Banking

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The Dangers of Exaggerating RMB Internationalisation

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RMB ‘internationalization’ is one of the most discussed issues in China’s economic policy. But many claims regarding the extent of RMB internationalization are greatly exaggerated and the practical proposal to attempt to achieve it, capital account convertibility of the RMB, is extremely dangerous for China’s economic and social stability. To eliminate false estimates and policies, it is, therefore, necessary first to accurately establish the facts regarding the real international role of the RMB and then analyze what consequences flow from these.

Those wishing to present a highly exaggerated picture of the degree of RMB internationalization frequently do this by presenting percentage growth figures. This gives a misleading impression because it fails to mention that such growth rates look impressive merely because they are calculated starting from extraordinarily low levels. To take a typical example, the proportion of RMB payments carried out in the US in April 2014 had risen by 100% compared to a year earlier. This sounds spectacular – until it is noted that the rise was only to 0.04% of all worldwide currency transactions!

A sense of reality is immediately injected if its noted that in April 2014 the RMB accounted for only 1.4% of international payments – globally, RMB payments are entirely marginal. Furthermore even this very low figure exaggerates the RMB’s internationalization because a large percentage of the payments are merely between mainland China and Hong Kong.

To illustrate the real situation, start with China’s strongest area internationally – trade. By the end of 2013, 8.7% of world trade was denominated in RMB – but the dollar’s share was almost 10 times as high at 81%. Furthermore, the RMB figure was artificially flattering as around 80% of RMB payments were for Hong Kong. Excluding Hong Kong RMB payments were marginal. For example, by April 2014 only 2.4% of China and Hong Kong’s trade with the US, China’s largest single country export market, was in RMB.

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Anglo: Not Our Debt Campaigners Alarmed at ECB Pressure

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Debt Justice Action – a coalition of community, trade union, global justice, academic, faith-based and other groups that hosts the Anglo: Not Our Debt Campaign –  has described as “alarming” media reports that the Irish government is being pressured by the European Central Bank to quickly sell on to the private sector the government bonds it issued to replace the Anglo promissory notes in 2013.

Spokesperson Niamh McCrea said that any such sale would “make an already bad deal even worse”.  She said, “The debts run up by a bank like Anglo, which is under criminal investigation, should never have been taken on by the Irish people through the promissory notes, and those notes should not have been turned into sovereign debt, as the government did last year, extending the repayment period but with no write-down of the debt”.

Andy Storey pointed out that as the bonds are currently held by the Central Bank of Ireland, any interest paid on them stays with the Irish state, but that “if they are sold to the private sector, as the ECB is now pushing to happen quickly, then the same class of creditors and bondholders whose gambles were made good by the Irish government will end up making yet more money by raking in the interest payments due”.

Ms McCrea called on the Irish government to “for once, resist ECB pressure and insist that the bonds remain with the Central Bank with a view to negotiating the write-down of this odious and illegitimate debt”.

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Irelands’ Bank Guarantee: A Lesson In Class Power

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The following article by Conor McCabe, is taken from the first issue of the relaunched The Bottom Dog, published by the Limerick Council of Trade Unions. Copies of the full print issue are now available in Connolly Books. You can also follow The Bottom Dog on Facebook.  

At the start of 2013 the indepen­dent TD for Wicklow, Stephen Don­nelly, stood up in the Dáil and ta­lked about the bank guarantee. He said it was passed because ‘of a di­ktat from Europe that said no Euro­pean bank could fail, no Eurozone bank could fail and no senior bond­holders could incur any debt.’ It is a curious opinion to hold, as the on­ly foreign accents heard on the re­cently-released Anglo tapes are imitations done by Irish bankers of considerable wealth and influence.

The tapes shone a light on the short-term focus, the scramble for capital that was to the front of the bank’s management team. John Bowe, the head of Capital Markets at Anglo Irish Bank, told his collea­gue Peter Fitzgerald that the strate­gy was to get the Irish central bank to commit itself to funding Anglo, to ‘get them to write a big cheque.’ By doing so, the Central Bank wo­uld find itself locked in to Anglo as it would have to shore up the bank to ensure it got repaid.

The Irish financial regulator, Pat Ne­ary, in a conversation with Bowe, said that Anglo was asking his offi­ce ‘to play ducks and drakes wi­th the regulations.’ Once the gua­rantee was passed the bank’s CEO, David Drumm, told his executives to take full advantage but advised them to be careful and not to get caught.

This was reinforced by an article in the Sunday Independent on 17 No­vember 2013 which looked to the British Treasury’s archives for in­formation on Anglo and the bank guarantee. ‘The documents reve­al’ said the newspaper, ‘that the Fi­nancial Regulator tipped off Britain that Anglo might be “unable to roll €3bn [in funding] overnight,” but not to worry as if that happened the Central Bank or Government would step in to bail it out.’

The idea for a blanket guarantee, however, did not originate entirely with the Anglo management team, regardless of how much they em­braced it. In the weeks leading up to the decision, the idea of a gu­arantee was flagged in the natio­nal media by people such as David McWilliams and the property deve­loper Noel Smyth.

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Friday Stat Attack: The Financial Heaven that is Ireland

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When we think of profits, we think of successful companies that employ people to produce goods and services that other people want to buy; for instance, the proverbial ‘widget’ factory.  Ideally, a profitable company employs people on good wages and conditions, invests in expansion (to keep up those profits and increase market share), and pays a competitive return on capital.

With the onset of financialisation, financial companies have come to over-ride traditional markets such as industry.  They don’t actually produce much, but they make a lot of money and with that comes political power to dominate decision-making in the economy.  If you have any doubts about that just remember our own bubble, crash and bondholder rescue.  The productive economy takes second place.

One measure of the extent to which financial institutions can dominate the productive economy is to compare profit levels between the two.  In a productive economy, profits from non-financial companies should be strong.  In a financialised economy, profits from financial institutions will be stronger.

Where does the Irish economy stand?  With the financial boys and girls.

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Yes, if you’re a financial company and you happen to be in Ireland, you’re in heaven.  Even the UK, with the power of The City, doesn’t match Ireland in this measurement.

Yes, some people might say, but financial companies bring their own benefit to the economy.  Oh?  Not according to the latest Central Bank Quarterly Report – thanks to Ben (aka Conor McCabe) from Dublin Opinion for spotting this:

‘Financial sector developments, which are for the most part unrelated to the domestic economy, account for a significant portion of the rise in GNP. To the extent that these persist in contributing to growth in net factor income in the coming year, they would further support GNP growth unrelated to domestic consumption, investment or export activity.’

Ah, yes, they are in this economy but not of this economy.

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A Union for Big Banks

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This report was originally published on the Corporate Europe Observatory website today, the 24th of January 2014.

Far from being a solution to avoid future public bailouts and austerity, Europe’s new banking union rules look like a victory for the financial sector to continue business as usual.

In late 2013, the EU took a major step towards a “banking union”. This has been presented as a series of measures in response to the financial crisis to avoid a repeat of the vision of contagious risk and bailed out banks.  In the preceding months a “single rule book” for banks and a European-wide system of supervision had been adopted. Finally in December a set of rules on a common regime of “resolution” (winding up) of ailing banks was agreed, and the European Council decided its version of rules on how to manage the question of the costs of resolution.

EU Single Market Commissioner Michel Barnier was a happy man:

“Today is a momentous day for banking union. A memorable day for Europe’s financial sector… We are introducing revolutionary changes to Europe’s financial sector… I have now delivered 28 proposals to better regulate, supervise, and govern the financial sector and a more integrated, less fragmented single market. So that taxpayers no longer foot the bill when banks make mistakes. Ending the era of massive bail-outs.”1

These bold promises are bound to be received well by the public in most parts of Europe. With the financial crisis, member states took over massive debts originated in the financial sector to save banks. Four and a half trillion euros had been risked for bailouts – and the final bill was 1,7 trillion euro. Not only did this send national economies spiralling downwards and set off a public debt crisis, it also led to a regime of harsh austerity policies, imposed by the EU institutions and the IMF as conditions for loans.

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An Open Letter to Minister Shatter

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This open letter was originally published on Project Allende on the 9th of December 2013.

On Monday this week I received a surprise email from The Minister for Justice, Equality and Defence. Signed “Best Wishes, Alan”, minister Shatter’s email was no Christmas greeting. It acknowledged a November online Contact.ie campaign to “Destroy the Anglo Bonds” in which I had participated along with an estimated 100,000 others.

The timing of Alan’s missal was unorthodox, as the vote had already taken place, the other emails I had received from TDs were in favour of the motion and had been sent before the debate. None of these were from any of the three major parties. In contrast to Alan’s letter they were strongly in favour of removing the Anglo ‘socialised’ debt, first created by Fianna Fáil as promissory notes, then consecrated by Fine Gael & Labour into sovereign bonds.

I can only surmise that Alan felt a need to explain himself.

This ‘debt’, as every Irish person knows, was the result of a disastrous public rescue of Anglo Irish Bank, the bank that The British Independent Commission on Banking called “the worst bank in Europe”. Internationally Anglo is a case study in the corruption of the European banking sector. To Alan it was an unsightly legacy from Fianna Fáil. Had Alan not listened to the Anglo Tapes? Maybe not.

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Labour Throws 30,000 Unemployed and Low-Paid Mortgage Holders to the Wolves!

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Statement from Seamus Healy TD 087-2802199

There is a special category of up to 30,000 low-income distressed mortgage holders who do not have sufficient income to enable them to avail of the personal insolvency procedure put in place by the government.

Labour has abandoned them to repossession and eviction. The Irish people have a long history of resisting evictions. Workers and Unemployed Action, in accordance with this noble tradition, will support these families in resisting repossessions and evictions.

On December 3, at Leaders Questions in the Dáil, I asked the Tánaiste and Labour Party Leader, Eamonn Gilmore, the following questions:

(1) Last week the Taoiseach refused to answer my question on the issue but he repeatedly stated that there is a solution for everyone in mortgage distress. Does the Tánaiste regard bankruptcy and repossession of the family home as a solution for those blameless families? Is that the reason the Government removed the legal ban on repossessions? One could ask whether that is the reason the indefensible situation has arisen whereby the Government has allowed the Central Bank to reduce the moratorium on repossessions from 12 months to two months. Will the Government ensure that the families which have fully engaged and have modest mortgages that are not buy-to-let properties, who are not strategic defaulters – will the Tánaiste ensure that these families will be allowed to remain in their homes?

(2) The Icelandic Government announced today that it will defy the banks by writing off up to €24,000 of household mortgages. Iceland obviously has real sovereignty. Will the Government exercise sovereignty by preventing reckless bailed-out banks, some owned by international vulture capitalists, from evicting 30,000 families in this country?

Mr Gilmore did not answer either question but continued to assert that these families do not face repossession despite the evidence. He expressed meaningless wishes such as: “We want every family and householder in mortgage difficulty to have that difficulty resolved and to avoid up losing their home” He said that each distressed mortgage would have to be dealt with “on a case by case basis”. He is clearly refusing to take any action to protect this special category of low income mortgage holders. His “case by case basis” places the individual mortgage holder at the tender mercy of the banks.

My question was based on a Report by the company Grant Thornton Debt Solutions which showed that thousands of distressed mortgage holders, unemployed or lowly paid, did not have sufficient income to avail of the Personal Insolvency procedure put in place by the government. This is because their income is below the minimum permitted living expenses for their household and consequently have no money to give to the bank each month. An interview with Michael McAteer, senior partner with Grant Thornton, can be heard by clicking here.

Mr McAteer makes clear that the only option for these low income families is to seek bankruptcy. Under bankruptcy law, which has recently been revised, ownership of all assets of the bankrupt person including the family home are transferred to the Official Assignee for the benefit of the creditors (the bank). In the last 12 months, Mr Gilmore’s government has removed the absolute ban on repossession of the family home. The Government has also reduced the one year delay before a bank can take legal action for repossession against a person who can’t pay a mortgage to a mere two months.

Mr Gilmore and the Labour Party have removed the protections for unemployed and low income distressed mortgage holders. They are clearly on the side of the banks.

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What’s at Stake

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The Dail Technical Group is putting forward a private members’ motion calling on the Government to re-enter negotiations with the ECB with a view to writing off the Anglo-Irish bank debt.  Yes, the bank debt is still with us despite the binning of the Promissory Note; it is a debt held by the Central Bank in what can now be called Anglo-Irish bonds.  Same debt, different repayment schedule, same drain on the productive economy and same burden on the Irish people.

I don’t intend to repeat the arguments regarding the political illegitimacy of this debt, nor the means by which we can expunge this debt.  I want to focus on the level of debt – of which the Anglo-Irish bonds are a significant contributor.  For the Government is having to take steps to drive down the debt by raiding its savings – because economic growth is still too sluggish to reduce the debt burden.

Remember the claims earlier in the crisis – that when Government debt reaches 90 percent of GDP we would be a in real danger zone?  As debt mounted, the new danger zone threshold became 100 percent.  Then it became 120 percent, after even more debt was accumulated.  In Ireland all these thresholds have been crashed.

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The debt rose to 117 percent last year (rising nearly five-fold in nearly five years).  The Government’s projections (in grey) show the debt peaking at 124 percent this year and falling to a little under 115 percent in 2016.  We crashed by 120 percent danger zone but, fortunately, the debt is starting to fall as the economy recovers and the austerity succeeds in getting our deficit under control.  Correct?  Not quite.  But before we discuss this  let’s look at two other measurements which show that the debt is actually much higher and the burden much heavier.

The ESRI Measurement

In their last quarterly review the ESRI put much emphasis on GNP as the defining statistic for the Irish economy.

 ‘The best indicator of what is currently happening in the economy is the growth rate of GNP . . .  it provides a much clearer picture of the change in the economic welfare of people living in Ireland.’

Ok, let’s assume this is true.  So what does the debt look like when measured against this ‘clearer picture’ of people’s economic welfare?

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When measured against GNP, our debt is through the roof.  Interestingly, the debt still has yet to stabilise completely even by 2016.  Even more interesting, Greek debt is projected to be 173 percent of GNI (a similar measurement to GNP) in 2015 – so were’ not that far off from the worst performing EU country.

I am sure that most commentators would agree that 150 percent debt is at, or beyond, the unsustainability benchmark.  And that’s where Ireland is if we use GNP.

The Fiscal Council

The Fiscal Council attempted to define a new measurement for the economy’s capacity – an adjusted GDP figure, a hybrid of GNP and GDP.  This is a useful measurement and, despite problems, is probably closer to the reality.  So what does the debt look like when this benchmark is used?

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While not as bad as the GNP measurement, we find that debt is phenomenally high – peaking this year at 140 percent of the Fiscal Council’s adjusted GDP before starting to decline.  But even in 2016 we’re still above 130 percent.

Is this sustainable?

The Government’s Raid on Savings

The debt levels, when measured against benchmarks that try to assess the real capacity of the economy, is extra-ordinarily high – much higher than when we use GDP.  But GDP is the measurement we will be judged by, even if the economy groans under a debt burden that is much higher.

The Government is understandably keen to show everyone that the economy is generating sufficient growth to bring debt levels down.  However, is this the case?  In the first chart, we saw debt peaking this year and starting to fall next year.  But there is a bit of massaging here.

The Government is using a large portion of its cash balances to pay down the debt (cash balances , when borrowed, are counted as part of gross debt).  The economy itself is still not generating enough income to bring down debt levels.  We can see this by removing the cash balance element from the debt figures (essentially, this measures our debt by the actual amount we borrow in a year – the Exchequer Borrowing Requirement).

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When we measure the economy’s growth as a means of reducing the debt, it will still rise in 2014 and the fall is significantly less than the official figures.  Why the difference?  Because the Government is using its ‘savings’ (cash balance) to drive down the debt to make up for sluggish economic growth.

This is particularly relevant as the Government is claiming that they don’t need a precautionary credit line because they have €20 billion in the kitty.  However, the Government intends to use nearly €11 billion next year to pay down the debt – so that money is not available to it if things go pear shape and we can’t borrow at sustainable rates in the market.

All this might seem a bit wonkish and stat-picking.  However, there are some real considerations:

  • Our debt levels are high and the burden is masked by using GDP as the benchmark
  • When measurements of economic capacity (GNP or the Fiscal Council’s adjusted GDP) are used, our debt levels are much much higher
  • Projected economic growth is still so sluggish that the Government is having to dip into its savings to drive down the headline debt levels
  • What happens if economic growth is even lower?

One can argue that all this is sustainable.  I suspect it is.  Sustainability is a political choice.  If you hollow out your productive economy, drive down incomes, wreck public services – all to ensure that you pay off your debt, it will be sustainable; all the more so if you convince people there is no alternative.

But if the Anglo-Irish debt was expunged we would be in a better place.  Our debt levels, while still high, would be less of a burden on the economy.  We would be giving ourselves a better chance of extricating ourselves from high debt levels.  We wouldn’t need more doses of austerity.  Our economy would be better.  All of us would be better.

That’s what’s at stake with the Private Members motion on Anglo-Irish debt.  Not a panacea, just an opportunity to give ourselves a break.

Boy, do we need it.

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Breaking the Link Once and for All

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Day by day it gets weirder.  First, the EU commits itself to breaking the link between banking and state debt.  This was described as a ‘game-changer’ and led some in Ireland to believe that not only would future bank debt be borne by someone else, but that same someone else would also repay us for our past bank debts.  Oh, happy days.

But recent announcements suggest that just the opposite.  The ECB states that where banks fail the upcoming stress tests and they cannot raise capital in the markets, then national governments will have to pick up the tab.  And now an argument is being put about some European capitals that the European Stability Mechanism will only be a last resort for countries with bank debt problems – only after individual governments have come up with the money.  All this means that national governments will still be responsible for their own banks’ debt and capitalisation requirements; and if they get into fiscal trouble, they can use the ESM as a  . . . bail-out mechanism.

So breaking the link between banking and state debt may end up strengthening that link. This is what passes for common-sense in the Eurozone.

Still, there is a logic in all this that the Irish know only too well.  In a previous post I pointed out that the Eurozone could be on the hook for nearly €900 billion in banking debt.  Much of this is contingent and wouldn’t make its way on to public books.  But the problem is that we don’t know how much.  And this is before the bank stress tests.  The Irish people have rightly complained they shouldn’t be responsible for private banking debt.  So why should the Dutch or the Finnish or the Austrian people?  What would lead them to take on board on unknown but potentially large amount of liability?  If it’s not the Irish people’s debt, it’s not their debt either.

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Ireland and the Shadow Banking System

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Now that we only have one copy have no copies of the first issue of the print edition of Irish Left Review left and the second issue is now available to buy either online or in these bookshops we are now publishing some of the articles from the first issue on the web. The first is Conor McCabe’s brilliant article on Ireland the Shadow Banking System.

Ireland and the Shadow Banking System

Bretton Woods and the Eurodollar Market

Conor McCabe

Ireland is a tax haven.  It is a hub in the shadow banking system.  The dominant form of business in the Irish state, the one to which national economic policy shapes itself, is that which accommodates the needs of foreign capital and finance, to the detriment of productive and social activity. This business model is an intermediary model. It is conducted by a middleman class which has positioned itself between foreign capital and the resources of the state. These middlemen are found within law, accountancy, stockbroking, banking and construction.

This is not to say that every successful business in Ireland is a middleman business, but rather that these businesses wield the most influence regarding national economic policy. The type of middlemen may have changed over the decades, but the way of conducting business has not.

The intermediary/middleman business model maintains and reproduces itself through the structures of the state. In other words, the class which benefits the most from this economic policy is also the class with the most influence over the dynamics of Ireland’s legal, education and political systems. Governments come and go but the structural dynamics of the state remain the same. As a result of the structural presence this class has within the state, policy change comes dripping slow.

The current privileged status of international finance and wealth management within Ireland – that is, paper assets over production – is the latest field of play for this middleman class. Upon independence it was live cattle exports to the UK and the transference of credit to the city of London; in the 1960s it was free access to the UK economy for international companies with branches in Ireland, followed by similar access to the EEC/EU, giving rise to construction, land and property speculation; all of this was underpinned by the selling of the State’s gas, oil and mineral rights to whatever bidder took the middlemen’s fancy.

The national resource that is for sale today is the right of an independent state to set its own laws and tax policy. In other words, it is Ireland as a mature democracy and legal jurisdiction, one that is recognised by international law that is traded by this middleman class for the private gain of its privileged players.

The current emphasis on paper assets over production reflects the fundamental changes in economic power relations which have taken place over the past forty years in advanced capitalist countries. This period has seen the financialisation of everyday life and the re-emergence of rentier capitalism. The move towards profit-seeking in paper assets is in part a response to the decline in the rate of profit and a tendency towards overcapacity in global manufacturing industries.  The pressure to return profits in a world of declining margins has seen reductions in social expenditures by national governments and stagnation in wages. The resultant decline in aggregate demand is an underlying factor in the explosion of price speculation over production.

This is part one of a two-part article on Ireland and the shadow banking system. The rise of the Eurodollar market and the decline of the Betton Woods system is covered here. The emergence of shadow banking and Ireland’s role in its operation will be covered in a future issue.

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Breaking the Link? It’s Getting Stronger. It’s Strangling Us

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While Eurozone Governments continue to debate the details of the banking union; while the Irish government continues to insist that the deal reached last year includes bailing us out for past bank debt; while commentators debate and measure the link between public and banking debt; while the ECB steps into the void with its own peculiar version of ‘breaking the link’ between banks and states – while all this is going on, that game-changer which would break the link between state and banking debt is becoming ever more elusive.

With the latest data from Eurostat we can track the impact of banking debt on the public finances of Eurozone governments.

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2010 was the worst year – with plucky little Ireland contributing nearly half of the total €66 billion.  It eased off in 2011 but it came back with force in 2012.  In total, the banking debt has cost the Eurozone €138 billion but this is just the Eurostat’s accounting of the largely capital impact on General Government Debt.  It doesn’t include interest payments, cost to wealth funds (such as Ireland’s National Pension Reserve Fund) or the impact of contingent liabilities, never mind the impact on the economies in general.  So this is a narrow accounting of a cost which is much, much higher.

Who got hit in 2012?  Ireland didn’t.  In fact, we recorded a small income increase due to bank repayments (€1.6 billion).  The main victims, however, can be found in the periphery.  Spain, Greece and Portugal accounted for 86 percent of the net impact on the Eurozone in 2012.  Spain, in particular was hit, with an impact of €39 billion on their public books.  But other countries got hit: Belgium, Germany, Austria, France and the UK with minor impacts in other countries.  In short, 2012 was the second worst year since the crisis began.

But the fun doesn’t stop there.  There are two more tables which show the continuing bank-debt burden on the Eurozone.  First, is the relationship between the stocks of government financial assets and liabilities arising from the support of financial institutions in the crisis.

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A Few Referenda Ideas that Just Might Succeed

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As the Government does its post-mortem on the Seanad referendum, Switzerland is gearing up for a vote in November on a referendum that is truly reforming.  It’s called the 1:12 initiative. It proposes that monthly senior executive salaries cannot exceed 12 times the pay of the lowest paid in a firm.  And it proposes that this be put into law.  This is pretty heavy in a country which is home to major financial institutions and multi-nationals.

Imagine the impact here.  In the Bank of Ireland, the CEO Richie Boucher has a salary of €843,000 (no, that’s not a typo).  A bank clerk on starting pay is approximately €22,000.  Under this law one of two things would have to happen:  either Richie’s salary would have to fall by three-quarters – to €264,000 a year. Or the starting pay would have to rise to €70,250.  I leave you to decide which is more likely to happen, if either.

But there is more going on in Switzerland than just a pay ratio debate.  Earlier this year, the people voted on a referendum that put controls on executive pay and gave shareholders’ more rights over executive compensation.  There has been growing anger over excessive salaries and the bonus culture among Swiss companies.  The referendum passed overwhelmingly despite the fact that opposing business lobbies outspent the ‘yes’ side by 40-1.

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Behind China’s Liquidity Crisis

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In June, China suffered its worst liquidity crisis in over a decade. Some sections of the U.K. and U.S. media exploded with wild comparisons to the US financial crisis in 2008.

Such comparisons were nonsense, however, based on an elementary economic mistake. The U.S. did not suffer a liquidity crisis in 2008. It faced an insolvency crisis. The former is a shortage of means to meet immediate payments; the latter occurs when banks’ liabilities exceed their capital. In 2013, Chinese financial institutions faced liquidity problems, but not a single major institution failed. Numerous U.S. financial institutions collapsed in 2008. Comparing the two events is rather like claiming that the flu and the bubonic plague are equally serious, since both are illnesses!

But not being the bubonic plague doesn’t mean that in its own terms flu is not unpleasant, or that it doesn’t have side effects that last for some time. Therefore, it is important to analyze the crisis’ causes in order to determine whether similar events will recur. While the exact form of crisis was not predictable – it never is – both Chinese economists and the present author predicted why there would be problems for the Chinese economy. Now that June’s symptoms have been somewhat ameliorated, whether a similar crisis emerges in the future depends on whether the key mistake that led to the present one is resolved.

The key symptom of June’s crisis was a spike in interbank lending rates to a 13 percent peak. Willingness to pay this indicated that financial institutions urgently needed cash. Analyzing the links between the underlying disease and the symptoms shows why.

The core problem that led to the liquidity crisis was advocacy that China abandon the policies which for 35 years have made it the world’s most rapidly growing economy, in favor of something termed “consumer led growth,” a theory that boosting consumer demand will lead companies to a more rapid increase in production of consumer goods and a more rapid rise in living standards. Unfortunately, this theory factually doesn’t take into account that investment is the main source of economic growth, and conceptually it doesn’t understand what a market economy actually is.

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REITs for the (Property) Czars

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Recently the rating agency Fitch highlighted the massive connection between shadow banking and mortgage REITs, a property investment vehicle that has increased hugely on the back of the collapse in the US property market. While REITs have been around for a while (first legislated for in 1960 by President Eisenhower ) they didn't make much of an impact, as other forms of investment through asset speculation dominated the stock market.

With a financial crisis on the back of a bursting property bubble however, REITs finally came into its own as it seemed that the financial collapse deflated values in property sufficiently to make them a worthwhile investment given that prices in certain markets (mostly major capital cities) would likely rise again. As one of the requirements of REIT is to disperse up to 80% of its profits to shareholders, it is considered to be 'safe' from a regulatory point of view.

However, the Fitch report was written to highlight the considerable risk that mortgage REITs might pose, as they are being financed through the shadow banking system.

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