Tag Archives: irish bank guarantee

No Europe-wide rescue

A consortium of German financial institutions has pulled out of a rescue package for Germany’s second largest commercial property lender, Hypo Real Estate. The BBC reports this:

News of the failed plan came as leaders of the major European economies met in the French capital for talks hosted by President Nicolas Sarkozy.

Britain, Germany, Italy and France all agreed to work together to support financial institutions but did not agree to set up a big rescue fund similar to that of the US.

They decided instead to seek a relaxation of the EU rules governing the amount of money individual states can borrow.

What’s interesting is this: (1) there will be no Europe-wide bailout and (2) they want individual states to have their credit limits raised.  So first of all, the big nations will not take part in a rescue plan that covers the banks of other nations – quite right, I’m very glad about that part.  Secondly, we are transferring the over-leveraged positions of banks onto nations.  Whole nations of taxpayers being lumbered with debt to bail out irresponsible, and now very wealthy, bankers.

The old term ‘moral hazard’ has never been more appropriate.  Do whatever you like and the government will bail you out – meanwhile you keep all the cash!  Mr Sarkozy talks of vague measures but when the dust settles I’d like to see just how many heads have actually rolled into his little guillotine basket:

Mr Sarkozy announced a series of other measures – including unspecified action against the executives of failed banks.

Speaking after the meeting at a joint news conference, he said the four had agreed that the leaders of a financial institution that had to be rescued should be “sanctioned”.

The Germans do not want to intervene but at the same time they don’t want to be the only ones that don’t do so as it puts their banks at greater risk in comparison to overseas competitors:

Meanwhile German Chancellor Angela Merkel called on EU countries not to take steps at home that could cause problems for other member states.

Meanwhile, it is becoming clear that there has been no particular rush to transfer cash from UK banks into Irish ones.  Perhaps people have realised that the guarantee only means something if the country has the money to back it up.

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Greeks follow Irish and offer bank guarantee

The Greeks have joined the Irish in a bold promise to guarantee their banks.  If things go wrong for them then their taxpayers are in for a nasty shock, just like the Irish.  How long will it be before we have a truly two tier banking system where there are banks guaranteed by their home country and there are other banks where people feel it is unsafe to deposit their savings?  

We’ve already seen money flowing back into Northern Rock until they were forced to stop taking deposits due to their ‘unfair’ advantage of government backing.  The same thing may now be happening with Irish banks (although I don’t know how much I trust their guarantee).  Is there a point where the guarantee becomes worthless?  If the country itself doesn’t have the money in reserve, will anybody else loan it to them to make good on the guarantee?

The Germans are, rightly I think, against any plans for a european bailout:

The Greek move puts fresh pressure on Germany to back the mounting calls for an EU lifeboat fund to shore up Europe’s struggling banks, even though such a plans are anathema to Berlin. Chancellor Angela Merkel warned that there would be no “blank cheques” for those who get into trouble.

The Telegraph

Whatever the eventual outcome, the debate goes in on Europe and is likely to go on for some time:

Neelie Kroes, the EU competition commissioner, said that Ireland’s decision to act unilaterally — disregarding EU state aid rules — risked a descent into the beggar-thy-neighbour mayhem of the Great Depression.

“When Europe was confronted with a banking crisis in the 1930s, governments decided to go national and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice,” she said. Brussels has already been overtaken by events.

David Owen, Europe economist at Dresdner Kleinwor, said Ireland had no choice, given the lighting pace of events on Monday. “Their banks were going down. No government can let that happen. They did exactly the right thing to ring fence this.”

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Will the banks bankrupt countries?

I mentioned yesterday that people might now be looking at the creditworthiness of countries rather than the banks themselves.  This is after recent moves to bail out banks by several nations – most notably Ireland.  You see the funny thing is that in some cases the banks are now bigger than the gross domestic product (GDP) of their nations.  Here are a few examples:

Kaupthing Edge has total assets of €53bn – that’s 623% of Iceland’s GDP.

Landsbanki (IceSave) has €32bn – 374% of Iceland’s GDP.

They’re not the only banks in Iceland but between them represent around 1,000% of Iceland’s GDP.  With Glitnir having recently drained the Icelandic government’s coffers, would there be anything left to support other banks?  Of course it’s not quite that simple – if a bank goes bust all of it’s cash deposits don’t suddenly disappear.  On the other hand, this market is all about confidence – or rather a lack of it.

How about Ireland’s bank guarantee?

Bank of Ireland – €183bn – 102% of Ireland’s GDP.

Anglo Irish – €97bn – 54% of Ireland’s GDP.

Just two of the guaranteed banks have assets worth around 150% of GDP.  And let’s not forget that Ireland’s economy has been rather bloated recently due to an astonishing property boom that has now become a property crash.  The guarantee was a very shrewd move but essentially backed by thin air.

Now we turn to another bank popular with savers, ING.  It has assets of around €1,370bn which equated to 290% of the Netherlands GDP.

The UK has a number of huge banks.  RBS, HSBC, Barclays, HBOS, Lloyds TSB, Standard Chartered, Alliance & Leicester, Bradford & Bingley between them have assets of €6,900bn which represents 420% of GDP.

There is a nice list of these figures on the FT website here.

Banks declare each other likely to default due to their excessive leveraging then countries take on their bad debts to support them.  We are simply transferring all the bad debt to the countries instead.  Would I loan money to Iceland or Ireland?  Nope.

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Savings protection update

Just a quick word about things that were mentioned in the news recently:

1. The maximum protection under the Financial Services Compesation Scheme (FSCS) is still only £35,000.  There has been media coverage recently about raising it to £50,000 and this has in fact been scheduled to happen this year for some time.  The decision was made in the light of Northern Rock but the law has not yet been passed.

2. Around a third of Bradford & Bingley depositors had more than £35,000 on deposit and nobody lost a penny.

3. The Irish bank guarantee is telling – it covers only Irish banks.  And that doesn’t include banks who have a branch in Ireland, just those which are genuinely homegrown banks.  No taxpayers will want to prop up the banks of a foreign nation.  We are now in the realm of putting our money in banks based on their national origins and the willingness and financial ability of the government to intervene.

Irish government guarantees deposits for 2 years

While the US engages in some rather filthy political point scoring the Republic of Ireland government has quietly launched its own rescue plan for Irish banks.  Whether you agree with the politics of intervention or not, there’s no denying that the Irish are all action.  There’s no fuss, no mouthing off, just action.

The guarantee lasts until September 2010 and covers Allied Irish Banks plc, Bank of Ireland plc, Anglo Irish Bank Corp. plc, Irish Life and Permanent plc, Irish Nationwide Building Society, the Educational Building Society and ”such specific subsidiaries as may be approved by government,” the ministry said.

The guarantee is being provided at a charge to the banks and is subject to ”specific terms and conditions so that the taxpayers’ interest can be protected,” the ministry said.

Government Guarantees Deposits for 2 years, full article here

The guarantee covers up to €400bn – more than twice the country’s gross domestic purpose.

The Irish economy has been having a pretty tough time lately so the move is not surprising.  Given their corporation tax rate of just 12.5% the Irish have already shown willing to compete for business on an international stage and on a grand scale.