The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[mayogodhelpus@gmail.com]

Christmas 2008. The year the Southerners were fighting out the back of Sainsbury's over pallets of beer.

Was it the Munster lads still celerating their Heineken Cup win that year, or were the Kerry and Waterford boys still drowning their sorrows?

[armaghniac]

a punt was worth £1.05 back round 1995/96

Of course the punt is still worth more than sterling. Proper order too.

[Fear ón Srath Bán]

[thejuice]

Time to stop recklessness and start taxing banks

FINTAN O'TOOLE

AS EUROPEAN Union finance ministers discuss ways of controlling reckless banks, a very simple logic applies. Reckless banking wrecks lives. Ireland has suffered proportionally more damage from reckless banking than any other society. Therefore Ireland is at the forefront of pressing for EU-wide measures to rein in reckless banking.

Right? Wrong.

Ireland is lining up with the City of London and its political allies to protect the interests of the most rapacious kind of banking. Michael Noonan is out there batting for the wide boys in their opposition to a financial transactions tax.

There is an overwhelming financial, economic and political case for a tax to be imposed on financial transactions such as the trading by banks of securities (shares and bonds) and derivatives such as options and credit default swaps. Financially, the banks have been bailed out by ordinary citizens at appalling costs. But instead of repaying these costs, banks, under the current regime, will actually pay less tax in coming years because they will be able to write off their losses.

A new form of taxation on banks is thus not at all a radical idea. It is merely a gesture towards financial recompense. The EU Commission estimates that a 0.1 per cent tax on securities transactions and a 1 per cent tax on derivatives would raise €57 billion annually – significantly less than the cost of the Irish bailout alone.

Economically, the case is equally obvious: taxation systems should discourage dangerous and unproductive activities. Anyone who doesn't know how dangerous and counterproductive the untrammelled growth of derivatives trading has been should go back to reading Thomas the Tank Engine.

From a political point of view, a financial transactions tax (FTT) is also crucial. Citizens have been abused, defrauded and robbed by banking systems that have ceased to fulfil their basic functions. (Literally so in the case of Ulster Bank, whose inability to give people access to their own money is emblematic of the wider shift of banking from service industry to get-rich-quick machine.) From the Dirt scandal here to the rigging of the interbank interest rates in London, citizens have had their noses rubbed in corruption and impunity. And they have been left with nothing but a seething awareness of their own powerlessness.

This aspect of the FTT is arguably more important even than the money itself. We're living through a crisis of democracy. On the one hand, we've never had more obvious need for functioning, powerful transnational democratic institutions that can act coherently in pursuit of a common interest. On the other, the institutions we do have – in this context those of the EU and euro zone – are patently lacking in democratic legitimacy.

The EU Commission, the European Parliament and many of the major EU governments (including France and Germany) are strongly in favour of an FTT. So are European citizens: the Eurobarometer survey shows 65 per cent support for an FTT. The financial sector is, of course, opposed. We have, therefore, a crucial test of wills between citizens and democratic institutions on the one side and the finance industry on the other.

If the EU institutions lose this fight on what is, after all, a very modest proposal, their remaining democratic legitimacy will be holed below the waterline. Conversely, if the banks can face down the EU on this one, their sense of impunity will be absolute and their recklessness will be redoubled.

Ireland, which has suffered so outrageously from the effects of reckless banking, has an overwhelming interest in seeing an FTT put in place. We also know from concrete experience exactly how disastrous the effects of pandering to finance industry lobbyists can be. To take just one currently resonant example, Seán Quinn's catastrophic accumulation of contracts for difference (CFDs) for Anglo Irish Bank shares, which helped to cost the Irish taxpayer €3 billion, would not have been possible if, as the Revenue proposed, CFDs had been taxed and therefore disclosed.

Why were they not taxed? Because the financial industry lobby kicked in and persuaded the then minister for finance, Brian Cowen, that doing so would harm the competitiveness of the Irish financial services industry.

Now, here we are again, with Michael Noonan taking the same industry line in opposing an FTT. He has lined up with George Osborne and the City of London against this very basic measure to impose some degree of social responsibility on a disastrously rapacious system. Why? Because, allegedly, the imposition of a transactions tax would cause banks to flee from the International Financial Services Centre.

In fact, the EU Commission's proposals specifically deal with the threat by banks that they would relocate: any bank dealing with any European clients, regardless of its physical location, would be subject to the FTT. In any event, however, Ireland has surely learned in the hardest way that the short-term benefits of catering to the most reckless sides of the finance industry are massively outweighed by the long-term costs. Ireland has learned – but the Government, it appears, has not. When a choice has to be made, it still speaks, not for citizens, but for the banks.

As some one said on Slugger, both the Nuclear industry and financial industry have the ability to cause wide scale devastation. One is regulated to the hilt and quite rightly, the other is not, and our politicians are compliant in keeping it that way.

[Hardy]

I'm slipping behind here on understanding what's going on with the EU, ECB, bailouts, bank v. sovereign, etc. One thing that's puzzling me is the widespread reporting that Ireland is going to negotiate to have a certain percentage (typically, it's reported as 40%) of the bank debt removed from the state's balance sheet. This is as a result of the agreement reached by the heads of government a few weeks ago that bank debt was to be separated from sovereign and the specific commitment that this would be retrospectively implemented for Ireland.

What I don't understand are two things:

1. Why are we having to negotiate it when it has already been agreed in principle. Surely all that's to negotiate is the mechanism and the detail?
2. More importantly, why are we talking about only having a percentage of the bank debt treated in this way? Why not all of it? As far as I understood, the communique on the agreement said all bank debt would be separated from sovereign. I didn't see anything about 40% or any other percentage, so why are we only looking for a 40% deal?

What am I missing?

[trueblue1234]

A comma or two but nothing to worry about.

[bcarrier]

TBH I don't get that any amount of tax/levy will replace proper regulation.

Splitting the basic retail utility/retail function of the banks from their investment arms would achieve more than this tax imo. Banks need to be able to fail.

[bcarrier]

I'm slipping behind here on understanding what's going on with the EU, ECB, bailouts, bank v. sovereign, etc. One thing that's puzzling me is the widespread reporting that Ireland is going to negotiate to have a certain percentage (typically, it's reported as 40%) of the bank debt removed from the state's balance sheet. This is as a result of the agreement reached by the heads of government a few weeks ago that bank debt was to be separated from sovereign and the specific commitment that this would be retrospectively implemented for Ireland.

What I don't understand are two things:

1. Why are we having to negotiate it when it has already been agreed in principle. Surely all that's to negotiate is the mechanism and the detail?
2. More importantly, why are we talking about only having a percentage of the bank debt treated in this way? Why not all of it? As far as I understood, the communique on the agreement said all bank debt would be separated from sovereign. I didn't see anything about 40% or any other percentage, so why are we only looking for a 40% deal?

What am I missing?

An interesting question Hardy. There is mention of a different 40% here and a bank bailout of 63Bn.

I

t had long complained that the euro zone had unfairly obliged Irish taxpayers to shoulder most of the costs of rescuing formerly private banks when the country's bloated commercial property market crashed from 2008 onwards. Amounting to about 63 billion euros, or 40% of its annual economic output, Ireland faces one of the world's costliest bank rescues.
As those bank-rescue costs escalated, it was forced to strike a 67.5 billion euro bailout deal with the EU, International Monetary Fund and European Central Bank, in late 2010.
Read more: http://www.foxbusiness.com/news/2012/07/01/ireland-aiming-high-in-euro-zone-talks-on-bank-debt-irish-dep-pm/#ixzz20EFKVDX3

The 63Bn also ties back to 32BN + 31BN numbers in the article below.

THE European Commission has confirmed that a deal to shift the burden of Ireland's bank debt off the government's books will be ready by October this year.
The deal, reached after a marathon nine-hour meeting, involves the eurozone's future rescue fund, the European Stability Mechanism, taking over Irish taxpayers' €32 billion euro stake in the banks. EU economics chief Olli Rehn said early today that the Commission would publish proposals in September and aim to get the agreement of Ireland's 16 eurozone partners by October.
"The Commission will take forward technical work on improving the sustainability of Ireland's well-performing adjustment programme, in particular as regards its financial sector, together with our partners in the troika," Mr Rehn said after the meeting with with eurozone finance ministers in Brussels. The October deadline enjoyed unanimous support amongst finance ministers at the meeting, Mr Rehn confirmed. "That's very positive," Mr Rehn added. "It's positive for Ireland, its chances of succeeding in its reform programme, and thus it's positive for the whole of Europe."
"We all know the issues and challenges as regards the Irish financial system and debt sustainability," Mr Rehn said. Restructuring talks are already underway on €31 billion in promissory notes issued by the government in 2010 to spread the cost of bailing out the former Anglo Irish Bank

.


My thinking if that 32Bn in indo article is correct and this is 40% then the total bank bailout must equal 80bn. 32Bn of this must still be sitting somewhere as equity or debt on bank balance sheets. This is the amount that is getting reallocated. The 31bn in Anglo is subject to some other discussion and maybe  another 17bn is already be gone perhaps in bondholder redemptions ? Namawinelake might have more time to get to botton of it 

[Hardy]

That could be it, bcarrier. I don't understand, though, why the Anglo debt is being treated differently to the money invested in the other banks and why this wouldn't be included in the hand-off of bank debt. I know the funding mechanism is different for Anglo, but it's all debt incurred as a result of collapsed or potentially collapsed banks.

Speaking of Namawinelake, I see two of the most interesting commentators on this thread seem to have disappeared from here - Muppet and Bogball.

[fearglasmor]

I'm slipping behind here on understanding what's going on with the EU, ECB, bailouts, bank v. sovereign, etc. One thing that's puzzling me is the widespread reporting that Ireland is going to negotiate to have a certain percentage (typically, it's reported as 40%) of the bank debt removed from the state's balance sheet. This is as a result of the agreement reached by the heads of government a few weeks ago that bank debt was to be separated from sovereign and the specific commitment that this would be retrospectively implemented for Ireland.

What I don't understand are two things:

1. Why are we having to negotiate it when it has already been agreed in principle. Surely all that's to negotiate is the mechanism and the detail?
2. More importantly, why are we talking about only having a percentage of the bank debt treated in this way? Why not all of it? As far as I understood, the communique on the agreement said all bank debt would be separated from sovereign. I didn't see anything about 40% or any other percentage, so why are we only looking for a 40% deal?

What am I missing?

On Morning Ireland this morning it was stated that the original announcement that Spain banks would be recapitalised directly instead of going through the Sovereign was now being reversed and that the money would after all be chanelled through the Spanish government. It was stated that Angela Merkel did not in fact give in as was suggested at the time and the Finland are adamant that they will not participate in funding other countries debts.

Theres a list of northern european countries including Germany, France, Holland, Finland who are actually being paid to borrow money from the markets while Spain has to pay 7% .

It seems to me that there is as much chance of EU wide fiscal or political integration as there is of Leitrim winning Sam next year.

NB  The punts have already been printed.

[CiKe]

The thing with the FTT is that while all good in theory surely a lot of those costs will most likely be passed on to savers/investors somewhere? e.g lets say you have your current pension pot in cash and decide to invest in the market. Surely, reality is that whatever your size is, the pension fund is unlikely to deploy that 20k or 30k EUR or whatever the hell it is straight away due to operational hassle? Many PF's use derivatives for beta exposure in any case, so if you invest 20k or 30k in an MSCI benchmark and your PF's uses a deriv will the banks not just pass on the FTT to PF through higher swaps prices which then result in higher mgmt fees for the fund?

[bcarrier]

That could be it, bcarrier. I don't understand, though, why the Anglo debt is being treated differently to the money invested in the other banks and why this wouldn't be included in the hand-off of bank debt. I know the funding mechanism is different for Anglo, but it's all debt incurred as a result of collapsed or potentially collapsed banks.

Speaking of Namawinelake, I see two of the most interesting commentators on this thread seem to have disappeared from here - Muppet and Bogball.

Namawinelake does indeed have a better explanation http://namawinelake.wordpress.com/2012/07/09/a-glossary-to-help-explain-minister-noonans-negotiations-this-evening/

The word "spoofery" features prominently.

Agree that Muppet and Bogball were good posters here.

[Hardy]

It seems, from reading that article and its references and general scouting about, that you're right, bcarrier and the 40% figure being bandied about is not 40% of the cost of the bank bailout but the 40 PERCENTAGE POINTS (not percent) of Debt/GDP that the €64Bn-odd bank bailout represents.

So the government is looking for the whole €64Bn to be taken off the state debt, reducing the state's Debt/GDP ratio from about 120% to about 80%. Of course, the innumerate media, even those presenting themselves as financial analysts, present this as a 40% cut in Debt/GDP. It's not – it's a 33% cut.

Note that it seems the government is only looking to have the €64Bn direct bank recapitalisation cost shifted, not the total bailout cost, which comes to an estimated €87.1Bn, when you include interest on the promissory notes and the overpayment made by NAMA vs. market value for the bank loans (see below).

Whether they'll get it, or anything at all, seems to be up for discussion now, with noises coming out of Germany saying, "What? Are you mad? Where did you get the idea that we were going to take the bank debt off your sovereign? Shag off!"

I've tried to gather together in one place the headline figures and considerations in the bailout/debt situation. Here they are, for what it's worth (all figures, except percentages, in billions):

Debt and GDP
National debt 2011   174.0
National debt 2013 (projected)  198.1
Nominal GDP 2011   156.1
Nominal GDP 2013 (projected)  167.4
Debt/GDP 2013   111%
Debt/GDP 20132013 (projected)   118%

Banks recapitalisation
AIB/EBS   20.80
BOI   4.70
IL&P   4.00
Anglo/INBS   34.70
Total   64.20  (A)

Additional costs of bank bailout
NAMA "state aid"   5.60  (B)
Interest on promissory notes  17.30  (C)

Grand total cost of bank bailout
87.10   (A+B+C)

State shareholding in banks
AIB/EBS   99.8%
BOI   15%
IL&P   99%
Anglo/INBS   100%

Possible  value to the state of these shareholdings
AIB/EBS/BOI  9.40
IL&P   ?
Anglo/INBS   4.00

Bondholders
We have paid off most of the bondholders, but there are still "billions" – I can't find out how much - due to AIB and BOI bondholders and €160 million due to Anglo bondholders.

Ireland's contribution to ESM
1.27 Bn (1.5% of an initial 80 Bn). Germany contributes 27%.

NAMA
NAMA paid €32Bn to the banks for loans denominated as worth €74Bn, but with a calculated market value of €26.3Bn. The €5.6Bn above market value is deemed as "state aid". Effectively, this increases the state's contribution to the banks from €64.2Bn to €69.8Bn.

It is intended NAMA will break even by the time it is wound up in 2020. This depends on a recovery in the property market. Property values in Ireland have declined by 20-30% since NAMA valued the loans it bought from the banks (at €5.6 Bn above their then estimated market value).

NAMA's running costs are €700m per annum - operating costs, professional fees and the interest on its NAMA bonds. The state has guaranteed the NAMA bonds, so if NAMA hasn't made a profit or broken even by 2020, then the State will incur the loss. 

Promissory Notes
€30.7Bn of the €34.7n Anglo/INBS bailout was in the form of IOUs from the government - "promissory notes". The ECB insisted that the IOUs would incur interest, which means that we're not just paying the €31bn of IOUs but, under the present promissory note conditions, another €14bn of interest. We're paying the interest to IBRC which we 100% own so the interest isn't important. But we borrow the funds to pay the €31bn, so the interest we pay on that IS important.

A lot of work has already been done on the promissory notes to find a way of re-engineering them. Currently, the State must pay €3bn a year in interest payments, which will fall to €1.8bn from next year, bringing the total cost of interest on the promissory notes over their lifetime to about €17.3 Bn.

[thejuice]

http://www.dailymail.co.uk/news/article-2174785/David-Bagley-HSBC-chief-quits-U-S-Senate-committee-bank-accused.html

The City of London is awash with filthy money. it seems it ends up with mexican drugs gangs and saudi terrorists.

but don't expect anyone going to jail.

The UK economy is a bit of a paper tiger. or more accurately, toilet paper.

[Hereiam]

Just watched "inside job" this evening and really wished i hadn't. Just signed up to a 30yr mortgage and I now realise that this was a mistake and that people/companies are willing me to default on this so they can make money.....what have i done??