Irish Bailout

Fiachra2

This may be a very naieve question but how does the Irish Goventnment actually finance this bailout of €400B if it is called to do so?

Lets assume a scenario where depositors continue to withdraw cash and share prices keep falling so all or most of the banks are facing collapse. Presumably the government would have to raise the funds by way of a masive bond issue but, as the sum invoved could by a multiple of our GNP, then is there not a risk that no one would buy the bonds?

TheBazman

I suppose the more guarantees the govt give the less likely it will be that they will ever have to stump up any of this 400bn. The more guarantess, the less likely people will remove their deposits, the more likely that the banks will self generate new deposits, the less likely the failure.

Hypothetically if there was a bank failure - there are also a chunk of assets that will offset this 400bn of liabilities.

If the govt had to go and raise cash the standard way would be to issue more debt through govt bonds. As you suggest it is unlikely that the market would be able to digest this. In this cash you are saying there would be a problem with Ireland - this would put the whole European project at risk. I would imagine that Europe would not allow this to happen and you would see Germany, France etc increasing their debt issuance to help out Ireland.

Again this is not going to happen - If there was a problem with a bank despite this guarantee, the govt would most likely force a merger. This is why the minister will have power to do this bypassing the competition authority

ranger4

TheBazman wrote: »

I suppose the more guarantees the govt give the less likely it will be that they will ever have to stump up any of this 400bn. The more guarantess, the less likely people will remove their deposits, the more likely that the banks will self generate new deposits, the less likely the failure.

Hypothetically if there was a bank failure - there are also a chunk of assets that will offset this 400bn of liabilities.

If the govt had to go and raise cash the standard way would be to issue more debt through govt bonds. As you suggest it is unlikely that the market would be able to digest this. In this cash you are saying there would be a problem with Ireland - this would put the whole European project at risk. I would imagine that Europe would not allow this to happen and you would see Germany, France etc increasing their debt issuance to help out Ireland.

Again this is not going to happen - If there was a problem with a bank despite this guarantee, the govt would most likely force a merger. This is why the minister will have power to do this bypassing the competition authority

What would happen to the shareholders with banks if a merger with the banks was on the cards.

TheBazman

you would now have the shares of the new entity instead

cabinteelytom

I am so disappointed that the Irish taxpayer will shortly become responsible for not only the deposits, but also the debts (that's awesome), of Ireland's six largest financial institutions. The problem with being a guarantor,is that one day the call may be made- as 'names' at Lloyds discovered some years ago.
We will shortly be paying extra taxes to dig out the recklessly debt-laden.
In ten years time today's over-stretched buy-to-leters, and the 110% self-certifying mortgagees, will be lording it over me about how clever they were back in 2008; when their joint debt was so huge it became the 'national debt'.

The Kingdom County

The bailout is not a bailout, it is a loan at interest rates that are lower than the government can get on the market. It is not a bailout, it is debt. The government are picking up the losses from the banks, and instead of letting the people who lent money to the banks (greman banks, french banks, english banks etc) wear the losses, they are being forced onto the irish taxpayer by means of debt (so called bailout)
I want the political parties to walk away from the bailout and let the banks go belly up like was done in Iceland. If the euro cronies want to bail out the banking system, then let them, but keep your dirty hands off the irish taxpayer

soddy1979

Depositors also lend money to banks. You are also accepting risk when you go and lodge your salary into your bank account. Do you think depositors should take a haircut? There is 185bn private sector Euro's on deposit from Irish residents in Irish banks.

Walk away from the bailout, walk away from the Euro, see what your punt nua is worth. It's not going to stay at .787564.

I'm all about getting the best deal possible for Ireland, but everyone is spouting on about how we got a sh!tty deal and the country is fucced with this bailout. There is very little substance with this though - if you want to walk away from the deal, tell us what you would do instead.

You are right, it is debt, and debt doesn't disappear even if you walk away from it.

You'll end up doing this to your currency, which is the same as taking your 1000 euro's in the bank, but then you realise you only have 555 euro's in the bank.

sg2011022339948.GIF

The Kingdom County

true indeed, i recommended all my family to take their money out of deposit months ago. I dont believe depositors should risk losing their money because that is not what was signed up for when they made deposits. It is known as a risk free rate of return, they have seniority in the event of any liquidation, they have some legal protections. Without this legal protection, banks would never have been formed in the first place.
Re the question of what to do, look at Iceland. The Gvt wanted to bail out their banks but they held a referendum first, 97% said so, so they didn't and the banks defaulted on their debt. Iceland suffered a lot for all of this, but recent figures show they are recovering strongly. The current bailout may serve only to transfer the debts of the foreign banks onto the hands of the Irish taxpayer. I dont think that is right.
Finally, I think the bailout could come as a true bailout, with zero interest rate. All the pollies need to do is walk away. It is a game of brinkmanship and what they need to realise is that the bailout is not to save Ireland, it is to save the big european banks and the system at large. I bet the offer gets sweetened all the way to 0%, and if it isn't, the road Iceland took remains a better road. Default, and then consider bringing back the Punt.

soddy1979

There is no such thing as a risk free rate of return. Even if we were not in the Euro and our deposits were default risk free, there would still be inflation risk.

Also, I'm pretty sure that senior bond holders are afforded the same protection under law as deposit holders.

There is definitely moral hazard here with the way we treat the senior bond holders, but removing the implicit/explicit guarantees that both creditors & depositors have just serves to push up the interest rate. The money for these bailouts isn't just printed. You can't reduce the interest rate these bonds will be sold at, but you could look at reducing the spread that Ireland pays above this yield, which comes through negotiation with Europe. The IMF part is non-negotiable as far as I know.

So a zero interest rate is out of the question, unless you print money. And if you print money you are increasing inflation risk. You can think what you want about an Icelandic recovery, but the reality is that for such a small economy, that needs to import so much, there currency is still only worth 55% of what it was a few years ago.

The Kingdom County

lol, all the money is being printed. The IMF is funded primarily by US, the Irish central bank lent 50 odd billion to banks through a special credit facility, the ECB is buying sovereign bonds, the British are have increased M1 enormously through their own bailouts. Whether it is electronic or physical, the increase in M1 is outta control and the inflationary forces are evident in primary markets.
The only bond holders offered protection are covered bond holders, and that is not through legislative controls. You are right, protecting senior bond holders is creating the biggest moral hazard we have ever seen. Only god knows what will come next.
I say, let the banks default, stop the bailouts, do not create moral hazard and do not provide excessive liquidity to markets through QE and stimulus. HOWEVER, if there must be a bailout, the terms must be excellent, or else it is not worth it.
no matter what the debate, i do not support the debts of european banks being transferred onto the irish tax payers. The political parties need to do more to protect the people they represent.

soddy1979

OK, so lets say the next Government takes on your proposal and lets the banks default. We give back any money we received from the EFSF (which is also issuing bonds by the way) & IMF.

What happens then?

MASTER...of the bra

The Kingdom County wrote: »

true indeed, i recommended all my family to take their money out of deposit months ago.

What was your recommendation?

There has been a few threads on this topic ranging from Rabo --> flying to switzerland --> Northern Ireland Bank. What's yours?

The Kingdom County

Well, the first step is to recognise the "bailout" for what it is, and declare the intention to walk away unless the terms go to 0% interest.

Whilst I believe that the bailout will still be forthcoming, if it is not, then the series of events that will follow are as follows

1) European wide banking collapse will follow, unless the banks are bailed out (literally at zero or near zero rates as has happened in the past, either from sovereigns, ECB or Fed)
2) I hope that the Irish Government can get off the hook for their silly move of moving to accept the banks bad debts .. that is, reverse the decision as much as possible.
3) So, Banks default, and if necessary, Irish Government default on debts. That is to say, dont pay, or pay only a fraction of the debt (re-structuring - it has happened the world over many hundreds of times)
4) Leave the Euro and re-establish the Punt.

Whether the government can transfer debts back to banks & then let banks default is a difficult question. I cannot answer that, but chances are they could go some of the way. Regardless, either the banks only, or the banks and the government will need to default. The Punt should be brought back in giving monetary policy control back to the government, and the subsequent devaluation allows us to get back to competitive position.

These actions all come with high cost, but at least they re-establish the economy on a sound footing. The current path comes with a higher cost, and it does not put us on a sound footing.

We cannot grow our way out of this with a strong currency, the implicit devaluations used by excessive indebtedness & debt default situations in the past have all been resolved through control of monetary policy. Right now we are trapped, and with a strong German economy, and growing inflationary pressure, the outlook for interest rates is up, thus increasing debt servicing and strengthening the euro, both making things even harder for Ireland.

I promise we will end up in the same place anyway, but whether we assume the European banks debts onto the Irish tax payer is one of the only things we can control. I say NO.