“What an unfortunate mess..”

Maman Poulet has a collection of links reacting to the Republic of Ireland’s government tax-payer guarantee to the banks, which we are told emerged following a meeting requested by the chief executives of the two main banks. Meanwhile Germany has joined in, apparently in response to a consortium of banks withdrawing support [pdf file] from a loan to Hypo Real Estate which was announced only last week. But if I was sceptical before, Robert Peston’s update to his post on the German move only serves to heighten that scepticism. Maybe not “out of jail” just yet, Brian. From Peston

For example, it’s not clear whether this is a formal, unambiguous commitment to take the retail liabilities of the German banks on to the public sector’s balance sheet – a commitment would add many hundreds of billions of euros to Germany’s national debt. Also, to add an almost comic element to Germany’s evasive action, almost simultaneously there’s been a statement by the EU Competition Commissioner Neelie Kroes that blanket guarantees on bank deposits by individual members states are “discriminatory”.

Kroes added that she was hopeful that Ireland’s controversial 100 per cent guarantee – launched last week – would be modified in “a form for which we can together state that it is [in] line with the treaty”. At a time when there’s profound unease across Europe about the safety and security of our banks, the spectacle of governments seemingly at odds with each other and with the Commission is unsettling, to put it mildly.

Update Robert Peston, again, clarifies what the Germans did – “It gets weirder.”

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  • Brian Walker

    Pete, I think everybody’s winging it – including most alarmingly Mrs Merkel. Too right, “dazed and confused.” All I mean is that Ireland is no longer isolated. As far as I dimly see it, a “guarantee” can means either billions of euros on the public debt or the hope of next to nothing, depending on how things go.

  • Pete Baker

    Brian

    “Winging it” would appear to an accurate assessment of the state of play.

    I’m no expert on financial matters, but I’m still sceptical.

    Because by the time that the EU as a whole adopts a modified version of what Ireland initially claimed to have implemented there’ll be nothing special about the Irish position.

    And we may well be back where we started. Only with tax-payers picking up any tab that emerges.

  • IJP

    Pete

    Another excellent blog, thanks.

    There are a lot of alarming issues here. Ireland’s “winging it” could be forgiven at the action of a government faced with a dramatic reverse in growth figures. Germany you would expect to be a little calmer, but is a country I know well and seems to me to be suffering from a kind of “indignant panic” (“Hold on, we had our recession and we don’t use credit cards as much, so why’s this happening to us?”)

    But there’s another side to this which you hint at but doesn’t appear in many other reports – the relative (and, yes, almost comic) powerlessness of the European Union. These pronouncements from on high (well, from poor old Commissioner Kroes anyway) are becoming almost ludicrous. Can the Commission enforce its rules, or not? If it can’t, well…

    In the end, America may come out of this better than Europe despite the initial diagnosis being much worse there. The reason seems to have a lot to do with the functioning (or otherwise) of the EU. Both for Eurosceptics and for those of us who seek to reform the EU to a functioning organisation (but away from the crazy federalist agenda), we live in interesting times.

  • IJP

    Peston is, as you say, very good as usual. Also note:

    What an unfortunate mess. Just hours after leaders of the UK, Germany, France and Italy promised to co-ordinate their responses to the global banking crisis, Germany seems to have struck out on its own.

  • Pete Baker

    Thanks IJP.

    You’re right to highlight the problems of Germany “winging it” and the apparent impotency of the European Commission as areas of particular concern. And we’ll wait to see how other EU states react.

    “we live in interesting times.”

    And that’s all we can ask for. ;o)

  • RepublicanStones

    I remember hearing once that Germany had an unusually high percentage of but to let business going on and that compared to Ireland or Britain very few people actually owned their own houses. Just wondering if this is true and has it in some way fed into Germanys decision. While so far it seems Ireland’s trailblazing and risky decision isn’t as of yet ‘illegal’, Germany is entitled to follow suit, however if it has broken a gentlemanly agreement between the other big boys of Europe, its unsporting to say the least.

  • Henry94

    Denmark has now faced reality too. The point of all of it is to keep your banks afloat while they (and us all) adjust to lower asset prices. Shares and property prices have to fall because they were over-valued.

    The ECB, if it wants to help, needs to cut rates sharply to keep the necessary declines from turning into a crash and to prevent deflation becoming a problem.

    Wen the fog clears I think the European project will have more realistic and therefore more modest dimensions. When the chips are down it is country first. Did anyone ever seriously think it would be otherwise?

  • Comrade Stalin

    Henry,

    Very interesting. I was thinking to myself last night that a rate cut would have to be on the cards to get things kick started once the dust had settled.

    The thing is that we’re now getting very close to repeating what Japan went through in the 1990s. That means we could be in for a long, sustained period of deflation.

  • Glencoppagagh

    To be fair to the EU, bank regulation is still entirely a national function.

  • RepublicanStones

    Companero, didn’t Japan have a 0% interest rate at some stage in the nineties? Which meant savers got nowt, but mortgage wise you only owed what you borrowed?

  • Jack

    The base rate was .25% if I remember correctly.

  • DC

    So far it would appear that Germany has only spoken of this and not definitively decided. It has all the hallmarks of bluff or bogus confidence building to try and stop financial spasms. Robert Peston also pointed out that there is still money about just not in the right places because people don’t want to lose money so they pull it out until stability is returned, which has its own destabilising consequences. The world still revolves around capitalism except right now the tide is out.

    It’s the in between that is unknown i.e. how to get over the false high watermark of bogus capital and return to getting a more correct and settled level of the available global capital. And when it is unknown and interconnected at a global level, failing a global understanding and informed response, national bluff is the only thing that can happen.

    There should have been a financial demarcation of what is ethical and what is not based on a fundamental yet quite simple understanding of what affects people the most or is a priority need. The answer is housing, in the context of this problem.The utmost partnership in life is your house or home.

    Houses were turned into financial commodities via market backed securities in the US but in the UK the freeing up of false capital and opaque hedge funds activity fuelled this speculation on property, so tempting given perceptions around supply of housing and notions of high demand. Around 2005-6 it was patently obvious that it was all unsustainable but a winner takes all approach from the several banks and financial institutions seemed to happen, now the game is over and whistle blown. Those that have won have won and those that have lost have lost big.

    The problem with linking it to houses is that bank induced over-inflation through its lending practices has to be seen as somewhat unethical and against ethical social practices and people will realise this and take to task the governments for allowing speculation on homes as a means to reward city business people.

    In basic terms, governments should not allow improper financial speculation in areas vital to life, housing. They knew this, the trends were there in relation to retail index inflation in comparison to house inflation. It was faulty economics driven on at a global level, with domestic intervention shouting in the wind and in the face of the public too who on the ground put their faith in financial advisers and mortgage managers – perhaps government too held out.

    It has turned out to be car crash TV and the emergency services are arriving after the accident. What we have now are States passively stepping in rather than instead forcing capitalist marketeers from leaving the economic field that is creating this void.

  • John East Belfast

    Pete

    “Because by the time that the EU as a whole adopts a modified version of what Ireland initially claimed to have implemented there’ll be nothing special about the Irish position”

    I am not so sure in that my understanding is that the Irish Govt have guaranteed ALL lending to Irish Banks – be that Retail and Corporate Desposit Accounts as well as Other Bank Lending from the Money Market.- that is why at Eur500 billion the Irish Guarantee is so proportionately large.

    Germany is only guaranteeing Retail Deposits and if the UK does follow suit then I think that is also the route they will take

    Henry

    “The ECB, if it wants to help, needs to cut rates sharply to keep the necessary declines from turning into a crash and to prevent deflation becoming a problem.”

    On balance I would possibly agree with you – especially the UK Base Rate of 5%.
    However there was an interesting comment in the Sunday Times yesterday where they were going through the views of economists who have been predicting this crisis for years.
    One said that everytime the market took fright and tried to bring asset prices down the Central Banks had stepped in with Base Rate cuts to add fuel to the fire.
    Events like the Dot Com crash and 9/11 had caused markets to take a reality check on prices of equities and assets but Central Banks had interfered with unregulated cheap credit and kept the party going.
    They quoted Japan where things had just got so crazy that eventually 0% had no impact on Shares and Property – essentially to this day.

    Basically property assets and share valuations based on future earning were (and possibly still are) over inflated and we would be better off getting used to it.

    The problem with this of course is all the Bank Lending that was advanced to buy these over priced property assets and whether the Buyer or the Bank have the ability to absorb the write downs.

  • Henry94

    JEB

    I would take the point about previous interventions. But I don’t see how asset prices could be sustained now and the pace of the decline is all that can be controlled.

    It could well be that letting them fall of a cliff would be the way to go but it’s risky. The position of the banks makes another credit explosion highly unlikely.

    The party is over. The question is are we leaving in a taxi or an ambulance.

  • ulsterfan

    I am glad I am not an Irish tax payer.
    Today’s decline on all stock markets is bad news for Irish Banks.
    The truth is that no one knows the full extent of the problem and the guarantee given by the Irish government was foolish.
    Two weeks ago people were thinking of a 1929 type depression.
    This spectre to day raises its head and where now is the Celtic tiger when needed?

  • Comrade Stalin

    Companero, didn’t Japan have a 0% interest rate at some stage in the nineties? Which meant savers got nowt, but mortgage wise you only owed what you borrowed?

    The 0% rate was, I believe, in the midst of the economic crisis. In an attempt to stimulate the economy they slashed interest rates in an effort to reduce the cost of credit and make people less motivated to save money. It is an interesting lesson that interest rate cuts are really more of a way to tune the economy, rather than to control it. If an economic downturn leads to spiralling deflation, we’re going to be in for a tough one.

  • Hugh Dubh Oneill

    ulsterfan where now is the Celtic tiger when needed?
    yeah we,re in dire straits along with every other western economy.how are things in the UK any credit crunch,housing crash,nationalised banks.things still peachy creamy north of the border are they!!!
    God I wish an irish government would just have the guts to implement the kenny report.never happen though.