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Tuesday, October 2, 2012

Ireland is a case study in why not to accept money from the Troika to bailout your banks

Recently, finance ministers from Germany, the Netherlands and Finland took the position that the European Stability Mechanism could not be used for legacy assets and the cost of bank bailouts would be left to each country.

This was a very important statement as it cutoff Ireland from the possibility of having the ESM take over 20 billion euros of debt.  Debt that was incurred specifically to bailout the Irish banks so that they could repay unsecured debt owned by banks in countries like Germany, the Netherlands and Finland.

Given this example, Spain might want to ask itself why it would want to accept funds from the Troika to bailout its banks.

A bailout that helps banks from countries like Germany, the Netherlands and Finland avoid losses while saddling the Spanish taxpayer with more debt.

The Spanish banking system is designed so that banks do not need to be recapitalized even after the banks recognize all the losses on the excess debt in the financial system.

With deposit insurance and access to central bank funding, Spain's banks can continue to operate and support the real economy while they are rebuilding their book capital levels.

As discussed in the Irish Times,
The loot may be lost forever. All the media buzz last week surrounded the feisty Roisin's dramatic resignation in Dublin. Far more cataclysmic events in Helsinki were relegated to second place.
The three most powerful finance ministers in Europe had given the thumbs-down to Ireland's hopes of a Santa Claus-type bank rescue. 
The new European Stability Mechanism (ESM) funds would not, after all, be allowed to be used to sort out those sins of bankers committed prior to the establishment of a new European banking supervisor. 
Or, as they put it so delicately, no "legacy" assets would be taken on by the new body. Thus historic problems would be left in the hands of "national authorities". 
Enda and Ireland are left holding their own banking babies. Contrary to previous hopes, Europe was not now going to charge in, a white knight on a chariot, to buy shares in AIB and Bank of Ireland at inflated prices. 
Europe doesn't do white knights. As far as the three powerful finance ministers were concerned, Ireland was done and dusted. 
There was going to be no relief for past sins. 
Ireland is a sinner from the past, doing its penance dutifully -- an example to other errant nations. Future sinners will qualify for forgiveness. The ESM will step in with funding to break the link between bank and sovereign debt for them, but not for us. 
Ireland was out on a limb, abandoned by its colleagues. The Government was exposed. It had grossly oversold the benefits of the earlier agreement in June. 
Irish ministers were ashen -faced in the Dail on Wednesday morning. The premature cries of triumph after the summit in June had vanished. 
No wonder they looked shell-shocked. Enda admitted to the Dail that he had been given no warning about the three ministers' bombshell. He was kept in the dark. 
He was reminded that he had announced a "seismic shift" in June. Now, Ireland had been humiliated. 
Kenny was careful to repeat ad nauseam the bald words of the June communique: the vicious cycle of the link between bank debt and sovereign debt would be broken. 
Equally, he reminded TDs of the June promise that Europe would "examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme".
Gone was June's rhetoric of "seismic shifts" and "game changers". Stripped of the rhetoric, the June statement suddenly looked naked. 
The Taoiseach tried to claim that nothing had changed. He was in denial. 
So too was the Department of Finance who even told the Irish Times that it "welcomed the ideas put forward by [German finance minister] Schauble and his allies". The mandarins feebly mumbled that "these ideas will feed into our discussions over the coming months".
The Taoiseach was in denial. The mandarins of Merrion Street were in denial. And their own minister, Michael Noonan, was in denial....
Taoiseach Kenny spoke loftily of his own meetings with three PRIME MINISTERS, firmly putting the three upstart finance ministers in their place. Unfortunately the three prime ministers whom Enda had met came from Greece, Italy and Spain -- three basket-case countries. The three finance ministers issuing the statement came from the three strongest, triple-A rated nations in Europe: Germany, Holland and Finland. 
No contest. Enda's pals are the bearers of begging bowls. The three finance ministers hold the purse strings. His assertion that "all European finance ministers are equal when they sit around the table" is nonsense. 
The big powers in Europe are treating us shabbily. For a short while they even cruelly allowed us to indulge the fantasy that they would pay us €20bn for equity in our pillar banks when it was worth less than €8bn. 
We will hear no more of that. 
The Government needs someone with the bottle of Roisin Shortall to stand up to our European colleagues, someone who is neither captured, nor in denial.

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