.com) on Tue Sep 30th, 2008 at 11:10:43 AM EST
[ Parent ]
Given that these global finance guys seem to jump everytime a government spokesperson sneezes, I fail to see why they wouldn't believe the government on this occasion.

Are these global finance guys the ones who were shorting Anglo-Irish to the tune of €800 million just last week, or are they the ones now responsible for the surge in it's share-price today?

by ectoraige on Tue Sep 30th, 2008 at 12:31:05 PM EST
[ Parent ]
It's its, of course. Sigh.
by ectoraige on Tue Sep 30th, 2008 at 12:34:06 PM EST
[ Parent ]
I'm thinking more of the bond fund managers (like pension funds, insurance, etc...) who are ultimately in control when it comes to rolling the short/medium term paper of said Irish institutions.

If paper matures within the guarantee (2 years, what a joke, like you could put heroin in your veins for 2 years straight and give up overnight ... the Irish gov't is in this forever), any cautious bond manager will get his principal back guaranteed, and not subscribe in the new bond offerings at any rate. Then he puts the money in bunds and gold.

This pretty much guarantees that the gov will have to pay for the shortfall at the roll, since bank assets will be unsellable non-performing mortgages. Taxpayers would be in it for exactly the amount they defaulted on wih the mortgages in the first place, that is an amount they can't repay even if the tax collector put a gun in their mouth. The only two ways the country can get through this is:

  • with cross-border assistance (like, ceding control of all national banks to stronger foreign ones, but these are now in short supply, or even more innovative: direct relief from taxpayers in the rest of the EU),
  • by printing money on its own (thus, outside the EMU)

Making grand statements of unlimited commitments when the market has proven in the mood to test all kinds of bluffs, including those of the US treasury, pretty much guarantees that Bad Things &tm; will happen (also shows the gov't is none too smart, but that shouldn't be a surprise: they're one of the many who let a toxic bubble grow in its backyard for short term political gains - all sides of the political spectrum, in all bubble countries, seemed pretty happy with the bubble actually)

Pierre
by Pierre on Tue Sep 30th, 2008 at 04:22:36 PM EST
[ Parent ]


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