It has become almost fashionable to call for a banking union to complete the monetary union. This is what I had to say in today’s Sunday Independent:
The referendum result is a relief rather than an achievement. A No vote would have made a bad situation worse. The government needs to move on quickly in exploiting whatever opportunity has been created to reduce the burden of bank-related debt imposed on the Irish Exchequer. The misfortune of Spain presents an opening, since an Irish-style response to the Spanish banking crisis is clearly unwise. The banking crisis in Spain needs a European solution and the European leadership appears to understand that Spain cannot be cut adrift to embrace unknown, and unknowable, liabilities for the debts of mismanaged banks. Ireland was SETF (Small Enough to Fail) but thankfully Spain and Italy cannot be dismissed as peripheral. It is a shocking state of affairs when European countries can see the misfortune of others as a welcome development, but this is the sad reality which has been fashioned in pursuit of the single currency project.
The European Union is not structured in a way which encourages decisive management of crises. The intergovernmental nature of the Union and the inevitable reversion to national political priorities when crisis strikes create a predisposition to muddle, delay and half-measures. These features have been prominently on display since the Eurozone banking and sovereign debt crises erupted in 2008 and have seen both sets of problems intensify. One of the unambiguous lessons of history is that the costs of financial crises magnify when the policy response is too slow.
There have however been some potentially promising developments in the weeks leading up to the Irish referendum which received little public attention here, drowned out by the torrent of referendum babble.
The president of the European Central Bank, Mario Draghi, made an important speech at the European Parliament on Thursday. He described the existing Eurozone structure as ‘unsustainable’, and called for the creation of a banking union to under-write the failing currency union. The currency union has clearly lost the confidence of the markets and, more importantly, of the public, as evidenced by continuing deposit flight in several countries. Draghi is to be congratulated on his candour, a sharp contrast to the waffle and evasions of his predecessor, Jean-Claude Trichet.
Draghi’s remarks come in the wake of a series of speeches from ECB executive board members drawing attention to the need for centralised bank supervision and resolution, the absence of which helped to propel this country into a blind alley back in October 2010. The ECB’s behaviour on that occasion, insisting that a sovereign unable itself to borrow, should repay unguaranteed and unsecured holders of bonds issued by insolvent and closed banks, will come in time to be seen as an appalling misjudgement. Without helping the bank bond market in any discernible way, this ECB policy choice helped to undermine confidence in Eurozone sovereign debt across the board. This discretionary action by Trichet’s ECB was resisted at the time by IMF officials, whose judgement has been thoroughly vindicated by subsequent events.
The popular narrative that the sovereign debt problems derive from fiscal excess may be a reasonable characterisation in the case of Greece, but Ireland and Spain ran budget surpluses through the pre-crisis period, and had amongst the lowest debt ratios in the Eurozone in 2007. It has taken far too long for European decision-makers, in particular ECB officials, to acknowledge that this is mainly a banking crisis. Regional banking crises are to be expected in a currency union. They have been a recurring feature in the United States but are dealt with at federal level, without bankrupting individual states. The failure to anticipate regional banking crises in Europe and the subsequent decision of Trichet’s ECB to prohibit haircuts for unsecured senior bank debt has turned banking crises into sovereign debt crises, weakening banks which hold sovereign bond portfolios and inserting a new short-circuit into Europe’s financial system. A circuit breaker in the form of bank resolution would have been the better option.
ECB executive council member Peter Praet, speaking in Milan on May 25th. last, concluded that
“…….more is needed for the euro area to break the link between fiscal imbalances, financial fragmentation and financial instability. Europe needs to move towards a “financial union”, with a single euro area authority responsible for the supervision and resolution of large and complex cross-border banks. This authority should also be responsible for a euro area deposit insurance scheme. With bank resolution and deposit insurance funded primarily by private sector contributions, taxpayers would be shielded from picking up the bill for future banking crises. Essentially, I envision an authority similar to the Federal Deposit Insurance Corporation in the United States”.
Two other Executive Council members, Jorg Asmussen and Benoit Coure, have expressed similar sentiments in recent speeches. The EU commission has also been working on bank resolution proposals according to newspaper leaks and a definitive document is due to be released later in June. EU Commission president Barroso has also stressed the desirability of a banking union.
Whether Europe’s single currency needs a fiscal union, for which there is little political support, is unclear, but a currency union unaccompanied by a banking union is inherently unstable (‘unsustainable’, in the admirably concise judgment of ECB president Draghi). With free capital movement, no perceived currency risk, freedom of establishment for banks and a worldwide liquidity bubble, it is clear that bank balance sheets expanded far too rapidly in several countries, including Ireland, through the pre-crisis decade. The delegation of bank supervision to national authorities and the imposition on them of the no-bank-bondholder-left-behind policy is, Greece excepted, the principal source of the sovereign debt crisis. It is also a moral hazard machine, removing market discipline from banks in countries still solvent and capable of spawning further crises in the years ahead.
The solution is not a Europe-wide bank rescue fund, which could make the moral hazard problem worse, through substituting more credible backstops for the next round of banking excess. The solution is the restoration of market discipline through exposing bank bondholders to the risk of loss. Europe’s single financial market has been sundered through deposit flight and nation-by-nation re-matching of assets and liabilities. This is no longer a monetary union in any meaningful sense – no country has departed the Euro but it has already ceased to be a trusted common currency. Further financial dis-integration can be avoided only if bank deposits in all Eurozone countries are seen as equally secure, which means a Europe-wide deposit insurance scheme, ideally funded through risk-reflective and fair premiums. Banks, including those deemed too big to fail, should be required to carry substantial bond liabilities which can be bailed-in should the banks get into trouble. If this means more expensive funding for banks, so be it. This is hardly an unintended consequence.
The common currency introduced in 1999 was poorly designed, and the failure to build a banking union to accompany the single currency was the principal weakness. It is enormously important that both the EU Commission and the ECB are now persuaded that the monetary union project is incomplete pending new structures to deal with this omission. It is Ireland’s misfortune to have been the first casualty of this design failure, largely our own fault of course, but no country should face punishment to the point of national insolvency for the sins of bank mismanagement and poor bank supervision. It is too late to lament Ireland’s decision to join the Eurozone in the first place. There is no option of painless exit, as Greece may be about to discover. Countries not already in the Eurozone are thinking twice about joining and those who stayed out are silently thankful for the foresight of their politicians. The best outcome for those already in the common currency is that the design flaws are admitted and remedied, sooner rather than later. The referendum result is welcome but the flood of admissions that the common currency needs to be re-designed is far more significant.
Creating a Europe-wide deposit insurance scheme on the hoof is challenging and there are numerous difficult issues to be addressed in the design of a new bank supervision and resolution regime. One tough question for policymakers is whether a banking union can be confined to the Eurozone or must embrace the full European Union. The banking union cannot however be long-fingered until things get back to normal. Its absence is at the heart of the current crisis.
114 replies on “What Kind of Banking Union?”
The economic readjustment underway in the West is much quoted as significantly greater than those of recent decades, and still be played out. That the US integrated system will deal or has dealt with this crisis any better at a macro level is still unclear. I am unfamiliar with the responsibilities held by individual states and the US federal organs in terms of bank regulation and state budgets no doubt greater than the Euro area, if not then the responsibility largely falls back on the individual state or euro member. Either way a failure by the irish finance dept to plan for the consequences of Euro membership and the expedient way in which borrowing was regulated mean this is very much an Irish failure to protect ourselves and it is naive in the extreme to expect others within the Euro to be responsible for our failed economic model. The contrast of how Ireland allowed rampant asset and price inflation post Euro entry is in stark contrast to many of the countries now being asked to pay. Perhaps our treatment reflects reality and our failure to grasp our own destiny and our eventual default will ingrain a genetic response to prevent future episodes or irresponsible behaviour by the Irish people
I know I’ve probably missed this but don’t we have to make up our minds on banks. Either they are commercial enterprises subject to the laws of capitalism or they’re not.
If the state thinks that it is important that it’s citizens can store wealth safely then deposit banking should become a boring state function – not run by commercial interests at all. And the interest rate would be zero in that state owned bank. This would incentivise some spending and investment.
There should no middle ground here. Some state functions are too important to be entrusted to the private sector. Safely storing wealth is one of them.
The EU needs to cut investment banking completely adrift from the state. Take the deposits from every state owned bank. Put them in a good bank (a boring bank) – and then let the rotten investment part of the system tumble down.
Should the question not be: “Should we just scrap the Euro in an orderly manner rather than create a banking union and somehow keep it going for a while longer?”
Of course, that question will never see the light of day as it doesn’t underpin what the real PTB are trying to do.
I think Megan Greene from Roubini wrote sensibly on this recently. Can’t find the link.
I agree. Banking union is going the wrong way but banks see advantage in it esp. in keeping ‘enmeshing’ with state and keeping them propped up forever by state money during bad times – they do not want us to learn/apply the lessons of the past few years. Most banking activity needs to be completely segregated from state and ordinary public. The agenda is being taken away from the democracy. That way be dragons.
Deposit taking needs to be as safe as safe can be and that cannot be safe in the hands of the private sector. Take it away and let what’s left of the gambling industry live or die by the sword.
Will Hutton having a good old swipe at austerity last night.
Why are we saving virtually ALL the banks? Do you not think that might be something that’s being orchestrated? Please wake up.
Banks love taxpayers’ money. It’s a bit like vampires. Give them a bite of the young virgin and they just can’t get enough of it after that. “Gimme the money or I will bring everything down with me.” I can assure you, some bank CEO’s have made those threats.
“Unsustainable”……. for….. ? Which players?
I trust nothing that comes from your mouth sir.
…and I think getting our priorities right for once wouldn’t be a bad idea. What should we spend our energy, money and intelligence on: Creating a banking union or dealing with this sort of thing?
I despair of what humanity is becoming (has become). I really do.
This Greece was the bad boy meme is getting worn out.
They had a credit hyperinflation in Greece also.
They also got revenue from tourists from other jurisdictions which hyper inflated debt / credit / deposits.
Also if we, another non sovergin nation, had a air force a bit bigger then the RAF and submarines capable of penetrating a carrier battle group our fiscal debt would be somehow bigger I should think.
The Irish hypocrisy is very very disturbing to me , we are the snitches of the European classroom – in other words we have no honour.
They spent the money , we all spent the money created – what else can you do ?, you can’t really save it long term as the banks nakedly short the currency every time they give out a loan.
To save the currency the Core expects us now to operate commerce without much medium of exchange in our pockets as they think base money is bad somehow – this response is spectacularly after the event.
PS ED Harrison also covered the Target 2 thingy a couple of day days ago including both Karls and Buiter anylasis.
In my opinion Buiter acknowledges that treasuries effectivally issue fiat as CBs always need collateral money.
The problem for them now is that if treasuries issued unbaked fiat into the system in would expose even more banking waste for all to see.
They must therefore issue letters of comfort all over the shop – these letter of comforts is a pledge to tax the citizens so the banks can recapitalise themselves via “sovergin” debt.
But the treasuries don’t have to talk to the CBs and their sisters.
They can go tell those bastards they can take a long walk off a short plank and print by issuing taxable interest free treasury notes at will – this will cut the banks off from the sovergin debt spigot.
(I acknowledge this will not happen until we get a wider breakdown of this artificial debt crisis)
Chart of the day: Net Target2 Balances in Eurosystem show capital flight
It’s a little charitable to put it mildly, to term the Irish and Spanish crashes as being triggered by banking crises. Which came first — the chicken or the egg?
There were many other failures that left property booms overwhelm the two economies.
Embattled Bankia is a recent merger of seven politically-controlled caja savings banks.
Both are back to pre-boom jobless levels and absent property bubbles, would have shown little or no growth over the past decade.
The German newspaper Handelsblatt, says there are two problems with the European banking union as proposed by the EU Commission and ECB president Mario Draghi:
“It is a shocking state of affairs when European countries can see the misfortune of others as a welcome development, but this is the sad reality which has been fashioned in pursuit of the single currency project. ”
But thats another important problem. Ever since the French, Dutch and Irish all said No to the constitution/Lisbon but got it anyway its been clear that the EU we have is not a cooperative group but a dog eat dog. Even with a banking union aimed at ressolving the economic problems the issue of political legitimacy of the EU is still unresolved.
The sad reality of what the EU has become isnt going away. Thats going to have implications for Union
MH: Handelsblatt seems to be reacting to a collective deposit insurance model which would substitute a European guarantee for national ones. A banking union which required substantial bailable-in liabilities on bank balance sheets would not require official support to the same degree. The existing arrangement is a moral hazard machine which is breaking down in the distressed countries, whose sovereign guarantee has little value. Replacing this with a stronger guarantee creates a more efficient moral hazard machine. The design of the banking union is key and there is plenty of scope to get it wrong.
This recent IMF paper tries to quantify the subsidy to TBTF banks under the moral hazard regime.
These are, of course, the two major problems.
Nevertheless, I think that the issues raised in the article are the ones that cannot be avoided and that have forced themselves on to the agenda. Of course, it would be nice if Germany just caved in but this, it seems to me, is wishful thinking and the fact that it is being indulged in across Europe at the highest level does not alter the fact.
While it is an obvious thing to say, politicians do not like making difficult choices and alienating the people who elected them in the process. Either German politicians make the difficult choices or those in other countries do so. My money is on the latter being forced to do so because of the relative strenght of the two sides.
There was discussion of some of the issues on the thread dealing with the results of the referendum, especially as to whether the US should provide the model. Professor Adalbert Winkler has, in fact, done the intellectual groundwork in this are and I have linked to it on several occasions.
All will, presumably, be revealed when the Commission tables its proposals on 6 June. They will, in all likelihood, constitute a halfway house with some sort of co-insurance and sharing of risk but with the political cost more equally shared than is at present envisaged by the countries on the debtor side of the ledger.
Colm, you cast light on some of the more relevant issues that must be dealt with. To confine myself to Ireland which is a relatively opaquely governed country. To my mind the gov’t was buying votes and “campaign contributions” by priming the pump for at least four years after it should have been in the counter cyclical mode. There are issues like NAIRU which on its own should have been dealt with as soon as the skilled trades started leasing Mercedes. Sure didn’t we have our one trick pony i.e. low corporate tax rates, the new holy water. Our non existent bank regulators are one of a number of useless coffee klatches on Kildare Street. The lack of an independent deposit insurance scheme, quite simply criminal and the ultimate in stupidity.
I totally agree with you that a Europe wide deposit insurance scheme is now absolutely necessary to avoid a Europe wide banking collapse. Euro bonds backed by all EZ members collectively are an essential tool. Ireland badly needs responsible gov’t instead of the Head Waiter and the waiters that we have been electing for almost a hundred years. The banks operate at the government’s pleasure and can and should be tightly regulated, there are no valid excuses for blatant negligence.
@ MH and Colm McCarthy
This presentation by Winkler may of interest, especially as it deals with the issue of moral hazard.
The argument is a bit circular.
While I lay no claim to technical knowledge in this area, can the banks afford bail-in arrangements without the support of their respective sovereigns? On deposits, the financial press identifies 3 trillion as the total sum. How could this be guaranteed?
What is certain is that decisions are required urgently and the route of the adoption of a binding Reguation under Article 114 TFEU – even the announcement of an agreement to agree it – might do the trick.
Where does such an eventuality leave the UK?
What is credit and is it required for a fully functioning economy and creation of sustained and sustainable economic growth? If the answers are “Yes”, than banks are more than just simple commercial enterprises, it’s just to what degree that we need to agree on.
Secondly, deposits and senior debt – are these risk capital or should trust be seen to at least some degree as protected funding? If they are risk capital, you increase the chances of bank runs and the financial system an inherently more unstable place. Should governments view a decrease in that instability as being a positive for economic growth?
Why would you want to form a union with a Den of Vipers ?
One snake is enough for anybody.
This problem will not be solved without the printing of money by truely sovergin goverments.
As this crisis is a leverage crisis created by the banks credit hocus pocus.
You see the relationships between countries and geographical areas have no physical economy rationality anymore.
Ireland and the Caribbean are unfortunately the most extreme of these cases –
Which means their domestic economy essentially does not exist and cannot now be called upon to do anything of consequence. -as it has been squeezed out by these fluid destructive capital flows.
Money essentially does not flow out of any specfic countries productive capacity anymore – it operates withen a untaxable credit ether floating in the monetary stratospere…..when the oil stops flowing to its engines it becomes a very poor glider.
A banking union may do some good to restore confidence in the Euro in the short-term.
However it won’t tackle the root of the problem. It will still be the case that every euro will have it’s corresponding debt and it will still be the case that any new Euro is expected to originate through the bank loan process.
Even if Ireland get a deal on the bank debt whoever owns these bonds will have to write-off a series of assets. In many cases these bond holders are other banks in the Eurozone and thus the fear of contagion.
A better solution would be to allow the Central Banks to create debt-free bank-account money as well as cash for their Governments and use it to repay these banking debts.
This wouldn’t be anymore inflationary than writing the debt off because quite quickly this money would find it’s way to companies or households with a debt to a bank and the money would be canceled out of existence through the bank’s loan repayment process as usual.
While not any more inflationary it would be a much smoother way to deal with bank debt and could pave the way for a more permanent system of debt-free money creation thus alleviating the primary cause of future debt crises
“I know I’ve probably missed this but don’t we have to make up our minds on banks. Either they are commercial enterprises subject to the laws of capitalism or they’re not..”
Thank you for that comment as it cuts through 95% of the crap spun in relation to this issue. Its the slightly pregnant argument all over again. It doesn’t wash. The bank financiers are either risk takers or they are not. There should be no middle ground if your on the side of the capitalism model or there is no upside for financiers on the side of the ‘boring bank’ model as described. When viewed in this manner the world becomes a lot clearer.
As CMcC correctly notes the no bond holder left policy has been a disaster principally because the ECB et al did not fully appreciate the question posed by Eureaka above. The half way house solutions have not worked, won’t work and will likely bring us all to much more dangerous phase where trust breaks down in a monumental fashion and maybe Marc Faber will be proven correct where he suggests the seeds of WWIII are fast germinating.
I don’t think I’m saying anything new. Wasn’t this the way it was meant to be after the Great Depression – a separation of deposit and investment banking?
I think that we need to go a step further now and put deposit banking firmly into the hands of the state and have no interest generated on savings.
Then leave a separate fully capitalist fully commercial sector to invest money in an attempt to make returns. The idea of having 0 interest on the deposit side is that it encourages people to divert some funds to the investment side. And I think the search for the guaranteed return on savings accounts lead to a lot of this chaos.
Banking should embrace this. It woudl lead to a triumph of te smartest as opposed to the most amoral. Take the state out of he picture and the whole thing gets a lot cleaner.
I’m sure there are things I’m missing but it’s an interesting idea to think about. Instead of guaranteeing deposits held in failed banks – move those deposits to an ECB backed good(but boring) bank and let the failed banks fail
Reuters had a good report recently on the main elements in the Commission proposal (via the Telegraph).
The take of a Frankfurt economist with a development bank background and years of international experience.
1) Yes, banks are independent commercial enterprises.
2) Governments are not legally bound to circumvent the receivership/examinership route in the event of bank failure.
3) But, the consequences of bank failure, even small banks are so destructive to public confidence without a cast iron deposit insurance scheme that it is inconceivable that any gov’t would let any bank collapse.
4) The US system which manages bank failures every month and is also used by the Germans works well. The stock holders are wiped out and the bond holders take hits according to their seniority. The depositors are protected to a ceiling determined by the existing deposit insurance. The failed bank is usually folded into a sounder bank.
5) I had stated it was lunacy for the Irish gov’t
to bail out its banks other than to protect depositors up to a preset ceiling. He put that in terms of orthodoxy being fine but the hit to the well being of the population far outweighed the cost of rescuing bankrupt banks.
6) Irish law putting bondholders at the same level as depositors he saw as deeply flawed. However an instant fix would have destroyed investor confidence.
We stumbled and bumbled into this one and the Gov’t was damned if it rescued and damned if it did not rescue.
Why the assumption that banks have to be the key instrument of monetary union? If capital wants to move across borders looking for higher returns, it could do so through securities markets. In fact, since commercial real estate if not residential, is clearly a fundamentally risky proposition, having such a high mix of debt finance is always going to be asking for trouble.
There’s a broader picture behind all this. Prior to the mid nineties most investment funds that had asset allocation between classes (eg shares, bonds, index linked, overseas etc) as part of the management process were in the habit of having majority holdings of equities (shares) if not constrained by liability profile or influenced by particularly bearish market strategists. This meant there was plenty of funding for share issues and, importantly, a natural limit of funding for bond issues and by extension debt funded businesses, projects and states. Limit is too strong a word but you get the idea.
Since then there has been a big shift as a combination of tax breaks for debt funding, the influence of actuaries on liability matching policies, equity market volatility, low inflation etc etc. Actually “wall of money” is more appropriate than ‘shift’.
The result of this has been the gradual movement of the line that demarcates something appropriately funded by equity investment (risky) as against something appropriately funded by lending (all you have to do is work out that it won’t perform so poorly that the debt will not be repaid). More and more risky investments have been funded by a queue of debt investors.
This has encouraged overly easy financing of banks which flowed through to inappropriate debt financing of projects (like property development of fields in the back of beyond) which should, if at all, have been financed by equity investment.
“3) But, the consequences of bank failure, even small banks are so destructive to public confidence without a cast iron deposit insurance scheme that it is inconceivable that any gov’t would let any bank collapse.”
Your German economist evidently wasn’t around when BCCI, British & Commonwealth Bank and a few others went down and took senior creditors funds with them. All that did was get those investment advisors and asset managers who had got sloppy to do what they should have been doing all along – thinking about where they put money.
Those were smallish banks, but the principle that no bank can be allowed to fail is simply wrong, as is the idea that senior bank credit was never capital at risk.
The fundamental shift towards risk-aversion, started originally by people like the Boots pension fund trustees has effectively resulted in the risk being dumped on (and bizarrely accepted by) states and their taxpayers 15 years later.
They say there’s no such thing as a free lunch. Maybe its time to copyright “There’s no such thjing as a risk-free lunch”?
@ Frank Galton
I think that the simplistic answer to your question is that one can dissolve a bank but not a sovereign state.
This may, of course, be just another example of “groupthink” but Gavyn Davies, as usual, has the full insight into the ins and outs of what is under discussion.
From 1999 onwards David McWilliams was screaming to everybody in Ireland that there was a massive property bubble –the house was on fire–please somebody help help help. David was told calm down,have a holiday,you’re under too much stress. It’s almost certain if the Irish property bubble had been dealt with earlier –the Spanish authorites may have taken corrective action. Unfortunately the Irish professors of soft landings won the day and the rest is history. below is the link to the simple property valuation error that creted the greatest bank and property crash in the history of mankind which banrupted Spain and Ireland http://www.independent.ie/opinion/letters/bubble-values-3034584.html
What analysis did people undertake and what advice did people take before fanning the flames of the Irish commercial property bubble by taking out leases that contained upward only rent reviews? Why didn’t they listen to David?
Re-Colm McCarthy:’Further financial dis-integration can be avoided only if bank deposits in all Eurozone countries are seen as equally secure, which means a Europe-wide deposit insurance scheme, ideally funded through risk-reflective and fair premiums. Banks, including those deemed too big to fail, should be required to carry substantial bond liabilities which can be bailed-in should the banks get into trouble. If this means more expensive funding for banks, so be it.’
The ratio for funding for this would be lop-sided, though. And Schaubel said that these gifts, if given, entail sovereignty & competence surrenders. And thus we move away from the whole ‘partnership’ pretext of the EU – since the Merkel & Sarkozy appearances – and the media seem to be unconsciously participating in the ‘normalising’ of this – a core-leaderership (illegally) are assuming suzerainty over the parliaments and peoples. Whatever about the constraint of ‘realpolitik’ (which themselves hold no moral or democratic validity), this is now being touted as natural and inevitable.
The whole viability of the EU, in it’s earlier days, was the way in which discrete parts could viably participate and remain what they were – this is being destroyed. What we’re being led towards is in no way different from any other instance of annexation that history supplies us with.
You have been one of the few commentators to have dealt in any detail on what you have called ‘ECB duress’ regarding the banking issue here, and so deserve commendation for treating the ethical or moral aspect of what has happened as something that deserves more than mere notional regard.
(elsewhere on this site I have quoted extensively from your articles when mentioning my own firm but less-substantiated belief that the ECB ordered the guarantee – I have emphasised when doing so that this does not seem to be your position)
Given the first point above (that a ‘nucleus’ of power will accompany the creation of either/or ‘Banking Union’/eurobonds, etc; to whatever extent this will be necessarily German, or perceived as such), is this political transfer not merely an extension of the same ‘duress’ ?
I realise that for the integity of the discipline, economists will present their materials without admixture of politics, but the former has no existence in the Platinic sense or otherwise outside the world where the latter operates.
As such, there are concerns which – while remaining neutral, if necessary – need to be at least alluded to more often when these matters are being described.
re-Michael Hennigan:’It’s a little charitable to put it mildly, to term the Irish and Spanish crashes as being triggered by banking crises. Which came first — the chicken or the egg?’
Surely the scale of the guarantee would have had much the same effect here even if Ireland was not running her PS & Welfare on balooning stamp duty, and was in ever other respect virtuous ?
I might be mistaken, too, but hasn’t it been alleged that much of the money entering the banks was going into various projects abroad, and that the investment; schemes were consciously using the local operations as convenient proxies, to bypass regulation ?
The Irish State in the 2000’s funded itself through property related taxes, which were ultimately fuelled by excessive lending by the banks. The profligacy of the Ahern/McCreevy/Cowen era was built on the back of credit excess. As Micheal Lewis wrote, the Irish too found themselves alone in a room full of borrowed money, and they had no intention of turning the lights on.
But does this mean that the Irish state should pay for those same banks? No, they are private companies and should simply go bust. Does this mean that sharholders should lose? Yes of course. And should bondholders be burned? Absolutely.
And should depositors in Irish banks also lose their money?
Yes, they should.
The “ordinary depositor” in Ireland’s banks has kept his money in reckless, irresponsible, and insolvent institutions. Why should Irish people, broke from austerity, with no money in their accounts at the end of the month, guarantee absolutely and eternally that someone with money in Anglo or AIB has to get it back. It’s nonsense. It’s moral hazard and blackmail rolled into one corrupt package that is sinking Ireland and the democratic continent.
Banks must be allowed to fail. There is no other solution. The socialisation of losses is rewarding incompetence and corruption, pauperising ordinary people, undermining the authority of the state, and driving a dagger into the heart of civic society. We are witnessing political upheavals and bringing back the days of communist and fascist gangs on the streets. And all so men who add no value to anything can hold on to their lost bets.
Banks must be allowed to fail. No lesser banking union will work. We cannot accept dictates and blackmail from Germany or any other country, forcing us to put money into private companies, to pay the bonuses of bankers foreign and domestic. We must never again have to ask permission to apply the bankruptcy laws of our own land. Never.
All the Irish banks must be wound down. Private BoI and “public” AIB included. The depositors must accept their losses. The rest of society can then move on.
@ John Corc
Seriously dude, give it a rest. You’re using this site to repeatedly report the exact same comments, big-up your media appearances, and call the Irish electorate stupid for not helping you reverse your own stupid decision making. Tough.
A I read the last few years most people see a difference between deposits and bonds of various seniority. A cast iron guarantee on deposits and none whatsoever on bonds would perhaps increase bank originated funding cost but the present madness of no bond holder left unscathed has done so also by increasing the risk free (hahaha) rate.
What is austerity withen the Eurozone ?
It is simply a method to save a stock of debt , it does not necessarily save real resourses.
France is stepping up its rail programme – where is it getting the money ?
Its drawing on our accounts , just as Germany is although I would argue at least France is trying to increase its wealth base much more then Germany which is on a Mercantile bad trip once again.
Within the eurozone when we consume less real resourses it drives down core yields while peserving the hypothetical value of each euro……its a sort of reverse transfer union.
This stuff going on may not be a stimulus euro wide but it is transferring real energy to the core none the less.
For example France is rebuilding a old railway line between Chartres (pop :39,122) and the small town of Voves (population 2,910) (with nothing in between but fields)
This will serve as a mixed freight / passenger railcar line mainly used for Grain transport but with 3 passenger services a day probally using single railcars such as these.
But the line is not unlike Foynes …. indeed Foynes is far more suitable – but we have no money you see…….its flowing to the core.
A deep sea port with no rail access….. Ballycummin estate West Limerick (pop 17,490) with no rail access……with Patrickswell , the tourist town of Adare , the nice villages of Askeaton and Foynes port village…….Hmmmm something not quite right in that me thinks.
Its quite clear there is a recent reversal in French regional hub transport policey of the 70s when old lines were closed to pay for high speed.
They are preparing for something me thinks.
If yee lads don’t believe me go to
3.Tous le Projets
4. Réouverture au trafic voyageurs de la ligne Chartres-Voves-Orléans
Télécharger la fiche d’information (press statement for most recent budget projections)
RFF alone(just one part of the system) will spend 3.4 real Billion euros this year … thats not claims on fictitious wealth turned into money as normally happens in Ireland.
Just saying like.
The root cause of the current crises in Ireland and Spain was the madness of property bubbles. Their banking crises are an effect.
The social sciences need to get to grips with the fundamentals of asset bubbles.
Why did Ireland and Northern Ireland with very different currencies, national governments, laws, and regulations, have very similar property bubbles. And later crashes.
sorry – BALLYCUMMIN ED Pop 17,490.
The implications of a ‘Banking Union’ as seems to be envisioned and a ‘Fiscal Union’ are both looking the same – an insurance scheme to underwrite private investors.
And the engine of this is the co-opting of entire countries.
‘The root cause of the current crises in Ireland and Spain was the madness of property bubbles. Their banking crises are an effect’
– Mutually inclusive pathogens, I think.
Both feeding on their host countries.
And like the case of the swine flu, engineered by the same company that sold the vaccine, I think we need to look at the ultimate source of the problem as being co-extensive with the proffered cure of a Banking Union.
Mark: I do not know what role the ECB played in September/October 2008, in the genesis of the blanket guarantee. There should be an inquiry.
OMF: Except in Anglo and Nationwide, bondholder haircuts would, I think, have restored balance sheets without touching depositors. There were enough sub and senior bonds. I cannot be quite sure of this, since there has not been an inquiry.
When you consider that RFF does not cover rolling stock ,companies such as Systra, much of the Paris transport system , all of the massive Tram investment in now dozens of French cities / 100s of tram lines & Corsica and Nice – Digne (both of which I have travelled in the past) the fixed capital investment is perhaps approching the French Nuclear investment of the 70s and 80s.
Even the Notoriously unreliable private tourist / commuter line of Nice – Digne have got new vehicles recently.
The money is flowing to the core……. the Euro was the biggest con job of all time and yet even after we realise this we continue to vote for it!!!!!
What must they think of us ?
Retarded I guess.
A timely intervention by George Soros but somewhat apocalyptic.
I am confining my field of vision to retail, deposit taking banks. These cannot be allowed to fail if the depositors are not protected by a known level of deposit insurance. The damage is caused by fear and uncertainty which leads to outward ripples that take down even sound banks that do not have deposit insurance. The deposit insurance has to be credible and at arms length from Gov’t and banks. It can be operated by gov’ts but as a separate legal entity managing its own funds with an assured inflow such as a 0.2% levy on all bank deposits annually, more if the bank regulation is lax. The managers of the deposit insurance scheme would be free to deny insurance to any bank deemed to lack good risk management. In Ireland of course cronyism and nepotism would run interference via the gov’t from the top down. In time we will learn to vote responsibly.
Anglo for example would not be considered a deposit taking retail bank and would not qualify for deposit insurance. Also rest assured that the banks paying the levy would rat out the non compliant very quickly at the prospect of increasing levies.
Since Anglo were haemorrhaging €1.5 billion a day at one point, it would depend on _when_ the bondholders were finally burned.
But just burning bonds is not a solution to a deliquescent financial system. Depositors keep their money, and the banks’ management and boards keep their pensions and/or salaries. No one who really matters has any skin in the game.
And so the crooked game goes on. Anglo Irish Bank still has ~1500 employees. The very people who played their part in losing over €30 billion are still in their jobs, still making decisions, still taking risks and making mistakes. Incompetence has been rewarded. The game goes on as it did before, and the people who don’t play it are forced to pay for all.
It’s not enough to just to exposing(reintroduce) bondholders to losses. You have to expose bankers and ultimately depositors to the same. They have to stand to lose their jobs, their pensions, their saving if they choose to work or save in a “frat-party” come finance house. The most shocking element of Simon Carswell’s “Anglo Republic” was the descriptions of Anglo’s Credit committee meetings. Everyone associated with the place deserves to lose everything. There’ll be no more moral hazard after that.
I extend these arguments to AIB, BoI, and every bank in Europe. Don’t pay anything, to any of then. See how long the Germans will want “ever closer union” then.
You have said everything a lot of what I want to say thanks! The day after Ireland throw away another card by voting “Yes” we turn around and make noises about cutting or negotiating some kind of deal on odious bank debt.
At first I thought, the only “deal” we will get is, if we are thrown a few scraps from the ESM table, but the more I think about it, the more I accept what Constantin Gurdgiev says, that, once all our debts are converted into ESM it effectively becomes impossible to repudiate them and that, “they will not be written down by a single cent”. Any write down would automatically signify a a default on ESM or a default within the ESM. According to Constantin our converted debt within the ESM become “Super senior” and it would become impossible not to pay them and paying them may even take precedence over IMF debt. We may get some temporary relief on interest rates but the debt deflation will continue essentially unabated.
British & Commonwealth, BCCI and Anglo all took ordinary deposits and had a limited deposit guarantee scheme behind them. That the first two were let go and I bet harly anyone reading this thread can even remember much about them is a comment in itself on the folly of the total, total bailout of Anglo’s creditors in 2008.
Merkel seems to be pushing toward a fiscal union (of sorts) but blocking any move toward a banking union. I do not understand her logic for that — what is the essence her argument? The banking union seems more crucial, outside of the Greek case, which is borderline hopeless anyway.
Re Soros link….thanks for an interesting article.
I am somewhat skeptical that an operator like Soros would spell out the market strategy he is employing. On the other hand, he may be a true philanthropist these days and is genuinely concerned about the possible/imminent demise of the european dream. He seems to lay the blame squarely with the “core”……
“Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is no sign of this happening.”
@ Grumpy May I firstly say that your comments are always excellent. The Irish commercial property market is an organised cartel and if you wanted to trade on the Irish high street or shopping centres then the cartel organised these feudal leases. Irish commercial lease law i.e. upward-only rent reviews tied to long leases, was the most anti-tenant lease law in the world.
Why did no other eurozone country have a massive commercial property bubble and bust?
The eurozone is a group of seventeen countries with a combined
population of three hundred and thirty million citizens. All member
countries have the same currency,the same central bank,the same
interest rates and the same commercial property lease law except one,Ireland.
Ireland has very different commercial property lease law to all other eurozone
countries. The three components of all countries commercial lease law
is the length of the lease,the rent determintion process and lease exit
strategies/break clauses. In all other eurozone countries lease lengths
are short,say three to ten years,with break clauses and rents are
indexed annually to changes in the consumer price index. In Ireland
lease lengths are long,say twenty five years,with no break clauses and
rents are reviewed every five years using the ratchet upward-only rent
review process. This review process used the highest rent as evidence
against all tenants and was open to malpractice and corruption.
Irish commercial lease law was a twinheaded monster which incentivised
the over-renting of tenants and more damaging,it was the rocket fuel
for the commercial property valuation model which created the monster
commercial property bubble. When this bubble burst it destroyed our
entire Irish banking sector. Reckless Irish banks lent tens of billions
against these ruinous leases,not against the properties. If Ireland
had had regular eurozone commercial lease law it would have been almost
impossible to have had a commercial property bubble and crash.
In my case my lease is a thirty five year lease and the bubble came along after 20 years of the lease has elapsed. See below for details
I sincerely appreciate your interest. Commercial property is meant to be a service to enterprise, trade and employment,however in Ireland the cartel organised these ruinous leases to destroy all three.
Can’t argue with much of that, except perhaps to add that in addition to bank resultion at a euro-wide scale, there should be limitations on cross-border capital flows – money should not slosh in at an unsustainable level to an economy, equally, it should not be permitted to slosh out at the first cloud (turning a shower into a deluge).
Hoganmahew: If capital controls are required to make a supposed monetary union work, what does that tell you?
Listen you lot and especially Colm McCarthy.
This is all a designed crises which is leading to a federal Europe which could,nt be achieved through Democratic terms so lets do it through a crises instead. Quit wasting your mental energy and see it for what it is. As for the Fiscal Treaty, its long game is Privatisation with Slippers. I have,nt got a degree in economics but I do have a Beady Eye.
re “Merkel seems to be pushing toward a fiscal union (of sorts) but blocking any move toward a banking union. I do not understand her logic for that…”
Clearly the German banks would suffer badly in the event of a robust EZ wide banking resolution.
Fiscal Union is an aspirational nonsense that will not happen but carries a fantastic austerity stick to beat the peripherals with.
Banking union on the other hand brings substantial cash losses straight to Germany’s door with a stroke of pen.
Germany will oppose banking union with the same force that the ECB applied to Ireland.
‘No bank bondholder’ gets a haircut has been the all powerful policy position so far even though objected to by the IMF. Even more powerful that ‘State pay their debts’.
That core policy would not have survived until now unless Germany had been behind it all the way.
I found it to be a very interesting presentation and politically exceptionally well informed, as one would expect. I shared the general scepticism with regard to “reflexivity” when I first tried to get my head around it but it is gaining ground relative to the brand of alchemy propounded by modern mainstream macro-economists about whom I had already become highly sceptical.
His strictures with regard to the design of the euro are also now accepted wisdom.
There are reports in the popular German newspaper Bild that the four horsemen, Van Rompuy, Barroso, Draghi and Juncker have been mandated to come up with a general schema which, unfortunately, seems likely to include something for everyone in the audience, including another attempted push on tax harmonisation. However, I think that this will come to nothing. An FTT on the other hand, on which the SPD is insisting, and on which Merkel is now reported to be moving – despite the opposition of the FPD – seems a definite runner. The proposed bank resolution route has to be funded somehow.
As to the continuing post mortem on the corpse of the Irish banking system, what puzzles me is the fact that little regard appears to be had to the cost to creditor countries of providing assistance at rates well below those of the IMF and, of course, the markets. Are the countries concerned not, in effect, participating in the bailout of their own banks? German banks have, reportedly, a high exposure to Spain, hence Berlin’s obvious – if denied – efforts to get the Spaniards to take their EFSF medicine.
I come back again to the situation of the UK which is of more than passing interest to Ireland. The so-called “negotiating box” i.e. the parameters of the negotiation for the next seven-year multiannual financial framework has just been agreed under the Danish Presidency and this matter will also come up for discussion. Decision time for Cameron.
The attached Lex FT article dated August 31st 2009 explains that the upward only rent review lease clause was a bomb waiting to explode. The UK escaped the explosion because soon after their property crash their economy boomed and the crisis was averted. In Ireland`s case the explosion destroyed our banks and our country. Upward only rent review tied to long leases, just didn`t destroy the tenants, it massively inflated the commercial asset pricing model which created the monster commercial property bubble.
UK commercial rents
Published: August 31 2009 20:22 | Last updated: September 1 2009 09:10
Most industries are suffering from falling prices. Not UK commercial property. Property trusts such as British Land and Derwent London have reported relatively upbeat earnings figures; in spite of continued falls in property valuations, rents have generally remained strong. This is largely due to “upward-only” contracts, whereby rents rise through the life of a company lease, whatever the state of the broader market. However good this industry norm might sound for landlords, it also represents a potential timebomb.
As Nomura’s rent-free move to a new London headquarters shows, the problem comes when contracts, typically for five years, but sometimes 10 or more, expire or otherwise lapse. If market rents drop in the interim, leases are renegotiated at lower rates. That is what is happening now, after vacancy rates doubled over the past two years. By March, new rental contracts in the City had dropped by more than a third. This has re-focused minds on the remaining life of property companies’ leases. At Land Securities, about 22 per cent of lease contracts will expire or can be broken by 2013. At Derwent London, it is almost half.
Upward-only rents have come under pressure before. In 2004, the government considered banning them. That initiative fizzled out in the boom, but now tenants have become increasingly vocal; Ireland banned such contracts in July after retailers complained they gave an unfair advantage to new entrants. Meanwhile, high street heavyweight Philip Green, owner of the Arcadia Group, is seeking other concessions. Landlords have successfully argued in the past that upward-only reviews keep overall rents down by providing certainty of returns and ensuring a stable supply of new properties. The recession, and property surplus, are putting paid to that. Meanwhile, the timebomb ticks on.
@ Joseph Ryan
Please to explain! Banks are no more popular in Germany than they are anywhere else. The whole purpose of the exercise, as I understand it, is to break the link between sovereigns and banks and to make the latter pay for their own breakages.
You are assuming a level of competence and forward planning that the leadership of the continent simply does not possess. These jokers are barely able to cope with what’s coming next week, let alone design and implement master-plans over decades.
Never ascribe to malice that which can be explained by incompetence—and self interest.
“If capital controls are required to make a supposed monetary union work, what does that tell you?”
Absolutely. Without a single regulator, though, gaming of capital movements will continue leading to regulatory slosh. It’ll be someone else next. Never mind the Germans, I don’t think the Dutch or the Luxembourgians will go for pan-european banking standards, capital ratios, capital asset eligibility enforced by a single non-national authority.
So in the political absence of what should be there, we’d better have rules that stop the worst excesses that arise out of the crapulent setup we are stuck with. I don’t see a real problem with that in as much as every other large currency area (okay, the dollar) has its own problems and its own mad rules.
Wolfgang Munchau answers the question posed both by CmC and Gavyn Davies. (He must also have been reading Soros).
He comments that “A proper banking union would come as a shock to many Germans, including those in the media”. It would also come as a quite a shock to the City of London, an aspect he does not go into.
I read that Lex as warning of risk to the property sector investor as rents may fall significantly – that is the time-bomb referred to – it is aimed at shareholders.
Of course UORRs inflated the asset prices. The initial rents would have been higher in their absence. People signed them after thinking through what they were doing, and exercising their judgement presumably. More cautious potential tenants were priced out by less cautious ones – some even went out of business as a result.
“Please to explain! Banks are no more popular in Germany than they are anywhere else….”
In that case a robust bank resolution should pose no problem for Germany. But it does. So banks may not be popular in Germany. They will be even less popular if Merkel allows a proper bank resolution through. But so will Merkel.
A bank resolution brings immediate cash losses to banks, insurance companies, pension funds. To savers in other words. And there are a lot of savers in Germany.
To my mind ‘Follow the money’ is the best guide to the European politics and policies of the last four years, particularly those of the ECB, France and Germany.
@ Joseph Ryan
Germany already has a robust national bank resolution scheme and savers are not complaining. The question is whether they will do so if an attempt is made to create one at an EU or, more likely, EA level. Munchau makes this point, especially as Merkel has made no effort to prepare the ground.
Incidentally, was it not Ireland that set the precedent with regard to accepting national responsibility for bailing out banks?
Great link – thanks.
I don’t see a good outcome medium term here.
Here’s how I see it:
1: Germany will be so freaked at the Spanish numbers that it will cut Greece loose as an example
2: once Grece goes Spanish international trade will be crippled and it will have to re-introduce the Peseta
It’s at that point that the depth of the crisis will become apparent and really radical steps will need to be taken. This is not going to be pretty
As for the ‘designed crisis’ hypothesis above, it is very seductive but OMF is probably right about the lack of planning.
However, the historical fact is true that they have continued to march along a path independent of popular will as regards the fate of their countries. There really isn’t all that much difference between this kind of arranged marriage without consent and a carefully engineered secret scheme, if they lead to the same end. Either way we thought we were turning up for a meeting of the Steeple Restoration Fund and instead we’re getting force-fitted for a white frock, in a room full of both grinning and gurning guests.
Now that RTE have finally announced that (gasp!) there is a Federal movement in a position of some ascendent power in Europe, perhaps it can now also be proposed that the currency union was designed to suit a federal situation, and while perhaps they imagined everything falling into place in the medium-to-long term there is a race now on to create a working-proto-type as a stop-gap. We’re looking at attempts to rush through portions of the underdeveloped Union in an emergency, and perhaps with intransigence/opposition from certain factions. Filling in too much of the details of what is happening from our imagination will always result in a conspiracy-theory-effort. But being on the outside, that’s inevitable. And conspiracy-theories aren’t altogether out of place with people who said ‘we’ll lead the people [to what] we’d never dare openly declare to them’, or words very close to that effect.
DOCM:’Incidentally, was it not Ireland that set the precedent with regard to accepting national responsibility for bailing out banks?’
– under some duress, I allege….
re: “Incidentally, was it not Ireland that set the precedent with regard to accepting national responsibility for bailing out banks?”
I see you do humour on occasion.
No, Ireland guaranteed the liabilities of solvent but illiquid banks that had AAA loan books. Seriously. Or at least that is what the Irish public were told at the time, backed up by the banks themselves, the auditors, the Irish regulator, and the ratings agencies and if I am not mistaken positive reports from the ECB as late as 2007.
When the losses started to become apparent, the Irish tried to resist, but the ECB threatened to send us back to the time of the Tuatha De Danann. Our modern day Fir Bolg promptly stuffed their pockets and ran, leaving the country to the tender mercies of the Gallic and Saxon hordes.
Many of these Fir Bolg and indeed Mna Bolg now turn up on Radio shows advising us how to change the country for the better. With nice little state stipends thrown in, just to improve the clarity of their deliveries.
PS. How many German banks have been put into resolution in the past four years, with losses being met by bondholders.
With the benefit if feigned-learning (via Google-translate)
On the subject of the forced Moonie-Mass-Weddingthat’s approaching, Conjugal Rights were asserted in advance ( described from another angle by Joseph Ryan, above), as admitted after the dirty deed by Oli Rehn:
”pacta sunt servanda”
(EU citizenship came with rights and obligations, remember)
Nuptias non concubitus sed consensus facit, Oli.
I think Maastricht needs to be revisited.
Increasingly German exports are competing on price as opposed to quality and reputation. Export volumes have been ramping up as German labour and the cost of production in general declined as the Euro declined against the other major currencies. If the Euro stabilises or increases against the competition then it impinges on Germany’s ability to export profitably.
It may be necessary to hold Germany’s feet to the fire by seriously making an effort to form a new currency bloc led by France which would leave Germany with an overvalued currency and a serious and prolonged recession. Realpolitik in the real world, should lead to a more conciliatory stance from Germany. Would Enda and the boys be up for that or are they in thrall to the Frau Doktor.
“There are reports in the popular German newspaper Bild that the four horsemen, Van Rompuy, Barroso, Draghi and Juncker have been mandated to come up with a general schema which, unfortunately, seems likely to include something for everyone in the audience, including another attempted push on tax harmonisation.”
Isn’t that the crux of the matter.
Germany will decide despite the best efforts of the bureaucrats.
As Soros says they have three months to get their act together …I wouldn’t hold my breadth that they will.
As for the “reflexivity” bit, I view this as something akin to the doctrines espoused by the Maharani or some such Indian guru that the Beatles were so fond of.
That said…Soros is an amazing man.
Goldman squid at it again. BOH.
Jon Corzine, MF Global and the disastrous gamble that brought down a company.
“This is all a designed crises which is leading to a federal Europe which could,nt be achieved through Democratic terms so lets do it through a crises instead. Quit wasting your mental energy and see it for what it is.”
I could not agree more.
I see (and experience) time and time again that powerful people use crises to further their own agenda/aims/wealth – whether at a personal, company or national level. The whole Euro crisis is simply yet one more example. The problem with this one is we’re going to end up with one of two extremes – either a form of dictatorship USE that the European electorate don’t want or a broken Europe that could end up back in wars.
The deposit insurance scheme is only important if a bank is actually put into a resolution regime. The resolution regime isn’t close to be ready. The big problem is that it is not clear when a resolution regime is triggered. The valuation of model known as ‘mark to fantasy’ is still allowed and without ‘mark to fantasy’ then and only then is a bank resolution regime important.
I have to admit that I find it strange that anyone is surprised that Spanish banks are experiencing some solvency problems. A big credit/property bubble burst and due to mark to fantasy they chose not to recognise losses that always occur upon the bursting of a credit/property bubble. How long ago did it burst and how much losses have been recognised so far?
Northern rock experienced a bank run. Deposits were backed by the UK government and the Bank of England. Were/are those backers not credible or are bank runs simply not logical? The bank run did happen so why would a similar euro-zone scheme provide a different result?
Btw, I’ve read some transcripts from when Swedish negotiators reported back from negotiations regarding banking rules. Sweden wishes to legally force banks to increase buffers against losses, but due to being a member of the EU, Sweden is not allowed to do so….
Some banks are simply too big, I don’t think anything needs to be added to the description that they are too big.
Analysis about the situation in the US:
We are saved!
Some banks are simply too big
I would go further and say that the combined balance sheets of the western banking sector exceed the capacity of the world to service them. Morgan Kelly had a great quote back in 2008 – “those ghost estates – that is where the capital of the Irish banks is.”
It’s the same for so many other banks . US , German and UK Bond yields at record lows are saying that deflation is the future.
Deflation means assets are not worth current market value.
The credit machine is broken.
The banks are like cyclists pedalling furiously on a bicycle with no chain that is situated on an airport conveyor belt that is going backwards.
The bank run at Northern Rock forced an unlimited deposit guarantee. Before that the “some loss” insurance scheme was in place. IIRC it was the first 1,000 pounds guaranteed then 10% loss on the rest up to 20,000 pounds. There was also the uncertainty of having to wait for a payout…
Another less sexy rail project then all that high speed stuff.
“This operation aims to modernize these two railway lines , with the objectives to reduce journey times and increase the capacity of the line .
The first phase of work, completed in January 2011, included the modernization of the way between Nantes and Saint Pazanne and the signage on the set of two lines .
The cost of the first phase of the operation was 51 million euros , financed by the state (8 million), the Region Pays de la Loire (16.4 million), the Departments of the Vendee (8.3 million) and Loire-Atlantique (8.3 million) and RFF (10 million).
The second phase of work provides for the renewal of track beyond St. Pazanne to Saint-Gilles-Croix-de-Vie and Pornic, allowing an increase in speed. The preliminary design studies of this second stage of modernization of the line were launched in 2011 .”
Notice the small fraction of the RFF funds that go towards regional rail – most of the money comes from local goverment and some from the state directly…..this puts their 3.4 Billion Y2012 expenditure in some perspective.
Now Saint Giles croix de Vie is much more Glamourous then Youghal will ever be but it ain’t Monte Carlo either.(all the better as it is a sunny place for shady people)
No1. terminus :en.wikipedia.org/wiki/Saint-Gilles-Croix-de-Vie (pop 7,495)
No2. terminus :fr.wikipedia.org/wiki/Pornic (pop 14,052)
The French are preparing for a possible return of the Franc me thinks – The people from Nantes can spend all their Francs in the local seasde resort without sucking much Diesel.
thanks, I stand corrected. The UK deposit guarantee was bad and if I’d had money with them I’d also have transferred anything over the 100% guaranteed amount out:
I’d still not keep more than the deposit insurance on deposit anywhere (if I had that cash amount…). I’m probably biased but I do not see it possible that a government would not honor a deposit insurance scheme. Political suicide and possibly riots would ensue. It might take time, but a payout would come. That is unless governments could ignore laws at their leisure.
“and possibly riots would ensue. It might take time, but a payout would come. That is unless governments could ignore laws at their leisure.”
Or had particularly brutal security forces……. But of course they would want guarantees that they would at the front of the queue if they had their own money in said banks.
Am I dreaming or was this really reported in the WSJ: “the chiefs of four European institutions are in the process of creating a master plan for the Eurozone, the daily Die Welt reports Saturday, in an advance release of an article to be published Sunday.”
Surely anything in Europe with the words ‘master plan’ appended to it would not be touched with the proverbial barge pole?
Munchau suggests that deposit insurance should be unlimited.
Who knows, the gripe sometime ahead maybe that the euro fx rate is too high.
Anglo attracted a lot of deposits including from overseas by offerring high deposit rates.
Will there still be interest rate competition among banks?
I might be naive on this, I hope I’m not, but I believe that governments in Europe follow the law (when observed at least) and will not resort to the use of brutal security forces. I’ve heard stories that have caused me to have some concerns and I might lose that belief.
If I lived in a country where the government wasn’t constrained by law and it also used brutal security forces, then I’d be more concerned about my personal safety than about the safety of my savings.
@ colm mccarthy/ Mark
Rather than an inquiry on the genesis of the infamous bank gurantee, maybe a PQ to Minister Noonan may suffice?
Like the Nostradamus prophecies and the 3 or was it 4 secrets of Fatima, the facts will not provide more varnish for the victims’ cross.
The save Anglo folk had no consultation with key people in EU institutions prior to revealing what was likely seen as the mother of all strokes in a country with a significant number of people who saw that manifestation of machine politics as normal governing.
So much for referendum respite. NYT reporting (citing Fitch) that Ireland’s situation remains “dire”.
And Der spiegal reports that with developing countries reducing their euro holdings the situation is becoming “dire”
The beauty of imperialism with European Union characteristics is that it does not need the threat of physical violence, simply the threat of loss of livelihood and security. The structure of ESM is a nice example of how the will and needs of Germany and the ECB’s stakeholders (the currently dominant forces in the EU) can be enforced on a country without the need to resort to something as crude as the threat of violence.
As for following the rule of law the evidence is mounting that in a European context those rules were made to serve the needs of certain sets of people. In short European Union law, how it is made and by whom is a significant part of the problem. (Obviously the Fiscal Compact is not European Law in the strict sense but close enough)
If you want a laugh on a dire Monday just go to the examiner…
“I’ve heard stories that have caused me to have some concerns and I might lose that belief.”
Keep that belief. Stay wholesome. Whatever you do, don’t go protesting at any G8 summits in Europe and seriously, don’t go protesting about anything in Spain. I’ve seen some pretty horrid violence dished out by Spanish riot police. Brutal.
Of course previously in places like Argentina, first they took your savings then they ‘disappeared’ you. It would never get so bad as that in Europe. Er, would it? We forget just what a track record we have over here in Europe – and it’s not as long ago as we like to think. Especially where you have flakey military in periphery countries like Portugal, Spain and Greece. They’ve all had their military governments in relatively recent times and the Generali’s still like to remind the politico’s that they’re keeping an eye on things. It was only 1981 (I think) that I recall seeing Spanish soldiers waving guns around in their parliament.
Of course, banking union at the wrong end of a gun might be quite fun to watch…….
And to make it worse I’m stuck out in the spondoolicks with seemingly very little open (as in closed down permanently due to ‘the recession’) and wondering how much in the way of traffic jams I’m going to have to endure to get home later. Thank goodness for distractions. I’m pretending to be working while ‘dinner’ is cooking. Mrs PR Guy is giving me the old daggers looks for not engaging with her family. Now that’s “dire”.
@ rafa hijo
You made this comment on the other thread.
“@DOCM The comparisons with US are because the US is a federation with a common currency and the history of how that currency developed and how the need to mutualise the debts of the individual states lead to a common currencya and ultimately a much strongere federal government. There are few if any other examples of the creation of a new currency across separate states bound only in a loose federation. As such it is important to reflect on the lessons from that. I don’t think anyone is unaware of the differences, but the points of coincidence are very revealing”.
On this general point, I am in entire agreement. That is why I find the work of Winkler so impressive and why I posted the link above to his work (repeated here for convenience).
The problem with Krugman is that he seems to think that the EU can react like the US now before going through a process such as happened in the US (without – hopefully – the necessity for a civil war!).
My conclusion is that only some form of half-way house is possible and I think that this is what we will get cf. the view of a senior CDU board member of the Bundesbank.
Incidentally, I find the debate in Ireland among both economists and at official level in strangely detached from reality with euphemisms much in use “funding”, “official sources” etc. etc. when it all boils down to money. (It must be said that Tony Foley of DCU crossed the T’s and dotted the I’s at midday on RTE). Germany will attempt to limit its financial exposure to the maximum extent possible. The idea being propounded that we are somehow due a reward for doing what is in our own national interest is simply juvenile.
And if we wish to return to the markets we must balance the badget. Full stop.
The Irish government is not alone in trying to run away from the unpleasant domestic political consequences (“austerity is not working” = our standard of living is falling) but to expect German politicians to make up the slack by inviting an extra effort by German taxpayers is also politically naive.
So falling standards of living are irrelevant to the measurement of the success or failure of austerity? Good to know.
It might help us all to understand your outlook (and interests) if you could lay out the metrics you will be using to let us know how much “austerity” has worked.
As an example is there a point at which the living standards of a person on Ireland’s median income could have fallen far enough for you to declare that austerity is not working, or are the benefits of austerity mostly spiritual for those outside the top income decile?
Also, might it not be more fair to say that we are expecting Germany to acknowledge that the less than fair advantage that the Euro zone membership has conferred apon it by contributing more towards rescuing Europe from the consequences of that same EMU?
By way of a footnote to the above, the former leader of the Greens, and former foreign minister in a coalition with the SPD under Schroeder, Joschka Fischer, has launched a ferocious attack on Merkel and the general stance of the current government.
The fact that the DAX has fallen below 6,000, and that the economic news from both China and the US is bad, may have a greater influence on the future direction of German government policy.
The wonderful web can simultaneously provide fuel for the optimists and the pessimists.
It’s certainly true that Krugman and others do not understand how much the EU differs from the US.
Daniel Gros says:
Joschka Fischer calls for eurobonds, but we can see from the recent Irish experience, that many people expect these changes to come without conditions.
@DOCM / @ALL
Your link above re:Joscha Fischer attack on Merkel and her policies.
It is a brave attack and he cannot be faulted for not holding the mirror to his own country. Even Google translate, that I am depending on, captures the full bite of the attack.
“Berlin has rarely been so lonely and isolated as now, the former foreign minister. In the 20th Century, Germany had twice with war crimes and genocide through to yourself and the European order destroyed in order to subjugate the continent.
Only a credible conversion and the integration of Germany into the West and the EU there has been the acceptance of German unity.
“It would be a tragedy and irony at the same time, if not now, at the beginning of the 21st century, the reunified Germany, this time peacefully and with the best intentions, the European order for a third time would be destroy.””
@ Joseph Ryan
He is overdoing it, in my opinion, and his approach is unlikely to greatly influence current German policy. The arguments advanced by Daniel Gros as linked to by MH are the reality.
Pending the outcome of the Greek and French elections (the first round of the latter is on Sunday), all that can be expected are holding actions. Madrid will obviously try and hang in there but the markets will decide the issue.
The news on the inflation front being so good, concerted action by the world’s central banks is being rumoured.
Meanwhile, Portugal sticks to its last. Now, if we could only get our own government to do so!
Heres a Socialist that actually gets something done.
Unlike our Boy Rory Banks – who wants to create flashy new eduacation blockhouses for the little folk to the tune of 200M~ with the EIB possibly providing 100 Million for this pointless waste of resourses.
” Since January 2011, Pau-line Oloron was returned to service following completion of upgrades.
This operation involved the complete renewal of the constituents of the track (rails, sleepers, ballast) for $ 35 million, funded by the Aquitaine Regional Council, the State and RFF, to ensure the sustainability of the line.”
I travelled on this route half a dozen years ago and it was nice but very very slow as can be seen in this video.
Now there are plans to extend the line to Bedous
“The recovery operation of rail traffic between Oloron and Bedous, Pau-line Canfranc closed to traffic for over 40 years, aims to increase the attractiveness of the Aspe valley and offer an alternative to car for access to the valley, allowing an extension of approximately half of TER services between Pau and Oleron Bedous up.
Before After Project, completed in late 2011, 2012 and 2013 will be devoted to administrative procedures (including preparation and implementation of the public inquiry), information and exchange with the public and communities detailed studies (project level).
This project represents an investment of 122 million euros. The studies are funded 100% by the Regional Council of Aquitaine. The work is expected to begin late 2013 for commissioning end of 2015”
It has the potential to go as far as Canfranc station in Spain ,linking onwards to Zaragoza….Canfranc is a Great hulking mass of a border station closed since 1970.
Here is the border rail route
I thought spondulicks meant money . Are you in the boondocks ?
‘The save Anglo folk had no consultation with key people in EU institutions’
– There was, though, at least a week of communication between th DoF & Trichet, up to & incl. the last twenty four hours or so.
There is also the matter of the media intervention from our allegedly independent CB, that so irked Lenihan.
Yes, everybody at the time was looking for the golden circle of developers in the smokescreen, thinking it was the devil we knew.
– About five years ago, an unmarked Garda car pursued another vehicle at speed along the Fonthill Road near Newlands Cross. There was a pile up of six or more cars, whereupon a Garda got out of his car and fired several shots into the vehicle he had been chasing.
The road was closed, the crime scene van arrived & were there for four or five hours, leaving that white powder all over the ground.
It was witnessed by at least a dozen people, myself and several children on foot and whatever number of people in their cars that were involved.
Word spread and the matter was discussed and mentioned locally.
But there was no mention of it on the media, and enquiries made to the Gardaí were answered with ‘we are investigating an alleged incident involving a robbed car.’
Don’t doubt that the letter of the law isn’t always followed.
If there was something more substantial than a phone call with Trichet, prior to the full-scale panic on the afternoon of Sept 29, 2008, it would have surfaced by now.
When Seanie and his sidekick arrived in Merrion St. from their meeting with BoI, the clock was ticking to their year end the following day and they needed more than €4bn to dress up their balance sheet.
FitzPatrick and Drumm were told to get lost to avoid giving the impression that a rescue
was mainly for Anglo, the FF subsidiary.
There was no contact prior to the issue of news on the guarantee to the markets, with Lagarde, the head of Ecofin; Juncker, the head of the Eurogroup; Trichet nor any other ECB executive director; Almunia, the Economic & Monetary Affairs commissioner.
There was a decision made to spring a surprise because there was a fear that Europe would not approve.
Anglo could not wait.
amazing is it not that after all these years, no EZ bank has been allowed default on a senior bond, largely at the behest of the Germans who want to get paid back all the money the are owed and by the US who do not want the EZ to blow up.
The details of our guarantee of the banks are irrelevant. The EU,ECB and the USA would have viewed it as an act of financial terrorism had we burned a senior bond holder at the time. We proably had no choice at the time but to take a bullet for the team.
Amazing too that after all these years and three or four episodes, the penny has not dropped with the EU that socialising private debt does not work. Ireland is insolvent and Spain is too now that is on the cusp of a 100bn -400bn bail out.
Sooner or later, reality will dawn. The Germans are not going to get all their money back or they will have to write a large cheque to the periphery. The middle ground of the ECB monetizing a shed load of Euroepan peripheral debt may also come on the agenda.
They will have to write a very large cheque to themselves, when they leave the EZ and are owed 1 Trillion that they are never going to see under the Target 2 system. I know Karl Whelan had a view that these Target 2 imbalances do not count but George Soros thinks otherwise and I am with him. First thing the Bundesbank will do post EZ exit is they will “print” a Trillion in DM’s for themselves to help themselves over an almighty Eurp kopfschmerzen.
“I thought spondulicks meant money . Are you in the boondocks ?”
I was in D4 at the time. It somehow seemed appropriate especially as I was having to sit there listen to my f-in-l sounding off about why he voted yes and trying to be well behaved 🙁
probably more than a trillion when it all adds up. Don’t forget they are all ging have to bail out their car industry. BMW and VW are both large consumer finance companies who happen to make cars. Both have extended large volumes of loans to peripheral Europe. Think what a 20% currency appreciation and a 30-40% default rate would do to the net worth of these companies. Bayer and BASF would probably go belly up as well as they seem to sell loads of stuff to BMW and VW.
The German industrial heartland would be back to 1945 levels.
One of the most beautifully designed and integrated light rail transport systems occurs in the region of Alsace which is neither fully French or German culturally.
It starts with a small Diesel car single track.
Example village :fr.wikipedia.org/wiki/Saint-Amarin
Stopping at these villages.
Kruth – Pop : 1,016
Oderen – Pop :1,321
Fellering – Pop :1,712
Husseren-Wesserling – pop :1,001
Ranspach – pop : 848
Saint-Amarin – pop: 2,421
Moosch – pop :1,789
Willer-sur-Thur – Pop : 1,923
Bitschwiller-lès-Thann – Pop 2,119
The X73500 diesel rail cars interlink with the new Tram trains at this station (Gare de Thann) since Dec 2010
(the first true tram train in France) … they are extremely difficult to execute as they integrate heavy rail with Tram lines…
Thann has a pop of 7,985
next population centre – Vieux-Thann pop 2,858
Cernay Pop 11,288
Dornach Pop 5,684 (suburb of Mulhouse)
Mulhouse Pop 111,156
A beautiful system using the valley population settlement distribution to the max.
Worth looking via Google earth to see how it all fits together.
Elegant is the word.
But the Irish did not do elegant when they had the money credit…. just friggen houses all over the shop.
Growth they called it !!!
Growth through depletion was the Orwellian motto of those days.
Sad , very sad.
You might want to think about who might have swapped those loans or bought the bundled CLOs… See for example: http://connection.ebscohost.com/c/articles/4474128/abs-sees-7-billion-tight-spreads .
With the demand for collateralised debt, I’d be astonished if any of the German car or other companies that do vendor financing are holding any loans at all.
So, who is holding the bag? Insurance companies, probably in the countries where the loans are, pension funds etc. Cross-border exposure may be expensive for your retirement plans…
re “They will have to write a very large cheque to themselves, when they leave the EZ and are owed 1 Trillion that they are never going to see under the Target 2 system. ”
Germany may be owed one trillion that she will not get back but on the other hand it is naive of those people who have hastened to put money into Germany that such monies will be retrieved in DM while Germany foregoes a one trillion loss on Target2.
IMHO the safe haven may suddenly grows walls that will not be scaled with DMs. They may find themselves being paid in their new national currencies with Germany pocketing the difference to compensate for its Target2 losses.
But at that stage it will really be ‘canned food and shotguns’.
PS I’m not the only one thinking about problems; the FTs Gavyn Davies has some spanners for the banking union works:
PS I disagree, though, about sovereign funding being a problem if the banks are ‘fixed’; the crookeder the fix the better, the more the banks are obliged to hold euro denominated assets as their core capital the better. At least for the time being…
“The German industrial heartland would be back to 1945 levels”.
Easy on the hyperbole there, Tull
Inflation – would it be as bad as this ?
Yes, insurance cos, pension funds and mutual funds would be the traditional holders of ABS as far as I know. But if the coupons do not arrive because the borrower (i.e me and you and him) defaults. BMW has a bit of a problem. If defaults rise then nobody will accept BMW paper, so car sales will slump and the factory stops. It would be worth asking if investors have any claim on parent company cash if defaults start to rose i.e does BMW/VW have to make the holder of the ABS whole.
Not sure what you mean by banks holding euro denominated assets as core capital?
I hope you are not suggesting that the Germans would burn senior bond holders and deposits held by non residents much less default on bunds held by non residents.
There is obviously going to be a need for careful ABS steering.
Why would the Germans want to destroy their economy anyway ?
I would be more concerned about the UK. The Jubilee weekend can’t hide the economic mess they are in.
How are sales of GSE paper these days? Or other bank covered bonds/ABS? If the loans are sold as ABS, there is usually no recourse to the seller. Covered bonds may or may not have putback clauses. So BMW etc. would be looking at cash sales in certain countries and third-party vendor financing in others. Just like they do in the rest of the world. BMW etc. don’t really have much of a problem as long as someone is prepared to finance its consumers.
I mean that if the new rules for banks in the eurozone require the holding of a certain level of eurozone paper as core assets (capital buffers), the cheapest, highest-yielding paper will be bought first. Hey presto, demand for trash. The ECB’s role is to treat all eurozone sovereign paper equally for repo – all at par…
FYI Der Spiegel International [good graphic on Ireland’s DECLINE
Ireland Still Long Way from Overcoming Debt Crisis
By Christoph Pauly in Dublin
Irish voters have approved the fiscal pact in a closely watched referendum, to the relief of European leaders. But the country is still a long way from solving its debt crisis, and its banks will soon need additional billions in fresh capital. ……..
In 2010, the European Union had to support the country to the tune of €67.5 billion ($84 billion). Ireland’s local banks had gambled and lost on real estate loans, and had been bailed out with comprehensive state guarantees. Soon thereafter, the Irish and their fellow Europeans throughout the continent had great hopes that the worst was over. Recently, the Irish were considered a paragon for the entire euro zone. In 2011, the economy even grew, albeit only by 0.7 percent. But such confidence proved illusory.
As things now stand, Ireland will have to be bailed out a second time. The banks have proven to be a bottomless pit. They have to be recapitalized once again. The previous write-downs of the 10 largest consumer banks, amounting to €118 billion, are still not enough.
“Berlin says bank deal for Ireland would send wrong signal”
“Ireland is considered a model student at the moment, so you would have to think of the consequences of such a renegotiation, which would in effect double Irelands bailout program”.
Let’s look on the bright side ….
Angela has proposed a centralised EZ banking union supervision – and is sympathetic to Lorenzo Bini-Smaghi’s [see his FT piece] lobbying to head up such a supervisory body …
Two thirds of ‘the Troika will be Thrilled’ to borrow a phrase from Student of “Q” and DOCM will make up the difference on the blog. Happy Days! (for others)
Combating the Crisis
Berlin and EU Weigh Greater Bank Oversight
Chancellor Merkel and European Commission President Barroso on Monday met to talk about creating a banking union to increase oversight over systemically important European banks. The move could mark a step toward providing direct aid from Brussels to ailing EU financial institutions.
‘Whatever Is Necessary’
Barroso also added that European deposit guarantees should also be a part of the discussion, a proposal broached last week by both the European Central Bank and the European Commission. He said that Europe must do “whatever is necessary to ensure the stability of our currency.”
It is no accident that Merkel and Barroso are broaching the subject now. Concern has been growing recently in Europe and, indeed, across the globe, that Spain might be the next euro-zone nation to require a significant bailout. Madrid’s biggest problem is its banks, with the country reportedly needing to inject €19 billion into Bankia S.A., one of Spain’s largest lenders. A lack of clarity regarding where that money might come from, however, has driven up Spain’s long-term borrowing costs toward the danger zone of 7 percent.
German Finance Minister Wolfgang Schäuble also indicated on Tuesday that he supports the idea of a banking union. In a long interview with the financial daily Handelsblatt, he said that “we should pursue a step-by-step approach toward a banking union of the kind proposed by Commission President Jose Manuel Barroso.” Schäuble also repeated Germany’s opposition to euro-bonds in the interview. “We have to pursue greater integration,” Schäuble said.
Will a banking union require another referendum? if so how can our government negotiate for one with our history of voting against treaties our government negotiated?
I am sorry that I don’t read this blog anywhere nearly often enough. Its good. Sorry to get off topic. Stuck as I am on a small distant island, I would really like to understand Irish views on euro exit.
You say that “There is no option of painless exit, as Greece may be about to discover.” I would concur, but there is growing recognition that the Euro area is unsustainable. If something is unsustainable, the addage goes, it must stop and thus some sort of exit strategy will need to be engineered — better an orderly exit than disorderly exit.
I can’t help wonder whether the idea has support in Ireland. If you type “leave euro” into google trends — then Ireland seems to be the palce most obsessed with the idea.
I would think that a banking union could be the first step in exiting. It would allow a euro area member countries’ banks the ability to stay euroised (have access to the Euro clearing house) but allow governments to introduce a parallel currency or scrip that could gradually allow them to exit.
Please excuse the self promotion, but a couple of links.
Der Spiegel has now accepted and posted comment on their story “Banking Woes: Ireland Still Long Way from Overcoming Debt Crisis”.
Please join in and communicate the Irish people’s understanding – views which Germans don’t hear often enough.