Comparison of EU Bank Bailouts

Michael Taft uses Eurostat data here to compare the 'direct' impacts on General Government Deficits caused by the EU's numerous bank bailouts. In some cases these figures dont even capture the full cost of the bailouts as, for example, in the case of Ireland the €20 billion taken from the National Pension Reserve Fund is not included in the Eurostat figures.

Fiddling while Europe burns

Paul Sweeney: Today’s Financial Times tells us that in an effort to persuade Spain to accept a bailout, “unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU and could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin, according to people familiar with the plans.”

It is reported that the oversight of the support to Spain would be dependent on increased outside oversight and faster restructuring of the banking and financial sector.

Why should Ireland and Greece have severe austerity imposed under the Memorandum of Understanding with the Troika of the EU, ECB and IMF while Spain gets off more lightly in comparison?

The answer is of course, size and importance. Ireland is unimportant in the order of things and this hard lesson is being driven home in the wake of last week’s referendum vote. We can be the model of goodness and obedience and the veritable “Poster Child of Austerity” but it still does not matter to the kingpins in Europe.
Not that austerity at this level is working. It is exacerbated by European and world conditions, but still is too severe in such a short time period. Yes we are heading towards target - if not acutely to hit it - on the deficit level, but little else is working. Growth is anemic and at last year’s level of GDP growth of 0.7 per cent, (if it's not revised downwards by the CSO later) it would take 15 years to get back to the level of 2007 GDP. It would take far longer on GNP and a very long time for the recovery of domestic demand to reach the level of five years ago.

Unemployment is at a very high level of over 14 per cent and it is at 25 per cent by the wide measure – officially. Emigration is very high too and participation in work has fallen dramatically especially for women and the young.

It is excellent that FDI continues to flow in and jobs are created. This shows that the fundamental economy in Ireland is working. Indeed it is working very well – very well!

But it is not enough. Domestic demand has fallen massively. And it is not just the collapse in investment (due to lack of confidence but also lack of state-led investment) but especially its main component – consumer spending.

What would help? If the so called leaders in Europe (largely a bunch of conservatives hide-bound by 1920s economics) could get their act together before the whole edifice falls apart, that would be most helpful. The edifice that is collapsing is both the euro, the European Social Model, the Single Market and the European Project itself. They have been fiddling while Europe burns - for four years now.

The election of Hollande has changed the balance, somewhat. The EU is no longer dominated by Germany and France. (It may seem like it is now just Germany, but Merkel is increasingly isolated). This gives some hope. If the left is elected in Germany and Italy within the next year, all may change. But social democracy and socialism in Europe is in crisis too.

Many of the political leaders of social democracy and socialism have forgotten their core values. Instead, they espoused what is now fairly clearly a failed market system. Most have now recognised this. Yet most these leaders still seem immobilised. Intellectually and politically.

The immediate answer should be the message that – “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”
It’s a simple message which would give hope to hundreds of millions in Europe. It also needs to be accompanied by policies to stimulate growth, now. For them, it seems the European Social Model is under deep threat. It not just that ECB boss Draghi said the Model is finished, but the conservatives have decided to end the Post-War European Social Contract.

They simply want to keep the money. Sharing is out. The cake is no longer growing. The Soviet tanks are no longer in Germany. The alternative socialist vision is blurred. What impetus is on the elite and owners of capital to share but the minimum, with labour?

The European elite have decided, along with their US cousins, that inequality does not matter. But they are very wrong, as Joe Stiglitz says in the blog below. He says “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.”

In conclusion, it does seem that we are heading back to naked class war in Europe.
If you do not believe me, then why are the European elites and the ECB saving the banks and letting sovereign states sink? Why, after four years, are there still no solutions?

The ECB and the Forthcoming Referendum

Jim Stewart: A recent speech delivered by Mr Asmussen (Executive Director of the ECB) at a seminar organised by the IIEA in Dublin (The Irish Case From An ECB Perspective), gives powerful (though unintended) grounds for a no vote in the forthcoming referendum.

Mr Asmussen emphasised that from an ECB perspective it was of the “utmost importance” that all euro area countries adopt the fiscal compact to regain the confidence of markets. The overall policy can be summarised as austerity (raising taxes cutting expenditure) releases, what Paul Krugman has called the ‘confidence fairy’ and recapitalising banks and repaying senior bond holders, releases the ‘banking fairy’ – banks will once again start lending. Both policies in the absence of policies to encourage growth and investment will simply result in further stagnation. The Fiscal Treaty will make the adoption of policies supporting growth more difficult if not impossible.

Specifically in relation to Ireland, Mr Asmussen clearly outlined ECB thinking on the origins of the crisis and subsequent developments. In summary the view of the ECB is that while the crisis largely originated in Ireland, the solutions devised in conjunction with the Commission and the IMF and set out in the EU/IMF Programme for Ireland are working . The ECB has been particularly generous in its support to Ireland (“working as a true partner”), and because the programme is working there must not be any deviation from it for example in relation to the payment in full of the promissory notes, issued to finance the Irish Bank Resolution Corporation.

The following examines three claims made by Mr. Asmussen:-
1 “The Programme is on track. So far Ireland has delivered” (p.1);
2 The ECB is “a true partner” to Ireland (p.3);
3 “No other institution has provided more help to Ireland than the ECB” (p.7).

“The Programme is on track. So far Ireland has delivered”
Many might query that the EU/IMF Programme is working. Mr Asmussen states Ireland “is the only programme country that has managed to close its deficit and to return to growth last year” and cites growth last year of 0.7% and projected growth of 0.5% in 2012. But we should note projected growth (Table 1) at the time the Memorandum of Understanding was signed (16 December 2010), and on which the programme was predicated, was considerably larger than actual and projected GDP.

Table 1:

	'10	'11	'12;	'14	'15
Department of Finance forecast of GOP growth, December 20101	0.3	1.7	3.2	3.0	2.8
Actual 2010-2011 IMF forecast, 2012-2017	-.04	0.7	0.5	2.0	2.5
Department of Finance forecast of unemployment rate, December 2010	13.4	13.2	12.0	10.9	9.8
Actual Unemployment rate for 2010-11 and IMF forecast April 2012	13.6	14.4	14.5	13.8	13.0
Department of Finance forecast of change in total numbers at work 10th, December 2010	-4.0	-0.2	1.3	1.6	1.8
IMF forecasts for change in numbers at work April 2012	-4.2	-2.0	-1.0	0.07	—

The ECB does recognise unemployment as an issue. Mr. Asmussen states, (p. 6) “worst of all, perhaps, is the fact that a large portion of the population is currently out of work”. What is not stated is that unemployment in Ireland is the second highest in what the IMF classifies as advanced Europe (IMF World Economic Outlook April 2012, Table 2.1 p. 53) at 14.4% in 2011 and is forecast at 10.5% in 2017. Examples cited by Mr Asmussen such as deregulating the market for legal and medical services (p. 5) are most unlikely (even if implemented), to “expand activity and increase employment” in any meaningful way.

The ECB is “a true partner” to Ireland;
Mr Asmussen describes the ECB “as a true partner”. In fact many of the policies implemented and required by the ECB have magnified the crisis in Ireland. In his address Mr Asmussen clarified that the ECB regarded repayment of Anglo bondholders as a key consideration to prevent negative effects to “banks in other European countries”. This clarification is strangely absent from the written statement (available here). These ‘negative effects’ are uncertain. Bondholders may have held insurance in the form of credit default swaps. Default on senior bank debt by banks in Denmark had no or very little (reported consequences) for banks in other countries (see Denmark Takes Over Second Bank to Trigger Bail-in Resolution, Bloomberg 27 June 2011) and yields on Danish Government debt are close to or below those for Germany. But the main implication of Mr Assussens comments are that the ECB sought to give preferential treatment to banks in other countries at the expense of the Irish State and Irish society. This transfer in wealth (it was a transfer as Anglo-Irish and other banks senior debt was trading far below the value at which it was redeemed before the new government took office) has helped increase the cost to the State of the bank recapitalisation to €62.8 billion by March 2012 approximately 38% of General Government gross debt. Without any bank recapitalisation Irelands Debt/GDP ratio would be approx 65% of GDP (ignoring interest savings)- amongst the lowest in the eurozone.

In February 2011 the five institutions recapitalised, held €35 billion in senior unguaranteed secured and unsecured bank debt (see Senior Debt and Subordinated Debt Issuance by Irish Credit Institutions, Central bank March 2, 2011 available here). If this were written down by 50%, the Debt/GDP ratio (as measured by the IMF), would fall from 105% for 2011 to 94%. (Note this excludes the approximately €71 billion in bonds redeemed at face value prior to February 2011). Any policies that reduce government borrowing and the Debt/GDP ratio, without advesely affecting economic growth will enhance Irelands ability to access market based funding. The ECB belief that negotiating a reduction in the cost of the promissory notes would adversely affect Ireland’s credit rating is delusional. The IMF has recently urged the need to reduce the links between sovereign debt and bank debt. In Ireland the policies of the ECB have the effect of increasing these links.

“No other institution has provided more help to Ireland than the ECB”.
The one area where ECB policy is beneficial to Ireland has been through Eurosytem liquidity provision. Mr Asmussen implies that this liquidity provision was in some sense preferential aid to Ireland. He states “Relative to the size of the economy, no other euro area country has received so much support from the Eurosytem. And no other institution has provided more help to Ireland than the ECB”. However the provision of unlimited liquidity is one of the main functions of a Central Bank and liquidity was provided to banks in Ireland fully in accordance with ECB rules (a point acknowledged by M. Asmussen) and cannot in this sense be preferential. Furthermore the benefit of this liquidity provision accrues not just to Ireland but in a monetary union given large scale interbank borrowing and the presence of a large EU owned bank sector in Ireland, throughout the monetary union. A collapse in Ireland’s banking sector would have been a calamitous event not just for Ireland but for the Eurosystem.

Mr. Asmussen states that the level of this “support” contradicts claims that the ECB “bounced” Ireland into the EU/IMF programme in late 2010. Rather the level of liquidity provision which the ECB erroneously believed was in some sense a gift or aid, exclusively to the benefit of Ireland, and the desire of the ECB to reduce this as quickly as possible were likely to be prime factors in the initiation of the EU/IMF programme. Reducing ECB liquidity provision to Irish banks remains a key policy objective of the ECB. Mr Asmussen states “There can be no doubt that the current amount of liquidity support by the ECB and the Central Bank of Ireland needs to be substantially reduced over time”.

The expressed wish to reduce the amount of eurosystem liquidity provision is not in Ireland’s current interest. A policy objective should be to maximise the amount of liquidity provision from the Eurosystem, given the risks of bank deleveraging as a response to the economic crisis. This risk has been exacerbated in Ireland by the imposition of a higher core Tier 1 capital ratio (equity/risk weighted assets) than that required by the European Banking Authority (10.5% compared with 9%) and at the same time reducing the loan to deposit ratio from 180 to 122.5% (See Central Bank, Financial Measures Support programme, p. 7 and 12).

The crisis in Ireland is largely of our own making involving multiple failures at many institutions (public and private) and at many levels, but ECB policies have magnified the crisis. Policy at the ECB and other EU institutions can and must change to support a pro-growth strategy for Europe as a whole. This is in the interest of all countries in the EU, and in the vital long run interest of Germany. Irish Government policy should be to support the likely new Hollande administration in amending the fiscal treaty and in reforming the ECB (See “Hollande seeks wider EU fiscal pact”, Financial Times April 24, 2012).

Irish Bonds Tempt Buyers Again After Banks Blow Up: Euro Credit

Sheila Killian: There’s an interesting article on Bloomberg, by Dara Doyle and Cormac Mullen. Interesting, that is, in the Confucian sense of living in interesting times.

The initially rather bizarre gist of the article is that for potential bondholders, the banks that we have bailed out are now a far more attractive investment proposition than the Irish government which guarantees them. They are producing a higher yield, which is counterintuitive if you take the view that they have the same risk, since we are underwriting them.

Here’s a quote from the article:
“Essentially, you are getting more than twice the yield for the same amount of risk,” said Fergal O’Leary, a director at Dublin-based fixed-income firm Glas Securities. “The government bond is undoubtedly more liquid than the guaranteed bank security, but that just doesn’t justify the current scale of the yield premium.”

Indeed not. So what does? Well, perhaps the market, in its anthropomorphised all-knowingness doesn’t actually “think” they have the same risk. Perhaps it “thinks” that for some reason Irish bank bonds are riskier than Irish government bonds, despite the government’s willingness to guarantee them. Another quote, this time from a billion-pound fund manager based in the UK:

“I don’t see how they will be able to maintain that guarantee, or at least there’s a risk that they won’t, and certainly the chances of a default on the bank debt are significantly more than on the sovereigns,” Bathgate said by e- mail yesterday. “The risk return just doesn’t add up.”

So it looks as though investors don’t really believe that the government will ensure that all the bank bonds are repaid. It looks as though that might already be priced into the yields of these bank bonds. In which case, perhaps, we should look again at the unguaranteed bonds coming up later this month, and consider what’s really to be gained or lost, by paying them.

Guest post by Arthur Doohan: The burning of the bondholders

Arthur Doohan: There is something of a scramble to jump onto the bandwagon of those seeking to attend the 'burning of the bondholders'.

What could possibly have prompted the rush to this 'auto-da-fé'?

Could it be that the institutions are afraid that the recently enacted powers under which these orders hope be enforced might be struck down in the High Court challenge brought by Messrs Abadi and Aurelius, due to be heard next week?

It could be that the banks want to make sure the schemes have some chance being allowed to stand by reason of being extant before the ruling in the event of the ruling going against the State.

That would indicate a severe lack of confidence on the part of 'our learned friends' in the strength of the primary legislation with respect to other laws and precedents.

But it could just be that the market trends and ever rising bond-yields mean that they hope the bondholders are entirely ready to throw in the towel.

Either way, an awful lot is riding on next weeks hearing.

Four Truths about the Irish situation (and one possible solution)

Nat O'Connor: The Government's four-year recovery plan doesn't address the issue of the banks. Without addressing this issue, the credibility of the whole plan is undermined. Richard Douthwaite presented Four Truths about the loan negotiations with the ECB, IMF, etc. These remain valid concerns.

In a context where orthodox monetary policy is no longer available to individual eurozone member states, Douthwaite presents 'deficit easing' as a novel suggestion.

In brief:

Truth 1. If Ireland has to pay interest on the loans being negotiated at a rate which exceeds the rate at which the economy grows over the next few years, it will make the country's situation worse, not better.


Truth 2. Any grant or loan to Ireland will only buy time for the eurozone to come up with a cure for the whole sick system. Ireland should not be asked to bear more than its proportionate share of the cost of gaining this time which is for the benefit of every euro user.

Truth 3. The ECB bears a large share of the responsibility for the regulatory failure which led to the property bubble.

Truth 4. There is a Plan B. Ireland doesn't have to take anything that is offered. It can leave the euro quickly and easily.

In a separate article, Douthwaite proposes a solution in the form of 'deficit easing' (full paper). His proposal is for money to be distributed directly to member states by the ECB (through a form of quantitative easing) and used to pay down national debts and to reduce borrowing requirements for expenditure.

It is increasingly clear that the Irish crisis is a eurozone crisis. And Ireland is caught in a damning position. Either we 'go it alone' and insist on major restructuring of the bank's debts we've taken on - and do huge damage to the (mostly European) banks that lent to our banks - or else we do huge damage to the people in Ireland by taking on huge private debts in order to save - for now - other banks in the eurozone. This is a lose:lose situation, and we need to find another way.

A road to a solution is equally clear. When we pooled our sovereignty into the euro currency and ECB, we took an 'we're all in this together' approach. We need to return to the basic principle of eurozone solidarity; and indeed wider European solidarity. Ireland should push for a eurozone-wide solution that would also aid Portugal, Greece, Spain - but equally Germany and all the rest. Some form of quantitative easing (or equally 'deficit easing') could be a major part of the solution.

The logic of the deficit easing proposal is interesting, although the politics would perhaps be more difficult to manage - what would stop politicians wanting to use this approach more and more? Nevertheless, orthodox monetary policy is not available, and innovative approaches should be given serious consideration.

How much are the bank bailouts going to cost us?

Nat O'Connor: There is a lack of clarity about just how much the bank bailout will cost ordinary people. But based on recent news, the estimated costs are huge.

The Irish Independent states that "Every man, woman and child in the State will have to pay an average of €2,000 every year just to service interest payments on borrowings to pay for the bank bailout, estimated to cost €40bn."

In fairness, it's not clear that we have enough information to know that yet. If the banks raise their own capital we won't need to borrow as much. Also, if we part-recapitalise the banks out of the National Pension Reserve Fund (which is what we did before) we will borrow less again. But let's tease out the scale of what borrowing €40 billion would mean.

Unfortunately, not every man, woman and child in Ireland has an income. So will paying the bill fall on the shoulders of Ireland's 1.6 million households, rather than its 4.5 million people? The costs then comes out at roughly €5,600 per year per household. But with state pensioners and other people living on social welfare on incomes of around €12,000, are we talking about halving their incomes and plunging hundreds of thousands of people into destitution?

Alternatively, we could look at the 1.9 million people in employment, who would have to take on an average of €4,600 each (with couples, where both partners are employed, taking on €9,200).

Average earnings for someone in employment in Ireland in 2009 were around €36,300 per year (CSO). So, for example, a single person on this income, already on c. €29,500 after tax, will see their final income fall to around €24,900. (Of course those on lower incomes might pay less, and those on higher incomes might pay more... this is just the average cost applied to the average income).

The cost to those in employment is likely to be lessened by further cuts in public expenditure (social welfare cuts, cuts to pensions, cuts to public capital expenditure, cuts to public services of all kinds, etc). Except that these cuts will also reduce quality of life, health, education, and increase households' costs to fill the gap created by the absence of public services.

And this is just to pay the interest on the loans to bail out the banks.

All the above assumes that NAMA will work and we will only have to pay the interest on the loans for a period of years. If NAMA makes a loss, or further bank bailouts are required, the burden of paying for all this will increase.

If that wasn't bad enough, some people will be further affected by mortgage interest increases. The Belfast Telegraph suggests that AIB "will respond to its latest bailout by raising mortgage rates by a further 1.5% this year." That's on top of this week's 0.5 per cent increase. Assuming the other banks follow suit, that will increase pressure on tens of thousands of households.

Not every household is affected by this double squeeze, but it is hard to see how households will be able to afford to pay another couple of thousand extra per year on their mortgage repayments, alongside bearing the tax increases to pay the interest on the loans to bail out the banks.

It is possible that we could see a major wave of mortgage default and repossession, which would trigger a further crisis in the banks, and a need for further recapitalisation. Those who don't default are likely to be paying way more than they can comfortably afford to keep their homes; all to avoid the nightmare of selling their homes at a low price, while still owing the bank the balance of their original (massive) mortgage loans.

In a year or so, the State could own all or most of the banks, but the citizens who own the State will be paying increased charges to the banks as customers at the same time as paying taxes for the loans to own them. The burden of paying the interest on the loans will all but rule out any productive investment in better infrastructure, better education, etc. Most of our potential for investment will be tied up for years in paying for the mistakes made by past governments.

There is a need for much more accurate information to be made available on exactly how the Government plans on paying for the banks and at what point it would be cheaper to let some of them go bust. We need to know exactly how much households will have to pay and what will be the opportunity cost in cuts to public services and the loss of a generation's ability to invest in a better future. At present we can only speculate. But based on the figures currently in the news, it's a perverse and gloomy situation and we haven't gotten to the bottom of it yet.