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Could Germany afford Irish, Greek and Portuguese default?

Robert Peston | 13:06 UK time, Friday, 15 April 2011

The Western world remains where it has been for some time, delicately poised between anaemic recovery and a shock that could tip us back into economic contraction.

Euro logo

Perhaps the most conspicuous manifestation of the instability is that investors can't make up their minds whether the greater risk comes from surging inflation that stems largely from China's irrepressible growth or the deflationary impact of the unsustainable burden of debt on peripheral and not-so-peripheral eurozone (and other) economies.

And whence do investors flee when it all looks scary and uncertain, especially when there's a heightened probability of specie debasement - to gold, of course.

Unsurprisingly, with the German finance minister, Wolfgang Schauble, implying that a writedown of Greece's sovereign obligations is an option, and with consumer inflation in China hitting 5.4% in March, there has been a flight to the putative safety of precious metal: the gold price hit a new record of $1,480.50 per ounce for June delivery yesterday and could well break through $1,500 within days (say the analysts). Silver is hitting 30-year highs.

In a way, if a sovereign borrower were to turn €100bn of debts (for example) into an obligation to repay 70bn euros, that would be a form of inflation - it has the same economic impact, a degradation of value, for the lender. But it is a localised inflation; only the specific creditors suffer directly (though there may be all sorts of spillover damage for others).

And only this morning there was another blow to the perceived value of a chunk of euro-denominated sovereign obligations. Moody's has downgraded Irish government debt to one level above junk - which is the equivalent of a bookmaker lengthening the odds the on that country's ability to avoid controlled or uncontrolled default.

Some would say that the Irish government has made a start in writing down debt, with the disclosure by the Irish finance minister Michael Noonan yesterday that he would want to impose up to 6bn euros of losses on holders of so-called subordinated loans to Irish banks.

But I suppose the big story in the eurozone, following the decision by the European Central Bank to raise interest rates, is that the region's excessive government and bank debts are more likely to be cut down to manageable size by a restructuring - writedowns of the amount owed - than by generalised inflation that erodes the real value of the principal.

The decision of the ECB to raise rates has to be seen as a policy decision that - in a worst case - a sovereign default by an Ireland, or Greece or Portugal would be less harmful than endemic inflation.

But is that right? How much damage would be wreaked if Greece or Ireland or Portugal attempted to reduce the nominal amount they owe to levels they felt they could afford?

Let's push to one side the reputational and economic costs to those countries - which are quite big things to ignore, by the way - and simply look at the damage to external creditors from a debt write down.

And I am also going to ignore the difference between a planned, consensual reduction in sums owed - a restructuring that takes place with the blessing of the rest of the eurozone and the International Monetary Fund - and a unilateral declaration of de facto bankruptcy by a Greece, Ireland or Portugal (although the shock value of the latter could have much graver consequences for the health of the financial system).

So the first question is how much of the impaired debt is held by institutions and investors that could not afford to take the losses.

Now I hope it isn't naive to assume that pension funds, insurance companies, hedge funds and central banks that hold Greek, or Irish or Portuguese debt can cope with losses generated by a debt restructuring.

The reason for mild optimism in that sense is that those who finance investments made by pension funds and insurers - that's you and me by the way - can't get their money out quickly or easily. We simply have to grin and bear the losses to the value of our savings, when the stewards of our savings make lousy investment decisions.

As for hedge funds, when they make bad bets, they can suffer devastating withdrawals of finance by their investors, as and when the returns generated swing from positive to negative. But so long as those hedge funds haven't borrowed too much, so long as they are not too leveraged - and most aren't these days - the impact on the financial system shouldn't be significant.

Finally, if the European Central Bank - for example - ends up incurring big losses on its substantial holdings of Greek, Portuguese and Irish debt, it can always be recapitalised by solvent eurozone nations, notably by Germany and France.

However this is to ignore the node of fragility in the financial system, the faultline - which is the banking industry.

In the financial system's network of interconnecting assets and liabilities, it is the banks as a cluster that always have the potential to amplify the impact of debt writedowns, in a way that can wreak wider havoc.

That's built into their main function, as maturity transformers. Since banks' creditors can always demand their money back at whim, but banks can't retrieve their loans from their creditors (homeowners, businesses, governments), bank losses above the norm can be painful both for banks and for the rest of us.

Any event that undermines confidence in the safety of money lent to banks, will - in a best case - make it more difficult for a bank to borrow and lend, and will, in the worst case, tip the bank into insolvency.


Which, of course, is what we saw on a global systemic scale from the summer of 2007 to the end of 2008. That's when creditors to banks became increasingly anxious about potential losses faced by banks from a great range of loans and investments, starting with US sub-prime.

So what we need to know is whether the banking system could afford losses generated by Greek, Irish and Portuguese defaults.

And to assess this, we need to know how much overseas banks have lent to the governments of these countries and also - probably - to the banks of these countries, in that recent painful experience has told us that bank liabilities become sovereign liabilities, when the going gets tough.

According to the latest published analysis by the Bank for International Settlements (the central bankers'central bank), the total exposure of overseas banks to the governments and banks of Greece, Portugal and Ireland is "just" $362.2bn, or £224bn,

Now let's make the heroic guess that a rational writedown of this debt to a sustainable level would see a third of it written off - which would generate $121bn (£75bn) of losses for banks outside the countries concerned.

If those loans were spread relatively evenly between banks around the world, losses on that scale would be a headache, but nothing worse.

But this tainted cookie doesn't crumble quite like that. Just under a third of the relevant exposure to public sector and banks of the three debt-challenged states, some $118bn, sits on the balance sheets of German banks, according to the BIS.

For all the formidable strength of the German economy, the balance sheets of Germany's banks are by no means the strongest in the world. German banks would not be able to shrug off $39bn or £24bn of potential losses on Portuguese, Irish and Greek loans as a matter of little consequence.

This suggests that it is in the German national interest to help Portugal, Ireland and Greece avoid default.

If you are a Greek, Portuguese or Irish citizen this might bring on something of a wry smile - because you would probably be aware that the more punitive of the bailout terms imposed by the eurozone on these countries (or about to be imposed in Portugal's case) is the expression of a German desire to spank reckless borrowers.

But as I have mentioned here before, reckless lending can be the moral (or immoral) equivalent of reckless borrowing. And German banks were not models of Lutheran prudence in that regard.

If punitive bailout terms make it more likely that Ireland, Greece or Portugal will eventually default, you might wonder whether there has been an element of masochism in the German government's negotiating position.

Comments

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  • Comment number 1.

    No doubt matt_us will be along shortly to accuse you of being part of the CDS conspiracy.

  • Comment number 2.

    Robert,

    I really don't think default makes much difference in the end - one way or other default or not the indebtedness of many states appears high and potentially unaffordable - however even without default the costs are the same in the end.

    What really matters is not the National default or not but the need to unwind some of the excessive private debt - states will always survive one way or another - however what states need is a competitively prices economy so that they can fulfil their productive potential at realistic prices.

    Here is where the PIGS are winning - many of the PIGS are getting their home asset prices down so that their can once again have a hope run a productive home economy at competitive international prices.

    You know where I am going now -- only the UK has stubbornly refused to understand that in order to get its economy going it must deflate asset prices at home. (I am referring to our absurd house prices.) The Irish market 'understood' what was necessary and collapsed its house and commercial property prices so they are far better placed to recover than we are, for example.

  • Comment number 3.

    Good afternoon Robert,
    It is now clear that it's time for the Euro to be pulled apart. The ECB is setting an interest rate to benefit the northern European countries, whilst the PIIGs suffer interest rates that are damaging to their economy. It's time for politicians to be brave and admit the Euro experiment has failed. It's time for their apologists to admit their own mistakes or else we could see a new wave of European Nazism.

  • Comment number 4.

    A better question would be 'Can German Banks afford Irish, Greek and Portuguese default?" Looking at the amounts the answer has to be no.
    http://www.howcome.co.uk/shortly/dEa/ The media has been reporting this for a while. It is the banks that leant money to these nations that are really been bailed out.

  • Comment number 5.

    This position represents the failure of the method of managing/reducing the deficit that is based on austerity and the economics of sado-masochism. A controlled rescheduling of debts by the Euro zone combined with a programme managed recovery and reform for these economies is essential to avoid a terminal crisis for the Euro-zone. How many times do we need to go through a default scenario before the centimo drops!

  • Comment number 6.

    In a word - no!

    Why bail out a banking system so utterly corrupt anyway. Whatever happened to the disclaimer "investments can go up as well as down"? Pumping 'new money' backed on the never-never to protect the investments of the rich from taking a haircut is hardly sound fiscal policy. In fact its pointless fiscal policy and is merely prolonging the inevitable.

    Default is the only way forward. The sooner the banks and investors get their head around the fact their assets are vastly overvalued, the sooner a scorched earth recovery can get underway.

    A market collapse is a mathematical certainty. What we are currently witnessing is a last filling of pockets from vast commodity gains before the whole house of cards comes tumbling down.

    Our leaders are ineffectual and corrupted by the same system they wish to protect, but they are hanging on my their fingernails, as is the banking system they're propping up.

    Let them fail. Its the only way out of this mess.

  • Comment number 7.

    "surging inflation that stems largely from China's irrepressible growth"
    Don't you think inflation might have something to do with the trillions (with a T) of USD and Euro's created each year to service government debts?

    Global leaders are in a bind, either let governments and bondholders suffer for their mistakes - leading to a higher level of interest rates for everyone as the myth that some countries will never default will be broken, or inflate the problems away giving the illusion of recovery whilst in reality making everyone suffer.

    As you say Germany has decided to save Greece, Ireland, Portugal and its banks from their mistakes but by doing so will spread the pain amongst everyone - including the "innocent".

    The solution is simple - having the courage to do it is another matter

  • Comment number 8.

    Maybe they've figured out that rather than give it to the Greeks etc to keep their banks afloat they would be better off letting the Greeks default and give it to the banks directly. That way they only prop up their own debt and not the ROW's.

    Makes sense.

  • Comment number 9.

    The truth is Robert that some extraordinary losses have been accumulated so far but the various manipulations or rescue schemes have hidden them. For example I read this earlier today about Greece's government bond market.

    "The current ten-year bond was only issued a year ago at approximately 99 and is now priced at 63.78 which speaks for itself really as a summary of how Greece’s financial fortunes have gone over this period"
    http://t.co/H4reeAa

    So the real question in many ways is who has made the losses so far and are they much different to a default scenario? If you look at the numbers above the losses are very large right now...

  • Comment number 10.

    Mushroom wonders if the decision will be made on the balance of sectors in the eurozone hub. Train crash approaching...do we jump left or right?

    Thinking along the lines of
    "Ein default ist perhaps bad for uns, but it vill be rather verse for ozers!" whereas
    "Das inflation ist rather verse for us, und only bad for ozzers."

    If I were a major exporter and a minor banking nation, which would I prefer? Hmmm.

  • Comment number 11.

    A salutary lesson for Mr.Osborne who thinks savage deflation is the answer to sovereign debt.

    Greece,Ireland,now Portugal.They`ve done it all,cut spending,allowed unemployment to rise,tried to pay down deficits.Result,deficits have risen,the policy has squeezed growth from the economy,with it the chance of receovery.

    The capitalist crisis,of which sovereign debt is a symptom, never went away.
    Sovereign default is the logical next step,when one does it others will follow.Like Frankenstein the crisis has been in storage until the time comes for it to burst out and cause damage.

    The capitalist crisis,of which sovereign debt is a manifestation,never went away.

  • Comment number 12.

    "4. At 13:43pm 15th Apr 2011, jon2534 wrote: "

    The link is a bit out of date!

  • Comment number 13.

    JfH wrote:- "The Irish market 'understood' what was necessary and collapsed its house and commercial property prices so they are far better placed to recover than we are, for example." A good example of the use of a pathetic fallacy but the reduction in house prices did occur. However the process of mortgage defaults, re-possessions and bankrupt building companies has little to recommend it has a model for UK.

  • Comment number 14.

    With the Greeks heavily in debt maybe it's time to complete the set and buy the Acropolis. I'm sure we could get our finest engineers (German of course) to dismantle, ship and then reassemble. I think Lord Browne should be put in charge of the project.

  • Comment number 15.

    Outstanding article, Robert.
    Innocent people cannot take much more punishment.
    Haircuts it must be.
    Bring it on.

  • Comment number 16.

    8. At 13:56pm 15th Apr 2011, tufftimes wrote:
    Maybe they've figured out that rather than give it to the Greeks etc to keep their banks afloat they would be better off letting the Greeks default and give it to the banks directly. That way they only prop up their own debt and not the ROW's.

    Makes sense.

    It does at first glance. The Greeks would then consider that their debt was paid in full and everyone else would consider it an illegal subsidy

  • Comment number 17.

    Robert mentions MT in this blog thread:

    "Maturity Transformation (MT) enables all firms, not just banks to borrow short-term money to invest in long-term projects. Of course, banks are the most effective maturity transformers, enabled by deposit insurance/TBTF (Too Big To Fail) protection which discourages their creditors from demanding their money back all at the same time and a liquidity backstop from a fiat currency-issuing central bank if panic sets in despite the guarantee."

    The backstop is key, with in our case, the BoE acting as lender of last resort.

    One idly wonders why inflation is not higher given the amount of QE that the BoE has been pumping out - maybe nobody is counting the stuff, he says, only half-jokingly.

  • Comment number 18.

    Bryhers 11:

    A salutary lesson for Mr.Osborne who thinks savage deflation is the answer to sovereign debt.

    Greece,Ireland,now Portugal.They`ve done it all,cut spending,allowed unemployment to rise,tried to pay down deficits.Result,deficits have risen,the policy has squeezed growth from the economy,with it the chance of receovery.

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

    You're simplifying things somewhat here. First of all each of the countries listed was tied to a currency that was overvalued in relation to their economy. They haven't had the boost to exports that we have had (albeit that the boom we enjoyed prior to the bust was all consumer led and our manufacturing base was weaker than it should have been).

    In the case of Ireland, it was the government's reckless guarantee to the banks that tipped it over the edge.

    As our boom was totally generated from increased household and government debt we cannot continue with that failed strategy. It will be painful transforming the basics of our economy but while it the current government that has to administer the sour tasting medicine it is Labour that is responsible for our stricken state in the first place.

  • Comment number 19.

    Until debt is written off it is simply being pushed around the green baize of the gambling table. At some point someone has to accept that they have lost and take the hit. We have now witnessed for the best part of 3 years the unravelling of criminally inept regulation and shocking levels of unprofessionalism in the financial markets. No-one is apprantly to blame and even better by shuffling the decks losses can be pushed from pillar to post.

    Austerity is the supposed silver bullet. This absolves as far as possible the private sector from losses and shoves it onto joe public. Never mind that vast swathes of joe public had nothing to do with getting us into this mess in the first instance.

    I see yet again that the rating agencies are mentioned (Moody's above). The ultimate insult that these jokers who couldn't predict a bevvy-up in a brewery are back in action telling us what we already know - the bonds of these broken economies are to be avoided.

  • Comment number 20.

    Spain has more debt to rollover in the next few months than the others put together. This is where the problem lies, the minor nations are small enough vessels to push against the headwind, Spain is a tanker in a hurricane comparison.

  • Comment number 21.

    Well Robert, its taken a while, but your getting there. Many of us have been saying for ages, its a pack of cards swaying, and the end is drawing near. I can see no way to avoid defaults, and if that includes spain, then the whole banking system has a high probability of collapsing. It is an inevitable result for those of us that believe we have a debt based monetary system. The tinkering suggested by the Banking Commission is a joke and will achieve nothing. I note your reluctance to refer to the debacement of the dollar as the reason for the inflation. Come on, you know as well as I do, that printing $4b new dollars every day, carries the price of inflation.

  • Comment number 22.

    Behind all these dodgy choices is one over-riding fact: they are being made by politicians (don't blame the bankers as they are simply playing around within the regulatory system set up by politicians). Now politicians have one basic objective and that is to get re-elected. They used to say to the electorate that this was the way they wanted to run the country for their benefit and the electorate either accepted or rejected it. Paternalist, perhaps.

    Now they try to guess what the electorate want and promise it to them. Electorates all say they want excellent services and low taxes, governments try to deliver these so that they get re-elected. They either don't deliver and don't get re-elected, or they bankrupt the country. The cause of this mess is democracy. Democracy only works when the electorate acts rationally (which implies being well informed) and not when it acts selfishly.

  • Comment number 23.

    If you can use a calculator, and can open your eyes, it's evident that the only thing keeping the great ship "world economy" afloat is misplaced confidence and inertia.

    The figures just don't balance, and frighteningly the people playing with it, are not even using their own money, but ours, and our childrens.

    If it doesn't collapse in a ball of flames, then the slow truth will start to dawn on folk when they try to retire in 10-20 years time, and find that their pensions are empty.

    You do have to admire the stupidity of the human race; perhaps we all just deserve what is coming to us.

  • Comment number 24.

    > Let's push to one side the reputational and economic costs to those countries

    Once a place defaults, its debts are gone. New lenders feel good about a place without debts. Money flows back in. Reputational and economic costs equal less than before. Plus they keep the items bought with the sucker-money.

  • Comment number 25.

    18. At 15:01pm 15th Apr 2011, CockedDice wrote:

    "As our boom was totally generated from increased household and government debt we cannot continue with that failed strategy. It will be painful transforming the basics of our economy but while it the current government that has to administer the sour tasting medicine it is Labour that is responsible for our stricken state in the first place. "

    Usual nonsense, blame the last labour government. If it hadn't been for households taking on debt there would have been no boom, as incomes have been falling in real terms for 20 years, the inevitable result of the over accumulation of wealth, a failing of capitalism. Cut backs will simply reduce net demand, and given that approx 70% of demand is from UK consumers, we are heading to the bottom. Labours solution of cut later will also fail for the same reasons. When will people accept that governments have little influence over the economy. Its those that hold the purse strings that cause the booms and busts, and always have done.

  • Comment number 26.

    "Perhaps the most conspicuous manifestation of the instability is that investors can't make up their minds whether the greater risk comes from surging inflation that stems largely from China's irrepressible growth or the deflationary impact of the unsustainable burden of debt on peripheral and not-so-peripheral eurozone (and other) economies."
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    I can't help a wry smile. The Investors are stumped eh? Bless. Seriously, the choice isn't even based upon the amount of risk but rather the time scale of the risk.
    "irrepressible Growth" is one way to put it; Another way to put it would be good ole kensyian economics practised purposefully by a State that weilds the power to tell Banks when to jump, lend that is. When the EU States embarked upon Austerity measures in order to try to deal with the Decefit the Chinese decided upon growth in the form of Infrasturucture, job creation and as a result a booming economy and rising inflation.
    David Camerons Gov. has embarked upon Austerity measures which promise (amoungst other things) another million and a half out of work, a lowering of Household wealth and yet is relying upon Household debt levels to rise in order to save the Economy.
    Hobsons Choice....or more correctly Morton's Folk........dear oh dear oh dear.

  • Comment number 27.

    It was announced today that Greece wants to sell off 50,000,000,000 Euros worth of state assets.

    What are these assets?

    Nobody in their right mind would wish to purchase any enterprise that included a Greek workforce and unions.

    I guess, therefore, that they intend to flog off some of the nicer islands.

  • Comment number 28.

    22. At 15:34pm 15th Apr 2011, Boilerbill wrote:
    The cause of this mess is democracy. Democracy only works when the electorate acts rationally (which implies being well informed) and not when it acts selfishly.
    ..............
    What democracy? Looks more like a plutocracy to my eyes.

  • Comment number 29.

    Perhaps a different perspective may assist. Germany's Banks are undercapitalised. This is particularly trust of the Landerbanks. The reason for the shortage of working capital in Europe, pushing up rates for lesser borrowers with different economies may be the heavy financing needed by Germany to refinance its reintegration, which incidentally Europe refused point blank to fund, and now to fund its expansion into the Eastern part of Europe which the Soviet Union was unable to sustain. The ranting of the Germans and the French over tax avidance and tax evasion has enabled both these Member States to surreptitiously reverse the freedom of movement of capital to the disadvantage of Greece Ireland Portugal and Spain, using the fiscal exception, not as an exception to that Freedom but now as a hidden principle, to require repatriation of Germany savings into the German economy, rather than it going to the IGPS. Is it not an easy and inefficient thing to be able to borrow money cheaply, on the basis of being 'low risk', and then lend it out at frankly usurious rates to countries whose systems are in a form of bondholder indebtedness. Doesn't sound like and efficient industrialised society relying upon the sweat of its brow to me.
    Add that to the current intentions of Germany to increase its stock market stature and bring in third country finances through the recently rehabilitated Liechtenstein and Switzerland, and I think that life takes on another aspect. Perhaps Germany should now be required to rectify the balance in accordance with EU principles, and lend at a lower rate to those countries whose capital availability it has "filched" to achieve a different end.
    In reply to Robert's rhetoric question, perhaps Germany can afford it so long as non EU States continue to lend money to it at lower rates than it lends to IGPS, through of course the fiscally purged likes of Liechtenstein, Austria and Switzerland. Not of course, London.
    Not bad for a country that didn’t exist until Bismark assembled it.
    But then the whole point of the Treaty of Rome was to avoid conflict in Europe by integrating France and Germany to the point of no return.
    Careful what you wish for.

  • Comment number 30.

    So who pays?

    A country defaults, and their creditors don't get paid.

    Who are the creditors? Has to be a combination of banks, pension companies and private investment.

    What happens to their money?
    Private investors, just loose their money. Tough, but at this level, they know what they're doing.
    Pension companies loose their investments = you lose your pension pot.
    Bank goes bankcrupt - shareholders lose their shares.

    Who owns bank shares?
    Pension companies and a few individuals. See above

    Conclusion.
    Bye bye pensions, savings, any sense of security of assets. Hello fear, worry and depression.

    Welcome to 2011.

  • Comment number 31.

    Average Joe

    Usual nonsense, blame the last labour government. If it hadn't been for households taking on debt there would have been no boom
    ----------------------------------------------------------------------------

    Exactly!

    Who was overseeing the economy when this credit explosion took place? Labour. Our economy would have been in much better shape if the brakes had been put on consumer borrowing much earlier. Mervyn King recently confirmed that he reccomended this to the Treasury in 2005 but the Government was enjoying spending the resulting tax receipts too much to take action.

    Maybe the tories would have fallen into the same trap but in our system we only convict those who are guilty of a crime- not those who may have done the same thing given the opportunity.

    I disagree with your dismissal of the capitalist system but do agree that society does need to get out of the habit of spending what it doesn't have to support a lifestyle it cannot afford. This also applies to Governments as well as individuals.

  • Comment number 32.

    23. At 15:38pm 15th Apr 2011, Crookwood wrote:
    If you can use a calculator, and can open your eyes, it's evident that the only thing keeping the great ship "world economy" afloat is misplaced confidence and inertia.

    The figures just don't balance, and frighteningly the people playing with it, are not even using their own money, but ours, and our childrens.

    If it doesn't collapse in a ball of flames, then the slow truth will start to dawn on folk when they try to retire in 10-20 years time, and find that their pensions are empty.

    You do have to admire the stupidity of the human race; perhaps we all just deserve what is coming to us.

    ........

    Great post. Although I would clarify it is the stupidity of the those that have fallen for the lies of the corporate business elite and their sycophants, which have fleeced us remorselessly, and some of us have been aware of whats coming for some time.

  • Comment number 33.

    18. At 15:01pm 15th Apr 2011, CockedDice wrote:
    "As our boom was totally generated from increased household and government debt we cannot continue with that failed strategy. It will be painful transforming the basics of our economy but while it the current government that has to administer the sour tasting medicine it is Labour that is responsible for our stricken state in the first place."
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    You are mistaken if you think the Political part of the problem is Party based. It is not. The issue at the heart of the problem is the movement of Capital itself. Every Government builds up debt. In boom years the party in power takes the credit and in recessionary years they give you the line that they have to introduce unpopular measures and act responsibly, such as the Austerity measures at present. Actually no they don't, they could wipe the debt off in one fail swoop through taxation of those that this flawed economic model disproportionately favours. The real political part of the problem of course is that those very people are the lobbyists that fund the Political Parties through elections and into power in the first place.

  • Comment number 34.

    The Icelandic people had the right idea. Whatever have happened to caveat emptor?

  • Comment number 35.

    So the banks had stress tests. We were persuaded that with luck and a following wind then they would be OK. - They failed.

    Then governments told everyone that was still awake that they did not need bailing out. - They failed.

    Now we are asking if the big daddy of them all, until last year the worlds biggest exporter of manufactured goods; Germany, is capable of carrying us all.

    Who ate all the pies?

    Have the bankers really done this to us all?
    Time to get rid.

  • Comment number 36.

    @Another engineer
    "No doubt matt_us will be along shortly to accuse you of being part of the CDS conspiracy."

    Maybe Robert Peston has never heard of Credit Default Swaps, and how every hedgefund, speculator, and granny from Beijing to Helsinki tries to profit from the misery of others, calling for a restructuring. Because they beome payable in case of restructuring, giving large profits to CDS investors.

    After all, economists or politicians or other journalists seem to be completely oblivious to the fact that CDS could in any way be connected with the eurocrisis, even though you can make much higher returns investing in them, than boring old bonds.

    So perhaps Robert Peston wants to go and have a look at the the blogs of his colleague Gavin Hewitt, who by now should be properly informed, if he reads the comments under his blog.

    Her his views on Portugal - and mine on why CDS should be banned
    http://www.bbc.co.uk/blogs/thereporters/gavinhewitt/2011/04/portugal_the_danger_is_not_ove.html


    Here his views on Greece - and mine on why CDS should be banned
    http://www.bbc.co.uk/blogs/thereporters/gavinhewitt/2011/04/greece_still_in_crisis.html

    And then next time Robert Peston could write a little piece - whether Germany can afford to pay for CDS to greedy profiteers in case of a Greek, Irish or Portuguese restructuring.

  • Comment number 37.

    31. At 16:01pm 15th Apr 2011, CockedDice wrote:
    Average Joe

    Usual nonsense, blame the last labour government. If it hadn't been for households taking on debt there would have been no boom
    ----------------------------------------------------------------------------

    Exactly!

    Who was overseeing the economy when this credit explosion took place? Labour. Our economy would have been in much better shape if the brakes had been put on consumer borrowing much earlier. Mervyn King recently confirmed that he reccomended this to the Treasury in 2005 but the Government was enjoying spending the resulting tax receipts too much to take action.

    Maybe the tories would have fallen into the same trap but in our system we only convict those who are guilty of a crime- not those who may have done the same thing given the opportunity.

    .....

    No government would have the courage to put the brakes on. Thats why I see no reason to target Labour for it being their fault. Politicians are fools. They claim they were responsible when times are good, and blame the other lot when times are bad.

    I disagree with your dismissal of the capitalist system but do agree that society does need to get out of the habit of spending what it doesn't have to support a lifestyle it cannot afford. This also applies to Governments as well as individuals.

    Why reject my capitalism criticism? I'm simply pointing out that the purpose of capitalism is for the corporate business elite (typically no more than 1% of the population) to accumulate wealth. The evidence is there because the unequal distribution in wealth is hitting an all time high. If too much is accumulated in too few hands, then consumer demand evaporates as surplus income for the rest disolves to subsistence levels. Its a simple as that. It is its underlying flaw. The only sticky plaster solution is a strong progressive taxation system otherwise it will always end up in crisis due to a lack of consumer demand. The increase in private debt is the inevitable consequence.

  • Comment number 38.

    The € was never more than an economic nonsense designed to meet Helmut Kohl's federalist aims. It's difficult enough running a single monetarist model for one country with diverse regions, it was never likely to work across a collective of vastly different peoples with completely different cultures. Ultimately Germany (and to a lesser extent, France) will pay the price of its politicians' hubris. But in the meantime, the exporting nations within the Eurozone, and in particular Germany, have been reaping extraordinary benefits from the € - its very existence ensures that efficient exporters within the eurozone are working with an effectively undervalued currency. Were Germany still using the DM, its exporters would be finding life far harder than they do today.

    The pain of either maintaining the €, or allowing it to fall apart, will ultimately be borne primarily by the very countries that have reaped the benefit of it. Let their political classes complain - but let's hope they, and the rest of us, also learn a valuable lesson. Politicians ignore economic reality at voters' peril.

  • Comment number 39.

    Now to Robert Peston's arguments.

    He is saying that Germans should rescue their banks, who have made loans to these three countries, just under a third of the total. Well, Germany is just under a third of the total of the Eurozone economy. So, in relation to its size, the loans are not too high. What that, of course means, that other European countries, including Britain, will also have large inter-European loans through their banks.

    Next. Robert Peston's glib suggestions:
    - losses for the ECB, well lets just recapitalise it,
    - losses for other investors, lets grin and bear them.

    How big is are the losses really. Ball park figures for government debt - and easy to remember

    Greece has 300 bn Euro
    Ireland has 150 bn Euro
    Portugal has 150 bn Euro.

    A one third write-off means that savers and investors and the ECB would lose 200 bn Euros, roughly what the whole of Greece produces in one year.

    Or, the general public will have to bear these losses imposed on the savers, investors and tassxpayers. That would be about 600 Euro for each Eurozone European. Or a loss of GDP of 2%.

    It could well be that the losses double - as banks will need to be rescued with capital injections, a return of the scenario of 2008. Liquidity crisis everywhere. That is if a contagion to Spain and Belgium and Italy can be avoided. Let us guess the total cost of bank failures in addition to the write offs of state loans. Perhaps another 200 bn Euro. Another 600 Euro per European. A loss of 2% of GDP.

    It could well be that these losses triple. If Credit Default Swaps are still around by then, the CDS investors will receive 200 bn Euro. To be paid by banks which then will have to be rescued further. Another 600 Euro losses per European. Another loss of 2% of GDP.

    So, if you add all these costs together, 600 bn costs to restructure 200 bn worth of debt, a cost to each taxpayer of 1,800 Euro and a loss of GDP of 6% it is not surprising, that restructuring is an idea which will never fly.

    Europeans are not stupid. They will provide loans and in the end cheaper interest rates to make sure that these countries will survive.

    Its nothing to do with German banks - its all to do with common sense - restructuring of debts will not happen.

  • Comment number 40.

    #39
    'restructuring of debts will not happen" - the phrase last famous words springs to mind. You can't keep kicking a can down the road forever.
    2008 crisis was never dealt with. To start with, the powers that be used money that had been earned, then they borrowed money from the future that hadn't been earned and when all that has still not proved to be enough they will heat up the printing presses and use money that will never be earned. End result hyper-inflation and the destruction of fiat paper money. No more can.

  • Comment number 41.

    It`s only a matter of time before Greece or Ireland default. The maths simply do not add up and with European rates now on the rise default is coming sooner than many expect.

    An orderly default is highly unlikely.

    Even a sniff of a default by Ireland or Greece will create panic and if you are Spanish , or Italian or whatever country you will want to see similar write offs.

    Default is coming because the DEBT is too high and too expensive

    Ditto for the USA

  • Comment number 42.

    #13. watriler wrote:

    "
    JfH wrote:- "The Irish market 'understood' what was necessary and collapsed its house and commercial property prices so they are far better placed to recover than we are, for example." A good example of the use of a pathetic fallacy but the reduction in house prices did occur. However the process of mortgage defaults, re-possessions and bankrupt building companies has little to recommend it has a model for UK.
    "

    However, the alternative is hyperinflation - are you suggesting that this is a better 'solution' to our crippling property prices? Either way we are in a very difficult place to provide the jobs we need and to make the best use of all of our available resources (i.e. of our labour) at a competitive price.

    House (and property prices) have to fall substantially for the economy to revive. The Irish and the Spanish markets have 'understood' this are have taking the best possible rapid steps to get from where they are to where they need to be - whereas the British people, their pensions and their savers are being hang out to dry for the benefit of a few international bankers. It is rational to believe that the market will correct this - it always has in the past in-spite of the best schemes of the Bank of England to prevent the inevitable.

  • Comment number 43.

    39. At 16:46pm 15th Apr 2011, matt_us wrote: "Its nothing to do with German banks - its all to do with common sense - restructuring of debts will not happen."

    Commonsense doesn't even figure in this train wreck called the Eurozone. The Eurozone is like seesaw. Obese over productive Germany at one end and all the puny, underperformers at the other end. No matter what, the seesaw is always down at Germany's end.

    As has been muted many times, maybe the solution is for Germany to get off the seesaw and re-implement the D-Mark.

    What will happen - the D-Mark will soar against the Euro-puny. The little PIIGies debts will be reduced, the German Banks will have to write off a 20-30% chunk of their investments in the PIIGS and we'll all live happily ever after.

    Unfortunately PIIGS don't fly!!

  • Comment number 44.

    Good to see some rational discussion about sovereign debt restructuring.

    It will probably be some time in coming but I think a 'soft' default is now pretty much inevitable for Greece and possible Ireland/Portugal as well.

    However it is pointless defaulting whilst you are still running a deficit of 10% GDP, the countries need to get that below a least 5% first otherwise it will just make the problems far worse. If they can show that they are at least heading in the right direction a default can then provide a platform for the future rather than just another stage on a downward spiral.

  • Comment number 45.

    #37 Averagejoe

    "The evidence is there because the unequal distribution in wealth is hitting an all time high. If too much is accumulated in too few hands, then consumer demand evaporates as surplus income for the rest disolves to subsistence levels. Its a simple as that."

    I agree with much of what you say. Inequalities (both within and between nations) are largely to blame for the debt problem. I wouldn't necessarily limit the problem to the 1% that make up the "corporate business elite" though. I'd say (in the UK at least) it extends to the richest 5% who own approximately 50% of the Nation's financial wealth and 40% of the its pension wealth - that must be heading towards being enough to pay off both our public and private sector debt.

    If inequality gets too high, and the richest section of society is unwilling to spend/consume all that they earn, then their savings must be lent to others (State or individuals) who will spend in order to keep the economy afloat. It's no good blaming "reckless borrowers" - they are just doing what they have to do.

    The only answer in the end is for some mechanism to redistribute wealth thus reducing savings. That could be inflation, or it could be loan defaults, or it could be the rich getting a sudden urge to spend or give away much of their savings. A wealth tax would be the fairest and least painful way of course.

  • Comment number 46.

    Ignoring the reputational cost of default would be a big thing .... for Greece?
    You are of course joking - look at their history of defaults.
    Getting the Greeks to pay taxes will easily exhaust the patience of the Eurocrats.
    Impossible to believe that it makes sense for Greece to remain in the Eurozone.

  • Comment number 47.

    22. At 15:34pm 15th Apr 2011, Boilerbill wrote:
    Behind all these dodgy choices is one over-riding fact: they are being made by politicians (don't blame the bankers as they are simply playing around within the regulatory system set up by politicians).
    ===========================================

    I hear this defence all the time - That banks were merely playing to the rules set down by Government - and a similar defence - that banks are victims of modern accounting rules. No consideration whatsoever of the lobbying efforts of the banks, by far the most powerful and successful lobbyists of all, to get these rules changed in favour by servile and insipid government.

  • Comment number 48.

    If the German banks are indeed being punitive to punish perceived recklessness it would appear they are masochistic having not remembered the lessons of the Treaty of Versailles

  • Comment number 49.

    The political elites, certainly in this country and the US, will go to any measure to prevent any existential threat or harm to befall on their beloved banking system. They will never countenance any haircuts that will further threaten the equity capital of the banks. Therefore I suspect haircuts will come, as they surely must, only at that time when the majority of sovereign debt is held by those institutions that are financially and politically able to absorb haircuts - namely the central banks. This reveals the true purpose behind of Quantitative Easing. The price paid for this, bourne by society like a poll tax, will take the form of considerable inflation.

    Germany, however, has a predicament as the thing feared most of all is inflation and so they have little stomach for the anglo-saxon solution. The Irish for their part equally have no desire to default. But I suspect events in Athens, Lisbon and Madrid will take things out of their hands.

  • Comment number 50.

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

  • Comment number 51.

    28. At 15:53pm 15th Apr 2011, Averagejoe wrote:
    22. At 15:34pm 15th Apr 2011, Boilerbill wrote:
    The cause of this mess is democracy. Democracy only works when the electorate acts rationally (which implies being well informed) and not when it acts selfishly.
    ..............
    What democracy? Looks more like a plutocracy to my eyes.

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

    Exactly, and the bankers that hold and control the purse strings are running it. This makes politicians mere puppets so squabbling over blaming labour or condems is irrelevant.

    If you need any evidence of how corrupt the system is just read Matt Taibbi's latest piece in Rolling Stone...

    http://www.rollingstone.com/politics/news/the-real-housewives-of-wall-street-look-whos-cashing-in-on-the-bailout-20110411

  • Comment number 52.

    Afternoon robert,
    could Germany afford to pay for other countries defaults?
    I think you need to look at the wider picture. The EU have involved themselves in the last two years with a series of fire-fighting exercises to appease this mythical guy call Der Markt. The speculators have successfully picked off the weakest nations, one by one, but the EU hasn't fixed the problem (cf UK and USA).
    Now they have spent half of the slush fund and Spain or Italy would easily take care of the rest. Then what?
    No problems have been solved here just more money advanced to insolvent nations which they can NEVER pay off.
    If you look at the figures, France is not too healthy either hence their desire to wed themselves to the German financial powerhouse.
    Don't forget that the Irish finance minister tried the old "default will hurt the widows and orphans pension funds routine". This was found to be economical with the truth when the identity of the major bank bond holders was revealed!
    The only solution as far as I can see is for ANY country in receipt of IMF funds to leave the Eurozone and re-establish their own currencies which then float against the Euro. That takes care of the one-size-fits-all interest rate policy.
    The creditors of the outstanding loans need to take a 60% haircut and the finance needs to be restructured on an annual basis based on what the country has achieved in terms of servicing (and also repaying) the debt.
    Their has to be a WILL within the EU to help out their colleagues who have fallen on hard times because if they don't then they could be next.
    Once again, I see no evidence of Statesmanship here, no one with the overall vision to put right the financial crisis, just a bunch of very ignorant and greedy politicians who are looking towards their own retirement in the sun with loads of someone else's cash.
    The political will within Germany will soon be to ditch Frau Merkel, elect some other politician who promises the world at no cost and to withdraw German funding for any other country bailout. We will then have a real Euroland crisis!

  • Comment number 53.

    Here we are, 3 years on and still people advocating it's time for banks and investors to take a hair cut! If we had allowed the banks to collapse at the start, as I suggested at the time, the fallout would have been horrendous.....but by now a better system would at least be in the making! As it is, we allowed the delaying of what must surely be an inevitable event. The banks leaned nothing and behave like they still own the planet. The politicians are no more expert than they were when it started, while the corrupt and amateur EU oligachs are laying low in their tower of Babylon.
    Let the whole rotten edifice crash and burn. Time for a new resource based system where world governments are forced to work together for the very survival of their peoples and money is just a word that people quickly forget.

  • Comment number 54.

    52. At 18:49pm 15th Apr 2011, splendidhashbrowns wrote:
    Don't forget that the Irish finance minister tried the old "default will hurt the widows and orphans pension funds routine". This was found to be economical with the truth when the identity of the major bank bond holders was revealed!
    ---------------------------------------------------------------------------

    This was a very cynical comment coming as it did from government. The Irish National Pension Fund has already been used by the Irish government to help bail out their banking sector so pensioners have almost certainly already been committed to a very big hit.

  • Comment number 55.

    Just let me re-quote that, 41, you ended - "Ditto for the USA"
    That's "DITTO FOR THE USA"
    That's THE ELEPHANT STOMPING AROUND IN THE CORNER OF THE ROOM.
    Perhaps it's not the piddling little debts of the Euro fringe we should be thinking about but the gigantic black hole accross the water.

  • Comment number 56.

    I love how this bank debt has suddenly morphed into a government sovereign debt and now its been detached away from the private commercial banks. Talk about pass the parcel, the credit default swaps have in effect pushed this debt around all over the place.
    To such an extent now most western nations do not know who owes what, I guess that was the plan all along by the banks to devoid them selves of any responsibility.
    Here is my question how can a mortgage be foreclosed by a financial institution if they no longer hold the debt? For that matter should banks be allowed to sell the debt on e.g. should CDS be made illegal?
    The real root of the debt was in the USA but its been transmitted through the financial system by CDS products like a virus its spread.

  • Comment number 57.

    Could Germany afford Irish, Greek and Portuguese default?
    Yes! If the ECB does what is long overdue and does its job properly and gives better support with its management of the EU.

    However, this means slashing VAT across the 'periphery'/ PIIGS of the EU ... and that includes the UK and putting into immediate effect suitable 'trade tax harmonisation' on e.g. excessive Chinese and other imports to the EU (in ordinary parlance ... this means levying suitably targeted trade tariffs in the form of import and export tariffs). The 'benelux countries' would also benefit from lower VAT also.

    The global slump as affecting most developed economies is due to a combination of massive international capital flows to the high return/yield sovereign jurisdictions (BRICS and emerging economies) and soverign and other debts and trade imbalances on e.g. commodities, carbon fuels, manufacturing ... but more than anything is a function of the huge increase in global population and the rising demand of consumers in the BRICS and all other countries as the global population expects ... MORE and the same as the developed western economies.

    This is all unsustainable and increased global living standards is now starting to create substantial new problems and shortages and inflation and conflict ... are on the way, I'm afraid.

    This is all manifested in the EU by who does and doesn't pay VAT ... as this affects growth in the EU and the opportunity cost of lost capital and domestic manufacturing benefits for most EU countries and the high VAT level affects the basic cost bases also. Germany being a notable exception because of its unique and well functioning economy.

    The good news for those opposed to the 'EU straightjacket' ... is that the ECB shows no legal basis, inclination, strategy, understanding, policy or determination to change this.

    The bottom line is that ... Germany can help save the periphery (but not as including the UK, if our own economy is not radically restructured very soon) ... if the ECB does the right things simultaneously ... but this is looking increasingly unlikely.

    The EU, EURO and Eurozone can only break up going forward because the ECB does not have the strategy, guts and determination to be a bit more aggressive on trade and protect European interests better and play the 'protectioniist game' ... it is only a matter of time as the EU simply is unable to get things right.

    Huge bail-outs are one thing but if the bailed out countries do not have any growth to pay back the loans/subsidies ... then the bail-outs are money wasted and have no effect as would be bad loans chasing bad loans.

    The only solution to the population and resource shortage effects is much better EDUCATION of the type that helps us cope with the difficulties that are coming ... we all need to learn to expect and live with less and this means global redistribution and eventual rationing ... of everything. This doesn't mean we all look down our noses at developing countrries ... the entire UK needs re-educating about the tipping point being passed in our own UK population level which means an exponential trend increase in our UK imports if we are to sustain this population surge and current living standards (without massive internal restructuring of the UK economy). This also means that the UK needs much better joined up thinking in govt between govt departments e.g. Education and Business (perhaps voting for AV is not such a good idea after all?)

    Anyway that's enough of that ... I wonder when RP is going to evaluate the work done by Vince Cable as UK Business Secretary?
    What is his record as he's now almost been in post for a year... what if anything has he achieved ... jobs, investment, politicians 'growth'?
    Is he any good ... or is he useless?

    Can we debate Cable ... or is RP going to play it safe for the Easter hols?

  • Comment number 58.

    52. At 18:49pm 15th Apr 2011, splendidhashbrowns wrote:
    Afternoon robert,
    could Germany afford to pay for other countries defaults?
    -----------------------------------------------------------------------------------------------------------------------------------------
    It is not a question of whether the Germans could pay. The real question is whether they will pay. The German voter is reaching boiling point on this issue, so it's goodbye Angela. Whoever comes next will come in on a platform of NO MORE BAILOUTS. At that point, default for the PIIGS is the only option.

    Yes, this will cost the German banks a lot of money, but it is politically acceptable to the German voter to bail out their own banks- it is simply not acceptable to the average German to bail out other countries.

    One more point, though. If the German voter has to bail out his own banks as a result of foolish investments, then the managers of those banks had better get their pyjamas and toothbrush packed, ready for some time in a room with a barred window. What a contrast with the UK!


  • Comment number 59.

    Don't you have this question totally off track?
    Shouldn't the real question be: How will the world withstand the American default, followed by bankruptcy?
    The United States remains where it has been for some time, deficits rolling into piles of trillions in debt, mostly due to its false conception of itself as an Imperialist power.
    And whence do investors flee when it all looks scary and uncertain? Real value = gold, silver...
    I have no faith in Moody's and won't have any faith in Moody's until it downgrades American Government debt to one level BELOW JUNK.
    Fairly soon, within this year, the world will be so preoccupied with the huge American bankruptcy that it will consider the PIIGS rich by comparison.

  • Comment number 60.

    @dontmakeawave
    "Commonsense doesn't even figure in this train wreck called the Eurozone. The Eurozone is like seesaw. Obese over productive Germany at one end and all the puny, underperformers at the other end. No matter what, the seesaw is always down at Germany's end. - As has been muted many times, maybe the solution is for Germany to get off the seesaw and re-implement the D-Mark."

    That might be a solution, but not a very satisfactory one. For a start German unemployment would explode immediately as its currency would soar. Many of the exporter nation's goods would become incompetitive.

    Better for the German government to pay for a free 1500 Euro holiday for every man, woman, and child somewhere in the southern Mediterranean or perhaps Ireland (for people sho love rain). That would indeed get rid of the 125 billion trade surplus of Germany.

    Everybody will have a couple of weeks in the sun (all-inclusive) and a bit of spending money. That would give a massive boost to the tourist economies of southern Europe. Everybody would love helping to solve the Eurocrisis. The German GDP would go down - a full 5%, but the other countries' GDP would go up.

    Eurocrisis would be over. Germany exports so much stuff, they could afford to do that every year - free holiday for 82 million Germans. You might as well bring your own deckchair then, as there will be no sun lounges left in any hotel in the Med.


  • Comment number 61.

    #56 Keith Rodgers

    That is the $64,0000 question. The answer may be legally fudged for many many years to prevent total collapse of the mortgage system. One test case victory for a borrower and who'd ever pay their mortgage again. The US is currently turning every stone to create a legal case for lenders to win outright.

  • Comment number 62.

    "The Western world remains where it has been for some time, delicately poised between anaemic recovery and a shock that could tip us back into economic contraction."

    It would appear that the east may have trouble ahead

    http://www.businessinsider.com/china-worlds-fastest-printing-press-2011-1


    "“In the past 30 years, we have used excessive money supply to rapidly advance our economy,” said Wu Xiaoling, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress"

    "The coming months and years ahead are going to be affected by the out of control growth of today. The affects of a runaway money supply are well known. Anyone who is a student of economics knows what is going to happen next, but like all great bubbles, its impossible to time when they will pop. China is no different.

    They are so dependent on demand growth, they have decided to try and prop up the European bureaucrats with fresh capital. These new private placements in European Sovereigns will help keep Europe from dissolving into a mess this winter, while allowing the problems to fester at both ends longer"



  • Comment number 63.

    Once again the myth is repeated that it is German national interest to help its banks that are carrying PIIGS debts. It is not.

    It is not in a NATIONS interest to bail out its PRIVATE banks. The private banks should be allowed to take the loss and fail if necessary with protection only given to retail savers. If you are an investor, you took a risk and you (not the taxpayer) should take that loss.

    its time the German people mutinied on their government at the hint of more of their money going South. Let the "correction" happen and the losses fall where they deserve.

  • Comment number 64.

    Robert Peston
    "In a way, if a sovereign borrower were to turn €100bn of debts (for example) into an obligation to repay 70bn euros, that would be a form of inflation - it has the same economic impact, a degradation of value, for the lender. But it is a localised inflation; only the specific creditors suffer directly (though there may be all sorts of spillover damage for others)."

    Robert, in which economics book can I find that theory?

    Maybe I did not understand it right, but if a Greek bond holder has to take a haircut, that will reduce the money supply. The total amount of credit will reduce. Writing off debt will have a deflationary impact. If the bond holder is a German bank, the German money supply will reduce. Also deflationary.

    Look at the Japanese economy, which wrote of loads of loans in the banks over the last 20 years. That was deflationary. If the government had not stepped in and borrowed more money, the deflation would have been extreme.

    Same in the US, after 2008 there would have been massive deflation, perhaps, if there had not been any quantitative easing, caused by the write-offs of debt. It does not matter whether debt written off is private sector debt, or public sector debt, it will always have a deflationary impact. Less money chasing the same number of goods.

  • Comment number 65.

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

  • Comment number 66.

    Crooked Dice 18

    "As our boom was totally generated from increased household and government debt we cannot continue with that failed strategy. It will be painful transforming the basics of our economy but while it the current government that has to administer the sour tasting medicine it is Labour that is responsible for our stricken state in the first place."

    The usual mythology,the standard prescription,the usual failure.

    "Our stricken state" is the result of a capitalist crisis of the first magnitude beginning in the United States and becoming global.Alan Greenspan of the Fed called it "A once in a hundred years tsunami," Mervyn King "That the global banking system was hours from collapse"

    The derivatves and CFDs traded were not understood by the CEOs of the banks on their own admission,the whizz kids in the back office told them they couldn`t fail.Dick Fulds of Lehmann`s didn`t care if he understood them or not,he knew they were profitable.When the bubble burst,the assets value of these instruments had been vastly inflated,some were worthless. Bank collapse followed across the globe.

    If you think Mr.Brown had been moonlighting in all these countries then you can hold him responsible,otherwise your accusation is nonsense.Regulation was too loose,but that`s the wisdom of hindsight,conservatives were calling for less
    before the crisis.

    According the IFS,Britain on the eve of the crisis had a deficit equivalent to the one inherited in 1997,the debt was lower.The money went to bring underfunded public services close to European levels.Debt and deficit rocketed when the banks imploded,a crisis resulted and tax revenues fell.

    It was capitalism not Brown.



  • Comment number 67.

    Nice and perceptive article, Robert.

    I noticed only one thing I would quibble about - you attribute inflation (in the West? globally?) to "China's irrepressible growth" but this appears to eliminate (or downplay) the West's self-generated inflation, for example by the UK's QE and other money-printing devices around the West. We have been debasing our money, and inflation is one of the more obvious results, with too much money chasing the same (or less) level of products and services...

  • Comment number 68.

    This is a fantastic piece of journalism, thank you. It was a real pleasure to read your analyses.

    I would only add that there is, perhaps, a silver lining to these clouds of fiscal doom.

    If and when the germans write off many billions of lost money (let's be real: it's gone), there will have been a massive transfer of wealth inside the EU.

    But so what? Is that a bad thing?

    In the US federal system, there is and has been and will be a massive transfer of wealth from various regions to various other regions.

    In the US federal system, this is called "Federal Infrastructure Development". It is widely considered to be a good thing.

    So now look at what has happened in Europe, in that light. The money that was lent by German banks to the less developed European regions (let us pretend they are not "PROUD NATIONS!!!" for a moment) was largely used to fund infrastructure developments. That isn't theory, by the way. Anyone who has been to Spain, Poland, Latvia, Greece or Portugal knows that there are new highways, new trains, new sports facilities, redeveloped city centers and so on and so forth.

    It isn't clear that these things were built cost effectively, or even who is going to run them and at what cost to whom.

    But these things have been built, and they have been built in the parts of "Europe" that needed them the most.

    So I humbly submit to this blog that a write down in debt that taxes germans to rebuild a modern infrastructure across Europe might be described to resemble a useful and pragmatic federal european policy choice.

    It might cost the german workers in their lifetimes, but standing back and taking a longer term view, if and when the PIGS become competitive economies on the world stage, the infrastructure they have gained at the cost to german banks will inevitably be deemed to have played a crucial role in that reformation.

  • Comment number 69.

    56 you say: "The real root of the debt was in the USA but its been transmitted through the financial system by CDS products like a virus its spread."
    Not cause afaIcs, as the CDS were symptom not cause of everyone wanting to spend faster than we sensibly should. Craziest thing is people actually think it can all start moving again now as if nowt happened. Yeah Greece could auction off the Parthenon and we could offer a buy back on the Elgin Marbles and they could start selling slaves off to work in N. Europe. I hear Turkey would buy some islands off them too but they'd still be in hock. Think the question is who can collapse most gracefully! And avoid the psunami from accross the pond.

  • Comment number 70.

    #65

    Actually I'm part of the 5% who are net savers rather than the 95% who are net borrowers. Partly because I'm a reasonably high earner, and partly because job insecurity is such these days that I know I may not remain a reasonably high earner for ever. So I save a lot. It's in my interest, but it's not in the country's (or the world's) interest. My savings are likely to become someone else's debt.

    For the economy to function, it needs greater equality and less insecurity. That's not envy (I've nothing to be envious of). It's just a statement of fact.

    My point was that in circumstances where there is a surplus of savings, and where private debt is no longer sustainable, perhaps it is actually necessary for Governments to run a big defecit in order to mop up the excess savings?

  • Comment number 71.

    Nautonier#57 asked(can we debate Vince Cable). Vince is the man who likened Gordon Brown to Mr Bean. It seems now we have replaced Mr Bean with Laurel @ Hardy. Another fine mess you have gotten us into.

  • Comment number 72.

    I think defaults are inevitable and the longer it goes on, the worse it will get.

    IMHO inflation and defaults are the same thing - either a charge on consumption or a cost on financing - both will be paid for one way or another.

    The important thing is that those who expected to make a killing on speculation should lose big time.

    Invetment is no longer about a choice between reasonable options - it's a bet at the roulette table where the odds are unknown. We are in the era of casino capitalism - that's why there is a crisis in confidence.

    The idea that sovereign nations wouldn't default whilst their commercial banks ran riot is at the heart of the delusion - sooner or later there will be defaults - there is no other way out.

    This will force markets to end the delusion and accept that nations just like companies or individuals CAN go bust. when this happens there will be no future ofr the PIIGS - and probably the UK - in playing along with this delusion - at which point their commtment to the Euro and the EU will shatter - and the choice will be between socialist collectivism and facist repression - in othjer words we're back to 1930s Spain - Cameron's speeches on immigration are a portent of what is to come.

  • Comment number 73.

    72. At 21:51pm 15th Apr 2011, richard bunning wrote:

    > the choice will be between socialist collectivism and facist repression

    We don't do "repression" (Britons never, never, never shall be slaves), so there is no choice.

  • Comment number 74.

    I know I bang on about the presently dormant catastrophe which is property prices, but as I expect most of you have noticed it is still slaughtering bank profits on the other side of the pond even with zero interest rates to borrowers. (Bank of America has today written off a further $2.39bn via the its residential mortgage unit.)

    The US property market is still falling and has fallen substantially already, as have all markets except one - the UK and we have the biggest overpricing of all markets. These falls in every other market make doing business in these countries far more potentially profitable than the UK - we are digging ourselves a very deep hole - all becasue of the Fools of Threadneedle Street - that created the bubble in prices in the first place by deliberately ignoring house (and property) price inflation for over a decade and they are still denying it is a severe problem for the Nation's competitiveness.

    Furthermore the continued property collapses overseas actually effect UK banks directly so the British Taxpayer is bailing out the US (and other) property markets - but NOT yet our own - that will come later and it is the fervently hoped that we will have some money left! We are left with a gigantic barrier to competitiveness courtesy to the idiots who are running monetary policy who got it wrong and are still getting it wrong - they are slaughtering the country, its pensions, it savers and all and every prudent aspect of running an economy. For what benefit?

  • Comment number 75.

    70. At 21:17pm 15th Apr 2011, random_thought wrote:
    "My point was that in circumstances where there is a surplus of savings, and where private debt is no longer sustainable, perhaps it is actually necessary for Governments to run a big defecit in order to mop up the excess savings?"
    ___________________________________________________________________

    Almost, but I would argue that it is often Politically motivated Idealogical change. Governments running up debt and steping into the breach of decefits can use the ensuing crises to exercise idealogical change.....and before anyone accuses me of a cheap pop at our current governments strategy it's been going on for years. Reagans Republican Government unashamidly cut the tax on the wealthy over night and ran up unprecedented levels of debt until it gave them an agenda for cutting out the regulation that Capital hates so much and target what it sees as unwanted public service costs in favour of private enterprise.

  • Comment number 76.

    Re 74 Johnfrom Hendon.
    The most chronically over-priced property market in the world is not in the UK, but in urban Australia.
    Many Aussies seem now to be worried that they are heading for the same fate as much of Europe and the USA.
    Their banks have been pouring money into over-priced property mortgages, with the same sort of "abandon to reality" as they were doing over here.
    As that great old Aussie entrepreneur once said....."If you owe the bank 10k and can't pay it, you have a big problem, but if you owe the bank 500k and can't pay it, the bank has a big problem".
    And is the world entering the "decade of default"?

  • Comment number 77.

    24. At 15:40pm 15th Apr 2011, Jacques Cartier wrote:
    > Let's push to one side the reputational and economic costs to those countries

    Once a place defaults, its debts are gone. New lenders feel good about a place without debts. Money flows back in. Reputational and economic costs equal less than before. Plus they keep the items bought with the sucker-money.

    So Jacques will you lend me a few quid? I have absolutely no intention of paying it back but then that will make you feel better won't it ? We'll call it quits and I can borrow some more off you next week.

  • Comment number 78.

    #75 lacoaster

    Yes, the motivation of politicians does complicate things. The economic imperatives can be over-ridden by both the left (spend more without raising taxes) or the right (tax less without cutting spending).

    However I think there is still a bit of an "invisble hand" at work here. Governments of either side will basically increase their deficit as far as they can without incurring inflation. So if the economic situation is such that there is an excess of savings, then the Government will find that it can safely increase its deficit, and if it can it will. This provides the natural balance that is required, and we are foolish to argue against it. That is not to say that it would be far better to redistribute wealth and avoid the excess of savings in the first place.

  • Comment number 79.

    "But as I have mentioned here before, reckless lending can be the moral (or immoral) equivalent of reckless borrowing. And German banks were not models of Lutheran prudence in that regard."

    Fully agree. At some point both lenders and borrowers should both share in the losses, it should be equitable as both are at fault, and not be one-sided. A negotiated default appears the only way to go, and both need to suffer the pain of irresponsible borrowing and lending now otherwise nothing will be learned and misery will drag on for years ruining the lives of future generations. Lenders nor depositors also ought to receive 100% risk protection, or they will continue to act without thought to risk, and make dumb financial decisions.

  • Comment number 80.

    Despite the severity of all these financial crisies one thing you will never hear is leaders saying that they will massively reduce their salaries.They always balance the books by massively reducing everybody else's.

    Decision makers in government are paid colossal salaries but given the state of Europe they are being paid for failure.

    At the moment it is clear that most if not all governments in Europe and possibly beyond have been living beyond their means which is a worrying trend.

    You do wonder what monitoring indicators they have in place by which to judge the state of finances.It almosts looks like they have no idea about the state of the financial system, which they are supposed to be controlling.

    It does seem that the safest strategy is to keep your money out of the financial system until the government and the bankers know what they are doing.Sad, really as even then it's still possible for them to make your hard-earned savings worthless.

  • Comment number 81.

    Can someone explain for me in words of one syllable why the pound is faring so badly against a continually collapsing Euro?

  • Comment number 82.

    It's an oldie, but also a goldie. If a country owes a bank a billion, the bank has that country by the balls. If a country owes a bank 100 billion, it has the bank by the balls. Maybe it's time for Ireland et al to re-negotiate.

  • Comment number 83.

    @splendidhashbrowns
    "The creditors of the outstanding loans need to take a 60% haircut ..
    ...Once again, I see no evidence of Statesmanship here, no one with the overall vision to put right the financial crisis, just a bunch of very ignorant and greedy politicians who are looking towards their own retirement in the sun with loads of someone else's cash."


    Sorry, have you read my post #39 here?

    I just estimated the total cost of a 33% haircut to be 600bn Euro, about 6% Euroarea GDP. And now you suggest that we double that loss.

    Just as a reminder, 6% loss of GDP was less than what we had after the crisis of 2008. Look where that got the economy?

    Everybody is still paying for it now. My mother in law's library bus service is being cut, and I just heard form yesterday from some family, because the subsidised schoolbus service was being cut, their expenses for transporting their children to school changed from £200 to about £1000 per year. If you have a big family with four clever children wanting to go to university, the cost tripled to almost £150,000. All thanks to the financial crisis and the BS policies (Big Society) pursued by the Tories (and their Lib Dem henchmen).

    So you are suggesting a doubling of that nonsense - just to save the pay-outs which could potentially be made from Credit Default Swaps, betting on the default of Europeriphery countries. Double unemployment, more than double public debts. double taxes! So that hedgefund managers can buy more Ferraris and villas in Tuscany!

    You must have been eating a bit too much of your hash... hash browns, I mean!

    Ban CDS now!

  • Comment number 84.

    81. At 08:21am 16th Apr 2011, Ferguspuskas wrote:
    Can someone explain for me in words of one syllable why the pound is faring so badly against a continually collapsing Euro?
    --------------------------------------------------------------------------------------------------------------------------------------------
    Because UK base rate is being held at 0.5%. Part of the Governments master plan to inflate its debts away. Why would anyone want to hold a currency which they know is going to be destroyed by inflation as a matter of Government policy? The USA are playing exactly the same game, which is why sterling is holding up only against the dollar.

  • Comment number 85.

    81. At 08:21am 16th Apr 2011, Ferguspuskas wrote: "Can someone explain for me in words of one syllable why the pound is faring so badly against a continually collapsing Euro?"

    In words of one syllable - it is not. The Euro is not collapsing and the Pound is almost precisely at the same value to the Euro as 2 years ago this month. The current strength of the Euro has more to do with the weakness of the US Dollar and the recent move of interest rates upwards.

    Another influence is the German exporting machine creating in a sense a de-facto Euro D-Mark. This is the nub of the problem for Portugal, Greece and Ireland, they are having to trade with an uncompetitive exchange rate.

    There has been lots of speculation and forecasts that one or all of these countries might default. Like a personal bankruptcy they can wipe the debt slate partially or wholly clean. Obviously that's serious to the debtor nations. But even with a default, unless they can get to a realistic exchange rate, recovery is going to take a long time.

  • Comment number 86.

    78. At 23:30pm 15th Apr 2011, random_thought wrote:
    "However I think there is still a bit of an "invisble hand" at work here"

    "This provides the natural balance that is required, and we are foolish to argue against it."

    The Invisible hand at work is Neo-Libralism, what do you think it is? Would you mind expanding on why we would be foolish to argue about the suggested provision of balance.
    I guess my point is, that whilst everyone argues over the micro-management of the problems from a purely economic standpoint, the driving forces that actually allow these crises's in the first place is largely ignored OR, God forbid, accepted.This is not just an Economic crises but a lack of moral philosophy. It is a Social problem.

  • Comment number 87.

    If the banks have to write down their assets (Irish, Greek and Portugal's debt: loans to banks in these countries etc), to what they are really worth how much of a hit will banks like Barclay's take?

    Will this tip them into a loss? (Rhetorical question)

    Does that mean the Bob Diamond et al will have to repay their bonuses??

  • Comment number 88.

    RP

    Of course Germany can and should pay - it has gained the most form the Euro and has made little effort to truly harmonise growth across the EU.

    JfH

    House prices are falling in the UK perhaps not the big GBP correction you are looking for but when priced in a currency with value such as CHF, AUD, CAD and even the Euro they are down substantially. Measured in ounces of gold they are probably down 40% from the 2007 peak. Add in inflation of 5% plus static/slightly falling prices then in 3-4 years you'll have your big reduction

    Nautonier

    Good point on Cable - in my opinion he has done little of substance and seems a bit drunk on the power that coalition govenment has given him - he's in danger of falling into the same category as Gordon Brown and Norman Lamont - useless!

    Gordon Brown Supporters

    Are you seriously trying to defend him - his mistakes are so many history is already writing his legacy and it ain't good. Time to take off the Red Rose tinted spectacles and admit to the mess made by Labour - you can't move on until you do.

  • Comment number 89.

    There is only one way out of this mess, everybody knows what it is but no one dares mention its name.

    It is the vast destruction and reallocation of assets and wealth.

    It has three letters and it begins with W.

  • Comment number 90.

    Thought Osborne may have attended this and had some influence on global matters rather than setting up inward looking commission which told us nothing new.


    http://www.bbc.co.uk/news/business-13098537

  • Comment number 91.

    The inflation/deflation debate is subtle but explainable. Both can happen at the same time, and that is what is happening now. 5 years ago - with currency trusted - loose change was swept up by the banks and deployed with confidence to the future, with things like 20 year Mortgage Backed Securities. The willing surplus at the long end of the bond market happily financed houses, and so they inflated, while the sweeping up of near cash for long investment (by banks) created a permanent near-end cash shortage, which held down retail inflation.

    But Quantitative Easing changes how it works. With money being printed no-one (especially the banks) trusts the currency for the long term, so money tends to be deployed in short-dated near cash instruments. There is now a shortage of long term money and a surplus of short term. So houses fall, and the things you buy with cash - supermarket shopping, and petrol for your car - are competed for by great piles of cash. (Viewed internationally this is what is driving up commodities)

    Unfortunately it will get worse. QE is a switch which kills long term confidence permanently, but it takes 20 years for the outstanding supply of long bonds to wind the clock down. By then, most outstanding long bonds will be owned by the central bank, and most private money will be piled up at the short end.

    In 2005 the US had about 9 trillion in short term money, and 100 trillion in the bond markets. The 9 is now about 15, and the long is still 100 trillion, because QE keeps it fully stocked (though inaccessible to house buyers, because the new stuff is all central bank owned). That 15 is going to go on swelling. It's unstoppable. So the benign deflation (short) and inflation (long) of 2005 becomes the painful inflation (short) and deflation (long) from 2008 onwards. It will last several more years, getting steadily worse, and end with a hump of repeating short term re-financing requirements which precipitates crisis - both here and in the US. Greece is in exactly this situation, a few years ahead of us.

  • Comment number 92.

    I don't think the be PIGS will default ie Iceland.

    But no doubt the terms of the loans may be "Flexed" in the times to come. For me this is a big money making exercise to enable the PIGS to continue to buy German goods. This is no different to BMW providing loans @5 % in order customers can afford £50k cars .

    My own view is the quick way out for the PIGS is default and then revert to their own currencies for effective de-valuation against the Euro. Borrowing of the Germans on the"Never never" is the quick rd to effective enslavement.

  • Comment number 93.

    91. Does your statement above support John _from _Hendon' view about the value of money ??

  • Comment number 94.

    Do the Harvard Aluminati really want to force a default on those Countries ?
    They are the guys calling the shots after all.

  • Comment number 95.

    80** We already have 3 on the go , how many more do you want?

    I know its off topic , but this "War of words" against Libya is a Joke , there is no way we are going to be able to keep it up ,Gaddafi just needs to keep his head down for 12 months and we will back in his tent shaking his hand again. No wonder the rest of world despise the UK , at heart we are just Imperialist Morons.

  • Comment number 96.

    @Bozeau
    "The inflation/deflation debate is subtle but explainable. Both can happen at the same time, and that is what is happening now."

    Excuse my French, but this is bolleaux!

    I am sure that Robert Peston, who undoubtedly penned the article himself, has a better explanation than that - expecially if he looks at work of economists Richard Koo or Steve Keen. That is all they do. If credit goes down, the economy shrinks, and deflation is more likely. And, of course, the other way around, hence the bubbles in Irland and Spain. And of course in the US and Australia.

    You remind me of a writer I have come across before with a penchant for -eau endings. Pity him, he is not around here to argue the toss!


  • Comment number 97.

    The ECB can easily create the money needed to fund Europe's private domestic and foreign desire to net save and keep demand and supply balanced and the economy growing at a reasonable rate. Checkout the Warren Mosler proposal for the Euro, the alternative is to break the Euro up...

    Just look at Japan creating hundreds of billions of $ worth of Yen and it strengthening in value at the same time!

  • Comment number 98.

    #97 RNG

    You are right. - The ECB can create as much money as it likes. The problem is that the EU has to buy oil and gas. Those suppliers and traders can name their price.
    And it is a sellers market.
    If they want paying in $ then exchange rates matter. And will get manipulated.
    Before you know it the price of energy goes up and up.
    The beneficiaries aren't all oilcos either...

  • Comment number 99.

    No country can afford to have other countries default because globally all countries are financially interdependent.When a country defaults financially linked countries take a hit too.

    Here in the UK we have seen the impact of the Iceland row where the UK pays out to UK investors losing money in the Iceland banks but has to vie with Iceland to get the money back.

    Each country needs to be financially independent and investors need to invest in their own national infrastructure. Our government needs to state publicly that it will not guarantee repayment to investors who invest outside the UK. In that way future investors abroad know that if things go wrong they will lose their money and will not be bailed out.

    If the banks do manage to split into a low/no risk savings arm and a higher risk investment arm, the government could opt not to repay high risk investments which go wrong.

    Banks might then be more careful with regard to toxic debt because they will not be getting bailed out.

    Customers will then have the option of deciding whether they opt for relatively risk-free savings or higher risk investment with a full knowledge of the consequences.

    That may have dramatic consequences for the banks too.

    It will be interesting to see how things turn out.

  • Comment number 100.

    #93. hughesz wrote:

    "#91. Does your statement above support John _from _Hendon' view about the value of money ??"

    The PRICE of Money!

 

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