Capitalism without bankruptcy is like Catholicism without hell. Although he didn’t say as much, this is what Mario Draghi meant when he announced this week that he was prepared to see banks go bust in order to clean up the balance sheet of Europe’s ailing banking system.
This means that Ireland, even if it exits the bailout, is still, if not quite in purgatory, then at least in a limbo-like state, because it is almost certain that at least some of our banks still need more money.
The EU is also envisaging that burning the bondholders will ultimately happen all around Europe in cases where banks are bust. This is obviously something that the ECB refused to countenance in Ireland – and it means that Ireland will have been hoodwinked.
In recent weeks, Germany has moved to protect its taxpayers from picking up the tab for non-German banks’ losses. This is despite the fact that, by definition, being the country with the largest current account surplus in Europe means that Germany had to have been the biggest lender in Europe and, therefore, has some culpability for where it lent to, though clearly a lot of blame lies in bank boardrooms and regulators’ offices too.
And if the Irish taxpayer had to foot the bill for debts that we had nothing at all to do with, then German taxpayers should do likewise. If this is not followed through, then the logic of all citizens being treated equally in the EU falls down.
This volte-face where rotten banks will be let go is bad news for us because obviously, we have already put money into our banks and we – unlike Italy and Spain – didn’t benefit from Draghi’s LTRO (long term refinancing operation) which was announced in 2011, a year into our bailout programme.
Back then, before Draghi, Ireland was pushed around and implicitly threatened that the ECB would cut off liquidity to the Irish banks if the state didn’t come in and shore up bondholders’ losses. The ECB policy was based largely on the notion that Irish banks couldn’t go under, because that might cause contagion all across the eurozone banking system. This could be termed the Trichet doctrine and it centred on the rule that no banks would be allowed to go bust in the crisis.
Now that Draghi’s LTRO has worked in terms of easing the immediate crisis in Spain and Italy, the new doctrine is saying something quite different.
Draghi is saying that next year there will be a fresh round of stress-testing of European banks – including our own – to see if, in the worst case scenario, they have enough capital to survive. Banks that do not have enough capital will be forced to go and raise money. Now here is the rub for Ireland, because he went on to say that if they don’t raise the capital or can’t, they will go bust.
In an interview with Bloomberg, the ECB boss said that ”banks do need to fail to prove the credibility of the exercise. If they do have to fail, they have to fail. There’s no question about that.”
Draghi went on to say that he’s sure that the region’s governments will be ready to fill any capital holes that emerge as a result of the stress tests.
”I have no doubt whatsoever that backstops will be there, which doesn’t mean that they will have to be used, because first and foremost it’s private money that needs to be used,” Draghi said. ”There’s an explicit commitment to have in place proper, adequate national backstops by the time the exercise is being carried out.”
Now if we read this carefully, it is saying to the Irish government that the Irish taxpayer will have to stump up even more for the banks. Mr Draghi may have no doubt about the government’s willingness to do this, but I do. I doubt the Irish state has money to plug holes yet again in the banks.
And it is precisely because we don’t have the money that the extra Euro 10 billion post bailout exit ”credit line” comes in. The government will be forced to take on an extra Euro 10 billion credit line – which will be drawn down if the Irish banks need more capital.
All this means is that the Irish taxpayer will be on the hook again and, amazingly, it is being dressed up as a victory, when what is happening is yet another bank bailout.
This is all a far cry from June 2012, when the Irish delegation came back from Brussels with a game-changer. Not only was any new capital for the Irish banks going to be injected by the European bank fund, the ESM, but we were told that we could claw back some of the money we stumped up because we were seen to have ”taken one for the team”.
Do you remember that? Well, now it looks as if that too will be reneged on, and Ireland’s taxpayers – having just come out of a bailout – will regain their sovereignty to give it away again, in the form of a forced loan to be paid for by future generations to pay for the banks today.
So all that guff about plucky little Ireland being rewarded for being a good boy is just that – guff. The Americans have an expression: ”You don’t get what you deserve, you get what you negotiate.” And we threw it away when we had the ace – when we were contagious.
Rather than using our contagion to extract concession, we turned it against ourselves. What does the clever leper do when he is knows he has the disease? He threatens the healthy folks that he might join them for dinner unless they give him something, to go away, that’s what he does.
But we didn’t do that when we were a hazard, we went away and we ended up losing our opportunity.
Now, from what we are hearing coming out of Brussels, Frankfurt and Berlin, the notion that Ireland would be rewarded with a post-dated cheque is in the dustbin.
According to the new Draghi doctrine, banks would be given time to raise the required funds if the stress tests deemed that they need capital. Initially, banks would try to raise money from private investors. But who is going to invest in the likes of AIB, with a mortgage book timebomb about to explode in its face? And if the investors don’t come in, who does?
Well that’s where you enter the drama.
Germany is moving as fast as it can to ringfence the ESM – the European slush fund – as much as it can. I don’t blame Frau Merkel for protecting her own people, that’s what national politicians are there for. Or at least that’s what I thought.
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I did a project in Hamburg Jan-Sept this year and attended the Bundesbank Forum presentations when living there. The slides on the EU Banking Uebersicht/Control from 130923 are in German and on the link below. Interestingly the speaker referred to the fact that the Wild West IFSC incidents lead to its formation. As the speaker mentioned that there would be Bail-Ins in future winding down of Banks a la Cyprus without a burden on taxpayers, I asked whether this model would be applied to Anglo. Answer : No. The heart of the rot in Germany’s economy is the very little… Read more »
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stress testing is simply not the tool needed for this job.We’ve seen “how Italy’s tenure rates went from 5% to 6% they went from perfectly stable and fine ,to a full crisis ,in 100 basis points.”
just shows how fragile this ‘system’ is
Draghi knows this house of cards is about to fall. Fall on the heads of the public coz they will be forced to foot the bill,again!
split the banks …say no to the gamblers
ACC is gone – where will the farmers bank now and Osborne is trying to figure out what to with Ulster Bank – that could hurt.
Don’t forget to put your clocks back – if you can – put them back several years it might help as hindsight would then become predictive-
Hi David, When I read this article my mind drifted back to the interview with Brian odriscoll on the late late recently. Like Bono odriscoll seems to draw the ire out of some people. I think perhaps people view Brian and Bono in the same way ie very succesful in their respective fields but hopelessly wawah with pretention. Having played the game myself at a reasonable level I know how honest brains play is, his work ethic and performance levels are also first class so I find criticisms of him rather churlish. With regard to this article there is uncompromising… Read more »
Exactly David, why should Merkel care about the suffering of irish tax payers, she must protect her own. is there any reason to hang on in the EU club when we are obviously held in such low regard? Would the EU have any concerns if our ‘Leaders’ had the backbone to threaten to quit the EU club and walk away from the dept. Would the people of Ireland support our ‘Leaders’ if they had the balls to do it.. (& i know this is an unlikely event but I would be interested to know what you all think out there)
DMcW: ESM – the European slush fund
+1
“that’s what national politicians are there for. Or at least that’s what I thought” There is no chance that the Permanent Government might put its much longer-term interests at stake and allow the Temporary one to do this.
“Plucky little Ireland’ spiel is pure guff”
That is what I call a headline.
I am very busy on a project but that headline pulled me in.
I might read the article later.
You can hardly say that Ireland was hoodwinked when it was the Irish political class that nationalized the Irish gombeen-developer class debts, in the form of bank-issued bonds. Blaming the Great Irish Financial Crisis on Germany for having allowed this Irish gombeen-developer class to profiteer during the Tiger Years is like blaming the Quakers for the Great Famine for having given up and left Ireland in exasperation when they saw their relief efforts being hijacked by the Irish gombeen-famine-profiteering merchant class of the 19th Century. The true history of these first decades of the 21st Century will be that the… Read more »
“…in the form of a FORCED loan to be paid for by future generations to pay for the banks today.” DMW writes- “Draghi is saying that next year there will be a fresh round of stress-testing of European banks ,including our own , to see if, in the worst case scenario, they have ENOUGH capital to survive.Another “optical backstop” as Kyle Bass called it. VIRTUAL , NOT REAL!! And there’s NO way of knowing or computing or anticipating how much ‘buffer’ is “enough $” !! And with the level of volatility in the markets and possible “black swans” under the… Read more »
The Irish population had everything to do with the bank debt. They borrowed the money, and then spent it like drunken fools.
There is NO playbook for all this and the “kicking the can down the road” is a policy meant to buy time,find growth and make ‘orderly’ adjustments …but Ire Inc found no growth and is LOADED with debt,like no other!
“we’ve run outa road” and Germany are fed up of giving road and are now taking it away and the end is coming very quickly
So, the old approach was ‘No bankrupt Irish bank can be allowed to fail coz that will destroy the European Banking system’ Now, the new approach is ‘Some bankrupt European banks can be allowed to fail so as to save the European Banking system, although we fully expect each national government to actually save their banks through enforced bail-ins’ Well, either way, bank failures or bank bail-ins, the reaction of the ordinary Joe is that his trust and faith in the Euro will be kaput. The Euro as a faith-based FIAT currency will be finished. Surely Draghi and co can… Read more »
Adelaide, Draghi is hardly trying to kill the Euro. What David is describing is a new ECB policy of forcing bank solvency problems back on national governments while denying them recourse to the ESM, which is largely dependent upon reluctant German taxpayers.
This policy is being dictated by current political and financial realities, which seem to indicate a greater fear of the American disease of printing money known as QE than the contagion fear that drove the Irish bailout. In fact I doubt that the Irish bailout would have occurred under present perceptions. Too bad for Ireland.
Kanye West Monetary Policy
If you follow his rhythm and you believe you are a fan of his ‘you are not a fan of me’ he says , ‘you are a fan of yourself ‘, ‘ I am just the expresso .I’m just the shot in the morning’.
Maybe we should arrange Noonan to change his own ways meet Kanye and and be schooled in something more shocking than his own underwear and debunk the cult doctrine of Draghi .
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A big issue after upgrading WordPress installations is the matter of apostrophes appearing as ‘â€TM’ – junk characters.
Stop junk characters.
http://luisrocks.com/blog/2011/stop-junk-characters-aetm-from-appearing-instead-of-an-apostrophe/
Bailing out the banking system was an insane idea, never gonna work. EMU was a botched job, who’s fault was that? The price for the bail-out is, firstly, Ireland, we are dead in the water, I’m getting out. Secondly, the Euro is doomed, we could’ve held a gun to it’s head when it was actually worth saving, another boat missed. Finally, the EU, bureaucracy triumphant over democracy and the EU Civil Serpents botched, botched and botched again, as Civil Serpents do. David articulates what has been clear to me from the start. This is bad and it’s gonna get worse… Read more »
What was Foisted On Capitalism By Irish Govt And Others Was Akin To Removing The Crankshaft From An Engine And Expecting It To Run Smoothly, total agreement EMMETTOR,
Bailing out the banking system is exactly what an immature share speculator does when they refuse to believe it is time to cut your losses. The only trouble is that when immature speculators get burned, might loose a few 100K or the house because of greed and the idiot belief that if you just dump now, you’ll be sorry the next day you never waited. That’s why DMW says the market has no memory. Memory has no guaranteed upside. The longer we wait, the bigger the bust. There is no upside at all and the resulting splash will big. In… Read more »
A chairde It’s nice to take time off from this site and return with fresh perspectives. Some sites affect you and not always in a positive way. It’s wise to take control from time to time and go with the heart. Have an ollerday Currently I doing an internship with a County Council and it is going great. I am loving it deep in the heart of darkness that is the post celtic tiger Irish midlands. I love the characters I meet and today I went for a scalping and tomorrow I am going back to look at the barbers… Read more »
Hmm yes it’s all clicking into place now.
I reckon this is what is known as a west brit shop.
Am I right?
I’m brushing up on my German. I hear John “Bowsie” Bowe is giving lessons.
Collective clearing of throats… .. .
“Deutschland Deutschland uber alles..”
I think Auferstanden aus Ruinen might be a better choice. It’s a nice tune and I hope Rising from the Ruins will be one of our ambitions. It’s the old East German national anthem.
Deutschland, Ich liebe dich! Laut Singen.
http://www.youtube.com/watch?v=mZ8zUcg_Lks
It’s actually got a grand air.. if you can park the history baggage bit!
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