Breaking the link between banks and sovereigns (or not)

This post was written by Kevin O’Rourke

The FT has a sobering report here.

25 Responses to “Breaking the link between banks and sovereigns (or not)”

  1. Paul W Says:

    No surpises here.

    Note the related blog posting by German Taxpayer “It will be a grave mistake to break the link between the banks and the sovereign. After all the taxes on profits earned by the banks in the boom years in the past have accrued……not to Germany, which in the guise of European solidarity is being pressed to pick up the tab for the so-called rescue.
    As a German Taxpayer, I fervently hope that the draft statement will go through as reported and Angela Merkel will not be forced once again to sell German interests down the stream at the next EU ‘crisis summit ‘ as it happened so many times in the last couple of years!”

    Yesterday’s ‘confident’ statement from Mr. Kenny regarding a deal on the PNs looks very curious (and mouch more doubtful) in this context. Or will we simply get debt elongation at significantly increased interest cost…..?

  2. seafóid Says:

    I thought this was one of the best comments following the article

    ReportCloudyday | January 14 11:03am | Permalink
    The girl I hate the most is the one that says she will, but you find out pretty much she won’t…

  3. grumpy Says:

    Predictable and predicted.

    NWL has a post up regarding what will ‘count’ for PR purposes as “a deal”.

    What abvout all those “Gateways”, “Pathways” and “Stepping Stones”…?

  4. DOCM Says:

    The key sentence is surely the following;

    “the two-page proposal drafted by the European Commission would force countries that could afford it to inject their own national funds into failing banks to make them viable before the ESM would shell out any of its own cash.”

    For anyone not actually having access to the document, this comment suggests that (a) it is not a formal Commission proposal and (b) the definition of the corollary, i.e. a country “that cannot afford it”, seems somewhat up in the air.

    Otherwise, there is little to be surprised about, it having been made abundantly clear by Berlin, and confirmed in the texts adopted, that the system of banking supervision must be in place before anything can be done with regard to recapitalisation funding being provided by the ESM. Indeed, this seems to be recognised by the government.

    On the PNs, anything that could be clearly identified as monetary financing by the ECB is ipso facto precluded. If there is to be an actual net write-down, the arrangement will have to be funded by the ESM. A considerable amount of imagination has been shown with regard to Greece in this respect. A bit more is now evidently required.

  5. seafóid Says:

    Possibly related…

    http://www.ft.com/cms/s/0/195ed762-5bd7-11e2-bf31-00144feab49a.html

    EPFR’s latest weekly figures showed a net $7.4bn inflow into emerging market equity funds and $3.4bn into world equity funds. Inflows into US equity funds, at $10.4bn, were at a six-week high. Europe equity inflows were more modest, at less than $1bn.

  6. Paul W Says:

    An interesting graph in the Economist:

    http://www.economist.com/blogs/graphicdetail/2013/01/daily-chart-8

  7. PeterJ Says:

    I read this as saying that ESM funds can be used for bank recaps provided repayment is guaranteed by the government is question.

    In the short them Ireland’s focus is the PN. So does it mean the PN will be replaced with a new loan from the ESM. Easing a major cash flow problem.

  8. David O'Donnell Says:

    with apologies and thanks to the Financial Times:

    “Under the plan seen by the FT, Ireland could potentially get some relief from the ESM, although it is likely to be only a small portion of the €28bn it used to bail out its two surviving big banks.

    Eurozone leaders have already ruled out using the ESM to help Dublin with banks that were wound down, including Anglo Irish Bank. Separate negotiations on Anglo Irish’s debt are ongoing with the European Central Bank.”

    This simply remains The Conflationist Fallacy ReLoaded and June 2012 a deft smokescreen; no problem with doshing out €One Trillion for the financial system at 1% (champagne all round) but ’sobering’ bread and water for the citizen sefs who remain one way or the other on the hook to said financial system “aid” from the ESM.

    Neat of DOCM, true to form, to bring up the issue of ‘monetary financing’ and article 123 of Lisbon re the PNs and dead banks to brighten up a dull monday evening in the occupied financial_vichy land territories.

    fyi
    With the probable collapse of The European Project, A high level expert group within The Blind Biddy Hedge Fund is examining the D_scenario of Default and alliances with the UK, China, The US, Russia and the IMF. Wise to check out and prepare for all Panic Buttons!

  9. David O'Donnell Says:

    @grumpy

    I hear that the ‘Technical Paper’ is now in its 199th draft!

  10. colm mccarthy Says:

    Watch what happens in Cyprus. Without bank bondholder haircuts, difficult to make the deal look credible, assuming that matters.

  11. David O'Donnell Says:

    more of it …

    Haven for Oligarchs
    Europe’s Mounting Reluctance to Bail Out Cyprus
    By SPIEGEL Staff

    There is growing resistance in Europe to the planned aid program for Cyprus, because it would also benefit illegal Russian money parked in bank accounts in Cyprus. The government in Nicosia is willing to make concessions, but Brussels is demanding more reforms.

    http://www.spiegel.de/international/europe/tax-haven-reputation-plagues-eu-bailout-of-cyprus-a-877369.html

  12. David O'Donnell Says:

    European Central Bank policymaker Jörg Asmussen is now calling for further concessions from the Cypriot government. “The current memorandum is a draft; there has been no political approval from the Euro Group yet,” says Asmussen. To achieve it, he adds, a key section of the declaration would have to be improved. “My impression is that improved transparency of the financial sector will be critical to obtaining approval of the program in the partner countries.” In other words, Asmussen is saying, Cyprus should fight money laundering more resolutely, but it should also raise its corporate tax rates.

    Otherwise there might not be an aid program at all, German government representatives are indicating, and they’re resorting to the cynical jargon of international bailouts to send their message. There are limits, they note, to how “system-relevant” Cyprus is.

  13. Joseph Ryan Says:

    So who pays for bank losses, known and unknown.

    Bank bondholders? Blocked by Germany/ECB.
    Bank Liquidation? Blocked by Germany/ECB
    Common EZ Banking fund? Blocked by Germany/ECB.
    Depositors? Blocked, so far, by Germany/ECB/most countries.

    Classic German pincer movement. Losses have nowhere to go except outside the bank.
    Common EZ fund Blocked by Germany

    Losses have nowhere to go except onto the ‘host’ countries and the taxpayers of those host countries, who have nowhere to go except into the sea.
    The hammer blow of the pincer movement was the protection of bondholders. That was the time to make a stand. The only option now is to swim.

  14. Tullmcadoo Says:

    JR,
    I suggest you insert German before Bondholders and Depositors. As our man in Dubrovnik says watch Cyprus and prepare for some sabre rattling from Russia.

  15. Fungus the photo Says:

    For any equitable solution, sharing losses caused by credit booms, it might be useful to ascertain what countries, not individual bondholders, gained most and least to the nearest Bn Euro, as a result of the idiocy of believing that Finance creates wealth anywhere, as opposed to transferring it from those who have, or had, to those who “work for it”?

    Making adjustments between jurisdictions might be done via the EU and ECB.

    Given that some countries use credit boom as a weapon, this should become apparent in the process? They might then be asked to suffer a penalty for not playing nice and teaching the victim countries that greed is dangerous?

  16. Bryan G Says:

    The ESM Treaty requires that any loans made by the ESM must be to Member States. Loans cannot bypass a Member State and be made directly to a bank, nor can the ESM itself act like a bank and deal with the ECB directly. This isn’t going to change this year, let alone before March.

    However there is no reason the arrangement already made with Spain & Greece cannot also be applied to IBRC. The ESM loans 30BN to the State, which then immediately returns it to the ESM to buy 30BN worth of ESM Notes. The ESM Notes are given to IBRC, which repos them with the ECB and uses the cash to retire the PNs. Terms of the ESM loan are good - very low interest rate, 10 yr grace period, 15 yr maturity. Everyone’s a winner:

    - the ECB gets ESM-level collateral not some dodgy PNs and a letter of comfort written on the back of an envelope.
    - the Irish gov gets a “victory” showing off their outstanding negotiating skills, and the 3.1 annual repayment disappears for many years
    - the AAA countries don’t accept any debt mutualization. ESM utilization goes up a bit, but there’s still lots of headroom.

    The 10 year grace period puts it beyond the event-horizon of all involved. After that time the AAA countries can roll it over or turn the thumbscrews, depending on whether anyone needs to be taught a lesson.

    The ESM can actually fund itself with negative interest rates right now, so that the “market-rate” on the newly created ESM notes can be very low. All that worldwide QE and the race to devalue your own currency to increase exports is working.

    The situation with AIB/BOI looks trickier. AIB have about 12BN in debt securities they are servicing. Perhaps some cheap ESM money could be used to retire some of these liabilities, replacing it with ultra-low rate financing. Maybe there are some other tricks that can be played here.

  17. David O'Donnell Says:

    Interview with Cypriot Finance Minister

    ‘Cyprus Is No Tax Haven’
    In a SPIEGEL interview, Cypriot Finance Minister Vassos Shiarly, 64, defends his country’s request for billions of euros in European bailout funds. He denies accusations that Cyprus encourages worldwide money laundering and is attracting investment by means of tax dumping.

    http://www.spiegel.de/international/europe/cypriot-finance-minister-vassos-shiarly-denies-cyprus-is-a-tax-haven-a-877399.html

  18. grumpy Says:

    @Bryan G

    I’d guess you are about right that this sort of arrangement (or something kind of comparable) is what is being discussed. Its probably the reason why Endawatch suggests he thinks a deal will be done.

    The Irish debate, on VB at least, will be about the ‘downside’ of giving up the dodgy-looking packaging of “promissory notes”, allegedly written under duress, and therefore reducing the wooliness coefficient of that part of the national debt.

    I’m sticking to my rolling-fudge-if-absolutely-and-demonstrably-necessary thesis.

  19. Paul W Says:

    test

  20. Paul W Says:

    @ Brian G
    No breaking of the sov /bank link then? Sov debt continues to head north but there is a short term cashflow benefit. Also, if it’s that straightforward, what’s all the fuss (and waiting) all about?!

  21. Bryan G Says:

    @Paul W

    I think it is procedurally straightforward for IBRC, but much less so for AIB/BOI/ILP etc, as those injections were made with NPRF funds.

    The EU are always complaining that too many of the “reforms” in Ireland are temporary or one-off and are not the structural reforms they had in mind. Maybe they would like to see some movement on this first. Perhaps the Irish gov are pushing for a principal writedown which is being resisted. Maybe they want to see what Q1 growth looks like before agreeing the final numbers. Making decisions early and with plenty of time to spare is not the EU way!

  22. DOCM Says:

    @ All

    What matters IMHO is the attitude adopted by the big players, notably Spain.

    http://www.ft.com/intl/cms/s/0/a77122ce-5f35-11e2-8250-00144feab49a.html#axzz2HtGoNq6r

  23. David O'Donnell Says:

    … other links not being broken … Good Graphic

    Hotel Mama
    Bad Economy Has Young Europeans at Home

    Young Europeans in countries hit hardest by the Continent’s economic crisis are finding it difficult to move out of their parents’ home. Data shows that over 50 percent of those aged 25 to 34 in some countries have yet to move out.

    http://www.spiegel.de/international/europe/bad-economy-means-young-europeans-having-trouble-leaving-home-a-877616.html

    Irish emigrate - most Southern Europeans cozy up to MAMA.

  24. Patrick Ryan Says:

    What of the most obscene moral hazard of all - the one that tells the markets: “don’t worry about risk when lending to EZ banks - the taxpayer in that country will cover your losses and when push comes to shove the ECB will make sure they do”.

  25. Maestonom0 Says:

    What of the most obscene moral hazard of all - the one that tells the markets: “don’t worry about risk when lending to EZ banks - the taxpayer in that country will cover your losses and when push comes to shove the ECB will make sure they do”.

    Sometimes it feels like my master is cracking the whip to break my resolve and take ownership. Other times it feels like there’s a big hand palm coming from the sky to squash me into a pulp. But, whatever way I see it, I don’t see my self as being beaten by my better, just a foot-eating psychopath, nothing more nothing less. There’s a legion of hell-worshipping monkeys at the controls that don’t and can’t possibly understand the full gravity/reality of what they’re meddling in..

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