Leave the Banks go, Create a new Bank, and bail ourselves out. Possible?

z0oT

This is something I've seen trumpeted as a rather unusual solution to our whole financial mess in various places.

It goes something like this:
- Leave Our Banks go to the wall, default on all the bank debt, "Burn the Bondholders" etc. , which I'm aware isn't without problems in itself.
- Now, create a new wholly government owned and controlled bank, free of course of the massive bad debts that our current banks are so endowed with, and move the deposits, and any performing loans over to said bank.
- Further capitalize it with the likes of the money that was thrown down effective black holes that are Anglo et al.
- Now, depending on the reserve ratio, that'll allow this newly created bank to loan us essentially what the EU/IMF bailout is at a near zero rate of interest. If say for example the required reserve ratio was 10:1 it'd allow this new bank to issue up to €100bn in loans for €10bn on deposit.
- Using such a loan the government could effectively bail itself out.

Leaving out the fact that this bank would of course have to replace our current banks, ie. loan money to your average joe-soap and not just the government. I'm curious as to the viability of such a proposed solution, it seems somewhat preposterous that the Irish government could effectively bail itself out in such a manner. It also strikes me as something that would have been attempted before if it was the be-all and end-all that it was portrayed to be. Of course as it stands now, such a scenario would involve essentially telling the IMF and EU to get stuffed which wouldn't exactly be an optimal solution either.

Obviously such a solution is not without problems leaving out such concerns as I've previously mentioned, but would such a course of action be possible, or would it have been in the past? Say, going down such a road instead of the blank cheque government guarantee?

Sand

No.

z0oT

Sand wrote: »

No.

Could I possibly trouble you to elaborate on that?

As I've said I'm under the impression that such a scenario would indeed be preposterous, I'm curious as to why.

Liam Byrne

It may - and should have been - possible before the current disastrous path was chosen by FF, however a u-turn like that now would probably completely destroy any remaining credibility that Ireland has.

The only mitigating factor would be a substantial vote against FF in the next election, possibly showing the EU that the Irish people wanted no hand, act or part in that ridiculous decision, and possibly giving the new government some leeway, since it wouldn't be their u-turn.

That's a very risky "possibly" though; particularly since the bond-holders (who unfortunately hold the power, and given the economic mismanagement and requirement for day-to-day loans, hold too much power) aren't prepared to take the hit on acknowledging their high-gain, risky loans backfired and would probably seek "revenge", again hitting the Irish people instead of those who willingly tried the same gamble.

Unfortunately the state's finances are too bad for us to not need money, and the only possibility for the above to have any real chance is if there is EU-wide agreement on how to handle the gamblers, which there isn't because the vested interests in Germany & elsewhere have too much of a say.

RichardAnd

Liam Byrne wrote: »

It may - and should have been - possible before the current disastrous path was chosen by FF, however a u-turn like that now would probably completely destroy any remaining credibility that Ireland has.

The only mitigating factor would be a substantial vote against FF in the next election, possibly showing the EU that the Irish people wanted no hand, act or part in that ridiculous decision, and possibly giving the new government some leeway, since it wouldn't be their u-turn.

That's a very risky "possibly" though; particularly since the bond-holders (who unfortunately hold the power, and given the economic mismanagement and requirement for day-to-day loans, hold too much power) aren't prepared to take the hit on acknowledging their high-gain, risky loans backfired and would probably seek "revenge", again hitting the Irish people instead of those who willingly tried the same gamble.

Unfortunately the state's finances are too bad for us to not need money, and the only possibility for the above to have any real chance is if there is EU-wide agreement on how to handle the gamblers, which there isn't because the vested interests in Germany & elsewhere have too much of a say.

I'd agree with the broad thrush of what Liam is saying here. There was a time when this would have been an option but it was back at the start of this crisis. Sadly, we've poured too much money into places like Anglo to realistically turn around now.

later12

Liam Byrne wrote: »

the bond-holders (who unfortunately hold the power, and given the economic mismanagement and requirement for day-to-day loans, hold too much power)

What on Earth do bond holders have to do with economic mismanagement and requirements for day to day loans? Bond holders, i.e. investors in wealth funds, are far removed from bank policy. It would be very unusual for a bond holding investor group to have ever, as a group or as individuals, spoken to anyone remotely responsible for Irish banking polcies. Funds generally arose from foreign groups of faceless strangers, managed by wealth managers in Germany or Belgium or the United States who decided what to invest and where and when. This whole demonisation of bond holders would be laughable if it were not so blatantly dumb.

aren't prepared to take the hit on acknowledging their high-gain, risky loans backfired and would probably seek "revenge",

What, exactly, is high risk or high gain about being a senior bondholder??? That is a contradiction in itself.

amen

Even if you could do the above that still wouldn't solve our 18Billion a year defeict a year in public spending i.e PS wages. I know this is reducing but we would still need to find money to fund it.

Fitzerb

Ride the storm for five years and it will be easier to default. I don’t know much about banking but I have a view that a lot of Banks across Europe will go through what we went through and they cant all safeguard the bond holders.

z0oT

amen wrote: »

Even if you could do the above that still wouldn't solve our 18Billion a year defeict a year in public spending i.e PS wages. I know this is reducing but we would still need to find money to fund it.

Well it would, in essence still only be a short term solution, it's still piling a large amount of debt on top of more debt. Nonetheless on the surface of things it may have been a better way of doing things rather than having to pander to the IMF and EU, the latter of course, who are set to make a nice profit on our bailout.

ei.sdraob

Shifting chairs about and hope no one notices?

Increasing the amount of credit this plan above calls for thinking that the issue in the system is lack of credit, how is this different from increasing money supply thru printing and hoping that this pushes the banks to lend more?

anyways the problem with Irish economy is not lack of credit (we were sold another lie there by FF) but lack of confidence, there is huge amounts of money out there, its just investors have moved on to far east to invest...
also we are left burdened with much debt secured on overvalued assets hence no one is willing to lend since this good money might endup going after bad

but anyways the problem is lack of confidence in the system, the government needs to go and the banks needed to go 2 years ago but yeh failure is not an option :rolleyes: tho slow painful suffocation of the economy is.

kenrr

z0oT wrote: »

........
- Leave Our Banks go to the wall, default on all the bank debt, "Burn the Bondholders" etc. , which I'm aware isn't without problems in itself.
- Now, create a new wholly government owned and controlled bank, free of course of the massive bad debts that our current banks are so endowed with, and move the deposits, and any performing loans over to said bank.
...........

As far as I'm aware that's not legally possible. Under current law the only option would be to put the relevant insolvent banks into liquidation. Depositors and senior bondholders are, in general, treated equally when the liquidated assets of the bank are distributed to the creditors i.e. both the senior bondholders and depositors would be burned. Because the total amount of deposits is usually more than the total amount of senior bonds, then the total amount burned from the depositors would be quite high. Govt could, of course, leave the bondholders to suffer their loss but make the depositors whole. Therefore it's not possible to make the bondholders suffer for all the bad debts and Govt would have to find the very large sums of money from somewhere to reimburse depositors.

Alternatively there's the Iceland solution. As I understand it, Iceland was in a similar legal position as Ireland in that senior bondholders are generally treated equally to depositors in the liquidation process. However Iceland introduced retrospective legislation and made decisions that paid out domestic depositors ahead of senior bondholders and paid foreign depositors nothing i.e. domestic depositors got 100% from the liquidated assets (therefore no cost to Govt); senior bondholders got whatever was left, perhaps burned 70% or so; foreign depositors got zero. However pressure was put on Iceland and foreign depositors will be paid from loans from the UK and the Netherlands for the next 30 years. About 100 institutions representing senior bondholders have got together and are taking legal action against Iceland saying that the retrospective legislation is illegal and they should have been treated equal to depositors. My guess is that Iceland will finish up paying the senior bondholders what they were entitled to under the previous legal situation.

Therefore there's no easy way out. I have no political viewpoint on this, however I tend to think that, pragmatically, the route that's been followed so far, painful as it may be, is probably going to be the least worst option for the average citizen.

RichardAnd

kenrr wrote: »

Therefore there's no easy way out. I have no political viewpoint on this, however I tend to think that, pragmatically, the route that's been followed so far, painful as it may be, is probably going to be the least worst option for the average citizen.

I often wonder about that myself. I wholly reject that there was/is any easy way out of this mess but if there was an EASIER way, well we shall never know .

CDfm

The essential flaw in the plan is that the Bondholders are other european banks where we are the bondholders.

Bondholders include pension funds and pensioners.

If it were to happen essentially we would also probably cut the foreign private depositors loose too.

So if the foreign banks were to do the same to us it would have a knock on effect.

CDfm

kenrr wrote: »

About 100 institutions representing senior bondholders have got together and are taking legal action against Iceland saying that the retrospective legislation is illegal and they should have been treated equal to depositors. My guess is that Iceland will finish up paying the senior bondholders what they were entitled to under the previous legal situation.

The other issue is that Iceland has a population of c 300,000 and its economy is more dependent on basic traditional industries.

So it is not compaing like with like.