BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Ireland: How much punishment for British and international banks?

Robert Peston | 09:09 UK time, Wednesday, 17 November 2010

Are haircuts in or out for Ireland? Will the putative experts at the IMF, European Commission and European Central Bank, who will spend the next few days examining Ireland’s intertwined banking and fiscal challenges, recommend that there should be losses imposed on the providers of tens of billions of euros of wholesale debt to banks.

EU flag reflected on a window in Dublin

 

It’s extremely difficult to be sure - which is going to unsettle markets.

This is what finance ministers from the eurozone said in a statement last night:

“We welcome the measures taken to date by Ireland to deal with issues in its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to support the Irish banking sector at a time of great dislocation. However, market conditions have not normalised and pressures remain, giving rise to concerns that further reforms and stabilisation measures may be appropriate.”

Or to put it another way, the Irish strategy of using taxpayers money to strengthen the balance sheets of banks - by injecting new capital into them and dumping their worst loans into NAMA’s toxic bin - has only been partly successful. Other measures are needed.

What might those other measures be? Well goodness only knows. The European Commission’s Economic and Monetary Commissioner, Olli Rehn, said there would be an “intensification of a potential programme with an accent on the restructuring of the banking sector”.

It is that phrase “restructuring of the banking sector” which may alarm the banks and financial institutions which are wholesale creditors of Ireland’s banks, the providers of more senior debt which is supposed to be least at risk of non-repayment. The implication is that consideration is being given to forcing losses on them, such that they would share in the costs of rehabilitating Ireland’s banks.

If that were to happen, it would be counter to the passionately stated policies of Ireland’s Taoiseach or prime minister, Brian Cowen, and his finance minster, Brian Lenihan. They fear that reneging on these debts would see Ireland cast out into a financial leper colony, unable to tap new commercial sources of credit for years if not decades (see my post, Why Ireland can’t afford to punish reckless lenders to its banks).

However, and slightly to my surprise, I am told that the European Central Bank is also opposed to imposing losses or haircuts on senior debt holders. If true, this would matter, in that - as I made clear on Monday (see my post, Will the ECB pull the plug on Ireland?) - it is the ECB which is the prime mover in trying to force Ireland to take emergency finance from the EU or IMF, as part of a package to put its banks and public finances on a firmer footing.

That said, it would be a bit odd if the ECB, in the shape of all its senior movers and shakers, were opposed to such haircuts: there is a powerful moral argument, of the sort that normally appeals to central bankers, to the effect that overseas banks and institutions in the UK, Germany and so on should have known better than to encourage Ireland’s banks to lend recklessly and pump up a completely unsustainable property bubble - and that they therefore deserve a bit of a spanking.

What’s more, if Ireland is fundamentally incapable of paying off all it owes - which is equivalent to an oppressive 700% of GDP when banking, public sector and private sector debts are added together -some will say it is grotesquely unfair that the cost should fall entirely on taxpayers in Ireland, the European Union and (if IMF money is drawn) the rest of the world.

All that said, there might be sound practical reasons for protecting the senior debt providers.

Certainly it is very difficult to see - under the current law - how the senior debt holders could be punished in the absence of some dramatic events. First the two weakest of the big banks, Anglo Irish Bank and Allied Irish Banks, would probably have to be declared insolvent. And second, almost all the many billions of euros that Irish taxpayers have already pumped into these banks would have to be written off, which would be extremely painful.

What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators. These payments would generate enormous losses for the financial institutions, including banks, which provided the CDS cover.

Ouch.

Sources close to the Irish government tell me that the US authorities are deeply concerned at the idea that CDS payments would be triggered in this way. The implication (yet again) is that insurance contracts designed to reduce risk are in fact a source of systemic instability. Which, of course, has been the hideous norm in the Frankenstein markets that have been engineered over the past decade or so.

Even without the CDS loss multiplier, the impact of debt haircuts would be painful for British and international banks. According to the Bank for International Settlements, total lending of non-Irish banks to Irish banks is around $170bn, of which British banks provided $42bn, German banks provided $46bn, US banks $25bn and French banks $21bn.

Which British banks are at risk? Well according to new research by Morgan Stanley, total lending to Ireland’s private and public sectors is equivalent to 92.3% of the net assets of Denmark’s Danske Bank, 89.5% of Royal Bank of Scotland’s net assets, 60.2% of Lloyds’ net assets and 15.9% of Barclays’ net assets. Those figures exclude bank-to-bank lending, but they indicate how exposed Britain’s banks are to Ireland’s woes (RBS is most exposed, as the owner of a substantial Irish bank, Ulster Bank).

What’s more, if there are haircuts imposed on Irish bank debt, it’s very difficult to see how haircuts could be avoided for Greek and Portuguese bank debt too, and also for plain vanilla Irish, Portuguese and Greek government borrowings.

If you add all that together, it comes to $435bn of exposure for international banks to the banking and public sectors of the eurozone’s three weakest economies. If, say, a third of that were written off (enough to make the residual debt almost bearable) that would trigger not far off $150bn of losses for banks alone.

By the way, bigger losses would fall on pension funds, insurers and other financial institutions.

Would that be an unthinkable, unbearable cost for banks, that would undermine the integrity of the financial system? Probably not. Is it understandable that the Irish government doesn’t want to be the first to test whether international banks can take the strain? Probably.


Comments

Page 1 of 4

  • Comment number 1.

    "Would that be an unthinkable, unbearable cost for banks, that would undermine the integrity of the financial system? Probably not"

    Probably not? I'd say definitely yes and its something that many posters have been screaming for.
    Why would the ECB allow this? It is the lender of last resort. OK we don't know how the thing is politically controlled but there is no financial constraint on the ECB to clear up this mess as far as I can see. The politicians need to shut up now.

  • Comment number 2.

    > It is that phrase “restructuring of the banking sector” which may
    > alarm the banks and financial institutions which are wholesale
    > creditors of Ireland’s banks, the providers of more senior debt
    > which is supposed to be least at risk of non-repayment. The
    > implication is that consideration is being given to forcing losses
    > on them, such that they would share in the costs of
    > rehabilitating Ireland’s banks.

    This is very fine, as long as the bankers as individuals are at the front of the queue for asset stripping, rather then the institutions. They made choices as individuals, and they must be stripped of their assets as individuals for moral hazard to take place.

    This will hit our bankers where it hurts them the most - in the pocket, while leaving our pension funds intact. We all know it is right to impoverish the greedy bankers, so let's get on with it.

  • Comment number 3.

    Bob you say
    "the two weakest of the big banks, Anglo Irish Bank and Allied Irish Banks, would probably have to be declared insolvent." I hate to say this but THEY ARE insolvent!
    "reneging on these debts would see Ireland cast out into a financial leper colony, unable to tap new commercial sources of credit for years if not decades" Perhaps that would be a good thing until the Irish establishment is fully purged and replaced with honest and prudent bankers, lawyers and politicians (I know that last is a stretch!) and the last lot are serving time.

  • Comment number 4.

    Morning Robert,
    On a day like today there's only one thing to post. Thank goodness we are not in the Euro

  • Comment number 5.

    If lending becomes more risky then surely interest rates have to go up.

    Or is there a deliberate programme by governments to monetise their debts and land us all with massive inflation?

    The public need to know.

  • Comment number 6.

    Write off's are going to happen , it is inevitable.

    The Irish government will get support from the Euro and the IMF both in terms of cash and guarantees.

    What the Irish need is confidence in restoring its housing and commercial values.



  • Comment number 7.

    We are all in the same boat as the Irish.....only the degree differs.
    All that international cash squandered.
    Will the West learn to stop borrowing and squandering it?
    Will the East learn to stop lending it?
    Good sense in economics?....what's that?
    This comment is either 100% right or 100% garbage.

  • Comment number 8.

    "What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators. These payments would generate enormous losses for the financial institutions, including banks, which provided the CDS cover."

    Didn't some wise man (Buffet?) once call CDS's "financial weapons of mass destruction"? It seems he was right - in the sense that they are instruments that will never actually be used in any meaningful sense. I have to ask, if it would be too catastrophic to let any bank fail and trigger a wave of CDS pay-outs, then what is the point of CDSs at all?

    A cynic might say they are purely a way of keeping bankers in the manner to which they are accustomed i.e. bonused up to the max. Certainly a huge industry seems to exist, generating massive profits for itself by creating financial products which can never actually be put into practice when required - far easier to send another bill to the tax-payer.

    And all the time bankers are taking home huge packages for their supposed ability to quantify risks, yet when they get it wrong no-one is actually prepared to take a haircut. The whole system is madness.

  • Comment number 9.

    On what and where have Irish banks 'leant' these huge amounts of money?

    Even the stock-pile of empty Irish homes still does not get anywhere the amount in billions of all of their loans.

    The suspicion, is that many of these bad loans, perhaps the bulk of the bad loans are on 'assets' in the UK ... which may mean that the UK, particularly its UK taxpayers, are equally as exposed as Ireland to the unfolding mess.

    'Harbinger' once again ... but unfortunately, the signs are there.

  • Comment number 10.

    I really don't see why Taxpayers should be paying for this at ALL.

    Let them go bust - isn't that how it's supposed to work under a Capitalist system? That's how it works for any other business.

    Free markets for free men. What a load of cobblers. Socialism for the rich more like. It's enough to make you want Communism to come back in fashion.

  • Comment number 11.

    "According to the Bank for International Settlements, total lending of non-Irish banks to Irish banks is around $170bn, of which British banks provided $42bn, German banks provided $46bn, US banks $25bn and French banks $21bn."

    Calling it an ‘Irish bailout’ is a fallacy - the money will never reach Ireland.

    It is another British, German, French and American bank bailout.

    Anyone who lends money recklessly deserves to lose some of it...

  • Comment number 12.

    Surely it's possible for the pain to be shared without just declaring bankcruptcy and wiping out all of the credit that's been offered...?

    For example, suspension or reduction of payments, or some of the '2 for 3' price reduction deals, the kind of thing that happened to GM in the 'States when it went into bankcruptcy protection...?

    Perhaps that is what they mean when they talk about restructuring the banking sector? I guess anything like this would mean that Ireland would not be able to raise anything on the international markets for a while but perhaps the EU fund will fill the gap?

    Lets face it, the reason investors have continued to buy Irish bonds is because they are getting over 8% return but you only get that because of the risk and so fair does if they loose out at some point...

  • Comment number 13.

    "Certainly it is very difficult to see - under the current law - how the senior debt holders could be punished in the absence of some dramatic events."

    Robert, the way things are going, just wait a little and you'll get your dramatic events. Basically, governments and banks are just issuing smoke to hide what everybody knows - they're broke.

  • Comment number 14.

    It started out as the Irish Free State in 1922, now its going to cost us $500bn; I suppose that's 90 years of price inflation.

  • Comment number 15.

    I agree with Morpheus who in spite of the name has not been asleep when Robert's post appeared. Is this not shaping up to be a re-run of the Lehman's trigger bankruptcy even if there is surprising nominal resilience in the banking industry. What is also not helpful are governments like the Irish (and UK) that are slash and burn on the public sector with inevitable consequences on the true value of private assets and the worsening of the ability to repay debts linked to these assets together with a falling market value of assets like houses.

  • Comment number 16.

    Everyone just points at the banks in Ireland as the main cause of their problems. Well they did have a hand in it but they were not alone. They had the politicans on one side institutions on the other and the population pushing hard from behind. Yes you can say the banks may have lent irresponsible but I have not heard one person claim that they were forced to take a loan or buy that house. No companies were forced into borrowing or investing, no institution being cohered or Politicians being hoodwinked. No all in Ireland are comparable, lets face it when a country that has a population of 4.5 million can pay it's PM more than the president of the USA there must be something wrong.

    There is one little thing that still nags at me and that is the Irish still don't know how big the hole is and many still don't believe that there is a problem. Until there is a clear understanding of how big a problem they have and that they actually do have a problem there is little hope for the once roaring Celtic Tiger.

  • Comment number 17.

    @ 3. At 09:53am on 17 Nov 2010, tonyparksrun wrote:

    > until the Irish establishment is fully purged and replaced with honest
    > and prudent bankers, lawyers and politicians .... and the last lot are
    > serving time.

    We have the same thing here in Britain. Most of our greedy London bankers are still on the loose, causing mayhem and generally going about pretending it's not their problem.

    We can only put this behind us and get on with improving the world once they are serving their time, having been impoverished. That's the least we can do to them for their behaviour.

  • Comment number 18.

    4. At 09:53am on 17 Nov 2010, Sam_From_Hendon wrote:

    Morning Robert,
    On a day like today there's only one thing to post. Thank goodness we are not in the Euro

    ..........................

    An interesting point but if ... the 'Irish debt problem' also becomes an 'additional UK debt problem' ... it will make little difference that we are not in the Euro ... because the UK cannot now 'borrow its way out of trouble'... and it will be difficult to get sufficient loans from e.g. the IMF and

    Britain will have to look at larger and 'proper additional big cuts' in govt spending

    and

    huge tax rises for all and sundry

    and

    e.g. sell off e.g the Falkland islands

    I'm 'harbinger' once more

    The answer .. stop pretending that we're not in decline .. as 'we are' .. because short and medium term 'staganation' is very much a 'decline' on any kind of measurement, in UK living standards for the bulk of the UK population.

    We need a strategy to manage a war-time economy ... rationing, discipline, identify our global 'friends', insist on fair trade and impose export and import tariffs with immediate effect to manage the UK economy and get e.g. our best moo milk cows producing milk for our shops a supermarkets., instead of importing milk to the UK which is about as sick as our UK trade can get.

  • Comment number 19.

    "It’s extremely difficult to be sure"
    Nice use of the vernacular

  • Comment number 20.

    6. At 09:53am on 17 Nov 2010, hughesz wrote:
    What the Irish need is confidence in restoring its housing and commercial values.
    =========================================================================
    Hard thing to do when there at least 500,000 empty homes, more if you count the part finished projects. There are 2,800 ghost towns were there are very few if any residents and the properties are starting to fall into disrepair with vandalism and theft the main cause.

    This is going to be a long, slow and painful journey....


  • Comment number 21.

    The one thing we learn from all this is that all these problems were inspired by the state. It was the Irish government which set out on a housing boom with low interest rates, which borrowed and spent far too much money and the worst mistake of all, which was to join the Euro.

  • Comment number 22.

    The word to summarise the situation is "fear". Fear of another "Lehman" moment where the political classes called the bluff of bank creditors and allowed the institution to fall. The Frankenstein system then pushed out the contagion all over the world.

    Substitute Eire for Lehmans and you have a similar event, but pivoting on a sovereign and its banks.........but now the Frankenstein system has more power over sovereigns who find themselves in hock to it to a point of compromise.The failure is that Frankenstein lives!

  • Comment number 23.

    Robert

    The crisis affecting the "Euro-periphery" has to be handled in a comprehensive way, rather than on the current basis of "let's wait until there is a crisis for Ireland/Greece/Portugal/etc (delete as appropriate), then run around, a la Corporal Jones, crying "Don't panic!"".

    I cannot see that there can be any other settlement for the situation that, for differing reasons, all of these three countries are in other than exit from the euro and a substantial devaluation in their resurrected national currencies (25%?). All of the debts in euros can be redesignated as the same nominal sum in the devalued currency. So a haircut for the banks is inevitable, and, judging by the figures you have quoted, Robert, looks unpleasant but bearable.

    The real pair of canaries in the coal mine are Spain and Italy; if Greece, Portugal and Ireland are "fixed" (sic), will the attention simply move to the bigger Latin countries? However, notwithstanding this issue, a solution for all of the three smaller economies is urgently needed.

    The quicker that something like the co-ordinated devaluation and partial default is done, the sooner this crisis will be brought to a conclusion. The remaining members of the eurozone (whichever group of nations they might be) can then move quickly to a much closer fiscal union, with substantial powers for the European Commission to set common rates of taxation in a number of areas, such as VAT and business taxes. Such a development ought to be enough to ensure that there could be no repetition in the future of the current crisis for the remaining members of the eurozone.

  • Comment number 24.

    #8 DavidBrent
    "CDS..purely a way of keeping bankers in the manner to which they are accustomed" If you want to understand just how true this is, read 'The Big Short' by Michael Lewis which gives the gory details of AIG FP writing insurance (CDS) on hundreds of billions $ of BBB grade subprime bonds. Literally shake your head in disbelief at the sheer stupidity!

  • Comment number 25.

    ''lending to Ireland’s private and public sectors is equivalent to ..... 89.5% of Royal Bank of Scotland’s net assets ....'

    They sure did like to pump up the volume.

    You can't gentrify the problem by trying to landscape over it.

  • Comment number 26.

    #5

    'Or is there a deliberate programme by governments to monetise their debts and land us all with massive inflation?'

    Maybe not deliberate - that would require some thought and analysis

  • Comment number 27.

    2. This is about the Irish bankers, who were guilty of reckless lending moreso than feeding at the trough. You won't find the same proportion of million pound packages in the Irish banking market, and trading floors are a very minor component. The top boys in Anglo Irish had their snouts right in there, of course, but the salary/bonus profiles in Irish banking ar drastically different to London.

    In the Irish banking crisis, the main component has been reckless lending to property developers, and the problem now is that so many of the developers have managed to squirrel away the profits from the good times, either shifting it abroad or signing it over to family members, and NAMA can't go after those funds. So the answer to the question of "where has all the money gone" is that it is hoarded away by property developers.

    So your tired mantra of taking money off bankers holds no water in this discussion, as they're not the millionaires you think they are, and they're not sitting on the cash.

  • Comment number 28.

    What I find a little puzzling (doesn't take much!) is,

    a) why the "open attack" in this way on the Euro at THIS moment in time?

    b) why the Irish should be under 'speculative attacks', WHO BY and WHY NOW?

    WHat political games are really being played out and WHO are the PLAYERS Robert?
    Bond traders? The Banks that have made the loans, the UK govmt?

    WHO REALLY STAND TO GAIN BY FORCING THE IRISH TO ACCEPT IMF/ECB help?

    After all, it had been relatively quiet on the Irish front for some time now.

  • Comment number 29.

    9:

    On what and where have Irish banks 'leant' these huge amounts of money?

    Even the stock-pile of empty Irish homes still does not get anywhere the amount in billions of all of their loans.

    The suspicion, is that many of these bad loans, perhaps the bulk of the bad loans are on 'assets' in the UK ... which may mean that the UK, particularly its UK taxpayers, are equally as exposed as Ireland to the unfolding mess.

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

    The bulk is not in the UK market. Lots in Dubai, lots in Eastern Europe (yes, suddenly everyone in Ireland wanted to own holiday homes in Bulgaria, and the Irish property developers obliged), lots in the US.

  • Comment number 30.

    1 ) Ireland , alng with the rest of Europe and America , has been living beynd its means by borrowing to cover what it can't afford. These living standard expectations are beyond what the rest of the world has and double what is sustainable for the planet ( for UK and US this is even more true ). The cutbacks are inevitable and essential,not just for the obvious financial reasons but also to redress the balance for the future of the human race and the planet

  • Comment number 31.

    Could you please clarify the figures about bank assets?
    I find it difficult to believe that 89.5% of RBS assets are in Ireland, as is suggested. In my banking days the concentration of risk analysis would have put a stop to that kind of thing. Besides, that suggests that less than 10% of RBS lending is within the UK, allowing for the fact that they also have assets in US, Germany etc.

    I think, to be fair, I'd raise the same query with regard to Danske bank and Denmark. A bit of qualification required.

  • Comment number 32.

    I'm glad I had my hair cut yesterday.
    What Eire needs is time, the great healer.
    It is very easy to bully a small economy, though I accept the sums aren't small, but the sovereign government uber alles avec La Marseillaise in Brussels needs to consider the knock on effect to the Community.
    Our contribution to the mess will certainly knock the UK government's plans off course.
    It's all smoke and mirrors unless the crunch happens. It's in everyone's interest to just keep looking in the mirrors and ignore reality, after all we've been pretty good at that for the last 10 years or so.

  • Comment number 33.

    ......talk about "least worst" options! Give the bond-holders a haircut and you won't see another loan for decades or saddle the tax-payer with more debt (supplied by the bond-holder!)to avoid the need to give the bond-holder a haircut! Only way around this connundrum is to join the Yanks and the Brits and QE your way out of it by buying back your own bonds so that the banks can recapitalize. Only problem is that you are in the Euro, so this door is closed. Only realistic hope is growth. Bit tricky when your austerity package has just reduced the size of the economy by 10%. Up a creek without a paddle would seem to be the sum of it. For Ireland read Iceland in the next 12 months, debt default and start again. US and UK have already started the process by using QE which equals printing money which equals currency debase which equals inflation which equals less real debt. Iceland was just a bit more honest about it, that is all. Start learning how to grow your own vegetables.

  • Comment number 34.

    If the moderators will allow me to repeat a few comments that seem relevant here....
    We in the West can no longer "trade" our way out of the overwhelming spiral of international debt that we are all in.
    And the public are not going to accept 90% taxes.
    So what does that leave?....."printing" it!
    And the East will have to accept it.
    This applies to many in the Eurozone, the Dollarzone and Sterling.
    Rubbish or reality?

  • Comment number 35.

    29. At 10:35am on 17 Nov 2010, jimmy wrote:

    9:

    On what and where have Irish banks 'leant' these huge amounts of money?

    Even the stock-pile of empty Irish homes still does not get anywhere the amount in billions of all of their loans.

    The suspicion, is that many of these bad loans, perhaps the bulk of the bad loans are on 'assets' in the UK ... which may mean that the UK, particularly its UK taxpayers, are equally as exposed as Ireland to the unfolding mess.

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

    The bulk is not in the UK market. Lots in Dubai, lots in Eastern Europe (yes, suddenly everyone in Ireland wanted to own holiday homes in Bulgaria, and the Irish property developers obliged), lots in the US.

    ...................

    Well thanks for pointing that out ... I suppose this may reduce the direct UK exposure although property lending in the UK, by Irish banks, is I think underestimated but at least there is an asset there if it can be used?

  • Comment number 36.

    Robert, your lending figures are wrong - UK lending to Ireland is £150bn not £42bn, see Stephanie's blog for the accurate figures. Or try googling 'Ireland debt graph' to see the PIGS' debt broken down.

  • Comment number 37.

    Ordinary folk have had a real 'bashing' over the last 18months and some have suffered terribly. I've known many lose their homes and businesses despite being honest and hard-working. And before anyone jumps in and says 'they were overborrowed' - maybe they were but the punitive bancrupcy laws can take you down for really very modest amounts.

    Now, I'd like to see the holier-than-thou overborrowed guvts get a bashing. The one thing folk have a right to expect is a stable economic platform in which to live and work, take that away as is happening all over Europe, then what is the point of having guvt at all?

    Time for Realpolitik, methinks.

    GC

  • Comment number 38.

    As ever in these threads, there is a touching belief that everything is the fault of "the bankers" whoever that is precisely. The problem with this though is that the bankers are simply the visible manifestation of a wider societal malaise i.e. the belief that we can buck several thousand years of human experience and get rich quick.

    Posts from Irish contributors on these threads paint a picture that sounds very like SE England in the late 1980s, with everyone obsessing about the value of their house and borrowing mightily against that value (the same thing of course happened during the early noughties, it was just that people had learned not crow quite so crassly about unearned income!). "The market can only rise, property is a one-way bet, you'd be a mug not be in the game, if you don't buy now you'll never be able to afford it!" etc etc. It all sounds horribly familiar and it seems to stem from exactly the same errors of judgement i.e.

    1. The world has changed and the fundamentals no longer apply!
    2. I think that I'm much cleverer than I am in reality
    3. ...and anyway, people who I think are probably much cleverer than me are saying that it's a good idea.
    4. The growth curve is continuous, therefor I can't lose!

    Asset bubbles are created by precisely this type of mass hysteria. The demand is just as much "pull" as it is "push" with ordinary people abandoning common sense and borrowing money against perceived asset values. The fact that under-regulated banks fill this demand is hardly surprising and, seeing the profits they make, it's natural that they will seek to keep the bubble inflated.

    In short, it is politically convenient but nonetheless wrong to suggest that the whole thing is the fault of the banks. It's a collective malaise and it's a collective responsibility...greedy public, greedy bankers, opportunistic politicians and ineffectual regulators. To turn around ex-post and complain that it's not your fault and someone, somehow forced you to do it is profoundly disingenuous.

    It seems inevitable that sooner or later, Eurozone bondholders will have to accept a writedown on some categories of sovereign debt. It is simply wrong that the taxpayers take the hit for the whole thing! Perhaps it is better that this is actively planned for and executed in as fair a way as possible, rather than beggar ourselves trying to keep the tottering ediface upright! The result will of course be very unpleasant, will result in great reductions in credit availability, will crimp public spending, living standards will fall and European currencies will weaken. Perhaps though it will be the beginning of Europe working towards a sustainable economic model in a changing world order!

  • Comment number 39.

    @Sam_From_Hendon
    If only it were that simple. It's not just about the euro although the EU is naturally determined to protect it. As we've seen recently there are other bigger currency squabbles between the US and China. From an Irish perspective it is just as well that they do have the support available to them. It's also just as well that it's a small EU economy and not a country like Spain. That seems to have been the nightmare scenario that has spurred the EU into this urgent action.

    The trouble ,as Robert Peston highlights, is the deck of cards that much of international finance seems to be built on, and the risk that the Irish banking debt potentially poses to all of it. I think Merkel is right about the need for bondholders to take some pain but the risk of trying to do so at present far outweighs any schadenfreude we may get from seeing "greedy" bankers suffer.

  • Comment number 40.

    total lending to Ireland’s private and public sectors is equivalent to 92.3% of the net assets of Denmark’s Danske Bank, 89.5% of Royal Bank of Scotland’s net asset...

    RBS exposure is Euros 101.4 billion. It has assets of a couple of trillion I think which would make it about 5%

  • Comment number 41.

    9 Nautonier

    "The suspicion, is that many of these bad loans, perhaps the bulk of the bad loans are on 'assets' in the UK"

    Hmmmm....I can see this particular piece of baseless speculation playing well Irish political circles when the time comes to "play the green card"

    Do you think that this type of crass conspiracy theory really helps at times like this?

  • Comment number 42.

    We should try to stay out of this mess and not get involved. It would only remain a matter of a few years before the next set of nationalist songs berating Britain for causing the "Great Irish Property Surplus", the deaths of "millions" of Irish bank accounts and enforcing mass emigration to the "evil" UK mainland.

  • Comment number 43.

    "providers of tens of billions of euros of wholesale debt to banks."

    Come on Peston! You know you mean "wholesale credit".

    Write out 100 lines please. "Credit is not Debt"...

  • Comment number 44.

    Nothing like over-reporting another revelation of this global Ponzi scheme run by Bond managers to keep journalists in a job while those around them are losing theirs?

    Seriously though ... oh yes, I was being serious.

    This current recession is no accident, but a culmination of factors causing loss of trust in the banking and currency 'system'.

    What governments, politicians, and ALL financial institutions need to remember is that if you take ordinary people's taxes, pension, insurance and investment payments - which in itself is a legal contract - which, if renaged on, is illegal and must be compensated for?

    So, the point is: you can't have it both ways and then expect ordinary people to continue to tolerate such bad behaviour.

  • Comment number 45.

    16. At 10:14am on 17 Nov 2010, Chris London wrote:

    "... the banks may have lent irresponsible but I have not heard one person claim that they were forced to take a loan or buy that house. No companies were forced into borrowing or investing, no institution being cohered or Politicians being hoodwinked. "

    Sorry but I have to disagree with this sentiment in its entirety.

    The final decision when issuing a loan is always made by the lender.

    They have full responsibility.

    Sub-prime loans had that name for a reason.

    Banks knew what they were getting into.

    Why do you think they were repackaging and selling the loans on faster than you can say toxic rubbish?


  • Comment number 46.

    To those who say that "printing" your way out of this mess is the same as defaulting.....
    If the ECB, The Federal Reserve and the Bank of England "say" that another trillion dollars, euros or pounds exists....it exists.
    And if they all do it together, who in the East is going to argue with it?
    Give it a fancy name like "international rebalancing" or something, and bingo....the mess disappears.
    The currencies may suffer a little relative to the East, but that just "rebalances" our competetiveness.
    The ratings agencies may not be happy, but something drastic along those lines may be necessary, and they may have to accept reality.

  • Comment number 47.

    Well - we could have been having this discussion OVER 12 MONTHS AGO!!!!...if you had bothered to listen to my "ramblings".

    Let me tell you how it's going to go....

    The EU will make lightweight promises of 'no haircuts' to appease the bond holders and prevent a EU sovereign debt collapse, however this will upset Germany.
    However this will only last for Ireland....and possibly Portugal - when the Italians start getting in line for their bailout and the Spanish see this is the 'better way out' - then the Germans will say NEIN!

    Too late, already set a precident - and it will be unfair to deny bailouts to some EU nations when already having bailed out others. (it's like the banks - remember?)

    They're going to fall like skittles - some are genuinely falling and some will be 'pushed' by bondholders wanting to get a piece of this EU money before it dries up, and by national governments who find "bailout" easier to justify to their people than "default".

    So all the fantasists on this blog can go and swing from a tree - you're claims of recovery are in the bin, your fantasy that this would end in a 'swift recovery' were all baseless nonsense. There always was only one path this would take and those who defied it now look stupid (to put it mildly)

    The people are starting to see through the lies - they've actually worked things out for themselves - nothing has been 'fixed' in the last 2 years, it's all merely been 'postponed'.

    My god, the US pumped $600 Billion of QE into the markets last week and the US markets actually went down!!!!

    ...if you don't realise what is wrong with that - then I sincerely fear for you. In real terms this is when you see the coach driver swigging from a whiskey bottle as he careers around the mountain pass.

    ...better get your seatbelt on....

  • Comment number 48.

    ==Thank goodness we are not in the Euro==

    The City of London Supercasino means we are as vulnerable as Ireland.

    Current Government thinking, known as the UK banking bailout, involves 1.5 trillion+ in loans of taxpayers money.

    The British Government are gambling with the wealth of all our tomorrows at this Supercasino.

    Do you feel any safer now?

  • Comment number 49.

    45. The lender makes the final decision on whether to grant a loan or not, but they used to be much better at saying no, and everyone was better off. Even 10-15 years ago, if you wanted a mortgage, you were looking at multiples of 3 times salary, and bonuses would not be included, or 50% at most.

    Roll forward a few years, and let's take a look at how the mortgage market looked in Ireland. A friend of mine in Dublin tells me about his mortgage application. He wanted to borrow double his salary, as that's all he needed. Rather than accept the application and process it, he was told what a mug he was, and that if he leveraged himself up to the hilt, he'd make a fortune, as prices were set to continue rising. The mortgage broker drafted up figures for him, factoring in maximum bonus levels (higher than his historic levels), upcoming salary increases (plucked out of thin air), and rental income from ficticious lodgers in the spare rooms. Luckily he stuck to his guns, took out the loan he needed, and is sitting pretty now. Sure, his pad is worth less than he paid for it, but he has a roof over his head and can afford the repayments.

    Even after he took out his sensible mortgage, the pressure to borrow didn't stop, with regular calls offering great deals for extending the mortgage (plenty of headroom on the loan-to-value ratio, so why not blow it on a car, that sort of thing).

    Massive change in the lending market in a short space of time. Reckless behaviour by lenders, stupid behaviour by some borrowers, and complete inactivity from regulators and government.

  • Comment number 50.

    Isn't there an expression concerning "When you owe the bank manager a hundred vs when you owe the bank manager a million?" It is not in the interests of the institutions that are creditors to Ireland to demand a default before they take their haircut. The knock-on effect of exposure to CDS would see many of them go out of business. They can restructure the debt. This whole situation is only seen through the prism of what the debtor must do. It is, however, a partnership. The creditor must recognise their position that the money simply isn't there, globally. To pull down the whole house of cards rather than accept this reality and arrange a method to stabilise would be foolish in the extreme. Their investments would be written off and they would lose their power in any new currency launched. The global creditors need to recognise that their position is as precarious as that of Ireland.

  • Comment number 51.

    Therre is a very simple set of rules:

    The bank's equity shreholders, bondholders and senior staff pay the price. The small (under a million Euros / private individuals) should be protected - the borrowers who continue paying the interest/repayments should be OK, but those secured debtors that don't, should be repossessed.

    Follow these rules down and through the banking chain and we should all survive and so should the whole system.

    As to Consolidate Obligations and other insurance products such as CDS - crash and burn!

    As to the buffoons (above - you know who you are) who are pleased we are not yet inside the Euro. We are now in the 'happy' position where we are paying the price of the economic collapse caused by the insanely stupid regulation in any and all of our European trading partners - BUT we still do not have the benefits of the trading certainty of being inside the Euro - i.e. we are paying the price without getting the benefit - if that is what these fools want they must work for banks or some other leech on real trade and real business!

  • Comment number 52.

    45: You seem to be suggesting that banks parcelled up the sub-prime mortgages and sold them on, purely to get them off their books. Only true to a point. The packaging/resale of mortgages started out with top-rated mortgages (in the 90's), rather than the poor end of the market. It was the success of those instruments that created demand for higher returns, hence poorer quality mortgages. In the good times, investors were bullish on the lower-quality mortgages, as they were getting paid higher rates and felt that as property prices were still going up, the instruments were safe.

    This wasn't just an effort from banks to get rid of the rubbish on their books, that's just the final chapter.

  • Comment number 53.

    Robert,

    The real fear here is that, as you mention, the CDS effect is still waiting in the wings to hammer what is left of financial stability in a system built on debt. Triggering CDS underwriting will cripple the sysrem for good. No amount of QE would solve the problem and the sclerotic system would shudder to a halt. Haircuts? More like guillotines!

  • Comment number 54.

    Newblogger

    Your sentiment is disingenuous. So we can only have reckless lending but there's no such thing as reckless borrowing??? The banks will advance money against what they judge to be sound investments. Make no mistake though, if that investment goes sour the liability lies with the borrower...it always has done! If you borrow money then the risk is disproportionately borne by you. This is a constant through recorded history and the idea that it was some vile wheeze cooked up over the past ten years to boost profits is just wrong!

    The fact that the banks got their risk management models so desperately wrong is a cause for concern but does not obviate the fact that you borrow money at your own risk.

    Your blameless lender hypothesis sounds like the sort of "everyone is a victim, everyone is vulnerable, everyone must be put on State benefits because we know that's good for them!" that has got us into such a pickle in this country. Take responsibility for your actions in life! Otherwise you're just a whiner!

  • Comment number 55.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 56.

    It would seem that the financial sector is externalizing their crisis into our economy. There is a game of bluffing going on. The financial sector is pretending to all other sectors of the economy that there is a general crisis. Which makes the massive cuts plausible. The cuts will fix the situation. Yet, the truth is that the cuts actually precipitate a crisis. Those cuts are, in fact, The Crisis.

    By precipitating The Crisis the debt is externalized from the Financial Sector into the General Economy. Which keeps profits private and losses public.

    The Irish Government - darlings of Neo-liberal Tiger Economics - fell for the bluff. In essence creating The Crisis by imposing Austerity. Just as the Greeks created The Crisis by imposing Austerity. The bubble excuse - property or share or public sector borrowing requirement - is merely the means by which the bluff is articulated. By first getting the economy addicted to liquidity created through fractional reserves the Financial Sector externalizes future profits. Thus when future profit becomes required it is taken from the external source.

    Imposing austerity measures is the conman's switch. The austerity package and the cuts are, in fact, The Crisis being externalized from the Financial Sector into the rest of the economy. It does not matter if the entire banking sector of Ireland is nationalized. The financial sector merely sees it as an asset to be stripped. Through Austerity to future profits.

    The extent of the haircuts being imposed on the general economy is unacceptably high. For institutions that regularly advertise that "investments can go down as well as up" financial institutions are being willful. In effect, they are mis-selling their toxic investments into our economic activities. The way in which they are succeeding in doing so is with the bluff of "cuts are required for you but not for me".

    There should be some bluffs called.

  • Comment number 57.

    4. At 09:53am on 17 Nov 2010, Sam_From_Hendon wrote:

    "Morning Robert,
    On a day like today there's only one thing to post. Thank goodness we are not in the Euro"

    ....and I shall follow that up with but don't think that doesn't mean it's not going to cost us a fortune!!!!

    Clearly you don't understand the integration between UK banks and EU nations - still, you also don't understand why no-one is safe from this crisis - not even you.

  • Comment number 58.

    #31 Toryandproud and #40 Morpheus

    RP is comparing the Banks lending to Ireland with their NET assets.

    eg Total Assets 100 Trillion
    Total Liabs 99.5 Trillion

    leaves Net Assets 0.5 Trillion

    These are not the real numbers for each bank just to illustrate what he means by Net Assets.

    If net assets are negative then a company is technically insolvent ie even if it could realise all its assets at their full value it would not be able to pay its liabilities and would need to cease trading.

    At the %'s quoted Danske Bank and RBS would be very close to his level if they had to write off all the lending to Ireland.

    I would have thought it unlikely that 100% would need written off? However likely that there would be further write offs with other banks and countries as a kind of multiplier effect of bad debts incurred in reland around the world take effect.

    Finally of course Net Assets and Cash Flow are two very different things - I doubt RBS or Danske Bank would be able to realise anything like the funds required to deal with a rush to withdraw funds that would be likely if the wider public were aware of the risks discussed in this article - fortunately only a handful of saddos like us read these blogs!!

  • Comment number 59.

    38. At 10:53am on 17 Nov 2010, Anglophone

    Far too sensible a comment for here. Many of us have said the very same and are now termed "apologists"......

  • Comment number 60.

    54: I agree completely with regard to the responsibility of borrowers. Yes, banks were reckless in granting loans, but as a customer, it's my decision whether to leverage myself up or not.

  • Comment number 61.

    "What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators. These payments would generate enormous losses for the financial institutions, including banks, which provided the CDS cover."

    This is what happens when banks get involved in the 'insurance business'

    BOND HOLDER: I need someone to insure my debt against default
    BANK: How much are you willing to pay?
    BOND HOLDER: Well I need to insure £500,000,000 worth for the next 5 years
    BANK: How much are you willing to pay?
    BOND HOLDER: I need to be sure that I'm covered in case of default
    BANK: How much are you willing to pay?
    BOND HOLDER: I will pay £50k per £1,000,000 worth of debt
    BANK: Tappety, tappety, tappety, tap (on the calculator) - Yes, we can do that.
    BOND HOLDER: Excellent, now you're sure I'm covered in case of default - I have a lot of people counting on this.
    BANK: Yes, yes (thumbing through the money) - all good, all good.


    BANK: John, sell this debt onto someone else, for a profit (of course) - we know we can't cover those sorts of losses, but if we spread it around then the impact will be less.

    JOHN: But isn't that what all the other banks are doing?

    BANK: Yes, which is why we need to do it, it's competitive and profit making.

    JOHN: but isn't there a chance that this could go horribly wrong as all the claimants discover there isn't enough to cover the promises?

    BANK: Shut up John, or I'll fire you - all that matters is me getting my bonus for my yacht and masserati.

    ....and people on this blog are sad enough to look up to bankers? - Oh dear, on what rung do you place yourselves in the ladder? - Surely you must rank yourselves at the bottom, just above the 'estate scum' you so often sneer at - although I think even they have worked it out by now...

  • Comment number 62.

    58. At 11:27am on 17 Nov 2010, GRIMUPNORTH77
    Thanks GRIM. Got it now. I imagine that is one reason why RBS is now effectively a state bank.

  • Comment number 63.

    #54 Anglophone. You are evidentially wrong on every substantive point you seek to make.

    In the period leading up to this crisis banks made no effort whatsoever to judge whether an investment was sound or not - do you not remember "liars loans." Sure anyone can lie, but that doesn´t mean that you have to believe them.

    Some banks facilitated and encouraged the misrepresentation of a potential borrowers underlying position. Take Goldman Sachs who advised the Greek state as to exactly how it could misrepresent its underlying economic fundamentals.

    There are a lot of outstanding mortgages where no-one is able to identify the loan note holder. This is a consequence of securitization and "risk management" and this explains why BoA and others have suspended foreclosure activity (i.e. they have suspended foreclosure because they do not have the legal right to foreclose.

    All of these examples basically net back to the breakdown of law and law enforcement. I don´t much care whether people consider themselves as victims or not - but I do understand that vast masses of ill informed atomised people are being financially raped by predatory corporations who are able to operate outside of the law.

    It is not the case that the position that you describe has been constant through recorded history. All major religions caution against usary, and all prior civilizations periodically reset their "systems" through debt jubilees.

  • Comment number 64.

    54. At 11:23am on 17 Nov 2010, Anglophone wrote:

    'Your sentiment is disingenuous. So we can only have reckless lending but there's no such thing as reckless borrowing???'

    Define a 'RECKLESS' borrower?

    When does a borrower become a reckless borrower? Before or after the loan is approved?








  • Comment number 65.

    RP _'What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators.'
    +++++++++++++++++++++
    - Speculators = Gamblers?

    These CDO and CDS instruments seem to have been a major factor in our recent and current woes. We have not always had them. Why not ban them? They look as though they generate the smoke in the Smoke and Mirrors Trick.

  • Comment number 66.

    61:

    Couple of problems with the story you tell. All the "how much are you willing to pay" stuff is nonsense. It's more like getting an insurance quote, where the client tables their requirements and is given a price.

    Also, selling the risk to the market is not done at a profit. Banks lose money diverisfying their risk in this manner (if someone makes a profit heding risk, good on them, that certainly deserves a bonus). Again, very much like the insurance market ... cos that's exactly what default swaps are.

  • Comment number 67.

    16. At 10:14am on 17 Nov 2010, Chris London wrote:

    "Yes you can say the banks may have lent irresponsible but I have not heard one person claim that they were forced to take a loan or buy that house. No companies were forced into borrowing or investing, no institution being cohered or Politicians being hoodwinked."

    ...still banging that same old drum are we Chris? - Haven't you woken up to the fact yet that the PROFESSIONALS in banking are RESPONSIBLE for ensuring they don't lend to those unlikely to ay it back.

    I lent Fred £50 last week, he still hasn't paid me for the £50 I lent him 2 weeks ago - am I unlucky or just stupid? Is it Fred's fault for asking it?

    I've told you a thousand times already it's not down to the unqualified borrower - please stop trying t excuse the banks failure in their prime responsibility as it's making you look like a clown.

    I mean can I put it any simpler for you to understand?

    Why don't you lend Fred the £50 he needs to borrow - I mean I've learnt my lesson but clearly as you think the onus is on the borrower then you can lend it to him and then he will have to suffer the consequences.

    Crikey - if you can't get a simple concept like that (which even the banks don't argue with) - then what hope is there you'll understand why this is happening????

    "FINANCIAL TIMES
    ABU DHABI MOVES TO SECURE FOOD SUPPLY
    Abu Dhabi is to make a bold foray into commodities with the establishment of a government-owned trading house aimed at securing food supplies for the import-dependent nation and capturing profit margins in metals and agriculture trading. People familiar with the plans say the company, which is called Abu Dhabi Sources or ADS, is likely to be started with a capital base of several hundred millions of dollars."

    http://www.cityam.com/news-and-analysis/what-the-other-papers-say-morning-361

    ...you have no idea....this isn't a crisis caused by the people, it's been caused by a small number of people - the same people you defend time and time again - and without any reasoning.

  • Comment number 68.

    #8. At 09:59am on 17 Nov 2010, davidbrent wrote:

    "Didn't some wise man (Buffet?) once call CDS's "financial weapons of mass destruction"? It seems he was right - in the sense that they are instruments that will never actually be used in any meaningful sense. I have to ask, if it would be too catastrophic to let any bank fail and trigger a wave of CDS pay-outs, then what is the point of CDSs at all?"

    Warren Buffet has called derivative trading generally "weapons of financial mass destruction". The reason is that you can amplify your returns (both profit and losses) by this means. This is widely recognized as risky activity within banks, so, of course, they got themselves insurance cover.

    There are two sorts of calculation a sensible insurance provider does: (1) calculate the premium [easy, charge enough to cover last year's pay-outs + inflation + profit, ramping premiums up if a loss is made]; and (2) ensure that total exposure does not threaten the financial stability of the insurance company [historically, they've worried about hurricanes in the US; and have off-loaded some of the risk onto other companies (re-insurance)].

    It is my personal hunch that the insurers failed to undertake part (2) above, and while the profits rolled in no one bothered to ask the important question about the nature of the risk. Mainly because getting anyone to explain derivatives in simple terms to senior management would have been near impossible.

    A very simple method to control investment banks derivative operations would be to impose regulation on insurance. I'm thinking a plain outright ban on derivative insurance would do the trick, but would be interested to debate the down-sides.

  • Comment number 69.

    Re Borrowers or Lenders - whose fault is it?

    I think my point on this is that if you have been a reckless borrower you deserve to suffer; if you have been a reckless lender you also deserve to suffer; however the people who seem to be suffering the most in this crisis at the moment are the people who are in neither of these groups - the sensible savers!

    Therefore I think ultimately it is the lack of regulation enforcement at a government and banking level where the fault lies as the 'savers group' should have been protected by these regulations and from irresponsible lending on a massive scale.

  • Comment number 70.

    I had a very lengthy conversation this morning with an ex-colleague from my days in the banking sector. Let's just say he has very sweaty palms at the moment. His comments were along the lines of "We were hoping the EU sovereign debt crisis could be held off until after Spring 2011"

    What he was in effect saying is Ireland, Portugal and Greece are doomed but the ECB will do anything in their power to keep them temporarily afloat to avoid a crisis of confidence before the banks need to refinance their loans next year. If confidence falls before the loans come up then banks are going to fall like a deck of cards. If confidence however is still "reasonable" in the Spring they MAY be able to get away with refinancing bank loans then RESTRUCTURING sovereign debts. I stress restructuring because this will be a major catastrophe but far lees so than the banking system collapsing although it could eventually lead to this end as anyway but they'll drag it out regardless in the hope of "something turning up". He also said keep an eye on Spain, the economy there is very significant in world terms and they need major bond sales next year. It struck me how many times he used the word "Confidence," clearly they're just buying time so I'm a tad worried but at the same time excited that this whole scam is soon to crumble. Sure, I'm going to suffer being a debt slave myself but I'll live.

    I discussed at great length exposures, balance sheet asset valuations and toxic derivatives floating around and who actuially owns them at the moment. All I'll say is be very, very, very afraid. He wasn't too clued up about foreclosuregate but did say there's many a fevered brow searching through stocks to trace what is dumped where and exposure to possible "Dead" loans.

    He seemed resigned to something pretty awful in view, maybe that was just me!

  • Comment number 71.

    64: Reckless borrower. Someone who takes on debt that they know that they are going to struggle to service. Facilitated by reckless lender, who is happy to help the customer bite off more than they can chew.

  • Comment number 72.

    59. At 11:28am on 17 Nov 2010, yam yzf wrote:

    "38. At 10:53am on 17 Nov 2010, Anglophone

    Far too sensible a comment for here. Many of us have said the very same and are now termed "apologists"......"

    You are both banking apologists - you are to scared to face the real cause of the problems - so you both rather blame the weakest as they cannot defned themselves with Government lobbying and millions spent on advertising.

    How very brave of you both - is this how you 'got through the bullying at school'?

    Me - I knocked the bully out - in Home economics class after he wrecked my crumble (because he forgot his own ingredients) - and strangley the bully was no more trouble after that.

    Only the snide pick on the weak - because they fear the bully more. It doesn't solve the problem - it merely distracts the bully. This is exactly how your apologetic nature for the banking bully is - better to blame those below than bite the hand that feeds you.

    ...well fortunately behaviour more accustomed to the Muroidea family is not as common amongst humans as you may believe (although it's possibly quite popular in your circles)....and eventually the bullied bite back - at which point you will find yourself neither protected by the bully - nor welcome amongst the bullied.

    You chose your side - now stick with it - and good luck!

  • Comment number 73.

    69: Spot-on. If lenders and borrowers are behaving like idiots, it's up to regulators and government to do their job. They didn't. All parties guilty, and throw in the auditors too.

  • Comment number 74.

    re#61...Being one of those 'estate scum' at least that's where I was dragged up, I find it quite amusing (in a wry sense) to read, when I'm not busy earning a crust, so much meandering waffle from a few 'erudite' bloggers. There seems,to me, a great variety of differing opinions as to what has caused the current situation in Eire and elswhere, and the possible solutions. All based, it would seem, on ideas and prothesis issuing forth, from the very same people that, reading between the lines, work or have worked in those very institutions you now berate. And while you all enjoy your verbal fiddle playing......the world burns!

  • Comment number 75.

    66. At 11:49am on 17 Nov 2010, jimmy wrote:

    "Couple of problems with the story you tell. All the "how much are you willing to pay" stuff is nonsense. It's more like getting an insurance quote, where the client tables their requirements and is given a price."

    No Jimmy - this is a market, the issuance of insurance is determined by how much the buyer of the CDS is willing to pay not by the actual risk of default (you're getting it confused with REAL insurance) - don't worry, it's just another lie you've been told and you sucked it up like a good little boy....otherwise there wouldn't be any concern about "who is going to cover this"

    "Also, selling the risk to the market is not done at a profit."

    ...it is if you're doing "god's work" - because I've seen profit made with my own eyes selling on debt (is it not becoming clear why this is all going so bad yet??)

    "Banks lose money diverisfying their risk in this manner (if someone makes a profit heding risk, good on them, that certainly deserves a bonus)."

    Deserves? - spoken like a true Capitalist - didn't think about the word 'deserve' there did you, because there has been no effort, so why is there a reward?

    Tell me, how long do you think a system can sustain itself if it's based on rewards without effort? - please tell me, clearly your brain is so great it knows how this is sustainable.

    "Again, very much like the insurance market ... cos that's exactly what default swaps are. "

    No they're not, insurtance companies employ actuaries to assess the risk - the banks do not, they work off formulas relating to the amount insured and "what the market says" - which of course is usually wrong.

    The cuckoos are out today - look at these people thinking that CDS's are anything like regular insurance!!!

    Don't make me laugh - go and do some research before you start making claims of that nature.

  • Comment number 76.

    69. At 11:50am on 17 Nov 2010, GRIMUPNORTH77 wrote:

    'I think my point on this is that if you have been a reckless borrower you deserve to suffer;'

    The problem I have with this is what is the difference between a borrower and a reckless borrower?

    Is it default?

    If one person defaults – reckless borrower?

    If over one million default – reckless lending?


    If one person defaults




  • Comment number 77.

    71. At 11:51am on 17 Nov 2010, jimmy wrote:

    "64: Reckless borrower. Someone who takes on debt that they know that they are going to struggle to service. Facilitated by reckless lender, who is happy to help the customer bite off more than they can chew."

    ...and there is the answer - I don't think you meant to say it but...

    –verb (used with object), -tat·ed, -tat·ing.
    1.
    to make easier or less difficult; help forward (an action, a process, etc.): Careful planning facilitates any kind of work.
    2.
    to assist the progress of (a person).

    ...without the reckless lender - there would be no reckless borrowing....

    We don't allow children to buy cigarettes for the same reason - they will ask for them, but they don't realise the dangers of smoking.

    ...are you saying we should apply the same laws there? - I mean it's not the shopkeepers fault these kids keep asking for fags?

    Your defence of bankers goes way beyond mere ignorance - it's downright unjustifiable and senseless! - you must love them for some reason - work in one do you? - or maybe you're a shareholder - surely you knew what you were getting into when you bought shares (irresponsible investor)

  • Comment number 78.

    63. At 11:44am on 17 Nov 2010, armagediontimes wrote:

    "#54 Anglophone. You are evidentially wrong on every substantive point you seek to make."

    What I can't decide is whether these banking apologists are merely pushing their own misguided self interest, wind ups - or whether people are really that dim they actually think their points are correct!

    Maybe I've got my faith in man wrong - and they are actually that dim - I mean it's getting harder and harder to believe that people genuinely still don't get it - I mean it's been going on for 2 years now!

  • Comment number 79.

    We keep on bailing out gamblers who lose.

    In the Irish case, we are asked to bail out a failed rescue for a failed casino economy.

    Enough - its time to let one go, and its Ireland. Like the other land that begins with I, they will get over it.

    We may well be next, so be it. Better a rapid adjustment than a slow one.

  • Comment number 80.

    27. At 10:32am on 17 Nov 2010, jimmy wrote:

    > they're not sitting on the cash.

    That's rights - banks have no cash to sit on so they're sitting on the taxpayers and customers instead. You got it in one.

  • Comment number 81.

    24. At 10:30am on 17 Nov 2010, tonyparksrun wrote:
    #8 DavidBrent
    "CDS..purely a way of keeping bankers in the manner to which they are accustomed" If you want to understand just how true this is, read 'The Big Short' by Michael Lewis which gives the gory details of AIG FP writing insurance (CDS) on hundreds of billions $ of BBB grade subprime bonds. Literally shake your head in disbelief at the sheer stupidity!

    _________

    Is that why US banks / US insurers are concerned about the Irish Government 'guaranteed' banks defaulting?

    Are AIG insuring external Irish bank loans' exposure?

    If not, who is?

    Let the banks and insurance companies take a hit this time and give the Irish taxpayers a break from austerity...

    RBS should also take a hit; they seem to be behind a lot of this 'house boom' loan debt!

    But of course the taxpayer in the UK will end up covering the RBS Irish bank bad loan debt if it defaults under the HM Treasury £282 billion APS RBS UK Government backed RBS bank insurance 'guarantee' scheme - that's why Osbourne and Cameron are keen to 'help' Ireland out or rather the banks in Ireland to save another RBS bank bail out here!

    Did the HM Treasury take out its own bad bank loan insurance cover for its RBS £282 billion insurance 'guarantee' with AIG?

    What happened to monoline CDS bank insurers?


  • Comment number 82.

    73. At 12:01pm on 17 Nov 2010, jimmy wrote:

    69: Spot-on. If lenders and borrowers are behaving like idiots, it's up to regulators and government to do their job. They didn't. All parties guilty, and throw in the auditors too.

    It is now near impossible to get a loan, why?

    Has the regulation changed?

    Politics? Politicians want borowing levels increased!

    Have all the reckless borrowers dissapeared? Can I still get a 125% mortgage?

    Or have lenders changed their ways?


  • Comment number 83.

    http://www.bbc.co.uk/news/business-11771574
    "There have been reports that the UK is considering offering billions of pounds of direct loans to the Irish Republic."
    I wonder what the interest rate would be on those loans. Presumably a slightly lower rate than the interest Ireland is currently paying, but wouldn't that simply be exchanging one debt for another and turning "good" money (I'm assuming it's "good" money that's being loaned, although it probably won't be really) into bad.

    @67. At 11:50am on 17 Nov 2010, writingsonthewall wrote:
    "I've told you a thousand times already it's not down to the unqualified borrower - please stop trying t excuse the banks failure in their prime responsibility as it's making you look like a clown."
    Please could you explain this a bit more clearly: banks make part of their money from lending out the money they have. This comes from bank desposits usually from ordinary people, and in this case they are the lenders to the bank. The banks lend this out with interest under FRB as you are aware. Now, if the onus is on the lender to ensure that the money they lend is as free of risk as it can be, i.e. due diligence, this requires the ordinary bloke/lass to be more savvy regarding the entire economic system than the bankers, and they also by your argument have to assume their own responsibility for the money which they have deposited (which means the taxpayers or least those with deposits should bail out those banks dumb enough to be careless with the money the banks have loaned - an insane and baffling situation).
    Now, IANAB, so I may have completely misconstrued your comment, but I would like a little clarification as it seems by your reasoning the banks can have their cake and eat it. I sincerely hope I'm completely wrong.

  • Comment number 84.

    Excellent commentary. It is important that bank to bank lending risk is not believed or perceived to be guaranteed. Otherwise the Financial System is an abstract system which as we have seen over the long term leads to risk being ignored for income generation. There has to be at the least some pain for those who take the risk and lose. Blackmail of a system collapse does not work in the long run as it will eventually collapse ...hopefully this is not it and we are not too late to make it count this time.

  • Comment number 85.

    The claims of reckless borrowing and reckless lending are no more than an illustration of how The Crisis is managed. The borrower that misrepresents their capacity to produce surplus is rightly judged reckless. The lender that misrepresents their means to lend is equally reckless.

    The recklessness of borrowers is tempered by the fractional reserve nature of the lenders. For every reckless instance of borrowing there are multiple instance of reckless lenders. The lenders take the reckless overstatement of the borrower and lend against it. Which they continue to do so knowingly.

    So accusations of recklessness need to be tempered by the knowledge that the austerity packages being proffered by governments simply feed the fractional reserve multiplier (in all of its guises) of the lenders.

    Responsible lenders would remove the multiplier. Responsible borrowers would not feed the multiplier with the fruits of austerity.

  • Comment number 86.

    23.Philof1949 is absolutely right and reflects my own view that not an awful lot that is coherent has taken place in resolving the eurozone crisis. On-the-hoof, elastoplasts solutions will only be temporary and are little more than kicking the can of worm down the road. Maybe we really entering a new phase where, as some economists including Stiglitiz argue, as here http://www.mindfulmoney.co.uk/1767/economic-impact/all-eyes-on-germany-as-eurozone-crisis-rumbles-on.html that the only long term sustainable solution is for, say, Germany to exit euro and allow for an orderly resolution of the PIIGS woes.

  • Comment number 87.

    #76 - I'm not going to try and give a dictionary definition for you to blow a hole in but I think everyone knows that in the 90's there were many people borrowing recklessly to get things today that they shouldn't have been able to afford till tomorrow or in many cases never.

    If you lie about your earnings to get your mortgage or loan you are a reckless borrower and deserve no sympathy if you can't repay the loan.

    If you are given a mortgage quote and it is £3,000/month and your net earnings are £3,500/month then you are a reckless borrower

    etc etc this category of people deserve no sympathy.

    If you borrowed at three times your earnings to buy a house and then lost your job you are not reckless just unlucky and you deserve sympathy and help.

    To define reckless would be pointless - however within the millions of borrowers who have defaulted or are in trouble many have enjoyed the asset they should never have had so I have little time for them (people who have fallen on unexpected hard times I have a lot of time for).

    As for reckless lenders I, along with many other people on this blog over the last couple of years, find it difficult to believe that those responsible have not faced criminal proceedings and imprisonment instead of handouts, payoffs and bonuses as a result of QE, but I have blogged to exhaustion on this topic and nothing has changed.

  • Comment number 88.

    "It’s extremely difficult to be sure" I hope this wasn't an attempt deliver this blog entry in an Irish accent!

  • Comment number 89.

    Robert Peston wrote: 'By the way, bigger losses would fall on pension funds, insurers and other financial institutions.'

    Terrible, my heart bleeds for the poor insurers and financial institutions!

    About time they paid the price for their own 'moral hazard' and greed!


    'Would that be an unthinkable, unbearable cost for banks, that would undermine the integrity of the financial system? Probably not. Is it understandable that the Irish government doesn’t want to be the first to test whether international banks can take the strain? Probably.

    You can't 'undermine the integrity of the financial system', for it has no 'integrity'!

    Let the banks crash and the wealthy insurers can pay out to the poor [sic] bond holders and poor bankers!

    If not, I'm sure Paddy Power the bookies will always open a book on the Irish banks defaulting and a Government default too, and who knows, perhaps the Irish PM has already placed a bet on default?








  • Comment number 90.

    40. At 10:56am on 17 Nov 2010, You wrote:
    RBS exposure is Euros 101.4 billion. It has assets of a couple of trillion I think which would make it about 5%

    Sorry about this, I was writing drivel as per.
    RBS sovereign debt exposure to Ireland is 4.8 billion euros. Its total sovereign debt exposure is 101.4 billion euros

  • Comment number 91.

    Is the Euro to blame for the Irish Crisis?

    Having lived and run a business in Ireland from 1987 to 1999 here is my view.

    To blame the Euro is a simplistic explanation. Joining the Euro in 1999 did lower its interest rates from roughly the same as the Uk's to that of the Euro zone. Which of course meant cheap available credit providing a boost to commercial and domestic construction and property prices which accounted for most of Ireland,s growth from 2000 up until 2006/7

    However its her politicians, who didn't for-see or didn't choose too who are chiefly responsible. Tax incentives for construction, introduced in the eighties and nineties whilst valid then were irresponsibly kept thus leading to the massive construction boom. The government coffers got rich on stamp duty etc, the developers got rich on every increasing property and land prices and the banks made money on massive loans. The Fianna Fail government should have abolished the incentives and brought in measures to control the construction led boom.

    Lower interest rates are not bad in themselves and are in fact a great help to businesses wanting to invest in real productive capacity. Not to build unwanted Zombie hotels, shopping centres and housing estates. Why did they let this boom continue when it was so obviously bound to blow up?

    Also to blame, are the credit rating agencies, the economists and the media. Only a fool could believe a boom based solely on construction is sustainable. The real Celtic Tiger was over in 2000 what followed was a mania fueled by stupidity, greed and ignorance. Building houses to house builders, bulding shopping centres to feed and clothe builders, building hotels for imaginary tourists. Where was the planning where was the plan, who got rich and who now is the poorer.

    It is now left to the people of Ireland who were only caught up in the whirlwind of the Celtic Tiger to pay for the mistakes of others. The bankers, politicians and their advisors who should have known better.

  • Comment number 92.

    76. At 12:07pm on 17 Nov 2010, newblogger

    Interesting....because many millionaires defaulted on their way to 'success' - but we don't class them as reckless borrowers - no, then they are 'ingeneous entrepenuers'.

    Sir Freddie Shreddie was a 'reckless borrower' as the business he was 'managing' collapsed - do we count him as a reckless borrower, or not because he has a knighthood.

    The problem is this is the same old 'pick on the smallest / youngest / weakest' that some people go in for rather than stand up and face the truth. You see when these people who describe 'reckless borrowing' all picture someone living off benefits, borrowing money to buy giant TV's and appearing in the SUN every few weeks with stories of their 15 kids.

    ...sadly this is not what a reckless borrower looks like generally - as they are unable to borrow to begin with.....but it fits nicely with their other stereotypes of the 'benefits scrounger' and the 'non-tax payer' and the various other imaginary people the jealous nitwits like to create to make their pathetic ego's feel a tiny bit better about the fact that it is they who caused this problem by not standing up to the bully in the first place.

  • Comment number 93.

    We need to forget the emotional attacks on bankers
    - Teflon politicians need to have some of the blame attached to them -this crisis is the result of poor regulation [ ie our regular stupidity in following the USA - integration of retail and investment banking re the reversal of the glass-stegal act]
    - Why does a developed country such as Ireland or the UK need to borrow money - why does it not fund development out of tax income? The only answer is that we are living beyond our means -the 'chickens are coming home to roost'

  • Comment number 94.

    "If that were to happen, it would be counter to the passionately stated policies of Ireland’s Taoiseach or prime minister, Brian Cowen, and his finance minster, Brian Lenihan. They fear that reneging on these debts would see Ireland cast out into a financial leper colony, unable to tap new commercial sources of credit for years if not decades "
    It would do them a favour. Out of the ashes monetary reform could come forward and rid us of the failings of the current monetary system for good. Its the only credible way forward. Default is coming, its inevitable, the only question is will it bring the whole banking system down or will parts of it survive. Personally, I'm trying to reduce my risk to a banking system collapse as much as I can.

  • Comment number 95.

    83. At 12:28pm on 17 Nov 2010, Stuart Wilson wrote:

    "Now, IANAB, so I may have completely misconstrued your comment, but I would like a little clarification as it seems by your reasoning the banks can have their cake and eat it. I sincerely hope I'm completely wrong."

    .....that's exactly how it is! - how else do you think banks 'make profit' without engaging in any activity which has merit?
    Unless we stop them they will have had their cake, eaten it, then had yours too - eaten that, and eventually eaten the Government's cake too!

    The depositors do not decide the risk of borrowing at the other side - that is the banks responsibility - if we start to listen to the misguided ramblings on here then we will be taking away from the banks the only purpose they have - risk assessment

    ...and then how would you justify their bonuses? - HSBC are about to double their bankers wages (so they don't have to pay unpopular bonuses) - now what did they actually do to earn that again?

    Took your money, created some from thin air (FRB) and lent it to someone who couldn't pay it back (not bothering to check if they could) - and this is a rewardable skill???

  • Comment number 96.

    As if this poor country wasn't fragmented enough - I don't understand why those of you arguing about 'irresponsible lending/borrowing' don't give over.

    I'm irresponsible: the guvt told me repeatedly publicly and in private via letters from my MP & the Treasury (indirectly) that Brown's policies had brought a stable economy. Without that of course any borrowing is suicide. But if your guvt assures you the economy is safe what exactly is the problem?

    GC

  • Comment number 97.

    To most people it would seem reasonable that one of the FIRST groups to be asked to share the load would be the financial institutions... and yet in Ireland as in the UK, they seem to be the only folk (bar politicians) who are not being forced to accept austerity measures, loss of the services for which they have already paid, etc. despite it being financial institutions and politicans who caused the problem in the first place.

  • Comment number 98.

    WOTW - The simple truth is the masses are, as you say, too dim. I would go further and say outright, the masses are a liability used as cannon fodder in physical wars, and the financial wars. Sadly those who can see the scams for what they are, become very frustrated at the levels of denial, and downright lies being told to fool the liabilities.
    I want to live a free life, make decisions based on what I know intuitively is right from wrong based on my humanity. The masses (read, sheeple) prevent this from happening, because they not only have no ability to think and see logically the reality hitting them in the face every day, they stupidly believe that what they are being told in the truth. Living knowing this is the current state of the world I find very hard to accept. Because of them, the rest of us get to live like prisoners too.

  • Comment number 99.

    87. At 12:32pm on 17 Nov 2010, GRIMUPNORTH77 wrote:


    “If you lie about your earnings to get your mortgage or loan you are a reckless borrower and deserve no sympathy if you can't repay the loan.”

    This misinformation amounts to fraud.

    “If you are given a mortgage quote and it is £3,000/month and your net earnings are £3,500/month then you are a reckless borrower”

    This mortgage should NEVER be approved.


    “If you borrowed at three times your earnings to buy a house and then lost your job you are not reckless just unlucky and you deserve sympathy and help.”


    Agreed. This is the most common situation (I think).

    I find it difficult to believe that the global banking system is being propped up to the tune of $12 Trillion and poor Cletus in Alabama is getting the blame!




  • Comment number 100.

    Can someone explain to me why the price of golf has been falling this week from its record high despite the continued chaos? Do investors now thing the dollar is safer?

 

Page 1 of 4

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.