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Can the eurozone afford its banks?

Robert Peston | 10:29 UK time, Monday, 29 November 2010

Jim O'Neill, probably the most influential thinker at Goldman Sachs (as current head of its asset management division and erstwhile chief economist), has this morning written that "European Monetary Union (EMU) will probably survive, but it is likely to remain very messy".

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Which is hardly a ringing endorsement by the world's most powerful investment bank of the most ambitious economic and financial project in Europe of our age.

And, let us not forget, Goldman Sachs is not famous for issuing public statements that rile the world's most powerful governments - which tend to be its customers.

For O'Neill, the issue is about the governance of the eurozone, not about the magnitude of the debts of Europe's financially stretched economies. He points out that the sovereign indebtedness of Greece, Ireland and Portugal is huge relative to the size of their respective economies but almost de minimis in relation to the size of the eurozone as a whole.

Even Spanish debt represents "only" 5.3% of eurozone GDP, he points out.

So if Germany, France and the Netherlands were to properly underwrite the debt of their over-stretched neighbours, Europe would (in theory) have little more difficulty borrowing than the US - whose overall ratio of debt to GDP, at 80%, is more-or-less the same as the eurozone's would be, on a pro forma basis.

The verdict of the markets this morning, following last night's agreement on the structure of a bail-out for Ireland and on a new framework for eurozone financial rescues, is that Germany, France and the Netherlands are a long way from being prepared to properly guarantee the indebtedness of Greece, Ireland, Portugal, Spain and Italy.

The prices of Irish, Portguese, Spanish, Italian and Greek government bonds have hardly moved this morning. The implied interest rate that they would have to pay to borrow for 10 years remains way above normal levels, and a mile above what Germany pays: it's 9.12% for Ireland, just under 7% for Portugal, 5.2% for Spain, 4.45% for Italy, and 11.9% for Greece.

What investors have registered is that, far from saying they'll honour the debts of the so-called peripheral countries, Germany, France and the Netherlands last night sent out an unambiguous message that they want the risks of lending to weaker countries to be born in part by the lenders.

European finance ministers announced new arrangements for rescuing eurozone members to replace the €440bn European Financial Stability Facility from 2013. And these would include the insertion of "collective action clauses" into bonds issued by eurozone countries from June 2013 onwards.

These collective action clauses would make it easier for debtors to force losses on creditors - by, for example, lengthening the term of the debt, altering the interest rate or writing off some of what is owed - so long as a "super-majority" of debtors agreed.

European finance ministers have in effect announced that the risks of lending to financially stretched eurozone countries would increase in two and a half year's time - which is no time at all for many investors.

In practice this means that the eurozone has set itself a deadline of two and a half years to persuade investors that its finances are in order. If it fails to do so, a whole host of weaker eurozone states could find they are confronted with punitive borrowing terms or even a strike by lenders.

If this isn't causing a degree of anxiety for the governments of Portugal, Spain and Italy, then it probably should be. Because, according to figures from Bloomberg and Moodys, they collectively have to refinance more than €165bn of existing debts in 2013 - which takes no account of what they'll need to borrow to finance whatever gap there is between their spending and tax revenues in that year.

What also needs to be pointed out is that O'Neill's relatively sanguine analysis of the challenge for the eurozone takes no account of the financing needs of the eurozone's banks - which can be seen as contingent liability of the public sector.

In the case of Ireland, the banks are now a real liability of the state - and the better news for the Irish government this morning is that the share prices of Bank of Ireland and Allied Irish Bank have risen, following the provision of €35bn for recapitalising Ireland's financial system.

That said, Allied Irish is on its way to being more-or-less fully nationalised, and Bank of Ireland will struggle to avoid becoming majority owned by the state.

What some investors will find disturbing however is that this public-sector rescue of Ireland's banks is predicated on the idea that the banks' creditors will be reassured by a lifting in their capital resources from 8% of assets to 12%.

The fact is that a 12% "core tier 1 capital" ratio - while it may be a multiple of the protection that was in place for banks three years ago - will be seen as still too low by some investors and many international regulators.

Given the size and importance of Bank of Ireland and Allied Irish in relation to the Irish economy, a much higher capital ratio - or greater protection against future losses - could be seen as appropriate (as I pointed out in an earlier post).

Here is what may spook investors in eurozone banks in general - that the IMF and EU may have shied away from putting pressure on Ireland to increase the capital resources of its banks further for fear that to do so would shine a light on what may be seen as a relative shortage of capital in the eurozone's banks in general.

For Europe's very biggest banks, the ratio of their assets to their equity capital is 50% greater than for the UK's banks and 100% in excess of the so-called leverage ratio of big US banks, according to Bank of England calculations. Or to put it another way, Europe's giant banks appear to be taking far bigger financial risks than US and UK banks in relation to the reserves they retain as protection against potential losses.

So here's the big question. O'Neill may well be right that a reformed, integrated eurozone could cope with the aggregated sovereign debts of its members. But it is altogether another question whether even Germany could afford to underwrite the liabilities of the eurozone's monster banks, if creditors started to seriously question whether those banks have sufficient capital.

Comments

Page 1 of 2

  • Comment number 1.

    I think that the Eurozone (and as such the Euro) will survive for the foreseeable future. There is sufficient political will to make sure that it does.There is also sufficient funds to bail-out most of the failing Eurozone members.

    The question is, though ..... 'In what form will the Euro survive?'

    There is an idea that there will be a 2-tier Euro, one with the stable economies, another with the weaker ones. However this is for the European finance ministers to decide.

    What has been lost for every is the faith some people had in the European Union, its managers and its ability to conduct its own business and manage a single-currency.

    The problem in Ireland is only a small indicator of the 'cancer' that lies at the heart of the European Union in Brussels. Namely, an appauling level of management.

  • Comment number 2.

    Forgive me if I am wrong, but the Irish Banks all passed the "stress" test a few months ago?

  • Comment number 3.

    soothsayer-' beware the Iberian jitters'
    Frankie Howard- Yes dear, jitter me not ! Oh well, please yourselves !

  • Comment number 4.

    Len Goodman called it right on Strictly last Saturday. If you have to explain what you are doing it's not clear enough.

    This money to the banks is going into a black hole. I'm glad we can get rid of this albatross in 2013. Well done George!

  • Comment number 5.

    Can the Eurozone afford the Euro?

  • Comment number 6.

    No. two I believe the answer to your question is yes and what does that say for the test and for the resilience of other Euro banks? Having a large banking sector in relation to the domestic needs of the economy is close to all bad news - a small slip of the pen and Ireland becomes Iceland. Governments need to get it that regulation is a poor second to supervision and with a substantial publicly owned part of the industry. But it is also a question of economic management to avoid both high retail and asset inflation. Consenting geeks in private effectively dictating policy on the MPC will become to be seen as an appalling mistake.

  • Comment number 7.

    Am I alone in thinking that it is just beginning to dawn on these self-styled bankers that if they pull the rug out from underneath all the governments of the world they will forgo any chance of a further bonus, eventually ending up broke like the rest of us.

    There has to be a better way to deal with these difficulties.

  • Comment number 8.

    So we now consult with the wolf about the future of sheep, is that right Bobby?

  • Comment number 9.

    It seems that it is not the Euro that is at stake - but money itself?

    Then it doesn't matter what you've got because without money there will be no order and so dollars, pounds but also title deeds and the like will all cease to have value.

    It will take a long time to adjust to a system of barter and in the meantime people will not be able to wait.....

  • Comment number 10.

    The key word is integration. Unless the Eurozone goes out collectively there will always be disparities between the interest paid to bondholders. But then a central function is required to distribute where it is needed. And this is from an organisation that hasn't had the accounts signed off for 11+ years I think it is now.

    Do we really want this?

  • Comment number 11.

    The answer is NO , but the precedent has already been set that banks country of origin should pick up the tab.

    I am afraid the only answer (If it can be called that) is the slow deflation of the debt over a decade .

    Sovereign debt is the last port in the storm , so if this fails , the only option would be a market lead depreciation of the debt with incalculable consequences.

  • Comment number 12.

    This is a reasonable precis of the situation as far as I am concerned.

    The problem is politicans who are determined to be thespians at every opportunity. Politicans behaviour is consistent whatever country they are located in when faced with a major system problem. Firstly they express outrage at the impositions placed on the innocent taxpayer - who have been implicit in the process and are far from innocent. Then they bray about intangible and emotive issues as distraction. Eventually reality dawns that there is no way out and the politcan then moves to declaring they are the salvation, the hero.

    Consistently politicans pretend they are in control when they are not. They also do not appear to read Machiavelli.

  • Comment number 13.

    I recognise some of these themes as what in systems engineering might be called a 'buffering' issue.

    That is, the Tier 1 capital is, in effect, a buffer to be deployed when bank 'runs' occur and the management of the fractional reserve banking system by central bankers seems to have allowed insuficient buffers to be maintained, hence the potential risk of runs putting banks into jeopardy.

    One solution might be to ensure that the power of the central bank stands full-square behind the banks, with the quid pro quo being that the banks accept more monitoring and overall control by the central banks.

    To do this, the central banks could use a technique borrowing from the telecoms industry. At the heart of each telecoms provider is a 'black-box' called the lawful intercept which routes all traffic through to interested parties in the intelligence community.

    So, the banks could, at the heart of their infrastructure, have an equivalent 'black-box' which routes financial data traffic to the central banks for oversight purposes.

    After all, if you can't measure it, you can't manage it (in this case, financial risk).

  • Comment number 14.

    I agree with EuroSider. The main problem with the EU is it is neither a country or an association of countries. It has a central bank and a parliament, but does not really operate cohesively. Elections are mainly a joke and 'anyone' can get elected to the EU parliament with little or no scrutiny of their lack of talent.
    Either the EU should become a country (a federation like the US) and impose proper management on it's wayward outlying regions, or give up and go back to being separate countries.
    As EuroSider says, the main problem with the Euro is a total lack of decent management skill at the centre of the monster, despite the huge sums it costs. Until they fix this it is going to continue to be a mess.

  • Comment number 15.

    Like companies and individuals , countries incl the USA are going to have to get used to the idea of balancing the books . Running up annual deficits year on year is simply unsustainable and will without doubt, cause future generations to have a lower standard of living.

    For the UK, I hold Gordon Brown to account , year after year it kept saying he would be prudent with the UK public finances, but in the end he got in badly wrong . Indenial that public finances required a sword through it , due to the collapse of the tax take.

    In my view governments should always be looking to spend within their annual tax take with a 5% fund for the "unexpected". To me this prudence , not spending £100 billion on PFI on never never capitalisation schemes. Believe me in 30 years these PFI flagships won't be assets but liabilities needing a total re build.

  • Comment number 16.

    Can the eurozone afford its banks?
    ...............................................
    Probably not ... of course not

    The main question for me now is how will the ECB manage the declining exchange rate value of the Euro? The ECB appear to have policy of favouring a strong Euro in comparison with other currencies ... even though a weaker Euro would assist non EU exports. Being 'generous', the ECB may have done this deliberately in case the current circumstances reduced the Euro value ... I very much doubt that, as would be crediting the ECB with being something like ' at least half way competent'.

    If sovereign and other debts have not been made in Euros and/or the contracts have a catch all currency clause if the Euro falls below a certain exchange rate value ... then the ECB is, sooner rather than later, going to be forced into deciding whether to raise interest rates to stop the Euro from sliding.

    This is the catalyst looming for a massive crash coming in Europe that can also drag the UK into the abyss ... it's time to abandon the Euro otherwise a 'falling weak Euro' will tempt the ECB Eurocrats into raising interest rates... and interest rate increases before EU wide improvements in sustainable economic performance ... means medium term stagnation for most of Europe/most of the EU countries.

    If the choice in 2011/2012 for the ECB is between a low value Euro or a propped Euro with high interest rates .... the ECB are soon to be faced with an impossible decision.

    The only answer is to get those printing presses out and start printing the original EU sovereign currencies again. The ECB will have to throw in the towel at some point and just admit that the Euro currency and EMU is not sustainable/not sustainable without major reform and Treaty re-negotiations. If the ECB can do this eraly and have an orderly restructuring this can avoid a lot more economic turmoil ... as we've likely 'seen nothing yet'.

    Bye Bye Euro (EMU)!

  • Comment number 17.

    "For O'Neill, the issue is about the governance of the eurozone, not about the magnitude of the debts of Europe's financially stretched economies. He points out that the sovereign indebtedness of Greece, Ireland and Portugal is huge relative to the size of their respective economies but almost de minimis in relation to the size of the eurozone as a whole.

    Even Spanish debt represents "only" 5.3% of eurozone GDP, he points out.

    So if Germany, France and the Netherlands were to properly underwrite the debt of their over-stretched neighbours, Europe would (in theory) have little more difficulty borrowing than the US - whose overall ratio of debt to GDP, at 80%, is more-or-less the same as the eurozone's would be, on a pro forma basis."

    Time for the Europhobes to re-engage with proportion and perspective.

    Time for the UK to join.

  • Comment number 18.

    10. At 11:55am on 29 Nov 2010, yam yzf wrote:
    The key word is integration. Unless the Eurozone goes out collectively there will always be disparities between the interest paid to bondholders. But then a central function is required to distribute where it is needed. And this is from an organisation that hasn't had the accounts signed off for 11+ years I think it is now.

    Do we really want this?

    Yes we do.

    'And this is from an organisation that hasn't had the accounts signed off for 11+ years '

    A favourite and meaningless mantra of the Europhobes. Have UK accounts been signed off.



  • Comment number 19.

    You must ask;
    Who should pay the debt?
    The very powerful banking system that was allowed to create it does not want to take a hit but that is where the wealth is.
    What can we do to avoid this in the future?
    Get educated.
    Is "Austerity" needed?

    http://www.youtube.com/watch?v=go2bVGi0ReE

    What is wrong with the banks?

    http://prosperityuk.com/



  • Comment number 20.


    In recent years the true rate of profit from enterprise (productive capital) has been so low that capitalists have invested their money in finance capital (much of which never becomes productive capital, but is fictitious capital).

    This fictitious capital has been used to buy assets, eg. property, & the high rates of profit are essentially due to rising asset prices.
    More bailout money more fictitious capital.

    But no-one can get away from the fact that the true rate of profit from productive capital is low, or even negative - private investment has collapsed.

    In the long-run the rate of interest cannot be higher than the rate of profit from enterprise.
    And here I'm not refering to the rate of interest bank customers get, rather the difference between the rate of interest banks pay the government & the rate of interest they charge to customers.

    The banks are doing very well in terms of reported profit, but it's all fictitious & will pop!

  • Comment number 21.

    The simple fact of the matter is that unless banks and other lenders actually realise that investments may end up losing them money and that if that happens they have to bear that loss, they will continue to make these sort of investments for ever.

    By constantly bailing them out they are being give carte blanche to make money in the good times and have themselves compensated in the bad times. If you reward bad behaviour you foster it.

    The first rule that any small investor is told is that "prices can go down as well as up". If banks aren't told that they have to abide by this fundamental rule of economics then we're simply going to lurch from this crisis to similar ones in the future.

  • Comment number 22.

    I think the real questions are:

    Can Eurozone public finances afford the banks?

    And:

    Can banks afford the ambtitions of Eurozone?


    Methinks both are a resounding no otherwise the problems we see all across Europe (UK included) wouldn't be spreading like forest fires in a heatwave.

  • Comment number 23.

    = the whole Eurozone is a going concern.

    Will Barcap come in and buy Germany from the rest of the rotting corpse a la Lehman?

  • Comment number 24.

    Maybe the Eurozone cannot afford its banks.

    The next question then is does it need its banks. In my opinion the answer is not in their present form. Of course they are needed to facilitate the movement of cash and credit around the world, but they should be required to always have sufficient completely secure, easily liquidated assets, to cover the balances they hold while performing this function. The practice of including risky assets on a weighted basis should be outlawed. It is based on the false assumption that only a known proportion of these investments will fail.

    Only funds specifically deposited with a bank for that purpose should be used for providing investment capital. This will of course reduce the amount of credit that the banks can provide. But the crunch was the result of the provision of excessive credit, so less credit would result in a more secure financial system.

    To compensate for the reduction in credit, governments would need and be able to have larger unfunded deficits to prevent deflation. It would be easier for central banks to regulate the monetary system, if private banks were no longer allowed to create as much credit.

    The Eurozone would need to develop a body, preferably answering to the directly elected European Parliament rather than the Council of Ministers, to exercise the necessary degree of control for such a system. Although this might upset eurosceptics, after chaos that has been the result of trying to use markets to control the euro monetary system, most of those interested in maintaining the EU, must surely agree that some such development is vital.

  • Comment number 25.

    I think the difference between what we class as sovereign debt (pre-bank bailout) and the potential transferable debt spoken about in this article, which is the unquantified amount run up by private banks being passed onto national government books, is a hugely blurred line, and one that is deeply worrying. The rot now spreading through national level borrowing is a response to governments sustaining the debts of private banks through bail out packages, part-nationalisation, direct injection of capital, and/or underwriting debt, and is not fundamentally to do with sovereign debt (i.e. calculated year on year borrowing) - it's the situation post-recession that has fundamentally shifted the attention towards now precarious looking national books. Whether you agree with the concept of governments operating on a the principle of 'national debt' or not, the reality is that national governments and their finances of say Ireland for arguments sake would not be requiring an 80bn euro bailout. Would the Irish banking system collapse without however? Yes, probably.

    What would happen if a significant chunk of the banking sector collapsed? The fundamental concern would be the savings of individuals. Closely followed by assets owned in the form of mortgages. Then investments. The availability of credit for individuals and business would then become a serious issue. But is the amount quantifiable? And is that amount more or less than the £300bn injected directly into the UK banking sector?

    I can't help but wonder what would have happened if the global response to the financial crisis was for national governments to underwrite and secure every individuals' savings and assets, instead of keeping banks afloat, and let the system crash. You can reinforce against severe pressure, but the only way you can deal with the stress is by releasing it. I am not an economist, and this probably demonstrates my naivety, but despite a period of chaos that would ensue I'm sure the end result would be a natural stabilisation of the financial sector - maybe the death of several banks along the way, but at least any national debt caused as a result of securing individuals' assets would be in the name of the taxpayer, and not the banks. Maybe I'm being ignorant, but I certainly don't see any added value in the bailout we have provided to the banking sector - yes my savings are still there, but I am getting nothing for them, and is there any credit being extended to me? No. So what, then, is my bank doing for me that justifies being in existence, yet alone a position of privilege?

  • Comment number 26.

    All this user's posts have been removed.Why?

  • Comment number 27.

    > shine a light on what may be seen as a relative shortage of capital in the
    > eurozone's banks in general.

    Hm... so those bankers have been sailing too close the wind again, eh?

  • Comment number 28.

    I sit here reading and writing endless rhetoric about the banks, bailouts, risk, derivatives etc yet we all know everything comes down to a really viscious circle with sharp pointy teeth.

    All that is happening is governments and banks are colluding to delay the inevitible horrors because the immediate consequences of allowing banks and states to fail is too hideous to inflict upon a generally unsuspecting public. This is more hope and prayer stuff now than considered solutions.

  • Comment number 29.

    The OBR are at it again.

    http://www.bbc.co.uk/news/business-11860585

    Sniff, sniff, can you smell b******t

  • Comment number 30.

    Look, let's calm down with respect to the figures. The principles are exactly the same whether you are talking about 10 pounds, or 10 billion pounds.

    Basically, the greedy bankers have been gouging us by taking big risks with our money, and now they've been caught short. In the words of the late, great Leslie Nielsen – it looks like the cows have come home to roost!

  • Comment number 31.

    "Europe's giant banks appear to be taking far bigger financial risks than US and UK banks in relation to the reserves they retain as protection against potential losses."

    You can not compare European figures with US/UK. You could get mortgages at upto 120% in the UK the max in france/germany was around 70% so the underlying risk also has to be included in the equation. Ireland went the US/UK route of wreckless borrowing and thanks to the IMF/Euro will have stricter controls to adhere to that will work out alot better in the longer term. The majority of the bailout covers property (alot of which is within the M25 belt and eastern europe) so the biggest problem Ireland will have in the future is what to do with the income from the sale of property in 5-10 years. The "mortgage" on that property will be paid off over the next 4 years so any proceeds from the sales that were obtained at upto 50% discount will come after the Irish have tightened their belts and paid off the loans. There will be alot of extra revenue that was previously used to service the loans plus the global economy should have improved generating even more revenue. Taking property/banks out of the equation Ireland has one of the healthiest economies in Europe so the biggest issue will be how to prevent another potentially larger boom/bust cycle in the future.

  • Comment number 32.

    There can be no currency union without political union cf The American Civil War. It's time to stop this charade viz either throw out of the Euro those countries that lied, cheated and doctored their numbers to pass (sic) the test for entry or give them an ultimatum - you can do what you want but only if the German taxpayers agree or you do what we want.

  • Comment number 33.

    "So if Germany, France and the Netherlands were to properly underwrite the debt of their over-stretched neighbours, Europe would (in theory) have little more difficulty borrowing than the US - whose overall ratio of debt to GDP, at 80%, is more-or-less the same as the eurozone's would be, on a pro forma basis."

    Time for the Europhobes to re-engage with proportion and perspective.

    Time for the UK to join."

    =========================

    The correct question should be why should Germans agreed to underwrite the uncontrolled spending habits of their neighbours? Or in other words there is nothing wrong with the Euro as long as all countries agree that they should give up control to a centrallised authority of spending (and presumebly tax raising).

    It is entirely reasonable for a centralised true of govt of Europe to be founded but is that really the desire of the people of Europe?

    What I find amusing is that all news seems to be treated by the pro-Euro fanatics as a reason to join the Euro and exactly the same news is treated by the anti-Euro fanatics as a reason not to join.

    The reason is simple. Pro-Euro fanatics over-state the benefits of the Euro and understate the costs (assuming they even accept there are costs) and the Anti-Euro overstate the costs and understate the benefits (although in general they do accept there are some benefits).

    The true position is more complex and I certainly do not know for sure the answer:

    Benefits: a common currency reduces the costs of trading within the currency zone (no exchange rates to worry about) and should increase trade within the currency zone. A large currency can carry more credibility within financial markets although I should point out that Sterling is of sufficient size to have its own credibility so this second benefit is somewhat doubtful.

    Costs: common interest rate which may not be suitable to UK. Fixed exchange rate with rest of currency zone means that exchange rate devaluation is not an option when UK has become uncompetitive (for example due to higher wage inflation) which results in restoration of competitive position having to be more brutal (for example mass wage cuts) than under a floating exchange rate system.

    My own view is that the costs probably outweigh the benefits because the world economy provides assymetric shocks (economic shocks which have a different impact to different parts of the currency zone) rather too frequently for my comfort. But unlike the fanatics on both sides I am happy to admit that this has to be an opinion based on gut feel because there is no real hard data to actually try and quantify the costs and benefits.

    And of course I am of the view that the Euro has to work economical first rather than being a political construct that is deemed to be the "right way forward" irrespective of the economics

  • Comment number 34.

    18. At 12:34pm on 29 Nov 2010, Richard Dingle wrote:
    10. At 11:55am on 29 Nov 2010, yam yzf wrote:
    "Do we really want this? (I asked)

    Yes we do. (responded)

    'And this is from an organisation that hasn't had the accounts signed off for 11+ years '

    A favourite and meaningless mantra of the Europhobes. Have UK accounts been signed off."

    As far as I am aware, but feel free to correct me, the audit commission/office have done so. If I am mistakedn, in the UK I am given the chance of affecting change through elections

    The EU does not give this chnace for much of the work is done by the commission and not the parliament - the MEP being the one vote we have in Europe.

    So no, I and many others, do not want this.

    But thank you for extending the list of names I have now been called which was, at the last count, included Europhobe, Banker apologist, idiotic capitalist, appeaser, fool..... :-) Sticks and stones.....

  • Comment number 35.

    All this user's posts have been removed.Why?

  • Comment number 36.

    I think the Euro will survive for now because there is a political will for it to survive. That is to say a political will totally bereft of any logic whatsoever.
    However, I believe we are seeing the first seeds of a two tier Euro currency being sowed. I think that by splitting the debt security from senior debt (guarenteed) to unsubordinated debt(haircut) then this will give the ECB for now, some control over the soverign debt issues. However, I can't see many governments of the peripheral Eurozone countries allowing their hands to be tied like this so the end result will be a split in the Eurozone.
    This is all a direct result of the bigger countries (Germany) imposing their political and financial will on the smaller countries which caused the problems in the first place.

  • Comment number 37.

    It seems that even Mr. Peston hasn't put 2 and 2 together yet on this one.

    There is no way that the PIIGs can be allowed to fail because the Germans have up to a trillion Euro of cumulated surpluses invested there. If the PIIGs were to fail, the German banks would turn to currywurst.

    On the other hand, EU stability fund underwriting of investments into sovereign debt can be interpreted as propping up banks, particularly German banks.

    Naturally, those banks, whose existence is already owed to the tax payer, should be paying the consequences of increasing the cost of national debt.

  • Comment number 38.

    33. At 13:41pm on 29 Nov 2010, Justin150 wrote:
    The correct question should be why should Germans agreed to underwrite the uncontrolled spending habits of their neighbours? Or in other words there is nothing wrong with the Euro as long as all countries agree that they should give up control to a centrallised authority of spending (and presumebly tax raising).

    It is entirely reasonable for a centralised true of govt of Europe to be founded but is that really the desire of the people of Europe?

    ============================================================

    The Euro project has for better or worse only got a forward gear - no reverse.

    It can be made to work with more fiscal integration. It goes forward.

    It is logistically almost impossible for the PIIGS to pull out - it would be the mother of all 'cutting off nose (and everything else) to spite face'. It would mean devaluation and servicing Euro denominated debt in their new currency, it would mean raising fresh money with a new currency (laughter), their people would be unwilling to exchange Euros for New Punts, New Drachmae, etc. Sovereign defaults are a given but (for them) better to do it in the Euro.

    Will Germany pull out - that is the question.

    No, they see a big political prize on the horizon. Germamy always has been a confederation of Lander and why not add a few more.

  • Comment number 39.

    No responsibility without authority - I can see why the Germans, French et al want to put strings on their bailout of the Irish, Greeks and so on. The question as to whether this would be better under a common european state is interesting - it would be relatively easy to create such a beast with functioning central bank, regulation and economic functions, it may even be efficient. The real issue would be the length of time that it would take to persuade the populations of individual countries that 'their money' isnt being used to support perceived freeloading, lax, inefficient foreigners. The only place they could lash out would be at local politicians, probably leading to a growth in isolationist anti-european parties and probably a breakup of the Union (similar to Northern League in Italy?).
    Europe is a cultural issue, in my experience many Germans haven't quite got up to 1866 - the first flag up the pole in Dresden when the Wall came down was the Saxon flag, not the old German state one. As for the Bavarians, they are still a free state you would think. If you want to change culture, be prepared for a very long slow process. Comparisons with the USA are not necessarily helpful as the individual states, whilst having a degree of individual history and autonomy, have been part of an overarching federal state that nearly everyone recognises for over two centuries.

  • Comment number 40.

    If the countries of the EEU are all trying to maintain the integrity of the union but at the same time do not wish to risk any sovereign defaults I do not understand why the ECB could not be responsible for underwriting the banking element of the loans as a separate agreement. In return the ECB could accept either equity in the banks or charge the banks (and not for example the govenment/taxpayer of Ireland) a higher commercial rate of interest to reflect that risk.

    Separate loans could then be made to the governments at rates that reflect their ability to repay without having to take into account the risks of their banks. This would make these rates lower with a consequential reduction in any risk of default.

    The result would be that the cost of the risk would be borne by the financial institutions and would be centrally underwritten by the ECB at commercial rates. Baling out the member states could then be undertaken with lesser risk to the EEU and therefore lessen the chance of an EU break up.

  • Comment number 41.

    You are usually on the ball Robert and this time probably bang on right.Its not a Rosy scenario at all.Something has to be wrong when companies like Google for example make 1.6 billion in profits but transfer their profits to Dublin because of their low corporate tax and only pay the U.K 144.000 pound in tax.Then to top it off we have to bail out the very ones who are ripping off this country in taxes.It all stinks of corruption yet again.Eventually the people are going to get cheesed off with these constant banking indulgences and keep their money away.Lets see where they stand then.

  • Comment number 42.

    I wonder how long it will be before the good,hard working people of Germany,Netherlands and particulary FRANCE say"no more of my cash mister".On ya Bike Merckel and Sarkosy.

  • Comment number 43.

    Was the euro a good thing to set up? Not really as the last few years have pointed out.
    Will it survive? Does it need to is more the question, the euro has not really achieved too much in my view and the banks will make cash out of it either way so it can come or go or be a 2,3 or 4 tier currency whatever.
    Enter next crisis stage left please...........

  • Comment number 44.

    "The implied interest rate that they would have to pay to borrow for 10 years remains way above normal levels, and a mile above what Germany pays: it's 9.12% for Ireland, just under 7% for Portugal, 5.2% for Spain, 4.45% for Italy, and 11.9% for Greece."

    So Ireland alone pays nearly £8,000,000,000 in interest per annum for the next 10 years, guaranteed by the tax payer. Bankers must be worth every penny of their bonuses if they can find a business plan out of that one

  • Comment number 45.

    The simple fact is: The banks have paid out billions in bonuses world-wide based on a property (or currency or raw material price) bubble. Huge amounts of money have been privatised. Now it is demanded back from people who had little or nothing to do with it and by and large did not profit from it. It is of course possible to trace the very people who have made the biggest profit from it. If the goverments could decide to demand the money back from them it would send a signal for the prevention of future bubbles. However the same people ("the markets") who have ruined the Irish banks now demand that the Irish tax payers clear up the mess that they have created.
    The people and their elected governments must have the supremacy about "the markets".

  • Comment number 46.

    Take the Irish Central bank's announcements yesterday on revised capital targets for Irish banks - we have the quote " 5. The PCAR will be enhanced by the inclusion of a detailed review, to be conducted by an independent third party, of asset quality in the participating banks. In addition, an independent third party will review the quality of the data banks submit for the PCAR."

    So, notwithstanding the bailout announcements there are more independent reviews and audits and stress to be undertaken. Its an acid drip which must be neutralised otherwise we have an open pan-european cheque book.

    Can we afford these costs? You might answer the question if you knew what they were..

  • Comment number 47.

    Will Germany pull out? I have always held Richard Dingle's opinion re 'Lander' and they are about to 'add a few more'! Not immediately, maybe, but definately in the future.

  • Comment number 48.

    Wrong question Mr Peston ; should have been ; can the banks afford either the Euro or indeed the European Union ?

  • Comment number 49.

    Unfortunately, at some point along the European road, the political imperative for the EU overtook the economic.

    That is, some member countries were signed up to the Union when they were not really suitable candidates, in terms of economic convergence, at that precise point in their economic development - I suppose Greece is the prime example.

    It is now down to EU policymakers to dig themselves out of a hole that is largely of their own making.

    This blogger is sure they will, with Germany driving the whole thing, all without a single shot being fired ... that's progress.

  • Comment number 50.

    "Can the Eurozone afford its banks?"

    Perhaps we should really ask "Can any country afford its banks?" Importantly can the USA (or the UK) afford its international banks?

    The answer is NO.

    If by afford, we include the too big to fail profligacy and stupidity of these banks. (Included in banks is the whole financial services community nest of vipers.)

    All of these 'institutions' are bust.

    Now, how can we navigate a way forward?

    We have to engineer a deleveraging of debts - we need to offset credits with debits between these 'institutions' in a transparent, yet secret, computerised bank safety system. That is just for starters. This means that there can be no more 'over the counter trading' ever again.

    The reason that this system has to anonymous is that this information is explosively price sensitive. But unless it is done on an international / global scale including all institutions countries such as Ireland, the UK, Spain and the USA can be picked off by speculators one by one. No-one is safe.

    There is of course another way - exchange control where money moves only in response to trade. The shock of this will however be devastating.

    When this system is up and running the institution responsible for running it (yes real things still need to be run by real people) will be able to insist on the maintenance of appropriate debt to asset ratios and so ensure that banks are less likely to fail. (Rather like the system in the UK where the BoE used to insist on the maintenance of these rations by all of the banks on a daily basis.)

    I rather like the name Office for Debt Asset Maintenance - or 'O-DAM'! Shades of Odin and a profanity.

    We could (and indeed should) start with 'O-DAM EU' or 'EU O-DAM' (Order of the initials dependent on ones view of the EU.) This undoubtedly is something that does properly fall under the auspices of the EU and should be implement without delay.

  • Comment number 51.

    Goldman Sachs, now there is a trustworthy group. Big player in the defrauding of individuals and governments and now wishes to give advice on proper financial management....hypocrits.
    Banks will be shored up as governments must borrow their own money back from the big banks to finance debt caused by big banks. Sounds silly but this is the world when governments are shadows and banks make the decisions. Watch the year end bonuses as they will compare nicely with the cuts in services to the poor in these countries. This is all about maintaining the wealth of the wealthy and has nothing to do with economics. The banks will win no matter what. As the governments pretend that they have no choices the lobbyist of the bankers make sure they are protected and everyone one pays for their gambling and crimminal lending and rating schemes. Like in the old days, those in the castle have different rules.

  • Comment number 52.

    A key question that is not being raised by any of the commentators is "What do those much heralded EU Bank stress tests mean now?" It is clear that they really were an obfuscation exercise in order to pacify investors and markets. It is evident that a large number of major European Banks were, and are still, holding large amounts of sovereign and Bank debts from the areas now being rescued or still threatened with rescue. Therefore huge contagion risks are still in the game. Taking a conservative view to write down such assets by a single figure percentage which is what was done is not assessing the true value of such "assets". This is the fundamental problem of the EU to face up to reality and hope that time will solve it for them.

  • Comment number 53.

    Richard Dingle @17 and 18,
    You are so biased and misleading in your pro-euro comments that you must be either a europhile politician or a mindless supporter of lost causes and self-agrandisement schemes hoisted on the put-upon citizens of Europe.

    The EU Accounts have not been signed off by the auditors because there are glaring discrepancies in the way funds have been distributed and in the general costs of the Commision and European Parliament, including MEP and functinaries' expenses.

    Whilst the auditors have not said it in so many words, the implication is that, at best, the EU's central administrative bodies are incompetent if not riddled with fraud.

    In the UK each government department is rigorously audited and any discrepancies either publicly acknowledged, as in then case of benefit overpayments for example, and remedied; or if fraudulent, those responsible would be prosecuted and/or removed from office.

    So, far from being a meaningless europhobe mantra, the fact that the EC accounts have not been signed off is a perfect example of why we should be skeptical about the EU and why joining the eurozone would be folly.

    The EU as it stands is a doomed project and it is only through lies and obfuscation that self-serving politicians are managing to keep it going.

    It is only a matter of time before the Euro is confined to the scrapheap of history and the EU is restructured into the free-trade economic zone and cooperative congress that it was originally intended to be.

  • Comment number 54.

    Can the Eurozone afford its banks? Can it afford to be without them? The euro debt has to sit somewhere.

    Germany, France and the Netherlands export their Mercedes Benz, Tulips and butter to the other countries in exchange for Euros. If they want to continue to export, they have to let those countries replace their Euros (just as they manufacture or grow cars, vegetables and dairy products).

    It's not a difficult equation. Moreover, the finance ministers of all the eurozone countries could not have been so stupid as not to understand it when they signed up for the single currency. Even if they were, they must have learnt by now.

    If the imbalance is not resolved, the importing countries (Ireland, Greece, Portugal... ...) will, by choice or necessity, stop importing. Then Germany, France and the Netherlands will have to find somewhere else to send their products.

    It saddens me that, by 'saving' British investments in Irish banks, UKgov is also subsidising German industry and French and Dutch agriculture. You just can't win!

  • Comment number 55.

    53. At 14:52pm on 29 Nov 2010, fourbetwo wrote:
    Richard Dingle @17 and 18,
    You are so biased and misleading in your pro-euro comments that you must be either a europhile politician or a mindless supporter of lost causes and self-agrandisement schemes hoisted on the put-upon citizens of Europe.


    More paranoia from the Europhobes.

    You forgot #38

  • Comment number 56.

    34. At 13:46pm on 29 Nov 2010, yam yzf wrote:

    > The EU does not give this chance

    Yeah, what have those Europeans ever done for us, besides the aqueducts, sanitation, the roads, irrigation, medicine, education, public baths, health, wine, public order, peace, climate action, competition laws, culture, equal opportunities, industry and justice? Nothing, that's what! We'd be far better off without 'em!

  • Comment number 57.

    #53 - you entirely justify my statements in #33 about the anti -Euro fanatics and I am not even in favour of the Euro for the UK.

    John_from_Hendon: ODAM EU, perfect!

  • Comment number 58.

    How can The EU be trusted to "save Ireland" and other countries in trouble within the EU when the EU can't even balance its own books and get auditors to sign them as off as correct. They have been trying to do so for years.

  • Comment number 59.


    To Robert Peston:

    I am genuinely curious, why is your cartoon version of how a bank works so misleading?

    Why have you put such a explanation forward?

    Presumably there’s a good explanation, but I’m curious to know what it is?

    Answers on a web page please.

  • Comment number 60.

    @ 53. At 14:52pm on 29 Nov 2010, fourbetwo wrote:

    > It is only a matter of time before ... the EU is restructured into the free-trade
    > economic zone and cooperative congress that it was originally intended to be.

    You mean like the United Kingdom is? Or Canada? Isn't it already like that?



  • Comment number 61.

    Richard Dingle @55,

    I didn't forget 38, I just didn't think it was worth including as all you were doing was regorgitating stuff written previously by others.

    Your, and their, contentions that it would be impossible for the PIIGS to pull out of the Euro because of the dire consequences to their economies, finances etc are naive and disingenuous since we all know that it would be in nobody's interest for those dire consequences to come to pass.

    So, in the same way that you contend that further fiscal integration can make the Euro go forward, similarly the same consensus required to achieve this would be needed for anyone to be able to pull out.

    Therefore, assuming that it would not be just a complete dismantling of the single currency, which I think is what will inevitably happen, what would need to be done would be for all EU countries to agree to a conversion and fixed ongoing rate for each exiting country for a specified term, backed by exchange and capital flow controls.

    This, of course, is as feasible and likely as your further fiscal integration and so we come back to the only sensible outcome - the dismantling of the single currency.

    You may call it europhobe paranoia as much as you like, but it is clear to any marginally clear-thinking and intelligent individual that the single currency is not working and the Irish is merely the latest, but not last, population to feel the effects.

  • Comment number 62.

    People seem to have very short memories.

    After all, it was'nt so long ago when 'the vultures' were 'picking off' individual countries, one by one.

    That was one big driver for countries to sign up to the Euro and gain safety by being part of something that was theoretically too big for 'the vultures' to attack.

  • Comment number 63.

    61. At 15:58pm on 29 Nov 2010, fourbetwo wrote:
    You may call it europhobe paranoia as much as you like, but it is clear to any marginally clear-thinking and intelligent individual that the single currency is not working and the Irish is merely the latest, but not last, population to feel the effects.

    The facts really don't support your argument.

    Spain and Ireland had property bubbles - they have burst.

    Caused by low interest rates ?

    Over simplification.

    No property bubble in Germany or France.

    Try political immaturity or corruption rather than blame the Euro.

    Ireland's problem are down to the banks and compounded by the crazy decision to guarantee their debts.

    Ireland and Spain could better solve their situation if they had their own currency and controlled their own interest rate - wrong it would give them an illusion of control just as enjoyed by the economic basket case the UK.

  • Comment number 64.

    So what's in it for Goldman Sachs in making these public statements?

  • Comment number 65.

    Jacques Cartier @60,

    Even a common language, goegraphical integrity, cultural similarities and centuries of integration don't stop the Scots from wanting to leave the Union.

    As for Canada, even the concession of language parity doesn't stop the Quebecois from flirting with independence periodically.

    So what hope for a federal europe?

    But to answer your question, neither is the EU in any way comparable to the UK or Canada in terms of social, economic and institutional matters; nor is it a commonwealth since any benefits of free trade are mainly retained within individual countries. ( Note the punitive interest rates Greece and Ireland are forced to pay)

  • Comment number 66.

    Johnconstable @62

    The only instance of "Vulture" feeding I recall is when £ was hammered for pursuing the foolish notion of the ERM.

    Countries joining the Euro did so because buffoonish politicians conned the people.

    Interesting comments about some of them in wikileaks leaked documents.

  • Comment number 67.

    56. At 15:04pm on 29 Nov 2010, Jacques Cartier wrote:
    "Yeah, what have those Europeans ever done for us, besides the aqueducts, sanitation, the roads, irrigation, medicine, education, public baths, health, wine, public order, peace, climate action, competition laws, culture, equal opportunities, industry and justice? Nothing, that's what! We'd be far better off without 'em!"

    Hmmm, don't think any of those are directly attributable to the EU alone unless we never had justice (Tyburn), industry (Industrial Revolution), Health (Fleming), Equal Opportunities (Suffagettes), Peace (Last two big wars have been in Europe) .......

    And don't forget that it was are trade with Europe that necessitated international banking mechanisms

  • Comment number 68.

    Can the eurozone afford its banks?
    The eurozone cannot afford investment banks "too big to fail"; they cannot even afford to do business with investment banks "too big to fail".
    All the eurozone needs is commercial banks, completely seperated from investment banks (as called for under the US Glass Steagall Act which unfortunately got repealed). Let those who want to gamble have their investment banks, and let those who just want a commercial loans have their security.
    Jim O'Neill, probably the most influential thinker at Goldman Sachs: "European Monetary Union (EMU) will probably survive, but it is likely to remain very messy".
    Whose mess is this? Where did it originate? Where is the accounting of exactly what this debt entails? Why are EU countries just accepting the debt without asking for the audit that shows from whence each debt originated and via what financial instruments?
    Goldman Sachs is not famous for issuing public statements that rile the world's most powerful governments - which tend to be its customers. Exactly! The EU as I said cannot afford investment banks "too big to fail". Investment banks "too big to fail tend to look out for themselves and of course: their bonuses.
    Jim O'Neill points out that the sovereign indebtedness of Greece, Ireland and Portugal is huge relative to the size of their respective economies, but how did these STUPID PIIGS get into this position?
    Why should Germany, France and the Netherlands underwrite the debt of their over-stretched neighbours, at least without submitting for analysis (to Brussels)
    - what comprises the debt
    - is the debt legal
    - is the debt really tantamount to white-collar crime (e.g. derivative bundles, rated AAA, never audited, which almost automatically became bad debt).
    Like most other financial problems, the key to solving this mess is knowing exactly what happened and when. The best question to ask is: Who benefits?
    The prices of Irish, Portguese, Spanish, Italian and Greek government bonds have hardly moved this morning; the prices of municipal bonds in the US are - quite frankly - tanking.
    Germany, France and the Netherlands last night sent out an unambiguous message that they want the risks of lending to weaker countries to be born in part by the lenders.
    No, I disagree.
    The very first thing that should have been done before the debt was actioned is an audit. The debt may not even be legal.
    In practice this means that the eurozone has set itself a deadline of two and a half years to persuade investors that its finances are in order. What about the finances of the United States - the source of the "AAA derivative bundles", the source of the negative credit default swaps (bets against sovereignty)? In my book, this sort of financial instrument is gambling and likely illegal.
    A host of weaker eurozone states could find they are confronted with punitive borrowing terms or even a strike by lenders, but what if the debt is white-collar crime? Where is the audit? Maybe there should be one massive charge-back to the investment bank "too big to fail".
    Because, according to figures from Bloomberg and Moodys, they collectively have to refinance more than €165bn of existing debts in 2013. Well, this gives the STUPID BIGS two years to address the legality of what they owe, and potentially sue on the nefarious financial instruments that caused their financial woes. Why are the STUPID PIIGS JUST LAYING DOWN? Are they that STUPID?
    The Eurozone should act immediately to split commercial and investment banking. The Eurozone does not need investment casinos "too big to fail". It simply needs normal commercial banking.
    The Eurozone should act immediately to impose a bank levy on all foreign investment transactions; this would not hurt the commercial banks which do very little foreign investment, but it would stop the investment banks "too big to fail" from playing their gambling games, especially with computerized front-end loading.
    Given the size and importance of Bank of Ireland and Allied Irish in relation to the Irish economy, why aren't they being split into commercial and investment banks - totally seperate?
    Europe's giant banks appear to be taking far bigger financial RISKS than US and UK banks in relation to the reserves they retain as protection against potential losses. So split them!
    But first audit all debt due by Eurozone countries, this audit will reveal what hanky-panky may have caused the debt and whether an international Court deems the debt legal.

  • Comment number 69.

    We must fix the banks or they will destroy us.

    What is wrong with the banks is their casino nature of creating debt and pretending they have the assets. But fortunately they gamble mainly between themselves. So it logically follows that we need to insist that all transactions are reported to some central creating house and that the banks maintain sufficient liquidity and assets to match their lending - just as Banks used to have to do to the Bank of England when the system worked.

    It therefore follows that we need a European wide system to protect us all (A global system would be nice but as there is no organisation capable of running it we are out of luck there.)

    The best we can do is an EU wide system. (indeed this is the least we can do!)

  • Comment number 70.

    In the absence of a power house of industry those countries that choose an easy life will go bust. If you have natural resources you can afford to take things easy; if you are net consumers you have to balance the books. Overall the EU is in the latter category. Monetary union will only work in the longer term by the countries having the same terms, wages, retirement age etc etc.
    Sounds pretty boring and it will stifle innovation as they become more and more risk averse.

    It's being blamed on the banks who should have known better than to make profits out of silly people who borrowed more than they could afford to buy a house, which caused a property bubble. Perhaps a mirror might be useful.

    Ireland (shouldn't that be Eire?) property reached unusable numbers ignoring the fact that no-one would live in a considerable proportion of new builds, not because they couldn't afford them but more because there simply weren't enough tenants.

    Perhaps that should teach China a lesson. It's early days but Chinese investors seem to think having a tenant in a new build devalues the property; like driving a car out of the showroom - it's no longer new.

  • Comment number 71.

    I understand that the IMF recently stated that Spain's financing needs for 2011 is £26,000,000,000. (21% of GDP). In addition, they would also need to refinance some £20,000,000,000 of current debt.

    That seems a tough call in the current economic climate. It would probably be OK if they were the only country in the que - but they are not alone.

    The only practical way out of this debt crisis is through real, tangible growth. With austerity measures announced almost daily, you have to ask where the source of significant growth will be?

    One thing is certain. This problem will not be solved with the usual 'quick fix'.

    PS: I prefer not to use the shorthand '£bn'. Somehow, it doesn't convey the right message!

  • Comment number 72.

    Is this the same Jim O'Neill that said everything was OK just before the bank system fell to pieces - what short memories his clients must have - even with all the insider knowledge that Goldman has established.

  • Comment number 73.

    No. 69: John_from_Hendon

    Wasn't that the task we entrusted to the FSA?

    The problem as I see it is that 'trust' has been utterly destroyed. Once lost, it is very difficult to restore. Only time and honesty will achieve it.

    I think I'll continue to trust my own judgement.

  • Comment number 74.

    #69 Your solution does not follow logically at all.

    Iceland and Ireland are economic failures because they failed to control their own banks not because foreign banks lent excessively. If the Irish banks were solvent Ireland would not have any significant problems. The question is therefore why did Ireland fail to control its local banks.

    A similar question can be asked in UK why did govt/central regulation fail to control RBS, HBoS, Lloyds, Northern Rock.

    The answer seems to have been in the good times every country weakened regulation because they did not want their local banks to leave and set up elsewhere (in hindsight each country would have been well advised to call the banks bluff) - there was a race to the bottom in terms of regulation. Whether central govt and central banks actually understood the risks they were running is an interesting question.

    Coming forward to present day we seem to be permanently stuck in a similar position where no country is willing to take unilateral steps to improve regulation unless done internationally - again because the banks may move. This is a recipe for doing nothing.

    Politicians are elected to make hard decisions and lead. It is clearly better to impose well thought through regulation that a country believes to be right and call the bank's bluff.

  • Comment number 75.

    The markets have rattled the euro's cage and the euro-zone + UK+ IMF have coughed up some funds. The markets now feel that the funds they can now use have some real backing behind them so they will get their money back. Interest rates haven't fallen - why should they when the markets can now make more money. The markets have left a marker that they will be back, they will be back to ask for more and more and more ....... After all there are more nations to have a go at. What a rubbish system !

    The question, Mr Peston, should be "Can we afford the markets?"



    It won't surprise many of you that I think we cannot.
    Are we to live in a state of intermittent crisis like this? Can all the countries that provide support continue to provide it without severe political damage at home?

    So, is there an alternative to the markets?

  • Comment number 76.

    71. At 17:44pm on 29 Nov 2010, Goldbug wrote:

    I understand that the IMF recently stated that Spain's financing needs for 2011 is £26,000,000,000. (21% of GDP). In addition, they would also need to refinance some £20,000,000,000 of current debt.

    ---------------------------------------

    Not sure about these figures. In round figures, this makes Spain's GDP about £130bn [get bored typing 0s]. In the IMF data I found at
    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29
    quoting IMF data (2009), the spanish GDP is about USD $1.460 trillion if I am reading it correctly. Have I got this wrong?

  • Comment number 77.

    Maybe something is beginning to happen (when even politicians realize there's a problem!):

    uk.news.yahoo.com/21/20101129/tuk-government-warned-over-bank-system-6323e80.html

    If the link is deleted go Yahoo news and search for 'Meacher'.

    Why not reported by the BBC?

  • Comment number 78.

    No. 75: SleepyDormouse

    "Can we afford the markets?" - I think that is a very, very good question.

    Obviously we need markets to conduct trade, but you question digs a little deeper.

    30 years ago, I would probably have wondered why you even posed that question. There was widespread trust in our institutions. A person's word could be trusted. Politicians and Bankers were unimpeachable.

    Fast forward and look what we have. I won't bother rehearsing the accepted views, but I will offer a few suggestions:-

    Bring back Glass Steagall in modified form.

    Enforce 'moral hazard'. By all means take a punt, but if you lose - tough!

    Political courage and honesty - tell it like it is, good or bad, and translate that into the market.

    Stop pretending that everything is OK - regain control of the financial sector.

    Devise an effective system of regulation and enforce it.

    etc. ... etc ...


    I realize that this may be a pretty pathetic response to our current problems, but you must admit, it is a tough question!


  • Comment number 79.

    No. 76 SleepyDormouse

    I read this info in today's Telegraph - Ambrose-Pritchard's column. It's worth a read - he's very reliable.

  • Comment number 80.

    @64. puzzling wrote:

    "So what's in it for Goldman Sachs in making these public statements?"

    You mean to say you don't believe that GS is "doing God's work"? How cynical can you get?

  • Comment number 81.

    78. At 19:32pm on 29 Nov 2010, Goldbug wrote:

    "but I will offer a few suggestions:-

    Bring back Glass Steagall in modified form."

    Yup - we've been demanding this for over 2 years.

    "Enforce 'moral hazard'. By all means take a punt, but if you lose - tough!"

    Yup - how about unlimited personal liability for Directors? That should sort it.

  • Comment number 82.

    Evening Robert,
    it strikes me that the Eurozone debt is largely self-contained in that nearly all the banks debt is owned by other Eurozone banks.
    If that is true, then surely this problem can be rationalised and solved (however this will take many years and it requires a return to real country growth).
    The bigger issue, is when will Germany call halt -enough (to paraphrase "and damned be him who cries halt -enough (Macbeth)).
    The USA sees Europe's problems as a welcome distraction from the unemployment catastrophe in its own country- hence the comments from GS.

  • Comment number 83.

    @75. SleepyDormouse wrote:

    "The question, Mr Peston, should be 'Can we afford the markets?'
    It won't surprise many of you that I think we cannot.
    Are we to live in a state of intermittent crisis like this? Can all the countries that provide support continue to provide it without severe political damage at home?

    So, is there an alternative to the markets?"

    Markets have existed for millennia, because they serve a universal human need. So no, there is no alternative if you take the long view.

    The problem, I'd venture to suggest, arises from the misuse of markets to make speculative profits. So, for example, the merchant corners the local market in grain then witholds supplies from the market to drive the price up - then makes a killing (he might, of course, get killed first - but that's just a part of risk management).

    Nowadays markets are global and this puts entire countries at risk of having their economies derailed by the machinations of international speculators (currency speculators, investment banks, hedging funds, etc).

    If a country wants to carry through some fundamental reform of its own domestic financial system (which if it is in earnest it will have to be prepared to sustain in the teeth of the most intense obstruction from the IMF, not excluding sanctions) it can only do so if it can succeed in temporarily uncoupling itself from the global speculative markets - especially the currency market.

    Difficult but not impossible. Malaysia did it. It's a question of having the necessary chutzpah to put up two fingers to the rest of the world.

    The other way, I suppose, is to default (like Argentina). The effect is much the same.

  • Comment number 84.

    No. 81: the_fatcat

    I'm sorry I was late to the party!

    Seems like my kind of show though ...

  • Comment number 85.

    78. At 19:32pm on 29 Nov 2010, Goldbug wrote:
    ---------------------------
    Many thanks, I appreciate your response and agree with much of what you have written.

    The major problem is that we have a system now that is open to abuse and one that can also take us, apparently unknowingly into areas from which there is no easy escape and is going to cost the world trillions.

    As I wrote that two thoughts occurred. If very few people realised where we were going then we have the dumbest load of bankers in positions of influence and this to me beggars believe. I am sure that some/many within the system must have realised that the trajectory of lending was going to end in tears. But they were unwilling or unable to do anything about it - a total lack of moral courage. Now I know I cannot make such statements and apply them to all bankers; many do their job perfectly well and probably do put in long hours. I just feel let down.

    Anyway, back to the theme. There is I suggest enough evidence now to see that the next 5 years at least will be like the last 2 years. To me this is unacceptable. We need to evolve our financial system to one where the lives of ordinary people are not devastated by the eruptions in the financial world.

    I believe that the UK is fortunate not to be in the eurozone. We have a fiat currency, they do not. This gives us freedoms that many bloggers here deny, but they have never really argued their case properly and in detail. We now hve a dependence on a market that is in part a hangover from the gold standard / convertible currency era. We can reduce our dependence. There will be a need for a market in government securities, but it should not be allowed to hold such a central position and dominate in the way it does.

    If only we had a leadership that at least acknowledged that there are ideas out there that could be picked up and made to work, I believe we would be far better off. The UK could then be ruled by our elected politicians rather than the nebulous nameless people that consitute the market.


    Re the other post concerning Spain; I quote
    "Has Mr Zapatero read the IMF’s devastating Article IV report on his own country? It states that the government’s “gross financing needs” for 2011 will be €226bn, or 21pc of GDP. “Spain’s financing requirements are large and, retaining market confidence will be critical. Spain has exhausted its fiscal space. Targets should be made more credible.”
    I regret you mistyped, its €226bn not €26bn. All is now clear, and a tad worrying!

  • Comment number 86.

    Can the eurozone afford its banks?
    -Wrong question.-

    The correct question should have been:
    Can we afford governments and banks gamboling about together?

    Governments love banks because the banks allow the governments to cling onto the pretence of being in charge. What is actually happening is that the bank's customers are busy ripping off the rest of us, all to benefit the banks.

    Consider what is about to happen in the North East.
    SSI of Thailand wants to buy Redcar Steel Works from Tata of India.
    What has this got to do with the UK government?
    Thai company wants to buy an asset from an Indian company..

    Consider it as a soccer club style leveraged buy out.
    SSI of Thailand wants the UK government to support their proposed deal.
    Why? Because it will mean work in an unemployment blackspot.
    But what is in it for SSI? Access to bank loans to buy the distressed asset.
    SSI want the UK government to guarantee the plant working. And that way SSI will be able to get a big bank loan. Leveraged buyout style.
    Hang on a minute. Wasn't this the deal that Tata got when they bought Corus?
    And wasn't it the deal that Corus got when Dutch Hoogovens merged with British Steel.
    And wasn't this the same deal that British Steel got when they were privatized by a certain M Thatcher?
    Yes that's right. State backed loans to all and sundry.
    And now SSI want the same deal.
    And the government will roll over since it will be good for them to show that they are caring. Hang about though. Wouldn't it have been better, less costly, to keep the steel industry nationalized? Yes. But the banks wouldn't have had a look in.
    The government needs to support the bankers because the government thinks the bankers will support them. What tosh. The bankers just want government money and guarantees. Yours and mine.

  • Comment number 87.

    No. 85: SleepyDormouse

    My apologies for the mistake.

    Still, what's £200,000,000,000 in this day and age! (said he weeping).

  • Comment number 88.

    81. At 19:47pm on 29 Nov 2010, the_fatcat wrote:

    78. At 19:32pm on 29 Nov 2010, Goldbug wrote:

    Your suggestions (that have been echoed by many others in these blogs) seem reasonable to me. It appears to me that there is little public debate by govt and industry on these issues. After what must surely be the biggest and most widespread global financial and economic catastrophe ever I have difficulty understanding why there seems to be so much unwillingness to openly discuss these things in the places where they should be discussed and addressed. What's the holdup!?!

  • Comment number 89.

    "The correct question should be why should Germans agreed to underwrite the uncontrolled spending habits of their neighbours?"

    Because Germany lent money to these countries to buy German goods ie have their cake and eat it.
    Why did the rest of europe bow to these German scams enforced by EEC law to subsidise German industry (catalytic converters, airbags, "green" energy, photovolatics .......)? Stand up to German bullying.

  • Comment number 90.

    83. At 20:11pm on 29 Nov 2010, torpare wrote:

    Many thanks for your comments, and of course you are correct that a marketplace in many things serves a useful function. But when the costs of a market can be seen to be distorting, spoiling the quality of life and causing major problems, I believe the time has come to consider if this is a game with which we should continue. After all the markets exist because the countries exist in the first place and have needed a range of services. They forget apparently that countries do not exist just because there is a market.

    To break from a market will be very difficult. Finance is a significant part of our industry now and in the past has proved very valuable to the country as a whole. But is it now looking more like a cancer within our country? Cancer kills, is this market in debt benefiting us or killing us? At the moment it is more the latter than the former. Perhaps we need a bit of chemotherapy type thinking.

  • Comment number 91.

    87. At 20:40pm on 29 Nov 2010, Goldbug wrote:
    --------------------

    Never mind, no harm done and you pointed me at an article I would not have otherwise seen. Many thanks for that.

    200bn would see me out! I could really spend and affect change in the UK economy if I had that sort of money.

    But more seriously, can Spain ever get that sort of finance? Politicians and financiers can be very inventive when push comes to shove.

    You know, I just wonder if there are departments in the eurozone, now shrouded in secrecy, working out how to get back to their own currencies?
    I know that if I were a civil servant or politician in power I would have asked 'how do we untie this gordian knot we have created? Wouldn't you?

  • Comment number 92.

    The problem with the Euro is Germany. Germany should leave the euro maybe with Holland & Finland the rest will be left with the euro which will fall in value and enable those countrries to start to compete. The other choice is to watch the pigs being ejected one by one from the euro, that really will be a disaster. Expect the latter.

  • Comment number 93.

    Question

    Who benefits from the banks being a scapegoat. Please try and work it out.

    Regards

  • Comment number 94.

    I agree with @the_pk1. Or at least, there is just as much of a problem in Germany as there is in Ireland or Greece. The bankers in all of these countries added to the credit bubble that got us to this crisis. And infighting among all of these countries, and Germany feeling like it's "burdened" with other countries' problems, is only going to make it harder to work the whole thing out. There's some really smart commentary on it here, I suggest reading it: http://www.newdeal20.org/2010/11/29/bankers-gone-wild-in-ireland-and-germany-28321/

  • Comment number 95.

    Correct me if I'm wrong, but if a country manages to eliminate its defecit, then it no longer needs to borrow anything off the "market". It is then free to give a jolly good haircut to its gilt holders, without the associated problems of having its borrowing rate hiked up, since it no longer needs to borrow.

    So the condem policy to eliminate the defecit seems to give a good degree of financial secuirty to the state.

  • Comment number 96.

    And in the meantime state owned RBS share price falls to 38.5p

    I'm still waiting for the mythical profit for the public purse.

  • Comment number 97.

    #95. At 21:33pm on 29 Nov 2010, NonLondonView

    Sovereign states would still need to borrow to refinance their structural debt every time the original borrowng matures. You can't escape the markets that easily, once they've got you you're in for life.

    It would take decades of frugality so severe to repay the debt we would need to return to the stone age.

  • Comment number 98.

    No.91: SleepyDormouse

    You posed a tough question at post 75. Let me offer another:-

    "Can an economic crisis be a good thing in the long run?"

    Now I admit that's a hypothetical question which will generate strong feelings. The people who are currently suffering may well accuse me of being arrogant and facetious - I am neither.

    I pose the question because I simply cannot imagine any other solution to our current predicament.

    Think about it. Our culture accepts greed, consumerism, personality worship, and individual indulgence as normal behavior. "Greed is Good" seems to be accepted across all social classes (as if such a thing ever existed!).

    Within that context, speculation is regarded as normal, acceptable behavior. Greed has been romanticized! "You're a player, you did the deal, who cares who loses ... here's your bonus. Politicians? - fuggettaboutit!"

    The only thing that will stop greed in it's tracks is fear - real 'gut-wrenching' fear. It may also frighten the politicians into positive, corrective action.

    When you are staring into the abyss ...

  • Comment number 99.

    Personally i think Goldman Sachs should be jailed on block along with the majority of the other major finance houses,they had to be bailed out just like the rest and their business practices have shown me and many others just how corrupt our banking system is.

    The fact that the US government has done nothing to curb the practices , on the contrary they are actively encouraging them by giving them billions of US tax dollars that they neednt, shows me how corrupt the whole system is , far from "doing gods work" i wonder just which god lloyd blankcheque actually worships because it isnt one of the ones we usually hear about.

    When these people talk , they are only concerned with how they will make money if it brings down a country, a currency its of no concern to them and its the good old american tax payer thats providing the money to do it in the main.

    The money they make wont be used to help the US tax payer either it will be used to line the partners pockets just like our tax money here is being used, it stinks to high heaven but they and all the others are untouchable and cant be held to account, it would be nice if god were thinking about actually showing himself to be real if he were to re enact the scene where his son threw the money lenders out of the temple, it would be enough to make even a hard line unbeliever like me take him seriously.

  • Comment number 100.

    87. At 20:40pm on 29 Nov 2010, Goldbug wrote:

    "Can an economic crisis be a good thing in the long run?"

    --------------------------------------------

    Interesting. I think I would prefer evolution to crises. Sudden change is never good in my view as too many will loose out and decisions made fast will tend to include too many mistakes.

    However, if there are shortsighted, incompetent leaders in any significant position of power, then maybe a crisis can bring about useful change. So yes, it can be good, but usually there ought to have been better ways of resolving a situation.

    I have to keep in mind that each of us has only one life. While we are here, it would be good to think that we have had a worthwhile time and we have been able to contribute whilst enjoying ourselves. An Example: Being unemployed has never happened to me, but it must be deadly. The government policy should be to maximise the public good it does, maximising employment is included. Since the early 70s, employment has never been full [~2% unemployment]. I would like to see this change and providing employment should be very high on the agenda. If as a result of this crisis employment policy were put where I would like to see it, the yes, it would be good.

    However, you have to consider the downside of crises. There always are. This one is striking at the very heart of the capitalist system. I view this with trepidation as I believe social capitalism is probably the best system we are likely to see. Problem is that as time goes on I realise we are moving further away from what I believe is social capitalism. I also suspect that we can not now get to the system I would like to see. Business, and trans-national companies in particular- are now just too pervasive through all our economies for my ideal to become a reality. So this crisis is going to throw some of it in the air and see where everything lands; for good or ill. Politicians have, I believe, now in part lost control. So I am far from sure that this will result in good or have a happy ending. But the world is changing now and we will all have to do the best we can.

 

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