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Iceland - Can't Pay; Won't Pay - so why not a National Equity?

by ChrisCook Mon Aug 17th, 2009 at 05:30:15 AM EST

Iceland's debt repayment limits will spread

The most remarkable thing about this article is that the financial world has changed to such an extent that a Financial Pornographer and Known Troublemaker like Professor Michael Hudson is now being published in the FT.

His core point is that countries that cannot pay debt, will not pay debt, and that it makes no sense for the international community to attempt to force them.

Can Iceland and Latvia pay the foreign debts run up by a fairly narrow layer of their population? The European Union and International Monetary Fund have told them to replace private debts with public obligations, and to pay by raising taxes, slashing public spending and obliging citizens to deplete their savings.

Resentment is growing not only towards those who ran up the debts - Iceland's bankrupt Kaupthing and Landsbanki, with its Icesave accounts, and heavily geared property owners in the Baltics and central Europe - but also towards the foreign advisers and creditors who put pressure on these governments to sell off the banks and public companies to insiders. Support in Iceland for joining the EU has fallen to just over a third of the population, while Latvia's Harmony Centre party, the first since independence to include a large segment of the Russian-speaking population, has gained a majority in Riga and is becoming the most popular national party. Popular protests in both countries have triggered rising political pressure to limit the debt burden to a reasonable ability to pay.

This political pressure came to a head over the weekend in Reykjavik's parliament. The Althing agreed a deal, expected to be formalised on Monday, which would severely restrict payments to the UK and Netherlands in compensation for the cost of bailing out their Icesave depositors.

This agreement is, so far as I am aware, the first since the 1920s to subordinate foreign debt to the country's ability to pay. Iceland's payments will be limited to 6 per cent of growth above 2008's gross domestic product. If creditors thrust austerity on the Icelandic economy there will be no growth and they will not get paid.

Michael's reference to Latvia is based upon an academic relationship he had there.

Will Britain and the Netherlands accept Iceland's condition? Trying to squeeze out more debt service than a country could pay requires an oppressive and extractive fiscal and financial regime, Keynes warned, which in turn would inspire a nationalistic political reaction to break free of creditor-nation demands. This is what happened in the 1920s when Germany's economy was wrecked by the rigid ideology of the sanctity of debt.

A pragmatic economic principle is at work: a debt that cannot be paid, will not be. What remains an open question is just how these debts will not be paid. Will many be written off? Or will Iceland, Latvia and other debtors be plunged into austerity in an attempt to squeeze out an economic surplus to avoid default?

The latter option may drive debt-laden countries in a new direction. Eva Joly, the French prosecutor brought in to sort out Iceland's banking crisis, warned this month that Iceland would have little left but its natural resources and strategic position: "Russia, for example, might well find it attractive." The post-Soviet countries are already seeing voters shift away from Europe in reaction to the destructive policies the EU supported.

Something has to give. Will rigid ideology give way to economic reality, or the other way round?

I advocate a new approach to the problem, which I call National Equity.

Nations simply issue undated Units of National Equity and these are exchanged by the Issuer for existing debt. If creditors are unwilling to accept them, they are issued anyway, and kept by a custodian until they do, but no other payment against sovereign debt is subsequently made.

These Units carry a reasonable index-linked return - say 1.5% to 2.5% - in an agreed currency, probably dollars, for as long as it is the global reserve currency.

Units are redeemable by the issuer, in that they may be bought back at any time, thereby reducing the dollar payment obligation. In the hands of creditors/ Investors the value of these tradable Units will reflect the confidence of the holder that the Issuer will be able to service the obligation.

The methodology of National Equity turns existing thinking about risk on its head. Everyone has an interest in a country agreeing an affordable dividend, since it will then be more likely that it will be paid, and the Unit will therefore be less risky and more valuable.

So unsustainable obligations to repay sovereign debts are extinguished in a "Debt/ Equity swap" on an international scale.

 


Display:
Why should Iceland have to pay anything for the losses incurred by (i) greedy UK savers who were attracted by the extravagant interest rates on deposits offered, or (ii) the UK govenment in compensating said savers for their losses?

Either:

  1. the deposit accounts were properly regulated, in which case the UK government should pay up via its bank deposit protection scheme (ie the savers were right to go for the good offer, knowing that they were protected by their government as if going to any other UK bank);

  2. the deposit accounts were not regulated, this was made clear to savers, and they should thus take the losses for investing in a risky venture;

  3. the deposits were not regulated, this was not clear to savers: in that case, the government did not do its job properly and should be held responsible for it (and it's not obvious that the money should come from the deposit protection mechanism - it should probably come from general taxpayer funds).

I'd note that 3) includes the case where the UK government "naively" trusted Icelandic authorities to do the regulation while giving an explicit or implicit deposit guarantee to these accounts.

I see no case where Icelandic taxpayers should have to pay anything.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Aug 17th, 2009 at 05:39:37 AM EST
I see no case where Icelandic taxpayers should have to pay anything.

I couldn't agree more: the Icesave debt is pretty "odious" debt.

But whether debt is rightly due or not - and Hudson refers to Latvia's troubles as well - why cannot a sovereign state issue Units of National Equity carrying a dividend, rather than debt?

Other than the fact that this debt is the convention, of course.

I'd be interested on your thoughts in respect of that point, since we have recently seen both Nicholas Taleb (in the FT) and Willem Buiter (in his FT blog) recognising the point that since global debt is unsustainable, it is in a new approach to equity that the solution to the Credit Crunch must lie.

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

by ChrisCook (cojockathotmaildotcom) on Mon Aug 17th, 2009 at 06:22:59 AM EST
[ Parent ]
why cannot a sovereign state issue Units of National Equity carrying a dividend, rather than debt?

That concedes the point - the crucial point - debt of a private company is backed by the inhabitants of the country where that company is physically located.

There is a (weak) case to be made the inhabitants of the country are obligated for the debt their government contracted.  There is no case for having them being obligated for a private company.

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

by ATinNM on Mon Aug 17th, 2009 at 11:28:19 AM EST
[ Parent ]
Not at all.

I agree totally that socialisation of private losses is unacceptable, but unfortunately we are seeing government after government doing just that.

I propose that sovereign governments should be able to create unconventional undated Equity obligations, as well as conventional dated Debt.

This would change the dynamics of international finance in very interesting ways, with great potential, I believe.

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

by ChrisCook (cojockathotmaildotcom) on Mon Aug 17th, 2009 at 12:04:14 PM EST
[ Parent ]
I would 'go' with your scheme ONCE the perps had everything, including their underwear, confiscated as collateral/backing for the scheme AND it was clear a precedent was not being established.

Difference in orientation.

I'm immediately 'move to' (Read: obsess about) the Communication aspects of a situation/problem.  Your experience and expertise is different thus, your concerns are different.

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

by ATinNM on Mon Aug 17th, 2009 at 12:54:15 PM EST
[ Parent ]
Why is socialization of private losses so unacceptable?  Isn't it more a question of whose private losses are being born by society and whose are not?  Socialization as such provides a means for more people to take income-increasing risks, which, if not abused, can be the difference between prosperity and poverty.
by santiago on Mon Aug 17th, 2009 at 03:29:52 PM EST
[ Parent ]
Because it was wholly unnecessary. Management should have been dismissed, shareholders wiped out and debt converted to equity.

What has been done will just prolong the pain and cause more collateral damage in the form of foreclosures and bankruptcies of other entities which would have survived otherwise.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Mon Aug 17th, 2009 at 04:27:55 PM EST
[ Parent ]
I agree regarding the banking crisis, and particularly the case of Iceland.  But I just wondered if Chris meant to make a general statement about socialization of losses, period, or if it was particular to the discussion of Iceland or the financial crisis.
by santiago on Mon Aug 17th, 2009 at 04:34:59 PM EST
[ Parent ]
Socialisation of losses is fine within the right framework, I think.

To me, that means that whoever receives some sort of public guarantee, limitation of liability, or insurance, should actually pay something for it, if they are able.

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

by ChrisCook (cojockathotmaildotcom) on Mon Aug 17th, 2009 at 05:59:32 PM EST
[ Parent ]
The problem is cross-border banking.

FT.com | Willem Buiter's Maverecon | Ruminations on banking

(3) The repatriation of cross-border banking

...

This means that conventional border-crossing banks and other systemically important financial institutions will become a thing of the past.  We will not see the kind of cross-border branch banks that we have seen during the past decades for very much longer.  These foreign branches are not independently capitalised, have no independent, ring-fenced sources of liquidity, are often effectively managed from the home country (the country of the parent bank), are regulated and supervised by the home country regulator and supervisor, with lender-of-last-resort support (if any) from the home country central bank and fiscal support (if any) from the home country Treasury.

...

There will no doubt continue to be cross-border banking subsidiaries.  These will, however, be independently capitalised.  Their liquidity will not be pooled between parent and subsidiaries, but will have to be ring-fenced for each subsidiary.  They will be regulated and supervised by the host country (as they often are today).  Lender-of-last-resort support, if any, will be provided by the host country central bank (as it often is today) and fiscal support when insolvency threatens will be provided by the host country fiscal authority.

The reason for host country supervision and regulation is simple: the pain is local, so the control will have to be local.  The reason for host-country bail-outs is even simpler: tax payers are national.  They will not accept the use of their taxes in bail-outs of foreign shareholders, unsecured creditors and counterparties.  The US authorities have been able to channel somewhere between $40 bn and $50 bn of US tax payers' money to foreign counterparties of AIG, but that is unlikely to be the new status quo.  They got away with it, thus far, because the foreign bail-outs by the US tax payer was hidden in obscure, indeed barely comprehensible financial transactions.

See also here and also FT.com | Willem Buiter's Maverecon | The Banca d'Italia and the re-nationalisation of cross-border banking

As a result of the current crisis,  I expect that cross-border bank branches will become a thing of the past, and that the only cross-border subsidiaries we will continue to see will be independently and fully capitalised entities, regulated and supervised by the host country regulator and with recourse to the resources of the host country central bank and fiscal authority on the same terms as `domestic' banks in the host country, that is, host-country banks that are not wholly owned by some foreign bank.

The Eurozone is in a bit of a pickle here, because although it has a central bank with supposed uniform access to its resources for all Eurozone banks, regulation and supervision remain national and  fiscal bail-outs (recapitalisation by the state, guarantees, insurance, loans or whatever provided by the sovereign) definitely remain national.  When the central bank acts as market maker of last resort, as the Banca d'Italia is  now doing in the Italian interbank market, it takes on significant credit risk which requires a fiscal back-up - the Italian Treasury.  But that undermines the principle of equal treatment of banking institutions across the Eurozone, and makes a mockery of the claim that general eligibility criteria for counterparties to national central banks "are uniform throughout the euro area".

So there we are.  If we are to avoid the balkanisation of the Eurosystem, and its degeneration into 16 national sub-systems, with different conditions of access to central bank resources, we will need some form of common European fiscal authority.

But the underlying assumption is that it makes sense for the UK government and no other to be the one guaranteeing deposits by UK savers with UK institutions (and icesave must have been "authorised and regulated by the FSA").

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Mon Aug 17th, 2009 at 06:56:12 AM EST
[ Parent ]
This means that conventional border-crossing banks and other systemically important financial institutions will become a thing of the past.

To which I respond, "so what?"

We will not see the kind of cross-border branch banks that we have seen during the past decades for very much longer

Good.

If a financial institution wants to become a presence in a country they can damn well follow the banking (and tax!) regulations of that country.  

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

by ATinNM on Mon Aug 17th, 2009 at 11:38:13 AM EST
[ Parent ]
The US authorities have been able to channel somewhere between $40 bn and $50 bn of US tax payers' money to foreign counterparties of AIG, but that is unlikely to be the new status quo.  They got away with it, thus far, because the foreign bail-outs by the US tax payer was hidden in obscure, indeed barely comprehensible financial transactions.

And because they represent less than five percent of the total bailout theft...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 19th, 2009 at 01:46:57 AM EST
[ Parent ]
BBC News: Q&A: Are my savings safe?
If you have an account with a UK bank, building society or credit union then your deposits are covered up to £50,000.

Banks from outside Europe are required to set up a UK subsidiary if they wish to operate in the UK and those subsidiaries have to be members of the FSCS, so your deposits there would also be covered.

A more complicated situation arises if you have an account with a bank from somewhere in the European Economic Area (EU members plus Iceland, Norway and Liechtenstein) in which case your bank may be covered by their home scheme.


Icesave apparently didn't have a UK subsidiary, though Kaupthing did. I don't know whether this situation is due to EEA rules (I would expect so) or due to English banking rules.

The 'poor little Icelander' frame is ridiculous given that Iceland was just recently praised to high heavens for being one of the richest western countries, and the people who made their money running these scams are still sitting on it. The British and Dutch should ask for a share of expropriations from the Joly investigation...

by nanne (zwaerdenmaecker@gmail.com) on Mon Aug 17th, 2009 at 07:07:08 AM EST
[ Parent ]
The wikipedia article on the Icesave dispute (which seems not to have been updated since end of 08) has more on the legal details. To my mind, the legal case was overwhelmingly on the side of the English and Dutch.
by nanne (zwaerdenmaecker@gmail.com) on Mon Aug 17th, 2009 at 08:24:13 AM EST
[ Parent ]
I still see no reason to saddle the Icelandic taxpayers for liabilities incurred by Icelandic citizens (or rather, corporations) in actions where the UK and Dutch regulators don't seem to have done their work properly or diligently.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 18th, 2009 at 05:38:23 AM EST
[ Parent ]
But they did, this is due to rules pertaining to the European Economic Area. Whose fault those rules are is a different question - and I can understand that it is hard to feel sympathy for the Brits who are simultaneously working against meaningful forms of regulation on banks and hedge funds.

The fact that Icelandic citizens have to pay up has to do with the actions of the previous Icelandic government, which decided to nationalise the banks and apply for an IMF credit rather than letting the banks and the country simply go bankrupt and wipe out the savings of Icelanders and foreigners alike.

The main principle here is discrimination. The Icelandic government saw fit to protect savers in Iceland itself but not foreign savers. This is not something you can do in an 'economic area' where your companies can operate abroad without subjecting themselves to the protection regimes abroad.

The British and Dutch are already letting Iceland off the hook for pragmatic purposes, they would be in a good legal position to ask for than what they are getting.

by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 07:34:04 AM EST
[ Parent ]
nanne:

The fact that Icelandic citizens have to pay up has to do with the actions of the previous Icelandic government, which decided to nationalise the banks and apply for an IMF credit rather than letting the banks and the country simply go bankrupt and wipe out the savings of Icelanders and foreigners alike.

Trying to sort this out for myself, this statement confused me.

If Iceland had let the banks go bankrupt, would they not have had to pay for some savings anyway as deposit guarantees? And is deposit guarantees not exactly what the present conflict is about?

Another thing that confuses me is, what did the icelandic government do when they took over the banks? Did they
a) put the banks into receivership?
b) take over the stocks and continue running the operations?
c) transfer the debt of the banks to the government?

If a or b they could still let the banks default on their debts, and if they need to start a new bank for those icelandic savings and loans operations. If c they are criminally insane, like their US counterparts.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Aug 18th, 2009 at 01:43:49 PM EST
[ Parent ]
You're right, it was muddled thinking. The banks were largely put into receivership, one bank was nationalised (see here). The banks were then restructed, and new ones split off by the government of Iceland.
by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 03:15:09 PM EST
[ Parent ]
If c they are criminally insane, like their US counterparts.

Or the Irish.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Aug 19th, 2009 at 01:34:02 AM EST
[ Parent ]
See also A Modern Icelandic Saga: Part One by ChrisCook where the infamous phone call between Darling and Mathiesen is transcribed in full...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 06:30:54 AM EST
[ Parent ]
I see no case where Icelandic taxpayers should have to pay anything.
The situation is entirely absurd: it was a deal between private Icelandic interests and private British interests. Since when does the debt of an individual to a foreigner automatically fall into the hands of the state if the individual can't pay?  

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 04:32:14 AM EST
[ Parent ]
Banks are special. It's about time we stopped pretending they are not so. But this also means that banks and individuals cannot be free to enter into just any old agreement.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 05:38:28 AM EST
[ Parent ]
for the UK government bearing the losses of UK savers (which I tend to agree with, to a decent extent) - but not of the Iceland government bearing these losses.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 18th, 2009 at 05:41:27 AM EST
[ Parent ]
At which point did the Icelandic government assume all the liabilities of the Icelandic banks?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 05:45:39 AM EST
[ Parent ]
Icesave dispute - Wikipedia, the free encyclopedia
The situation is complicated by the position of so-called "wholesale" depositors. In the United Kingdom, 123 local authorities and other public bodies had a total of £920 million (€1.1bn) deposited with Icelandic banks.[68] Even the Audit Commission, the independent body responsible for overseeing local government finances, admitted having £10 million deposited with Landsbanki and its subsidiary Heritable Bank.[69] In the Netherlands, 22 local authorities had a total of €220 million deposited in Icelandic banks,[70] with the province of North Holland being the most exposed.

The complication is that both the UK and the Netherlands exclude local authorities and larger private corporations from their deposit insurance schemes, as is possible (but not obligatory) under Directive 94/19/EC, on the grounds that larger organizations should have more capacity to judge (and absorb) risk than the general public. Iceland makes a much more sparing use of this provision, so its definition of a guaranteed deposit is wider:

"Deposit" [...] refers to any credit balance resulting from financial deposits or transfers in normal banking transactions, which a commercial bank or savings bank is under obligation to refund under existing legal or contractual terms. However, this guarantee does not extend to bonds, bills of exchange, or other claims issued by a commercial bank or savings bank in the form of securities.
Deposits, securities and cash owned by Member Companies, their parent and subsidiary companies for their own account, and deposits, securities and cash connected with convictions of money-laundering, are not covered by the guarantee [...]

- Paras. 3 and 6 of Article 9, Act No 98/1999

This means that Icelandic local authorities and corporations had their deposits (not including bonds) guaranteed at 100% by the Icelandic government, while British and Dutch organisations in the same situation had no cover whatsoever. The Dutch government was forced to use a royal decree to prevent North Holland from attempting to seize Landsbanki assets through the courts outside the Netherlands: speaking on 7 November, Minister of the Interior and Kingdom Relations Guusje ter Horst said "Their behaviour is hindering the difficult and complex discussions with the Icelandic government."[71]



En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 06:33:15 AM EST
[ Parent ]
Imagine that, say, Credit Agricole went down, and the French government decided only to pay out deposit insurance on savings of customers of French branches, but not of branches CA had in other EU countries, for which CA did not have to pay into their deposit insurance schemes because they were just branches, not subsidiaries. Now add that there are EU laws that specifically state that any such discrimination is forbidden and that there is a minimum amount the French deposit insurance has to pay out to its foreign customers in the EU.

We might start wondering what this single market in the EU is actually about.

by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 07:53:36 AM EST
[ Parent ]
They certainly shouldn't let banks operate in their countries, no matter if they were branches or subsidiaries, if they won't take part in the local depository insurance system. No way Jose.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 08:05:36 AM EST
[ Parent ]
Well, that's the way things are (for branches) under the single market, and that includes the European Economic Area. I don't see any major problem with it other than the general insufficiency of banking regulation on the European level -- deposit insurance taken alone seems to be arranged well enough.

General regulation of finance is where the British government is a problem. Maybe the Dutch government too, although I don't really think so at the moment. So on a karmic or moral level I don't know about the British beef with Iceland. Legally, though, they are fully in their right to insist on equal deposit protection for their citizens.

by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 08:36:47 AM EST
[ Parent ]
I don't see what nationality has got to with it, as long as Icelanders using the Dutch or British subsidiaries/branches haven't been compensated differently than non-Icelanders using those very same branches... or if non-Icelanders using the Icelandic banks on Iceland were treated differently than the locals were.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 08:45:21 AM EST
[ Parent ]
The Icelandic government Argues that they are not discriminating on the basis of nationality but they are distinguishing branches based on location.

The question is, which regulator and deposit insurance scheme covers a branch located in a foreign country?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 08:53:47 AM EST
[ Parent ]
The FSA of the foreign country in which the branch is located?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 09:08:16 AM EST
[ Parent ]
The subsidiaries (e.g. of Kaupthing) take part in the deposit insurance scheme of the country they are in. The branches do not. The problem is precisely that the deposits in Dutch and British branches of Landesbanki were treated differently by the government of Iceland.
by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 08:54:55 AM EST
[ Parent ]
I can tell you of another very specific case, which I had studied in great depth in 2006 when I became aware that TEOTWAWKI was coming for banks and I started chasing the best yield/safety for my own liquidities.

The case relates to ING. ING has a subsidiary called ING Direct, which markets no-thrills, low-fees, at some time high-yield (but not so much so today) online banking services. The brand is operated worldwide, but the legal framework is not everywhere the same.

In France, ING Direct is a branch of the Dutch ING Direct. It is not a french-incorporated subsidiary, and it is not registered as an "établissement de crédit" at the Banque de France. It is only registered as a branch of a foreign bank from the EC.

As such, ING Direct.fr was NOT (and still isn't) covered by the "Caisse de Garantie des Depots" scheme (of 7Ok€ per depositor and per bank at the time, Sarko talked of raising it to 100k€ but I don't think it's actually in place yet). The website of CGD makes it very clear that depositors in such situations would have to file cross-border claims with the deposit insurance of the home country (The Netherlands in this case). At the time, the Netherlands offered only 20k€ per depositor in insurance (this has subsequently been made an EC-mandated minimum, but it wasn't even in place in the UK during the NR run).

EC does not mandate equal treatment in insurance for branches and subsidiary, nor for local or foreign banks. What it does mandate is that depositors from any EC country in a given bank, should be given equal treatment by all regulators concerned by a failure of this bank. Enrolment in deposit insurance may or may not be mandatory for cross-border operations, it is a mess.

Pierre

by Pierre on Tue Aug 18th, 2009 at 10:58:53 AM EST
[ Parent ]
From your information and that provided by Migeru, I see that there are two big zones of gray:

  1. whether you are banking with a subsidiary or a branch of a foreign bank - I'd say this is not a distinction that is accessible to retail clients and they should not have to expect to be treated differently;

  2. the fact that with branches, part of the deposit guarantee was provided by one State, and part by another. I must admit I'm not quite clear which amount was paid by whom in the Icesave saga, and which amount is claimed against another State (especially as some governments announced new guaranteed deposit ceilings right in the middle of the crisis).


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 18th, 2009 at 10:53:14 AM EST
[ Parent ]
Under the 'passport' system referenced by Migeru, Icesave paid into the deposit insurance of the UK and the Netherlands for the amount of deposits they insured above Iceland.

Thus, the UK and the Netherlands paid the amounts above € 20,887 to an amount equal to their domestic deposit insurance, but Icesave also paid insurance for those amounts.

In this particular case, then, the lack of clarity was not that harmful for depositors.

The question is whether something like the 'passport' system can be made mandatory by a national regulator, or if banks will just in general prefer it because having pointed out that your savings are insured to a lower amount than those of other banks is bad advertising.

by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 11:57:16 AM EST
[ Parent ]
Migeru:
Banks are special

aah, nice to see it written out so concisely.

reminds me of my old sig, 'lobbyists are people too'.

we mere mortals bow our heads at the new reality, counting ourselves fortunate to have representatives of such divinely mandated agents and entities deigning to sully their fine leather soles in our refuse-strewn streets.

good thing they hover 30 cm above the ground, but the smell must be terrible for their delicate olfactories.

what luck, they are gods amongst monkeys, special just begins to cover it.

'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 Aug 18th, 2009 at 06:04:31 AM EST
[ Parent ]
melo:
Banks are special

aah, nice to see it written out so concisely.

reminds me of my old sig, 'lobbyists are people too'.

You misunderstand. They are special in a way that probably means they shouldn't be run for profit.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 06:08:52 AM EST
[ Parent ]
you're right, in that my perception of the word special did not so much refer to their exploitation of moral hazard issues, as yours did, but rather to the fact that their actions and flaunting of their impunity with the continued bonuses reveals how special (in a reverse sense) they feel themselves to be, hence the bitterness of my comment.

the two interpetations of 'special' are orthogonal, not mutually exclusive or contradictory in this case.

the money-men's victory in this duplicitous gaming of the regulation process, and corruption of the legislature, risks bring our whole system to its knees, as almost happened last october, when the biggest bandaids in the planet's history were assiduously used to cover up the necrosis.

what will this october bring, i wonder? is that the whetting of a giant scythe i hear yonder?

as we see the first world's coherence dissolve into mumbo jumbo gibberish, perhaps it's worth remembering that to the billions suffering poverty, this is a levelling of the playing field, not some vengeful god's revenge, as it might seem to the paranoid wing of our societies, (creating the need for the islamic scapegoat).

'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 Aug 18th, 2009 at 09:29:19 AM EST
[ Parent ]
Banks are special and can't behave in any old way, yes. Which is why we have bankning regulation. Like Jerome said, if the Brit and Dutch authorities didn't think ICEsave was sound, they should never have let them operate in their respective countries. But they did. The fault is theirs, or if the savers indeed knew that they weren't covered and they felt the risk was worth it, it's their own fault. Jerome put it very succintly in his first comment in the thread.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 08:04:00 AM EST
[ Parent ]
This single market thing seems to be difficult to understand. Or, I wonder what the legal possibilities for British and Dutch regulators would have been to forbid Icesave from operating in their territories or to force it to establish a local subsidiary. I suspect, none.
by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 08:39:47 AM EST
[ Parent ]
Is it against EU rules to demand that banks operating in the country takes part in the deposit insurance system used in the country? Parex bank (since nationalised) had a presence in Sweden and its local deposits were specifically guaranteed by the Swedish FSA, and I find it hard to believe they got that service for free.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 08:46:09 AM EST
[ Parent ]
There is a difference between foreign subsidiaries and branches in foreign countries.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 08:51:20 AM EST
[ Parent ]
Is there any reason why this should be the case? It seems the rules are made to create loop-holes: don't like the local regulations? Just create a branch instead of a subsidiary and use the lax rules of London (or Cyprus, or...).

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 09:10:24 AM EST
[ Parent ]
Indeed. This is why we need better financial regulation at the European level.
by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 09:28:04 AM EST
[ Parent ]
Isn't this sufficient?

Icesave dispute - Wikipedia, the free encyclopedia

The Directive imposes a minimum guarantee of €20,000 per depositor: moves to increase this minimum to €50,000 or even higher had been agreed politically before the Icelandic crisis, but had not been incorporated into EU law, much less into EEA law. The Tryggingarsjóður guarantees 1.7 million krónur on the basis of a fixed euro-króna exchange rate, equivalent to €20,887.[61] The Netherlands and the UK have higher guarantee levels, €100,000 and £50,000 (approx. €60,000) respectively: Landsbanki was a member of the Dutch and British compensation schemes for the purposes of guaranteeing this difference in cover, an arrangement known in Britain as the "passport system",[64] and commonly used by banks throughout the EEA. In addition, the UK Treasury has exceptionally guaranteed retail deposits in excess of £50,000 which were held in Icelandic-owned banks in the UK at the time of the crisis, at a cost of some £1.4 billion (€1.7bn).
Icesave depositors would have been covered up to €20,000 by the Icelandic deposit insurance, and had become a member of the Dutch and British compensation schemes for the remaining covered amounts. So, for Dutch deposits, the Dutch compensation scheme would have been liable for an additional €80,000 and the British compensation scheme for €40,000.

What am I missing?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 09:33:57 AM EST
[ Parent ]
As I stated upthread, I think the regulation with regard to deposit insurance is arranged well enough (especially if the amount is raised to € 50,000). The issue is general regulation of banks.
by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 09:45:36 AM EST
[ Parent ]
But the raise to €50,000 took place after the collapse of the Icelandic banks. What we're discussing is who is liable for how much in the Icesave case.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Aug 18th, 2009 at 09:54:28 AM EST
[ Parent ]
Yes, I don't disagree with you, I was talking more generally.

In the Icesave case the government of Iceland is liable for the € 20,887 for private deposits that it has settled for with the British and Dutch.

It could legally have been liable for more (the equal amount that it guaranteed for its own citizens and organisations), but since there is a settlement, that is no longer relevant.

by nanne (zwaerdenmaecker@gmail.com) on Tue Aug 18th, 2009 at 10:44:45 AM EST
[ Parent ]
As long as Iceland hasn't put people in prison for fraud over this (and confiscated their assets - all their assets; I want the assholes sleeping under bridges when they get out of prison, if they ever do), Iceland absolutely has to pay - they've not shown any inclination to prevent similar frauds and pyramid scams in the future.

As long as the UK hasn't put people in prison for fraud over this (and confiscated their assets - all their assets), the UK has no claim on Iceland's debt repayments - they have not shown any inclination to prevent similar frauds and pyramid scams in the future.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 19th, 2009 at 01:56:41 AM EST
[ Parent ]
Can you wrap this comment up in a diary? I'll front-page it.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Aug 19th, 2009 at 02:24:18 AM EST
[ Parent ]
Done.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 19th, 2009 at 06:33:33 AM EST
[ Parent ]
It is possible for a sovereign state to repudiate its debt. It has happened many times over history.

Unless you are going to send some marines and warships to ensure that the debt is paid (the traditional US method of bullying its weaker neighbours into paying up), then there is little foreigners can do except increase the interest rate for future loans to the defaulting state.

by Gary J on Mon Aug 17th, 2009 at 08:09:07 AM EST
Sort of what the Kirchners did in Argentina recently, to the great benefit of Argentina, which paid very little in the way of a "price" for the repudiation.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 17th, 2009 at 07:10:27 PM EST
[ Parent ]
It is always a bit unsettling when the US is in one of those in between times when its not clear who we are going to invade next.

Now the only question is when. I expect it will be to divert from some disaster in Afghanistan, just as the Grenada invasion diverted from the Lebanon disaster.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Aug 17th, 2009 at 07:17:59 PM EST
[ Parent ]
Better to invade the Grand Turk & Caymen Islands, seize the bank records and from US tax evaders alone, be able to pay for the TARP.  But that would be a very rude thing for the US Government to do to the people in whose interests it is running things.  So, perhaps you are right.  Go invade Iceland and seize all of its debt obligations.  Then the full faith and credit of the US Government can be put behind them.  Then consider making them the 52nd state.  That should make the citizens of Iceland think twice about not giving everything to the debt holders.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 18th, 2009 at 06:08:53 PM EST
[ Parent ]
A commonwealth, like Puerto Rico, so they can remain frozen in a 1/3 independence, 1/3 statehood, 1/3 can't decide status quo.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Aug 18th, 2009 at 06:17:35 PM EST
[ Parent ]
If they have any brains, which I think they do, they would be much better off remaining independent or opting for some kind of association with Europe.  The banking elites affiliated "intellectually" with the USA and look where that got them.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 18th, 2009 at 07:59:58 PM EST
[ Parent ]
opting for some kind of association with Europe

Like the European Economic Area to which they already belong and whose rules on cross-border banking have been debated vigorously on this thread?

Iceland's EU accession application is motivated by a desire to join the Eurozone to attempt to solve this crisis.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Aug 19th, 2009 at 01:32:04 AM EST
[ Parent ]
Trade war, naval blockade... Iceland has no navy and could easily be starved into submission by the Royal Navy, but just mentioning this point shows how ludicruos the entire affair is.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 04:34:13 AM EST
[ Parent ]
But the UK already has a number of islands up in the cold North Atlantic, don't they?

Is the Spanish Navy a Royal Navy? Could they accomplish it? Maybe they have to wait for delivery of their amphibious assault vessel.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 18th, 2009 at 06:20:48 PM EST
[ Parent ]
The debate around NAMA - the National Asset Management Agency - or a bad bank nationalising private debts of banks and property speculators - is hotting up in Ireland with the Green party planning to hold a national conference on the issue.  I can't see their membership approving the NAMA legislation as it imposes the potential for 90 Billion (or 60% of GDP) of debt on taxpayers for bad loans maid by banks in order to enable the banks to become profitable again within the neo-liberal model.  If the Greens rejected the legislation, the Government is likely to fall.

However the TINA (There Is NO Alternative) argument may well still win the day, so an op ed piece in the Irish Independent or Times on the lines you suggest could be absolutely crucial in re-framing the national debate and showing that there is an alternative.

Let me know if I can help you get something published.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Aug 17th, 2009 at 08:17:02 AM EST
Debtors revolt is the only way that the GFC can be dealt with.  This is no less true in the USA than it is in  Iceland.  The difference is that the US beneficiaries of the Ponzi economics that got us here can, for a while, delude themselves and most of the public into believing that these debts can be made good by some sleight of hand involving taxpayer bailouts.  It ain't gonna work. Even were the US citizenry willing to try to make good the bad bets of the Ponzi economists and financiers, they cannot.  They are already saddled with massive debt that they foolishly but reasonably willingly assumed and are in no position to see that debt increased by 25-50%, which is likely what would be required.

The USA is currently witnessing the process of having that understanding spread from a few "heterodox" economists and social critics to a much broader segment of society, including much of the economically literate investors in the country.  Watching everything one has worked for being thrown on a bond fire to warm those who brought us the GFC will become politically untenable once enough people understand what is happening.  The real question is what will happen then.

I am reminded of Keynes' The Economic Consequences of the Peace.  At least in Germany the hyperinflation experienced during the Weimar Republic was largely the consequence of conditions imposed from without.  In the USA a similar situation could result and it would be entirely the result of policies and theories "made in the USA."

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 17th, 2009 at 11:35:19 AM EST
The global swindlers and thieves financiers made a lot of money in and under the current system.  They aren't about to shrug their shoulders and walk away.  Judicious use of a small part of their loot gain in the political arena should go a long way to creating a blocking minority in government -- just like California, US of A.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Aug 17th, 2009 at 11:54:33 AM EST
[ Parent ]
Judicious use of a small part of their loot gain in the political arena should go a long way to creating a blocking minority in government...

At this point >90% of the capitalization of Goldman, Morgan, BOA, Citi, WF, etc. is based on their regulatory and policy capture of the US Government and they have calibrated the application of loot to governmental institutions and representatives quite effectively. Even a significant percentage increased application of that loot would be no problem.  However, there are those rare moments when the screens and curtains are blown away and the pirates are revealed in all of their sordid reality.  We were on the verge of such a moment last fall, but Obama stepped into the breach and distracted most of the public with "change we can believe in."

When the next big downward leg comes he may not be able to reprise his performance.  It will have grown stale and obvious and too many may be on to him.  But this does not have to end in repudiation of the Ponzi losses and prosecution of the guilty.  We could go the way of Weimar.  In fact that is the more likely outcome.  The sort of deals Hitler had to make with the German industrialists are already in place in the contemporary USA.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 17th, 2009 at 12:42:37 PM EST
[ Parent ]
ARGeezer:
We could go the way of Weimar.  In fact that is the more likely outcome.  The sort of deals Hitler had to make with the German industrialists are already in place in the contemporary USA.

hmm, interesting, could you expand on that a bit, please?

'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 Aug 18th, 2009 at 06:16:05 AM EST
[ Parent ]
AIRC, when Adolph became Reich Chancellor he needed the support of Hindenberg to lend him legitimacy with the military and he had to forge links to the industrialists, who found him distasteful and more than a little frightening.  Any right wing government that may come to power in the USA will be as a fish in water with respect to working with US industry and business.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 18th, 2009 at 09:43:34 AM EST
[ Parent ]
All economic solutions for the US will be gridlocked or sabotaged, similar to what has already been done in California.  

In the absence of solutions there will be social breakdown and chaos.  

Chaos will be dealt with through nazification.  

This strategy was field tested with success (from the elite point of view) in the 20th century.  It is one of the main scenerios for the 21st century.  

Minor differences in detail (eg that the US has already significantly de-industrialized) will affect how well it actually plays out.  

The Fates are kind.

by Gaianne on Wed Aug 19th, 2009 at 02:37:02 AM EST
[ Parent ]
The most obvious candidate for the sort of sovereign Debt/Equity swap I propose would of course be the US.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Aug 17th, 2009 at 12:06:44 PM EST
[ Parent ]
should there be sovereign debt swap when most the debt incurred was private ??? Let the creditors that lent to poor risk prospects take their losses (or get equity) Why have the State involved in any way?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 18th, 2009 at 05:39:55 AM EST
[ Parent ]
You are once again conflating two distinct points.

The question about whether or not the obligation should be public or private is of course a no-brainer. I agree with you entirely as I have said many times.

But you continue to avoid the question of why it is necessary for sovereign obligations to be dated at all.

Why should sovereign nations not issue equity as well as debt?

Do you have a problem with that?

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

by ChrisCook (cojockathotmaildotcom) on Tue Aug 18th, 2009 at 07:26:22 AM EST
[ Parent ]
is called perpetual bonds. It exists already.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 18th, 2009 at 10:49:44 AM EST
[ Parent ]
IIRC the Brits have some of those still rolling since hundreds of years, with interest rates so low it makes no sense to repay them/buy them back.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 18th, 2009 at 11:49:23 AM EST
[ Parent ]
Perpetual Bond

A perpetual bond, which is also known as a Perpetual or just a Perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt

Consols for instance, which is a very interesting beast, having first been a motley bunch of annuities. Some Consols have interest rates of 2.5% and others 4.0%, and there's also War Loan at 3.5%.

These bonds give rise to a flow of indefinite duration, the market price of which varies with interest rates.

Why not one single class or pool of National Equity/Perpetual Bonds of indefinite duration, and with an index-linked coupon?

Why do we need a National Debt anyway? It may be conventional, but it's bollocks.

We could then pay off all other fragmented (in terms of dates and coupons) sovereign debt with it. Using the huge amount of debt servicing thereby freed up (ie the capital repayments) we could invest in productive assets, which produce more revenues and so on....

There is simply no need for dated sovereign debt or debt repayments. Buybacks to create a sinking fund in respect of depreciating assets will be necessary of course, but that's another issue (no pun intended).

We could also create classes of Units of National Equity redeemable for energy (because the state has aa right to energy production from the assets funded), or for the right to occupy land (from public investment in land)....

Why not?


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

by ChrisCook (cojockathotmaildotcom) on Tue Aug 18th, 2009 at 12:47:35 PM EST
[ Parent ]
ARGeezer:
thrown on a bond fire

lol, even if that was a typo, it's still genius.

great comment all around.

'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 Aug 18th, 2009 at 06:08:12 AM EST
[ Parent ]


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