In the 30 years from 1973 to 2003, Ireland got €17 billion from the EU in structural funds.
In the 30 weeks since Anglo’s new board came up with a new plan, we have lost €22 billion in the bank.
Do I need to remind you that Ireland’s banking insiders described Anglo as having been ‘‘well stress-tested’’ at the top of the boom?
I heard from that old friend again last week for the first time in ages. Yes, the ‘‘banks tress test’’ is back. You might remember it from bust banks, such as Anglo, AIB and Bank of Ireland.
The famous stress test was used to assuage fears about the Irish banking sector in 2007. But the mighty stress test proved to be useless. The Irish banks are now bust, with a hole in their collective balance sheets in the region of €200 billion.
You’d have thought the stress test wouldn’t be mentioned again for a long, long time. But no, EU leaders (this time) were back at the stress-testing malarkey this weekend.
The reason is that the interbank market in Europe is seizing up again. No bank trusts another bank because of exposure to debtor countries like the Greeks, the Spaniards and us.
According to a BIS report last week, French and German banks had exposures of $958 billion (€776 billion) to Greece, Spain, Ireland and Portugal, including $174 billion (€141 billion) of government debt.
This is the sort of debt that could destroy the German and French banking system.
The markets realise this, and it is this threat that has the politicians and central bankers back chattering on about stress tests.
The EU’s politicians have announced they are going to stress test 25 of Europe’s banks but, without any of these banks being declared bankrupt after the stress test, the test is merely another symbolic – and credibility-draining – gesture.
Are they prepared to say which banks are bust and which are not? The tests will have to identify those banks that need an immediate injection of equity. If they don’t do this, the markets will conclude that the banks are all in a mess, and sell them all accordingly.
Any further sell-off of European bank shares tightens the credit crunch further, and the interbank market gets less liquid. This is the economic backdrop to this weekend’s meeting of our EU leaders in Brussels. Amazingly, the leaders are yet again driving an agenda to cut budget deficits right back. With no signs of internal demand and a banking crisis, where do these guys think Europe’s growth will come from?
The Baltic Dry Index, one of the most reliable indicators of global trade, has weakened for the past 15 days as demand for freight and raw materials has dropped in Europe and America. Without growth, the EU’s recovery will falter. If this happens, the peripheral EU countries – Ireland included – will not be able to pay the huge bank debts built up in the credit splurge, and we will default.
This default will initially be a cumulative process in the private sector but will eventually pass to the sovereign government. After all, the sovereign is only the aggregation of us – the private citizens – so, once we wobble, the state does too.
This fundamental economic truth seems to evade our politicians. They don’t seem to realise that the more blank cheques they write to shore up the European banking system, the more they are burdening us with future taxes. This tax burden causes the economies to contract more. Writing cheques to bail out Europe’s banks won’t help anyone, apart from the creditors of the banks – who should suffer anyway. This is how capitalism works.
The lender is as culpable in a crisis. Was that not the capitalism you learned too?
If the government increases spending to invest in productive assets, like education or infrastructure, it means that, on one side of the balance sheet is debt, but on the other side is an asset, the productive investment which increases the long run growth of the country. This is beneficial spending, because it increases productivity and thus offers a return on investment.
If, on the other hand, governments are spending money to shore up the balance sheets of the banks because the banks have made bad investments in Greece, Spain or Ireland, this is a waste of public money. In this case, the debt is on one side of the balance sheet while, on the other side, instead of productive asset, we have collapsed property loans.
Thus it is easy to see now how the ECB is operating a proper ‘‘cash for trash’’ scheme. Worse still, the ECB is fuelling a new Ponzi scheme to keep the banks afloat. Here’s the deal: the ECB is making credit available to the banks at historically low rates of interest.
The banks are then using that money to buy higher yielding government bonds to try and rebuild their balance sheets. So the ECB is sponsoring what is called in finance a European-wide ‘‘carry trade’’, which is when you can borrow cheaply and lend out more expensively.
This is the strategy to keep the banks alive. So if this is the central banks’ strategy, why are governments cutting back now? Surely the thing to do now is issue more debt, avail of cheap credit and rebuild the banks’ balance sheets – and a few bridges, literally.
It is now time for big infrastructural projects, with the state doing what America did in the 1930s and spending money to turn the economy around. This is what the ECB is tacitly inviting politicians to do with this new form of quantitative easing.
The best policy for now would be for the stress test to reveal a few bankrupt banks and for these banks to be closed down immediately, with consequences for the exposed creditors. Once that has happened, the markets would be assuaged and they would come back in to support fewer, stronger European banks.
All the while, the better banks could be allowed to rebuild their balance sheets using higher yielding government securities.
The quid pro quo would be that government capital expenditure would rise, not fall. In fact, capital expenditure should be accelerated, not decelerated.
Once growth resumes and the banks are in better shape, the state can cut back.
But in the EU the left hand doesn’t know what the right hand is doing. The ECB is implicitly saying ‘Go for it’, and the politicians are saying ‘No, halt everything’. This proves that crises produce the oddest of turnabouts.
Traditionally, central banks tell the politicians not to spend, that money is tight and that we have to keep credit manageable. Today, however, politicians are acting like tight-arsed central bankers, and the central bankers like free-spending politicians.
All the while, bad banks are kept open, when closing them down would be the first stage of the recovery.
I am intrigued by the analogy between BP’s problems with its Macondo well and the banks’ dizzying debts. And between the Macondo Blow Out Preventers (BOPs) and the banks’ Stress Tests as last ditch defences against disaster. David writes: “The famous stress test was used to assuage fears about the Irish banking sector in 2007. But the mighty stress test proved to be useless. The Irish banks are now bust, with a hole in their collective balance sheets in the region of €200 billion.” €200 billions is ten times the amount BP has had to put in escrow to cover… Read more »
http://www.Independent.ie/opinion/columnists/shane-ross.Excellent as always.
Oil – commodity or utility?
Credit – commodity or utility?
So far, both are handled as commodities and so profiteering results, and with oil and credit provision alorra bounty to be had if you can keep the ‘small people’ at bay.
David says : …..’the private citizens so, once we wobble, the state does too.’
The Land of The Wobble
Which European Banks are the most in trouble?
http://www.marketwatch.com/story/europe-bank-stress-tests-to-be-published-in-july-2010-06-17-122400
just a comment on a different subject, earlier i read the irish goverment will issue certfificates of irish heritage, it really is embarrasing as an irish citizen here in australia that the goverment would stoop to this level of revenue collecting. IS THIS ALL FARMLEIGH COULD MUSTER?? I REALLY AM ASHAMED!! IF THEY WANT TO SOMEHOW TAP INTO THE DIASPORA ,THIS IS NOT THE WAY. SHORT TERM GAIN AS USUAL.
Is it true that AIB was bailed out in the 1980s and they never paid it back?
Ah yes, ICI. Reason for the 2% levy on insurance.
This is definately the most apocalyptic article to date. As well as vindicating by 110% the assertions of the financial ponzi scheme conspiracists (Wills being the most vocal and direct)it also seems to directly align with the 4 weeks of moon wobbling a la John Allen. And then Malcolm tops it off nicely with a rather worrying comparison with the BO disaster. However, I think I know what is fundamentally different now. This kind of crap went on for ages in somebody elses back yard. Argentina, Bhopal etc. Now that it’s in the nice cuddly US and Europe, the rules… Read more »
Greetings from the hols in Vegas:) Great article from D. USA Today, Money Section, ‘Rate of bank failures double that of ’09’, puts number so far at 83. ‘By this time last year regulators had closed 40 banks’. ‘The number of bank failures this year is expected to peak this year and be slightly higher than the 140 that fell in 2009. Meanwhile on CBS this morning stocks are up, economy is doing fairly well bolstered by news the yuan is about to be allowed to float, this should help both US exporters into China and be a boost for… Read more »
Mad as Hell – Kown opens a China Town in Athlone right on his doorstep .Limerick is experiencing the 2nd Broken Treaty from Fianna Fail .Limerick has more infrastructure than Athlone and deserves it .
Just a Kow Kam Kown only good for Kuick Koop
Franca Flak – I was talking to my foreman in Nice today and he wanted the update on French economy .He said the French are only talking about Soccer now and nothing else.I told him French banks are burst .He confirmed he would believe it as the propaganda suffered by the French now is greater than what we have to experience.He went away worried.
Whiteboys – these were the earlier nucleus that believed in a mind of their own and acted upon it .
1.Patrick Sneary the Financial Regulator has some very serious questions to answer. A very simple warning sign used by Regulators to identify a Bank exposed to increased risk is rapid balance sheet growth. An annual growth rate of 20% real is often taken as the trigger. Each of the guaranteed Banks had at least 1 year where that threshold was triggered, but Anglo triggered in 8 of the 9 years between 1998-2008 with an annual growth rate of 36%( yes you have read correctly). Irish Nationwide triggered in 6 of the 9 years with average of just over 20%. So… Read more »
“It is now time for big infrastructural projects, with the state doing what America did in the 1930s and spending money to turn the economy around.” I couldn’t agree more. Its badly needed. Hand all the landowners (where new projects are to proceed through) a green jersey instead of a cheque with 6 figures on it. Make the cyclist the dominant mode of transport in the city. Protect this hero who reduces traffic congestion, reduces obesity rates, improves work performance, reduces polution (noise and air)in the urban area and saves time on the part of everyone. Encourage parents to opt… Read more »
Some industrious person has done some of the work………..
Families in the Orieachtas (I like they way they say people ‘inherit’ the seats…….wonderful democractic process we have)
http://en.wikipedia.org/wiki/Families_in_the_Oireachtas
Another excellent article from DMcW which again captures the situation in simple terms: central bankers trying to rescue the sitation while politicians (presumably stampeded by the media) are more and more obsessed with deficits and balancing the books. I mean, it’s worrying to say the least when the only people with any ‘vision’ might be in the ECB. I thought the lessons of beggar-your-neighbour policies attempted 80 years ago were reasonably uncontroversial. Isn’t retrenchment at this point a bit like sending Paras into Derry after already witnessing the results in West Belfast of similar actions six months earlier? (‘These people… Read more »
The Garden & the Bulldozer
http://www.youtube.com/watch?v=v5uOljEtT1g
I recently did some quick back of the envelope calculations to see how much it would cost to supply Irelands energy needs under solar power. A section of land 8km by 12km covered in 90 watt solar cells would do it. Cost would be around 50 billion euros. For the same amount of money, we got NAMA. If we had taken that money, and produced the 120 million of solar panels we’d need, we would have a new green industry, with jobs. Mass production on such a scale might even bring the cost down, and we’d be virtual world leaders… Read more »
Recent article from Roubini:
http://www.todayonline.com/Business/EDC100617-0000062/Avoiding-a-second-crisis
This bit applies to Ireland:
RESTRUCTURE DEBT
Seventh, in countries where private and public debt levels are unsustainable – such as household debt in countries where the housing boom has gone bust and debts of governments, like Greece’s, that suffer from insolvency rather just illiquidity – should be restructured and reduced to prevent a severe debt deflation and contraction of spending.
I can’t follow the syntax. I think he means debt should be restructured and reduced.
The other recommendations, eg for the likes of Germany to stop saving, require interantional coordination.
And here’s the site where I found the above link:
http://www.progressive-economy.ie/2010/06/urgent-priorities.html
In the last two weeks Pery Square and around the Park in Limerick is Empty of cars parking .In the past any driver would have to fight very hard to find a space of any kind.Many I have met are commenting and there is an eerie feeling of something worse to come.
The Void of Emptyness
Me again. This link to an article by Michael Hudson taken from his website is easily the best global analysis I have seen to date. No doubt others will have posted this here before and I will have missed it. http://michael-hudson.com/2010/05/neoliberalism-and-the-counter-enlightenment/ Sums up and explains an awful lot of stuff that had been going through my mind. It’s long – it takes a good hour to read. Can’t quote as I wouldn’t know where to finish. The following recent article by Hudson is also relevant here: http://michael-hudson.com/2010/05/euro-bankers-to-greecethe-wealthy-won%e2%80%99t-pay-their-taxes-so-labor-must-do-so/ Here’s the start: “The “Greek bailout” should have been called what it is:… Read more »