More on the S&P Downgrades

The WSJ has nice graphics here;  see also its euro blog here.

96 replies on “More on the S&P Downgrades”

hey France i nearly forgot when you bail out your financial sector you will be just like us


a little advice from some who know don`t go looking for help from your Uber friends when you need it you just might be dissappointed

Re the figures…several French politicians again saying if France downgraded so should the UK

This is faulty analysis as the Bank of England owns a high proportion of UK debt via its ‘quantitative easing’ programme – and very few in the markets believe it will sell all this back. So a good chunk of the UK national debt has been monetised.

Attention will now turn to the EFSF – you would almost think the media, especially the UK media, were gunning for it to be downgraded too.

Look on the bright side though…. at least the Slovak Republic maintains a stable outlook ever after its downgrade (?)

My friend Monsieur PR Guy tells me to expect lots of French bleating this weekend about how this downgrade is ‘political’ and that there are dark forces behind SandP out to destroy European solidarity zzzzzzz

Personally, I will forget about France for now as life will go on there much as before…… but Portugal, Spain and Italy is where all the action is going to be next. I’m taking it as read that Greece is a basket case anyway. As I predicted in a previous thread, the P’s in PSI are going to take this right down to the wire in the hope that more taxpayer money will be thrown at them because the various European countries and institutions know they daren’t do otherwise and the US does not want any disorderly defaults or CDS’ being triggered. And the P’s know that and smell blood.

@Philip Lane

Finally, a nice little understandable graphic. Thanks for posting.


Schadenfreude = Jubilation, en francais (compliments Google translate).

It was too good not to post.

@ All

The Standard and Poor’s Takes on Ratings Actions is here:

Lots of quotable passages, but here’s one for now:

“We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”

Austerity alone isn’t going to work.

The one bright spot in recent times has been the impact of the ECB’s actions but it’s clear that the remainder of the decade is going to be a hard slog.

Western European banks have been significant for all Eastern European economies but these banks are now in retreat and in some countries there is only one significant local bank. UniCredit, the most important, is pulling back from 16 of 19 countries.

In our view (S&P), however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

This has to be a two-way process but there will be no advance unless individual countries give serous attention to reform themselves.

Italy’s parliament costs $2bn annually to run – – almost the same as the US Congress.

It’s not easy of course to change entrenched systems. The Italian Senate has 1,000 staff represented by 10 trade unions.

This week ‘Corriere della Sera’ reported that “a stenographer in the top pay band rakes in nearly €290,000 gross. Only €2,000 less than Spain pays Juan Carlos de Borbón and €50,000 more than Giorgio Napolitano’s gross salary of €239,181 as president of Italy.”

Patriotism is seldom evident beyond the poor.

S&P very positive, relatively speaking, on Ireland…

”  However, we have not adjusted the political score of the Republic of Ireland down. This is a reflection of our view that the Irish government’s response to the significant deterioration in its public finances and the recent crisis in the Irish financial sector has been proactive and substantive. This offsets our view that the effectiveness, stability, and predictability of European policymaking and political institutions (with which Ireland is closely integrated) have not been strengthened so as to match the severity of the broadening and deepening financial crisis in the eurozone.
  Excluding government-funded banking sector recapitalization payments, the authorities have adjusted the budget by almost EUR21 billion (13% of estimated 2012 GDP) since 2008 and plan additional fiscal savings of some EUR12.4 billion (7.8% of GDP) for 2012-2015. All other things being equal, we view the government’s fiscal consolidation plan as sufficient to achieve a general government deficit of around 3% of GDP in 2015. In our view, there is currently a strong political consensus behind the fiscal consolidation program and policy implementation so far has been extremely strong. In the face of a weaker-than-expected outlook for economic growth, additional measures (EUR0.2 billion, 0.1% of GDP) have been introduced to meet the government’s targets.
  We expect the general government net debt burden to fall to about 103% of GDP in 2015, having peaked at 109% in 2013. Our net debt estimates include the impact of the government’s EUR64 billion (40% of GDP) in banking sector recapitalizations during 2008-2011 and EUR29 billion (18% of GDP) in debt issued by the National Asset Management Agency (NAMA) as of end-2011. NAMA’s purpose is to acquire, hold, and dispose of land and property; it has acquired and is now working out eligible assets from participating financial institutions. Should NAMA asset disposals progress more rapidly than our current assumption (10% of GDP over 2013-2015), the government’s net debt burden could improve at a faster pace.
  In our view, Ireland has a flexible and very open economy. This is illustrated by the 25% depreciation in the trade-weighted exchange rate between May 2008 and October 2011 (latest data) and by goods and services exports estimated at about 113% of GDP in 2012. Partly as a result of these factors, as well as the noncyclical nature of a substantial part of Irish exports, net export growth has contributed positively to the muted Irish economic recovery in 2011. However, in our view this also leaves the Irish economy and, ultimately, the Irish government’s fiscal consolidation program, susceptible to worsening external economic conditions. This is reflected in our downside hypothetical scenario, which contemplates real GDP per capita economic growth, general government deficits, and general government net debt averaging 0.9%, 6.6%, and 114% of GDP, respectively, over the 2012-2015 period, compared with our base-case scenario of 1.7%, 6.1%, and 107%.
  We have lowered our assessment of Ireland’s external score. On Dec. 5, 2011, we said that this score was unlikely to change as our concerns raised with regard to a sudden stop in interbank funding had already been realized in Ireland. However, the Irish government and Irish financial institutions have not had access to the capital markets for unsecured long-term funding since early 2010. Our assessment of the sovereign’s external risks has been updated to reflect this. Outlook The negative outlook on Ireland’s long-term ratings indicates that we believe that there is at least a one-in-three chance that the rating will be lowered again in 2012 or 2013. We may lower the rating if we see that weaker external demand results in lower economic growth undermining the government’s strong policy implementation. If such a scenario were not offset, in our view, by redoubled efforts to attain fiscal consolidation targets by the government, we could lower our political score.
  If the long-term ratings were lowered below ‘BBB+’, the short-term ratings would also be lowered to ‘A-3’.
  Conversely, the ratings could stabilize at the current levels if government policy–alongside a relatively favorable external environment–would enable Ireland to achieve a general government deficit of 3% of GDP by 2015, down from around 10% in 2011.”

In its statement justifying tonight’s downgrades, the rating agency said that fiscal austerity alone “risks becoming self-defeating” and furthermore “does not address the full spectrum of the financial turmoil”.

WSJ graphic not that good, it doesn’t contain the important flag, ‘negative outlook’. Ireland is S&P BBB+, Moody’s Ba1, Fitch’s BBB+ while Italy is Moody’s A2, Fitch’s A+ and S&P BBB+

Both Italy and Ireland are on negative outlook

Polyannas, eg Corrigan, Honahan, McDonagh from our ministry for propaganda will be out there once again saying Cassandra’s should be ignored, great news we havn’t been downgraded. These ratings show Cassandra’s no longer exist as they’ve now been vindicated not only by the markets but by the Ratings; they can distinguish between black and white unlike those from the ministry 🙂

@Bond from your quote “Outlook The negative outlook on Ireland’s long-term ratings indicates that we believe that there is at least a one-in-three chance that the rating will be lowered again in 2012 or 2013.”

Judging by their remarks, first paragraph above, austerity is not working in the EMU, there is recessionary outlook for EMU. You can be certain before the end of the year, if the euro lasts that long, Ireland will drop at least 2/3notches to CCC, “highly vulnerable, very speculative bonds”

Basically the polyannas are burning this economy as we speak; T-Bond 3 month in June/July, will these be bought by the ECB? Who is foolin who?

This economy is on a downward plunge sunk by the useless management provided by the above three gombeens and their political lackeys out to preserve the quality of life of those travelling first class at the expense of those locked down in third class 🙁

@Mr. Bond,

Many thanks for the extended extract from S&P’s assessment of Ireland. I suspect the other two main ratings agencies would have a similar view.

It looks like the Government’s ‘shiny box’ optical illusion about Ireland is continuing to convince these guys’n’gals – and presumably the investors who take their pontifications reasionably seriously. Viz, “…strong political consensus behind the fiscal consolidation program and policy implementation so far has been extremely strong”..”Ireland has a flexible and very open economy”…”..the noncyclical nature of a substantial part of Irish exports”.. etc.

It also looks like these guys’n’gals have learned nothing. They didn’t lift the lid on these boxes of US mortgage backed securities or CDOs which were stuffed full of crap sub-prime mortgages before they awarded them an AAA rating. And they haven’t lifted the lid on the Irish ‘shiny box’ to examine the dysfunction in the sheltered sectors and the burdens they impose on the domestic economy and on the non-sheltered indigenous sectors.

Still I suppose it’s all relative. At least Ireland has taken the cost of the bank fiasco on the chin – even if it continues to suffer further Anglo-related punches it doesn’t deserve. If they were to lift the lids off Germany and France, the former might not have escaped unscathed and the latter would be looking at a bigger downgrade.

@ B-E-B

‘ In our view, Ireland has a flexible and very open economy.’

Ireland is an ex-colony with a dual economy. It’as apparently flexible and apparently open, but within certain rigid limits, as PH notes.

The FDI sector is mostly tax-incentive driven and is in most respects disconnected from the domestic sector. There are also the critical energy/infrastructure issues to which the Dork rightly points. Any analysis which desregards those realities is fundamentally flawed

@Michael Hennigan

The one bright spot in recent times has been the impact of the ECB’s actions but it’s clear that the remainder of the decade is going to be a hard slog.

What bright spot was that? I must have missed it.

@Paul Hunt re “optical illusion”

All not lost, perhaps nominees for banking roles or roles at the commission as fan hits the proverbial here over 2012 for those responsible for the optical illusion ? : worked for Declan Cardiff, Bruton, Dukes..Spring….

@ PQ: One minor nit. “Ireland is an ex-colony…”. Nope. We we never a colony, we always had an Irish-based civil service in charge of the country and heavy political representation in Westminster (apart from military security, and foreign affairs) and the imposition of the odd import tariff and excise duty to ‘protect’ some vested interests. No change really.

Dual economy. Yep, First Class and Steerage. Little change there either.

Our legislators are addicted to spending taxpayers money – particularly future income. With scant regard for the ability to pay up when the time arrives – as it has now. Our legislators are psychologically incapable of even recognizing the predicament (big debt – little income). Hence they are behaviourally marooned. The EU lot ditto. Maybe those ratings critters will rattle their cages for them. Doubt it. But something – even if its mad, bad and dangerous, is better that staying dumb.

I’ll refrain from re-commenting on your last two sentences. It would just sound like (and may indeed be) a continuation of a personal whinge. The energy security situation is dire and getting worse.


@ Colm B

” long, Ireland will drop at least 2/3notches to CCC”

It’d have to drop 6 notches to get there. Check the scale.

@ All

Very few comments these days on Irish bond yields I notice. 5.5-7.5% across the entire curve, they’re practically bulletproof at the moment it seems.. A return to the market isn’t as outlandish as it sounds, though the amount of funding required means that we may still require official funding even after regaining market access.

Its a market guys. In all markets there’s haggling. In this market the rating agencies do the haggling on behalf of bond traders (by pointing out flaws in the product(in this case debt)).
Even if the countries can’t pay up ECB will buy the bonds. It’s a great game – only a fool wouldn’t buy them

The comment about the UK needing to be downgraded because France has been is like those of children in a play ground, but it goes someway to explain the Euro mess.
If the continental European political class do not understand why the UK has not been downgraded while France and the other guarantors of the Euro debt have then is there any hope they can deal with the problems?

Fair point , maybe short term paper issuance is not far away.
Noted the picture of Wall Street behind the NTMA / RTE News interview Yesterday………………

I think Finance should look at pushing up excise on fuel by 10 cents to be honest (closer to the British standard) , maybe they still think in little republic terms to some extent.
But Ireland is much more integrated to the North then what it was although it is still a very seperate place.
It does not serve Belfast or Dublin to be in competion like this as end use consumption is taken out of now semi -integrated systems via waste – but I don’t know, we don’t travel much down in the Irish semi – tropics.

Kinsale is now covered in 20 feet of pumice apparently……………

All bets are off if the euro goes to $ parity of course – the oil shock would be just too great to counter.

Ireland has always been run as a estate – often a very badly run kip , by agents out of Dublin castle.
They have made such botched job of the place the Landlords have had to come back from whoring on the continent & somehow try to get a sustainable yield from this bog.

@ B.EB

Some comments here. But with around €25 billion required in 2014 alone I agree that it is unlikely that all of this can be raised without continued official funding.

As regards S&P’s statement on Ireland, it is clear that the views of their Irish analyst(s) are largely unchanged since August. It would be interesting to see how they work out their measure of “net” debt. The 2015 figure of 103% of GDP is just as it was back in August and with the double-counting episode from November it is clear they are now factoring in higher borrowing and/or lower growth over the period.

The 103% figure is inclusive of NAMA but not the consolidated debt of the IBRC. This may be included in eurostat’s gross debt measure in 2012 but depending on what assumptions you make and inclusion of the IBRC could actually reduce net debt.

@ All

The FT Deutschland reports that the CDU is thinking of changing the legislation governing investment rules for life insurance companies that oblige them to invest only in triple A rated securities. Merkel reacts very positively to the idea, as well she might,and, indirectly, seems to confirm that the initial leak emanated from Berlin (as Larry Elliot indicated).

The SPD points out the obvious implications for Germany’s contribution to the EFSF and Merkel, equally predictably, denies that there are any.

@ Paul Hunt

Best not to look a gift horse in the mouth! As the reaction of Berlin demonstrates, rating agencies play the role of the canary in the mine. The miners (investors) pay attention to it even if the mine owners (governments) would prefer that they did not.

@ Gray, Germany

I posted a response to your other comment on the relevant thread (NYT article on Germany; opened by Philip Lane).

The EFSF is as solid as a rock. The downgrades were widely telegraphed for months and will have little effect on bond markets.

The yield on the European Financial Stability Facility benchmark bond maturing April 2022 rose Friday on talk that ratings agency Standard & Poor’s Corp. is on the verge of downgrading several European countries.

The 10-year benchmark saw its yield rise 16 basis points to 3.144% from around 3.128%, according to Tradeweb.

The news came as the EFSF preps itself to sell six-month paper in an auction next Tuesday. Gauging the possible impact on the sale is, however, quite difficult, market participants said.

“It is very difficult to predict how the auction of next week will be impacted by a likely downgrade,” said Michaela Seimen, analyst at Barclays Capital.

“The WSJ has nice graphics here”

Well as long as they please you I am relieved…. print some and frame them perhaps… LOL

@ Bond,

“It’d have to drop 6 notches to get there. Check the scale.”

I make it 9 notches adding in the -‘s on S&P scale from BBB+ to CCC

See link below on how they approach ratings. One interesting aspect to me is the following:

“In our view, likelihood of default is the centerpiece of creditworthiness. That means likelihood of
default–encompassing both capacity and willingness to pay–is the single most important factor in our assessment of the creditworthiness of an issuer or an obligation. Therefore, consistent with our goal of achieving a rank ordering of creditworthiness, higher ratings on issuers and obligations reflect our expectation that the rated issuer or
obligation should default less frequently than issuers and obligations with lower ratings, all other things being equal.”

What is interesting in the above is the rating given to Ireland by way of its support from the ECB. For example,
if ELA were withrawn from Ireland; or, if a further bailout were negotiated and substantial write off of our debt could be achieved with assistance from EFSF or other source, then, in absolute terms, our ratings would improve, our risk of default diminish.

It seems to me we’ve now reached the stage that rather than contamination spreading from Ireland to Europe, instead our debt position is now being contaminated by Italy and Spain, Greece and their more substantial risk to the euro.

Overall, I believe they’ve got us totally wrong, we should be way down their scale to:

CC currently highly vulnerable

Overall, our situation is untenable which is very sad for those making the sacrifice; their sacrifice is making our situation worse !! Their pockets are being plundered to pay for rewarding those who continue to make a mess.

Political consequnces of whats on the cars a while already apparent.
Marine LePen on 21% to Sarko on 23%.

The anti Merkozy vote building around lePen?

@Mickey Hickey

““It is very difficult to predict how the auction of next week will be impacted by a likely downgrade,” said Michaela Seimen, analyst at Barclays Capital.”

Those who know better on this particular matter, correct me if I’m wrong. My understanding is the EFSF is substantially underwritten by France, previously AAA.

France downgrade means there will be a ‘substantial’ negative effect on these auctions purely on the trigger major funds are prohibited from buying anything other than AAA ?

@ Colm
You seem to be looking for logic in all this. You will not find it. Start thinking like a slightly dumb but very greedy gangster and you’ll get the way the rating agencies work.
The greed bit is on profiting from more Euro chaos.
The dumb bit is unleashing forces from the right which will start taking hold in Europe.
How will Sarkozy win an election now? Marine LePen could do very well first round (unlikely to get the final prize but the genie will be out of the bottle).

I still think the markets underestimate the political dangers here.


Important point.

Events are conspiring to do all of Marine Le Pen’s Joan of Arc branding for her.

It is positive that there is now some alignment between the problems Ireland faces and the problems S&P says the rest of Europe faces, i.e. the dangers of self defeating austerity.

Whereas it is necessary to inflict some economic hardship to prompt reform, it is pretty certain that Ireland has got the message at this stage.

One fears that the leaders in the ECB, the EU and the core states will not believe that we have learned the lesson until they experience it in their own countries.

If politicians in Leinster House were out of touch with ordinary Irish people in 2009/2010, one can only imagine how out of touch politicians and officials in Paris, Berlin, Brussels and Frankfurt are.

I also think that the EU politicians need to stop kicking the Greeks around. There are massive rates of youth unemployment in that country. The EU/ECB should be surfing the wave of Greek indignation rather than setting themselves up as the enemy.

@ Joseph Ryan

What bright spot was that? I must have missed it.

Maybe you did.

Much of the commentary here is on the short run and is probably as useful as football punditry.

Sarkozy’s fortunes can excite some but France is paying for adding to its debt every year since 1975.

Mahathir Mohamad, former prime minister of Malaysia, had some interesting comments in the FT this week on the Eurozone crisis. Asia had its own crisis in 1997/98.

Just as in the east Asian countries earlier, America and Europe became poor. The refusal to accept their impoverishment has resulted in their refusal to accept austerity measures. Their people demonstrate and go on strike against the measures. This simply aggravates matters.

Asian countries behaved differently. When they became poor because of the devaluation of their currencies they lived within their means.

For a long while Europe’s manufactured products lined the shelves of the world’s markets. They monopolised and dominated world trade and business. Their people enjoyed the highest standards of living. This increase in European growth and wealth would have gone on indefinitely. But after the second world war Japan industrialised and produced cheaper yet good quality goods. Then Taiwan, South Korea and China got in on the act. Rapidly the Europeans lost their markets.

Unable to compete, the Europeans and particularly the Americans opted for the financial markets.

In normal circumstances a down grade of France should affect the institutions that France supports. When the 6 AAA countries were reduced to 4 the safe havens within the EZ have contracted by 1/3. The ability of safe havens to absorb the funds that are desperately seeking safety is contracting. The search for yield is also becoming desperate In Canada two of the big five banks are offering fixed rate five year term mortgages with 25 yr amortization at 2.99%. The flight to safety from the EZ and the US is pushing down interest rates in all countries that are perceived to be stable. The negative return on German bonds recently is indicative of the level of panic in bond markets. The EFSF underpinned by all EZ countries should be shock proof and hence offers a level of safety and yield that many will find palatable in these difficult times. The world is awash with liquidity as the US, UK with their QE and ECB with its half trillion injections into EZ banking demonstrate.

All that is required is demand for loans from individuals and businesses. Businesses are hoarding cash while individuals are over indebted. We are probably looking at Japan being replayed twenty years later. Next will be mammoth infrastructure projects along the lines implemented by Roosevelt in the US and Hitler in Europe.

The age of liberal finance came to an end with the Friday January 9, 2011, S&P downgrade of nine European nations.

Our times are best understood through the lens of bible prophecy. The Sovereign Lord God, Psalm 2:4-5, is acting to bring forth a revived Roman Empire, that is a German led Europe.

At the appointed time, He will open the curtains, and out onto the world’s stage will step the most credible leader. This Little Horn, or Little Authority, Daniel 7:25, will work behind the scenes in regional framework agreements to change our times and laws to provide order out of the chaos from a soon coming credit breakdown and financial system collapse. The existing rule of law will be replaced by his word, will and way, Revelation 13:5-10. In the supranational New Europe, national sovereignty will be seen as a relic of a bygone era. The people will be amazed by this, and place their faith and trust in him; they will give their allegiance to his diktat, Revelation 13:3-4.

The Banker regime of Neoliberalism came via the Free To Choose floating currency script of Milton Friedman; but these are now sinking, causing global disinvestment out of stocks and deleveraging out of commodities. The natural result of destructionism is the rise of despotism.

The Beast regime of Neoauthoritarianism, Revelation 13:1-4, is rising in its place. It comes via the 1974 Club of Rome’s Clarion Club for regional global governance. This monster of statism and collectivism is rising from the profligate Mediterranean countries of Italy and Greece. The Beast’s seven heads are rising to occupy in all mankind’s institutions, and its ten horns are rising to govern in all of the world’s ten regions. The Beast system is coming like a terminator that can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever until mankind is totally dominated and subdued.

Bank nationalization is coming world wide. Banks will be nationalized in 2012; perhaps better said banks will be regionalized as Bloomberg reports Too-Big-to-Fail Definition May Be Expanded. Global regulators may expand the definition of a too-big-to-fail financial firm, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks. The “framework should be in place for domestically systemically important banks by the end of the year,” Mark Carney, chairman of the Financial Stability Board, said yesterday after a meeting of the group in Basel, Switzerland. Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and Goldman Sachs Group Inc. (GS) were among 29 banks subject to the so-called capital surcharge on globally systemic financial institutions drawn up by the FSB in November. Banks will have to boost reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators. The new banks will be known as government banks.

In a bank insolvent and sovereign insolvent world, regional stakeholders will be appointed to Stakeholder Committees, that is regional public private partnerships, PPPs. Public private partnerships, such as Macquarie Infrastructure, MIC, will take the lead in managing the factors of production. Canadian Energy Income Companies, ENY, and Canadian Oil and Pipeline Companies such as Enbridge, ENB, will for all practical purposes, be regionalized, that is something akin to being nationalized. There will be New Credit for the New Europe, it will be Stakeholder Credit coming from the Stakeholder Committee, as it meets in working group conference. This Stakeholder Credit will complement regional global governance to provide funding for the operations of industry critical to the EU’s security and stability. As for the people, the residents of the New Europe, the prevailing concept will be, let them eat diktat. …

“In an interview with Reuters, John Chambers, chairman of S&P’s sovereign rating committee, said it would take further increased commitments from the remaining AAA-rated guarantors, including Germany, for the EFSF fund to retain its AAA status.
Ms Merkel however rejected that idea today, saying Germany should not have to do more than other countries as a result of the downgrades.” (IT)

That’ll help then.


Can I have a pint of whatever it is you are drinking?

@Mickey Hickey

“We are probably looking at Japan being replayed twenty years later.”

Except that it’s much worse. Europe has achieved that with a bubble that was much smaller than the one Japan had.

It might be the end of the EFSF .Those who believe that Ireland can go back on the market at the end of 2013 will not be affected.Those who doubt it can be a little worried.

Not really glad to become a new member of the sane club.

What would Charlie McCreevy make of those 4 Horsemen I wonder ?

I guess importing oil & reexporting thoroughbreds to pay for the stuff is so 20th century.
At least we know the horses won’t be manifesting themselves out of here anymore……..

Should read “out of DC- 8s anymore” but whats in a few Jet turbines when it comes down to it…………..

It seems to be the case indeed. Looks like FN will become a strong player in France.
In a way its something good cause there aint no difference between the rest of them.


What political danger. The danger of yet another European country having a far right party becoming a key political player.

Havent we crossed the bridge a long time ago. Ireland is unique in not having a far right party enjoying political success on such a large scale.

Markets have seen this before.

@ Eureka,

“@ Colm
You seem to be looking for logic in all this. ”

Sorry if I seem to put the rating agencies on a pedestal. They made billions handing out AAA to OTC Derivatives that later brought 2008 meltdown; they milked it on financial service funds based on derivatives bigtime from 1971 onward. Even Enron got the heads up from them.

S&P have made a lot of improvements to their methodology since then and have greater transparency so you can examine criteria and judge their ratings on that basis.

But, I agree with you, they are still as corrupt as hell and I wonder myself on how much they are being used as a tool by vested interests out to undermine the euro and build up confidence in dollar based securities at euro expense.

Their modus operandi remains highly speculative when it comes to making calls on countries dependent on bailouts especially when those bailouts offer the possibility of being revisited.

Be that as it may Investment funds use their benchmarks as guides. In the global casino of debt they carry some weight.

@Mickey Hickey,

“All that is required is demand for loans from individuals and businesses.”

That cash has gone into investment funds and into banks. The past decade has seen the US middle class stripped of its assets similar to what is happening here in Ireland.

Basically all loose cash is being hoovered up to the top 1% who are hoarding it. Financial services have sucked the productivity and manufacturing base of EMU and the US and we are witnessing the consequences of this. However, for the sake of analysis and objectivity I try to stick to fundamentals eg EFSF bond auctions.

I acknowledge the political dangers in all of this. It appears we have Hobson’s choice: the choice between a growing EUSSR and a dangerous far right. For example, as a fan of writer Stieg Larsson and his lifelong work opposing the far right, its scary to think Marine Le Pen will profit from Sarkozy’s loss.

PARIS — Far-right presidential candidate Marine Le Pen on Friday lashed out at Qatar for investing in “Muslim” areas of French cities and for taking over Paris Saint-Germain football club.

Hopefully the breakup of the euro will lead to a better outcome than that following the breakup of the Weimer Republic.

As another poster said here, ‘sleep with one eye open’ 🙁

@Bond. Eoin Bond @Seamus Coffey
@ NTMA (if you are out there)

Re: Back in the Market (in a small way).

There have been a number of statements from Govt / NTMA about getting back into the market in 2012 or 2013 but ‘in a small way’.

Allow me to ask the question:
What is the purpose of being in the market ‘in a small way’. Either the country is able to borrow independently or it is not.

In fact being in the market ‘in a small way’ has all the disadvantages of still being under the Troika regime and the further disadvantage of paying more for borrowed money than under the Troika.

Getting back into the market, which I do not believe we will, ‘in a small way’ does not sound like good strategy to me. Except for bond traders perhaps who will make money on commissions.

The solution to the Euro debt problem is easy as it is in trade balance to slight surplus………….. produce a huge amount of euros to pay down private debt but tax (destroy money) on energy use.
The one problem with this ………. is the US would be destroyed ..& they ( see all of them) need $$$ to pay the troops , to protect the wider Imperium , to keep the owners on top & the peeking order in place.

The ECB is clearly a office of the FED / BIS structure and not a seperate unit with now very real tensions between the top managers in one operation (NYFR , US Treasury , CIA) & local CBs / European Treasuries +the lower orders of the commission.

While the owners look on and play their games.

“rating agencies play the role of the canary in the mine.”
super canaries – they should gone legs up before the CDO s$$t hit the fan – they must have had the gas masks on for that one. Then again it was the issuers of CDOs who paid them for the ratings – so they just said “what would you like – triple A Ok?
The question is who pays them for the sovereign ratings – obviously not the sovs?

“At the appointed time, He will open the curtains, and out onto the world’s stage will step the most credible leader.”

You’ve been to too many Judas Priest concerts!

@ Jean
Yes – its interesting to think this out. You have a point.
Before your comment I had always equated far right with angry young men in paramilitary uniforms. Given the age profile of Europe a lurch to the far right might be more along the lines of grumpy old men cursing into their soup. Maybe they’re ok about seeing the place being wound down.

@ Colm
I think zerohedge is not as subversive as it seems. It’s got a definite political agenda. It’s a mouthpiece for somebody (or something).

Joseph Ryan
“What is the purpose of being in the market ‘in a small way’. Either the country is able to borrow independently or it is not.”
Its to allow the governmnt to say ‘look, we got ireland back in to the markets, after that other shower got us locked out’. 10m of 3 month money raised will do that. Its got sfa to do with economics.

If you are a person with a keen interest in the schenanigans of the shadow banking sector, the following
is a must read:

It defines a scenario for the MF Global Collapse and changes to bankruptcy laws in US/UK/EMU that allow traders in CDS seize assets immune from any threat of default.

Some of the facts elaborated here are truly astonishing, eg the explosion of the global derivatives market; the repo and hypothecation method of seizing assets first in line in a bank wind down.

Quoting from link above:

“in the six months to June 2011 the global trade in Derivatives increased by 18% to an astonishing $707 trillion in nominal value (the face value of all the contracts). And remember the Repo market is $10 trillion.”

“The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can. To me, this gives a possible answer to why there has been such a surge in derivatives trading.”

“To give a concrete example. Spain or Greece puts its tax payer money in to one of its insolvent banks.That bank then uses that money to get a short term repo or hypothecated it for loan. Or it uses it to hedge its currency problems via a currency swap or buys CDS insurance on assets it is deeply worried about. If the weak bank then goes down all those assets are seized by the big bank who was lending or was the counter-party to the derivative deals. The tax payer gets zero. And there is no redress. It was legally done. And the money the Big bank would have used to get themselves into this position would be the bail out money we had earlier given to the mega banks. They would have used that money against us – again.

The largest banks, those with the greatest exposure to bank and sovereign bonds from the most indebted euro nations, have the most to gain from doing derivative. repo and hypothecation deals with the troubled euro area banks and nations. The more assets the weak banks and nations have pledged in deals with the Big banks, the more theBig banks will walk away with in the event of a crash. I suggest this is why, even as this crisis has worsened, the Big banks have been increasing by 18% their trade in derivatives and why Repo and hypothecation is as large or larger than even before the crash.”

I am sorry this has been such a long piece but I wanted you to see exactly how I came to this because I hope you can show me how I am wrong. Please do so politely and I will go downstairs and celebrate my stupidity with a cup of tea, before apologizing to you all. I would very much like to be wrong.

But if I am not wrong, then the banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months not even days. It could happen in hours if not minutes. Our leaders would have only a few hours to decide who they would side with: the banks or us. The past four years give me no faith they would chose us.”

The global financial market has spread a dangerous virus through looting laws such as the above that make a farce of ‘austerity’ measures in Ireland or globally.

Without a new Glass Steagall to remove the looting powers of bankers destructive of trade, democracy as in the above, removing the financial weapons of mass destruction used in repo and hypothecation; along with the disinfecting of OCD abuse and regulation of same, …your guess is as good as mine.

I agree,
He has skin in the game , it has lost a lot of credibility these past 2 years – I think it is more then just a basic money making operation.

Who really knows what happens in New York .

But the commentators have really dragged down the level of discussion – I reckon I started the entropy chain reaction.

@Paul Hunt

Re January 14th, 2012 at 12:31 pm

All S&P are interested in is whether the bondwallahs get their money back. It doesn’t matter what teeth pulling is required or how dysfuctional the economy is.

Why do all these rating agencies indulge in such daft scoring schemes? Why not just award a score going from 10 down to 0?

@ Joseph,

Choice is always good. If we are completely beholden to the EU/IMF for funding it is unclear what conditions could be attached (particularly from the EU/ECB) if the loans are to keep coming to 2014.

If we have some access to markets consider the EU offer to keep funding available after 2013 akin to a lender of last resort. If markets don’t provide the necessary money or are seeking too high a rate then continue to use the official money.

It might not be great but a choice between the conditions of the EU/IMF and the interest rates of bond markets is better than no choice at all.

I don’t think anyone is advocating borrowing privately at 8% when official funds are available at 3%. However, that is the gap now. Who knows what the gap will be in 23.5 months time. It could be narrowed at both ends.

@ All


S & P explains its action.

The French coverage is the best as it focuses on the real message conveyed viz. the problem is the breakdown in competitiveness and the resulting imbalances within the Euro Areas not budgetary irresponsibility. In short, Germany is insisting on treating the symptoms not the disease, with the acquiescence of Sarkozy as he has been incapable of getting any change of approach or in persuading his countrymen to confront reality.

Ireland’s only strategy is to continue doing what it has been doing only more so. The recovery in competitiveness has been remarkable and this is reflected in the return to something close to normal with regard to trade in Irish sovereign bonds. S & P were justified in drawing attention to this.

The prognosis must remain gloomy. S & P are also right in this regard. There may well be a re-run of what happened in the 2002 French presidential election with the respectable main candidate of the left (Hollande) or the right (Sarkozy) failing to make it to the second round having been beaten by Le Pen. In either case, a tumultuous period in French politics lies ahead.

I don’t think Le Pen is the biggest threat to Sarko. The right wing side of the race looks wide open.

@ seafóid

I was making the point that Le Pen could emerge as the runner up in the first round as her father did in 2002 because of divisions in the other camps. Whether they cause the damage on the left or the right on this occasion remains to be seen.

@Joseph Ryan – Bond traders don’t make their money on commissions. They make it by by achieving an excess return over their cost of funds (if borrowed), or in absolute terms (by seeing the return on the bond purchased exceed the alternative uses for the cash employed). This return comes both by way of interest earned and through capital movements in the underlying price of the bond, which are related to changing expectations re future interest rates/inflation and, in certain circumstances (vide Greece) the expected percentage recovery rate in the event of a default.


“I think zerohedge is not as subversive as it seems. It’s got a definite political agenda. It’s a mouthpiece for somebody (or something).”

It’s support is for the shoot em up Texan presidential candidate Ron Paul… for obvious low taxes, free markets, only pay Mexicans $1 a day if you think you can get away with it, Jewish conspiracy, let people without private healthcare die on the streets reasons if you know the guy.

He is sometimes described as the ‘intellectual godfather’ of the Tea Party.


Re “in certain circumstances (vide Greece) the expected percentage recovery rate in the event of a default.”

Re mine of 8:15pm As I’m curious to verify

“Or it uses it to hedge its currency problems via a currency swap or buys CDS insurance on assets it is deeply worried about. If the weak bank then goes down all those assets are seized by the big bank who was lending or was the counter-party to the derivative deals. The tax payer gets zero. And there is no redress. It was legally done.”

Could I ask you to elaborate on your ‘percentage’ comment or comment on the quote I use above ? Both comments seem to be the antithesis of each other implying percentage losses in your interpretation, as against guaranteed ‘no loss’ in my quoted interpretation?


“I also think that the EU politicians need to stop kicking the Greeks

the Greeks are paying and have paid a terrible price for their Euro Zone membership i see no solidarity from our so called core member state to the state of anarchy that is happening to a proud nation Greece i also see little compassion from Ireland to the perilous situation the Greeks find themselves they are being hung out to dry and yet we look on happy in knowledge that we are not Greece the Austerity program is failing unemployment is rising investment is decreasing there is a huge money flight out of Greece to so called safe havens,

here in Ireland i feel we are only six to twelve months behind the Greeks in our trioka deal it is faltering the domestic economy is being squeezed to death but yet our approach is to pretend and extend nothing going here.

the downgrades are good in so far that they should concentrate minds in Europe that Austerity alone will not work it needs a more growth focus and debt sterilization and back stoping from the ECB /BUPA

we need get out of this crazy ground hog day scenario

Is it true the new Spanish PM let slip today that unemployment there shot up to 23.3% in Q4 (official figures are to be released on 27 January)? That would be worth two notches on its own.

@PR Guy
Spanish unemployment up to 23.3%
hope we have enough shovels to go around this EURO thing the whole aint have half big enough yet, it needs to be seen from Frankfurt

5.4 million Spanish people unemployed at the end of 2011
time for Germany to wake up to what is happening to the rest of Europe
ehem …i mean of course the Eurozone

Two comments on Spain:

1) It’s mainly young ‘temp’ workers who have been fired; many of the oldies are untouchable.

2) Spain’s shadow economy is estimated to exceed 20% of GDP. So not all the unemployed are in dire straits; even in the boom its lowest unemployment rate was about 8.5%

Spain accounts for 12% of Eurozone GDP but it has 18% of the region’s €500 bills in circulation – – the usual choice for cash transactions.

Eurozone countries like Greece and Spain have had trade deficits with Germany since at least 1980 — 20 years before the euro was established.

The IMF says the euro is a continuation rather than a structural break.
In 1980 when Greek debt to GDP was at 30% (just before the decade when it went crazy), trade was almost in balance. Since then the value of
German imports from Greece hardly changed until 2005 while exports from Germany quadrupled.

Superficial commentators may blame German banks but it ignores the main story.

Without FDI, Ireland would be in the same position.

Germany not only has a strong industrial base but is also strong in the food and drink sectors.

According to IMF statistics, since the introduction of the euro in 1999, Germany’s trade surplus with the rest of the world has grown faster than its surplus with the other Eurozone countries — and faster still with European nations that have not adopted the euro. The 2011 statistics confirm this.

Contrary to the mantras from chairborne experts on exports, it takes a very long time to develop new export markets.

The reach of Germany’s mittelstand mid-size firms is amazing and while much of Chinese manufacturing produces ‘cheap’ low quality goods, people who want quality pay more.

An extremist right wing is a frippery that only well off countries can afford. Holland, Denmark, Norway for example. Economic instability focuses the mind wonderfully which means there will be a small protest vote at both ends of the political spectrum and a flight to the stability of the main stream parties by the broad centre. Social services are holding up, there are not hundreds of thousand homeless and hungry anywhere in the EZ. Marine Le Pen and the Parti Front Nationale have about as much support in France as the Unionists and Ian Paisley have in the ROI. France is made up of sober bourgeois people who know which side their bread is buttered on to use an Irishism.

Colm McCarthy on the subject, and on the possibility of a second bail-out, here:

“Talk of new bailout is not ludicrous”

Last para:

“Despite three-and-a-half years of fiscal cutbacks, the budget deficit remains at a quite unsustainable level. There is also the looming requirement to roll over large quantities of maturing debt after the current programme runs out at the end of 2013. There is little point to the Government making itself hostage to the promised re-entry to the bill market later this year. Ireland needs to be able, at some stage over the next two years, to sell large quantities of long-term debt at low interest rates if the programme is to succeed. Buiter is saying that there is little prospect of this happening without burden-sharing on the bank rescue costs. His remarks should be welcomed: they help to strengthen the Government’s negotiating position.”

Also Paul Krugman:

“Still barreling down the road to nowhere.”

@Gavin K,

S&P have expressed their doubts unambiguously about the EU Grand Panjandrums’ ‘one club’ fiscal austerity approach. And Colm McCarthy, in his Sindo piece, is quite right to highlight the additional unnecessary cost that this failed attempt to shore up bond financing of EZ banks is imposing on Ireland. But, by continuously harping on about this – thereby not paying commensurate attention to equally important issues – Ireland is suffering from what I call the ‘LBJ-Galbraith condition’.

JK Galbraith wished to be part of JFK’s ‘Camelot’, thought he had a right to be part and continuously plied JFK with economics papers and policy suggestions. He was appointed Ambassador to India to get him out of JFK’s hair. Subsequently, by opposing increased intervention in Vietnam, he fell out of favour with LBJ’s administration. Eventually LBJ required some input on a specific speech on economic policy and Galbraith was commissioned to produce a draft. Galbraith, delighted to be back in favour again, put huge effort in to the draft speech. He was summoned to the Oval office. LBJ, feet encased in cowboy boots on the Oval office desk, was perusing Galbraith’s draft. “That’s a mighty fine speech you’ve written, Ken. But, d’ya know what? It’s a bit like p1ssing down your leg. It’s very hot for you, but it means damn all to anyone else.”

I’m not accusing Colm McCarthy of suffering from this condition – he has been consistent and forceful on three things: close the fiscal deficit, fix the banks and get the cost base of the economy down. But, for many economists, removing this costly Anglo-related legacy of fixing the banks ssems to have secured a priority that is at odds with the variety of serious challenges Ireland faces. And the effect is to raise potentially false hopes – and to foster an anti-EU prejudice – in the minds of the public and to distract attention from other problems that are fully within Ireland’s powers to resolve.

Does anyone seriously believe that the Government, behind the scenes, isn’t straining every sinew to reduce or remove this unnecessary cost burden? Maintaining a focus on it in the public domain may, indeed, help to strenthen the Government’s negotiating position, but it is a very dangerous game.

The Government is seeking to sustain this optical illusion – for international consumption – of a strong political consensus behind fiscal consolidation and of a flexible open economy; and seems to have convinced the bond wallahs. Sustaining this optical illusion is not only in the Government’s interests, but it is also in the interests of the official lenders and of the EU’s Grand Panjandrums. However, I expect the Government is making the case, behind the scenes, that it won’t be able to sustain this optical illusion indefinitely without some help on the promissory note payments. And, of course, it helps if the Government can point to informed public opinion backing its position.

But the danger arises if public opinion increasingly coalesces around the notion that any further fiscal adjustment, not to mind any consideration of structural refrom, is entirely contingent on this matter being resolved.

And this, I sense, is increasingly what is happening. By virtue of the excessive executive dominance – and enormous Dail majority – it enjoys, the Government is able to pursue a certain amount of top-down salami-sliciang of public expenditure and incremental increases in taxation. But it believes that, to maintain any sullen, resigned consensus on fiscal adjustment, there is absolutely no way it can pursue any meaningful structural reforms. In the face of concerted opposition from the powerful narrow sectional economic interests it has whittled down the structural reforms required by the Troika to almost nothing of any substance.

But without meaningful structural reform of the sheltered sectors continued fiscal adjustment will generate economic stagnation – and for a long period. However, while the export enclave keeps churning out the exports, the resilient non-sheltered sectors keep fighting their uphill battle, the committed front-line public servants keep doing their jobs and, crucially, while the powerful narrow sectional economic interests remain quiescent, the economic stagnation will be manageable – and the Government will have a good chance of being re-elected.

At the end of the day, that’s all that really matters.


this is from

“The 10 Commandments for the euro-zone
First Thou shalt not live beyond your relationships
No State shall make its deficit to rise about three percent of economic output. But he does it, is automatically a penalty imposed against him.
Second You shall not prevent a just punishment
Third Thou shalt be considerate of future generations
4th Thou shalt have respect for the European Court of Justice
5th Thou shalt not confuse investors
6th You shall ensure economic growth
7th Thou shalt respect the independence of the ECB
8th Thou shalt not covet thy neighbor’s money
9th Thou shalt listen to the major economies
10th You should recognize the core of Europe as a new reality”

i thought this maybe is to your liking

@mickey Hickey,

Only rich countries can afford right wing flippery?
An interesting idea but its the poor in those countries who are supporting them. The sober bourgeoise support the usual conservatives if above a certain age and the younger bourgeoise support various acceptable left wing outfits before switching sides.

The poor tend to support the far right. The far right is now the voice of the european working class. Welcome to modern Europe Mickey.

By the way you think LePen has no support in France? She is running at 21% – 2% behind Sarko? Thats not bad support surely?

What do you call that?

@ Paul Hunt

‘But without meaningful structural reform of the sheltered sectors continued fiscal adjustment will generate economic stagnation – and for a long period. However, while the export enclave keeps churning out the exports, the resilient non-sheltered sectors keep fighting their uphill battle, the committed front-line public servants keep doing their jobs and, crucially, while the powerful narrow sectional economic interests remain quiescent, the economic stagnation will be manageable – and the Government will have a good chance of being re-elected.’

Yes, but electoral politics is just one part of the story, and the government is simply running before the wind. This is big stuff by any reckoning. The global economy is entering another epoch, with Europe, and Ireland, up at the front. Reminds me of that Keira Knightley Pirates film where the ship goes into the whirlpool.

‘For all the plans for banking reforms proclaimed for 2012 by the Central Bank and the Government, in all likelihood, this year is going to see more mounting corporate and household loans writedowns, amidst the continuation of the extend-and-pretend policies by the banks. The longer this process of delaying losses realization continues, the less viable the remaining banks assets become. And with them, the lower will be the credit supplied into the real economy already starved of investment and funding’

OK, I’ll try asking this question for the 3rd and final time.

The question is of fundamental importance to the discussion above re austerity vs allowing bondholders to share in losses.

Because if this is true, it puts a whole new dimension onto the question of burning bondholders and allowing banks to fail….In effect, as I understand this, eg in the case of allowing Anglo to fail, the consequence of this would not only guarantee bondholders against losses, but it would give bondholders the legal right to seize any good assets at write down costs, to loot the bank, before any taxpayer got a look in.

Is the above the real reason why the ECB has adopted the policy of not allowing banks to fail?

I’m trying to verify if changes to the bankruptcy laws in the US specifically the amendment mentioned below to with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), mean simply bondholders cannot be burned.

Have bankruptcy laws between 2002 and now been updated across the world to incorporate the amendment above?

“When a company declares bankruptcy there is what the Americans call an ‘automatic stay’, which means all the assets left in a company at the moment it goes bankrupt are protected from the rush of creditor’s demands until appointed auditors can sort out who should get what. The automatic stay prevents a first come first served disorderly looting where those with the most muscle getting everything and everyone else getting nothing. As we are all painfully aware now, there is a legal pecking order to who gets paid before who, with Senior bond holders at the top. But, in America culminating in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) the order was changed. And that change is the crucial event.

At the time the law was being passed few were aware of this change and even fewer were aware of how important it would become. At the time the furore was all about changes to personal bankruptcy. The Credit Card industry (AKA Banks) had spent more than a decade and its rumoured as much as $100 million lobbying to make bankruptcy much harder and more punitive for ordinary debtors.

An article from 2005 in the Boston Globe quoting a very senior Republican Senator, gives a flavour of what was then being said about ordinary people who fell into debt.

Senator Orrin Hatch (R-UT) has said that millions of Americans are bankrupt or near-bankrupt because “they run up huge bills and then expect society to pay for them.”

After 4 years of bailing out banks who did exactly that the irony is enough to gag on.

But what was not talked about was an amendment which was put into the bill and, as far as I know little debated. Don’t let the word ‘amendment’ mislead you. Amendments are generally not there as refinements and improvements on the original idea. Whenever a bill goes through Congress every lobby group and industry with something it wants done, gets their tamed/owned/ political friends to tack on the change in the law that suits them in return for supporting the original bill. The bill emerges from this process festooned with ‘amendments’ to other vaguely related laws. Amendments are the price of getting the original bill passed. They are often little understood, written by and for the benefit of the sponsoring lobby group and can be far more influential than the bill they are smuggled in on. This is certainly the case here.

According to a scholarly article in the American Bankruptcy Law Review,

“the provisions [in the amendment] were derived from recommendations from the President’s Working Group and revisions espoused by the financial industry”

The President at the time was Bush and one of the most vociferous sponsors of the amendment was none other than Senator Leach whose other claim to fame was the Gram-Leech-Bliley Act which repealed most of the Glass Steagal Act of 1933 whose repeal virtually assured that the present debt crisis would happen. When bankers play pocket billiards, Senator Leach is what they prod their balls with. Ribaldry aside Senator Leach can certainly be described as one of the principle architects of our present global misery. But I digress.

What was this ammendment? The ammendment exempted repos (and hypothecated and re-hypothecated assets) and a whole range of derivatives from the automatic stay. It also allowed lower quality assets to qualify for the exemptions.

Which means,

The special bankruptcy treatment given repos and derivatives means that repo lenders and parties to derivative contracts can keep the collateral if their trading partner becomes insolvent. This exempts them from the “automatic stay” rule in bankruptcy, which prohibits most creditors from trying to collect ahead of others.

Or as the official report from the US Financial Crisis Inquirey Commission said, under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy. (p. 48)

So when a bank goes bankrupt, BEFORE even the most senior bond holders, the repo lenders and derivatives traders can remove, or keep all the assets pledged to them.

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies also allowed a whole range of far riskier assets to be used, making them too immune from the automatic stay in the event of bankruptcy. Which meant traders flocked to a market where risky assets would be traded and used as collateral without apparent risk to the lender. The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get your money back before anyone else and no one could stop them.

It also did one other thing. Because the repo and derivatives traders ran no risk – they could get their money out of a failing bank before anyone else, it meant they had no reason at all to try to stop a bank from going under. Quite the opposite.

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of both Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those instituions suddenly stoppped trading and ‘looted’ them instead.

According to Enrico Perotti, professor of international finance at Amsterdam Business School speaking at the London Conference on The Future of Bank Funding, held in June of this year, 2011,

The financial crisis happened when repo lenders and derivative parties lost confidence in the mortgage-backed securities they’d accepted as collateral for repo loans and credit default swaps. They demanded to be paid, forcing their troubled trading partners into fire sales of their holdings to raise cash. They were unconcerned that they might drive their trading partners into bankruptcy, because they were exempt from the automatic stay.”

I realise the shadow banking industry is rather opaque to some economists who’ve been educated pre 1971 and even though highly skilled in economic matters that effect national/global trade in the real economy, know very little
regarding the rules of play/consequences for the global economy for eg “in the six months to June 2011 the global trade in Derivatives increased by 18% to an astonishing $707 trillion in nominal value (the face value of all the contracts). And remember the Repo market is $10 trillion.”.

But this is a matter that’s worth more attention than it is being given.

@ All

The debate on whether or not Ireland needs a second bailout is opening on another thread.

On the S & P downgrades, Michael Hennigan summed up the situation rather well as follows;

“In our view (S&P), however, the financial problems facing the euro zone are as much a consequence of rising external imbalances and divergences in competitiveness between the euro zone’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues”.

He comments;

“This has to be a two-way process but there will be no advance unless individual countries give serious attention to reform themselves”.

That is it in nutshell!

Paul Krugman criticises the approach of Merkel but for the wrong reason. S & P recognise (as expressed during the conference call) that even Germany has little or no room for an expansionary policy. But they also refer to the difficulty of dealing with vested interests.

A good example of these, and of the truth of what Lagarde said about it “taking two to tango”, is illustrated in the the following Bloomberg link.

Making smokers pay in order to reduce risks to health and even putting the proceeds into health care may be defensible. Doing so in order to pay a subsidy to mitigate the true energy costs for the chemical industry is not. Nevertheless, such is the sacrosanct nature of the belief in favouring the export sector in Germany that the counter-productive nature of depressing domestic demand in order to do so is hardly even disputed (although this may now be changing).

The S & P analysis is correct. More importantly, it has put it up to European leaders either to proceed on the basis of it or to face further downgrades. In the event of them failing to do so, the issue of a second bailout for Ireland will become academic; there will be no one there to provide it.

Let me add one amendment to the above:

In investment banking and commercial banking insofar as the lines between both have become blurred, are senior bondholder contracts a separate category to repo and hypothecation derivative exchange contracts?

It would appear repo and hypothecation derivative exchange contracts are now of higher category than the contracts held by senior bondholders.

To what extent are european banks exposed re above; and what are their obligations to these contracts under current bankruptcy laws.

And sorry for the long posts, as I endeavour to get to the bottom of this to understand this fully 🙂 Enuf said now on this from me.


“the issue of a second bailout for Ireland will become academic; there will be no one there to provide it.”

Yep, you got a self evident truth there, a tautology, even the core are lining up at the trough of bailouts. Not enough to go round.

EFSF had ¢440 bn of AAA now this is doubtful, efforts to leverage it up to an insurance fund or provide a foundation for other investment options are not going well..

One caveat emptor in which the S&P does a complete fudge is on the issue of the financial markets themselves.

Its entirely empty of any commentary on the fundamentals of the financial industry, on how the ECB operates, on how global markets and investment works. It has nothing whatsoever to say re the UK approach of QE versus the ECB consideration of euro bonds or ELA.

In fact, S&P has nothing to say on the highly deregulated nature of debt markets and their contribution to instability because it makes a fortune from this instability.

To point the finger of austerity and blame taxpayers and consumers for the profligacy of lender banks and out of control financial institutions is a bit of a laugh; to go further and demand austerity to extract money from taxpayers to pay through austerity for the wanton mess of the financial services industry and the banks, amounts to criminal negligence.

Sorry but this post was wiped from S. Kinsellas McCarthy thingy.

“For the budget defecit to be eliminated , the credit banks need to be eliminated – what do you think pays down the credit debt ?
Its the fiscal stuff baby.
All mortgages should have been declared null & void 4 years ago – as they serve no constructive economic function.

I hear a lot of rubbish about how the banking sector losses have caused only one part of the “fiscal adjustment”
The Banks are the economy – they have financed the entire built envoirment.
People are just looking at Finances direct injections into the banking sector.

The costs go much deeper then that.
Its the apartment in a central location that has been put on ice to create a artifical value to the properties , the skills lost , the massive depreciation of capital that is occurring throughout the state.

Do people have any idea how much money it takes out of the Net economy to commute into Cork city from some island estate in North Cork ?
Thats where the internal bleeding is located.
Meanwhile buildings in central locations such as the Elysian remain empty or almost empty……………
Credit deposits should have financed the state directly as the last thing this country needs is more credit – it needs money.
But to the banks who control us all this is a form of blasphemy that can never be spoken.
I don’t trust Buiter.
The man is one of them.”

Anyway I ask economists – what productive function do mortgages serve.

The houses have been built – there is a extreme glut , paying for mortgages will keep this country on ice but the whole rotten artifice will slowly melt.

@ Jean
Support for extremes evaporates at the ballot box. The old Irish habit of sending messages extends right up to marking the ballot, remember the referendum. In most countries voting behaviour tends to the rational while public opinion surveys are used to send messages. Voltaire, Rousseau and Cartier elevated rational thought in Europe and their descendants are familiar with the processes.

@Colm Brazel – re your post of 8.15pm on 14th: I got as far as the “concrete example” and lost interest. The example mentioned Spain putting taxpayers’ money into an insolvent bank, which bank would then use that money to get a repo off a larger bank.

The problem with this is that repos are secured BORROWINGS – the cash goes from the lender to the borrower, and the lender receives collateral. In the “concrete” example, the newly cash-rich bank would be the receiver of collateral fromthe solvent bank, making a bit of a nonsense of the point the example was trying to make – i.e. that solvent banks are on an asset grab via collateral.

In fac, such is the fear of underlying systemic insolvency, that virtually the only bank-to-bank lending occurring is collateralised lending. The uncollateralised interbank market has not functioned since August 2007, effectively. Swaps (like futures) have always in my experience been collateralised.

The thrust of the piece, which I admit to not having read in primary form, appears to be similar to accusing, say, the Irish banks of attempting to corner the housing stock by means of cunningly advancing mortgages, rather than unsecured lending, to housebuyers in the period up to 2007, with a view to foreclosing and making a killing. Hmmm.

@ Aiman

the entire post you refer to up above (8.14pm on 14th) doesn’t make even a lick of sense. Its incoherent and rambling to the point that I’m not even sure what its trying to suggest.

@BEB – I was trying to be polite, and explain that it didn’t make sense, and why. The urge to be polite doesn’t often overcome me, so I yield when it happens.

@ Mickey Hickey
That’s the problem. You speak with certainty about things that nobody can be certain about.
Mrs Le Pen could do well at the ballot box (first round anyway). Nobody can deny that

I’m interested in your take on the lurch to the right. I think the unintended consequence will be isolation of the immigrant (muslim) minorities in those countries. This could open up potentially woeful fault lines. So the right in Europe will be old and kind of impotent (even though there might be some young people in it) but the backlash against it will be young and radicalized. It’s not so much the rise of the right as the reaction of the rest that will be the real global game changer

My take is its unhappiness with current setup. Why I can’t say. You keep ln saying its old people specifically men yet for these right wing parties to get the votes they do would require what 100% of all men over 45 in countries like France Holland Austria Switzerland and so on. Pretending its angry old men who only vote for them is borderline delusional.

The muslim question has been a significant issue in France since the “pieds noirs” of the De Gaulle era. It is something played out in many countries, we do not like immigrants but we need them. Even worse is the “we need them to do menial work” but we definitely do not need them to take “good jobs”. The Irish are experts on the problems experienced by immigrants. It ranges from large scale massacres in eastern seaboard US cities to “no dogs or Catholics” signs outside factories in places like Australia and Canada.

I heard complaints in Germany about Muslims not integrating and my answer was if they are ghettoizing they are not accepted so look at you own behaviour. The Irish ghettoizations occurred in response to hostility from the locals.

I do not see the Europe of today turning into the Europe of the Thirties. This current downturn is nothing like what happened in Germany in the Twenties or after 1929 worldwide. Within two years there will be definite signs of improvement and life will go on as usual.

@ Jean
What I’m getting at is the change in demographic of Europe. Europe is now an “old” continent in terms of age profile. That will influence the shape of politics and how things will look. The lurch to the right will not be 1930’s style – it will have a different character. Maybe that’s why the markets are not as afraid of it

In Ireland it is fashionable to play the demographic card touting Ireland’s advantage. My daughter phoned me yesterday to tell me about the fine fellas in their twenties from Tipperary and Dublin who installed her furniture. Two years in Canada and luvin it. As it has in the past Ireland’s demographic advantage is talking with its feet. The Irish football association (seems to be an amalgam of GAA and Rugby) in Toronto is now thriving with the influx of thousands of fine young men and women from Ireland.

By the way if I speak with certainty it is to cover up serious doubts I might be having.

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