Yanis Varoufakis: The Death of Direct Bank Re-capitalisation: Europe’s (Newest) Day of Shame

By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog

The idea was to de-couple the banking from the debt crisis. The reality is that they propose to do nothing of the sort.

In June 2012 Mario Monti had demanded that banks in need of capital injections should source capital directly from the ESM, without the involvement of states and, of course, without these funds counting as part of the member-states’ national debt. Faced with a front comprising Spain, France and Italy, Mrs Merkel relented but added a precondition: Banking Union (BU). Ever since, Germany has been proclaiming the idea of a BU in principle in order to deny its formation in practice. The more BU is debated and pushed into the future the easier it was to undermine the direct ESM recapitalisation of banks. Now, the Eurogroup has handed down its blueprint for direct ESM recapitalisation of banks. The gist is it will not happen. At least, it will not happen in any manner that helps decouple the present banking crisis in the Periphery from the crisis of debt and of the imploding social economies of the Periphery. And this is not just because the agreed upon scheme will not begin before the end of 2014 – see below for the deeper reasons. In short, today is nothing short of a(nother) black day for Europe.

Here is the essence of what they agreed to:

When a bank needs capital injections, the first thing that happens is that the national government provides the capital needed to raise the bank’s minimum capital ratio (T1) to 4.5% of its assets. After that, a sequence of haircuts must follow. First to be haircut are the shareholders and bondholders and then come the uninsured depositors (i.e. the Cyprus model is enacted). Beyond that, the ESM and the national government pout more money in the bank, with the latter participating at a rate of 20%, which can later be reduced to 10%.

What does this mean? And why am I arguing that this is the death of the spirit of what was decided in June 2012? Two points need to be made here, and shouted from the rooftops:

The Eurozone’s fragmentation is to continue: Member-states that are not insolvent will be able to bailout their banks’ unsecured depositors, just as the head of the Eurogroup did with Dutch SNS-Real recently. On the other hand, insolvent member-states will have to follow the above blueprint, with deposits above €100,000 savaged and the member-state going further into debt.

Legacy losses will be used as a disciplinary device: The Eurogroup reached no decision on whether the above can operate retrospectively. They announced that banks already recapitalized by insolvent states will be dealt with on a case-by-case nature. Thus, Greece, Spain and Ireland will now have to tussle, to beg, to plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks. As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60 billion, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a better ‘model prisoner’ than the rest.

Lastly, you do not have to take my word, dear reader, that this scheme does nothing to decouple the banking from the debt-deflationary crisis of the Periphery in particular and of the Eurozone in general. Mr Olli Rehn, the EU’s economic overlord, has said it himself, in describing this scheme as an attempt not to decouple the two crises but, rather, to “dilute the link” between them. It is like telling a hanging man that you will not cut the rope choking him but that you will remove a couple of layers of string from it. A truly shameful day for Europe.
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  1. psychohistorian

    A good posting about a despicable situation.

    I guess you can say that Europe has some experience with the neoOrwellian Dark Ages they are entering.

    Will they start offering nubile virgins to the Gawds of Debt next?

    Tis NOT a pity Mother Nature will eliminate the Gawds of Debt as easily as the rest of us for their puerile impudence and imprudence.

    It is a pity that mankind cannot seem to learn to control its imprudent social and environmental tendencies….probably linked.

    Science continues to tell us how limited our understanding of the universe is but we continue to act like we are Gawds of our planet to despoil as God’s work…..a true sickness that is baked into the Western social system of inheritance, accumulating private ownership of property and deluded pre-Enlightenment faith in man made dieties (Xtianity) and associated patriarchy.

    I am frustrated human wanting our society to evolve so we don’t die.

  2. Michael Hudson

    For “the government” to bail out domestic insolvent banks means “taxpayer expense” UNLESS the ECB will create money electronically “out of thin air” as the US Fed can do. So this means in effect that “taxpayers” will bail out tax evaders, and the 1%, as well as large businesses with normally larger deposits.
    One result will now be that depositors shift their deposits over a whole slew of European banks, $100,000 at a time.

  3. The Dork of Cork.

    Yanis wants to make free banking official across the continent of Europe
    Turning from a higher circle of free banking within older nation state (Chinese) walls to the 9th circle of the European managerial version of the modern market state.

    No thanks
    The last thing we (the proles) need is these demonic banks to scale up even further.
    The corrupt domestic elite of the PIigs wants the (corrupt) elite of Germany to play ball so as to enrich themselves even further.

    Perhaps the elite of Germany consider domestic extraction a pure sustainable form of parasitism ?

    Banking jurisdictions pretending to be nations can delink from the European 9th circle anytime ……..rebalancing european and indeed global trade in a very short period of time.

  4. Generalfeldmarschall von Hindenburg

    I’ve become more and more interested in A Merkel. Who does she work for and how did this Thatcherite get her hands on the controls of the EU?

    1. Jan

      Here you have some from German paper Focus:
      “New book about Merkel’s unknown life in the GDR
      Minister for Women, for environmental protection,

      General secretary and national chairman of the CDU, Chancellor Angela Merkel has made a career of politics after the turn. But how did its role in the GDR? She got closer to the system, known as?

      On 14 May a new book about Angela Merkel. An advance copy of “The first life of Angela M.” there is in the new Focus, which appears on Mondays. These show the journalist Ralf Georg Reuth and Günther Lachmann how the first life in the GDR Merkel’s second period of life influenced as CDU chairwoman and chancellor – until now. They prove that the Chancellor discovered not only in their political ambitions during the turn.

      Merkel was purposeful as members of the scientific elite of the Soviet-style communist state and had behaved system compliant. The authors show that Angela Merkel was closer to the DDR system as was previously known. “During her tenure at the Academy of Sciences of the GDR, she was at her institute functionary, for example, as of 1981 FDJ secretary for agitation and propaganda, which it denies to this day. They also sat in the operation union leadership, “the journalist said in an interview in the” Bild “newspaper on Friday.

      As Reformkommunistin not for the reunification
      Angela Merkel appeared as Reformkommunistin for democratic socialism in a separate GDR. She had been active in, Democratic Awakening ‘and did not come until 1989 as a newcomer to politics. At that time it did not occur for the reunion.

      Of a fining their CV Reuth and Lachmann do not want to speak but. But it would come to “at least on the assumption that Angela Merkel’s first life in the GDR later should be brought in line with the expectations of the Christian Democratic supporters.”
      That Merkel as fast politically made a career after 1989, she owed the political circumstances and their sponsors: Wolfgang Schnur, former head of the Reform Party, Democratic Awakening ‘and the last East German Prime Minister Lothar de Maizière of the East-CDU. Both were performed with the Stasi as an unofficial employee, they say.
      Guido Cantz would you like to be fooled, the ChancellorNew book about Merkel’s unknown life in the GDR
      Minister for Women, for environmental protection,

    2. Carla

      Angela Merkel is working for the international banking system. Barack Obama is working for the international banking system. David Cameron is working for the international banking system. Got it?

  5. Mickey Hickey

    No sooner does the IMF in its 10th Ireland Review (IMF country report No. 13/163) state “The ESM direct bank recapitalization instrument remains well suited to tackling this bank-sovereign loop and making the prospect for Ireland’s recovery and debt sustainability more robust.”. Then the instrument has its legs kicked out from under it.

    Mickey Noonan the Irish Finance Minister is praying for divine intervention as he visits the shrines of politics and finance in Brussels, Frankfurt and Berlin. Fatima, Lourdes and Knock is not good enough for them anymore. It appears to me that “Plus ca change plus c’est la meme chose.” is as applicable as ever.

    Dork of Cork you should get back on Irish Economy they need to be riled up. Good to see you are in fine form.

  6. The Dork of Cork.


    “Although there are different viewpoints of those who should be allowed in neo liberal bars – some “conservatives” favour them for their safety………”


    No thanks – I will stick to any local bars that will allow my viewpoints.
    Even in so called down to earth bars where I point (quite obviously_) out that a certain branch of Talmudic Jews dominate finance and indeed general social discourse I tend to hit all the wrong barman buttons.
    The world is becoming stranger and stranger to me as local bars contract into a form of strange anti alcoholic heat death / debt.

    The Irish economy bar has to be the shittest establishment in internet town.
    Why go there ?
    even if you are made welcome ?
    Indeed if you are made welcome – perhaps you should ask questions of yourself ?

    Went to Declan ganleys do in Cork the other night.
    What total crap – he like Yanis wants more concentrated central POWER………….

    Ireland has had its “problems” with Dublin Castle and he wants MORE.
    Go figure – its easy.

  7. The Dork of Cork.

    That certain very limited Cork upper middle class “Crosshaven” crew who attended that meeting in Silversprings hotel better get it into their thick skulls that “the system” is out to subtract them also.

    It was stated (quite correctly) that their small businesses are about to hit a second bankruptcy wall over the next 2 ~ years
    Declan stated that businesses will create money / credit and foster dynamic growth.
    If he said local “dynamic ” business / banks must create more debt he might have got a different reaction.
    Again it was a typical conservative meeting mixing up money tokens with interest bearing debt.
    A system where real stuff is liquidated in honour of a debt money system

  8. Shingaling

    Seems like good policy to me. I can understand why a Goldman-Sachs stooge like Monti wanted to directly bail-out bad banks with taxpayers money but i’m less certain of this author his motive..
    In my country, the Netherlands, the ESM fund was sold as a bail-out fund for member states, not for banks. If member states have to bare the debt burden, naturally they would be more risk aware when it comes to picking & choosing which banks to bail out.

  9. Shingaling

    Also, the proposed policy seems to be much more in line with the Lisbon Treaty than what the author suggests:

    “The member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

    Keyword being “indispensable”.

  10. Lafayette

    A truly shameful day for Europe.

    Maybe and maybe not.

    YV is overly dramatic in his postulations. A Banking Union is perhaps necessary, but only after the EU southern underbelly understand that profligate financing of the Social Democracies is out of the question. (I leave Ireland out of that ensemble because I think the Irish have indeed learned their lesson.

    I am less sanguine about Spain, Italy, Greece and Portugal or the ex-Balkan States as well as Hungary and Romania. Neither of the latter two were prepared for assimilation into the EU. Or Greece, for that matter. EU leaders thought, however, it would be a “nice thing to do”.

    Lessons have to be learned the hard way in the EU and, unfortunately, that means dire consequences for a youth (in these countries) that was totally unprepared for the austerity that has ensued. There will be renewed growth that will come, which will be weak at first and take time to build.

    It will be a full decade beyond 2009 that will have been lost by this present generation. Yes, ’tis a shame.

    But the present political class, some still in place both in Brussels and in the countries, did not stick to the rules originally laid down by the Maastricht Treaty in 1992.

    And now they are paying the piper for having not obeyed the 3% rule on National Debt. Mind you, Germany did not obey the rule either, which is the political happenstance that perhaps prompted other EU-countries into their lackadaisically bad budget habits?

    That’s life – monkey see, monkey do …

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