Banking

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Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken? Part 4

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For many the detail about the pressure which was widely reported to have been applied by the ECB for Ireland to enter the 2010 Troika bailout has coloured their understanding of the original blanket guarantee. The extent of the guarantee and the large sums being poured into our failed banks ensured that a bailout would be required. It was hardly a coincidence that the bailout occurred in the months after the blanket guarantee ran out on the 29th of September 2010.

The ECB’s insistence that the promissory note for Anglo Irish Bank and other unsecured unguaranteed bonds should be paid have led people to think that it was ECB pressure that led to the 2008 – 2010 guarantee in the first place. I have tried over the previous posts to unravel this myth and show that it was an Irish decision alone put in place for very local reasons. In fact, the ECB warned the Irish government that under Maastrict (where the cost of borrowing is dependent on maintaining a good credit rating in the financial markets) the guarantee could cause substantial funding problems for the sovereign. Other events disprove it, including the fact that an attempt by the Greek government to also bring in an unlimited guarantee immediately after the Irish made their announcement was rescinded due to pressure from EU Commission. Neelie Kroes, EU competition commissioner at the time said “A guarantee without limits is not allowed”.

Of course, the myth has its own political uses and it’s not surprising that there has been very little examination to date of the guarantee. But even any future Public Accounts Committee examination and its ‘who said what in the room on the night’ scope will not provide much clarity. Looked at from the perspective of class and power, however, examining the guarantee reveals much about how both work in Ireland. Such a focus would not fixate on the technical detail of whether dated subordinated bonds should have been included, or whether Dermot Desmond was there behind the curtain throwing his voice in to the mouth of Brian Cowen. Instead, the focus should be on the decisions made in the context of how the Irish government behaved in the past when other Irish financial institutions went into freefall. We tend to see 2008 as a rupture, but in terms of understanding why certain decisions are made it’s more useful to examine the continuities. After all, this was not the first time that Ireland provided a blank cheque for Irish banks.

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Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken: Part 3

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This article follows on from Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken: Part 1 & Part 2.

Hindsight provides 20-20 vision, but in light of more recent events political spin and a sense of justifiable grievance can cloud the popular understanding of what happened in the past. There is, of course, the accuracy of the historical record to correct the flawed collective memory.

One ‘flawed memory’ is that the bailout by the Troika was forced on Ireland in order to ensure that money from Irish tax revenue was used to pay back French and German banks, and that since the bailout was a consequence of the guarantee, that it too was forced on Ireland by the ECB to ensure that European banks got their money back. At the time that the bailout was announced, Brian Lenihan began the process of conflating the terms and conditions of the program with the guarantee:

“There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the ECB. Those who think we could do so are living in fantasy land.”

But when Irish politicians provided an unlimited guarantee the credibility of the guarantee and therefore its effectiveness in upholding the banking system depended on the willingness of the ECB to prevent a country from defaulting on its sovereign debt.

This is not to say that the actions of the ECB, its rules and structures or even the way that the single currency is arranged and the orthodox thinking that underpins it in the interests of private banking is correct or just. Far from it. However, a clear order of cause and effect must be followed, and the ECB is not responsible for the far reaching consequences of providing an unlimited guarantee.

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Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken? Part 2

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This article follows on from Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken: Part 1.

It is five years since the Irish government announced on the 30th of September 2008 that Ireland was going to provide an unlimited bank guarantee to six covered financial institutions. It’s important to remind ourselves of the context of that event. On the 15th of September 2008 Lehman Brothers collapsed and the subsequent credit crunch ensured that the international banking system was soon struggling to obtain interbank credit. Soon significant problems at European banks came to a head. Towards the end of September France, the Netherlands and Belgium injected €11.2bn into Fortis, Belgium's biggest bank and then, a couple of days later on the fateful 29th of Sept, the Netherlands was forced to take over Fortis’ Netherland operation at a cost of €16.8bn. By the 6th of October the German government had authorised a €50 billion rescue package in its second, and this time ‘successful’ attempt to rescue Hypo Real Estate Holdings. The first attempt was a week previously, again on the 29th of September.

The problems for Irish banks trying to access liquidity in the interbank market were not unique, but Ireland’s solution to resolve it differed considerably to that of every other country in the EU. In the weeks prior to the full guarantee the Irish government had already taken the decision to guarantee deposits up to €100,000. Up to that point deposit guarantees in the majority of European countries was just €20,000 with only Italy providing a deposit guarantee of 100,000. As a result of the Irish extension 97% of all customer deposits in the Irish banking system were fully guaranteed (Carswell, IT Oct 2008, see image below). Yet this wasn’t enough to stem the banking crisis and the loss of liquidity. At this time Anglo Irish Bank that was losing significant deposits of between €50 million and €200 million each, amounting to losses of €1 billion a day, causing Anglo to breach its regulatory liquidity ratio. Most of these deposits were borrowed from the short term money markets.

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AlJazeera English: Firms enjoy tax haven in bankrupt Ireland

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A recent AlJazeera English report called Firms enjoy tax haven in bankrupt Ireland which uses a short excerpt from the recent Anarchist Bookfair IFSC walk tour.

Ireland is one of the country’s that’s been hardest hit by Europe’s debt crisis.But amid the austerity, billions of dollars are still flowing in and out of the economy.The problem for Ireland is that it is not collecting much of a share of the money. Laurence Lee reports from Dublin.

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Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken?

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There seems to be a myth doing the rounds at the moment that the 2008 Blanket Bank Guarantee, which ran for 2 years from September 2008 until 2010, wasn’t put in place to simply stop both Anglo Irish Bank and Irish Nationwide from collapsing in order to protect, as far as possible, the considerable interests that a small group of Irish people had in those cauldrons of greed and corruption.

Rather, popular thinking now goes, the notorious guarantee was put in place because of pressure from the ECB who were eager to ensure that revenue from Irish taxes would be used to pay bondholders in the banks of Core EU countries in full.

Take this recent article published on the 27th of March last which has the headline: “Germany’s rethink on just where the blame lies for the Irish bank bailout”. The implication behind the headline is that the bailout was required because of the guarantee, but also suggests that the statement made by the German Finance Minister that the Irish guarantee was a solely Irish initiative is a ‘rethink’, that is, an attempt to change the narrative that the bailout, and the guarantee that made it inevitable, was dictated by interests of big German banks.

“It was the Irish government that imposed the farthest-reaching guarantee for its banking system at the start of the crisis – on its own initiative,” said German finance minister Wolfgang Schäuble.

The statement itself was prompted by comments made by Irish politicians while negotiating on bank debt. Such comments, of course, are tailored to an Irish audience who are increasingly convinced that the enormous and unsustainable burden of Irish bank debt which the residents of Ireland are being forced to finance is being imposed by the ECB and Germany in order to protect their own struggling banks. This particular framing of the story feeds into the tale told about Timothy Geithner’s phone call and the posthumous yarn about the letters Brian Lenihan received from Jean-Claude Triche.

These Irish politicians are entirely aware, however, that the decision to provide such a broad guarantee was made without the advanced knowledge of the ECB. It is a consequence of this decision which was only put in place to maintain access for Anglo Irish Bank and Irish Nationwide to the interbank market that the vast majority of bonds have been paid off in full.

We know this because on the 3rd of Oct 2008 the ECB published an opinion on the Irish bank guarantee. Here’s the relevant excerpt.

“As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.

2.5 A further point relates to the risks to the Government’s budgetary position arising from any financial support to Irish credit institutions. While the ECB appreciates that any guarantees provided by the Minister under the draft law would be contingent in nature, given that the financial exposure of the Irish State under such guarantees is potentially very large, the Irish Government could be obliged to make significant payments in case these guarantees are called over the next two years. At a point in time when the Irish budgetary position is deteriorating and may risk exceeding the 3 % of GDP reference value for public deficits, as specified under Community law12, this is a cause for concern, even when the provision of financial support would, under the draft law, as far as possible ultimately have to be recouped from the credit institution or subsidiary in question.”

More to follow.

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Padriac White and the Establishment of the IFSC

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The following extract is taken from The Making of the Celtic Tiger: The Inside Story of Ireland’s Boom Economy. Dublin. Mercier Press. (2000). It is Padraic White’s own account of the development of the Irish Financial Services Centre.

In the middle of 1973, the IDA launched international services as its latest product. At the time, this category included both technical consultancy services and computer services. However, within the IDA’s own research unit, work continued to identify and analyse other service products, including those n the financial-services area. One of the economists engaged in this task was Ken O’Brien, who later, as founder of Finance magazine, would provide specialist coverage of the Dublin financial centre. Our New York office befriended a Wall Street lawyer, Bob Slater, who was familiar with the then-exotic world of offshore banking – the reasons why banks set up in specialist offshore centres, the kind of financial activities undertaken there and the nature and number of jobs created in this developing sector.

As manager of the planning unit, I agreed to take on Bob Slater, both as a financial consultant on financial services to IDA and to produce a study of offshore banking systems. His report examined the success of Bermuda in creating jobs in financial services, and he was satisfied that Ireland could emulate its achievement. And so in 1978 – innocently, in hindsight – we set out to promote international financial services to the world, and did so on a pilot basis to test-market the reaction. The IDA executives embarked on their selling mission, armed with the expert conclusions of the Wall Street expert.

During the year the IDA team soon landed some big fish in the form of two US banks that had developed specific job-creating proposals. However, the agreement of the Central Bank was first needed. Michael Killeen* considered the proposals sufficiently important for himself to go with Jerry Kelly, who was negotiating the projects, and myself to make the case for Central Bank authorisation. The reaction was not encouraging and we left the Dame Street offices feeling rather dejected. We could not give the required assurances or promises of authorisations to our foreign bank clients. The projects died and we ceased to do any more financial-services promotion. Subsequently, it emerged the bank no stomach for the projects and would not approve them. However, the IDA could never get a clear reason for this. The most authoritative word which came back indirectly was that the Central Bank believed the offshore financial projects ‘smacked of a banana republic.’ (pp.323-4.)

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Developing of the Tale of the Tiger: Ireland and the IMF

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The paradox of the hot bath is symmetrical: it draws the blood to the periphery, as well as the humors, perspiration, and all liquids, useful or harmful. Thus the vital centers are relieved; the heart now must function slowly; and the organism is thereby cooled.

(Foucault 1961 [1965: 169–70])

The following essay is an attempt to answer a question of critical importance to the history of the Irish State’s development; Namely, in light of the IMF’s recent disciplinary stance toward the Irish State, and in consideration of the key role played by a number of inter- and supra-national financial institutes in stimulating Ireland’s period of unprecedented economic growth, can the IMF’s stance in the post-crisis period be deemed an attempt to legitimise the institute’s technocratic claims to authority; and what are the implications of Ireland’s bailout within the wider context of Europe.

The essay will be two-pronged in its approach; in the first section, we will seek to offer a revisionist interpretation of the negative consequences of Ireland’s economic growth having been characterised largely by external exigencies. Ireland of the Celtic Tiger era was heralded as a “successful model for small and peripheral states in this era of globalization.”[1] The factors culminating in its dramatic demise thus merit closer attention within the wider context of development (or indeed post-development) studies.

In the latter section, we will seek to contemporise the discussion by focusing on the EU-IMF bailout in 2010. Here we will attempt to offer a political economic approach to the IMF’s intervention and authoritarian stance in Ireland, by contrasting the Fund’s economic surveys prior to and following the financial crisis. We will offer two readings of this: first, we will consider if the Fund’s authoritarian stance can be read as part of the institution’s bid to continued legitimacy– in its failure to prevent the crisis, and in light of its crisis of legitimacy prior to this.[2] Secondly, we will consider how the Fund’s stance toward Ireland relates to its roles as part of a wider international economic system, acknowledging that the IMF and the World Bank function as “twin intergovernmental pillars supporting the structure of the world's economic and financial order.”[3] In so doing, we will seek to offer an alternative reading to the “sovereign” debt crisis.

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China – the World’s Emerging Financial Superpower

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The US magazine Worth published a report with its analysis of who were the 100 most powerful people in global finance. Four were from China – Shang Fulin, Chair of China Banking Regulatory Commission; Zhou Xiaochuan, Governor of the People’s Bank of China; Lou Jiwei, Chair and CEO of China Investment Corporation and Jiang Jianqing, Chair of the Industrial and Commercial Bank of China (ICBC). They were respectively ranked 14th, 15th, 27th and 31st.

That only four of China’s top financial figures were included in the list in fact showed how much understanding of the power of China’s financial and banking system still lags behind its reality. There are exceptions – for example Bloomberg journalists Henry Sanderson and Michael Forsythe in their recent book China’s Superbank simply stated that Chen Yuan, chair of China Development Bank, was ‘the world’s most powerful banker.’ But in banking it would seem Deng Xiaoping’s famous advice that China should ‘hide brilliance, cherish obscurity’ is alive and well.

This is a serious error, as will rapidly become apparent. To grasp the underlying dynamic of the global financial industry it should be grasped that it is a mistake to understand the strength of China’s economy by statistics such as that China produces as much steel as the next 38 countries combined, more cement than the rest of the world put together, that it is the world’s largest market for TVs, refrigerators, mobile phones, cars, or that it has more than twice as many internet users as the US. These figures are impressive but far from illustrating the real core of China’s economic power. The real center of China’s economic strength, which determines both its domestic and global expansion, is unparalleled financial strength.

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Profitable Poverty in Extremadura: Bailing Out Banks, Evicting Poor People

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This is a translation of a piece written by Manuel Cañada, a militant in Trastienda, a social rights collective. It was originally published in Rebelión on 30th June last year. A friend from #AcampadaMérida (manifesto here) suggested I translate it as it helps provide the context to the situation in Extremadura. However it has universal resonance, particularly so in countries living in the wake of burst property bubbles.

The discourse of social Darwinism and the 'the kingdom of the plasma screen TVs' cited in this translated text on evictions in Extremadura ought to be particularly relevant to Irish readers. This morning, the head of the Department of Finance has declared that it 'is not necessarily appropriate that banks should be using taxpayers' money to subsidise people living in accommodation, even if it is a family home, that is beyond their means', citing an 'unnaturally low' level of repossessions (as if there were anything 'natural' about a neo-liberal state that protects the financial sector at all costs!). Meanwhile, Michael Noonan the Minister for Finance has cited, on the public broadcaster, the problem of satellite TV subscriptions taking priority over mortgage repayments.

Bailing out banks, evicting poor people

by Manuel Cañada

I ask of the political economists, of the moralists, whether they have calculated the number of individuals it is necessary to condemn to misery, to undue labour, to demoralisation, to infancy, to crapulous ignorance, to unconquerable misfortune, to absolute penury, so as to produce a rich person.

- Almeida Garret

12th of June 2012, in Mérida's Juan Canet neighbourhood. It is not yet nine in the morning and a group of riot police, armed with plastic bullet rifles, oversee the rapid removal of furniture from a council house. It is one of 16 such evictions carried out in Extremadura in the last month and a half. Expectant rifle sights scan the doors and cots scattered in the middle of the street. A woman, until now a resident of the flat, begs unsuccessfully to be allowed in to her home to pick up the bottle so she can feed her son. No, these neighbourhoods are not reached by the psalms that speak of the greater interest of the child, nor is there room in the suburbs for affectations of compassion. “They treat us like terrorists”, says an older woman, consumed by rage. For some time now we have ceased to be surprised by the presence of riot police and special operations teams in these slums of misery. It is the silent war, the war of the rich against the poor, the coming social war.

One eviction every three days. The Extremaduran regional government (in Spanish, la Junta de Extremadura), a weatherproof homeowner and judge, has let eviction be the guide of its housing policy. 764 eviction cases are open, and of these, we are told, 90 are to be carried out imminently. This is happening in a region with near 150,000 people who are unemployed, with more than 60,000 in receipt of no benefits whatsoever, and when the number of people seeking assistance from Cáritas food programmes keeps multiplying. A tsunami of marginalisation and misery is advancing with its mouth wide open and, while this is going on, the Extremaduran government starts spinning the roulette wheel of eviction. “I only get €436 euro in unemployment benefit and I have to pay €143 in rent. How do they expect me to pay another late payment bill”, says one of the women threatened with expulsion. “They don't want to apply the rent reductions to me because they say I have previous debts”, another neighbour complains. “Can you believe they have the right to threaten you with getting thrown out on the street for a debt of €800?”. The stories of uncertainty and fear pile up. The regional government, the property owner, mobilises police and judges to frighten poor people, but it does not seem to show the same diligence or energy in fulfilling its obligations as landlord. The lifts stopped working a long time ago in many blocks and the neighbourhoods are filling up with cockroaches, but the exemplary government of Extremadura can only think about making money, and, especially, in that most profitable of investments: fear. The vineyard of the powers that be, always sprinkled with fear.

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Government resignation – and then what?

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Translation of an article by sociologist Jorge Moruno and philosopher Juan Domingo Sánchez Estop, published today in Público, analysing the present conjuncture in the Spanish state in light of major corruption scandals and the crumbling of the current regime’s legitimacy.

Government resignation – and then what?

The Bárcenas papers are not a simple case of political corruption in which a boss puts his hand in the till and all can be simplified by talking about rotten apples. Beyond the final denoument, what we are faced with is an entire process of putrefaction of the party system that arose from the 1978 assembly (cortes), in which the Partido Popular is the main -but not the only- political exponent of the Spanish real estate-financial bloc which has benefitted so much from these decades of bubble. Some of us have taken to referring to this ruling layer from the political-speculative tandem, which draws together the worst of our society, as a lumpen-oligarchy, thereby highlighting the nature of its policies and the way it puts them into practice.

This modus operandi functions by democratising the idea of the speculating property owner, turning every citizen into a potential entrepreneur with regard to his home or the one she aspires to obtain. The spreading of this idea and its practice brought about a situation in which, for a time, the possibility of social ascent was associated with the negotiating ability of the individual and not with the extension of collective rights and the development of a democratic culture that placed value on what is public. This operation of moving society to the right, based on the ideology of the property owner, always works as long as one can speculate a little bit more. Corruption, then, is not a mere consequence of casino-capitalism; it is also the necessary lubricant for putting it into practice. The common thread between regime politicans, speculators and builders is reflected perfectly in the Bárcenas papers, where many of the donors are now receiving contracts for Madrid hospitals up for privatisation. Corruption -of the systemic kind- is also seen in the way the vice-president of the CEOE (Spanish employers’ body) receives a discount in the cafeterias of public institutions such as universities and ministries, whilst at the very same time he rails against anything that sounds public, even when this sector is his biggest source of payment.

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Prof. Terrence McDonough on the Irish Promissory Note Deal – Galway 12 Feb 2013

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Audio recording of Prof. Terrence McDonough’s talk in Galway tonight, “What the !$%! just Happened? A Discussion on the Recent Debt Deal.” Thanks to Vicky Donnelly of Galway Debt Justice for organizing the event.

Main Talk

Mcdonough12-02-13-talk by Conormccabe on Mixcloud

Q&A

McdonoughQ&A-12-02-13 by Conormccabe on Mixcloud

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A Rotten Deal

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The Anglo: Not Our Debt campaign regards the promissory note deal announced last week as a rotten one, and we do so for three main reasons.

First, this was not our debt in the first place. Anglo Irish Bank (some of whose executives are under criminal investigation) and Irish Nationwide Building Society ran up these debts on the basis of loans made to them by speculative investors looking to make a fast buck. Those investors gambled and they should have lost, rather than have the state guarantee their gambles and force people living in Ireland to repay debts that they had no part in creating and from which they derived no benefit. The deal legitimises an illegitimate debt.

Second, the stretching out of the repayment period (which may or may not reduce the real value of the debt – government projections on ‘savings’ are already being contested) places the burden of this debt on future generations: our children and grandchildren will pick up the tab for the gambling debts of the bondholders. Minister for Finance Michael Noonan uses the analogy of a long-term mortgage, the cost of which will be eroded by inflation, but in reality we are paying a massive mortgage for someone else’s house and will have nothing to show for it in 40 years’ time save for the scars left by successive cuts. Meanwhile, billions of euros will be continue to be taken from public spending annually to cover the interest repayments on the sovereign bonds that have replaced the promissory notes. Children will pay now through cuts to their education, community and other public services, as well as the bombshell payments of principal they will face in 25-40 years’ time. How can this be considered just or ethical?

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