Exciting New Scheme Revealed

The summit communique contains the following:

’12. The Private Sector Involvement (PSI) has a vital role in establishing the sustainability of the

Greek debt. Therefore we welcome the current discussion between Greece and its private

investors to find a solution for a deeper PSI. Together with an ambitious reform programme

for the Greek economy, the PSI should secure the decline of the Greek debt to GDP ratio with

an objective of reaching 120% by 2020. To this end we invite Greece, private investors and

all parties concerned to develop a voluntary bond exchange with a nominal discount of 50%

on notional Greek debt held by private investors. The Euro zone Member States would

contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready

to provide additional programme financing of up to 100 bn euro until 2014, including the

required recapitalisation of Greek banks. The new programme should be agreed by the end of

2011 and the exchange of bonds should be implemented at the beginning of 2012. We call on

the IMF to continue to contribute to the financing of the new Greek programme.’


I don’t quite see the point of going through a default (which is not, of course, a credit event) in order to get Greece down to 120% of GDP in 2020.

But note the very nifty €30 bill to be contributed by ‘…the Eurozone member states…’.

This could include little us! Imagine, the team taking one for France and we are allowed to tog out!  

What is being proposed here is that European investors who lost money in Greece are getting bailed out to the tune of €30 bill, not by their host governments but by the team. Those who lost money in Ireland got bailed out, and continue to get bailed out, by the host government only.

You have to hand it to the French.

139 replies on “Exciting New Scheme Revealed”

@Colm McCarthy

“You have to hand it to the French”

Or perhaps it’s more a case of ‘not hand it’ to our leaders (past and present).

Or it could be a case of ‘Who gives a 5hit about the little guy? What are they going to do about it?’

“I don’t quite see the point of going through a default (which is not, of course, a credit event) in order to get Greece down to 120% of GDP in 2020.”

But remember we have some other countries with debt ratios at or heading for 120% (e.g. this one) and need to pretend that’s perfectly sustainable. Saying now that Greek debt needs to be 80% to be sustainable would let that particular cat out of the bag.

On the CDS issue, I have never understood the idea of avoiding trigger a credit event. The net position on these contracts is now known to be small


And if we’re supposed to be encouraging people to hang on to their Italian and Spanish debt, I don’t see how imposing a big haircut on Greek debt in a way that doesn’t trigger CDS contracts helps at all. People who previously might have thought they were insured will now decide the bonds are huge risk because the insurance is worthless.

What am I missing?

@Karl Whelan.

I have a serious doubt as to whether there is any PSI hit based on market prices of Greek bonds. I have asked the question on your thread.

@Colm McCarthy

Yes, to use a colloquial expression used by John McGahern in his novell, ‘That they may face the rising sun, Ireland is being ‘Double *ucked’.

It would appear that all that’s been achieved by the quasi-default of Greek Government bonds is to alert investors in sovereign debt to the necessity to consider very carefully the fundamentals of the sovereign in question.

One good example today is MF Global which was downgraded and lost half it’s value on account of it’s exposure to Italian, Spanish, Greek and Irish sovereign debt.

Caveat Emptor.

Important bit of news for our banker friends here…
“Oct. 27 (Bloomberg) — The European Union’s agreement with banks for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association.

ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory. European leaders said in today’s agreement they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new debt.”

Now can we invite bondholders to a haircutting party or is Enda going to insist that he is going to pay every last cent to our bank and sovereign bondholders.

Who buys CDSs for insurance anyway?
A fiver each way on the number 4 in the 3.30 at Uttoxeter isn’t insurance.
Neither is a CDS.

At this point surely we should assume that this is a detail skipped over, or a 4 AM drafting error, and only those countries which haven’t already stepped out of EFSF will be expected to contribute to the €30bn. Now if the ECB ever writes down its Greek debt – not countenanced this time, of course – then things will be a little more interesting. No stepout clause for ECB recapitalisations…

@Karl Whelan

On the CDS issue, I have never understood the idea of avoiding trigger a credit event. The net position on these contracts is now known to be small

If you think of it as more reflexive pandering to the political priorities of the self styled core Eurozone does it make more sense?

For example it serves as a useful excuse not to impose the losses required to make Greece’s continued membership of the Eurozone possible, satisfies monetary hawks (presuming the currency flows would be to outside the Eurozone for the majority of naked CDS) and most of all shows the priority that is placed on maintaining the current structure of the European financial sector (since, lets not forget, the problem is purely one of fiscal irresponsibility). That works for me as an explanation.

A big IIF sticking point was the status of their remaining 50% holding. At the least they were seeking that it be senior to the ECB/EC debt. So let’s watch the detail on that one.

@Karl Whelan
“What am I missing?”
The question is not whether the net position is small, the question is who is holding it and how much of the netting is fudge (AIG-style contracts within companies where, say, the insurance/customer arm has taken out contracts with the derivatives desk of the same bank holding company – in this case, I believe, the net is zero).

A relatively easy to read FTA piece wondering the same thing:

With all the market euphoria today, it time to check in with reality and the stats from CSO are grim…particularly the deficit and employment…off 80,000 last year.

“Among the most striking figures are the increase in the general Government deficit – from just under €22.7 billion in 2009 to €49.6 billion in 2010, a 30 per cent decrease in the level of production in the construction sector in the same period and an almost €14,000 disparity in the average earnings of men – €47, 178 – and women (€33,932).”

Now that is some deficit.

Haircuts anyone?

@ PR guy
It seems that Sarkos plan well described as the ‘stealth recapitalisation’ of French banks with other peoples money has begun.
David McWilliams suggested Ireland should now ask him to raise his corporation tax and cut out the loopholes to make a point.

@Joesph Ryan,
The key is the change in the nature of the bonds. The market price would stay the same if the nature of the bonds was not changed. If the nature of the bonds were not changed a 50% write down would be a 50% writedown. Barry Eichergreen pointed out the last time that cause the nature of bonds were changed a 21% writedown was really a 5%. He is an expert in bonds and government debt restructuring. I would like to hear what he will say now.
The ‘new’ bonds would have much improved collatoral and higher interest coupons paid by the Greek government.
As such it is correct to say that the banks are getting a nice deal. I’m guessing The writedown for them must be only 15% due to the collatoral being provided by other EU governments and the extra interest payments.

@Karl Whelan

What am I missing?

I don’t know.

An intuitive guess would suggest Geithner, AIG, and the Big Squid. M-M derivatives are the Nuke that allows Financialization of 99.5% of Homo Sapiens into supine serfs to be continued … strangely enough, Ireland has the firepower to create the Credit Event which would call their bluff –

@ Karl
On CDS. We don’t know who holds them, we should. We can guess
1. Most likely Greek banks were selling insurance on Greek government debt. Why? if the Greek government doesn’t default they win. If they do theyre fecked anyway so might as well trhough the CDS on top. The Greek banks could be being protected.
2. There is a mjor conflict of interest with Ackermans IIF basically deciding what constitutes a credit event, selling CDS and being involved in negotiations about Greek debt. How do we know that Ackermans bank hasnt a large position in over the counter CDS in Greece? We don’t.
3. American banks have an estimated 32billion exposure on CDS in Greece – BIS.
Politicans don’t actually understand the ins an outs of an over the counter derivatives market which is completely untransparent.
According to John Taylor the head of a leading currency funds there is a strong legal case for investors in the states on the other side of CDS on Greek debts to ask for a full repayment of the bonds and he reckons there will be messy cases.

Simon Johnson has just commented that the derivitives market is just a giant government subsidy. So perhaps thats why there is a hesitance to go into it and instead keep subsidising it with taxpayers money. Maybe its a global strategy.


“As such it is correct to say that the banks are getting a nice deal. I’m guessing The writedown for them must be only 15% due to the collatoral being provided by other EU governments and the extra interest payments.”

The banks may be getting a writedown on nominal value, but they are getting a huge write up in market value?
Plus a €30B digout just to compensate for the loss so far.
Way to go!

Now if only I could get a deal like that on the €5000 AIB shares I bought in August 2007.

I see one member of our Central Bank has doubts about our debt sustainability…”

“Speaking at the launch of the pre-Budget submission, general secretary David Begg again called for the period by which the deficit in the public finances was brought down to three per cent to be extended from 2015 to 2017.

He said the current programme of austerity was not working. “Debt sustainability is a problem for us still and the economy needs to move back from the edge.”

Make you wonder.

The 30 bn are supposed to be a guarantee to the bonds the banks will get in exchange for their Greek bonds. The Irish may have to pay their share if Greece defaults a second time ,but if this happen that will be the least of their concerns.

Me thinks the Irish sovergin debt should be higher not lower – but all credit deposits need to migrate.
The strange superioty of credit over money in the euro area continues………….and has now been made official.
Despite the propoganda the majority of the “money” created even in Greece was credit.
Why are they destoying the concept of gov money to save fictitious “assets” on bank balance sheets ?
The very concept of goverment sanctioned money as a token of value is dying in Europe – strange days

Martin Wolf – ‘If you dont seperate Sovereign and banking debt you are finished. Not many governments have the wits to realise that’

The lethal tranmission mechanism hasn’t been altered. We still don’t have a bank resolution scheme for the Eurozone. Ajay Chopra spelt it out a fortnight ago.

“This could include little us! Imagine, the team taking one for France and we are allowed to tog out!

What is being proposed here is that European investors who lost money in Greece are getting bailed out to the tune of €30 bill, not by their host governments but by the team. Those who lost money in Ireland got bailed out, and continue to get bailed out, by the host government only.

You have to hand it to the French.”

Genuinely curious – this has been on the cards for weeks, how come there was so little apparent interest in highlighting it publicly before the Irish government effectively signed up to it, rather than after?

@ All

It seems to me that, before everyone gets carried away with righteous indignation, that regard should be had to the point made by ‘anonym’ above and to page 3 of the attached Q & A in relation to the EFSF.


Equal regard might be had to pages 76 and 77 of the latest Financial Report (2010) on the EU Budget which sets out clearly in tabular form who exactly is paying the bills in Europe.


There is no point in looking at simply one aspect of Ireland’s membership of the EU or picking out one element of a complex negotiation. All aspects have to be considered. On balance, Ireland is well ahead of the game, especially as the country will continue to benefit from the fact, by happy coincidence, that its agriculture specialises in the three product areas also of interest to France and Germany, namely beef, dairy products and cereals. The countries of the Mediterranean have no such luck.

I also repeat an extract from another thread on the trade imbalances in Europe that lie at the heart of the current crisis.

” Concerning the total trade of Member States, the largest surplus was observed in Germany (+88.9 bn euro in January-July 2011), followed by the Netherlands (+26.5 bn) and Ireland (+25.0 bn). The United Kingdom (-66.5 bn) registered the largest deficit, followed by France (-51.2 bn), Spain (-26.6 bn), Italy (-20.7 bn), Greece (-10.9 bn) and Portugal (-9.8 bn)”.

One can readily come to a rather obvious conclusion as to how France might view the above figures. They are not likely to fill French officials with undue sympathy for Ireland’s situation.

Cullen Roches translation……..
EUROSPEAK :“To this end we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready to provide additional programme financing of up to 100 bn euro until 2014, including the required recapitalisation of Greek banks.”

Translation: Greece is the offering to the German austerity Gods. Bondholders will take a haircut on the $120B Greek debt they own, but will also be recapitalized. This is really nothing more than a peace offering to those who want to see the banks “take a loss”.

Dork : but why do you need THESE banks to exist in the first place ?
Take the various bits of euro goverment money from the commercial banks and stick them into their parent CBs
Destroy ALL remaining credit / debt contracts while turning deposits in goverment money tokens
Then start new credit banks – call it Bank of Ireland Mark II if you believe in the Irish credit genie
Job done………. money supply stabilised


And another member of the Board of the Central Bank, Johnny Fitz in today’s Examiner and ESRI snippet, reckons all is ‘manage_able’, hunky dory, and twill all be grand end of 2013. Course he said much the same before the house collapsed …. but credit where credit is due, reading his few posts on this blog in the last century sometime assisted me in figuring out ‘Me Fiscal Stance’ (think it was, ready, steady, aim, FIRE)

And he don’t engage anymore around here …. de must be fierce buzy on dat board …. not even time for a haircut – not a peep outa most a dem – the gov’nor must have imposed the whip …

But cheer up – Bowel_Bertie on RTE1 at 10.15 pontificating on how he would have sorted it all out had he not been hounded from office by the meedja …. Where’s me MAHON_tosh … I’ll need a stiff drink if I can stomach it …


Martin Wolf is spot on – he 90% is – if we don’t separate the Genuine Irish Sovereign from De Bleed1n Vichy_Banks we are done …

So, who is going to buy peripheral country debt now? Or even ‘core’ country debt? If it doesn’t come with a 20% guarantee, it is rather risky, is it not? No telling what might happen in the future and who might pile up on debt later, so only buy short duration if you buy at all. No point in buying CDS that can’t be collected on either.

Indeed well done to the French. I suggest the difference between the French and Greek govt. and the Irish govt. is the former dont care if they are liked or not whereas the latter sets great store by it.

We are still sending secondary school kids with insecurities to argue our case.

One thing for the Shinners when they went into negotations with the British they didnt forget that the British were looking after their interests only.

But then everyone does that, bar the good Europeans

For some reason this reminded me of the attempts to refloat the Eurozone without bank resolutions.

I think we have to accept the hybrid CB / sovergin state model died with the euro.
So goverments lost their small remaining bits of money power when until that time CBs had just 1 host country. , now 10 years on corporate paper is now seen to be superior to Goverments paper which is just another form of credit in the eurosystem rather then base money in the US & UK system

Its hard not to escape the conclusion that Europe & the Euro especially is the elites monster project – anybody who is not generally afraid of these crazed Frankenstein’s is obscenely stupid in my opinion.
They could lead us anywhere – they have before – they are capable of anything.
The mark down of Greek sov debt while remaining inside the Euros cage will have grave consequences for us all – a corporatist nightmare awaits – ordinary folk will get torn apart I suspect.
Our only hope is that this lack of contract world will be just too unstable & costly to administer.
Perhaps – but it looks like they are prepared to continue with the experiment.

@Colm Mc Carthy

The word “contribute” is used very loosely in EU statements – it isn’t yet clear whether it means “lend” or “donate”. It could be that the wording means that this part of the funding will be solely European, and that the IMF won’t be lending their third. Or it could be that it will be some EU loans outside the context of the EFSF (Is there anything left in the EFSM at this point?). Or it could be that it really is a donation, maybe as a quid pro quo to France for removing all references to ECB bond-buying. There are dozens of details like this that are unclear, as at this point it seems the entire agreement is just at the political level, with headline targets and few details.

I think the best way to look at the Greek deal is as a modification to the July 21 one. The original had 4 options, now there will only be one. The closest original option was the 30 year Discount Bond at 6.4% coupon (average), with a 20% discount. The principal of the new bond was guaranteed by means of Greece borrowing money from the EFSF to buy AAA zero coupons bonds. The coupon payments were not guaranteed.

With the new scheme there will be a 50% discount. This is only firm thing known yet. The IIF have said that the coupons and maturities of the new bonds have not been decided yet. The Greek FinMin says the coupons and maturities are known and are better than before. This would not be the first time they have all left the same meeting believing different things. However it is likely the coupon will be about 6% and the maturity 30 years.

There is about €205bn in total privately owned GGBs, so if there is 100% participation (and that’s a whole other story) there’ll be just over €100bn outstanding. Now the €30bn in credit enhancement is almost enough to buy AAA coupons to cover the principal of the new bonds. Unlike the July deal, it looks as if this will be paid in cash to the banks. The banks themselves could then buy AAA zero-coupons, or could use the money for something else. It is not clear yet who is paying for this credit enhancement – Greece via a loan or EZ Member States via a donation.

There are two other components that need to be factored in to determine the net benefit/cost to Greece. The amount that Greece is going to borrow to recap its banks has been increased from €20bn to €30bn. Also there will also be credit enhancement needed to allow GGBs to be used as collateral with the ECB. No details on its cost or structure are given.

It seems as if all private debt is now included in the package – previously only debt maturing before 2020 was included. The new agreement is also silent on the original debt buy back program. Perhaps this has been abandoned.

In short it looks as though a GGB bondholder will be able to exchange an old bond, many of which trade below 50% of par (depends on maturity), with a new bond worth 50%, and with principal guaranteed (if the cashbask portion is used for that), so there’s a net gain compared with market value, but a considerably bigger net loss compared with par value than with the July deal. One final point – apparently GGBs are still trading in the expectation that there will be a further haircut (bringing it to 62%). I don’t think anyone here would fall off their chair in surprise when the next quarterly report beings with “Despite the diligent efforts of the Greek government in implementing the program, the recession has been deeper than forecast with the result that further measures are needed …..”

I agree. Anything other than the top European sovereign bonds are far too risky and the proposal adds another layer of uncertainty. The proposed “guarantee certificate” is not attached to the bonds and apparently can be traded separately. So how is one to know what is being bought. Effectively a plain vanilla government bond market is being transposed into a derivative type opaque market.

@Bryan G
The 10 year Greek was trading today at about 34 according to Bloomberg.
So theoretically there is money to be made on the swap if one had the

If you watch it let me know the salient bits. Don’t forget the sick bag.
I can’t get it here.

As national debt to GDP goes over 80% the probability of civil unrest becomes high. An outbreak of serious civil unrest puts the kibosh on progress as causes the economy to rapidly declines. The stoicism of the Irish has bounds that were last tested in the period 1914-1921. The Germans always do their homework thoroughly and rely on a vast reservoir of knowledgeable and learned people.

The economic models are of little use when political economy is the dominant issue. The breaking point will differ from country to country and since there is more than a fair amount of subjectivity surrounding the subject it is to be expected that Ireland’s rating will range from 80-120%.

Creditors become the big losers when a country breaks down, instead of recouping 50% it could easily become 10-15% after a period of prolonged civil unrest. For example in Argentina the workers occupied places of business as they went bankrupt and then continued to operate them as the mostly foreign owners tried to shift movable tangible assets out of the country.

We must assess the situation carefully and act intelligently. The consensus EZ bailout conditions will be our salvation and they are there for the taking.

@Mickey Hickey

If only Enda could say the same as the contribution below from Papandreou

“Greece’s prime minister voiced deep relief today at the new debt relief and bailout deal hammered out by European leaders, which he said has bought the country time to make a new start and will spare future generations of Greeks from a crippling burden.

In an address to the nation, a haggard-looking George Papandreou told austerity-weary Greeks that the €130bn package ended months of uncertainty over the country’s future.

“Tens of billions of euros have been removed from the backs of the Greek people,” he said in live televised comments. “Banks will pay this cost, instead of citizens. But it is a fairer distribution of our debt burden.” ………from the Examiner.

How can you me so exact ? 80% national debt to GDP ?

Its just money – its not a claim on a asset – it just is.
You perhaps mean 80% EXTERNAL debt to GDP which is indeed very serious.
External holders needs to stimulate a credit boom / malinvestment or instigate a famine to get a return on their capital tokens in such unbalanced circumstances.
But you don’t have to accept such malevolence- money can be created just like that.

So much for any relief for the poor suffering Irish taxpayer…
“The Government has been distancing itself from the Greek deal, saying the arrangements are unique to that country because its debt is unsustainable. Dublin argues that Ireland’s national debt is sustainable and that the State’s interests lie in fully working the EU-IMF bailout programme, with a view to regaining access to private debt markets.

After Taoiseach Enda Kenny said the latest euro zone plan would create a “much-improved” environment and stability in the single currency area, Minister for Finance Michael Noonan said the deal removed the threat of recession and would help the Republic emerge from its difficulties through export-led growth.

He said for timing reasons Ireland had carried a disproportionate amount of the protection of the euro banking system. “We want to reduce the burden of the debt,” he said.

Mr Noonan said arrangements for Greece did not represent a “good deal” for that country – the new measures would see Greece stuck in a bailout programme until 2027 in a worst-case scenario. “Could you imagine any of us in politics going to the Irish people and saying, stick with it lads, we’ve another 16 years of this?”

I now believe that Enda and Mickey have a new cunning strategy which I have dubbed the Matt Talbot strategy.

And while I’m at it…
How can Mickey say that the Greek deal has removed the threat of recession.

It’s simply arrant nonsense to assert this. Just look at the numbers.

“”Minister for Finance Michael Noonan said the deal removed the threat of recession and would help the Republic emerge from its difficulties through export-led growth.””

Min Noonan is (or was) a very crafty politician. As in very, very crafty. So, either he has completely lost his moxie, or he is lying through his teeth.

And for those of you who wonder why us Irish have not yet charged over that parapet. Why, we are slumbering under a cosy eiderdown of carefully applied, plausible, pap; (PR guy will explain how this is achieved). Bit like a slathering of total Sun-Bloc. Just wait until we have to shower in cold water!

A psychological explanation might be that we do understand our predicament. We do recognise how bad it is. But we are engaged in a deliberate behaviour of ‘displacement’. Or as Musashi wrote, “a resolute acceptance of death”, (aka: “What! Me worry? Alfred E. Neumann).

Brian Snr.

“David McWilliams suggested Ireland should now ask him to raise his corporation tax and cut out the loopholes to make a point.”

With all this talk of fiscal unification, tighter control from the centre, etc. I would imagine it won’t be long before Ireland’s CT rate is back under the spotlight again. Like I said at the start of this thread, ‘Who gives a 5hit about the little guy? What are they going to do about it?’

Totally agree with you about the stealth recap of French banks. It’s so obvious I can’t believe people aren’t kicking up a stink. Some of them are in deep doodoo without having some additional funds bunged into them on the quiet – and preferably without the great unwashed taxpayers having any kind of share in return. And we all know which Boards will be inviting Sarko on after he’s lost the next election. Revolving doors.

George Papendreou is, as predicted, telling his nearest and dearest back home that this is a ‘victory’ – but of course, choosing his words very carefully when there’s any kind of recording device around that might then replay it to those outside Greece. I am still pondering… with the economic contraction still to come (and it will get worse) will Greece even be able to support 120b by 2020 (assuming it actually gets down to 120b in reality by then)? A second haircut has to be on the cards.

My guess is the EZ crisis will all kick off again at some point around Christmas/New Year. Something will unravel or some spiv politician will get caught with his hand in the fund.

Winners at the moment? Angela has won a bit of favour/respect back home and elsewhere in the EZ, everyone hates Cameron, Sarko comes out neither winning nor losing and Silvio is heading for that big bunga bunga in civvy street after Christmas. George is laughing.

@PR Guy

Totally agree with you about the stealth recap of French banks. It’s so obvious I can’t believe people aren’t kicking up a stink.

I am not too surprised with that. Many comentators here work in the bank/financial complex. Having been major beneficiaries of Irish aid themselves they might struggle to find a high horse that would allow them to remain comfortably in the saddle.

@Brian Woods Snr

So Grasshopper, you also read Musashi?

As for “carefully applied, plausible, pap….. PR Guy will explain”

The thinking is very simple – and these are observations of mine over the years, not my core values (I was just ‘taking orders’ guv coz I’ve gotta feed my family somehow):

Keep the 99% more interested in (distracted by) who is going to win X Factor/Big Brother/Strictly Come Dancing/Britain’s Gone Cross-Dressing and not making any more effort than to pick up the remote control to change channels – and when you make detrimental changes to their lives (higher taxes, lower wages, etc.), try to do it by staging the changes over a long period of time, not all in one or two hits and keep up a constant media flak of reassurance and soothing during negative change. Above all, try to avoid shocks or long periods of repression as they can then become unpredicatable and start taking to the streets or demanding their ‘rights’. Always, always drip feed bad news and if in trouble, deny everything right up until the point where it can no longer be denied. Always make a big fanfare of good news to them. If the 5hit really hits the fan, find an external ‘enemy’ for them to focus on – blame someone outside of the country or someone who has recently left the country. If anyone dies, they got ‘caught in crossfire’. Lie through your teeth, be as vague as possible, avoid answering questions directly and make totally unfounded statements for as long as you think you can get away with it because the 99% don’t do challanges. Constantly repeat mantras (e.g. TINA) until it becomes accepted belief.

The other 1% need to be corralled into avenues like this blog, comment sections on media websites, limited circulation media (I include academic papers in that), etc. to make their arguments and voice their frustrations (crying in the wilderness), leaving mainstream media largely at the mercy of the wolves (have a look at the cross directorships of major media companies – JPM, GS, etc. all plastered across their Boards). It really doesn’t do when people like Morgan Kelly get space in the IT and get the 99% jabbering or people are pitching their tents up outside the CB.

Don’t shoot the messenger.

The initial thread by Colm Mac Carty was about the fact that his reading of the turgid prose of the communiqué implied that 30 bn of the 17 states good money would be used to pay back the banks and come in deduction of their “haircut”. In fact this interpretation was wrong (not Mc Carty’s fault).The authors of the communiqué later explained what their intent was:
“To achieve that massive reduction, private creditors like banks will be asked to accept 50 percent losses on the bonds they hold. The Institute of International Finance, which has been negotiating on behalf of the banks, said it was committed to working out an agreement based on that “haircut,” but the challenge now will be to ensure that all private bondholders fall in line.
It said the 50 percent cut equals a contribution of €100 billion ($139 billion) to a second rescue for Greece, although the eurozone promised to spend some €30 billion ($42 billion) on guaranteeing the remaining value of the new bonds. ”
This is very different, but all the comments of this thread keep imprecating again the dastardly French who got a special treatment for their banks at the others expense. Most of the contributors see the Irish as victims of” Merkozy”. Right now the rest of Europe public opinion is mad about the Greek ,but it would not be very sympathetic to the Irish if it read the Irish newspapers editorials.


facts are facts:

Greeks bonds (in the hands of mainly Europeans banks incl Greek banks) which were trading at close to zero last week are now to be guaranteed at 50% of nominal value through an all EZ country guarantee, including Ireland.

This is not a bailout of Greece, it is a bailout of the holders of Greek bonds.

Just as the ‘Irish bailout’ was not a bailout of Ireland, it was a bailout of the holders of Irish bank bonds. In the Irish case, Ireland were charged penal interest rates for the privilege at the insistence of among others, Madame Legarde, who is now the lead advocate in the Greek bailout.

@PR guy

Ar fheabhas . It’s one big circus and the main trick for prolonged enjoyment at the circus is to have a poor memory.

Crikey – Spain’s unemployment rate up to 21% today.

Just looking at an article on nationalisation of Greek banks and shareholders losing all their money etc. Would I be right in thinking (does anyone know the facts?) that Greek banks are likely to be like Anglo and it will be mainly Greek middle classes and pensioners who were probably advised to put their money in ‘safe’ assets like bank shares who will take the biggest hit? I would imagine any bigger investors are long gone.

@Joseph Ryan

This has only ever been about bailing out bondholders and the crusade has been led and orchestrated by the ECB – with religious fervour. But who was pulling the strings behind the scenes? And ongoing transfers of wealth are all part of the strategy.

@PR Guy: A+

Musashi was my antigen to the Machiavelli virion. ‘The Prince’ was a carefully crafted DIY manual of self-preservation – in the context of XVI northern Italian chicanery, treachery and short life expectancies.

Reading some of the ‘academic’ drivel about ‘Old Nick’, you will, if you have more than a single functioning neuron, rapidly form the opinion that his inclusion in the panteon is to sustain a ‘cottage industry’ of the intellectually bereft. Very sad. Ditto for Prof A Smith, late of Glasgow Uni. Good, but not great. Whose shoulders was HE standing on?

Back to the Master. I was spellbound by his brevity, his clarity (if you can ‘see’ through a philosophical fog), and the beauty of his drawings. Very hard to comprehend that he was such an accomplished and terrifying assassin – and that he passed away gently as well.

The CMcC post at the top alluded to the use of pasteurized, homogenized pap, to sooth the fevered and prevent searching questions. That’s spells Paternalism. As a member of the 1% – I would prefer that the 99% were accurately (in a modest fashion) informed – so that, “… (my) safety in turbulent times depends on … the inferior ranks… (not) being led astray by ‘enthusiasts’ and malcontents”. And, that’s from your man Smith!

Thanks for that nifty exposition.

Brian Snr.

@Joseph Ryan
Your facts are facts,but they are very different from the facts that the initial post of Colm McCarthy implied.

@ All

Moving on!

The speech by Barroso to the EP is worth a read, especially the following extract.

” I believe that the Summit decisions give us a solid platform from which to continue our work. I am also particularly pleased that the Summit conclusions highlight the role of the Community method and of the Commission in economic governance. In effect, Heads of State and Government have pledged to build on the measures of the six-pack and the European Semester by strengthening the Commission’s role in assessing, monitoring and coordinating national economic policies and budgets.

But we will now go beyond the legislation recently adopted by this Parliament. The Commission is committed to a true economic union, through increased convergence. Today I can announce to you that next month, we will present a comprehensive package on further deepening European Union and Euro area economic governance. This will include namely:

•a co-decision regulation linking surveillance with EFSF and ESM assistance on the basis of article 136 of the Treaty;

•a further co-decision regulation on deeper fiscal surveillance; also based on article 136 of the Treaty; So it is for you to decide with the Council on the basis of our proposal.

•a communication on the external representation of the euro on the basis of article 138 of the Treaty;

•a Green Paper on euro stability bonds, as announced in my State of the Union speech.

•and we will also anticipate in this package the Annual Growth Survey, so to give you then more coherence and focus to the preparation of next year’s economic policies.”

The appointment of Rehn as Vice-President of the Commission with increased responsibilities is of particular significance as it underlines the fact that what distinguishes the EZ17 from the other member states is simply that they have adopted the euro. (Article 3.4 TEU “The Union shall establish an economic and monetary Union whose currency is the euro”). This return to standard practice is an indication of the change of direction by Germany and a rebuff for Sarkozy (despite the waffle in the summit conclusions about meetings of the EZ17, the less of which are held the better).

The “burning” question for Ireland is not the issue of the bond holders but whether the measures being taken by other countries lead to a double-dip recession depriving the country of the means to grow out of its difficulties.

As I pointed out on another thread, it is highly likely that the fundamental deals were struck on Sunday evening and that there was an element of stage management on Wednesday. Sarkozy would hardly have set up a major national television broadcast for yesterday evening (Thursday) otherwise. He duly during the broadcast declared victory and conveyed the nasty medicine viz. the near halving of the French projected growth rate and “between 6 and 8 billion” in further budget savings.

As to PSI, I will believe when I see it!

Barroso is one of the most dangerous men there. He has a ‘dream’ and by God is he going to do everything he can to make it come true. One man’s crisis is another….

@Overseas commentator

Most of the contributors see the Irish as victims of” Merkozy”.

They are correct to do so. Ireland is to a large extent the author of its own misfortunes, but at the same time it is the victim of outside actors, including the aforesaid Merkozy. This does not make for an emotionally satisfying narrative, but it is how things often are in external reality.

Right now the rest of Europe public opinion is mad about the Greek ,but it would not be very sympathetic to the Irish if it read the Irish newspapers editorials.

It is a curious habit of you and some other commentators here to suggest that if Continental newspaper readers have a certain belief, then it must be true. In reality the facts of the case ought to lead the newspaper-readers to be sympathetic to the Irish in some respects, if not in all of them. If they do not or would not have that appropriate sympathy then they are, in this respect, deficient in information (quite understandable), deficient in judgement, or deficient in morality.

@ PR Guy

With all due respect, I think that you are wide of the mark. Barroso has, by general consensus, been notable for his caution and lack of ambition. It is the political and institutional context that has changed.

@DOCM – I have to disagree. Have a read of a few of his speeches. He really does want a USE.

@ Joseph Ryan

“Greeks bonds (in the hands of mainly Europeans banks incl Greek banks) which were trading at close to zero last week are now to be guaranteed at 50% of nominal value”

While facts are facts, these are unfortunately not actually facts.

Greek 30yr bond traded at 31 cents last Friday, it trades at 32 cents today.

Greek 10yr bond traded at 39 cents last Friday, it trades at 41 cents today.

Greek 5yr bond traded at 39 cents last Friday, it trades at 42 cents today.

The comment about banks “profiting” from this deal also misses the point – banks generally don’t mark to market their sovereign debt holdings, while this deal will actually crystalise that loss immediately. Banks have only recently even started “provisioning” for Greek debt holdings, and only 21% on that. They are not “profiting” from this.

@ All

Hot off the presses; German constitutional court blocks use of a special parliamentary committee to decide on EFSF decisions. Just what the markets needed!


It is worth mentioning two comments by the Prime Minister and Foreign Minister respectively of Luxembourg a week or so ago, the first to the effect that Germany was not the only country with a parliament and the second that internal party issues in Germany should not, and could not, be fought out in a European, as opposed to a national, arena. How right they are!

If there is to be mutual recrimination between member states, there is ample justification for it.


I’m confused. My understanding was that our learned friends in Karlsruhe had decreed that the agreement of a Bundestag Cttee was required to sanction any transfer to EU funding mechanisms, such as the EFSF, of, or contingent liabilities imposed on, German public funds. What has changed?

@ PR Guy

The point we are discussing is an important one because you, like many people, seem to attribute a personal political position to the President of the Commission which he does not have and could not have. He presides over a collegiate body i.e. only the Commission qua institution can decide anything (and because it is a college it decides by simple majority). And it can only decide in relation to matters within its purview in terms of the treaties. That the President might wish to put forward a vision of how the EU should proceed falls naturally under that heading.

What the President can do off his own bat is set out in Article 17.6 Treaty on European Union. One of the relatively new powers that he was given was to decide on the internal organisation of the Commission, including the right to appoint Vice-Presidents. He has finally chosen to exercise these powers in relation to an issue of considerable institutional importance.

@DOCM: The EU is a mature organisation. There is no need for any ‘vision’ or ‘belief’ anymore. Just some admin consolidation. However, this may mean that the ‘owners’ will demand more power over the citizens. Tricky. They are fooling about with political nitro. Just because our current political party elites are a bunch of compliant europhiles, it would be a dopey fallacy to extend that to their respective, national electorates.

The US developed from a nucleus of 13 commonwealths, by steady accretion of the remaining ‘lower 35’. Virgin birth sort of thing. Took approx 110 years. Now if this is the end-game that Borroso (or others) are aiming for, they had better take a long, slow, cold sauna to cool their ardour.

Brian Snr.

@Bond Eoin Bond
Looking at Bloomberg I see 10 yr Greek at 34.41 yielding 21.5% now. How come you are at 41.

The Italian premier, though, had previously declined to name Bini Smaghi to replace Italian Mario Draghi as head of the Bank of Italy.

“What should I do, should I kill him?” Berlusconi said he told Sarkozy when pressed about Bini Smaghi, whom France wants to replace with one of its own on the ECB board. Bini Smaghi must understand he can’t be a “cause of war” with France and will quit by the end of the year, Berlusconi said.”

@Bond Eoin Bond

What’s the story on Italy today? Has the krisis been postponed to Tuesday? & Spain?


In time, Portugal will need a deal.


Lorenzo would love it – hear he is already reading up on ArchDuke Ferdinand – and getting a new hair_do …. er tonsure.

Couldn’t stomach 30 mins with Bowel_Bertie last night …. had a nightmare on the couch where Bowel_Bertie (in brown-paper_envelope curlers, a mini_skirt, and smokin a loaded revolver) was refusin to give his DURTY Wash_In back to Mike Murphy …. so when I woke up I went straight to the pub.

@ CP

if i was guessing i’d say you’re looking at the 2022 bond and i’m looking at the 2020 bond. I didn’t pick the 2022 bond cos the pricing on it seemed funky (some of the quotes had it at par!). The basic point still holds though – they still trade well south of 50 cents and they still trade pretty close to last week’s price.

A pity. Would have loved to hear the gory detail. Maybe RTE will put it in the archives for austerity and reel it in every few years.

Meanwhile, back to the real world.
I see the wheels are coming off the wagon already.
Interesting quote today from someone who knows a thing or two about sovereign debt…….
“However Harvard economist Kenneth Rogoff says he still expects the country to have to leave the euro within a decade. The deal yesterday “feels at its root to me like more of the same, where they’ve figured how to buy a couple of months,” he said.
Speaking at a Bloomberg currency summit, he went on:
The interesting question is will all the countries in the euro still be in the euro? My answer to that is no.”

It’s looking like it didn’t even last a day or two with the Italians under siege again.


relief rally last all of a day and 4 hours, everything bar Ireland and Portugal wider again now: Italy +15bps, Spain +18bps, France +6bps, Belgium +14bps. Poor Italian bond auction this morning didn’t help.

@Paul Hunt
“I’m confused.”
Not in secret, though. The EFSF agreement says that it is secret committees of parliaments that are going to approve the spending of the EFSF. The rest of the Bundestag, quite naturally IMO, objects to this.

@Bond. Eoin Bond

Ta for that – 28 hours.


OMG. Looks like he might have borrowed one of Luce_Enda’s advisors …. bad enough to have Sarkozy really kicking the Greeks in the teeth when they are down … but wish he would shout the Distinction between Genuine Irish Sovereign Debt and Dodgy_Vichy_banking system debt ….. time to be concerned (but at least it got a mention) … I know that Noonan is not a fool – but if he starts acting it !!!

I’m sure we will get a repeat of Bowel_Bertie when Mahon comes out …. not that any of these tribunals make a whit of difference – and looks like Gov failed to educate the Citizenry on the need for Oireachtas Committees to have some ‘heft’ – …

But overall – a good day as a decent, cultured, honourable and intelligent man heads for The Park – we will not be the laughing stock of the globe after the presidential election … the bagman would have caused a constitutional crisis – and the world’s meedja camped again – but this time up in the Phoenix Park.

@ Jesper

Whose law?

The German government has signed the EFSF framework agreement, not the Bundestag. It seems that the government is now incapable of participating in the implementation of the agreement (as opposed to getting its parliament’s approval to agree to it which would be the norm in mature democracies).

The current situation is unheard of.

The governing law and jurisdiction in relation to the EFSF can be found at page 32 of the agreement.


Need I add that this confused legal basis, outside the treaties, was insisted upon by Merkel and her advisers!


Thank you. Thanks also to Jesper for the background story. It might slow things up; it might constrain the choice of the tools governments might wish to deploy; but there is something healthy and refeshing when a parliament asserts its primacy – and when the judiciary looks like confirming this primacy.

If only that were the case here.

@ Paul Hunt

You are confusing the role of the parliament in a democracy with that of the executive which is exactly what Germany is doing now. The conclusion to be drawn from your remark leads to an absurdity. Are all the parliaments in the world now to meet in order to decide elements of international treaties?


your understanding of how a democracy works is quite different than to mine.

You seem to have the same belief as Nixon – whatever the executive does is right and legal. He was and is wrong.

A law cannot contravene the constitution, if it does then the constitution takes precedence.

The German executive cannot take upon themselves more power than is allowed by law.

Representatives of the German parliament believed the government might have overstepped their mandate and is asking the court to make a judgement.

Do you really think that once a government is in place the parliament and the courts should just ok everything the government want to do?


I accept that it may appear that the pendulum is swinging too far now in Germany. But that is because it had swung too far previously in the opposite direction. Voters are angry because they feel they were gulled by assurances given by this government and its predecessors about the nature and functioning of the ‘Euro project’. Many EU national governments used thier executive dominance to railroad the legislation establishing/ratifying the Euro and the much modified EU Constitution through their parliaments. Remember Dutch and French voters rejected the EU Constitution in 2005. The members of the Bundestag are merely channelling this anger.

It is unfortunate that a re-balancing of the powers of parliament and government in Germany is being addressed in the midst of this crisis, but, had a better balance been achieved 10 to 15 years ago, it is possible this crisis might not have manifested itself in the manner it has – and, possibly, be more easy to resolve.

@ Jesper/Paul Hunt

“Do you really think that once a government is in place the parliament and the courts should just ok everything the government want to do?”

Just so we’re clear, this parliamentary committee was formed on a cross-party basis i think, so it’s not like the government is just doing what it wants, it probably just figures that such important and market-moving decisions aren’t best served by being debated every single day (cos thats what we’re potentially looking at) by 600 or so politicians.

Jürgen Habermas: Democracy is at stake

27 October 2011 Le Monde, Paris

This text is based on extracts from a lecture that will be presented by Jürgen Habermas at Paris-Descartes University (12, rue de l’Ecole-de-Médecine, 75006 Paris) on 10 November, within the framework of a colloquium organised by the PHILéPOL (philosophy, epistemology and politics) directed by philosopher Yves Charles Zarka. A complete version of the text will be published in the January 2012 edition of the review Cités (PUF). At 6 PM, immediately following the 10 November colloquium, Jürgen Habermas will hold a public discussion with Yves Charles Zarka on the role of philosophy in the current crisis of European conscience, at the Vrin philosophy bookshop (6 place de la Sorbonne, 75005 Paris).


Wonder has Michael D. met Jürgen? Might be time to re-visit the Frankfurt School … make a nice change from the ECB!

@Mr. Bond,

I’m not in disagreement with your position. It’s just that this is another chicken that is coming home to roost among a squadron of financial and economic chickens. It is unfortunate, but I’m not in the least bit surprised. For some time I suspected Chancellor Merkel was delaying and delaying and pursuing her policy of ‘small steps’ until she had some assurance that she could secure her ‘Chancellor’s majority’.

Other governments that may have been more tender of their parliaments may grumble, but this matter of democratic governance had to be addressed and resolved. Once resolved, the decisions that will emerge will be all the more robust as a result.

The ‘markets’ may not like it, but, given the way key market participants have usurped and suborned democratic governance, some reflection on their part would be welcome.

@ Paul Hunt

I have made clear in previous posts that I think that countries where parliaments have good control over what their governments do usually fare better than those that do not. This is generally true of Germany and I support it.

But I oppose with equal force the usurpation by one instance in a system of democratic checks and balances of the prerogatives of another. This is what is happening in the case of the EFSF. The government is the executive and it must, by definition, have the powers to implement agreements. This is what is being denied the present German government in a domestic institutional and legal imbroglio of its own making.


It is instructive to compare and contrast the post-announcement movement in EZ sovereign bonds with that of the equity in banks.

@David Od

Do have a look at the evidence given in the Callely case if the detail ever gets made publicly available. It is game set and match for the concept that a parliamentary committee (which is not broadcast and exposed to the light of day) can be trusted to make findings. Ivor’s head was required on a plate and so a committee provided it despite failing to ascertain any facts that they could present in court to back it up. Their defence amounted to them not needing to, because they were entitled to take political decisions.

Ivor may have questions to answer on lots of other stuff, but it should be disturbing that something he had a rock solid defence (no rules broken, demonstrably no attempt to deceive) for “did” anyway. One committee member stated that he didn’t care what the rules were.

Callely might not deserve much empathy, but you can’t blame people for failing to trust the integrity of his fellow politicians to have an absolute say reviewable by no one.


Point taken. And if tallies are anyway reasonable – this one will need to be revisited. Touch of Lisbon-1 in that Exec failed to sufficiently inform citizenry – and timing of the GildedLegalEagles_AG was almost as good as Sinn Fein’s. Gay Mitchell might be suffering at the mo – but his brother Jim Mitchell did a superb job chairing the DIRT enquiry [pity notice was not taken of the main findings re culture within Irish banks and the various professional advisers to the dodgers] – and many politicos do have ability – it remains open. Tribunals are a disaster – present and future eejit citizen serfs simply making legal_eagles multi-millionaires .. to no end as no_one is ever held accountable for anything. We do need to revisit this one. Such committes do need to be broadcast and open …

One of many institutional weaknesses in extant system – and powerful vested interests opposed to any changes in the strength of their gravy …. I’ll leave reading Callely for another day …. and take your word on it.


Similar to my comment to Mr. Bond, I don’t think we are in serious disagreement here. Yes, it would be better if the Bundestag were to ease the restraints on the German government to allow it deal as it had agreed to deal with this matter. I’m simply pointing out that the restraints are being imposed because there was a lack of restraint on previous governments – and that’s a major reason why the Euro is in crisis.

If an outcome of this crisis is that parliaments exercise more control over governments throughout the EU – but not obviously to the extent the Bundestag is currently attempting – I would be very pleased.

The Dail serves no real purpose other than electing a Taoiseach and the Oireachtas merely rubber-stamps the edicts of the government subsequently formed. A few more people seem to see the connection between this and the mess we’re in, but it’s up to the TDs to address it – and they collectively are about as much use as a eunuch in a harem.

@ Paul Hunt

The nub of the problem – and I accept that we are in broad agreement on the wider issue – is actually identified in your comment “not obviously to the extent the Bundestag is currently attempting”. It is not a question of extending control in the sense of good parliamentary surveillance but of attempting to do the job of the executive. Indeed, there is one country, Denmark, that has fallen into this trap. Ministers must get the approval of a powerful parliamentary committee for actions at an EU level. What this, of course, ignores is that ministers go to Brussels to negotiate, usually in the context of QMV, and if you have no negotiating leeway you cannot participate in the negotiation, simply state the national (parliamentary) position. If all countries were in the same position, the EU would come to a stop.

The situation is not greatly impacted by the situation of one of the smaller countries but would be impossible for a larger country. Luckily, in this instance the judgement of the constitutional court is confined to a specific issue, the supposedly inalienable budgetary rights of the Bundestag, and the court also left some leeway in its judgement by referring to “substantial” amounts or some such.

The problem is that the approach, even in this limited instance, is unworkable unless there is a hidden understanding to get around it. Indeed, commentators were seeing in Merkel’s approach in going further than the requirements of the court, and bypassing the special committee of Nine to get the approval of the full Bundestag, overtures to the SPD with the idea of re-establishing the grand coalition. In fact, it seems more likely that she got wind of what the court was likely to do. (The case was lodged by two SPD members of the Bundestag).

The political establishment in Germany must by now be wondering how they got themselves into this mess, which has long-term implications for the conduct of German foreign policy, and be devoting some thought about how to get out of it. The conclusion appears to be a return to the Community method which is welcome news. The French establishment have also cottoned on as evidenced by a lengthy TV interview piece featuring Vedrine, a former foreign minister to Mitterand, warning against the dangers of any move to “federalism”. This is not at all, it would seem, what Germany has in mind. But it would bring a halt to the French inter-governmental gallop.

@ Ceterisparibus

The following is word for word (le Figaro) what Sarkozy said in his televised address about the money France is loaning Greece .

“Nicolas Sarkozy a par ailleurs affirmé que la France avait prêté pour l’instant 11,5 milliards d’euros à la Grèce à un taux de 3 à 5% selon les modalités, sans que cela ne lui coûte rien. «Aujourd’hui, non seulement les prêts de la France à la Grèce n’ont rien coûté mais ont rapporté 200 millions d’intérêts», a-t-il dit. «Si les Grecs font les efforts que nous leur avons demandé, ça ne coûtera rien à la France et ça ne coûtera rien à l’Europe”.

The key sentence, “As of now, not alone have the loans from France to Greece not cost us anything, they have returned 200 millions in interest payments. If the Greeks make the efforts that we have demanded of them, this will cost France nothing and it will cost Europe nothing”.

With leaders like that, how can Europe go wrong!

@DOCM, Eoin, Paul Hunt,

you say better. Better for who? Better how?


you seem to think that the executive has a carte blanche. It doesn’t. The executive has some authority to make decisions but it only has the authority that the parliament has given it. Negotiators representing countries have only limited ability to make deals and the limits are set by the parliament. Giving a negotiator total control only works in isolated incidents and for the rest it belongs in fantasy.

Denmark seem to have chosen to set strict limits. Can the Irish representatives agree to anything and then the entire nation of Ireland is bound by it and there are no limits to what this representative can give away in the negotiation?

@ Jesper

You are attributing to me contentions that are manufactured by you. At no point have I said that an executive can act outside the authority given to it by its parliament. What I have said is that the latter must not seek to usurp the executive repeat executive function of the former. Why have a government and a parliament if such were to be the case?

If an executive (government) is seen as going beyond its remit, there is an obvious solution in normally functioning democracies; the matter is put to a confidence vote and the government resigns if the vote is lost. cf. the experience of the Slovakian prime minister.

@Jesper et al,

What is at issue here is the existing prerogatives of the Council (as Heads of State and Government) and the Commission to exercise and apply the ‘Community Method’. The Bundestag, by seeking to curtail these prrogatives, runs the risk of opening open the classic ‘powers of the states versus that of the federal government’ that so engaged the US Founding Fathers – and resonates to this day. And, in this respect, I agree with Mr. Bond and DOCM. We don’t want to go there.

My point, however, is that, in relation to the Euro (and it is also the case in relation to other institutional and policy areas) too much was decided and enacted previously using the Community Method without adequate scrutiny or restraint by national parliaments. By allowing the Bundestag more oversight in this matter, Chancellor Merkel is implicitly conceding this, but hoping to be able to wriggle out of its implications.

The intention was – and the beefing up of its role and responsibilities in the TFEU were intended to support this – that the European Parliament would broaden popular consent to the use of the Community Method. The Parliament, by virtue of its separate popular mandate and acting in isolation from national parliaments, is totally incapable of performing this function.

For quite some time it has been obvious to me that national parliaments need to be engaged, either directly or indirectly, in the workings of the Parliament – and by doing so it needs to be granted more powers over the appointment and dismissal of the Commission. (The underlying complaint in Britain about the EU and, specifically, the Commission – though it is rarely expressed explicitly is: “We didn’t vote them in; and we can’t vote them out”.)

How this might be achieved is a major challenge – though various options are possible – and probably one more than may be addressed in the midst of this crisis. But the national parliament of a major member seeking to expand its restraint of government (largely to compensate for previous failures to exercise more modest restraint) isn’t workable either.

“The key sentence, “As of now, not alone have the loans from France to Greece not cost us anything, they have returned 200 millions in interest payments. If the Greeks make the efforts that we have demanded of them, this will cost France nothing and it will cost Europe nothing”.

With leaders like that, how can Europe go wrong!”
This is the problem in Germany. This was how the funding for the EFSF was sold. Cheapest bailout in the world and all that. It is hardly surprising that the German parliament doesn’t want to fall into the mess that other parliaments have fallen into.


By accepting the responsibility of being the executive the executive accepts the limitations that the parliament has given it.

The Danish executive is willing to accept its limitations. The German executive is willing to accept its limitations. The Slovak executive was not willing to accept its limitations.

There are different nuances. The executive will not (& should not) resign for not being allowed to do everything it wants, the parliament will not (& should not) fire the government for all instances where the executive asks for more than the parliament is willing to give.

Would you resign for all slights from your employer? Should your employer fire you for any mistake that you do?

The French come out of this worse than anybody. At least the Germans showed acumen.
The current “solution” is not going to work either. I said it when the EFSF was first touted as a solution and I’m saying it again for this one.
The problem is in the leverage. I know nothing about this but the concept of leverage seems pretty basic. The fulcrum for the lever is the international money markets – they’re broken and the short end of the lever is the returns on loans from the EFSF. The countries that are being lent to are too bad an investment so the short end of the lever isn’t strong enough and will break.
The only way forward is for the taxpayers of Europe to stump up the 1 trillion Euros – but then you have a recession in Europe.
There’s no real way out of this actually. The thing is broken

@Paul Hunt,

we might not want to go to a place where the states are disagreeing with a federal government, however, I believe we’re already there.

The power that the EU now tries to take will not be relinquished when the crisis is over. Never waste a good crisis…

@all Pual Krugman on ‘The Path Not Taken’

‘… the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

And there’s a lesson here for the rest of us: The suffering that so many of our citizens are facing is unnecessary. If this is a time of incredible pain and a much harsher society, that was a choice. It didn’t and doesn’t have to be this way.


@all at all

Irish Debt – in totality – remains totally UNSUSTAINABLE ….


Handelsblatt editor grasps the bigger picture.

@ Paul Hunt

I agree with the central point that you make. The error lay in assuming that a directly elected European Parliament would somehow create the missing European demos. However, I think that this problem can be fixed, perhaps with a mix of directly-elected MEPs and MEPs nominated by national parliaments!

@ hoganmayhew

I find the behaviour of Sarkozy quite incredible (as does Der Spiegel in its international edition that ran a long comment on the interview but did not pick up on this point, no doubt because of the questions it would raise with regard to Merkel’s matching approach).

However, whether Europe’s inadequate leaders like it or not, the ground is moving under them, as the FT in its editorial yesterday pointed out.


In fact, the debate may start in earnest as soon as the Commission tables the proposals promised by Barroso as they will be in the form of Regulations (i.e. directly applicable in the legislation of the countries to which they apply), the decisions in the Council being taken only by the 17 member countries of the EZ under Article 136 but decided in co-decision with the EP representative of all 27 member states but binding only the 17! cf. extract from his speech posted above. It promises to be an interesting debate.

@ Eureka

I do not know anything about leverage either but I share your suspicions. The latest from Regling is that the EFSF might issue bonds denominated in Yuan!

@ Jesper

Your capacity for raising hares is without equal. If you do not mind, I will not try to chase them any more of them down.

“I find the behaviour of Sarkozy quite incredible (as does Der Spiegel in its international edition that ran a long comment on the interview but did not pick up on this point, no doubt because of the questions it would raise with regard to Merkel’s matching approach). ”
Not to get too far off track, but the position of M. Sarkozy is different to that of Frau Merkel. M. Sarkozy is a directly elected president so can claim to represent the people of France directly. Frau Merkel is a prime minister and as such represents the parliament of Germany. M. Sarkozy is an elected dictator, Frau Merkel is not – her mandate is from parliament and parliament can withdraw that mandate at any time.

@ hoganmayhew

I should have made clear that I was referring to his comment about Greece; the “live horse and you will get grass” aspect of it.

By the way, the debate in France is hotting up, especially in relation to the core of Sarkozy’s speech viz. his apparent endorsement of a two-speed Europe. The former editor of Le Monde, Colombani, has an interesting article in the French edition of Slate. (The Google translate button provides a good idea of its contents).


Colombani is right on all points in my view except on one, the French delusion – which he evidently shares – that France and Germany have the same vision for the institutional future of the core Europe that both have in mind. This might have been true of Merkel until quite recently but events have overtaken her.


Hogan makes an important point, which echoes one I’ve made previously about the similarity of the governance architecture of the EU with that of France. But the point shouldn’t be over-stressed. Pres. Sarkozy is into serious spin mode in advance of an election in six months and to conceal the extent to which Germany is calling the shots (but not without the support of the Netherlands, Austria, Finland and the other new Euro members – even if Luxembourg might grumble a little). However, he does not operate without popular restraint. Even if the Chamber of Deputies is frequently ineffective in exercising it, French citizens are rarely unwilling to take to the streets if they are sufficiently provoked.

The EU, as a community that has some competence to decide policy and to enact and enforce laws, lacks effective parliamentary or popular restraint and therefore lacks genuine democratic legitimacy. And I agree that there are various options that could be employed to enhance this.

I think we both agree that overreach by national parliaments is not the way to go, but I wouldn’t be too hard on Jesper. If successive Swedish and Danish governments had had their way, both Sweden and Denmark would be in the Euro, but their national parliaments prevented this. There seems to be a tendency there not to recognise the subtle, but crucially important, distinctions between federalism and the use of the Community Method. The exercise of the Community Method requires some exercise of restraint by national parliaments collectively over the exercise of the Council and the Commission of this method on a case by case basis. It most certainely does not require national governments individually and to varying extents tieing the hands of their governments in advance.

But the requirement for some restraint remains and will become more pressing in the light of Mr. Barroso’s intent.

@Paul Hunt,

I think & I hope we agree. Maybe an example can clarify?

I’ve read the discussion in a Swedish parliamentary committee where it was discussed what a Swedish delegate could agree to in Brussels. The government wanted the delegate to agree to a proposal, however, the government does not have a parliamentary majority and the opposition united in saying that the delegate was forbidden from agreeing to the proposal in Brussels on behalf of the Swedish nation.

This example can be described as ‘the delegate had his arms tied’. I wouldn’t describe it that way. I’d say that the decision of the Swedish people was being honoured.

Unless delegates know their limits of their mandate they might agree to things they do not have authority to agree to. The limits have to be clarified before the event as there are no Mulligans in dealings like this. What the delegate agrees to, unless it violates the law, is binding.

What I am saying is that sometimes the parliament should ‘tie the hands of the government’ in advance by setting the limits to what the government can and cannot do.

The case in Germany seems to be a point of law. As the German government has to follow the law then I honestly don’t see any problem whatsoever in it taking the necessary steps to ensure that the law is followed. I would see a huge problem if the German government was allowed to break the law just because it would be inconvenient to follow the law.


What I fear you are missing (and which may have occasioned DOCM to give up) is that where sovereignty has been pooled by treaty to allow the Union’s institutions competences in certain areas, the exercise of these competences may not, in a specific instance, be in the very precisely defined narrow interests of a member-state (or even of a number of member-states), but that it is in the broader interest of the Community. However, the range of competences that have been pooled and the continuous, for want of a better word, ‘horse-trading’ that takes place at Council summits ensures that compromises are reached that concessions by some member-states in some areas are matched by gains in other areas – and the Community in aggregate benefits.

This is what ‘keeps the show on the road’. But it can lead to some stupid and damaging compromises – and we’re experiencing the outcome of a number of these. All I’m arguing for is the exercise of more restraint, collectively, by national parliaments on the ‘horse-trading’ in the Council and on initiatives of the Commission. The union suffers from a lack of democratic legitimacy and it needs to be enhanced. This won’t prevent stupid decisions being made; but it should minimise their incidence and the severity of thier implicatons.

National parliaments, if they are to discharge their responsibilities to their citizens, are required to exercise restraint on governments – I only wish that were the case in Ireland – but they would over-reach if they, individually, were to exercise such restraint on their governments that they would not be able to secure agreement collectively in the interests of the Community in the Council.

I reckon we may have to agree to disagree on this.

@Paul Hunt
” …..and the continuous, for want of a better word, ‘horse-trading’ that takes place at Council summits ensures that compromises are reached that concessions by some member-states in some areas are matched by gains in other areas – and the Community in aggregate benefits.”

But other influence seems to bear on the decisions judging my the following Der Spiegal article….

A flavor of ….
“Although efforts are underway worldwide to regulate the financial industry more rigorously, implementation is a different story, as evidenced by the work of the European Parliament in Brussels, where members are under constant observation and attack by an estimated 700 financial lobbyists. These professionals work around the clock to ensure that none of the new laws adversely affects the interests of banks, hedge funds, insurance companies and private”
“If you listen around in Brussels, you can hear about the opulent dinners members of parliament have in the city’s most expensive restaurant during which representatives of a major bank will explain to them why their speculation in agricultural commodities has absolutely no effect on the world’s food supply. Or about the amendments to existing legislation that are sent to members of parliament prewritten, and of the printed copies of voting lists that explain to the parliamentarians exactly which box to check. “There are 200 financial-industry lobbyists for every paragraph of the law,” says Udo Bullman, a member of the European Parliament from Germany’s center-left Social Democratic Party (SPD).”

@Paul Hunt,

thanks for clarifying.

I think we agree on that negotiations/horse-trading are going on in the council.

I think we might agree that not all attempts to negotiate will lead to a settlement: What one must have, the other doesn’t want to give up.

Where we might disagree is how to handle negotiations where we believe one party to be behaving irresponsibly and damaging to the collective.

It is a classical philosophical question (individual rights vs collective good) to which there is no correct universal answer. In this particular case we might have to agree to disagree.

@ Paul Hunt

“Hogan makes an important point, which echoes one I’ve made previously about the similarity of the governance architecture of the EU with that of France”.

In fact, the governance architecture of the EU, if it reflects the system of government in any member state, it is that of the German federal system, with the Council in the role of the Bundesrat and the European Parliament in the role of the Bundestag. This explains why Germans are so comfortable with the idea of co-decision and the French are not.

“If successive Swedish and Danish governments had had their way, both Sweden and Denmark would be in the Euro, but their national parliaments prevented this”.

The governments concerned, and ipso facto their parliaments, were in favour of joining the euro but the step was rejected in popular referendums, by the Danes in respect of the Maastricht Treaty and by the Swedes by way of a referendum which would have allowed the Swedish government to avail of its right to adopt the euro. The failure of the referendum does not, however, remove the legal obligation, accepted when Sweden decided to join the EU, approved by way of referendum, to eventually adopt the euro!

On the broader point, if governments and peoples have accepted their obligations under the treaties, they have accepted the chance that their representatives will be on the losing side in votes. There is nothing national parliaments can do to prevent this. What they can do is give their negotiating representatives i.e. their government ministers the best chance of coming out on the winning side. This does not include tying their hands and behaving like the mouse that roared.

The crisis of democratic legitimacy stems in large measure from the cowardice of national politicians who try, for parochial political advantage, to pretend that there has, in fact, been no ceding of national decision-making powers when, in fact, opinion polls show that their citizens put more trust in the institutions of the EU than in them.


While facts are facts, these are unfortunately not actually facts.

Greek 30yr bond traded at 31 cents last Friday, it trades at 32 cents today.

Greek 10yr bond traded at 39 cents last Friday, it trades at 41 cents today.

Greek 5yr bond traded at 39 cents last Friday, it trades at 42 cents today.

The comment about banks “profiting” from this deal also misses the point – banks generally don’t mark to market their sovereign debt holdings, while this deal will actually crystalise that loss immediately. Banks have only recently even started “provisioning” for Greek debt holdings, and only 21% on that. They are not “profiting” from this.

We have to agree to differ on the substance of the deal. Indeed I am somewhat surprised at the Greek bond prices you quote based on yields of ~25%.

The yields on Two year Greek bonds were in excess of 75% before the deal. Now these bonds will pay 50% of nominal value!. Not profitable?

But if longer Greek bonds have not improved the only reason is that there is still doubt about whether the deal will go through.

I cannot agree that banks are not profiting by reason that there a loss from nominal value. Nominal value is not guaranteed to anybody ib the real world. Of course banks are losing on a nominal value basis but banks are profiting on a mark to market basis.

The fact that banks do not mark to market is a bank convention rather than a real world view.

So while I have little knowledge of the bond markets or pricing, I still remain of view that this deal (if it sticks) is very profitable for the holders of Greek bonds. And it is certainly a great deal more profitable for Greek bond holders than a messy Greek collapse/default.

@politico wing of political economy …

,,, from the Habermas link noted above …. Walter Hallstein (1st head of commission) warned against the Gaullist influence on power structures with early EEC (and they fired him eventually) … they are still there – who elected Sarkozy and Merkel to make decisions for all EU Citizens ………? they are taking european democracy backwards into a form of dictatorship ……..

‘… overdue reform will only be made possible by a transfer of some level of political remit from member states to the EU. However, Angela Merkel and Nicolas Sarkozy have agreed a compromise between German economic liberalism and French statism that flies in the face of these considerations.

If my impression is correct, they are seeking to replace the executive federalism implied in the Lisbon Treaty with an intergovernmental domination of the European Council that is contrary to the terms of the treaty – a regime that would allow for the projection of market imperatives onto national budgets without any specific democratic legitimation.

In so doing, heads of government are transforming the European project into its opposite: the first democratically legalised supranational community will be transformed into an effective arrangement that results in non-transparent post-democratic domination. The alternative to this outcome is the aggressive continuation of the drive for a democratically legalised EU. And with this in mind, it should be noted that a solidarity of citizens in Europe can only develop in the absence of a consolidation of social inequalities between rich and poor nations.

The European Union must guarantee what the fundamental law of the German Federal Republic describes (article 106, paragraph 2) as “the homogeneity of living conditions”. This “homogeneity” only refers to social conditions that are deemed to be fair in terms of the sharing of burdens and responsibilities: it does not imply an end to cultural difference. Political integration based on social well-being is necessary to protect the national plurality and cultural wealth of the “Old Europe” biotope from the increasing standardisation implied by globalisation.”


“The European Union must guarantee what the fundamental law of the German Federal Republic describes (article 106, paragraph 2) as “the homogeneity of living conditions”. This “homogeneity” only refers to social conditions that are deemed to be fair in terms of the sharing of burdens and responsibilities: ”

Well we in Ireland are certainly sharing the “burdens and responsibilities”
without the countervailing rights and entitlements.

Italy had to pay 6% at yesterday’s bond sale. It looks like senior intercounty hurling will be starting very soon in the eurozone. Enough of the junior C messing.

Interesting development – MF Global, a US broker cum investment bank looks like it’s gonna go to the wall very shortly. Supposedly holds $6bn in short term Eurozone debt (I don’t think that’s the reason they’r
e in trouble), so we could see some serious pressure on the short end next week. Don’t have he link to hand, but it was in the WSJ today if you google it.

@ Joseph

While nominally the loss will be 50 cents, they’re likely to receive very long date Greek govvies (with a guarantee) as part of the deal. Even if there’s a nominal 10-15 cent pick up to current market rates, a lot of guys don’t wanna have to old onto these probably restricted/untradable bonds for the next 10 years.


This battle ongoing since the Treaty of Rome was signed: [1] inter-statal of Gaullism which results in Franco-German domination based largely on their own, as distinct from broader European, national interests vs [2] A decision making Commission (favoured by the German Hallstein) grounded in the collective interests of the EU citizenry as a whole.

What we see in present crisis suggests that Hallstein (German CDU; and a sigantory to the Treaty of Rome) was right – and that it is getting worse e.g. the Merkozy dictatorship – which Habermas, Europe’s leading social & political theorist, rightfully sees as dangerous to EU democracy and very damaging to smaller members and EU citizens.

Stretching it a little – and following the Intellectual President elect Michael D. Higgins – a battle between ‘radical individualism’ [ nationalist MerKozy] vs a more Collectivist Cosmopolitan Democratic Europe, institutionalised in a much stronger Commision which leads with the Balls to place rights of citizens before the expropriating imperative of an abstract ‘market’.

Methinks Michael D. and Jurgen would substantively converse and understand each other. The FF_Trojan bagman wouldn’t have a clue … that said, we do have a ways to go ….

@Bond; seafoid

Surely we can make it to next Tuesday … (-;

There appear to be some confusion still:

“People sometimes confuse Parliament and government. Both have important powers, but each is responsible for different areas of our democracy.”

The statement:
“The governments concerned, and ipso facto their parliaments,”
is therefore not true. People living in parliamentary democracies & arguing about politics should know that.

FYI: Referenda in Sweden are only advisory & parliaments have in the past decided to go against the advise from a referendum. The parliament followed the advise regarding the euro.

Furthermore, the referendum did not fail. A referendum cannot fail. It did not give the result that some wanted but that is not a failure. People claiming that a referendum failed as it did not give the result they wanted simply do not understand democracy.

Treaties are laws that has to be respected and followed by governments? But other laws can & should, when convenient for EU institutions, be ignored by governments?

& what does this sentence mean:
“The crisis of democratic legitimacy stems in large measure from the cowardice of national politicians who try, for parochial political advantage, to pretend that there has, in fact, been no ceding of national decision-making powers when, in fact, opinion polls show that their citizens put more trust in the institutions of the EU than in them.”

I’m not sure how to disentangle the convoluted wording. What might be appropriate to say is that powers that have not been explicitly ceded to the EU still lies with the nations. Would the eurocrats like to clarify what powers has been ceded to them?

There are a couple of proposals for powers to be ceded to the EU, would I be correct in assuming that those powers still are with the nations?


re Whatever next

So Germany is €55 billion better off that she ‘knew about’ last February, because the accountants ‘forgot about’ cash collateral that had to been posted to cover derivitave losses-~ 2% of German GDP.

Its a bit difficult to miss €55 billion.
The other question to ask is if €55 billion was the cash posted against derivative, what in Gods name was the total derivitave bet.
Some casino!

“This is not a sum that the Swabian housewife hides in a biscuit tin and forgets,” he added. “To overlook such a sum is completely irresponsible.”

How about deliberately irresponsible?

The third question to ask is who are the counterparties and what were HRE/Depfa betting on?

Seriously embarrassing to find 55 billion when it reduces debt/gdp to 81 from 83. Looks a bit Greek to me.

Seems like the deal is in trouble already….

And Liam Halligan gives it two weeks….

Anyone have any idea why JCT let the Italian yield go over 6% on Friday. Seems strange that he didn’t stem the rise, or was it because they were forced to pay 6.06% on the new issue?

Oh dear, Mr. Soros is not happy. Still, what he fails to understand is that the only way this new ‘will to action’ among our great and dear leaders could fail to work is if they, and their bureaucrats, are knaves or fools… um, oh dear…

@ Hogan/Joseph

Depfa’s basic gig was to buy public sector/state-owned/government bonds or loans, usually very long term (out to 30 years), and often highly illiquid (toll road bonds for instance), and then swap the interest rate risk back to floating rate. They’d then fund this via commercial or ECB repo, or just short term funding. They’d make the credit spread on whatever they held. We call them “carry monkeys” in the biz. With all these interest rate swaps being structured so that they paid (high at the time) fixed rates to their counter parties, they’d all be heavily out of the money at this point (but the fixed rates on the underlying bond or loan would be very much in their favour against that). Most of their counter parties would be the big investment banks, they dealt with everyone.


Mr. McCarthy is back on this beat again and in fine form:

I expect though that he’s a tad disappointed that the Oireachtas inquiries amendment was defeated. It took particular genius by the Government to compel a majoirty of those voting to reject this. But these voters have also, unfortunately and implicitly, been compelled to confirm that, once a Dail elects a Taoiseach and TDs commit to honour these votes for the life of the Dail, the Dail could be suspended. A monthly roll-call would be sufficient (say when they were submitting their unvouched expenses).

Such is the nature of parliamentary democracy in Ireland. And we ownder why we’re in the mess we’re in.

However, with regard to the apparent ineptitude of the EU ‘powers-that-be’, I think Mr. Bond captured their dilemma very well on another thread when he spoke about banks, apparently, delivering the (riskless) free lunch of endless credit (while gorging themselves) and the ‘great unwashed’ – and their elected politicians – lapping it up without any thought that a big bill would be delivered eventually.

Well, the bill is being delivered and its size is scaring the bejaysus out of the allegedly prudent housekeepers and they’re hoping to be able to fudge and dissemble to keep the reality from the children – and to load it onto to less prudent households.


‘Anyone have any idea why JCT let the Italian yield go over 6% on Friday. …

He was v. peeved apparently that Mario intruded unitimely on his space with Mario’s comment that he would continue to buy up sovereign bonds …. and that Lorenzo is still sitting on his executive board …. so he let the Italian yield rise … there is absolutely no truth in the rumour that he is still p1ssed off with Silvio for not inviting him to any of those bunga-bungas.

The future of the EURO will be in Mario’s hands … er .. shortly. To do the biz he will have to defy Germany – I wish him luck. He will also have to FIRE Lorenzo.

What is missing from the article by Colm McCarthy is the overall context, notably the funding coming from the ECB and the wider balance of interests that Ireland has to consider.

Brendan Keenan deals with some of the broader issues.


There is also, of course, another side to the story of the Anglo-Irish bonds.


The other looming hurdle is the coming clash between the UK and the EZ in relation to future developments with regard to the euro i.e. the near certainty of increased economic and fiscal integration, whether this goes beyond the “essential scope and objectives” of the EU, and thus requiring a referendum in Ireland, remaining to be seen.

Will Hutton sums up the entirely predictable likely sequence of events in today’s Observer as far as the UK is concerned.


A gloomy prospect! The one possible avenue of escape is that the immediate use of the powers that the treaties already provide, which neither Germany, and even less so France, were hitherto willing to use, may see a return of confidence and a turn around in the economic situation.

@Paul Hunt

Ta for link. Sound analysis …

‘Some Irish economists believe that, without debt relief, Ireland can get out of the EU/IMF lending programme and back into the market on schedule. An early resumption of economic growth and a continuation of budgetary consolidation, with no unpleasant surprises, could indeed produce this happy result. But it is only reasonable to hope for the best if you also prepare for the worst. If the slow-motion muddle-through policy results in an environment unfavourable to Irish interests, let’s hope that someone is working on Plan B.’

No shortage of deluded economists ….. but pragmatists who can add, subtract, divide and multiply from left, right and centre see only UNSustainable …..

We need an Italian Coup in Frankfurt ……….. an Irish Plan_E would trigger it.


Thanks for the info re Depfa.

Regretably, not being familiar with these transactions, I am completely lost even after reading your explanation.

If you (or indeed any commentator) gets some time, perhaps you might elaborate a little more with an example.


I thought the Will Hutton article to be far fetched and essentially a rant on eurosceptics. It would appear also that he is not in touch with the real politic in Germany where he states
” A framework is emerging, which will underwrite the euro and, crucially, allow the European Central Bank to buy euro-denominated assets in trillions if need be. The likelihood is thus that the euro will pull through, which is certainly what the markets think, up some 15% from their lows just weeks ago.”

The markets suffered from irrational exuberance on Thursday, as they tend to from time to time and I would not judge the deal by their actions.

As Colm McCarthy pointed out..
The deal provides half of what is required and all three fronts ….and is therefore unlikely to succeed. I think it was Grumpy that pointed out recently that the bond markets behave differently to the equity barrow boys or spivs

@Joseph & Eoin
Ah, I thought it might be IRS – those vanilla, riskless liquidity management instruments. It’s all about liquidity, lads, nothing about gambling.

The one Eoin describes is (I believe and grateful for any corrections) like this:
Depfa loans 1 bn to toll road on 30 year terms at 6%
Depfa borrows that 1 bn at Eurobor+1% (5% at time of loan issue).
Depfa enters into a 30 year swap that provides Depfa with floating rate money of ECB +1.2% and pays fixed 5.8% to the other person.
As long as interest rates remain above a certain amount, Depfa are in the money.

I don’t believe that it is true that the fixed rates on the loan operate in their favour, since that is what they have sold, less a small carry. I also don’t believe that IRS hedging on bonds can be the source of their woes. It is true that the spike in euribor and the consequent declines of bustness will have greatly increased the costs of funding while at the same time not affecting the income from the floating rate swap (the income swap), it doesn’t explain the size of the hole.

They must have a large trading book. Since anyone who sells derivatives is clearly a master of the universe and since there is a limit to the amount of bonus, I mean, business that can be hedged (limited by the amount of loans the bank gives out), what better way to make yourself rich than to look at the direction of ECB rates in 2006/7 and see that they can only go up. The eurozone fundamentals are sound, commodity prices will mean an uptick in inflation (and so more interest rate rises) and anyway, the normal range for eurozone interest rates is higher than the current level.

Consider also the Greek model of funding using interest rate swaps. There was money out there available as cash up front to be paid back at a higher than normal interest rate. Instead of being called a loan or a bond, this was hidden in IRS.

Coming soon, oh heck, look, it arrived in 2007/8 at a now defunct bank near you…

@ Ceterisparibus

As rants go, it was one of the best! Hutton is a voice crying in the wilderness in the UK and his view of what the EZ17 is about to do is exaggerated. But his assessment of how the UK reaction is going to play out is spot on, in my opinion. It is to this that I made specific reference. I am not endorsing everything that he says.

@ Joseph/Hogan

Example, as Depfa and the market viewed it back in 2005: back in 2005, Depfa buys 30yr Greek government bond with fixed coupon of say 5%. 30yr swap rates (and probably 30yr ‘risk free’ Bunds) are say 4.5% at the time, implying a credit or liquidity spread of 0.5% for Greek 30yr bonds vs risk free Bunds or swap rates.

Depfa is a solid German bank that invests in government or public sector financial assets, and so funds itself short term via either interbank market or central bank liquidity at very cheap rates, probably very close to ‘risk free’.

Depfa considers Greek debt to be relatively risk free, and reckons it (Depfa) can borrow on the interbank market for the next 30 years at close to ‘risk free’ rates, so it wants to lock in that 0.5% credit and liquidity spread as it’s profit.

However, as the Greek bond is a long term fixed coupon, and as Depfa is borrowing at short term variable rates, there is obviously a very large interest rate mismatch between it’s assets and it’s liabilities. It enters into an interest rate swap with an investment bank whereby it will pay the IB a fixed rate of 4.5% (from above) and receive 3mth euribor, for the next 30 years.

Cash flows now look as follows for Depfa:
1. Receives 5% from Greek bond for 30 years
2. Pays 4.5% to IB for 30 years
3. Receive 3mth euribor from IB for 30 years
4. Pays 3mth euribor for interbank funding, or ECB base rate for central bank liquidity.

This equation pays out 50bps to Depfa for the next 30 years – assuming they can fund themselves at close to euribor/risk free rates for the entire 30 years, and provided Greek bonds don’t get defaulted on.

However, as interest rates fall, their IRS’s will go ‘out of the money’ and have a negative NPV, but their fixed rate bonds will also increase in value purely on the interest rate effect (ie as they pay a 5% coupon, vs say a now 3% risk free rate, people will pay well above par for this bond). So they will have to post collateral against the IRSs, but they should also receive additional collateral against their fixed rate assets when they repo them.

The problem that Depfa has is that the credit quality of their assets has deteriorated, at the same time as their own credit rating has deteriorated. So not only are they having to post more collateral to their counter parties for their derivatives, they are also receiving less funding from their repo counter parties. They are also suffering from the general liquidity problem in the market whereby sourcing funding at reference rates like euribor is becoming more and more difficult.

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