How likely was the threat of ATM disruption during 2008 crisis?

KingBrian2

In September 2008 when the banks where experiencing problems how likely was the possibility of bank shutdowns or Exchequer collapsing or was it all spin no substance.

Dohnjoe

There was a very real threat of a run on banks, which is why the government stepped in to guarantee deposits. There was a run on Northern Trust in the UK, the first in 150 years

On a global scale, the fourth largest investment bank imploded, almost every other major bank was affected. Without government intervention and TARP, anything unthinkable a year before was plausible - it was that bad

Bank of Greece is now facing the same issues, several billion in the last weeks been hurriedly withdrawn, and it is facing severe cash (liquidity) problems. Going to get much worse if they fail to agree and repay in 2 weeks.

KingBrian2

KingBrian2 wrote: »

In September 2008 when the banks where experiencing problems how likely was the possibility of bank shutdowns or Exchequer collapsing or was it all spin no substance.

Well the Bank Guarantee happened on a Tuesday, and IL&P was due to run out of cash on Thursday.

In reality, though, cross-border Eurozone liquidity flows including ELA would have prevented ATMs from drying up.

Neither the ECB nor the political institutions would have tolerated images of empty ATMs being beamed across the Eurozone. Someone was always going to intervene before it got to that stage.

My guess is that, if the Irish Government had not acted, the ECB would have applied pressure (soft coercion) on Ireland and external political institutions to intervene under threat of removing liquidity.

Sam Russell

I would like to know why the Irish Government did not declare three days of Bank Holidays to give them time to sort out the mess, and get the ECB to extend enough emergency credit to see us through. Making such important decisions through the night can end up in disaster.

The British Government did this (I think in 1987) during one of their many sterling crises.

Very Bored

As a History graduate and someone who studied the 1920s - 1930s crisis in detail, the similarities between today and then are too similar to not warrant concern. Greece, lets be honest about this, is on its arse. That generally would be a problem, but not an overwhelming one. The problem is, they make part of the Euro zone. I think a run on Euro was very unlikely eight years ago. OK, there was a crash, but in the grand scheme of things, it wasn't that huge an issue. What the EU is facing now, the EU imploding after Greece leaves and gives the message that debt repayment doesn't matter, and the Brits leave giving the message that the EU is dismantable is huge. I won't be popular by saying this, because in Ireland the mood is very much pro-EU, but when you really look into what the EU is and what it TRULY stands for, it is clear it has moved far, very far, from its original goals.

KingBrian2

Very Bored wrote: »

As a History graduate and someone who studied the 1920s - 1930s crisis in detail, the similarities between today and then are too similar to not warrant concern. Greece, lets be honest about this, is on its arse. That generally would be a problem, but not an overwhelming one. The problem is, they make part of the Euro zone. I think a run on Euro was very unlikely eight years ago. OK, there was a crash, but in the grand scheme of things, it wasn't that huge an issue. What the EU is facing now, the EU imploding after Greece leaves and gives the message that debt repayment doesn't matter, and the Brits leave giving the message that the EU is dismantable is huge. I won't be popular by saying this, because in Ireland the mood is very much pro-EU, but when you really look into what the EU is and what it TRULY stands for, it is clear it has moved far, very far, from its original goals.

Europe still has much to offer a breath of fresh air in a world of grotesqueness. The Brits have a possible Scottish exit to contend to while the Greeks have to pay their employees either way whereas over in the Muslim world old scores are still be settled while America has its own problems so you beyond the borders of Europe and you see we might be in a very bad place but we have a lot going for us. The world still wants to come to Europe.

porsche959

Dohnjoe wrote: »

There was a very real threat of a run on banks, which is why the government stepped in to guarantee deposits. There was a run on Northern Trust in the UK, the first in 150 year

Lol. A threat? There was in fact a bank run in September 2008. The guarantee stemmed the outflow temporarily and some funds came back in but in 2010 bank run started off again as Irish bond yields rose to unsustainable levels.

So there were two separate spates of bank runs.

Very Bored

KingBrian2 wrote: »

Europe still has much to offer a breath of fresh air in a world of grotesqueness. The Brits have a possible Scottish exit to contend to while the Greeks have to pay their employees either way whereas over in the Muslim world old scores are still be settled while America has its own problems so you beyond the borders of Europe and you see we might be in a very bad place but we have a lot going for us. The world still wants to come to Europe.

I think that's a very closed view to be honest. Europe is a big problem at the moment, huge in fact. The myth that we have had peace for so long it an absolute fallacy. People love to say Europe is peaceful. And its true, amongst the big players, but Europe hasn't been peaceful ever. We haven't, arguably, ever seen peace in Europe. That we, fortunately. see peace now in our part of Europe is a fortunate thing. Even in the Irish memory, peace is barely twenty years old. I'd say its a thing the general Irish population hate to hear we Irish correponded with conflict though.

Very Bored

Sorry, that last comment made no sense in parts, but we aren't any saints on conflict here in Ireland either. And you can call me old fashioned but I think history is repeating itself with Greece. I hope I am seriously wrong but I think Greece in fifty years time will be seen as the spark in a similar fashion to Ferdinand (personally I think, and I have thought for at least the last few years that Europe is repeating the errors of the past and is heading, unfortunately, for war, I vehemently hope not but I think it is).

expectationlost

KingBrian2 wrote: »

In September 2008 when the banks where experiencing problems how likely was the possibility of bank shutdowns or Exchequer collapsing or was it all spin no substance.

which banks?

K-9

Very Bored wrote: »

As a History graduate and someone who studied the 1920s - 1930s crisis in detail, the similarities between today and then are too similar to not warrant concern. Greece, lets be honest about this, is on its arse. That generally would be a problem, but not an overwhelming one. The problem is, they make part of the Euro zone. I think a run on Euro was very unlikely eight years ago. OK, there was a crash, but in the grand scheme of things, it wasn't that huge an issue. What the EU is facing now, the EU imploding after Greece leaves and gives the message that debt repayment doesn't matter, and the Brits leave giving the message that the EU is dismantable is huge. I won't be popular by saying this, because in Ireland the mood is very much pro-EU, but when you really look into what the EU is and what it TRULY stands for, it is clear it has moved far, very far, from its original goals.

Good points, though as pointed out Britain is a special case and might break up itself over the next decade. Even Greece doesn't seem to want to leave the Euro, so for all its drawbacks the member states seen to want to make it work. Indeed it could be argued both leaving would leave it more unified in the long term.

As for the op, I suppose emergency measures like Iceland did could have been introduced, but considering how dependent we are on multinationals, to be avoided if possible.

clear thinking

The real bailout we got was €130bn +- in bank liquidity. Without accepting the €65bn capital bailout the ECB €130bn liquidity would not have been there and what is happening in greece (ATM limits, bank holidays) would have happened.

8 years later, that €65bn will be down to €35bn when bank and AIB are sold off so the bailout worked out at a yield of about 4% of the liquidity bailout.

clear thinking

clear thinking wrote: »

Without accepting the €65bn capital bailout the ECB €130bn liquidity would not have been there

Current events in Greece give the lie to that, somewhat.

The country has no extant bailout programme, has had its IMF funds severed, yet the ECB, Atlas-like, continues to carry the Greek financial system on its shoulders.

IN reality, it is unlikely that the ECB could cut off any Eurozone member. It would be an unthinkably political act, undermine financial stability, and in fact the ECB's own rulebook gives it significant basis for not to doing so. There are no radicals in the ECB.

clear thinking

A Tyrant Named Miltiades! wrote: »

Current events in Greece give the lie to that, somewhat.

The country has no extant bailout programme, has had its IMF funds severed, yet the ECB, Atlas-like, continues to carry the Greek financial system on its shoulders.

IN reality, it is unlikely that the ECB could cut off any Eurozone member. It would be an unthinkably political act, undermine financial stability, and in fact the ECB's own rulebook gives it significant basis for not to doing so. There are no radicals in the ECB.

This is a good explanation of where things are at. €90 euro cash per person left, food and medicine shortages as retailers cant pay suppliers. Unless ecb is back funding on Monday a new currency is inevitable.

http://www.theguardian.com/world/2015/jul/03/greece-economy-collapse-close-food-medicine-shortage

nice_guy80

clear thinking wrote: »

This is a good explanation of where things are at. €90 euro cash per person left, food and medicine shortages as retailers cant pay suppliers. Unless ecb is back funding on Monday a new currency is inevitable.

http://www.theguardian.com/world/2015/jul/03/greece-economy-collapse-close-food-medicine-shortage

The Greeks should have pulled the plug 5 years ago

Their economy couldn't sustain the huge debt levels.

they are spending like a first world economy with a second rate tax system

clear thinking

clear thinking wrote: »

This is a good explanation of where things are at. €90 euro cash per person left, food and medicine shortages as retailers cant pay suppliers. Unless ecb is back funding on Monday a new currency is inevitable.

http://www.theguardian.com/world/2015/jul/03/greece-economy-collapse-close-food-medicine-shortage

Yeah that has nothing to do with my post.

You said that Ireland could not have received ELA without the sovereign bailout.

But that is not supported by what is happening in Greece, where the bailout is expired but ELA has not been withdrawn. And it doesn't take account of the fact that the Irish banking system was being propped up by ELA long before the Irish bailout at the sovereign level.

Although the ECB has capped its Greek ELA facility at 90 billion euro, unless Greek banks can provide further collateral. Crucially, and to its credit, the ECB has not withdrawn ELA.

I think the ECB is unlikely to withdraw it, even though it's difficult to see how they can possibly increase it, since the discount value of the Greek banks' collateral probably needs to be revised upwards after the collapse of negotiations and the referendum result.

clear thinking

A Tyrant Named Miltiades! wrote: »

Yeah that has nothing to do with my post.

You said that Ireland could not have received ELA without the sovereign bailout.

But that is not supported by what is happening in Greece, where the bailout is expired but ELA has not been withdrawn. And it doesn't take account of the fact that the Irish banking system was being propped up by ELA long before the Irish bailout at the sovereign level.

Although the ECB has capped its Greek ELA facility at 90 billion euro, unless Greek banks can provide further collateral. Crucially, and to its credit, the ECB has not withdrawn ELA.

I think the ECB is unlikely to withdraw it, even though it's difficult to see how they can possibly increase it, since the discount value of the Greek banks' collateral probably needs to be revised upwards after the collapse of negotiations and the referendum result.

I'm saying that Ireland would have had new ELA cut off without accepting the sovereign bailout. It had already been cut off in the run up but the Irish central bank had a few billion it was able to lend before Honohan went on the radio, and it broke EU rules to do this.

You'll also notice today that the ECB has increased the haircut on the ELA collateral - a defacto cut on new ELA.

You are spot on about the €90bn, but the critical thing will now be new ELA and a haircut means Greek banks may have to repay some of that existing borrowing.

Effectively this is the EU politicians abdicating responsibility to the ECB to put pressure onto the Greeks to come to the table.

What's happening in greece now, as you said originally about Ireland, is probably just how it would have panned out in Ireland too.

clear thinking

clear thinking wrote: »

I'm saying that Ireland would have had new ELA cut off without accepting the sovereign bailout.

And I'm saying that this is incorrect. Greece hasn't accepted a bailout, it has no cash reserves, is probably back in deficit, and it still has ELA.

In reality, it is almost unthinkable that the ECB could commit such a political act as to essentially evict a sovereign Eurozone member. It would only withdraw ELA after consulting political leaders, i.e. with some sort of approval from the European Council. If it were otherwise, Greece would already have had its ELA cut off last week, or yesterday at the latest.

You'll also notice today that the ECB has increased the haircut on the ELA collateral - a defacto cut on new ELA.

I explained in the Greek thread on the main forum why that's not as big a deal as it looks.

What's happening in greece now, as you said originally about Ireland, is probably just how it would have panned out in Ireland too.

No, Ireland had about five months of reserves in the tank when it was reportedly 'bounced' into a bailout that, at the time, was quite disastrous.

Hindsight is a wonderful thing but we can today look at Greece and conclude with a high degree of probability that No, Ireland wouldn't have had its ELA withdrawn, particularly given its reserves and its 4-year plan.

KingBrian2

A Tyrant Named Miltiades! wrote: »

And I'm saying that this is incorrect. Greece hasn't accepted a bailout, it has no cash reserves, is probably back in deficit, and it still has ELA.

In reality, it is almost unthinkable that the ECB could commit such a political act as to essentially evict a sovereign Eurozone member. It would only withdraw ELA after consulting political leaders, i.e. with some sort of approval from the European Council. If it were otherwise, Greece would already have had its ELA cut off last week, or yesterday at the latest.

I explained in the Greek thread on the main forum why that's not as big a deal as it looks.

No, Ireland had about five months of reserves in the tank when it was reportedly 'bounced' into a bailout that, at the time, was quite disastrous.

Hindsight is a wonderful thing but we can today look at Greece and conclude with a high degree of probability that No, Ireland wouldn't have had its ELA withdrawn, particularly given its reserves and its 4-year plan.

Greece was facing a situation during the referendum whereby it had to chose between a debt spiral or economic collapse. A very bad state of affairs and it still is required to help itself by paying what is due to the European Commission and the other 18 member states.

marmurr1916

A Tyrant Named Miltiades! wrote: »

Current events in Greece give the lie to that, somewhat.

The country has no extant bailout programme, has had its IMF funds severed, yet the ECB, Atlas-like, continues to carry the Greek financial system on its shoulders.

IN reality, it is unlikely that the ECB could cut off any Eurozone member. It would be an unthinkably political act, undermine financial stability, and in fact the ECB's own rulebook gives it significant basis for not to doing so. There are no radicals in the ECB.

So why have several members of the ECB's Governing Council confirmed that the ECB will end ELA to Greek banks on Monday if there's no deal on a third bailout for Greece by Sunday?

And why has the ECB refused to increase ELA from €89 billion since 26th June?

I'm afraid your post contains very little that accords with the facts of what has actually happened over the past two weeks.

clear thinking

A Tyrant Named Miltiades! wrote: »

And I'm saying that this is incorrect. Greece hasn't accepted a bailout, it has no cash reserves, is probably back in deficit, and it still has ELA.

Cowen said on the Dail record that this was the case (yesterday). It was also common knowledge that this threat was there and has repeatedly been commented on.

Greece has now been explicitly and officially given this threat - no more ELA after Sunday (if not before). No doubt the tactics are identical and the Greek Sunday deadline is no different to the bailout ultimatum we got, and caved in to.

clear thinking

A Tyrant Named Miltiades! wrote: »

No, Ireland had about five months of reserves in the tank when it was reportedly 'bounced' into a bailout that, at the time, was quite disastrous.

You clearly haven't a breeze.

The government did indeed have 5 months. The banks had NIL.

All the banks were highly dependent on weekly rollover. The cash call that forced the guarantee was a measly €0.5bn bond that could not be refinanced. The guarantee allowed the ecb to accept de facto government collateral from the banks.

The government did not have €150bn lying around as you suggest.

clear thinking

A Tyrant Named Miltiades! wrote: »

I explained in the Greek thread on the main forum why that's not as big a deal as it looks.

Please post a link or quote.

In simple term, the ECB have reduced the greeks banks overdraft. If you rely on the overdraft and it is cut by 5-10% you'd know all about it, so it is a big deal.

clear thinking

clear thinking wrote: »

A Tyrant Named Miltiades! wrote:

clear thinking wrote: »

I'm saying that Ireland would have had new ELA cut off without accepting the sovereign bailout.

And I'm saying that this is incorrect. Greece hasn't accepted a bailout, it has no cash reserves, is probably back in deficit, and it still has ELA.

Cowen said on the Dail record that this was the case (yesterday). It was also common knowledge that this threat was there

Ah ... so now you've retreated from claiming that something would have happened to saying that there was "a threat".

We all know there was a threat. Prior to the expiry of the Greek programme there was a similar threat, but it has not materialised despite the fact that there is no programme.

You clearly haven't a breeze.

The government did indeed have 5 months. The banks had NIL.

All the banks were highly dependent on weekly rollover. The cash call that forced the guarantee was a measly €0.5bn bond that could not be refinanced. The guarantee allowed the ecb to accept de facto government collateral from the banks.

You're confusing the Bailout with the State's guarantee of the main Irish banks on 30 September 2008. There's a gap of about 800 days between the two events.

Before you accuse me of not having a breeze, maybe you should explain why you're conflating the 2010 bailout with the 2008 Guarantee.

Please post a link or quote.

In simple term, the ECB have reduced the greeks banks overdraft. If you rely on the overdraft and it is cut by 5-10% you'd know all about it, so it is a big deal.

I'm no more willing to do a search for my explanation than you evidently are. I'm not here to fetch previous posts. However, I will simplify it.

The additional discount applied to Greek collateral held by the ECB is not synonymous with a reduction in its overdraft, since it in no way affects the outstanding obligations of the Greek financial system to the European Central Bank--it does not increase the banks' obligation, it does not reduce their obligation, and it does not affect deposits. That's because the additional discount rate is wholly absorbed by the liquidity buffer which the Greek banks have deposited with the Central Bank of Greece.

In short, the increased discount rate is purely symbolic.

K-9

clear thinking wrote: »

You clearly haven't a breeze.

There's no need for stuff like this. Make your point without getting personal. Thanks.

clear thinking

K-9 wrote: »

There's no need for stuff like this. Make your point without getting personal. Thanks.

Grand.

1. Ah ... so now you've retreated from claiming that something would have happened to saying that there was "a threat".

Categorically No. At the time the CBI had advanced c. 50bn liquidty on collateral that the ECB would not accept. The ECB pulled the plug on this (it was illegal). The bailout of 65bn into the banks effectively re-fi'd this CBI liquidity. The fact is, the ECB had already stopped ELA, forcing the CBI to print money. Without the bailout there was no more Euro liquidity. Whats happening in greece now, and worse would have happened at our ATMs.

2. You're confusing the Bailout with the State's guarantee of the main Irish banks on 30 September 2008. There's a gap of about 800 days between the two events.
Before you accuse me of not having a breeze, maybe you should explain why you're conflating the 2010 bailout with the 2008 Guarantee.

I'm certainly not confusing the distinct events. The guarantee allowed the banks to roll liquidity in the immediate aftermath of the guarantee. '800 days' later the ECB had €90bn on overnight money on the back of the guarantee, ie they put overnight ELA into the banks as they state had guaranteed it. This was collateral backed. At that point the ECB said no more, the CBI did its magic and unilaterally 'printed' euros for the banks backed by dud collateral. We then got bounced into the bailout.

3. You are still wrong on collateral. Here is a Very Simple table. It is a very real requirement that the facility user repays to stay within the terms of the facility, in this case a greek bank would have to repay the ECB '50':

||Before |After
|Collateral| 1000| 1000
|Haircut| 95%| 90%
|Loan Facility| 950| 900


Just to be clear on the OP's question - the CBI -Irish Central Bank was proviging liquidity that it was not supposed to. Without that there would have been a run on the ATMs. The ECB put a stop to this printing, or QE, and forced the bailout, most of which repaid CBI liquidity.


Apologies to Mitrades for the slur, but veni vidi vici.

dlouth15

KingBrian2 wrote: »

In September 2008 when the banks where experiencing problems how likely was the possibility of bank shutdowns or Exchequer collapsing or was it all spin no substance.

I think it is fairly clear that the banks were running low on funds prior to the guarantee.

The ECB adopted a fairly hardline stance against bank failures. I think the purpose here is that they did not want an "Icelandic" solution, so they weren't going to allow shutting down the banks, and setting up new ones like they did in Iceland. This would have required the support of the ECB and losses being taken by bondholders.

I think if we had called the ECB's bluf back at that time, there would not have been immediate closures. The ECB would have provided support through ELA for a time but we would have been forced into a bailout similar to the 2010 one. The threat would have been withdrawal of ELA and the banks shutting down.

There seems to be a dispute on this thread over whether the ECB would actually carry out this threat. I don't think we'll ever know the answer to that question.

Possibly what might have happened is what is happening in Greece - not complete withdrawal of ELA but just enough that the banks continue existing but only partially functioning. The public would then put pressure on the Government to do something about it. As we are a pro-EU country pressure would fall on the Government rather than the ECB. Then we would have to agree to a bailout under terms set out by our EU partners.

The Guarantee of 2008 therefore allowed us to postpone a bailout for a couple of years.

A very brave solution would have been to shut down the non-functioning banks, let the bond holders take the hit and then with no functioning banking system, approach the ECB for help. However they had already made it clear that they were not amenable to this solution.

clear thinking

clear thinking wrote: »

The fact is, the ECB had already stopped ELA, forcing the CBI to print money.

Completely incorrect.

The Governing Council approved a new extension of liquidity assistance to the Irish financial system on November 18, 2010, a Thursday. The following Sunday, Brian Cowen announced that the State was to seek a bailout.

It is certainly true to say that the ECB threatened to withdraw ELA. It is completely incorrect to claim that they actually withdrew it in the run-up to the Bailout.

Professor Patrick Honohan has made it very clear, in his testimony before the Oireachtas Banking Inquiry, that he does not believe the ECB would have forced the CBI to withdraw ELA

https://inquiries.oireachtas.ie/banking/hearings/patrick-honohan-governor-central-bank-of-ireland/

Professor Patrick Honohan: Supposing there had been a turbulent meeting of the Government here on that Saturday or Sunday saying, “No, no we will not go in, never”, supposing there had been that and he hadn’t made the [bailout] application on Monday, would Jean-Claude Trichet have withdrawn ELA on that occasion? I don’t think so. But he—–

Deputy Michael McGrath: So it was a game of chicken.

Professor Patrick Honohan: It was a game of chicken but … not real … a game of chicken, it’s you know, you either fall over the cliff or you don’t fall over the cliff. But it would not like that, because the ECB could say, “Well, this is a very bad situation and so as a result of that we are going to apply this additional rule, this additional cost, this additional, exceptional, supplementary burden”, which they have the right and power to do. So, unfortunately for Ireland, there always is the potential in this situation for a graduated pressure, and this is something that is not often recognised. People say, “Oh, they would always have given ELA.” Probably they would, but maybe on terms that would make it very, very uncomfortable and costly.

So, there you have it. The testimony of the Governer of the CBI refutes your claim. All that existed was a threat and, according to the Governer, one that was unlikely to be executed.

You are still wrong on collateral. Here is a Very Simple table. It is a very real requirement that the facility user repays to stay within the terms of the facility, in this case a greek bank would have to repay the ECB '50':

No that's incorrect, and it's not how the discount window or bond valuation work.

Needless to say all of the figures here are illustrative only.

Now, imagine the ECB has placed an ELA cap of €890 on Greek bank liquidity. Alpha Bank of Greece (which in my example, represents all Greek banks) applies for an ELA facility from the Central Bank of Greece. Alpha forward one five-year, zero-coupon security with a face value of €1000 in the form of a Pillar bond. The CBG discounts the bond as follows:

First, the Central Bank deducts a buffer amount in anticipation of future haircuts. For argument's sake, we'll say €30. This leaves €970 on the security for discounting. The ECB applies a discount of 1.5%

We can calculate the Present Value as:

[latex]PV =\left\frac{970}{(1.015)^5}\right = 900.41[/latex]

Now Alpha Bank is just slightly above the €890 liquidity cap.

The next day, Greek bailout talks break down, and Frankfurt commands the Central Bank of Greece to apply a 2.4% discount rate on the same security, in light of the diminished value of the collateral.

[latex]PV =\left\frac{970}{(1.024)^5}\right = 861.53[/latex]

In this case, the increased discount has dimished today's value of the €1000 security below the ECB's €890 liquidity cap. But remember that €30 buffer that was deducted by the ECB? That was deducted precisely in case such a discount arose. We now add that €30 to €861.53, and we see that Alpha Bank is just inside its compliance by the skin of its teeth.

Any further discounts, and Alpha will fall into non-compliance, putting Greek depositors at risk. However, since in this case (and in real life) all that has happened is the discount has eaten into the buffer capital, well the ECB's action is just symbolic, and has no practical effect on the Bank today.