“Could a bank bring down a country?”

As was indicated previously, the Irish Minister for Finance, Brian Lenihan, has confirmed the conditions under which a bail-out will be required

Minister for Finance Brian Lenihan has said that it is clear Ireland will need some sort of external assistance to address the problems in the banking sector.

Mr Lenihan said officials from the International Monetary Fund and the European Union were not in Dublin to direct Irish affairs, but to offer advice on the four-year budgetary plan and the banking sector.

Speaking on RTÉ’s Six-One News, he said he felt no sense of shame in fighting for the country’s interests.

A BBC report adds

“I certainly don’t feel a sense of shame about fighting hard for this country for the last two years to ensure its financial survival,” said Mr Lenihan.

“The big difficulty of course is that the banks grew to such a size that they became too unmanageable for the state itself; that’s the big difficulty here. And that’s why we have to consider external assistance to stabilise our banking system.”

And when the government/state effectively owns the banking system… and its debt…

Btw, everyone’s hero, Robert Peston, has a new hero

The reason is that Mr Honohan is refreshingly frank. He is the antithesis of the buttoned up, central bankers that are typical of his secretive and rarefied trade.

My favourite moment was when he was asked whether the Irish central bank has given super-special emergency loans to Irish banks that have been unable to obtain funding from the markets and from the European Central Bank’s emergency liquidity facility.

This is what he said:

All I’ll say is there has been such a need, but I don’t really want you to press me on that, because I’m not allowed to talk about these things on a current basis. Of course I’d have to make sure…just in case it would sound as if I’m exceeding my powers, I would have to make sure that the other members of the ECB, the governing council, don’t object to making these loans“.

So that would be a yes then. Which means that however much it has been obvious that Irish banks are finding it almost impossible to raise finance from commercial sources, the reality is probably worse,

Indeed.

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  • pippakin

    Apparently that rare, almost extinct breed, an honest man and, a banker…

    Mr Honohan is turning into a quiet unassuming hero.

  • pippakin

    Last line lost in the bb ether…

    Not just one bank but otherwise, as far as anyone can see, yes…

  • joeCanuck

    Irish humour; It’s the way he tells ’em.
    “…the banks grew too big….” Nothing to do with us your honour, honest, a big guy did it and ran away.
    As for “..they’re just offering advice …” it sounds more like an offer that couldn’t be refused.

  • Alias

    “The big difficulty of course is that the banks grew to such a size that they became too unmanageable for the state itself; that’s the big difficulty here. And that’s why we have to consider external assistance to stabilise our banking system.” – Brian Lenihan

    They’re considerably smaller now than they were before the state started to manage them, so what made him think that the state could manage them back then?

    What he really means is that the state grossly underestimated the scale of the debts that they forced the citizens of the state to underwrite, and thereby bankrupted the state and its citizens.

    And yet we are told that no one – with the exception of Prof. Morgan Kelly – could have known that the assets of the banks, in which they had invested their eurosystem capital, were collapsing in value and that this bust part of the monetary boom would likely mean that those banks would never see the bulk of their capital again within the repayment timescale of those eurosystem loans.

    Who then would make up the shortfall of several hundred billion to the eurosystem when it wasn’t going to be the mortgage holders of vacant properties? That would have to be the taxpayers, of course, since we couldn’t have reckless eurosystem lenders losing their money as a result of their reckless investments as that outcome wouldn’t contain the losses within a single member state but would realise the systemic risk of bankruptcy to other member state wherein the reckless eurosystem lenders are based.

    And that really is what the impending “bail-out” of Irish eurosystem banks is all about: making sure that the government is able to fully implement the EU’s policy of containing eurosystem debts within the borrowing state rather than allowing them to default to the lending state. The policy then is about ‘nationalising’ external debt by converting it into sovereign debt.

    Hence we have the government retrospectively underwriting the losses suffered by eurosystem banks and we have the EU making sure that the government can implement this policy by the simple expedient of lending them the money needed to repay the eurosystem lenders in other member states.

    Lenihan uses the familiar language of europhiles to create the false impression among the public that their sovereignty hasn’t been given away by europhiles, so he hear him talk of “our partners” (in reality, the sovereign power) in the EU who offer “advice” (in reality, they decide the policies) but who “respect” our sovereignty (in reality, they regard it as illegitimate, with only the ‘European’ nation having the legitimate right to self-determination in their ideology) and who only want what is best for us (in reality, who only want what is best for the EU and who demand we comply).

  • Alias

    The short-hand version of the above is that the eurosystem is too big to fail and that means that Ireland must be sacrificed to save it.

  • joeCanuck

    Good post Alias. They fu.ked us and now want us to pay for the pleasure.

  • Mick O’Kelly

    I left Ireland over 30 years ago and usually returned for a visit every year,sometimes twice a year and remember as far back as 8 years ago wondering where all the money was coming from as I could see all over Donegal new huge houses being erected all over the place and most people driving late model expensive SUVs and the whole chat was about the villas they had bought in Spain or Turkey,Portugal etc and the 3 vacations a year everyone was taking.Nothing seemed to add up as the wages didn’t reflect the buying power.A friend of mine at the time who barely finished school at 15 was able to explain the smoke and mirrors of the false economy to me even back then so for the political elite ,bankers and even the average Irish citizen to say they didn’t see it coming is a cop out.They all brought it on themselves motivated by greed and oneupmanship on a scale unprecedented in modern history.The Irish people have again become figures of derision and embarrassment all over the civilised world and will be held up as examples for generations to come as how to NOT run a country.In saying that I can’t wait to buy my retirement home in Donegal when prices finally bottom out which could be anytime in the nest year or two,Slainte.

  • drumlins rock

    Hold on a minute guys, who is going to pay this loan back? yes the obvious answer is the Irish taxpayer, but on tax revenue they can barely afford the interest, nevermind reduce the capital, surely it is just pushing a problem on the line another year or two, or twenty?

  • wee buns

    It is not the intention of the european elite, who run this EU show, that we ever pay it back. We will never be able to. The EU is remorseless in how it is drawing national sovereignty, and national democracy, into its quasi-dictatorial maw.

    What we are seeing is ‘the increasing use of the EU as a vehicle to bypass democratic challenges to capitalism that would occur in the parliamentary nation-state.’

    Profits will continue to stay private. The debt is socialised. We will remain debt ridden & deflated while the center of europe (Germany) will become richer.

    One of the most disgusting aspects of this ‘crisis’ is how it’s being turned into a personal moral failing on the part of Irish people. On the radio elderly voices lament but no amount of ‘knuckling down’ will cure this cruel exploitation.

    The only real solution is to get out of the EU.

  • Mack

    Yes, some sort of orderly default with the losses ultimately shared by taxpayers across Europe (and not the bond holders in the big banks) looks increasingly likely. Of course Ireland, Greece, Portugal and whoever else will suffer another round of reputational damage and lost sovereignty then too..

  • Mack
  • I agree with many of the comments in this thread. What is depressing is that the ordinary Irish man in the street is only waking up to the arguments that should have been properly ventilated and explained back in 1992. People might recall, back then, that this was before the Celtic tiger. Few would have thought that Ireland had so much to lose.

    I think that more and more people are beginning to realise the link between the abundance of credit, which became available when joining the Euro, and the ridiculous spending spree which followed.

    However, there are still important decisions to be made regarding the destiny of Ireland. The Germans need an amendment to the Lisbon Treaty. This must be used, ruthlessly by Ireland, to get what it needs.

    Basically, it is about making a choice between a lot of years of toil, sweat and tears followed by prosperity and no hope of prosperity at all in the lifetime of anybody living at the moment.

    What many people still do not yet understand is that the Euro itself can not survive without a future that drags the european nations towards third world status. The only thing which would make it work properly is political union of its member states. That way, voter democracy would ensure that poorer regions (for regions read nations) get the proper development support they need in order to improve their prosperity.

    The Germans and the Europhiles are arguing that what is needed is tax harmonisation to make the Euro stronger and more stable. Oh yeah, that would suit the Germans, wouldn’t it? The Irish would say that is unfair and should retain its 12.5% CT.

    If you think about it, Ireland’s 12.5% CT is like a regional development policy initiative. This is exactly why Europe can not work in its present form. The Euro needs stability but if it had it, it would be unfair to the poorer countries. The Germans will not stop pushing their aganda until the last breath of resistance is sucked out of the weaker countries.

    I suspect that many will be pushing for the option of European political union in the end because they feel they have no choice. I would advocate that Ireland adopt a policy that it breaks away from the Euro on terms that its debts are converted into punts.

    Worth then reading a blog from arch eurosceptic John Redwood. He was just as right back in the 90s as he is now.

    http://www.johnredwoodsdiary.com/2010/11/19/why-the-euro-was-bound-to-be-trouble/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JohnRedwoodsDiary+(John+Redwood%27s+Diary)

  • Micheál

    “There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.” – John Adams.

    We have had our fair share of the former method and, just about, have managed to overcome it. It will take generations to overcome the latter – if, indeed, it is at all possible.

    In Ireland we have a debt problem created by banks, supposedly going to be solved by debt created by other banks, with the Irish taxpayers repaying them all.

    Could someone please explain this insanity?

  • Greenflag

    I would’nt wait too long Mick – I read recently that they were having an auction for some nice apartments in Ballybofey and reports were that some units could be got for 11,000 euros .
    Are you waiting until they offer one free as well ;)?

  • Greenflag

    Pete Baker ,

    ‘Could a bank bring down a country

    Eh Yes indeed several simultaneously if need be ;(. The Banks very nearly brought down the entire world economy . It’s not so long ago that the US Congress and Senate voted a 700 billion dollar bail out for the major American banks . So scared were the US politicians at the gun that had been placed to their collective heads by the banking sector that they have since watered down every reform that was deemed necessary at that time to prevent another bail out being necessary .

    So what we have had under modern western ‘anarchic ‘ capitalism is the banks being allowed to do virtually whatever they like in the certain knowledge that the ‘people’s representatives ‘ will force the people to pay for the bank’s recklessness and greed .

    And if the ‘people’s representatives’ don’t do as the banks say then the IMF or the ECB will be brought in to do the job. .

  • Greenflag

    While listening to a German (ZDF) news broadcast I saw Monsieur le President Sarkozy allying himself with the ‘tax harmonisation ‘ of the Germans .

    The development of the European peripheral economies like Ireland (north and south ) , Scotland , Wales , Northern England , Portugal , Spain and the newer member countries from Eastern Europe is critical if the ‘European ‘ union is to have a political future .

  • DC

    Don’t you mean should?

  • DC

    The debt didn’t come from the Euro system but from the financial instruments and mechanics of global finance and such trading – liquidity is the problem and the problem of the many private financiers wanting to “get out of the game” which is of concern generally speaking, rather than the money in the systems. Once there is a whiff of haircuts out they go, private finance vacates.

    Also, Britain isn’t Eurozone and it’s just as fooked when you bring on board all the private debt wrapped up in PPP, PFIs, pensions etc onto the public accounts.

  • DC

    Add to that Lehman Brothers, and similar problems with the US’s system – which is not a euro system of course.

  • Munsterview

    Donegall had a major Garda and Adminestration Of Justice Corruption Scandal !

    Do anyone in their right mind think that this Corruption was isolated and contained inside the Garda Force ? When the law enforcers are corrupt who is there to ensure compliance with the rules ?

    Things were done so blatantly Corrupt in Donegall in breech of planning laws and goodness only knows what else that Letterkenny really did resemble a Wild West frontier town. One estate of a few hundred houses there had the gas instalations done by apprentice plumbers with ordinary pvc thread tape used on the joints of the fittings.

    This whole estate is a monumental explosion waiting to happen, offecialdom has been informed of the situation as were the most owners of the investment rental property in that estate. There are dozens more like that.

    Who Cares ?

    We can have another ten year Judicial Enquiry post the inetivable explosion and the loss of life.

    Until then…….. pray !

  • Why blame the banks for your own mess and greed? Banks lend money and will always feel they should lend more money. Politicians follow their voters and encourage them in their self indulgence. The Irish wanted their second and third houses, to be landlords (hello Michael Davitt, I am your last true disciple) anjd to bring in plenty of cheap labour to do the donkey work for them.
    The courts are still wonky. A sister of a leading criminal was given an award of E10k for cutting in front of a bus driver and a Louth businewss man was given many millionws of euros for walking into a woman’s room three times in the one night. Even the judge was surprised at the size of that award.
    Now the people who fly to Manchester to watch a foreign game, who put industrial levels of cocaine up their noses, who exploited East European workers, who rack rented are discovering their patriotism and more.

    As James Connolly, my spiritual mentor said about the Irish: Surely Christ die not die for threse people.

  • wee buns

    SOME Irish people lived/borrowed beyond their means ans there is no ‘get out of jail free’ card on that responsibility.

    However in the same way as it’s unethical to put sweeties at the checkout or illegal in Sweeden to advertise toys on the TV, the EU banks should have been tempered in their lending….because this is where it was intended to lead: complete dpendancy.

    Draw whatever comparisons to US & Britain, the capitalist principle remains the same: elite privately profit; the rest of us shoulder the debt.

  • Mick O’Kelly

    I wouldn’t live in Ballybofey if you gave me a house for 11Euros never mind 11,000.I am waiting till they offer two for one sales in the Inishowen area.

  • Alias

    The debt is eurosystem debt, denominated in euros. Also, try learning the difference between the eurosystem and the eurozone. The UK is a member of the ESCB and a shareholder of the ECB. That is why it is called upon to bail out the eurozone member states.

  • Alias

    And regarding your point about the UK being “just as fooked” as Ireland. You need to look at why that is.

    So why is it? Because its central bank followed the same expansionist monetary policies predicated on low interest rates as the ECB in order to keep its economy expanding at the same rate as eurozone states such as Germany and France. The ECB was also following the policies of the US Federal Reserve. All three central banks implemented the same policies and all three got the same results.

  • Alias

    Last point in reply here, young DC. The problem isn’t “liquidity” but solvency. Liquidity assumes that you’re just a tad cash strapped whereas insolvency means that your debts are greater than your assets.

    Now unless you want to prove to me that, for example, the Ringsend site where the banks exchanged 450 milllion in eurosystem cash for land that is worth 5% of what was paid for it doesn’t translate as the banks losing 95% of their eurosystem cash then I’ve just shown you that the problem is solvency and not liquidity.

  • Alias

    I think I’m in love.

    One poster above said that “The Irish people have again become figures of derision and embarrassment all over the civilised world and will be held up as examples for generations to come as how to NOT run a country.”

    That’s true, and I even have Russian e-mails in my inbox with jokes about it, but what isn’t pointed out is that the government of our monetary system isn’t Irish but European and the reason it isn’t pointed out is creat the impression that self-governance has failed and should be replaced by EU governance when the reality is that EU governance has failed and failed miserably.

    It’s a fact that Ireland’s external debt was only 11 billion punts 11 years ago when it still had a currency and a sovereign central bank and a sovereign banking system. What failed was EU integration.

  • Alias

    The EC controls how much the eurosystem banks can lend relative to their capital via the European Capital Requirements Directive. It could easily have set the leverage ratio to a sensible level of 5 or a maximum of 10 for low risk banks but it allowed its banks to leverage to insanely high levels. As I have pointed out before, no major German bank has a leverage ratio of under 52. What that means is that the entire eurosystem is now a house of cards that could come crashing down at any time.

    While the EC lowered the leverage ratio last year under pressure from the World Bank it didn’t lower it to anywhere near a safe level simply because to lower it other than marginally would result in most of the eurosystem failing its own stress tests.

    That is why the EU is seeking to opt-out of the new Basel Leverage Ratio that was adopted this week by the Group of 20 countries.

  • DC

    While my points are generalised and open to criticism, blaming the Euro is only the half truth behind the problem of toxic debt. Being in the euro zone makes it harder to get out of the problem and may have worsened the depth of the problem, but it didn’t create the problem itself. Which is why your argument is ropey as much as mine is.

    Ps Britain didn’t bail out Greece, but is helping Ireland – why is that then?

  • wee buns

    Alias – “..no german bank has leverage ratio of under 52”!? Is that a misprint?

  • Alias

    No, and Ambrose Evans-Pritchard is one of the few media folks who knows what a leverage ratio of 52 means for the stability of the euro. It is why Ireland is being forced to bail-out the eurosystem – the house of cards that is the eurosystem would collapse it the taxpayers of this state were not used to indemnify the overleveraged eurosystem lenders.

    Incidentally, the next wave is on its wave: massive domestic mortgage and loan defaults, now that the ECB has declared its intention to raise interest rates. As bad as things are now, they’re going to get much worse.

  • Alias

    The Greek deal was informal, with a case before Germany’s federal constitutional court that prevented it being formal in regard to the Maastricht Treaty preventing bail-outs of member states. The UK is a shareholder of the ECB (I think it owns 14% or thereabouts) so the shareholders are responsible for its debts. Given that the ECB has already circumvented the Maastricht Treaty to monetise debts via Ireland’s central bank that means that the UK has already ‘donated’ circa 14 of the circa 100 billion that the ECB has loaned to the central bank, since it will be responsible for a pro rata share of it if Ireland defaulted. The next round of bail-outs will be formal.

    If we didn’t join the eurozone then snouts would not have been dunked into its cocaine, and the 1.67 trillion worth of said cocaine would not have been imported or now be outstanding as nationalised debt.

    Access to the cocaine and governance that decreed it be used to fuel consumer spending was the cause of the problem – and will be the cause of other problems to come.

  • Alias

    Typo: “…next wave is on its way…”

    Effectively, the taxpayers of its member states are the eurosystem’s bank of last resort. In Ireland’s case, its taxpayers are the eurosystem’s bank of first resort since they are being used to underwrite the debts of massively overleveraged eurosystem banks. When the eurosystem collapses, the bank of penultimate resort will be the ECB’s printing press. Then it is the bank of last resort that will pick up the tab for this failed idealogical europhile enterprise, i.e. the taxpayers of the member states.

  • wee buns

    Alias – A E-P as an authority!?! On anything?! ya kiddin’ ain’t ya? argumentum ad verecundiam. Dumped even by the Torygraph as a foam flecked, headbanger so anti european that he scared even their harrumphing readership. Do explain how irish taxpayers, all <2M of them, act as "bank of first resort to to indemnify" the overstretched euroid system.

  • Comrade Stalin

    Dumped even by the Torygraph as a foam flecked, headbanger so anti european that he scared even their harrumphing readership.

    That reminds me of someone. Can’t think who.

  • Munsterview

    “…..Dumped even by the Torygraph as a foam flecked, headbanger so anti european that he scared even their harrumphing readership……” wee buns

    Details please wee buns ? Thanks.

  • wee buns

    Google him

  • Superscouse

    What price a United Ireland now ???