We indicated yesterday that the Irish government had been in the process of trying to steer an inevitable rescue operation towards salvaging its bloated, cancerous banking system rather than a government bailout, which would not only further reduce national sovereignty but also saddle Erin with debt that could not be restructured. Stratfor describes how the Irish crisis is indeed a banking crisis (hat tip reader Valissa):
The Irish banking system is in extreme distress with the Irish government fearing that it may need to inject another 20 billion euros ($27 billion) on top of the 60 billion euros it has already used to recapitalize the sector. But unlike the debt situation in Southern Europe — and especially Greece — Ireland’s worst abuses are private in banking, not public in state spending. This is not the (Greek) story of a state that lived on loans to maintain a standard of living it could not afford. Instead, this is the story of an overall well-managed system whose banks are guilty of overexuberance. So where the Greeks begged for a bailout earlier this year and then railed (and continue to rail) against the budget cuts they are being forced to abide by to maintain the intravenous drip of euros, the Irish are already nearly two years into a self-imposed austerity, all without any serious protests or strikes.
Stock markets rallied around the world on the assumption that the Irish will be forced to accept a IMF-EU-UK rescue. And while odds favor that outcome, there are still some serious points of friction.
In particular, outside observers took to heart the remarks of central bank governor Patrick Honohan, that he anticipated that negotiations with the bailout delegation, set to commence today, would result in a tens-of-billion-euro loan deal. But per the Irish Times, the government took issue with his remarks:
[Brian] Cowen indicated that the Government did not share Prof Honohan’s views on the figure or a deal, saying his comments were premature ahead of negotiations.
“The governor gave his view. He is entitled to give his view. I am entitled to give the view about the decision the Government will take when the necessary discussions are over,” he said.
However, Minister for Finance Brian Lenihan later told the Dáil that the Government could accept an aid package for the banks after the talks with the IMF.
He said the establishment of a contingency fund would be a “very desirable outcome” but said no final decisions had been made.
It was possible that the funds would be made available but not drawn down, he added.
In a subsequent interview on RTÉ television, Mr Lenihan accepted that the external assistance from the EU would “have to be funnelled through the State” but denied the IMF would be directing the budget and four-year plan.
Note that the Irish government is still holding out for a banking-system-only bailout, even if the funds are channeled through the government. Since I am not aware of any IMF bailout being done on this format, it’s likely to be a sticking point if the Irish refuse to back down (recall that the government itself is under no immediate funding pressure; they have six months before they need to go to market, which is an eternity in crisis-land).
The other major bone of contention is Ireland’s super-low corporation tax, which served as a significant incentive for multinationals to set up shop in Ireland. The Germans and French are insistent that it be increased to balance the budget. The Irish objections here are plausible, particularly since the low rates are a cornerstone of their national strategy (do you want 12.5%, the current corporate tax rate, of a decent sized number or 25% of a vastly smaller number?). The Irish have made it clear that they are non-negotiable on this point, and as keenly as the rest of the eurozone would like to beat Ireland back into line, I doubt they’d be willing to risk negotiations failing over this issue.
What has been remarkable about this whole saga is that these rescues continue to be presented as sovereign bailouts, when in fact the real objective is to keep the European financial system from imploding. A Financial Times editorial described what is really at stake:
There is something absurd about pressuring Ireland to borrow money from Europe in order to calm markets enough to lower yields for Spain and Portugal, whose refinancing needs are more acute..
But the most urgent problem is not the solvency of the Irish state; it is the solvency of the Irish banking system….If Irish banks collapse – and if one falls it will not fall alone – it may well trigger bank failures across a continent that remains full of institutions whose earlier stress tests were remarkably stressless…
Saving the banking system, however, is not the same as bailing out extant institutions; nor should taxpayers give up even more of their blood to the walking dead. Yet this is what Ireland is being asked to do – borrow money from the EFSF to raise the banks’ equity. Doing so would be an insult to the Irish people (whose incomes will be mortgaged to pay the loan back) and a gratuitous one at that: it defies logic to claim that adding to Dublin’s debt will seduce markets back to Irish sovereign bonds.
So Ireland – and Europe – must confront the prospect of an inevitable string of bank restructurings. Giving away more capital now will weaken states’ ability to deal with the problem when there is no more time to be bought….
Europe does not yet seem willing to give up a diabolical bargain that has core states lend to peripheral ones so that they can support their banks, all to save financial institutions in the core from losses. This game of bail-outs on the sly cannot be sustained for much longer.
It has hit the point that the banks’ refusal to remedy their behavior is facilitating continued looting, as the scale of bloated big bank operations and financial firm pay have changed. Financiers like to tout their industry as Darwinian, yet they have failed to learn a key lesson from nature: successful parasites do not kill their hosts.
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Whether Ireland citizens like it or not (as far as one can see they are going to be mute spectators) the bail-out is going to be rammed down their throats. After all what else can you expect from the politicians. the only person who speaks sense is Merkel. She is shouted out by others. We do not know whether that is being done to appease German voters so that she can later say that she was against bailout when she goes for the routine vote seeking routine but was paid no heed to.
All in all it appears that bond holders will be constantly appeased till they cannot be. Expecting anything else will appear optimistic!
Well if Ireland is to have a bail-out forced down the throat, my only hope is they will pass on the gesture to the banking sector via an immediate forced nationalisation of all major banks at a massive discount to their remaining (pitiful) enterprise value.
This needs to be wholly unlike the TARP where banks received injections of cash rather than simple equity buyouts at the prevailing market price of the day. It’s curious how bankers call constantly for the free market and laissez faire economic principles except when it’s their interests on the line!
As mentioned before, the total cost of the bailout of the Irish banks so far have reached 286 billions euros, 170%
of GDP; this compounded figure includes the ‘assets’ bought
by the NAMA
Europe does not yet seem willing to give up a diabolical bargain that has core states lend to peripheral ones so that they can support their banks, all to save financial institutions in the core from losses. This game of bail-outs on the sly cannot be sustained for much longer.
That sums it up. Here too there’s no such thing as deadbeat borrowers (like the way the pro-banksters like to say about Greece). Such a factor is negligible compared to the fact that this is all about bailing out a few banks, and the German and French banks most of all.
(Those are the same banks who made all the predatory loans, and who are therefore responsible anyway for all the alleged “deadbeats”.
That’s why they set up the EU in the first place – it was a veiled currency manipulation scheme to benefit the German corporatists and facilitate their banksters’ subpriming all over the European periphery.)
Not even close. British banks have the greatest exposure, and the greatest of them? RBS, 84% owned by the UK.
Ireland may deliver a nasty revenge for their excesses … yet again.
See here:
http://ftalphaville.ft.com/blog/2010/11/18/409191/whos-bailing-out-whom/
Just thinking about it …
Is this an opportunity for the boys in Frankfurt to finesse the boys in the City of London? A bailout that supports the eurozone banks but lets the sterling zone banks fall?
I guess it comes down to separating out liabilities, which is probably impossible. But then NAMA should hold alot of data on the source of loans to property developers
The UK doesn’t even use the euro, and has been ambivalent about the EU all along.
They sure weren’t a guiding force in its formation.
So what? The UK is on the hook because it ran the biggest, most reckless banks and chose to bail them out. The debt is real, no matter what the denomination.
Big political opportunity for Europe.
The figures you cite are not right.
See BIS figures.
Ireland owes foreign banks $650 billion. Granted, the UK leads the pack with $222 billion. But Germany comes in a close second at $206 billion.
Spain, Greece and Portual are a different situation. They owe a total of $1,444 billion. Here Germany’s in the lead with $310 billion, France second with $288 and Britain a distant third with $147.
You exude a sense of schadenfreude. It’s hardly appropriate. The exposure of U.S. banks is miniscule compared to that of the UK, Germany or France, but I know from watching hearings of U.S. Senate hearings on Tuesday that many U.S. senators are highly concerned about the fallout from Ireland, Portugal, Greece and Spain.
The So what? is that I don’t follow how your comments (let alone your “not even close”) are responsive to my comment.
I was talking about the structural “diabolical bargain” which went into the EU’s inception. The current position of British banks vis Ireland as just one facet of that structural diabolism seems to be a tangent at best. Yet you seem to be under the impression that you’re arguing with me.
Finger-pointing isn’t a productive activity, but it’s important to know what actually went down.
My BS detector goes off at the claims of pristine innocence for the Irish government. Surely they had a regulatory responsibility for a banking system that could make them permanent debt slaves. And in the real world, surely members of the government, bankers and real estate moguls knew each other very well and scratched each other’s backs. This ain’t their first time at the rodeo.
Someone should do a complement to “Econned” on the macroeconomics of the grift. It would be interesting to know the total bad debt and how much can be ascribed to misallocated resources (homes that will never be used, wasted training for building workrs), inefficiency (inflated fees for hurried construction of complex derivatives) and the take-home total for the IBeGone folks like Mr. Mozilo.
I suspect the amount of the grift will be a small fraction of the total wastage. It’s like the enormous expense of airport scanners and humiliating patdowns to punish people for not using them, all so that Chertoff can skim consulting fees off the top. It’s the American Way.
Delve a little bit into the history of neoliberalism and you will see a pattern emerge.
If the banksters can’t get a sovereign state to sign the note, then the next best thing is to get private parties on the note. The banksters know they can always rely on a little magic trick they have up their sleeve: Converting private debt to public debt. We saw it in Argentina. We saw it in the United States. We saw it in Ireland. The banksters know it matters little how debt is originally contracted, whether it is public or private. The banksters know that with their little magic trick the ultimate counterparty can be made to be the taxpayer.
Getting the private sector to engage in a debt orgy is a simple matter. It entails dismantling regulation. But dismantling regulation is one of the core tenets of neoliberalism. It’s part of the neoliberal package that the banksters advocate. “Private ‘free’ enterprise can do no wrong,” goes the refrain. This belief promoted by the banksters is of course false. Private ‘free’ enterprise can, and always does, do wrong when left to its own devices.
I say the banksters made their bed, so let them sleep in it. There is neither a rational nor a moral argument that can be made as to why Irish taxpayers should be coerced to bail out prodigal banks. Let the banks fail.
So it is, bank failures and or private sector having (especially external) deficits/debts have a tendency to be socialized. The private sector debtors as households or companies have a tendency to die or go bankrupt sooner or later, nations more seldom engage in these sorts of things.
When I read…
“So Ireland – and Europe – must confront the prospect of an inevitable string of bank restructurings. Giving away more capital now will weaken states’ ability to deal with the problem when there is no more time to be bought…”
… I thought, are these not strange words coming from the FT! Since when does the FT give two turds about the power of a sovereign?
Your elucidation has resolved my quandary.
… A very agreeable thread.
There is one detail to consider ‘ Downsouth’, the retail and corporate deposits still need be protected in case of a bank bankruptcy….
So not only should the Irish banks be allowed to fail, but all
of these banks should stripped of their assets and sold to deneraye the
cash to make the depositors whole…. Only after this are senior loans and bondholders recieve a portion of their investment. This will set a good worldwide precedent.
It appears that corporate depositors are already beginning a run on Irish banks. If that accelerates it could force a resolution of the present faceoff.
A competent Irish government would put the banks in receivership, wipe out the stockholders, wipe out the bondholders, pay off the insured depositors, and pay off as many of the remaining depositors as there is money left for.
But the Irish government appears to be wholly owned by the banks, like so many others.
Actually, “finger-pointing” can be extremely productive- like at criminal line-ups.
One would think that the grift is a small part of the losses, I did too, until you realize the grift was the whole purpose of setting up the criminal structures to begin with.
Trillions in losses still to come. Just a question of who pays for it.
Headshots, boyos, headshots: put those zombie banks down. The rest of the world could live with that, and the Irish public wants that. Citizens of the Republic arise, you’ve nothing to lose but your plastic chains. . . . Likely not on this iteration. Day will come though, so keep on robbing in broad daylight you banksters, the cameras are televising all.
Not many…including your self, know how to administer the coup d’état.
They are vulnerable but not exposed on all flanks yet, keep your powerd dry and be ready at moments notice….eh.
Skippy…I would fight along side you sir, although we must remember the souls we drag with us.
The spirit you summons, RK, is not to be suppressed when there is no time to waste.
What if institutional thuggery should evolve to become more publicly brutal and violent? Would not ensuing chaos probably become a maelstrom?
I hardly doubt we will find impediments less weighty then. So, courage to rise to the task might better be found right now.
There are many ways to skin a [fat] cat [banker]. The best ever always is presenting a face-saving way out (of course, prosecuting misdeeds along the way). That’s where Ferdinand Pecora, Glass-Steagall and a Hamiltonian National Bank come in.
Ireland look to have played a blinder with their brinkmanship imho, thats for sure, knowing full well the pressure for bailout has its roots in fears of contagion in other countries . This is yet another sorry mess, and is merely another in the line of on-the-hoof decisions that have been taken by the euromasters and IMF that do little for long term stabiluty. As economist here says , http://www.mindfulmoney.co.uk/2406/economic-impact/eurozone-shakeout-highly-probable.html breakup of euro at some stage in future is now highly likely.
The EU/EMU “peace project” is at its height. Many participating countries are now declared incompetent or even inferior (PIGS), and should be placed under receivership by the EMU’s responsible economic masters, Germany.
Will this attempt by Germany to take over as the masters of Europe succeeds, or will they fail again.
Let the banks collapse, let the dominoes fall where they may, and maybe we can be rid of these financial industry parasites for a good while. They have nearly destroyed the global economy, they are now running the USA in the ground, and there seems to be nothing that will stop them at the governmental level unless they and the plutocrat-oligarchs they enrich are made to feel real pain. The Irish people, like the American people, the French, British, etc., cannot keep shelling out money for these criminals. I listened to someone on the radio yesterday describe how officials at Anglo-Irish bank had plundered around $50 billion from that bank, and are still traipsing around as if nothing happened. Enough is enough. Make them all pay, and dearly!
For What Died The Sons Of Roisin?
How many fat cats have to be skinned and for how long into the future before we realize that the whole problem revolves around society’s stupidity in letting private enterprise manufacture and allocate credit? Surely we need an accountable body with representatives from the productive economy and the consumers of that economy. Least of all do want a body run by politicians who shill for the big banks!
For class discussion (cake and cookies after) : It would or would not be political suicide for Angela Merkel to accept any bailout that left the Irish 12 and a half percent tax rate intact. Also, how many pints of Guiness would it take to float the current debt level of the stricken supertanker HMS Anglo Irish bankship ?
On the flotation of boats I can tell you several things:
Firstly, boats tend to float even when vastly overburdened, that leading to the passengers’ complacency. They having no real knowlege of the mechanics.
Secondly, When boats develop leaks, they can seldom be repaired from inside the hull. Patches put inside the system are generally less effective than bandaids. There is a method of applying a TARP over the outside of the hull while the vessel is still in the water which can be quite effective as a temporary measure. However, as seen in the failed American experiment; that method can be rendered useless if the manufacturer of the TARP does not have the integrity required for making a good product.
Finally, even if all is done correctly and the TARP does it’s job properly, this is still only a temporary measure which allows a low speed and careful progress to a shipyard where the entire vessel can be removed from the water and the structural problems addressed.
I think that any, even remotly plausable solution, which found support from Ms. Merkle would win her so much support from the rest of the Eurozone Bureacracy, that she could afford a discontent in Germany. The last thing any of these governments want is a total collapse of a soverign government. Any solution, no matter how painful to the people is fine. But, they don’t want to risk loosing control.