Sovereign Risk and Banking Crises

Here’s a practical example of the link between banking crisis and sovereign overload

Great-West Lifeco Inc., the Canadian
owner of Boston-based Putnam Investments, is the leading
candidate to acquire Irish Life & Permanent Plc.’s life
assurance unit, according to two people familiar with the
matter.
The Winnipeg, Manitoba-based company’s Irish unit, Canada
Life, bid in excess of 1 billion euros ($1.35 billion) for the
largest insurer of its kind in Ireland, said people, who
declined to be identified, as the process is private. Irish
Finance Ministry officials have identified Canada Life to enter
exclusive talks on the Irish Life unit, though the government
has yet to ratify this, they said.
Prime Minister Enda Kenny’s government is splitting up
Irish Life to lower the cost of bailing out the Dublin-based
group’s unprofitable bank unit. A joint bid from U.S. leveraged
buyout firms JC Flowers & Co. and Apollo Global Management LLC
and an offer from CVC Capital Partners Ltd. had also been
shortlisted for the life assurer, three people said on Aug. 19.
Irish Life is 99.5 percent state owned, after taxpayers put
2.7 billion euros into the company in July. The central bank
ordered the company to raise a total of 4 billion euros
following stress tests by the central bank in March.
Finance Ministry spokesman Eoin Dorgan and Irish Life
spokesman Ray Gordon declined to comment on the process. Marlene
Klassen, a spokeswoman for Canada’s second-largest life insurer,
said the company doesn’t comment on rumors or speculation.

International Bailout

Ireland has injected a total of 62 billion euros into its
banking system since it came close to collapse three years ago.
The country sought an international bailout last year, partly to
cover the mounting cost of the country’s bank rescue.
The government is seeking to attract overseas investors for
its financial sector. The state sold a combined 35 percent stake
in Bank of Ireland Plc, the country’s largest bank by assets,
last month to a group of investors including Fairfax Financial
Holdings Ltd, WL Ross & Co., and Fidelity Investments.

meanwhile, http://www.ft.com/intl/cms/s/0/78994200-15c2-11e1-8db8-00144feabdc0.html#axzz1eWkSWehX

“Germany saw one of its poorest debt sales on Wednesday in what was seen as a failed auction by many market participants amid fears the eurozone’s debt crisis is spreading all the way to Berlin.
Marc Ostwald, at Monument, said “I cannot recall a worse auction … If Germany can only manage this sort of participation, what hope for the rest. Yields are at completely the wrong level.”
Yes, quiet…

….contd

And locally ………..
The Neu Servants of the Conflated World first attack the weakest regions of the Zone of Citizenry, and as has happened throughout Irish history, the upper-echelon tribe gratefully take the intruder’s schilling in its own interests, and flogs the serfs in the interests of the intruder.

Some empirical evidence – from an economist? Nein – from a journalist of all people, but with FACTS from the most savvy of Irish Institutions – The Irish Revenue

There are fair ways of making the fiscal adjustment required – indeed there are fair and effective ways of getting the EU, European Central Bank (ECB) and International Monetary Fund (IMF) off our backs. The principle of the strategy is simple: that those of us most able to pay, do pay, and that those less able to do so are spared.

First off, cuts in public sector pay. More than half of all 431,827 public servants are paid incomes of less than €40,000. They should experience no cuts. About 140,000 are paid between €40,000 and €80,000. They are paid probably €50,000 on average. Were they to take a 10 per cent cut in pay, the savings would be around €0.7 billion. There are more than 40,000 public servants earning €80,000 and over. Were they, on average, to take a pay cut of one-third, the saving would be about €1.3 billion. (This could be gradated, so that those in the €80,000 to €100,000 bracket would take a cut of perhaps 20 per cent, with those on higher levels taking a higher cut.) These calculations are based on data supplied in answer to a Dáil question on January 18th last.

Data compiled by the Revenue Commissioners shows individuals and couples who file their tax returns jointly and who are paid €80,000 and more, comprise just 9 per cent of all income tax payers (193,495 out of 2,224,798 income tax payers) and are paid 33 per cent of all income paid to everyone in the State. These 193,495 individuals and couples are paid on average €143,390 and they pay just 33 per cent of this on average in income tax and the Universal Social Charge (USC). If this group were to pay 10 percentage points more of their income in tax, (ie 43 per cent, including the USC), the additional revenue to the State would be €2.7 billion.

If, in addition to this, those taxpayers earning more than €140,000 – there are 49,195 of these, and they are paid €13 billion in total, an average of €268,199 each – were required to pay a total of 52 per cent of their income in income tax, there would be a further yield of €0.8 billion.

Also, a household charge would yield €1 billion. Then, with some of the projected cuts to yield €1 billion, the total adjustment would be €7.5 billion.

http://www.irishtimes.com/newspaper/opinion/2011/1123/1224307997208.html

Then we could use certain surgical techniques to remove the Tentacles and reclaim, however dodgy and imperfect, what used to be known as a fledgling democracy. It has never been a Republic in any substantive sense – and if present policy is maintained – it probably never will be.

I expect there will be a post of President Barroso’s feeble effort:
http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/820&format=HTML&aged=0&language=EN&guiLanguage=en

@ D O’D

Those cuts would throw more onto the arrears group of one out of five mortgage holders and the ‘savings’ would turn into more ‘losses’ by the banks as more go into default. Guess who would have to put more into the banks then, taxpayers. Or perhaps another bailout similar to Hungary’s over the past few days. This is more debt for taxpayers and more austerity leading to the need for further bailouts.

So, the saving is a lot less than €1.3 billion in that scenario.

This whole austerity business is useless anyway. It will drive us even quicker into more bailouts and eventual default , not a bad thing compared to the mess of the current disastrous economic model which is getting messier both in Ireland and across the EMU by the minute.

Anyone out there get the feeling that the failed bond auction by Germany is a real game changer.
10 year now out to 2.12% at 98.95… Someone losing money today.

Where is Eoin Bond when you need him?

http://www.bbc.co.uk/news/business-15851963

@ceteris ahura

The Big BIG Black Hole in Deutsche Banking System cannot remain ‘hidden’ forever ………… by the BundesBanke

DeutscheBanke a potential catastrophic risk to Deutsche Sovereign ….

… as I’ve noted before, from a vulgar serf_observer perspective, Germany needs a functioning ECB as much as the rest of the EZ – once this is acknowledged – the vulture shooting season will open and the pheasants and the grouse will multiply.

The Economist sees a credit crunch looming in the EU:
http://www.economist.com/blogs/freeexchange/2011/11/euro-crisis-16

@ DoD

The name of the game is peasant shooting. 2 barrels of austerity is too good for them.

@Mr. Bond,

Even in a slow motion car crash the car has to hit the wall sometime…

Hours..days…before everything seizes up? The banks are lining up their emergency teams and the vultures are circling..

@Cet. Par.,

The two could be linked. Various reasons being advanced, but one that is passing plausible is that Germany might have to confront finally the state of its crappy banks.

@ CP via PH

as Paul Hunt suggests, i think its just a bit of everything. You have a generally crappy economy (this mornings EZ PMI’s, China’s PMI, US Q3 GDP), you have a worried central banking fraternity (Fed dovish last night, BoE dovish this morning, ECB probably contemplating an emergency rate cut), you have lots of idle chatter about austerity but very little follow through (SuperCommittee fail), you have systemic deleveraging now starting to take place (new bank capital rules, Austrian CB telling its banks to stop lending in E.Europe), and now you have people realising that in either the Eurobond or Italy-leaves-the-Eurozone situations, Germany will ultimately be the big loser (it either guarantees all our debts, or its bank take a well deserved bath).

@ Cet Par / BEB / PH,

There seems to be a wide array of explanations floating about. It’s a bit surprising that the flight to safety within the euro didn’t provide enough demand. I can see why a 2% coupon on 10yr isn’t attractive, but equally I thought there should be enough blind panic money to buy up this debt.

Doing the google to find answers, I came across this article. http://www.reuters.com/article/2011/11/23/us-eurozone-idUSTRE7AM0VR20111123
No revelations per se, but reading it really gives a good sense of the current chaos.

Guardian profile of Angela Merkel.

Includes the following:

“There’s an ideological gulf, too, on the key question of economics. It doesn’t help, concedes a German banker in Frankfurt who would rather not be identified, that few Germans, hardly anyone in the German government, and certainly none of Merkel’s economic advisers “have ever read Keynes, or even begin to get market economics. To some extent, they’re entitled not to, of course: they have the most successful economy in Europe. The trouble is, this thing is a hell of a lot bigger than Germany.”

“So it remains the Bundesbank’s, Merkel’s and Germany’s deeply held conviction that discipline and austerity are the only ways out of the current crisis, and that any more generous solutions – collective Eurobonds, for example, or allowing the European Central Bank to act as a lender of last resort, both ideas touted in London and several other capitals – will only encourage more profligacy in Europe’s irresponsible southern periphery.”

http://www.guardian.co.uk/world/2011/nov/22/is-angela-merkel-europes-problem

US markets closed for the rest of this week and could be some stuff hitting the fan while it is? I wonder if we will look back on this week and label it ‘Black Thanksgiving’?

FYI

Kevin Cardiff rejected by one vote …

What appears to be happening is that “they” appear to be dismantling what is left of Europe’s shrunken post Maastricht productive economy to feed the States /Dollar junkies ……… and its working!!!!!

The Euros 420 billion Euro base is just too small to be stable & contrasts dramatically against the now gigantic 15 trillion Dollar US Base.
Europe is a lie – we are a colony of the FED / BoE
If you are going to Build a Pyramid you better make sure the Base is large enough.

@ceteris

Then she will break.

@DOD
Humiliating for Cardiff. Should have withdrawn after losing all that money ( on paper).

Wouldn’t be so sure she will “break”. Not after that auction today and the Bild headline.

She might break Nicky’s heart by leaving him in charge of the Euro rump. You can be sure that Weidmann knows where the exits are.

I see Mickey Noonan is thinking of wiping out the subs in that pillar of Irish banking BOI.
Extraordinary stuff.

just read in The Economist that the German bond sale failed today and the Bundesbank had to buy loads.

So, those this mean that the ECB cannot buy bonds to solve this crisis but the individual central banks can?

Can the Irish, Italian etc, central banks buy all the government bonds they like and so the ECB becomes LOLR without having to break any rules (well the ones they haven’t broken already)?

Der Spiegel International

‘A Complete Disaster’
Sovereign Bond Auction Fizzles in Germany

Investors seem to have lost their taste for Germany’s once much sought-after government bonds. At an auction on Wednesday of the country’s 10-year bonds, one-third went unsold according to the German Finance Agency, which manages the nation’s debts. The federal government had initially intended to sell bond issues worth some €6 billion (around $8 billion), but managed to garner just €3.89 billion.

The leftover issuing volume of some €2.35 billion will now be offered on the so-called secondary market, where bonds already in the process of maturing are sold. Disquiet on the markets likely led to the drop in demand, the German Finance Agency said Wednesday. “The result of today’s auction reflects the exceedingly nervous market environment,” a spokesman said, adding that Germany still does not face a financial shortfall.

Analysts, on the other hand, weren’t quite as relaxed about the situation. “This is a complete disaster,” said Marc Ostwald, an analyst at Monument Strategies. Another industry expert, Ralf Umlauf from Helaba, a government bank in the states of Hesse and Thuringia, called the auction a “vote of no confidence against the entire euro zone.” The event should be seen as a warning signal that shouldn’t be minimized, the analyst said. “A change in sentiment has taken place,” Umlauf told SPIEGEL ONLINE. In particular, foreign investors have become distrustful, he added. “They associate the investment in sovereign bonds with the risk of the euro zone,” he said.

http://www.spiegel.de/international/germany/0,1518,799550,00.html#ref=nlint

@ALL

Zero hedge is reporting that the BUBU bought up some of today’s German bond issue.

Did they ‘print’ money to do this.
Could it be true.
Is this our money they are printing to buy their own bonds.

The sale “prompted concerns the debt crisis was even beginning to threaten Berlin on Wednesday, with the Bundesbank forced to buy large amounts of the bonds to ensure the auction did not fail. The low yields offered on the 10-year paper deterred investors from the auction, especially because of growing concerns over the cost to Germany of the escalating crisis.” So what was otherwise formerly sacrosanct has just become reviled: welcome to fiat’s greatest hits. The resulting 10 Year yield chart should surprise nobody

@Shaun Byrne

+1
http://www.economist.com/blogs/freeexchange/2011/11/euro-crisis-16?fsrc=scn%2Ftw%2Fte%2Fbl%2Fthescrewtightens

I would love to get some answers to your question re BUBU buying bonds.
So why did Ireland go into a Troika program?
Why didn’t we just ask the central banks to buy Irish bonds —with good old euros—and offer them on the secondary market–Like a 1977 Datsun–The one that used to go on fire if a tailgater hit the rear.

@all

Does anyone think the political will still exists to save the euro (retaining all of its current members)?

German public opinion seems set against the idea of Germany continuing to “bail out” the periphery and Merkel is apparently determined to hold the line on this. As Eoin Bond points out: “in either the Eurobond or Italy-leaves-the-Eurozone situations, Germany will ultimately be the big loser (it either guarantees all our debts, or its bank take a well deserved bath)”. So in the absence of ECB becoming a LOLR – and without further defaults – we’re left with severe austerity in the periphery for the foreseeable future. How much of this austerity can/will people put up with? The technocratic governments in Italy and Greece will presumably have to seek democratic legitimacy at some point. Also, if Germany wants treaty changes to prevent the next crisis, that will mean referendums …

And what about all the Eurozone debt that needs to be “rolled over” next year? (as pointed out by the first commenter “transitionman” over on David McWilliams’ site: http://www.davidmcwilliams.ie/2011/11/23/this-cannot-go-on-and-it-wont-change-is-coming?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=this-cannot-go-on-and-it-wont-change-is-coming.) Where will the funding for this come from?

Should we start stocking up on gold bullion and canned goods?!

Makker hasn’t banked on the age old solution to all failed economies = war
First US backed strike on Syria
Then on Iran
And then you have the oil price shock that tips the west into mayhem
Welcome to the next 10 years – as brought to you by Lloyd Blankfein and the other guys like him

@Bond
They are targeting rates mate.

Ambrose is in Dublin and seems to have interviewed Mickey Noonan…

“Mr Noonan said Ireland is sheltered from the storm blowing through the eurozone since it does not need market funding until 2013, but the crisis cannot be allowed to drag on. “Some way will have to be found to create a firewall. The role of the ECB is a matter of debate. There may be legal difficulties in it operating in the same way as the Federal Reserve.Whether the ECB has a role in working with the IMF or EFSF (bail-out fund) is under discussion,” he said.
Ireland has no “detailed contingency plans” for a eurozone break-up. “Obviously, we have thought about it, but it’s a very remote possibility,” he said.”

A very remote possibility? What planet is he on.
Just reading an article about banks preparing for a euro breakup.

@BEB

Thanks for that explanation. Not 100% convinced but cannot argue.

Anyway the fact that Germany was not able to offload €6billion in bonds is more than just financial. I think governments including US, UK, EZ etc are telling their ‘national’ banks to make a point. If you have spare funds, we want them at home, not reducing funding costs for Germany.
The ‘Big Bazooka’ is not the ECB , it is nationalism and self defence.
The point will not be lost on Germany.
But I suspect they may still choose breakup.

@Ceteris

“Obviously, we have thought about it, but it’s a very remote possibility,” he said.”

I wonder if that is code for “we have thought very deeply about it and have been taking steps in the last five months to prepare for that eventuality”.

@Tom McDermot@all

“Does anyone think the political will still exists to save the euro (retaining all of its current members)?”

What is worrying me more is not the whether the “political will” exists to save the Euro (I don´t think it does) but whether the political ABILITY exists to save the European Union.

IMHO we can always go back to the “drawing board” and establish some form of exchange range mechanism in the interim provided the EU stays democratic and intact.

@Joseph
Thats not spare funds , CBs don’t need no spare funds – thats High powered Money Baby – all Central banks can do what the Bundesbank just did.
Is this not a form of excess reserves Bond ?
If the Irish CB did this in 2009 we would be able to keep / target rates interest rates at the Post office 3 year…………………

http://www.youtube.com/watch?v=VqomZQMZQCQ

Chillax about the old German Bunds. Why would you buy German bunds anyway? There are much higher returns on peripheral bonds that the Germans are guaranteeing and much safer returns on US Treasuries.
Simple as..

@ CP

Noonan’s job is to prevent the run on the banks by the plain people that has been staved off for 3 years plus now. I wouldn’t expect him to say ‘yes, and it’s going to collapse next Monday”.

@ Dork

Germany is not getting physical cash to spend from this operation, that’s why it’s not monetization. They can surpress yields doing this, but eventually they’ll run out of cash, that’s the difference.

@Seafoid/Livonian

He may be trying to prevent a run on deposits but his answer is not credible. If no preparations have been made by the DoF then we are seeing a repeat of reckless behaviour leading to the guarantee, when such momentous decisions had to be made in the middle of the night.
Osborne has publicly stated that they have preparations in place and you can be sure that Herr Weidmann has a team working on a possible German exit.

If Mickey Noonan believes a euro breakup is remote then he should read the Guardian where even Barosso is admitting it may go….
“Global financial markets prepared for the euro’s endgame after the sovereign debt crisis spread to Germany, the “stability anchor” of the single currency, and investors shunned its government bonds.

Europe’s biggest economy suffered what analysts called a “complete and utter disaster” as it managed to sell only two-thirds of its 10-year bonds at auction. “It’s a vote of no confidence in the entire eurozone,” one said.

Stock markets slumped, the euro fell to a recent low and France came under renewed pressure after it emerged it could be forced by Belgium to pump more emergency aid into rescued lender Dexia. Both countries were forced to deny reports that a €90bn restructuring plan for Dexia was being renegotiated.

Fears of a new credit crunch were heightened by reported problems at Belgian lender KBC and a €10bn (£8.6bn) requirement for fresh capital at Germany’s bigger banks.

Paris was again warned – by the Fitch agency – that the country could soon lose its triple A credit rating if the debt crisis and economic downturn deepened. Yields on key eurozone sovereign bonds, including Germany’s, rose in tandem, with Italy’s back above 7% in late afternoon trading.

Amid widespread investor anxiety about the future, the European commission president, José Manuel Barroso, admitted that it would be impossible to save the euro unless eurozone countries agreed to strict controls from Brussels and the European Central Bank in their tax-and-spend policies.”

KBC?

@D O’D
Your proposal for cutting the cost of the PS is in line with what happens in normal countries. Now Ireland with its age old history and culture approaches these things with a very finely tuned sense of fairness and propriety. The people making the decisions valuing fairness above all else and not wishing to be accused of discrimination will reduce the income of every PS by a flat fixed amount.

I can hear the voice of my dear departed mother in response to the German bond sale failure today “If this can happen to the Germans sure there is no hope for the rest of us. Tis past the power of novenas now Mickey bi.” I hope this is a blip, an aberration and we will be back to normal by Monday. To me it appears that the market is anticipating a failure of more than one German bank and has doubts about the German Governments ability to bail them out. Is there a combination of two German banks with liabilities as large proportionally as Anglo was in Ireland. This is a game changer in the truest sense of the word.

On the subject of German bonds here is a CNBC chart on the 16 groups which buy US debt and how much they hold. The Fed is top with over 5tril over 30%.
http://www.cnbc.com/id/29880401/The_Biggest_Holders_of_US_Government_Debt
The Euro is not the global reserve currency so it maybe that Europe cannot get away with that amount of soveirgn debt on the ECBs balance sheet – currently it holds 20% of PIIGS debt.
The following is now needed.
1. A EU wide bank restructuting mechanism. Major global banks dealing across borders are not easily closed down. This requires much thought and co-operation from the G20. Banks face reality and start writing down debts which are never going to be repaid, including mortage, failed companies debts and some soverign debts. If they are broke they are broke hence restructuring mechanism.
2. The EU sets up a fiscal union with common treasury. Having the power to tax would is key to issuing bonds and that is why fiscal union is needed for these bonds to work.
3. The ECB eases monetary policy by buying up 20% of new bonds and lowering interest rates.

If things go the other way around as some comentators suggest, it is only delaying the point 1, which will happen anyway. Then after point 1 happens there will be evn less instruments left.

Foaming about burning senior bondholders can whip up a lot of outrage but governments depend on these private investors for funding.

Germany has a low budget deficit but a relatively high debt.

There are not too many safe havens left and while the likes of RTE’s Joe Duffy may protest that they have taken a 30% drop in earnings, the adjusted outgoings for many countries include bubble gains.

Once again it’s clear that even though Ireland hasn’t surrendered all its sovereignty, it’s the foreign travails that elicit most excitement.

The Government has opted for the easier option of stealth taxes and has there ever been a bust, panic, depression or recession where the trade unions have been so silent, in common with other insiders?

It’s as if they’re all scared that their status quo applecart may be upended.

Big losses by bondholders would put the kaibosh on private sector pension schemes. Who with a personal sovereign guarantee cares about such things?

For Germany I think the only answer is a technocratic government led by Paul Krugman.

Does anyone believe politicians will be able to find a solution to the present crisis?

Take the extraordinary case of Kevin Cardiff’s proposed appointment to the European Court of Auditors:

Proinsias De Rossa MEP has come out in support of his nomination?

Its possible the government http://www.independent.ie/national-news/will-kevin-cardiff-get-top-euro276k-eu-job-by-backdoor-2944559.html Its possible his nomination can be rammed through by the government through the back door in spite of a claim made by Cardiff he would withdraw his nomination if the vote went against him.

Cardiff was there on the day of the guarantee when a phone call to Christine Lagarde, the French Finance minister of the time, could have drummed up support against Ireland taking the banks onto its sovereign shoulder. Alistair Darling, British Chancellor of the Exchequer should have been consulted given the exposure of British banks to the decision. Jean Claude Trichet, head of the ECB, was left off the hook.

This was more an EMU problem of the ECB than an Irish one though the outfall from this fell disproportionately on our shoulders. We were later humiliated to discover the EMU solution for us was made even more difficult because of our guarantee.

We were left with the spectacle of our Finance Lenihan reporting losses in our banks rising by the tens of billions by the month.

Cardiff I presume lent his support to NAMA predicated on Irish growth rates returning to 3% in the short term, perhaps the commercial and residential property base upon which this is predicated will have the endurance of the Egyptian pyramids to benefit in kind from return to these growth levels.

Cardiff of course was ‘the buck stops here’ when the “3.6 bn” was double counted and oversaw the Department of Finance when under critique from our weak inquiries into the banking sector showed glaring weakness in the number of professional economists assisting with development of macro economic policy, a weakness I believe being currently redressed in changes being made within the ESRI.

No chance Proinsias De Rossa MEP can resign under consideration of his support for Cardiff under the above scenario?

I’m sure the majority of people who fail their driving test are great people as I’m sure Kevin Cardiff is.

But I wouldn’t give any of them the freedom of the roads if they failed their driving test!

The fumbling, contradictory and baffling mess of the Cardiff appointment debacle is but a glimpse of the mess at the larger macro economic level in the EMU and in the Dåil. There again in a world where black is white, we are an example of European success in dealing with our currency crisis. Has someone been switching around the road signs again:)

Mohamed el Erian – recapitalise Europe’s banks

http://blogs.ft.com/the-a-list/2011/11/24/europes-banks-must-now-be-forced-to-recapitalise/#axzz1ecH1Y3kc

And this is from a few days ago about how fragile the Irish situation is.
Includes a vignette by Colm McCarthy. Any small country joining the Euro
without centralised supervision and resolution is nuts.

http://www.ft.com/cms/s/0/549370b0-137e-11e1-9562-00144feabdc0.html#ixzz1ecBtrDQw

We may need to open up a new ELA thread – “market sources” say Dexia is now using ELA facility at Belgian Central Bank…

@ All

Correction. I omitted to mention the not unimportant point that all 27 member states have first to ratify the amendment to Article 136 – introduced on German insistence – to enable that country to ratify the ESM.

For the aficionados, the ECB commentary from July on the ESM is worth a read, especially page 9 containing an extract from the IMF Guidelines which rather undermines the case oftem made that it insists on PSI.

http://www.reuters.com/article/2011/11/23/eurozone-esm-idUSB5E7MG01D20111123

Cartoon of the Day: Hopeless but not serious (h/t baseline scenario

http://www.plsteiner.com/blog/norquist/

Europe is not the USA! Yet both appear to be in bondage to the MatrixsQuid. The Dodgy Derivatives Rule the World OK. How does one untangle a derivative? One integrates it. Ahhh EuroBonds and Bank Resolution ….

@ Dork

assuming this isn’t a one off situation (and there is a lot of odd details in the market this week), i agree, Bunds should see a pretty significant sell off in the coming weeks.

@Michael Hennigan

Its a little unfair to pick out Joe Duffy but the point is correct. Salaries should return to pre-bubble differentials i.e. if in 1997 the ‘talent’ in RTE was getting 3 times average RTE earnings they should return to that ratio ( is it about 10-20 times now?) .

Likewise if the top civil servants are now getting say 8 times C.O. entry salary, instead of maybe 4 times in 1997 , they should return to that. When the great were paid peanuts they were competent, now they are paid in gold bars they look more and more like monkeys.

Likewise the pay of a bank CEO should return to the same ratio it had with a teller back before BertieWorld.

Talk about flat % cuts in wage rates are meaningless when an incompetent elite has been paying itself obscene money for the last 15 years.

@ Joseph

people are freaking out so much at the moment that all sorts of misunderstood events are being reported, both under- and over- reported.

@ All

Moodys already had them at junk, but another nail in the coffin.

FITCH DOWNGRADES PORTUGAL TO ‘BB+’ FROM ‘BBB-‘; OUTLOOK NEGATIVE

Fitch Ratings-London-24 November 2011: Fitch Ratings has downgraded Portugal’s Long term foreign and local currency Issuer Default Ratings (IDR) to ‘BB+’ from ‘BBB-‘ and Short-term IDR to ‘B’ from ‘F3’. The Rating Watch Negative (RWN) on the long-and short-term ratings has been removed. The Outlook is Negative. The agency has also affirmed its Country Ceiling at ‘AAA’. Fitch has also downgraded Portugal’s senior unsecured debt to ‘BB+’ and commercial paper to ‘B’, and removed both from RWN.

@ All

On the theme of “It’s the politics, stupid”, which will inevitably dominate from now on, this piece from today’s FT is of great interest.

http://www.ft.com/intl/cms/s/0/c4325d02-15de-11e1-8db8-00144feabdc0.html#axzz1ecTEdCY2

It is part of the accepted wisdom to say that Europe depends on the functioning of the Franco-German motor but little attention is given to the basic principle underpinning its design viz. a partnership between equals. This was always something of a fiction but the price that Germany was willing to pay for political stability in Europe.

Unfortunately, with Schroeder came a change of direction, eaten bread (German reunification) being soon forgotten. This was epitomised both in terms of principle and reality by the insistence of Germany on changing to a system of voting weights based on population which, despite initial resistance by Chirac, was eventually conceded and will come into force, with some emergency brakes, in 2014. The other larger countries that expected to benefit have discovered that they bought a pig in a poke, notably the UK as it is now likely to be in a minority position on a variety of issues, the proposed changes in the financial sector being a particular concern.

What the politicians of every hue, and in most EU countries, appear to be forgetting is that qualified majority voting is intended not to overrule the vital interests of any country – and the procedural rules are in place under the Community method to avoid this – but to prevent the vetoing under unanimity rules of decisions in the general interest. It has taken the experience of the EFSF and, indeed, the ESM, to remind them.

@ Colm Brazel

I had not read your comment when I posted the above. To misquote Churchill, the only thing worse than QMV is unanimity. What matters are the rules and context within which decisions are taken by QMV. Nobody speaks of annexation by the IMF – despite criticisms – for this reason.The IMF is, in fact, the example that the larger EZ member countries are attempting to follow and one can understand the reasoning behind it. Indeed, there is a formal agreement that, once the membership of the EZ reaches 18, the voting rules in respect of the ECB will also change on similar lines. Germany and the other triple A countries have, according to reports, become less enthusiastic, as the realisation has dawned that they would be in a permanent minority on the basic policy issue of the extent of the role of the ECB.

We were told to save Anglo to avoid a Lehman’s type event in Europe.

Is it fair to say that three years later we now have a full blown Lehmans event in Europe with frozen interbank markets and freezing sovereign debt markets?

The tragedy of this is that we signed up to the rescue plan devised by these geniuses. At least we made our banks take a proper bath earlier than the others.

The last line in the sand is the giverning law of our sovereign bonds. The bondholders are trying to screw the Greeks on that at the moment by making the new reduced bonds subject to English law. My view is we should opt for a messy default rather than accept such a fate of hopeless subjugation.

On the plus side, apart form tlla the warnings to the contrary, the world didn’t stop turning when Roosevelt abandoned the gold standard. People will keep on working with whatever solution is put in place be it EU wide bank resolution, sovereign default, eurobonds, ECB intervention or whatever you are having yourself. The real danger is if no solution is adopted. Presumably the DoF are ready on the domestic front.

@ PR

few comments out in the last hour saying that they’re sticking with the October deal for Dexia. Belgium smacked down quick sharp.

@Zhou

‘My view is we should opt for a messy default rather than accept such a fate of hopeless subjugation.

NO. If and quite probably when Capital_D is unavoidable, which I hope can be avoided, we do it Instantaneously, Ruthlessly, and Pristine Cleanly.

@ Zhou

Kevin Cardiff

“So I think we at least need to reflect on the possibility that the decisions made created some time and some space for further work and also protected our citizens, and indeed citizens of other parts of Europe, from the contagion effects that would have happened from an immediate catastrophe.”

That was the line. But the sickness has reached the core regardless.

“Asked what lessons he had learned from the financial turmoil, Mr Cardiff said there was a case to act more quickly in the face of crisis.”

Well said

Sovereign Risk and Banking Crises.

Are these problems?
Looks to me like the biggest issue for the Government, Prionsias DeRossa, Noonan etc is making sure that Mr Cardiff is landed with the ‘doodle’ job at 160,000PA plus plus plus expenses plus plus plus pension.

Why is this a big issue for government.
He should never have been put forward. He was voted out.
Why is protecting Croke Park a big issue. How about the 1.5million workers and the 450,000 that never got a smell of Croke Park.

What is the matter with these people.
For whose benefit is this country being ‘run’ for anyway?

@Bond Eoin Bond

Not surprised if Belgium gets a slap – loose talk costs AAA status and all that. So Dexia is just getting short term funding then until all parties actually deliver on the deal I guess. Although as I think you said, not sure why they would be getting any from Spain (assuming they actually are).

What odds are currently being given by the Bond dealing world on France losing that AAA status by the end of this month?

@All

Is the sub-headline on ft dot com (Brussels sues Germany over VW ‘Golden Share’) a case of the Empire striking back? Can we expect Germany to get picked on a bit more by Brussels over the coming weeks (assuming the Euro lasts that long)?

@Edward v2.0

“Changing one’s appearance so that the local audience will find you more trustworthy is a level of dedication you normally only see in war correspondents.”

Surely you mean ‘war criminals’? As we know from current investigations by the UK’s Inspector Knacker of the Yard, journalists maintain nothing but the highest standard of ethics… OK, OK, so some of them think ‘Ethics’ is a county in southern England granted…..

@Michael Hennigan

One of the points of using a pseudonym is the hope people will play the ball and not the man….

The eurozone is in the middle of a car crash. If the EU isn’t sending an ambulance we had better start patching ourselves up.

It is a great pity that you choose to spew venom at me rather than address the reality staring you in the face. The issue about the jurisdiction of bonds is that it removes the most important mechanism for our country taking its fate into its own hands. To give up such a mechanism would be utter madness in light of the failure of the EU to deal with the situation over the last three years.

Your assumption that unilateral default will necessarily lead to the worst outcome for Ireland is very questionable. One of the major ills we were seeking to avoid by not allowing our banks to default, i.e., contagion to the core, now appears to have come to pass.

You are like a broken record asking what everybody does for a living. It has some validity, as everyone should question their own prejudices and the costs for others, but it is not an answer for everything. For what it’s worth, and in the hope it might cure your obsession, I confirm that I work in the private sector, in a business that has seen substantial redundancies and I have seen substantial pay-cuts. The nature of the business is that it is dependent on the health of the overall economy. If the business folds I could find it difficult to find a job as many in my line of work who are unemployed are finding it difficult.

UK 10 year yields lower than German

http://www.ft.com/intl/cms/s/0/78994200-15c2-11e1-8db8-00144feabdc0.html#axzz1eLRuKyKU

Getting young people on the dole to work for nothing is obviously good for market morale.

I can’t believe Ollie Renn just said that the contagion process “has now spread and touched the euro’s hard core area”. He’s obviously been taking a walk on the wild side, past Hamburg’s Reeperbahn.

@Tim@Michael

+1

Hopefully we can just go back to to 1998 and not forward to 1932.

@Ceteris (re Mickey and Ambrose)

Maybe I am desperately trying to be optimistic and I am am most certainly not an apoogist for Fine Gaels/Labour however we must realise they have a democratic mandate for the next thre or four years.

However it recently struck me that Enda Kenny and Michael Noonan have been in politics long enough to witness the only two currency “divorces” in modern Irish history. The first was in 1978/79 when we left sterling (after the IMF entereed the UK ) and 1998/99 when we left the Puint. For most of their careers they also did not earn “stratospheric” salaries compared to every other worker.

I also found the appointment of a citizen of Sweden (which is not in the Euro and knows a lot about Banking crises) as deputy Governor of The Irish Central Bank five months ago as a very interesting development together wit the the fact that Ireland has apparently “drawn down” a lot of the money allocated for borrowing during the bailout period to be interesting developments.

Other EU stakeholders may be talking about “Fire power” and “big Bazookas” but I hope a small country like Ireland realises that the only economic thing we can do until this chaos is solved is make sure we have enough “turf” and “spuds” (even if they are “borrowed” in the shed and maintain neutral diplomatic relations with all sides.

In any event I think I will hold on to my solitary Transnistrian Ruble. 🙂

Der Spiegel International Today

The Return of ‘Madame Non’: Why Merkel Remains Opposed to Euro Bonds

There were some who thought that Angela Merkel might soon soften her stance on euro bonds. But on Thursday, the German chancellor once again emphasized her opposition. Why, though, is Berlin so adamantly opposed to issuing joint euro-zone debt? SPIEGEL ONLINE offers an overview.

http://www.spiegel.de/international/europe/0,1518,799803,00.html#ref=nlint

@DOD
Why, because it is going to cost Germany an enormous amount in extra interest…as the lady pointed out today.

The Plot Thickens

Who’s afraid of Germany? (4) Merkel’s Nein is wrecking the EU
24 November 2011 Die Tageszeitung Berlin

Alone against all, the Chancellor says ‘No’ to a supporting mandate for the ECB and ‘No’ to common euro bonds. In Germany too, more and more experts are warning that her firm stance on discipline and rules is plunging the eurozone into chaos.

http://www.presseurop.eu/en/content/article/1210121-merkel-s-nein-wrecking-eu

@all
meanwhile, back at the ranch, Irish are giving the rest of the European Parliament a tutorial on how to really ………….. [fill in the blanks]

Finally

Kafka_Reloaded by The Austrians

In the Czech Republic, Respekt fears that –

… countries like Hungary, Romania, Serbia and Ukraine will be forced to contend with a sudden credit crunch, at least with regard to Austrian banks, who will be reluctant to lend.

http://www.presseurop.eu/en/content/news-brief-cover/1209671-credit-crunch-comes-east

Blind Biddy is heading for StalinGrad …. hope she gets there in time … chaos theory is unpredictable at times such as these …

@Gavin
Its encouraging to have people following up with the commission on the new bank resoulution framework. The reason that they are delaying is probably the weakness of large global European banks and to protect them form any side effects. As Simon Johnson points out for global banks with business in all kinds of countries the chioces are really bankruptcy like Lehmans or a full tax-payer bailout like AIG. He suggests breaking them up into smaller entities. Or a G20 agreement on how asstes and liabilties will be treated in their countries. Thinking big a developed world bank resoultion mechanism for global banks is needed.
http://mobile.bloomberg.com/news/2011-10-10/too-big-to-fail-not-fixed-despite-dodd-frank-commentary-by-simon-johnson
On the other hand the FDIC released a paper this year on how Lehmans could have been restructured well if the new Dodd-Frank legislation was in place then.
Perhaps some part of the commssisions bank resolution framework might require a treaty change. If so it should be bundled together with the treaty changes Merkel and Sarkosy are now recommending for budget controls early next year.

@Colm
Those banks are not releasing their exposure to CDS and if they give any info its only their nett positions. The info is not out their as the OTC market is not properly regulated. Nett positions are not accurate in the case of the counter-party not being able to repay their CDS. Which in the case of a financial crisis is quite possible. CDS is big news which receives very little mainstream coverage. It was the reason AIG went bankrupt as it had to pay out hundreds of billions in insurance to Lehmans bondholders. Geithner is vetoing the pay-out of CDS in europe and at the same time not regulating it in the US where more and more CDS are bieng sold.
http://www.bloomberg.com/news/2011-11-16/jpmorgan-joins-goldman-keeping-investors-in-dark-on-italy-derivatives-risk.html

@ zhou_enlai

My reaction was triggered by the victim narrative of ‘subjugation’ coupled with the nonsense about a ‘messy default.’

Of course people’s views reflect their own experiences, values etc.

Lawyers for example can find 101 or more reasons that are valid to them to object to change. Direct self interest may not be seen as a primary one.

Why for example is the issue of private pensions such a non-issue in the public sphere?

Would it have anything to do with the fact that they and policymakers have an excellent system themselves?

@Bond Eoin Bond

What game is Geithner playing with CDS – who is driving this? Who are the big boys in dishing them out? Which one of them is the most vulnerable?

@Eoin,

The Financial Times and ISDA estimated the gross notional value of CDS contracts written on Lehman Brothers at USD 400 billion just after the failure. Based on this amount and a recovery rate of 8.625%, default settlement would have entailed an enormous transfer of USD 366 billion from
protection sellers to buyers.
The gross amount is not known as CDS is pretty opague, just estimated so ths things really are a matter of opinion and can easily fall into dispute.
0f the 5 U.S. institutions that sell 90% of CDS, AIG was known to be the lead seller of CDS on Lehmans. So 366 divided by 5 is somewhere over 75 billion, gross, estimated. AIG was known to be relatively unhedged in the CDS market.
AIGs bailout soon after totalled 180billion.
AIG also paid out tens of billions on other CDS liabilities such as subprime mortages.
The leading cause of AIGs bailout was its CDS liabilites, in Sep 08 it was aked for collatoral by everyone on all it CDS after its downgrade. So CDS is big news. That was the overall point.

Here a former Lehmans executive says
“Lehman had over $400 billion in credit default swap contracts with AIG”
,http://www.thedailybeast.com/articles/2010/09/15/meltdown-anniversary-how-lehman-brothers-triggered-the-aig-bailout.html

And here on the overall point
“Myron Scholes, the ‘father’ of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970’s, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must ‘blow up’ the market.”
http://www.marketoracle.co.uk/Article9497.html