The European Commission has published its new set of policy options here. There is now a four-week consultation period with key stakeholders.
The European Commission has published its new set of policy options here. There is now a four-week consultation period with key stakeholders.
41 replies on “Bailing In Senior Bank Bonds”
From which we conclude that the Commission believes that the LTRO has fixed all bank funding stresses, and that Spain is dandy?
Or that Spain is far from dandy but cannot be allowed to be the next Ireland, so a good dose of contagion rocking through the European banking system might be just what the politicians need to get their heads out of the sand?
I suppose the chance of Ireland retro-fitting itself into such a mechanism is zero? Any larger €zone member will be OK though, of course.
Believe it or not – the economies of the periphery need a much higher oil price + just as importantly positive money growth to promote good & service substitution and thus reduce oil money exports.
However Euro bank “investments” were dependent on the oil Fois Gras / BMW fitness regime remaining.
Its a unbelievable situation really – what have commercial banks got to do with the physical economy ?
Credit banks only function is to waste surplus energy – there is no surplus energy so why do we have Credit deposits ?
We have the absurd situation of wrecking what remains of the physical economy to peserve fictional bank assets ?
The money supply must divorce itself from commercial banks before we can have any recovery.
CTRL + F
Not one reference to Ireland?
Maybe my search box is broken.
”Banks provide vital services to citizens, businesses, and the economy at large (such as deposit-taking, lending, and the operation of payment systems).”
This report seems to ignore the function of banks as the creators of the digital money supply. Do the commission realize that when a bank loan is approved the bank increases the borrower’s current account without lowering any other account, creating both money and debt in the process?
There’s also no acknowledgment that banks delete digital money either. As a loan is repaid the customer’s current account is lowered, as is their debt. Since this is a stand alone transaction and no other current account is affected the money no longer exists.
The Irish may have a particular interest the extract below. Some pundits might like to dust-off their voluminous assertions that this is “unthinkable”, “impossible”, “morally wrong”, “not risk capital”, etc…:
“if, and only if, the total reduction of liabilities pursuant to points (a) and (b) is less than the aggregate amount, authorities should:
– reduce the principal amount of, or outstanding amount payable in respect
of, the rest of eligible liabilities that are SENIOR DEBT to the extent required (in conjunction with the write-down pursuant to points (a) and (b) to produce the aggregate amount and – require a payment from the Deposit Guarantee Scheme for the amount by which the write down and conversion would have been applied to the deposits if those deposits were not excluded from the scope.
They seem to be have a deposit-selling moment on page 7. Deposits wouldn’t be written down but deposit guarantee schemes would be?
Presuming it’s not an April fools joke on Ireland…as grumpy said, weren’t we told this was impossible? For a while some commentators here howled down and derided all suggestions of doing this, as not just impossible but unwise and so on.
Also well spotted no mention of Ireland or Iceland. The past appears to not have happened.
Lovely morning in SuperSweniorQUANGO_IBRC-AIB-BOI-NamaLand
‘The sale of Irish Life to the State will finalise the €4 billion recapitalisation of Permanent TSB before the separation of the banking and life businesses. The deal, which will be completed by June 30th, will push the State’s bank recapitalisation payouts from €62.4 billion to €63.7 billion.
The Irish Bank Resolution Corporation (IBRC), which is winding down Anglo Irish Bank and Irish Nationwide, has said it is in talks that could lead to it taking on residential mortgages from other banks, including Permanent TSB
However, IBRC chief executive Mike Aynsley said there were a lot of assumptions the Government had yet to work through and discussions with the troika were at early stages.
i think people said it was impossible outside of a pan-European resolution regime and bail-in rules. Which is what these are an attempt at.
“not risk capital”…ring any bells?
and its not! Or rather, it isn’t, but this proposal is now suggesting that it should be. Indeed, its suggesting that all liabilities of a financial institution, with the exception of deposits, should be “at risk” of a writedown. Surely this new proposal only backs up the idea that senior debt, as of right now, is not considered risk capital under the current regime?
Any chance of some serious negative implications from this on the cost of credit??
We’ve been through this before – that an accounting label ‘risk capital’ is fundamentally of little relevance to whether the money (capital) an investor invests is exposed to any risk.
The term ‘risk capital’ was never meant to imply that all other capital was exempted from the rules of capitalism. That there were some, scratch that, quite a few people who started to think that, just testifies to how lost the markets got in terms of risk assessment.
There is nothing new in what the commission are proposing here – they are just re-establishing the old, and correct order.
I thought the European Commission had been abolished! Didn’t anybody tell them?
Does Ireland have a Commissioner? I’d say it will come in really handy if we do. We can deploy her to ask a few questions at Commission meetings to make the system unwieldy and unmanageable.
Sure won’t we be much better off under direct French/German rule? Bring on the Fiscal Compact!
It would be nice if sanity prevailed but (as someone else previously noted here?) the Parri-Passu chorus did not pick their hymn sheets up off the street, the ECB will be dead set against this and since Merkel’s interests are roughly aligned with theirs there will remain a powerful alliance against this entirely sensible suggestion.
I imagine therefore that the ECB will try and delay any such scheme until all its stakeholders have sucked enough blood out of the debtor nations, we will get a bail in clause only after all the current investors have been made whole or otherwise indemnified by the state. Capitalism in finance will only resume after the costs of the last crisis have been fully socialized.
As you know yourself from Ireland Grumpy, nothing is risk free except being well connected – you can expect no apologies.
You are both right. The Seniors were not risk capital (EB) but funding but should have been at risk in the event of failure (Grumpy). However, the ECB ordained that Senior Bonds were senior to all other instruments including Sovereigns, although they did not quite put it that way. Effectively they threatened or pointed out that the EZ banking system would collapse if they taxpayer did not pony up. Then the Council operated in such a way as to destroy a good deal of the value of the taxpayers “investment” by implementing an excessively tight policy regime for the last 5 years.
Now EB raise an interesting point. If a bond holder gets put into a position where he takes losses he is going to demand more or supply less. Ergo, still more excessively tight monetary conditions?
“The past appears to not have happened.”
Past? What past? We have the most incredible eraser you’ve never seen.
Past? What past? We have the most incredible eraser you’ve never seen.
The Central Bank of West Asia will always have been in favour of bail ins, though with due regard to the double plus goodness of investor confidence.
@BEB: “Any chance of some serious negative implications from this on the cost of credit??”
Why should there be? Not to go all Scott Sumner, but money can always be made as tight or loose as a central bank wants it to be. Of course there may be a tendency for one kind of paper (no-longer-so-senior-bonds) to command a higher yield, but there’s no reason that I can see why a broad measure of the cost of financial capital should be affected.
It makes no sense that a sovereign should go bust just to honour debts of private companies. A state should have the option to intervene if it so chooses. If an investor wishes to get sovereign protection, then they should buy sovereign debt. Some posters 😉 suggest a system where Snr Bank debt is safer than government bonds. ‘Safer’ in the sense that the sovereign goes bust paying off bank debt.
Much hullabaloo was made when the EU raised country targets for protected deposits to 100k. Kinda jars with the implied guarantee of snr bank debt.
EZ banks are far more dependent on senior unsecured funding markets than most other advanced economies/blocs. Not one single senior debtor has lost money during the crisis, and even with 1trn in LTRO funding, the market is barely functional right now. Entire business models are having to be assessed due to the new normal in terms of bank funding costs and availability. More and more collateral is being ringfenced for secured lending, which actually increases the chances of senior unsecured liabilities (ie including deposits) being defaulted on and/or the state having to backstop those liabilities. Maybe this “should” happen, but with policy rates essentially at zero in all the advanced economies, we still have a very expensive (and getting more expensive) cost of capital. It is of course required to “force” the system to deleverage at a sharp pace, but this will obviously feed through into a higher cost of credit, less credit, and even less, more expensive credit again for all but the prime borrowers.
… so, following Herr Draghi interview with Bild on earlier thread, the Trillion simply went into the ‘big black vichy hole’ and stays there.
That said, appreciate the reminder that there used to be an institution known as ‘The European Commission’. I seem to vaguely recollect another institution known as ‘capitalism’, lower case “c”, that Adam Smith and Karl Marx used to ramble on about …
Purely as a matter of interest – how much genuine sovereign debt do we owe? The so called ‘bail out’ (sic 85bill) went into the lil ol Irish banking black hole but most of it escaped at the speed of a neutrino to fill little gaps in the ‘big vichy black hole’ …
@Bond Eoin Bond
I must read that again:
‘EZ banks are far more dependent on senior unsecured funding markets than most other advanced economies/blocs. Not one single senior debtor has lost money during the crisis, and even with 1trn in LTRO funding, the market is barely functional right now. Entire business models are having to be assessed due to the new normal in terms of bank funding costs and availability. More and more collateral is being ringfenced for secured lending, which actually increases the chances of senior unsecured liabilities (ie including deposits) being defaulted on and/or the state having to backstop those liabilities. Maybe this “should” happen, but with policy rates essentially at zero in all the advanced economies, we still have a very expensive (and getting more expensive) cost of capital. It is of course required to “force” the system to deleverage at a sharp pace, but this will obviously feed through into a higher cost of credit, less credit, and even less, more expensive credit again for all but the prime borrowers.’
The democratic world as we once knew it is now arse-ways: The Financial System has turned on its tail and eaten the System of Administrative & Governmental Power, and with this takeover is slowly digesting the citizen-serfs in the Lifeworlds which have been conned into providing false legitimacy to the captured Sovereigns. In essence, The Sovereign is no more. The only ‘primes’ are the uber-mensch Financials.
Little wonder that Patricial the Irish_Sovereign_in_Exile is abdicating shortly. (to be contd.)
” Not one single senior debtor has lost money during the crisis, and even with 1trn in LTRO funding, the market is barely functional right now. Entire business models are having to be assessed due to the new normal in terms of bank funding costs and availability. More and more collateral is being ringfenced for secured lending, which actually increases the chances of senior unsecured liabilities (ie including deposits) being defaulted on and/or the state having to backstop those liabilities.”
Yes, as predicted, the state sacrificed itself in a futile attempt to prevent the disintegration of the banks’ senior unsecured bond market.
I am interested in views as to whether we can yet be 100% sure that Ireland was playing out the role of Flight Officer Perkins in this sketch, and in nominations for role of Commanding Officer.
Point taken, but it’s not a valid critique of proposals for reform to say that the existing situation is a mess. Of course it’s a mess. That’s why there’s a need to start over. Depositors and bond-holders were living in a fool’s paradise. Then came the Eggertsson-Krugman “Wile E. Coyote moment” and gravity took over. There’s no going back.
I don’t disagree on the need to start over. They key is how to start over without shooting the economy in the head by accident. Its a bit like austerity – great in theory, but should we really be hardcore implementing it right now?
the world is hooked on the drug of cheap n easy credit. Only when it gets off that addiction, and view credit as a choice you can say ‘No’ to, will you get the sovereign power back. Significant political willpower and a period of unpleasant cold turkey may be required if you want this in the short term. More likely will be a medium-to-long term period in a cushty but less effectual Betty Ford for credit junkies.
‘kin academics! – publish a paper saying something that has been common knowledge for decades and bag yourself a place in history. Boo.
The Wyle E. Coyote moment was described to me more or less perfectly literally decades ago by an aware-winning fund manager who didn’t even have a degree. He has a tremendously insightful understanding of economics instead.
Opposition Party Warning
EU Fiscal Pact May Breach German Constitution
By Thomas Darnstädt
Germany’s opposition Left Party says the fiscal pact agreed by 25 of the EU’s 27 members may breach the constitution because — the party argues — it can never be rescinded. Legal experts are divided. But Germany’s top court may be called on to settle the issue, and to rule on Europe’s future yet again.
POSTPONE THE IRISH REFERENDUM ON THE FISCAL CORSET NOW!
The dictatorial logic of your local friendly ‘dealer’ – “hey, we know the drugs debt on top grade Kredit-H is not yours – but if we don’t get it from the high-stakes toker well we get it from all the neighbours in the vicinity or else we’ll break all your legs, or turn off your ESB at source and starve you all out – what do ya think this is – a bleed1n democracy.”
German lawmakers and the chancellor were all ears last Thursday when Gregor Gysi, the parliamentary group leader of the opposition far-left Left Party, addressed parliament. In the debate on the European fiscal pact, Gysi surprised his listeners with a few “constitutional issues” that “might” be worth “seriously considering.”
Gysi’s objections to the European pact for stricter budget discipline proved thought-provoking even for leading EU law experts. The agreement, says Gysi, a lawyer, violates Germany’s constitution, the Basic Law, because the country can never rescind it. He argued that Germany would be committed to drive with its debt brake on for all of eternity.
He may have a point. Steffen Kampeter, a senior official in the German Finance Ministry, confirmed what every reader of the treaty text will notice on the first read-through: “The treaty does not provide for a right to rescind.”
No to Austerity into Eternity!
p.s Rumour that Blind Biddy shot the dealer … I’m staying mum!
clausula rebus sic stantibus … think again!
Wolfgang Schäuble’s ‘Path of Virtue’
… for those poor eejits who sign up for an illusory plenary indulgence and austerity into eternity ….
The German government has long argued that strict fiscal discipline is the only way out of the euro crisis. Now, German Finance Minister Wolfgang Schäuble has come up with a new idea for keeping countries on the path of virtue. He wants independent panels of academics to keep a close eye on states’ budgets.
In addition, Schäuble’s ministry is also proposing that the role of the EU’s economic and finance affairs commissioner, a position currently held by Finland’s Olli Rehn, be strengthened in the future. According to the ministry document, the commissioner should be able to implement EU regulations “without the other commissioners or the Commission president having the right to object.”
Heavy! Really Heavy! Bleed1n Roight Heavy!
Time to call a Halt to this Galloperin_Lunacy. Nein Nein NEIN!
On Creative Accounting and the other Trillion …
The trillion-euro illusion
2 April 2012 De Volkskrant Amsterdam
On 29 March, EU finance ministers claimed to have come up with the right numbers with which to shield the eurozone from a new crisis. But it is a sleight-of-hand accounting that could crumble at the first sign of trouble.
In fact, there are no 1,000 billion dollars for the European Stability Mechanism (MES), the emergency fund that Spain and Italy will have to fall back on if bankruptcy threatens.
There are no 800 or 700 billion euros either, which are the amounts that the official declaration of the Ministers cites with pride. What De Jager and his European colleagues have rolled out is a sham. It’s a way of juggling numbers that undermines from the start the credibility of the relief fund, which will become operational on 1 July.
Angola continues to buy up Portugal
Spurred by the economic crisis, Angolans are eagerly buying up Portuguese firms, acquiring a wide range of businesses including banks, oil companies, media outlets and telecom operators. The trend is in part due to the lack of funds on one side and the abundance of cash on the other, but that is not the only explanation.
In a dell in West Cork, a little wooden mill stood on a stream.
Above the door, a sign in the lovely language of Gaelic read “Chatham House of West Cork. On your tongue shall the rules be binding.”
Inside a round faced red-headed wizard settled a series of strange instruments and bottles. Now and then he would let a strands of raw data into the mill-wheels which in turn ground them up to various dregrees, and then he would note carefully the outflows in various measuring jars and guages, from which final figures flowed, span through the air, before ultimately settling in the wizards book.
He seemed entirely and happily bound up in his work.
A rap at the door interrupted the steady sound of concentration.
“Come in Humbledore”, he called not in the slightest surprised.
The grand wizard Humbledore with his walking staff, his travelling clothes topped with a tweed cap, entered.
“Any chance of a cuppa Coffey?”, asked the senior wizard.
Coffey smiled the tight smile of a wizard who had heard that before.
“To what does West Cork owe the pleasure of the presence of the Grand Wizard of the Central Wizarding Bank of Dublin?”
“Ireland, Coffey, Ireland.”
“Outpost of Frankfurt.”
“Enough. Fiscal Wizard McHale tells me the models are all broken.”
Coffey paused at his work.
“All of them?”
“None of them work. Bags of figures come in from the CSO, where-ever, and whatever way you feed them in, they come out all wrong.”
“Miller error or mill error?”
“Who knows? Both I’d say.”
“Well fix them.”
“He’s trying. In the meantime, yours is the only mill that seems to work at all.”
Coffey allowed himself the slightest of smiles.
“I’m here, off the record of course, to ask you to show me.”
“What would you like to see Grand Wizard Humbledore?”
“Oh, let’s start with the banks shall we?” Humbledore made himself comfortable with the Grand Chair of Banking Wizardry which appeared comfortably under him.
Coffey busied himself mixing up rains for input, setting up alleys for roughage to be ground away, altering settings to allow for the fineness of the grinding.
“Look up there.”
On the wall was a map of Ireland. This time as the red-and-white cloaked wizard Coffey ground through the figures – if ever a wizard loved his calling it was he – the figures flowed into the map, and immediately towns appeared and disappeared, whole suburbs came and went. Great swathes turned into grassland.
But there were pockets of resiliance too and along the East the outlines of a megacity could be made out.
“What’s that?”, enquired Humbledore?
“Show me adverse.”
“How adverse, Grand Wizard?”
“75%”. There was a catch in Humbledore’s voice.
Coffey paused and nodded.
Now the sound of the mill grinding was enormous and the little wooden room was filled with noise that was like a solid grinding in the ears. The map darkened, and floming points of light leaped out, here, there and everywhere.
“What’s that?” mouthed Humbledore over the din.
“Oh that’s chains of banks exploding.” Said Coffey after the machine was stopped and all was quiet. “That particular thing melting down like a reactor was NAMA.”
Humbledore sat perfectly still for a moment, enjoying the pleasant humming of bees far away in the dell.
“Show me it all”, he said.
“All?”, asked Coffey, for the first time perhaps a little perturbed.
“Yes, I want to see it all.”
“With or without the Promissory Notes?”
“With them Coffey”, Humbledore said tetchily, “Leave them in.”
End of Part 1
The two wizards stared unblinkingly at an instrument that looked like a large thermometer.
It was marked from 0 to 120, where it stopped. At 30 there was a sign saying ‘safe’, at ’60’ there was a sign saying ‘allowed’, at 80 there was a sign saying ‘likelihood of failure’, at 120 there was a sign saying ‘bust’.
The wizards gripped wooden colums that support the ceiling for now the room jumped and twitched at the force of the mill-wheels grinding, and the noise would have intolerable for less committed men.
The red liquid in the guage stood at 118. It had risen and risen and their eyes, as it were, stood on tip toe in their heads, to see if had really stopped there.
Using a little magic, Humbledore whispered in Coffey’s ear.
“Show me with the new European unemplyment figures thrown in. And the next round of austerity.”
Neither men now looked the map of Ireland, which was burning away merrily – that is in the places where it had not gone completely black.
“No”, said Coffey, and he ran the mill down.
More than anything Coffey loved his little mill, and already he feared the repairs would take much time and effort.
“We both know what will happen.”
Humbledore idly watched the red line in the guage drop down. Yes, he knew what would happen.
“Well, thank you Wizard Coffey, for you valuable time.” Humbledore said with unusual formality and heaviness. Then he added, “Lane, what do you make of it?”
There was a silence.
“Oh come on Lane, you’re always watching”
With that a small china cat on the mantlepiece, with a slight but notable smile spoke up.
“Well it’s not good is it?”
“And what is to be done, Lane?”
“I am currently working with our American cousins. You will note, Wizard Humbledore, the Banking Resolution scheme is coming through.”
“Taxpayers should be protected, eh?”
“The Frankfurters hate reverse magic. Messing with time and all that.”
“Well, Coffey’s handy little mill shows the alternative.”
“Hmm, well. Better be gone before I’m missed”
And with that Humbledore was out through the door.
Coffey allowed a few moments for him to clear. “He’ll have his blue hat on already.”
This was true, the departing Humbledore now wore a grand conical hat of blue, marked with a golden E.
“Do you think it wise to talk to him of strategy? A man cannot serve two master and all that.”
In as far as a china cat could think, it seemed to think.
“I’ve said nothing he doesn’t already know. Anyway, if it wasn’t him, it would be some other Wizard. He’s what we have. Nobody wants another Greece both sides are going to have to do things they don’t like.”
“Are you sure about that? Some of those Frankfurt Wizards, they fear so much the return of the horrible Inflation Genie – what is Ireland to them?”
But the china cat was glossy and still now, and the mysterious wizard Lane was gone.
Wizard Coffey unwound a little. He began to potter about the mill again, tapping here, looking closely there. A man at home with his work.
He did not care to be bothered by the great powers of the world – but his little West Cork mill was the only one still grinding true. And he was deeply and immovably proud of that.
As a matter of interest, who is taksed with making submissions on these docments on behalf of Ireland?
Is this something the relevant Dail Committee should discuss?
Wot u smokin? U goin postmodernist on us?
The High Infants Class love it and seem to understand it! Jeez – don’t tell me they’re all on wesht cork weed! Told me they were makin nettle soup – due to De HossTerrrity as a kinaesthetic aid to deconstructing Eoghan_een’s Souper Sullivan … have we come this this?
The breakdown of antique financial-masonry (‘grand wizards’ ?), in the context of forces that have unmade their artificial world – by rescinding the laws which were it’s basis in order to wield greater control within it ?
Like cheating at Monopoly ?
The china cat intrigues me…