The European debt crisis is moving swiftly to the next phase following the downgrade of France and the collapse of the Greek negotiations with its creditors last Friday night.
It is becoming increasingly obvious that there will be no deal in Greece. This is good news because it means the end of the pass-the-parcel-ponzi-scheme, whereby the bill for more and more institutional debt was passed on to more and more innocent people who had nothing to do with the debt in the first place.
Greece will default – as it should. The bondholders will get roasted – as they should – for making bad investments. The laws of capitalism will be allowed to do their thing. Debtors and creditors will pay – as they both should – with both parties sharing the cost.
Whether this leads to Greece being pushed out of the euro remains to be seen. An opportunistic play by a desperate Greek government might be a total default, followed by the reintroduction of a new currency and then the restart button is hit. Initially, it would be an international pariah, but over time it would recover.
You might think it sounds radical, but it is straight from the IMF’s own adjustment handbook. In fact, the favoured IMF remedy to debt crises is partial/agreed default, followed by a rapid devaluation of the currency, which is then fixed at a new, much lower level.
The more aggressive approach is simply an amplified version of what is likely to happen anyway. The present policy calls for an internal devaluation plus some default. Why not an explicit external devaluation with total default, which gets you to the same place but a lot more quickly?
One of the reasons why there will be huge opposition in Europe to the Greeks going down this road is because it means the banks that lent money to Greece would get nothing or very little.
On the other hand, internal devaluation would mean that they would take a haircut and then slowly bleed Greece dry for the rest of the money. But when you think about Greece’s position, this makes no sense. Greece has a current account deficit of ten per cent of GDP. This means it must borrow an amount equal to nearly ten per cent of its GDP to pay for its current level of imports. If yet more money goes abroad to feed interest payments for foreign banks, it will have to borrow yet more just to make its current account balance. This is why getting the biggest default now must look attractive from Athens.
The realisation of this Greek position has led to the downgrading of France because the French banks are more exposed to Greece than any other foreign banks. All this news is simply the latest phase in Europe’s ongoing debt crisis. It is clear that, however it ends, the credit/banking industry will never be the same again.
We are moving from the great age of borrowing to the great age of saving. The great age of borrowing from 1990-2008 saw people, firms and countries borrow and borrow as much as they could to buy goodies today which they could only pay for tomorrow. Now the opposite is the case. We are in the great era of saving and this will mean, among other things, that the established banks in Ireland will shrink and shrink and shrink. They will sell everything and lay off staff.
In terms of job opportunities, the age of deleveraging means that the notion of safe jobs in the banking industry is over. Thinking back to only a few years ago, it was so different. When I got a job as an economist in the European economics section of the Central Bank, my mother rejoiced at the fact that the young lad had finally secured a “good” job in the bank. Second only to a “big” job in the bank, a “good” job in the bank was good because you couldn’t get fired. No one lost a job in the bank. Like the civil service, the bank had “P and P’ – permanent and pensionable – written all over it.
That age is over for good. Ulster Bank’s announcement that it is to cut jobs is only the first. Indeed, what tends to happen in these cases when there are layoffs of such magnitude, which can’t be avoided, is that the banks have been watching each other, waiting for one of them to move on redundancies first. The announcement from one is like a starter gun being fired. It gives ‘permission’ for the others to announce similar layoffs.
Up to now, bank officials have fared rather better than the people they financed in the construction sector. Relative to the building industry, the banking industry has fared reasonably well in the downturn. Layoffs in the building industry were swift and ruthless – while, in the banks, things have been much less dramatic. However, now this will change and what happened in building will happen in banking. The two industries are inextricably linked.
The Ulster Bank layoffs amount to just 0.9 per cent of the total number of people working in bank and finance. In terms of the total number of people working in Ulster Bank, the redundancies amount to close to 10 per cent of the workforce. If that were to be repeated across the industry – even exempting the growing IFSC – the impact would be devastating. We are talking about huge numbers of formerly “good” jobs gone.
The only light at the end of the tunnel would be for new banks to come in. One of the problems with the banks is that they are bust, they are carrying too much debt and they are not in a position to act as the engine for the recovery, lending to companies that are brave enough to invest.
But ultimately this recession will end. All recessions do. One of the ways to accelerate this is for new banking licences for banks with new capital to come in and start again.
Unless the state actively embraces and encourages new players – and there are some out there – the crisis will continue.
What we are seeing in Greece and France this weekend is only another phase in a banking crisis. Greece will default, taking some of the European banking industry with it.
We are witnessing the slow death of a certain form of the banking industry, but the need for banking remains. We are looking at the death of a certain type of banking – the type of banking which destroyed itself in the age of leverage. As night follows day, a new, very different banking industry will emerge. People will always want to save and others will always want to invest. The best hope for those who have lost their jobs is that the state embraces newcomers who could come in and we start again.
A Greek default would accelerate this process of creating a new banking all over Europe. Bring it on.
The noose is getting tighter.
There is an unbelievable amount of misery out there and now it is being shared more evenly. Next the rich will be asked to chip in to keep the lights on.
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I feel sorry for the ordinary bank officials who will be losing their jobs, but it would be no harm at all if the bank ‘bigwigs’ lost theirs! They’re the ones that have caused most of the problems if not all of them! Pauldiv, I agree wholeheartedly with what you had to say about the rich being asked to chip in to keep the lights on.About bloody time they were! Why should the ordinary joe soaps be the only ones.If the rich had paid their fair share from day one then we mightn’t be in the mess that we’re in… Read more »
David, how about a small business bank set up along the lines of the Irish Credit Union movement, capitalised by small voluntary contributions by Irish people, which would support small start up businesses? If a business receives support by way of seed capital, for a few years, it makes small monthly contributions back into the organisation, allowing it to grow and help new businesses that are applying for assistance. The problem with our current banks, in addition to them being bust, is that the very same organisational structure and the very same individuals, (Branch & Assistant Branch Managers, Relationship Managers),… Read more »
If this is the end of the age of leverage, do you see the return of hard money, asset backed currencies? It also looks like the Euro will disappear in it’s current form in the next few months, with Germany pulling out. Once that happens, the Irish government will not be able to hold on to the Croke Park agreement and all the other items it pays for on credit. There will probably be a harsh readjusting phase. Will it be worth sticking around for? History tells us we will just screw it all up again anyway electing fools and… Read more »
Having listened to the podcast, can anyone explain how Dan Mac has kept his job ? City are the best team in England,Madrid/Barca the best in europe, Messi, not Ronaldo the best player in the world.Dan earns (lol) 190 k a yr.Sack the useless branch and lending managers on 100k.They only got the job via nepotism.
Banking wise the solution here is to have one cetralised payments, clearing and transmission system which licenced Banks pay to use. They need to lodge enough with the Central bank to cover their customer demands. Then the Banks revert to being deposit takers and lenders with other approved activities. We are a small country and a cetralised payments system for this country is only the same as a mid sized Bank internationally.
If the banks want to bleed Greece dry, why then Sarkozy will decree it so. But LaGarde? Ah, she may walk out and the Sarkozy act be dragged off stage.
Banks are now paying deposit rates of 4% on one year fixed ….short term but lending out long/medium term at 5% , how can they make money ? Add in a level of bad debt and they must be losing money. I guess they are borrowing from the ECB at 2% and this is keeping them afloat. I cant see new banks coming here and setting up new branches which would cost alot adding to overheads. The only way a new bank can set up is to be an internet bank like Rabodirect but even they are losing customers due… Read more »
Good thesis about shrinkage of banks which can well be extended to banks outside Ireland. There are of course another two further dimensions to the sovereign debt default problem, namely: (1) Net contagion As an example, when the original lender (let’s say a French bank) nets off their exposure of say Greek Gov debt against the Credit Default Swap cover they purchased from say a large US bank/hedge/mutual fund who is the net loser? Logic would tell me the latter. But as these instruments are not publically traded, it is difficult to understand where exactly the knife is going to… Read more »
I work for a bank. Yes a dirty little secret of mine! With out going into the name or where I work , I can tell you the only department that is growing is our collection department. We are always looking for staff. The positions are very rarely advertised anywhere and we normally get an email once a month or once every 6 weeks asking if we have any friends or family who would be looking for a job to apply. And on a very much office gossip the higher you are up the ladder the more chance of your… Read more »
Intellectually, the people running the Irish banks are not up to the job. The solution is either to replace them with young blood, or else new banks. The solution dictated by the Troika is the exact opposite. If Fingers messes up INBS, then it should be liquidated, and that massive pension pot he had for himself, divided up to give a few pennys in the pound to the creditors. And the taxpayer should be kept completely out of the equation. But this is not happening. We have Marxism for Multimillionaires, and “Too big to Fail”. In fact we seem to… Read more »
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David,
“Unless the state actively embraces and encourages new players — and there are some out there — the crisis will continue.”
“The best hope for those who have lost their jobs is that the state embraces newcomers who could come in and we start again.”
The last thing we want is to government to encourage anything. Their encouragament cost us a lot, meager 100-200 billions or so.
Maybe Richard Branson would like to take a punt on Ireland? I like the language he is talking in on their manifesto but this country is so corrupted by greed, he would probably be blocked from entering our kleptocracy.
http://uk.virginmoney.com/virgin/northern-rock/40-years-of-better.jsp
David, The ‘age of leverage’. Fractional Reserve Banking for ye without regulators doing their job. And computer thrown in. And greedy bastards closed off from reality. A willingness to carry out fraud. A culture of plausible deniability. Resulting in an open season financial instrument ponzi criminal enterprise terminating in a crash and the wreckage left for the productive economy to sort out and re-set and then go again!! Cos the problem here is the white collar gangsters are at the same banking switch. So I reckon the culture of gaming the system and rigging the game and leveraging the productive… Read more »
The banks are dead, Long Live the Banks!
Yes we need commercial banks. Glass-Steagall does this cleanly and much less painfully. Even Volcker admits this.
We must hive off the “leverage” derivative arms to survive, and allow a healthy recapitalization based on a credit system of national commitment to progress.
This is not Hayek “spontaneous” action, nor distributionist regression, but a knowable, debatable public discussion-able, urgent action.
Why o why are we paying the Anglo bonds ,who the he’ll is advising kenny and co to pay up on behalf of the Irish people,this is just crazy insane ,kenny wants to keep our good name while Rome burns all around him, The domestic econmony has been taken of life support because it’s dead, How can they keep cutting a cut to me is a rise in diesel ,toll ,car tax when diesel and petrol goes up it makes every thing go up the wrong people are being made to suffer here and enough is enough since the start… Read more »
@ Molly66,
We are paying for the Anglo bonds because they are paying for our Civil Service. Who is screwing who???
Looks like 26 March 2012 is seen as possible D-Day for Greece: WSJ ‘Greece has a €14.4 billion bond maturing on March 20 that it can’t afford to pay in full, but the steps to be taken between now and then are many, technical, difficult and large.’ It should be clear that if Greece doesn’t manage to complete the restructuring by March 20, it will go into a hard default. While the market has largely priced in this eventuality, the fulfillment of the scenario is ultimately unpredictable.’ Spiegel ‘Yes, in the medium term Greece must leave. And the country’s debts… Read more »
Despite some restructuring of the Irish banks over the last few years, there is definitely too much middle management waste. People who literally have nothing to do all day, and are still getting overpaid for it.
There needs a be a serious clear-out.
The big problem is that the PIIGy banks need to raise about $200 billion rollover debt before the end of March.
Somebody in Dept Finance needs to paraphrase Maggie Thatcher and tell them “You roll-over if you want to, but Irish people are not Wheeler Dealers.”
Sean Quinn bankrupt. Meanwhile all the barristers, law firm partners, hospital consultants, accountancy partners walk away from their carefully constructed non recourse loans for the property syndicates they were in without a whisper and after availing of great tax breaks. And we are probably talking billions in loans. The same Bank Risk committees signed off on these non recourse facilities that now want ordinary people chased down for the full liability because as Michael Noonan would say it would be a moral hazard not to. Who sets the moral compass for you Michael. The other thing about thse loans is… Read more »
With Greek debt being expected to have a 50-75% haircut, it’s going to be interesting when it does default as some think there is a legal case to sue the Euro issuers…this could drag on a lot longer than we think.
So, Greece crumbles, Unicredit in Italy crumbles (article last week) as does Italy itself, CDS gets paid off to what effect? May as well come clean and say “no can pay”. We’ve already discussed last week about Australia’s emminent demise in light of falling demand for ore from China (copper prices are falling? ) certainly I know the cost of cabling dropping recentlty. Was chatting to a friend about the prospect of leaving a few bob in a German bank and was warned that the youd’d never get it back for a while when the Euro tripped over becasue the… Read more »
Next week, we will have Seanie Bond Day.
A pan EU celebration of our wealth, where we decide to give some of it away to a worthy cause. Re-electing Sarko. (If you ask me it does not matter how much money the French FIRE sector throws at Sarko, he is finished.).
Well done to #OccupyDameStreet on 100 days of occupation – you’re doing great work. We (Contact.ie) have just launched “Don’t Pay the UNSECURED Anglo Bondholders – Part2: Not Our Debt” at http://www.contact.ie/debt Other groups around the country, most notably the coalition of groups under the banner of “Debt Justice”, will also launch similar campaigns this week. Why this week? Well, because at the end of it UNSECURED and UNGUARANTEED Anglo bondholders are “due” to get paid €1.25bn of your money. Our aim is to get 4,000 people to email every TD and Senator about this outrage, which will mean about… Read more »
just lifted from contact.ie and reposted for all who wish to sign – please follow the link – its a good idea.
A good bank is where the Diaspora would come in.. we all have mostly decent jobs and a bit of cash that we could deposit to get Ireland up and running again.. unfortunately the unsustainable debt of banks means that people are cautious in bringing their money in to Ireland. A Good Bank loaning to ordinary business and people is exactly what we need.
We’re not screwed.. we’re in the same situation as always.. where the people like in this forum who are sensible are being ruled by the people who are more interested in who’s funeral they should be attending and feathering their own nest rather than Ireland.. we need 1. To get people together.. ie a forum/organisation where small new businesses can access high quality marketing/business knowledge. So the makers (functional) and business (financial and sales) people can help each other. 2. Get funding.. Good bank/Investment fund. Diaspora. 3. Marketing.. hey we have people in every country of the globe…
In two thousand and six I bought a cottage in Meath I bought it for two hundred thousand, I spent one hundred thousand on it after one year I sold it for four hundred thousand. I spent the profit on holidays I enjoyed the money ,the point is the bank where throwing money at me if I wanted it, the bank manager use to ring me up and say do you need to change your truck,do you want a loan,would you not buy another house and so on . Where are these people now,it would be very easy for me… Read more »
Morning All I have come to the conclusion that Senior Civil Servants run this Country,not the Elected Governments. Governments come and go , but Senior civil servants are for life, they are the ones with ALL the information.They inform Newly elected Governments what they can and can’t do after they come in to office. Senior Civil servants seem to be the ones cultivating long term relationships with their EU partners.These are the People , the EU know are in for the long haul and who do not change when a Government does,therefore it is far better to groom the civil… Read more »
Downgrading the Bailout Fund: It’s All Over Tim Geithner’s and Barack Obama’s loudly demanded “big bazooka” bailout fund for Europe is a buried relic after S&P today downgraded the bailout fund itself, the European Financial Stability Facility (EFSF). That bailout fund, which Geithner wildly promised could be “leveraged” to EU2 trillion, now {may} have a capacity to raise EU300 billion or so, and that goal is fading fast. Since bank bailouts in Ireland and Portugal have already used part of the EFSF, the real “bazooka” is a EU100-200 billion pistol. The downgrades of nine European countries on Jan. 13 essentially… Read more »
Just to give a reality check on what a financial crash means imagine 50,000 electricity disconnections in 1 week. Athens Indignants Return to Syntagma, Civil Disobedience and Strikes Continue As Greece teeters on the edge of default, the Greek mass strike is reawakening. For the first time in months, an estimated 2,000 Indignant protesters returned to Syntama Square Sunday night, to resume the anti-austerity protests. Following the massive police attack on demonstrators last July, the demos had tapered off and ceased by the end of the summer. Labor unions have announced new strikes, with the Athens Labor Center (EKA) closing… Read more »
Great article David. Bring on the layoffs for bank staff. Why should they have had 5 more years of work than people who were let go in the construction industry in 2007? And give them only the minimum statutary redundancy. Bring in Lyndon Jones as a lifestyle adjustment consultant to advise them of the benefits of austerity. And boy do they need to take the austerity medicine, as they have been far too insulated for far too long.
This article is good news, it brings hope to those who have suffered the most and lost the most.
David
OT, but (re a recent article of yours) there’s an amusing quote in last Sunday’s Observer from Boris Johnson (if the source is trustworthy, of course).
http://www.guardian.co.uk/commentisfree/2012/jan/15/nick-cohen-astor-cameron-taxes
Of course the banks should have been allowed to fail with the creditors losing. When in South America there was a very similar case of a failed company – a banana plantation. Failed due to its poor and reckless management. The banana plantation was bailed out with money set aside for diaster relief. The reason it was bailed out was to protect insiders in the country, it was as clear as daylight. If the bana plantation had been allowed to fail then all the jobs would be lost – that was the offical line. Not true. The bananas were still… Read more »
[…] This very interesting short essay was posted over at the Irish website davidmcwilliams.ie yesterday. It’s worth skimming…and I thank reader Declan Barrat for sharing it with us. The link is here. […]
The way things are heading we will be living on some sort of food aid the the army truck will come with food and we will have to fight for our rice if we don’t die from winter cold we will die from starvation maybe then the government might heed our warnings.
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We had Glass-Steagall until repealed by Larry Summers et al. That loaded the gun with live ammo known as derivatives. Plutonium ammo! It is not difficult to see why WallStreet/London so badly needed that law out of the way – Mandeville’s economics just could not work! The private vice of derivative trading just could not produce public good! Well what has it produced? According to economists and politicians, spontaneous good must appear at any moment from the vice of hedge-funds totally out of control. They are blue in the face waiting. But to take explicit action – not allowed because… Read more »
[…] Full article at source:http://www.davidmcwilliams.ie/2012/01/16/irish-banks-will-shrink-and-shrink […]
Dear David, I realise that you feel ultimately this recession will end. You believe that all recessions do. Any yet, this is not a recession. A great many people see this as a watershed event. I believe that things will not return to ‘normal’ after this ‘recession’. I feel that fundamental change is at work. Shall we stop calling this a recession?
Folks this is not a recession and don’t let anybody tell you otherwise.We are entering what can only be described as the long dark tunnel of depression.Nobody can find the light switch and there are many exit points and as we know at present the fools on the hill have little or no chance of lighting the way. You need to talk to the older generation to have any insight into what is ahead for us all.I had the pleasure of listening to Niall Tobin on Miriam Meets on RTE Radio 1 last Sunday and I strongly recommend that you… Read more »
Some news from half-way to Australia which shows the fighting spirit to be heartily recommended in Dublin. Malaysia was a Tiger too, and ruined by George Soros a few years before Eire. Malaysia Prime Minister Najib Echos Ex-Premier Mahathir, Speaking Against Economic Terrorism Malaysia’s Prime Minister Datuk Seri Najib Razak gave a surprising speech before the first “Global Movement of the Moderates” conference in Kuala Lumpur, comparing the “sharp-suited” bankers and economic “hitman” with religious extremists and terrorists. Najib has pushed himself forward on the world stage as representing moderate Islam, moderate politics, moderate economics, “moderation” in general, to demonstrate… Read more »
Does this poem describe Ireland or more exactly the EU and USA today? Bernard Mandeville, so beloved of many famous economists — The Fable of the Bees, Private Vices, Publick Benefits 1714 : ––— . . .Thus every Part was full of Vice, Yet the whole Mass a Paradise Flatter’d in Peace, and fear’d in Wars They were th’ Esteem of Foreigners, And lavish of the Wealth and Lives The Ballance of all other Hives. Such were the Blessings of that State; Their Crimes conspired to make ’em Great; And Vertue, who from Politicks Had learn’d a thousand Cunning Tricks,… Read more »
Regardless of bank layoffs which seem inevitable I wonder can anyone enlighten me on what exactly the tax payer gained from the bailout of AIB. They got a truck load of money to throw into a hole of debt. There was no conditions to the handout and the fatcats continue to enjoy their massive salaries and join golfclubs at the taxpayers expense. Correct me please if I am wrong or a little harsh I would love to hear that they actually took a pay cut ( the top brass not the lower paid )