The Irish mess (V)

Back in July, Rebel Economist noted how the Greek bailout actions had compromised the ECB:

The first concession made by the ECB was in the collateral requirements for its lending to eurosystem banks. These were set in terms of agency credit ratings, no doubt to distance the ECB from the task of differentiating between the creditworthiness of eurozone governments, with the inevitable consequence that a credit rating agency decision could render a country’s debt ineligible as ECB collateral at an inconvenient time. In particular, the likelihood that that Greek government debt would be downgraded below the ECB’s normal A- / A3 threshold threatened to restrict the ability of Greek banks to borrow from the ECB and would have removed a key benefit supporting the value of Greek government debt. On March 25th, however, ECB President Trichet said that investment grade (ie down to BBB- / Baa3) debt would be accepted for an indefinite period. And then on May 3rd, with the prospect looming that Greek government debt could even be downgraded to junk status, it was announced that Greek government debt specifically would be accepted regardless of its credit rating.

The most shocking climb-down by the ECB, however, occurred on the night of May 9/10th, when in association with the creation by EU finance ministers of a €750bn emergency funding mechanism available to any eurozone country, which added to a €110bn conditional loan facility for Greece agreed on May 2nd, the ECB announced an outright bond purchase programme. Since the ECB had previously consistently resisted appeals to follow the Federal Reserve, Bank of England and Bank of Japan in buying bonds to enhance monetary policy easing, this change raised questions about both the ECB’s commitment to inflation and its political independence.

…The retreat by the ECB is particularly disappointing because it represents a missed opportunity for Europe to interrupt the sequence of bailouts that have characterised the financial crisis since the demise of Lehman Brothers in September 2008 and to differentiate the euro as a reliably hard currency even in adverse circumstances.

It looks as if that train has well and truly left the station now. In the Irish Times, Morgan Kelly, Professor of Economics at University College Dublin, shows us how far the ECB has advanced down Rebel Economist’s slippery slope.

September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.

In other words, the exposures I suggested in my last, based on the 6-month-old numbers published by the BIS in September, are very out of date. Just based on the September action, the French, German and British banks are less firmly on the hook than I thought. If there has been significant ECB intervention in Irish sovereign debt since May, as well, as rumored, then that will again have tended to bail out those banks, and leave the ECB holding the bag. Kelly again:

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.

Kelly suggests that the bailout interest rate, estimated at around 8%, compared with the 5% currently paid on (underwater) mortgages, or for that matter Kelly’s ‘sustainable’ 2%, will simply tank Irish property prices and the wider economy some more, and the eventual result must be mass mortgage defaults. And even without that, he thinks the loan loss estimates of the Irish Government were far too small:

In my article of last May, when I published my optimistic estimate of a €50 billion bailout bill, I posted a spreadsheet on the website, giving my realistic estimates of taxpayer losses. My realistic estimate for Anglo was €34 billion, the same as the Government’s current estimate.

When you apply the same assumptions about lending losses to the other banks, you end up with a likely taxpayer bill of €16 billion for Bank of Ireland (deducting the €3 billion they have since received from investors) and €26 billion for AIB: nearly as bad as Anglo.

Indeed, the true scandal in Irish banking is not what happened at Anglo and Nationwide (which, as specialised development lenders, would have suffered horrific losses even had they not been run by crooks or morons) but the breakdown of governance at AIB that allowed it to pursue the same suicidal path.

Once again we are having to sit through the same dreary and mendacious charade with AIB that we endured with Anglo: “AIB only needs €3.5 billion, sorry we meant to say €6.5 billion, sorry . . .” and so on until it is fully nationalised next year, and the true extent of its folly revealed.

This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?

Please go and read the whole of Kelly’s very crisp and eloquent article. The Irish government has walked its people into a trap: the big Eurobanks and big countries drove the agenda, all along; which shouldn’t be a surprise.

For the European, as opposed to Irish miscalculation, the final word goes to Rebel Economist:

Many commentators claim that the eurozone authorities’ real reason to bail out Greece was that so much Greek debt was held by eurozone banks that even restructuring was likely to impose sufficiently large losses to bankrupt those banks and reduce Europe’s banking capacity enough to cripple its economy. If so, this was an unwise decision. First, bailing out a country means saving all its creditors, making it an inefficient way to protect banks. Second, unless banks are formally bankrupted, it is difficult to make full use of their shareholders’ and junior creditors’ money to absorb losses, making bank failure more costly for the taxpayer. And in Europe especially, bankrupting a bank need not involve disruptive closure and complete liquidation; it is easier to nationalise a failing bank in Europe compared with America where the public are more hostile to state ownership. As it is, the danger is that bank losses on sovereign debt are offloaded to the eurozone states, increasing their indebtedness and intensifying the pressure on the ECB for further accommodation. Ironically, in making concessions to abet the eurozone bailout of Greece to avoid a mythical banking meltdown, the ECB may find that it has opened a Pandora’s Box.

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  1. a

    I found Kelly’s article as very ECB-positive. He thinks the ECB will, in fact, be able to wring the money from the Irish banks (and Irish people), in order to be repaid. I’m not sure why he thinks this, other than presumably a fatalistic reasoning based on what came before.

    1. Richard Smith

      Indeed, the ECB (or whoever is in the driving seat when this all comes to a head) has to set a realistic rate, and bank on popular willingness to pay (as well as capacity to pay).

      Which may not work out (if there are mass defaults, or if the politics evolve as in his last few paras); and it won’t just be Ireland: Greece is in a comparable debt pickle, but has even greater difficulties setting budgets (and collecting taxes).

  2. Maju

    I’m not sure if I’m already feeling fed up of so much talking financial acrobatics but, honestly, money is a tool we make not an all-powerful god.

    What is all-powerful is food in the stomach or lack of it and stuff like that. Money is there to help keep our stomachs full and no other reason whatsoever. So I am sure that the key of the economic crisis is not financial and that a banking meltdown is trivial: banks are tools as well and the state can easily nationalize them and keep them working for the general purposes they exist while the productive economy is strong.

    That means that whatever path is taking the ECB it is non-important as long as Europe can export more than it imports. Also consider that whatever EQ the ECB is doing is most reluctant and largely pushed by policies of the USA, China and other states (like the UK), who are far ahead in that path, as well as by dire needs that cannot be left unaddressed.

    I have been for some time saying that is Europe we have two economic problems: (1) the cost of life is too high, what directly limits salary maneuvering and (2) other countries have undervalued currencies and poor labor and ecological standards (what decreases monetary costs but makes trading with them most unfair and probably immoral). So we can barely export. If we want to export and, hence, revive our economy, we need a cheaper euro, probably one pegged to the dollar or, better, the yuan, which is now for me more of a real reference currency.

    The banks can go to hell, in my humble opinion, as they can always be nationalized, what cannot go downhill is industrial production and infrastructure. Also it is not convenient to destroy the internal demand by pushing salaries too low.

    We need continental protectionism.

    1. Yearning to Learn

      We need continental protectionism.

      in my opinion it is only a matter of time before we start seeing protectionist measures around the globe. That sentiment is growing and growing from all non-surplus nations, and will continue to grow.

      but to the point of the article: again and again we see that the play book is:
      -banks gamble
      -banks lose
      -central bank and govt bails them out covertly
      -central bank and govt sticks the bill to the populace.

      of course the ECB will follow this… it’s worked like a dream in the UK and US.

  3. Rodger Mitchell

    Five years ago, in a speech at the UMKC, I said, “Because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.” (See: )
    I have been saying the same thing ever since. Those nations in the EU, that have given up their monetary sovereignty, can survive long-term, only with continual help from the EU itself.
    To understand monetary sovereignty, see:
    Rodger Malcolm Mitchell

  4. jake chase

    The ECB, like the Fed, has resolved that creditors will not be required to make ANY adjustments. MegaBanks will have unlimited credit for wholesaling to speculators, which means asset prices will continue levitating and the only brake on inflation will be a consumption crunch caused by unemployment and shriveling wages. Looks like a return to the Nineteenth Century. Instead of progress we have propaganda, corruption, militarism, pornography and ESPN (which nicely combines all four). Analyzing all this using conventional economic wisdom is a complete waste of time. Warren Buffet said it best: we are witnessing class war and his class is winning (decisively).

    1. curlydan

      As it was 2-3 years ago, we’ll know when the healing begins when the bondholders start to have to take some cuts.

      We patiently wait, but so far, no healing.

  5. AndyC

    “September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.”

    At par no doubt, and never a nickel of the ill gotten gains clawed back.

    10 bucks says these bastards rolled it all into Portuguese debt.

    What a system they are creating, all these guys need to do is buy the worst/highest yielding junk out there in systemically risky quantities, collect the interest, skim the profits for bonuses and then foist it all off on the central bank at par when the bonds fail.

    What a Country/World, no?

  6. sandorgb

    The physics equivalent of “too big to fail” is the black hole. Reading the descriptive characteristics of a black hole yields startling correspondences to the global banking cartel, and its attempt to attain so much mass that its pulls every human into its event horizon, emitting no light. In this context, to avoid getting “sucked in” and adding to its mass, as individuals and communities we must turn away from the banks and their debt-money and create an alternative. Instead of a “black market” or “shadow banking system” we may nominate our efforts as “light exchange”

    1. F. Beard

      In this context, to avoid getting “sucked in” and adding to its mass, as individuals and communities we must turn away from the banks and their debt-money and create an alternative. sandorgb

      I’ve been thinning along those lines and have reached the conclusion that common stock would be the ideal money form in a truely free market in private money creation.

      1. sandorgb

        Could you please elaborate how such a system would work in practice, and/or provide links along these lines? Much appreciated.

          1. F. Beard

            Here you go, a concise summation of the benefits of common stock as money:

            1. Common stock as money requires no borrowing or lending; assets and labor are simply bought with new stock issue. The commandment against usury between countrymen (Deuteronomy 23:19-20) is thus obeyed.
            2. Wealth is shared at the same time it is consolidated for purposes of economies of scale. This broadens the base of those with a stake in free market capitalism.
            3. All price inflation is born by the owners of the corporation since by definition they become owners upon accepting the corporation’s money, common stock. There are thus no innocent bystanders, an important moral and social stability feature.
            4. Common stock as money requires no gold but could easily accommodate it for dealing with primitives. However, as today, much of the assets of the corporation would be performing assets not non-performing ones such as gold is.
            5. The holders of the money are by definition owners of the corporation and may vote on new money (stock) issues. On one hand, the money holders might not wish to risk deflating the value of their stock. OTOH, perhaps they see an investment opportunity that justifies the risk. Notice the issue of new money is not artificially constrained as the case is with gold as money yet inflation is not likely either.
            6. Fractional reserves are not needed as is almost always the case with gold based monies. Common stock is thus a non-fraudulent form of money.
            7. Without lending or fractional reserves, deflation is not a risk.
            8. Common stock is a true store of wealth since a healthy corporation is always adopting to the needs of society.
            9. The perceived volatility of common stock is caused by the unstable and unjust money system that our economy is founded on. Ask yourself, does the underlying value of a corporation really fluctuate as wildly as its stock price? And if it does, is it not because our economy and thus consumer demand is unstable too?

  7. brian

    I’ve seen several passing comments about elements in the IRA issuing warnings to the banksters about the consequences of their actions

    Anymore on this?

    1. RichB

      No, the IRA’s too busy murdering children and extorting money from UK taxpayers to take any note of the bankers.

  8. AndyC

    “Warren Buffet said it best: we are witnessing class war and his class is winning (decisively).”

    Nice of Uncle Warren to acknowledge this and it almost sounds like Warren is on our side, too bad he’s just another greedy profiteer in this war.

    Warrens now in the ditch with the rest of them.

  9. sean

    The euro has no taxation backstopping the currency.It is dependent on intergovernment transfers approved by the political elites of constituent countries ,such as Ireland and Greece who are now insolvent.
    So why would investors purchase euro bonds from the stability fund when its guarantee for repayments of interest and capital are in part dependent on already insolvent nation states and discredited governments.?

    The interesting part of Morgan Kelly’s article came at the end when he predicts a far right,anti EU,fascist political party in power within five years.I have believed this to be the most likely outcome for some time.
    The middle classes in Ireland are being squeezed to pay for the rich (corporate welfare) and the poor (on state welfare) who party on regardless.
    The political parties have sold them out,most spectacularly during the twice held ‘NICE’ and ‘Lisbon’ treaty referenda until the electorate gave the right answer.The opposition parties were as fanatical as the government in their rejection of the first referendums and they were assisted in this endeavour also by the unions and various chambers of commerce and all the heads of the universities here.

    The people see the bank bailouts and the ruling Fianna Fail government party much the same way Germans hated reparations following WW1.

    Today it was reported from Greece that a far right ,anti illegal immigrant party was successful in the local elections and this was a new development for Greece.
    40% of the electorate did nt vote and an additional 10% returned blank ballots as a protest against all parties.

    The philosophy behind european integration to prevent nationalism ,fascism and its failure in implementation is now causing resurgent nationalism and fascism.

    The euro is a failed currency as the european political project.
    Hopefully the euro and the EU will collapse sooner rather than later.

    1. Paul Repstock

      After the Treaty of Lisbon, the EU cannot collapse. The only thing that can collapse now is the national borders.

    1. Paul Repstock

      The constables will be there to make sure they don’t even plant potatoes. It would be an infringement of Codex Alimentarius……….

  10. F. Beard

    When are people going to realize the utter absurdity of sovereign governments borrowing money? Soon I think, very soon. But first let’s blame the social safety net as being the problem, shall we England?

  11. Ignacio

    So, Mr. or Mrs X from Ubercasse, decided that buying tons of Irish MBSs was a good idea fueling an enormous housing bubble. Irish banks thnik that this easy money is a fundamental change to fuel the same bubble. The germans were rigth because they find that money comes back in it’s integrity even after the housing crash. The bagholder is, apparently the ECB, but it results to be the irish taxpayer. And because the taxpayers cannot pay back the debt, the country becomes bankrupt.

    F*ck!, Fu*k! *uck!, Fuc*!

    This is more than moral hazard. It is plain bribery.

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