Anglo caused global financial crisis?

hoorsmelt

According to this pair anyway :eek:

THE decision by Brian Cowen and Brian Lenihan to nationalise Anglo Irish Bank was the trigger for the global financial crisis, two well-respected International Monetary Fund (IMF) economists said in a report.

A study of data such as bond yields suggests that it was the decision to take the insolvent bank into state control four months after the collapse of Lehman Brothers that turned the world's financial problems into a full-blown crisis, claim Ashoka Mody and Sandri Damiano.

Mody, IIRC, was one of the Troika officials that 'negotiated' the 'bailout' last year. Full article linked. Personally I think this is way overblown, the European banks would have gone under with or without Anglo being nationalised once Lehmans went to the wall.
http://www.independent.ie/business/european/decision-to-nationalise-anglo-irish-triggered-euro-crisis-2944555.html

later12

"The relevance of Anglo is, at first, not obvious, since it was a small bank in a relatively small country," the two IMF researchers say. "However, the data quite robustly suggests a break at this point."

I don't know where or when the researchers said this exactly. Although they do basically take the opinion that Anglo finished what Bear Stearns has started, they certainly did not make the above quote in the IMF report.

I think that should at least have been clarified by the journalist in question, and he should have informed his readers where the authors said this.

The paper itself is available here.
http://www.imf.org/external/pubs/ft/wp/2011/wp11269.pdf

Although spreads declined initially after the nationalization of Anglo Irish, the subsequent march upwards was spectacular, as was the country differentiation.

What the authors neglect to mention here is that the 'subsequent march upwards' did not occur until Autumn following the January nationalisation of Anglo.

I would also take issue with some of the econometric analytics employed by the authors, whereby they firstly do not model risk aversion, and secondly make little attempt to convince the reader of the Anglo Irish nationalisation's causal effect on sovereign risk premia, apart from some token exercise in a really less than assuring test in this instance called Granger causality. They also fail to explain, as far as I can see, the limitations of what they do with Granger.

Furthermore, while the authors talk extensively of how financial equities can strangle growth forecasts, they fail to give adequate attention to how the low growth forecasts following on from Lehmans (or at least, around that time) weighed on financial equities and sovereign paper held by the banks!

It's a chicken and egg situation, and the authors of this paper seem to have taken a rather assured position on the matter without ever having satisfactorily explained their case.

From my own memory of the history of the European debt crisis to date, I think the possibility that Anglo's nationalisation had a serious effect on financial equities and sovereign risk premia is remote.

However, human memory does not reflect adequately on financial data with the clarity that can be enjoyed by econometric analysis. It is unfortunate that in this case, the authors have failed to provide any such clarity if which we can be sure.

This paper is more interesting for what it neglects to mention rather than for anything of value in assessing the importance of Anglo Irish's nationalisation on a global scale.

Sponge Bob

Anglo was the first bank failure that severely impacted sovereign ratings. The first Dexia failure in Belgium ( Dexia collapsed again post balout inn 2011) and that of WestLB in Germany and indeed Bank of Scotland in the UK were hidden shortly before but Anglo could not be hidden as easily.

http://www.bbc.co.uk/news/business-11701336

later12

Except it's difficult to ignore the fact that sovereign spreads fell when investors responded positively to sovereign debt issues in the aftermath of Anglo's nationalisation...

Of course the initial movement from equities into bonds, and falling yields, wasn't exactly because of Anglo's nationalisation. That's quite the point. We don't really know the extent of the relationship. This paper doesn't realistically make us any the wiser.