The Euro and Zombie Banks

Tyler Cowen writes on the euro in this NYT article.

37 replies on “The Euro and Zombie Banks”

Perhaps readers will want to start sorting their euro notes into goodies and baddies.

Here are some of the key prefix letters on the serial numbers:

X, P, and N for Germany, the Netherlands, and Austria.

Y, M, T, V, and S for Greece, Portugal, Ireland, Spain and Italy.

Pretty much highlights the disingenious nature of the debate regarding bank debts, the Euro and national protectionist electoral priorities – who’s going to blink first?

The inevitable cost? Well it isn’t going to get any cheaper or less of a mess as long as they keep lying and bluffing to each other.

Great article, thanks Philip

“Ireland or Portugal need only imply that without more aid it will be forced to leave the euro zone and bring down the proverbial house of cards.”

This is a point that John McHale, Patrick Honohan and other apologists for ECB policy don’t get – we hold a lot more cards than most care to acknowledge.

JMcH and PH insist that we cannot unilaterally default on the 20 bn of unguaranteed senior bank debt because the ECB will act irrationally, against its own interests and torpedo the Irish banking system. Well, if they want to shatter their own reputations then let them at it, but I am certain it will not come to that.

Most pro-bailout commentators seem to be adopting a wait-and-see attitude: if we stick around, something will turn up. John McHale has talked a bit about the option value of waiting and in doing so, shown us that he knows very little about option pricing theory. In Ireland’s case, if we do not act now on the front foot then we will be doomed to generations of debt servitude.

There is no option value in postponing hard decisions. In fact, our options are rapidly disappearing.

It not our or us anymore – the armies are already inside the gate.

They have been inside for a long long time – it just that they are getting stroppy with their broadswords now.
They were such polite Knights before – seems the power dynamics have changed somewhat – precipitating “hard decisions”.

The linked paper by Paul de Grauwe is relevant in this context.

To take a reversed version of a phrase that tends to make my hackles rise i.e. not speaking as an economist, I think both authors are wrong but de Grauwe is less wrong than Tyler Cowen.

The first suggests that it is the design of the euro that gives rise to the capital imbalances without making any effort to explain how these capital flows come about viz. the differences in “competitiveness” and the commercial imbalances which result from this. (I place the word in parenthesis because a good deal of German “competitiveness” is rooted in administrative government measures deliberately designed to promote exports). He is also wrong in taking the UK as an example given the unusual nature of its economy with the City of London largely compensating for the imbalance in visible trade. He is also wrong with regard to the issue of the prudential supervision responsibilities of the ECB and in his assertion that the authorities nationally could do nothing to prevent the bubbles that arose cf. also Dan O’Brine’s recent article in the IT.

But at least he suggest a solution towards which the countries of the euroarea are slowly edging, the manner in which the case of Greece is dealt with being likely to set the template. And it seems to me that he is also right with regard to the level of budgetary discipline required by the governments of the weaker economies required in order to be able to use the euro.

The impact of the Tyler Cowen article can be judged by the first contribution on this thread. As long as any doubt persists with regard to the possibility of a country exiting the euro, the phenomenon Cowen describes will persist. For the country likely to be the victim to even hint at the the possibility is the very height of folly. But the solution lies in the hands of the creditor countries.

The problem is not the value of the euro in Ireland, which will remain the same as its value anywhere else, irrespective of the myth of where notes in circulation – a very small part of the total – happened to be printed, but the credit of certain Irish-owned banks which is directly linked to the credit of the Irish sovereign. The last mentioned is what is at issue. The new government talks the talk but has yet to show that it can walk the walk of getting demonstrable control of the budgetary deficit. Indeed, there must be a question mark over whether or not it – or the country in general – is even yet – despite everything – collectively aware of the need to do so.

The most distressing aspect to the zombie-bank phenomenon noted in the article is that it was caused by the ECB (and was avoidable).

Ireland has embarked on an IMF Programme designed to fix its banks—on behalf of the whole of the European banking system—but the lender of last resort will not make a credible commitment to medium-term support for the banks while the programme is being implemented. (In fact, the lender envisages reducing its exposure during this period). This is why the banks are not regarded as safe and why deposits continue to dribble out.

Without a safety net, the banks will not be regarded as safe until the whole process has ended. This will take a long time. And the economy will continue to shrink without viable banks and this will further undermine any prospects for success.

We have a deeply flawed programme.

The Government should make this point very clearly and refuse to put further capital into the banks until the ECB can commit to its end of what was already a bad bargain for Ireland. Private assurances are not sufficient—commitment must be credible and public.

(By the way, the use of Gresham’s Law does not seem appropriate in the context of the article because it concerns a scenario where there are two monetary authorities—one good and one bad. Unfortunately, in our case, there is only one authority—and it is really bad.)

The Bank Guarantee was a disastrous mistake, wasn’t it? We tried to guarantee €400+ billion in the banks while now we find our state assets are worth “only” €5 billion (even if we wanted to sell them).

Talking of Greshams law……….
Our betters refused wage increases , then they gave up on credit provision – now there is no demand as the consumption circle is broken.

In such a scenario the credit money created for the last 3 decades will come home to Momma as the worlds saving surplus still exists.
Recapitalisation of the financial system is underway and in a debt system there is only one substance that performs this duty.
The ECB is merely preforming its primary duty of killing the dollar as the words reserve currency.
It wants dollar reserves on its asset side of the Euro balance sheet.
The BIS was never happy with the dollar default of 71 and put up with it under Volkers hard dollar policey.
That era is over.
Protect yourself – as we are witnessing the biggest transfer of wealth since the creation of the FED and the transfer of French and German Gold to New York to pay for the Great War.

Tyler Cowen writes,

If enough depositors fear frozen accounts, the banks will be emptied out, and they also will require additional government bailouts, on top of the bailouts for the bad real estate loans. The banks come to resemble empty shells, conduits for public aid but shrinking and unprofitable as businesses — and, to a large extent, that is already the case in Ireland.

I listened to Ivan Yates on radio this morning speak about Eircom company after privatisation, and he compared it’s situation to that of Manchester United, when it was purchased by a family a while back. How those institutions become shell-ed out by their new owners, loaded up with huge debt levels they never had in the past. I would also argue btw, that a proper explanation of the 30 largest property developers now in NAMA, requires this kind of analysis also. Effectively the Irish banks were using the largest property developers, like their own personal Eircoms. Basically as vehicles, or pack horses upon which they loaded mountains and mountains of debt, beyond which any property developer would actually need to trade successfully. The pack horses believed, or were convinced by the banking institutions, that they would only have to carry the assets a certain distance, and that the banks had a plan for what to do, further down the track. The pack horses, like the innocent beasts that they were, said okay!

There is a very big aspect, akin to that, in relation to Sean Quinn and Anglo Irish bank. Where the bank recognise that a fellow is in trouble, and use him as a vehicle to expand their asset side of the balance sheet. Except, what has happened with the property developers is the opposite to what has happened with Eircom. In the case of Eircom, the privatisation was done and that was the end of things. But with the property developers, they were shelled out first, and then the nationalisation of their debt was executed. Ivan Yates also went to efforts to point out, that at the height of the speculative property boom in Ireland, a total of €3 billion euro of property changed hands. Yet NAMA somehow expects to off load a total of €8 billion in the next two years, according to its business plan. The fact is, that in order to create €3 billions worth of property transactions in Ireland in 2006, all kinds of artificial incentives and market manipulations had to be undertaken, to support that market.

Much of the media conversation, and political conversation by ministers for finance in Ireland focusses heavily on this concept of excessive lending by Irish banks. But what these good folk do not understand – it is not enough to give the guy the finance to make the sausage – you have to guarantee a market for the sausage to the same guy. It was in the creation and artificial support of the said market, that really the greatest damage was done. This is why former minister for finance, Brian Cowen was under such enormous pressure from Anglo Irish bank to establish the legislation, that would allow Anglo to sell securities of commercial property on the London market. Anglo were conscious of the fact, that so many of their sausages were rapidly approaching a sell-by date. BOH.

This Tyler Cowen piece is actually quite poor in terms of the quality of the economic analysis. What about cross-national banks? Those will probably become a larger component of the banking sector in several of the peripheral markets (including Ireland). Invoking Gresham’s Law seems a cutesy use on an historically-important but outdated theory with limited relevance. The conclusions of the article possibly may be valid but the argument is weak and poorly supported.

Only one problem Ireland does not know how to play “Liar’s Poker” but our opponents (EU Partners) do! Perhaps, Portugal will show us how it is done?

It’s becoming increasingly clear that there is no-one at the tiller of the European baking “failboat” (as they say in the contemporary).

It’s hit stormy waters and has sprung several leaks. But instead of being on deck, all crew(politicians) and hands(banks) are holed up below arguing whether they should store the corpses of their deceased fellows in the bilge, or else begin eating them for sustainable. No-one has even dreamed of suggesting that the dead should be thrown overboard, and the merest hint of such dissent will get you fifty lashes.

Meanwhile, the water line is creeping ever higher, and the passengers(depositors) are, one by one, taking matters into their own hands, grabbing preservers and lifeboats and throwing themselves overboard to plead mercy from the high seas of finance, because there’s f-all salvation to be had on board!

Someone either has to take control of the Eurozone banking crises of the euro will sink. That’s all there is to it.

@Obsessive Maths Freak
The Euro is not sinking relative to the dollar – it has been sucking Gold out of the States since its inception.
They are playing the game with the utmost of professionalism.
The fact that Ireland is being destroyed is completly tertiary to their grand plan.

Dork, a word to the wise: Stay away from conspiracy theories. Or put another way: Never ascribe to malice, that which can be explained by incompetence.

And the euro is in danger of sinking here, make no mistake.

@ObsessiveMaths Freak

I would recommend the recognized authoritative work on World War I – “A call to arms” by strachan.
Particularly the chapter regarding financing that war.
After the creation of the FED the city of London decided to switch their primary operations to New York.
The mechanism to do this was World War.
Gold flowed to pay the debt incurred creating the FED as the prime power broker on the planet.
Germany and France had the biggest above ground Gold reserves back then while the British Empire had less above ground stores,it had South Africa.
The poor sods who belived in the British empire (gold sovereigns , tea and biscuits) belived in a Empire that did not exist – the control did not lie in London but in the city who hold no loyalty to anything but themselves.
They butchered a entire generation to change the worlds monetory system from Sterling to dollar based.
Now the Americas have been depleted they are moving onto pastures new.

The signs were everywhere for the last 20 years – from Gordon Browns giving interest rate power to the BOE withen a week without cabinet approval – to the destruction of the last bits of the landed class in the House of lords.
I could go on………………..

This is how the world works – do not fool yourself

Dork, you are ascribing far too much competence to bankers and fianceers. These people are simply greedy automatons. Unfortunately the ECB and European politicians bizarrely somehow regard them as “men of quality”, and are still operating on their behalf. Hence this toleration of the Zombie banks over the very stability of the continental currency.

As can be expected, I disagree with the article’s assertion that the euro was: “a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries”. The euro was no such thing! It was the ultimate—and correct—result of the integration of the single european market economy, which has always been one of the cornerstones of the european project. Nothing about the euro itself caused or lead to this financial crisis. Everything about the management of the european banking sector lead to this crisis. It was deregulation and marketism, not a single currency, which brought us to where we stand now.

I’m wondering what it is about bankers that makes them so persuasive? Is it their professional training; are they expert confidence artists by trade? Or is it simply the smell of money. Do people swoon and feel weak at the knees when an ageing yuppie with bags of cash walks into the room? Bankers and their companies should be ranked somewhere between drug dealers and pawn shop owners on the scale of dignified professions. Instead they still seem to be treated like royalty for some reason.


Spot on. They aren’t that smart.

But I would qualify it by saying that, in the bowels of the industry there are people of talent, creativity, endevour and integrity – it’s just a matter of how to get rid of the mediocrates who, by herd action, neutralise and eliminate people of consencience and talent who just want to do a good job for a good rate.

Sorry I ment to post this one

The Fed is selling put options on its own debt – I do not believe it can cash in on this paper during default but it does serve to lower its interest cost.
So therefore it wins both ways as it can print money anyway but at the cost of the currency.
The central banks are out of control.
During good times under the present monetory system it is best to have higher interest rates not lower – however we are in terminal decline now after Greenspan destroyed the western economies so that the central banks clients could profit from global wage deflation.
Me thinks a new monetory system is coming as dollars cannot absorb the worlds savings anymore.

….. well, the Big Black Hole in the Kore is still sitting snugly ……… meanwhile ………. ‘any nation with an exit strategy suddenly has enormous leverage’ …. workin on it!

Ireland is a economic Flanders fields with economic neutron bombs going off everywhere.
I would recommend a investment strategy of Irish post office bonds and Gold in your liquid funds as this could cover both ends of the economic spectrum of possible deflation , inflation and / or monetory collapse.
Just going into German bonds does not have sufficient opportunity cost advantages.
But then again I am only a Dork with no investment experience or qualifications.

The interesting thing about this article is it demonstrates the huge amount of leaverage the Irish Government actually has.

That is the reason that the Trokia treated us so nicely when they called. They didn’t demand the shutting of Hospitals or halving of the eduaction budget at the IMF did in Lativa.

At any point Bend over Lenny could have said No we are not going to bail out your German bondie banks with our National Pension Reserve and we would have immediately got Germans bearing gifts instead of Auterity Lite.

Not that I expect any different from this Bunch of Nice Euro Loving geniuses we voted in this time. They don’t have any b***ls either.

If I was in Government I would print (Secretly but let it leak) 5 bn of Irish pounds ready to fill the cash machines in case the ECB forces us any more. We have those guys over 150 bn barrel.

Set up a national bank for people to use in an emergency.

Come on this has huge first movers advantage. If the Greeks beat us to it they will get the first mover bonus.


I agree that the Irish government actually has a lot more leverage than it realises. IMHO many other EZ members realise it but are afraid to admit it and are concealing this by using heavy handed rhetoric.

However tempting as it is I would be inclined to let Greece (and others) make the first move, if they wish, while we checked out where our lifeboats are situated in case we need them in a hurry if MV Euro keels over.

In a potential post EZ scenario we would still need to trade within the European Union and that would be a lot easier if no one was blaming us for sinking MV Euro. Alternativelye vents over the next year may also encourage changes in the Euro which may turn to our benefit.

My opinion: wait and see, hold on tight to our assets/resources, tidy up our own quarters, preserve our energy and keep a watchful eye on the lifeboats in case we need to make a dash for them.

@ Jules

“If I was in Government I would print (Secretly but let it leak) 5 bn of Irish pounds ready to fill the cash machines in case the ECB forces us any more. We have those guys over 150 bn barrel.”

Why not print, secretly, €10bn.

After all if the Irish CB can “create” €60bn out of thin air what’s the difference.

Hard to argue though with the main point of the article.

When are we going to realise that the choices are stark? It’s either leave the euro or default.

Of course, it’s easy to say let’s go back to a national currency, but the immediate dislocation is likely to be extreme and impose huge social and economic costs – even more worrying is the fact that, once the deed is done, it’s hard to see what the medium to longer-term prospects would be and how a small country would be able to manage its way through them.

We also have to take real account of the fact that the Irish “development model” is heavily dependent on FDI – this investment increased income sufficiently to make it attractive for largely domestic investors to start the shops, hotels, restaurants, and the rest that gave us full employment, until the property bubble burst of course.

But what foreign firms would invest in an Ireland which had left the euro, effectively reneged on debt either directly or through inflation, and had gone back to an entirely new, untried, untested national currency?

Personally, I don’t want to live through an “interesting” or “historically important” of that kind.

I hate to say it but I think we’ve no choice but to stay with the programme and “hope” that in a few years some form of planned, organised EU-managed default is put in place. There may be some hints that this is on the cards – the bond markers certainly think it’s going to happen in 2013. This won’t be comfortable either, but it’s likely to be better than trying to go back to a national currency.

The terrible and probably useless lesson of course is don’t get into this position in the first place. Niall Fergusson’s book “The Cash Nexus” shows that successful states tend to be those which manage their finances to avoid precisely the problems we face…which leads to a question about the Irish state and how its governed.

Decisions can be made, or not made, which have consequences which cannot be avoided – I’m not certain that we’ve really learnt that lesson and are thinking about what it means for the future governance of the country.

By the way, I thought Blair Horan of the CPSU raised a very interesting question recently – “Why is Ireland always in crisis?”

It’s a very profound question. We used to have a crisis of poverty. We then became wealthy and then managed to turn that into a crisis – what is it about our social and political structures that managed the double trick?

@ Hua Ria
I was at a public meeting in the RIA about 2 years ago, Colm McCarthy gave a presentation the same night. Blair Horan was regaling the audience with a little bonhomie about the day he and his mates dared to demand 600 million form Bertie in a benchmarking negotiation, only to be laughed at by Bertie, “youse asked for 600 million and I have gave youse the 1.2bn”.

Perhaps the same Blair knows precisely why Ireland is always in crisis. If he does not, all he needs to do is look in the mirror or read his own scripts.

@Robert Browne.
Once the money is created it has to be spent – that is the nature of our monetory system.
Useful idiots are always well useful for the greater powers but they have no real function other then to maintain the illusion of executive power.
The problem is always money creation and that only happens in Banks.

The goverment was not in debt before the crisis and so had to spend – unfortunately because all currency is debt the private sector had to get into debt – they had no choice.
The severity of the Irish crisis is chiefly explained by the almost complete lack of goverment debt on our books during the boom.
This was a direct consequence of the Euros introduction – which divorced sovergin debt from the sovergin.
In effect sovergin debt in the euro area is equal to company debt – because sov debt is real money with just a time component the ratio of debt to money became unbalanced.
Its simple really – we need not blame ourselfs for a deliberate flaw in the euros creation.

We take responsibility on banking system debt which is not ours – to wait for a European charge of the light brigade to our rescure is a mug’s game at this stage; all evidence is that we are to be sheeply sacrificed at the altar of saving the EZKore Banking system.

Declare a state of emergency; gov to get on with radical on the deficit (place all senior counsels in the Curragh for the duration, and charge them rent on the pink jumpsuits) in a balanced manner re burden-sharing; return to republicanism and citizenry first; declare Sept 29 2008 an error of judgment by incompetents; simply state that this state is unable to take on all banking system debt; open negotiations, within limited time frame of 30 days, with all concerned re the ‘restructuring’ with genuine sovereign debt deemed superior; licence Irish banking to outsiders; bond-market on sovereign debt will do business with us as deemed to be real and sustainable; Ireland saves the European Project, and in the process, saves itself.

Leadership, balls, self-confidence, and moral authority.

Via IrishLeftReview – a little sane German Heterodoxy …. Worth a read … by Attac Germany’s Scientific Council on March 1st 2011.

Manifesto on the Crisis of the Euro

‘The current system of crisis management requires indebted countries to adjust, but not surplus countries. The structural flaw that already contributed to the collapse of the Bretton-Woods-System in the 1970s is being replicated in the Eurozone. The steps required to correct this flaw would be: on the income side of state budgets, develop rules for fiscal policy and for tax competition, and balancing mechanisms for countries with current account deficits and surpluses, respectively. Also, actively interventionist policies would have to work towards reducing the real economic divergences that exist in so many areas within the Eurozone (from wages to industrial policy). If the Eurozone is to have a future, it is European statehood that needs to be strengthened, not the market.’


“I’ve a very vivid memory of going to Brussels on the final Monday to sign the agreement and being on my own at the airport and looking at the snow gradually thawing and thinking to myself, this is terrible. No Irish minister has ever had to do this before.”

So why did you do it then and why are you only telling us now?

@ Noel

Good question, and I think the IT article deserves a thread.

My guess is that he was waiting for the Nyberg report which says this:

“The Government had earlier concluded that it could not permit any Irish bank to fail (which the Commission understands was also the advice from the ECB), given the potentially very serious adverse effects on confidence in the banking system in Ireland and elsewhere.”

And that Lenihan is now saying, it was absolutely under pressure from the ECB. It doesn’t make it right of course.

Time for an enterprising journalist to phone up the ECB and ask for their recollection.

@ Noel,

Whoops, no, my mistake. The Nyberg quote is about the guarantee, and the IT article is about the bailout, and I’ve conflated the two. Apologies.

I do think that the DoF – ECB relationship is the thing that is under scrutiny – who said what when.


‘Leadership, balls, self-confidence, and moral authority.’

Unfortunately all the qualities lacking in the people making decisions for this country.

All due to an underlying lack imagination and an overwhelming sense of ‘conformity’.

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