Gary O’Callaghan on conveniently flexible moralising

I thought I would hoist this comment by Gary O’Callaghan onto the front page:

Karl observes in his article that Ireland’s citizens must be feeling foolish today: “After being reassured time and again that all depositors and senior bond creditors of … Anglo Irish Bank must be saved in the name of European financial stability, they find out that Europe’s leaders now believe hair-cutting depositors is fine and fair and doesn’t cause contagion.”

In a related dynamic, there appears to have been a subtle turn by many commentators (including on this site) from the “serves them right” school of economics. That School, most righteously established by LBS, argued that Irish taxpayers should carry the can for bank losses because they “should have” sought better supervision on banks. Many from the same School now appear to argue that depositors (creditors) “should have” been more careful in the Cypriot case and deserve to suffer for their stupidity. Serves ‘em right!

Of course, there is a practical limit on the burden that Cypriot taxpayers can bear in this case but such considerations never bothered the LBS School before. Do they now grant that Irish taxpayers were not fully “to blame” (and that burden-sharing from bondholders was warranted)?

Would they now agree with Karl that “the moral grounds for a retrospective compensation deal for Ireland have increased substantially with this new development?”

The problem with theorizing from morals, of course, is that the ground can shift (and come back to meet you).

I am tempted to add that if we ask “cui bono”, there may be less inconsistency here than at first glance meets the eye.

79 replies on “Gary O’Callaghan on conveniently flexible moralising”

I leave comment to the leading LBS disciple on the blog; DOCM, all yours.

Power has kicked morality into the distance in the EZ. lorenzobinismaghiitis is the dis-ordoliberal ideology of the everyday …

Why did the Irish government decline to sue the ECB at the ECJ after the November 2010 deal? I can think of both good and bad reasons, but neither has been offered. The ‘acts’ of the ECB are expressly judiciable at the ECJ, it says so in the ECB statute. Was the matter considered?

Maybe it is my ageing memory, but I don’t recall many calls for burning Irish depositors.

@ John McHale

There were a few voices against the Irish bank guarantee four and a half years ago and many more objectors at the time of the bailout in late 2010 but virtually none within the Irish government or the Troika it seems.

With hindsight rescuing senior bond holders and depositors at the taxpayers expense was a disastrous decision but then it’s easy to say such things in hindsight.

It is interesting to see the Cypriot parliament reject a deal which looks much more favourable than the terms of the Irish bailout. An interesting 48 hours ahead for Cyprus!

What is the hanging hierarchy amongst bank creditors in EZ banks at this stage?

There was a great hoopla in Irish government and financial circles when BOI issued its ‘covered’ bond not too long ago. I argued at the time that such bonds down-rank depositors every time they are issued.
Depositors in the EZ should be in no doubt where they stand next time a ‘covered’ bond is issued. Their feet will just have been moved closer to the fire.
And it looks like depositors are now first into that fire.
It is a strange way to run a banking system that professes the primacy of a deposit base, and downsizing banks to the size of that (national) deposit base. Having downsized banks to their national deposit base, then you can burn the depositors at will. Its like shooting fish in barrel.
There is a clear thinking strategy behind this seeming incompetence.

@John McHale

September 2008 the question being asked was “Is my bank account really protected?”:

As I noted at the time – the Northern Rock information was wrong. It was 100% guaranteed.

When the topic was revisited later – I made the point that I was in Northern Rock in September 2008:

I had assumed that the hole was too big for the government to fill and all bets were off.

I sorely underestimated Comical Leni and Biffo The Clowen.

@ Gavin Kostick

This simply underlines the risk that the Cypriots are taking. Indeed, while the fat lady has yet to sing, the outcome is already known; the days of Cyprus as an inshore/offshore haven are numbered.

It would also be a pity if the link to Felix Salmon which you posted on another thread was lost sight of in the general melee.

It is unlikely in the extreme that the approach suggested will be adopted but it does clarify the issues. In short, there will be no full transfer of the responsibility for a mess created nationally to an international level. (The IMF, that friendly bunny, wanted a 40% cut, Lagarde accurately reflecting the general sentiment of the organisation and especially its largest shareholder).

As I recall the mantra was that bondholders and depositors would get equeal treatment. There was no distinction made between secured bondholders and subordinated bondholders. The FUD (fear, uncertainty and doubt) factor was used extensively. Civil/Public servants would not get paid, pensions would be ravaged.

So in order to save the depositors the bondholders (all) were also saved. Only in Ireland are there politicians who are willing to save all and sundry at taxpayer expense. In the argument at the time there was no mention of guaranteed deposits up to Eu 100,000 or subordinated bondholders taking a 30% cut.

The stockholders were sacrificed.

PR Guy talented as he is, could not have spun it better.

Similar spin is going on in the other direction wrt Cyprus. The Russians are evading taxes by depositing funds in Cyprus or so the argument goes. Putin loans Cyprus EU 2.5 billion to help his tax dodgers. Spread the illegal, evasion, avoidance story around Europe to poison any chance the Cypriots might have of getting treated equitably. All done in the hope that the Spaniards and others will think that because they have no major Russian involvement they are safe.

Unfortunately for the gang of seventeen the Cypriots have guts strengthened by centuries of warfare.

At some point their gov’t will cave but only after a good fight.


Anastasiades doesn’t have a lot of fight in him. He was always the ‘candidate’ of the EU/ECB and he’s not very happy with all this and how things have worked out over the past few days. I think he will resign and call a general election – which will of course muddy the waters even further and don’t be surprised that some in his own party have their own agenda.

This may well all get out of control.

I agree that generally the Cypriots have guts though – I lived there for a few years as a child and know them reasonably well. Easy enough going but don’t usually put up with too much crap once you push them.

@ John McHale

There are many ways to burn Irish depositors. Their private pensions can be sequestered, DIRT can be increased, they can be forced to pay a property tax on their homes, they can be forced to pay directors fees of public interest directors who do not act in the public interest, their children can be made to emigrate, their bank managers salaries can be increased with corresponding increases in variable interest rates and bank fees their government acquired shareholding in the banks can be sold off for peanuts so that the government can boast that our banks are of interest to outside investors. The bailout borrowings can be taken and pumped into bank pension funds. The list is almost endless.

@ All

Strange that Noonan was telling us on Saturday that, “this was good for the EU good for Cyprus and good for Ireland”. Someone should tell him that theft is never a good thing. Has he made any recent inquiries about how many Cypriots are still watching cable TV and did that inform his voting decision?

Is it just me, but I’m tired of hearing about Greece’s, Ireland’s, Portugal’s Cyprus’ cases being a) special b) unique c) exceptional

and once again sad to see the ECB reprise its role as chief bully in all this, turning the role of Lender of last resort on its head.

Panicos Onisiphorou Demetriades (Greek: Πανίκος Ο. Δημητριάδης; born 19 January 1959) is a Cypriot economist , who is a European Central Bank Governing Council member and the Governor of the Central Bank of Cyprus from 3 May 2012. Prior to his appointment, he was a Professor of Financial Economics at the University of Leicester (hat tip Wiki).


You couldn’t make it up.

@ All

Larry Elliot of the Guardian sums up the situation!

“…. there are really only two plausible scenarios: somebody – be it Europe or the IMF – gives Cyprus more money, in which case there is a chance that the crisis can be contained. Or Germany and the other hardline euro zone countries can insist that the deal is non-negotiable. In which case, the banks in Cyprus will go bust, risking widespread turmoil.

Given the precarious euro zone economy and the enfeebled state of European banks, cutting Cyprus a better deal looks like the safer option. The package could be restructured so that only deposits in excess of €100,000 were taxed, the preferred option of Christine Lagarde at the IMF. Sparing those with savings of less than €100,000 from any pain would require the bigger depositors to pay a 15.5% tax to find the €5.8bn demanded of Cyprus. Alternatively, Europe could
easily find the extra €5.8bn itself.

The problem is that both options will cause political problems. Putin will bridle at suggestions that Russian citizens – who make up a large proportion of the €100,000 depositors – should be singled out. And Merkel could expect an almighty domestic backlash if she backtracked from the tough stance she adopted at the weekend. But the alternative is to let the banks in Cyprus go bust as soon as they are reopened after the extended bank holiday and hope that it really is a “special case”. That looks like an awfully big gamble.”


Nice to see the Cypriot parliament has some sense and did not pass the “tax.”

Russian President Vladimir Putin called the proposed raid on deposits, “‘Unfair, Unprofessional, Dangerous.”

You know, when Putin calls something, “‘Unfair, Unprofessional, Dangerous” and he’s actually right, then maybe, just maybe it’s time to step back and think things through.

We’ve been on this austerity lark for five years now. It is very clearly not working.

It’s time we start spending money. Previous generations electrified the country and brought phone lines everywhere – maybe we could get broadband distributed around the country. Build proper schools and hospitals. Give larger grants to people to make their homes more energy efficient. Expand public transport, increase the frequency of existing lines and lower fares. Take a look back at the boom and see where the inefficiencies were and start addressing them for the next boom.

You have to spend money to make money as the old saying goes.

The EU are not going to let Cyprus banks go bust they never were. They just figured they could bully the money out of them. Neither are they going to let the Russians wipe them off the playing field. Merkel has totally over played her hand and her “right” to be re-elected. The entire EU monetary and banking policy is being dictated by the re-election of Angela Merkel. Does anyone ever remember that particular piece of conditionality being stitched into any of the Treaties? Logically, Germany must leave the EZ.

In the mean time, there is going to be a bit of a whip round for Cyprus and they going to be offered the extra €5.8bn but it would be one hell of a shock if the offer was lost in translation and they decided to leave.

Re John McHale’s comment

I’m a bit confused by the punchline in Karl’s article.

We all agree that making depositors pay is bad, right? So the fact that depositors didn’t have to pay in Ireland was therefore good. The downside of that was that we were told that this meant bondholders couldn’t be burned, since depositors had to be protected.

are we saying now, aha! you said bondholders and depositors HAD to be protected because there would be contagion, but now you’re saying there is no contagion, therefore bondholders and depositors could have been burned in Ireland and the state would have been spared the debt.

But….we don’t like it when depositors are raided…so why would we make this argument? Or are we just saying – you could’ve burned the bondholders, while protecting the depositors.
But…..the parallels aren’t similar because Cyprus doesn’t have (that many) bondholders…..

On the other hand, I always thought the pari passu argument, was dodgy, but the lawyers kept shtum. There is case history on pari passu that I found but it seemed to me like no one else bothered to look it up.

Now, few questions, and everyone forgive their rooky nature. I’ve come late to Cyprus

1. Did they have a reckless lending issue? Why exactly are in they in crisis if they’ve got billions sloshing around in the banks?
2. Is there anyway of figuring out which deposits are the dodgy Russian sort, and which the Cypriot granny sort? In fairness, you can’t blame Angela for not wanting to bail out Russian oligarchs…..


Lets not forget our Taoiseach Mr. Kenny going to explain to world leaders how we all partied too much.

Unfortunately the need for our leadership to ingratiate themselves may limit our ability to now point out some home truths to our creditor friends.

@Sarah Carey

The myth of ‘paddy pursued’ has been revealed. We wuz fools then and we are still fools now. It’s about ab_use of power Sarah – and a party, and its former treasurer, close to your own is no great shakes at getting on top of it. The power makes up the rules to suit itself.

The focus of some of the criticism is getting harder to understand as we get more details on what happened in the early hours of Saturday morning. In Ireland there has long been a call for bank creditors to bear more of the burden of bank recapitalisations (though the suggestion to include depositors seems new). This was the demand of official lenders in the Cyprus case. A point of general agreement is that the decision to hit sub-100K depositors has the potential to be hugely destabilising. (And even if the amount of senior bonds was limited, it is hard to understand why any tax would not apply to them as well.) But it appears the main pressure to limit the tax to 10 percent on any deposit came from the Cypriot side.

A useful updated account of the events of Saturday morning from the FT:

@John McHale.

The Russian and other wealthy tourist business is probably more important to Cyprus that the multinationals and 10% Corporate tax rate is to Ireland.
If that money goes, what do the Cypriots who work in those industries do?
The Cypriots are right to protect their national interests. Ireland could certainly take a lesson from them.

Juncker would never have allowed such a proposal to put on the table.
The new Netherlands ‘head’ of the Eurogroup was clearly out of his depth, and unable to stand up to Schaeuble.

Lets see if Schaeuble is man enough to stand up to Putin. I doubt it.

@Sarah Carey

Cypriot banks invested in Greek Sovereign Treasury Bills and Bonds as well as highly rated Greek bank bonds. Then the EZ (gang of 17) ripped the rug out from under the Greek gov’t and Banks in 2011.
Leaving the Cypriot Gov’t and banks up the creek without a paddle. Granted Russia came to the Cypriot Gov’ts aid with a loan of Euro 2.5 bln.

Obviously there are hundreds of thousands of depositors. The vast majority of Adoniss’ and Sofias’ will have deposits well under the supposedly deposit guaranteed level of Euro 100,000.

The Greek gov’t had to come up with Euro 6 bln from depositors under orders from the gang of 17 and the IMF. It was the Greek gov’t that imposed a tax on all deposits thus violating the EZ and Cypriot gov’t deposit guarantee of Euro 100,000.

Clearly the Russian oligarchs have sums well in excess of $100,000 deposited in Cypriot banks. The problems and solutions are quite clear. I am not suggesting that Russians should be hung out to dry. British people are also highly exposed since the British national pension plan deposits 18,000 cheques monthly in Cypriot banks.

See my link above where Orphanides describes the serial blackmail tactics used by the gang of 17.

We were mugged in 2008 but Cyprus is being assaulted, battered and humiliated in an unprecedented fashion. They deserve our sympathy and support.

I should point out that we successfully retained our 12.5% rate from a series of attacks. The Cypriots were forced to put up theirs to 12.5%. Perhaps,that is the new floor, perhaps not.

As regards, where this is going to end up. My guess is that the 9.9% rate on large depos go up. That is a new departure for the EU and a changing of the order in which liabilities should be hair cut. It does allow the Irish govt another basis to go back and say “we were shafted”.

@ John McHale,

Agreed. The confusion on the sequence of events is adding to the criticism. The original proposal seems to have a been a individually-set levy on deposits over €100k for each bank. This would have meant a levy of 30%-40% on deposits in Laika with lower rates in imposed in other banks and perhaps no levy at all in some banks (such as the Cooperative Bank).

There is around €35 billion of uninsured deposits (>€100k) in the Cypriot banks. 40% of that is €14 billion. The amount needed is €5.8 billion so the 40% proposal was never designed to be “across the board”.

It does seem that it was the Cypriot’s who wanted the keep the rate below 10% meaning the levy would have to be equally imposed on the failing banks, the ailing banks and those that are simply flailing in the midst of all this.

Comparisons to Ireland are somewhat incomplete. The Cypriot debate is taking place as the losses in the banks are better understood because of those crystallised through the Greek sovereign default. It is easier to compare losses to diminishing capital/remaining creditors in this setting.

When Ireland acted unilaterally in September 2008 the losses were poorly understood by almost everyone. If the subsequently-revealed €100 billion of losses in the covered banks were known, or even hinted at, then depositor haircuts may have been called for. With €30 billion + of losses Anglo had €11 billion of unsecured senior bonds so dealing with those losses without government injections would have required significant depositor haircuts – but no one called for them in 2008, nor where there calls for them in September 2010 as the guarantee was running out.

The consistent line of criticism of Ireland 2008 and Cyprus 2013 (as proposed) is that bankrupt banks should be bankrupted — both cases fail that test. As Seamus notes, the scale of the losses in Irish banks mean that depositors would have been haircut — and so all the circles that the government ran itself in about pari passu with the seniors would have been moot.

Cyprus has had a bankrupt bank system since the Greek debt exchange. Letting it run as a zombie system for a year was madness. Indeed, the deposit data up until the Eurocrats started talking about haircuts probably show that the system was still attracting deposits despite its bankruptcy as a Hail Mary mentality took hold of the balance sheet.

@ Sarah Carey

Karl’s point is that the “moral” argument appears to have shifted with the latest developments—toward burning bank creditors. This seems clear.

But the more general point is that we should not have gotten into the business of moralizing in the first place—who “should” or “should not” suffer (and this has surely divided Europe). The reality is that we are dealing with complicated systems where individual participants cannot know what the final outcome will be. The system certainly went awry but the hundreds of millions of participants cannot really be “blamed” (or rewarded, individually, if they got it right) and it is far more productive to concentrate on designing a system that will work better in the future (to everybody’s advantage, in response to clear and individual incentives).

The system failed and we need to redesign it. Full stop. (It’s economics).

Many people are responsible for the failures, including the ECB, but let’s leave the blame game for now. Unfortunately, in 2010, many people indulged in excessive moralizing with respect to groups of people (e.g. Irish taxpayers) and this may have impeded their search for a better system. It would have been better to concentrate on the future.

Now, those same people have appeared on the opposite side of the argument that they originally adopted—in the Cypriot case, it seems, the creditors (including bondholders) should take some responsibility after all! It is not all about the failures of the local taxpayers! This exposes the ultimate futility of a moral argument (and lends an air of futility to the whole line of debate).

@ John McHale

The point of this post is whether creditors “should have been burned.” As you well know, Ireland did not burn creditors. You seem to be concerned, instead, as to whether depositors (a subset of creditors) should have been burned.

Of course there was never a serious debate in Ireland over whether “Irish depositors” should have been burned—but this is not the point, as you well know. In the first place, the nationality of creditors—be they depositors or bondholders—could never have been an issue.

But the European Authorities have now suddenly decided that creditors as a class (be they bondholders or depositors—it matters, but they are both creditors) should bear some responsibility for a banking crisis. This is a significant shift.

Creditors, it seems, “should” now share the burden with taxpayers in the relevant regime. This is the change.

Please, let’s not try to bury past debates by splitting hairs over which class of creditors (bondholders or depositors) should now take a hit. Address the main issue. Creditors are now taking a hit.

How does the ‘serves them right’ school or indeed any other school of economics expect the system to run smoothly?

Bear in mind the vast majority of ‘depositors’ aren’t so because they’ve deposited cash with the bank. Instead most ‘depositors’ are so because they’ve taken a ‘loan’ from the bank at which point the bank creates the money for the loan by simply increasing the borrower’s account.

Given that this is how the vast majority of money is created how it is possible for the banks to behave prudently even if their depositors or the taxpayers insist they do so?

With only the partial principal of each loan in circulation how can the banks’ debtors pay the principal plus interest on each loan?

In theory it is right and proper that creditors take a hit.

What’s wrong is that the 100,000 gaurantee is being ignored.

What is also in question is why there have been different treatment of different creditors & indeed countries.

Let us not forget though that broadly speaking this whole mess is as a result of a poorly designed and maintained curreny union. For which a lot are responsible. So far only a few states and perhaps the EU project have felt any cost.

Following on from this, it’s hard not to feel like this was just a cheap attempt to make the Russians pay a bit of the cost under the guise of what is ‘right’ rather than an actual new found vision for what is right.

Putting it another way, if 40% of the savers were German or French would this proposal have been floated?

@Seamus Coffey

When Ireland acted unilaterally in September 2008 the losses were poorly understood by almost everyone.

To recap:

Ireland’s initial sin was to be prematurely pro-creditor, after the vast losses of the financial sector were clearly understood the initial foolish unilateral bank guarantee became the wise universal and strictly enforced Eurozone policy. We jumped before we were pushed, a serious error of character.

Confusingly it seems that the current consensus in German and ECB circles is that in retrospect Ireland was also insufficiently anti-creditor, for which we may well have to suffer again.

The moral imperatives pertaining to the European component of the global financial crisis are quite the conundrum!

Sometimes this changing narrative only make sense to me when viewed as a means of justifying the opportunistic implementation of a set of reactionary economic and political “reforms” long craved by horribly deluded neoliberals, self aggrandizing technocrat ignoramuses, historically ignorant monetary hawks and utterly despicable financial sector interests.

@john mch, seamus

You both make the point that no one “called for” depositors to take a haircut in Ireland in 2008.

I think you are starting from the recent status quo wtr creditor protection (ie 100% for depositors and all senior bonds). Back in 2008 though it wasn’t like that. Deposits didn’t leave Anglo because money managers began to think Anglo bight be insolvent, and if it was, there might then be “calls for” depositor losses. They pulled funds because there was an expectation that an insolvency would result in losses – automatically, unless there were successful “calls for” them to be let off the hook via a bailout. It was not widely expected there would be widespread calls for a bailout (not of Anglo anyway), nor was there a great expectation that any such calls would be heeded.

Nobody knew whether there would be depositor losses, but it was very possible. Just as a flavour from that time, I recall RTE having an ‘in studio’ interview with a ‘financial expert’ (mortgage broker I think) telling the anchor that there was no need for people to be particularly perturbed about the possibility of a bank failure in Ireland because all deposits were protected up to €18,000 (out of the max protected 20,000) and that if deposits over that figure were lost it didn’t really matter because only wealthy people had deposits over €20,000, and they could afford to take a hit. Ordinary people would be unaffected. The anchor was convinced, and the interview was relaxed. It was surreal to me.

Talk about going from one extreme to the other!

The argument that, as a matter of fact and law rather than practicality, senior bonds could not be haircut without depositors loosing to the same extent was made over and over despite being bogus (you compensate depositors from new funds not just those from the liquidation), and the ‘levy’ on deposits in Cyprus is just an illustration of the way things can be manipulated to discriminate. That gaff is now blown.

Having said that, it appears the 2008 decision to protect bank creditors was an Irish one, without specific demands to do so from outside. It appears to be ditto regarding senior bondholder protection during 2010, but we don’t know. During the 2010 bailout there are claims from the Irish side that they were made to stick with their previous policy on creditor protection, but as Colm mentions, there is an odd reluctance convince really anybody outside the Dublin political media that this is an accurate and balanced portrayal.

@Gavin k

“RAF plane flies out with money to Cyprus. That is where we’re at.”

Any sign of the ECB helicopters?

““After being reassured time and again that all depositors and senior bond creditors of … Anglo Irish Bank must be saved in the name of European financial stability, they find out that Europe’s leaders now believe hair-cutting depositors is fine and fair and doesn’t cause contagion….

..Would they now agree with Karl that “the moral grounds for a retrospective compensation deal for Ireland have increased substantially with this new development?””

The argument that haircutting some senior bonds was impossible because it would kibosh the senior bank bond market was attacked strongly, on the pages of this blog and elsewhere, as a mistaken and futile effort. The Irish government and others insisted this was not so. Going beyond this and singling out the most fleet of foot bank creditors – depositors – has now been resorted to.

But whether the Irish policy was indeed pointless in this regard is not the Key point regarding the moral obligations of other states. The key question is whether or not a democratically elected Irish government was unreasonably forced by ‘official creditors to act against the interests of its citizens. Why keep the details so hush hush and just make assertions?

@Gavin k

“RAF plane flies out with money to Cyprus. That is where we’re at.”

Is the UK not showing us the way forward? Who needs Banks? We can just have a securicor van arrive in a town on a Monday and people get their money. If you want you can give them some for safe keeping (Ha Ha).

Economists should tread carefully in claiming moral high grounds in this debacle as the majority in Ireland and elsewhere where there were bubbles, were either AWOL or cheerleaders.

It is both unfair and bad policy to have to bailout lenders to collapsed banks and depositors over the new normal guaranteed account limit of €100,000 for individuals and small business people.

As we know, Ireland guaranteed bank debt and unlimited deposits and the ECB’s lesson from the collapse of Lehman Brothers was to protect senior debt in banks.

Absent a Draghi and a banking union, a policy of supporting wipeouts of senior debt would have been costly because many banks in Europe were in a dire state and in many cases there was not much transparency on how dire.

In the US, the banking industry reported its second-best earnings on record in 2012. Seven of the top 22 European banks made losses in 2012 and there are more to come. In 2011, Europe’s top banks had a return on equity (ROE) of 0%.

It does help of course if the rest of a country’s banking sector is sound and Denmark imposed haircuts on the senior debt of a small number of collapsed banks in early 2011 but in that year its average loan/deposit ratio was 293% compared with 117% in Spain and 68% in the UK. Some Danish banks encountered funding problems and Denmark subsequently added a ‘consolidation package’ to its resolution system to provide incentives for mergers and for a good/bad bank split with the involvement of a state agency.

As for the morality of burden sharing, that in practice usually depends on which side of the fence one stands.

The Cyprus crisis highlights that it is becoming more difficult for small countries to profit from loopholes that attract both companies and the wealthy.

Switzerland which effectively legalised tax evasion in 1934, is now fighting a rearguard action to maintain its bank secrecy laws. Two of the big 3 of the UK’s big island tax havens have agreed to share tax information with
the UK Revenue & Customs and Jersey is likely to follow.

The amounts involved in Ireland’s facilitation of corporate tax avoidance have got so large that other countries are likely to take unilateral action.

@ Seamus Coffey

“The original proposal seems to have a been a individually-set levy on deposits over €100k for each bank. This would have meant a levy of 30%-40% on deposits in Laika with lower rates in imposed in other banks and perhaps no levy at all in some banks (such as the Cooperative Bank).”


‘The amount needed is €5.8 billion so the 40% proposal was never designed to be “across the board”.’

In what way can that be described as a tax? I mean you could say, everyone with money in Anglo pays X, AIB and EBS pays Y and BoI pays Z but it would be odd. A person with more money in BoI would pay less in a levy than a person with less money in AIB.

@ Sarah Carey

Morning Sarah. Just briefly. leaving aside the ‘tax by inflation’ and capital flight arguments I’m not sure ‘everyone’ is against taxing/levying deposits of banks in an emergency. The rublicon which they’re now trying to recross is levying deposits under 100,000.

In 2008 if you’d said as part of the wind up package losses are shared according to pre-existing norms (blow dust off book to see what that is), and depositors had been hit I think it would have passed.

But you do get Paul Ferguson-esque problems, for example, I would imagine the , say ‘McQuail’ family would have had a lot of money in Anglo, so you take that, but as they owe even more they just default harder if they have to.

The problem with the wild and whacky overnight Eurogroup decision was that it put depositors AHEAD of bond-holders for the chop. That appears to be news for everyone. Some of the Cypriot parliamentarians are arguing reasonable that they are being good Europeans by trying to restore the natural order.

Colm said: The ‘acts’ of the ECB are expressly judiciable at the ECJ, it says so in the ECB statute.

It might be worth adding that the the German federal constitutional court ratified the ESM bailout in 09-2012, ECJ ruled that the ESM is lawful in 11/2012, having said that, the ESM or their governing bodies, can not be taken to court, any court at all.

With it’s HQ not in Cyprus, but in Luxembourg and established under public international law the governors as well as all internal communications enjoy total immunity. It is the same immunity that applies to the IMF or Worldbank.

Forgive my bluntness, but the term economic dictatorship comes to mind again.

In the cypriotic spin fog of the past few hours, another interesting development was reported,

Europe’s Mr. Michael “Privatize all water” Barnier, the EU commissioner responsible for the proposal stated this to be the first fundamental step towards a real banking union which must restore confidence in the eurozone’s bank and ensure the solidity and reliability of the banking sector.

ECB will then regulate 6.000 banks with powers to supervise and bailout banks.

…Kafkaesqe times….


@Gary O’Callaghan

“The system certainly went awry but the hundreds of millions of participants cannot really be “blamed” (or rewarded, individually, if they got it right) and it is far more productive to concentrate on designing a system that will work better in the future (to everybody’s advantage [italics mine – CG] , in response to clear and individual incentives).”

This is an extremely insightful analysis but I have one major caveat: the idea that even the best system conceivable will benefit everyone.

The financial crisis is not so much a ‘problem’ with some kind of optimum ‘solution’ which can be figured out by some smart and disinterested experts (such as macroeconomists?) as a conflict with an outcome. Outcomes to conflicts are zero-sum or negative sum games: there are always losers as well as winners, or perhaps everybody loses. Of course there are many who believe in the deus ex machina of economic ‘growth’ as the rising tide that will lift all boats, the positive sum game that will bring about a happy end for all parties. But that belief is a very questionable one.

This is a conflict between taxpayers, bondholders and creditors, between borrowers and lenders, between young and old, private and public sector workers etc. etc. Not to mention the plethora of split personalities — taxpayers who are also depositors, bondholders who also happen to be our the investors of our life assurance and pension funds and whose burning will thus involve torching ourselves as well, or a household in which some members are private sector workers and others employed by the government.

Let’s ‘get back to basics’. Lenin’s phrase is perhaps the most perceptive:

Кто кого — (Who/Whom). Who has the power to do what to whom? That is at the heart of things — not finding ‘solutions’ to ‘problems’.

@ Gary O’Callaghan

Very good post.

“But the European Authorities have now suddenly decided that creditors as a class (be they bondholders or depositors—it matters, but they are both creditors) should bear some responsibility for a banking crisis. This is a significant shift.”

A further complicating issue is that the deal tried to differentiate depositors on the grounds of nationality.

@Seamus Coffey, Gavin K.

“The original proposal seems to have a been a individually-set levy on deposits over €100k for each bank. This would have meant a levy of 30%-40% on deposits in Laika with lower rates in imposed in other banks and perhaps no levy at all in some banks (such as the Cooperative Bank).”

I think the IMF proposal was more along the lines of a traditional restructuring of a failed bank, with uninsured depositors and senior bondholders getting hit. The 30%-40% number is likely the estimated losses for depositors in Laiki bank. Other banks may have had lower numbers or avoided restructuring at all.

WSJ report that the IMF are busy working on their restructuring plan (merging the big two banks into a good and bad bank). Also ECB/Cyprus CB working on capital controls, and Greece being ready to fly Euro banknotes in. All just contingency planning of course. Greece seems to have lots of unused banknotes left over from the last contingency plan.

The ECB governing council meets today/Wednesday afternoon. First item on the agenda will no doubt be whether Bank of Cyprus and Laiki are solvent. I think the Cyprus CB will extend the bank holiday through the weekend to see if any rabbits can be pulled from hats in Moscow.

Are we overlooking the fact that since the start of the crisis DIRT on Irish bank interest has risen from 25% to 33%? For most bank savings accounts real interest rates are now negative.

Olli Rehn chips in:

‘A spokesman for EU commissioner Olli Rehn said that while EU law guarantees deposits of up to €100,000 per customer, per bank, this is only in the event of a bank failure.

‘“In this case we are not talking about such a situation, we are talking about a one-off levy which will be applied as a fiscal measure that will be applied to all bank accounts in Cyprus. It’s a fiscal measure decided by the Cypriot authorities,” he said.’

The logic of this seems problematic. An EZ bank deposit holder is guaranteed in the case of bank failure. Governments are allowed to levy taxes on wealth on any amounts at all held in banks at any time. Therefore when banks are in trouble they can charge a levy and use it to recapitalise the bank. This may be cheaper to the government than trying to pay out on the guarantee of a bust bank. Therefore the depositor is more likely to lose money than she would be if there were no 100,000 guarantee at all. Therefore the depositor should not trust the guarantee and be ready to pull money out – which is not the desired situation.

It reminds me a bit of the Titanic (sorry) having fewer lifeboats than needed. Initially it is comforting – oh, look there are lifeboats. But when you realise, possibly only after a little shudder, that you can’t all get off, then the temptation is to get into a lifeboat now, rather than wait for the full emergency.

More classily, now that I think of it, it reminds me of the abandoning ship at the beginning of Conrad’s ‘Lord Jim’.

@Gary O’Callaghan

“… the ultimate futility of a moral argument…”

Such professorial cant!

Minor point: The EU is founded on a moral principle derived directly from E. Kant.

Very minor point: Adam Smith regarded himself as primarily a moral philosopher, a fact usually ignored by those ill-educated economists ‘trained’ in the neo-liberal tradition under the illusion of rational man. Poor dears!

@ Peter Stapleton 

“Are we overlooking the fact that since the start of the crisis DIRT on Irish bank interest has risen from 25% to 33%? For most bank savings accounts real interest rates are now negative.”

Yes but…the prospect of a hanging will always trump attention to facts like these!

Martin Wolfe, chief economics commentator of The Financial Times, says today that direct bank recapitalisation by the Eurozone, for which the sum required is a small matter, should be the choice but the banking union is not up and running. He adds:

“Many insist that any tax on deposits is theft. This is nonsense…Apparently on the insistence of Nicos Anastasiades, the president of Cyprus, losses are to be imposed on deposits of less than €100,000, the upper limit for deposit insurance in the Eurozone. The idea is to tax these smaller deposits at 6.75% and the bigger ones at 9.9%. That may now change – and for good reason.

But forgoing the former would mean raising the rate for deposits above €100,000 to 15%, to raise the required sum of €5.8bn. A good thing, I would argue. But the Russian government does not agree . Nor does that of Cyprus.”

Presumably the authorities have given up on boundless optimism that this crisis is fixable short term, do not expect the growth fairy to appear medium term and are readying themselves for another round of bank restructurings. How will AIB depositors feel about sponsoring mortgage forgiveness in the Home Counties of Dublin, I wonder.

In my post above Orphanides mentions that small countries like Luxembourg and weak countries like Spain are now vulnerable. This article from Die Welt shows he was right on the money.

The dinging of depositors in Cyprus will decimate the Financial businesses in small and/or weak countries. The whooshing sound you hear is money flowing into Germany to earn a negative return. The quiet money is going under the mattress to earn a 10% to 15% premium. This matters very much for Ireland, Enda has to recover from his reveries and make a full frontal assault on Germany on behalf of Cyprus.

Article in German


Luxembourg also has a questionable business model
Cyprus is not the only concern. Several euro countries depend on the weal and woe of their banks – deposits from customers exceed the economic strength of countries in many times. By Daniel Eckert and Holger Zschäpitz

Photo: Infographics World
European savers hoard in the banks huge sums
Share Image
Split Image

Government bonds: savings thanks debt crisis Schäuble billion
Cyprus-rescue: the savings of Germans are still safe?
Netherlands: Europe expropriated the first creditors of a bank
Black Money: How Russia’s mafia washes their money in Cyprus
Call money
Money laundering
For Wolfgang Schäuble, the world is often quite simple: Cyprus had just the wrong business model . With these words, the finance minister said now the problems of the euro area country.

Schäuble According Mediterranean Republic simply has too much on banks and admitted that the financial sector swells ever.

In fact, the banking industry giant arched over the mere 18 billion Euro Mediterranean economy: the deposits with the banks the last country amounted to 47 billion euros. That is two and half times the total economic output.

Schäuble’s explanation of the world has only one flaw. The beautiful island with 800,000 inhabitants, is far from the only country in the euro zone, which has a hochgetrimmte financial industry. In no less than ten countries exceeds the volume of bank deposits, the economic performance, in part by a multiple.

Store in Luxembourg € 227 billion

Cyprus is not up front, but the Euro-model country Luxembourg. The tiny country earned in less than 44 billion euros of goods and services, at the same time accommodate the banks of the Grand Duchy of € 227 billion in deposits, more than five times the gross domestic product.

Photo: AP
Jean-Claude Juncker is prime minister since 1995 in Luxembourg

Photo: Infographics World
Compared to the economy, the financial sector is in many European countries too big
How does the tax?
Who is affected?
Malta, with its only seven billion euro economy is home to nearly twelve billion euros customer deposits. The financial centers with significant deposits include the Netherlands, Spain, Belgium and Portugal. Even in Germany, customer deposits at the banks are with well over 3.1 trillion in economic output.

The anger at the compulsory levy for savers is now bringing to the surface the dangers that accompany such a financial overextension with it. With the financial crisis was at first mainly the security of the investment bank put to the test, then the skeptical gaze now on the deposits. What customers on savings accounts, checking account and have money market accounts was, so far as the solid part of the banking business.

Tax saver is lucrative for the crisis countries

That is now changing: Once in Cyprus, the small savers will have to pay prevails in customer uncertainty. Especially in the crisis countries Spain or Italy could bank customers withdraw their money for fear of being used for the rescue of the banks or the government finances.

In both countries precarious public finances is offset by a substantial private wealth. This could arouse the desires of the highly indebted countries – and confuse the account holder.

The U.S. investment bank Goldman Sachs has calculated that revenues could reach the governments, if they occupy the account holder with a tax or penalty tax: a very profitable it would be for the Spanish State, to fleece its citizens: Madrid could with a 8.5-percent savers EUR 129 billion tax take.

This would enable 15 percent of the debt pay off in one fell swoop. Also in Portugal a tax on deposits from government perspective would be attractive: At 8.5 percent, the state could control after Goldman calculations take almost 18 billion.

Levy would amount to a breach of trust

The dangers are considerable: In the view of savers would such a tax equal to a breach of trust, bank deposits in the European Union but are guaranteed up to € 100,000 per customer.

With the compulsory levy they would at once be available for the mass public. But the rumor that such an assault on private property is imminent, should trigger a capital flight – possibly even a bank run.

How fast can run rampant insecurity is observed in Greece. From a high of 244 billion euros in the winter of 2009, bank deposits have fallen to last 156 billion euros. That’s a drop of more than a third.

Even the much larger economy during the crisis, Spain was melting away in customer deposits: from 1.7 trillion euros in the summer of 2011 she went back to 1.49 trillion in the meantime. Meanwhile, the volume of Spanish deposits has stabilized at just over € 1.5 trillion.

Even the powerful rating agencies are alarmed. In assessing the creditworthiness of banks they already make a swing. “The credit quality auditors will look at the future of critical deposits,” said Vincent Truglia, former director of Moody’s.

Previously the nest egg of customers have widely been regarded as sound financial shape. This will for the euro zone is now questionable.

Accountholders financial pain inflicted

His former employer has already fired a warning shot first. In one study, Moody’s warns against the long-term consequences of the compulsory levy, “The Cyprus Package negative for all account holders in Europe,” Bart Oosterveld, managing director at the New York rating firm.

European leaders have in the decision of the weekend provided evidence that they were prepared to account holders inflict financial pain.

The logic: When it comes to the previously sacrosanct customers to the collar, which is a symbol of the bondholders who fund the Institute. According to the Oosterveld is true not only for the funding of Cypriot banks, it also affects the other institutions in the Old World.

An immediate consequence is that the connection between the investor public finances and the financial sector again Radin. Critical view but are not the only customer deposits, but the volumes of banking transactions at all.

In this respect also Luxembourg’s leader. All balance sheet items added up the banks of the dwarf State are leveraged by a factor of 22 to the gross domestic product. Whether you like the Schäuble may well?

Rushing now but some reading on pari passu here

It’s not black and white, but to me it says there is an arguable case that bondholders can be ranked. But no one even tried to argue it here. If we had worked on pari passu we could’ve protected depositors in Anglo-Irish, burned the bondholders and saved ourselves a lot of money.

@ Gavin,

In what way can that be described as a tax? I mean you could say, everyone with money in Anglo pays X, AIB and EBS pays Y and BoI pays Z but it would be odd. A person with more money in BoI would pay less in a levy than a person with less money in AIB.

Ireland, for example, has different tax rates for PAYE workers in the private sector, Non-PAYE workers, and public sector workers.

Of course, it is also the case that the Cypriot proposal was never a tax. It was a form of debt-for-equity swap with depositors getting shares in the banks for their deposits (though the doubtful value of this equity led to the introduction of some opaque links to future energy revenues).

“Euro zone paymaster Germany, facing an election this year and increasingly frustrated with the mounting cost of bailing out its southern partners, said Cyprus had no one to blame but itself for the gravity of the situation.”

This Soros article seems to be back in tune with the Zeitgeist again

@ All

James Macintosh in the FT says that the Cypriot parliament has called Germany’s bluff while the chief currency strategist in Standard Chartered in today’s IT agrees with Schaeuble that Cyprus is not a systemic risk to the euro. The latter comments that having found 200 billion for Greece, there would be no problem in finding less than 6 billion were the case to be otherwise.

The political problem seems to lie in the popular misconception that a bailout, whether from the IMF of Europe, is a form of grant when it simply consists of loans on favourable terms from “official lenders” when no one else will lend. The Cypriots have to find their share of the money, as Ireland did, as the overall loan burden would otherwise be unsustainable. Indeed, from the comments emanating from Cypriot leaders, they fully recognise this and the problem is not with accepting that the money has to be found but how.

Is the Cypriot approach hitherto better than that adopted by successive Irish governments? Hardly!

@ Sarah Carey

“If we had worked on pari passu we could’ve protected depositors in Anglo-Irish, burned the bondholders and saved ourselves a lot of money.”

Ireland was unlucky to have had the bust banks first.
It’s a bit like parenting. Figuring out what to do is much easier with the second than the first.

And EZ banking crisis management is very like parenting- it’s going to be messy no matter how noble the original intentions are. And you probably have to experience it to understand it properly.

@ Seamus Coffey

Fair enough, but I still reckon it is problematic as a tax. Will think more.

Martin Wolf in the piece linked by Michael Hennigan above argues:

“The first concern is the deal itself. The decision to impose losses on insured deposits is indeed a big error. (Yes, it is a default, not a tax.) But the decision to bail in some deposits was not an error. However unpopular it may be, a resolution regime that makes this a reality is necessary, in Cyprus and elsewhere. Another concern is the blanket coverage of the tax, which does not vary from bank to bank. This robs even big depositors of the incentive to monitor bank solvency.”

The situation has become convoluted.

So to my argument I think


I agree that blame arguments are unhelpful. But I see the irritating missives from LBS on that score from as something of a sideshow. In the latter part of 2010, the burning question was the practical one of what to do in the face of slow motion bank run.

In the early part of 2010, I wrote quite a bit about the need for having a Special Resolution Regime in place in time for when the original blanket guarantee expired in September. I was surprised at the time by the lack of attention this was getting with time running out. An Irish Times piece from April of that year has gone to archives, but the lack of interest in the comment thread on this site is revealing. The gist of the argument is given in a post in response to a call for an SRR by Colm McCarthy in the SBP (see below).

After September 2010 the situation had changed. The bank run was gathering force and Ireland’s ELA debt was rising rapidly – which continued well into 2011. If memory serves me right there was about 4 billion euro of unguaranteed senior bonds in Anglo when the guaranteed expired. A 50 percent haircut would have saved about 2 billion. The fact that haircuts for depositors were not on the table made a big difference to the practical calculations. I actually don’t think the ECB would have pulled ELA, but with the ongoing two-week rollover the inevitable uncertainty would likely have caused the run to gather steam. So the Government of the day faced a nasty practical dilemma; they probably now can’t believe their luck that the easy to digest narrative that they were forced to protect senior bond holders by the ECB has taken such hold.

Thread on the Irish Times piece here:

Thread following Colm’s SBP piece here:

The NY Times has a reporter on the ground in Nicosia. She reports on TV that the Cypriot Finance is in Moscow negotiating with the Russian Gov’t and a major Russian bank. Her take on it is that a Russian bank will buy one or two Cypriot banks in a matter of days. This will strengthen the Cypriot Gov’t in its negotiations with the gang of 17. It will also increase the level of uncertainty wrt the future of the Euro.

Cypriots are a tough and capable bunch.

It should be noted that according to Reuters, it was the president of Cyprus who proposed to haircut insured depositors.

@ Mickey Hickey

What’s this ‘gang of 17’?

With Putin being seen as a potential hero, after months of negotiations with him got nowhere, we may be about to see the emergence of a new version of Lenin’s useful idiots in the West?

I’m really confused. Europe ex-Ireland would have been fine if Ireland assigned the bank losses to depositors. It was the Irish government which unilaterally guaranteed deposits and which thus set up itself (and thus the Irish taxpayer) as the paymaster.

What Europe objected to was dinging senior bond holders but leaving depositors intact.

I think Cyprus is the perfect test case for a country leaving the euro. The effects would be small for the rest of the euro, so long as knock-on effects are small. And presumably the effects on Cyprus will be disasterous, with either its banks all defaulting or Russia stepping in and taking over the Greek part of the island (which, needless to say, will not make Turkey very happy, so the risk of Turkey stepping in militarily cannot be excluded). Hardly the shining example to other recalcitrants.


Right on cue, the irritating LBS is back! But I agree that he is a sideshow (and will not even bother to read what he says).

Also, I do not question your efforts to encourage the adoption of a bank resolution mechanism in 2010 nor doubt that it was crucial to have one in place. There were major mistakes all round.

But our monetary union was (and still is) tragically flawed and my principal objection is to people who blame individual actors to the exclusion of the system itself. Politicians, in particular, find this convenient. I do not accuse you of this but I do think it important, from time to time, to point out that any actors in a flawed system will (necessarily) make mistakes. And the blame game is used to detract us from necessary solutions (like a pan-euro-zone bank resolution mechanism).

As regards the bank run in Ireland, you may remember that there was a run on our offshore banks (that were not subject to guarantee) as well as on our onshore banks (that were a responsibility of government). The runs were equivalent in size. This tells me that the bank run was, in the first instance, caused by the ECB’s well-heralded reluctance to act as lender of last resort (to any banks). Only in the second instance was it due to the absence of an appropriate resolution mechanism (for onshore banks) and no such mechanism can work without a lender of last resort. This is why I am so critical of the ECB (and the great LBS).

In current circumstances, the Cypriot authorities must of course accept a lot of blame. But why did the ECB extend an implicit cover to these banks for so long if they thought them so shaky? If anybody replies that the ECB did not have oversight responsibility, this makes the point that the system is flawed.

@Michael H
The 17 members of the Eurozone.
Most people forget that the EZ has 17 members. In the MSM it looks like one puppeteer (Germany) and 16 puppets. Supposedly the 17 are collectively setting the terms and conditions and also calling the shots.

Merkel and Schauble are only 1/17 of the problem. The 16 sitting on their hands are the castrati without a voice.

Putin is a hard headed, clear eyed leader who has studied Von Clausewitz in detail. He has not forgotten that countries have interests, not friends. The Cypriots are no babes in the woods either.

When the gang of 17 imposed a hair cut on Greek sovereign debt in 2011, Putin stepped up to the plate with Euro 2.5 bln for Cyprus, in the past month he agreed to reduce the interest rate on the Euro 2.5 bln.

What is at stake here is Germany is destroying the EZ and benefiting as the slow bank run, now in its fifth year provides German businesses with funds at interest rates below the rate of inflation as interest rates rise for the PIIGS + C. The levy on deposits accelerates the destruction of the PIIGS and the Financial businesses in Cyprus, Malta, Luxembourg.

Do we sit back and take it or stand up and be counted while we are still able to stand up.

@ John McHale, Gary O’Callaghan

The EU resolution framework was floated here:

I was a bit surprised by the lack of interest on that one. I followed it up myself with emails over a year. It was initially planned for autumn that year, 2011, then Spring 2012, hasn’t happened yet, but is being pushed again over the last couple of days.

These figures are from Central Bank of Cyprus and Global Financial Integrity.
Savings in Cypriot banks:
Cyprus based Russian: Euro 25 bln
Native Cypriots Euro 21 bln
Greeks (mainland) Euro 15 bln
Other EU Euro 5.3 bln (except UK)
UK Euro 1.7 bln

Cypriot bank assets in Greece Euro 25 bln., a run on Cypriot banks would also pull down Greece in its now seriously weakened condition. This is Cyprus’s ace in the hole in its negotiations with the gang of 17. The domino theory is being reactivated irst Cyprus then Greece, Spain, Italy, Portugal, Ireland……..

Euro 17 bln. is required to recapitalise Cypriot banks. The Germans want to nail Cyprus to the cross for domestic [political purposes. The other 16 members of the EZ are playing Russian roulette with German guns and ammunition. People are going to get badly hurt.

If you are Cypriot you had a debt ratio of 71% in 2011, then the EZ puls the rug on Greece and in 2012 Cypriot debt ratio is 127%, projected 140% for 2013. The Cypriots did everything right and then were knocked down in a drive by looting as Germany sunk Greece, Ireland, Spain, Portugal, Italy. Collateral damage that serves to strengthen Germany.

This has got to stop, it is only a matter of time for Ireland in its present weakened condition to become two time casualty.

@John McHale

So the Government of the day faced a nasty practical dilemma; they probably now can’t believe their luck that the easy to digest narrative that they were forced to protect senior bond holders by the ECB has taken such hold.

Given the EU’s new order of rising creditor seniority (the state, depositors, bond holders) on show in the Cyprus ambush and how Asmussen actually told an audience in Ireland that the ECB compelled us to not even burn junior bondholders (for the protection of financial stability, dontchaknow) are you saying that ECB policy is not to protect bond holders (of any type) ahead of all other creditors?

Or is your point that the Irish government of the day did not have to confront the ECB as we basically agreed with the policy (though for different reasons)?

In the Warsaw ghetto the people chose leaders. The leaders were then told that a certain number of people were to be selected for transportation. They didn’t care who or how – just as long as a certain number was met.

It’s a similar modus operandi now. Ghettoize the periphery. Implement broad strategy through forcing ghetto leaders to decide on the detail.

This post may be deleted but the reason for it is this:
The best predictor of future behaviour is past behaviour. Group think, a fondness for absolutes and an insular mindset mean that the risk of the Euro being torn apart is very high.

The incorrectable issues that Cyprus has brought up are:
1: The guys at the top are now seen to be clueless
2: People have had to

@ Shay,

Asmussen was talking about the €4 billion unsecured senior bonds that were in Anglo when the guarantee expired. From the speech:

It is true that the ECB viewed it as the least damaging course to fully honour the outstanding senior debts of Anglo.

Also, under Draghi the ECB has not been absolute about protecting senior bondholders in all banks. It was reported back in July that Draghi proposed cuts to senior bonds in failed Spanish banks if such an eventuality was to come to pass. It was rejected.

But the way things are changing it is hard to know if there is any order of creditor seniority. This emphasizes the point that has been made by a number of people around here for the last few days. It is beyond time to be focusing on country-specific cases. A system-wide resolution regime needs to be formulated that takes out the “find the lady” approach that is currently being followed.

@Seamus Coffey

Asmussen was talking about the €4 billion unsecured senior bonds that were in Anglo when the guarantee expired. From the speech:

As the situation has evolved the order of bond holder seniority has changed but it certainly was the case that from the start of the global financial crisis to the end of arch letter-writer Trichet’s stint in the ECB (October 2011?) that the ECB saw protecting bond holders as a part of its mandate to preserve the stability of the financial system and that it was willing to exert considerable pressure on smaller states to ensure it.

Asmussen’s admission (in the midst of his uncontested dressing down of Ireland’s economic policy forming elite) that the ECB had insisted we pay four billion to unguaranteed seniors after the guarantee elapsed tends to confirm rather than contradict this view.

I was uncertain about the the initial Irish bailout and saw its extension as wrong headed and dangerous but the policy was absolutely consistent with the position of the ECB and our larger Eurozone partners for several years afterwards.

It is so hard to say that ECB and creditor state policy on the seniority of bond holders was at least as misguided (or wise, depending on your point of view) as Ireland’s initial blanket guarantee?

Asmussen as quoted today in the Guardian
“It is an illusion to think that more debt is the answer to this debt crisis. Recent research has shown that high public debt levels in the euro area hamper growth, with a serious negative effect starting when debt exceeds 90% of GDP.”

And we hail more borrowing as a victory. Where are we now.120% debt to GDP and rising.


Asmussen as quoted today in the Guardian….Asmussen channels Reinhart-Rogoff

I think everyone, even the cynics among us, underestimated how fanatical the commitment of the German body politic was to their particular variety of hard currency neoliberalism. They will say and do anything to avoid a policy change.

In this case Asmussen’s fall back to Rogoff’s interesting (but fairly useless) research on the correlation between debt level and growth is just another sign that they are looking for rationales for the existing course of action rather than trying to find the correct course of action.

Coming so close to the collective unremembering of Alesina’s politically convenient but utterly nonsensical thesis on expansionary austerity (“Empirical proof of the correctness of Conservatism discovered” announce conservatives) I think this is a a risky move.

It gives the impression of flapping mouths attached to frozen ideas.

@ Shay,

I was responding to this:

… Asmussen actually told an audience in Ireland that the ECB compelled us to not even burn junior bondholders…


… are you saying that ECB policy is not to protect bond holders (of any type) ahead of all other creditors?

The ECB made no issue of the buy-backs introduced for junior bonds in the covered Irish banks which netted around €14 billion. They might even argue that more savings should have been generated from junior bonds.

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