Making The Mess Bigger!

December 17, 2010


Consider a junction with loads of car accidents and casualties. Consider then a hospital with an A&E unit.

The report there is a bit like improving the A&E while doing nothing about the junction!

No new rules for investment products. No new rules for investment banking, derivatives and other paper.

Brooksley Borne on Derivative Trading

Plus no determination on the moral hazard aspect of a crazy guarantee exposing taxpayers to unregulated lending practices of cross border bondholder banks. See ’some classes of creditors’ qualifier below.

What about all banks contributing to a regulatory structure and supervisory regime and insurance scheme that would also make it illegal for governments to tap taxpayers for bailouts!

The cost of the insurance scheme would soon see regulatory practices improve.

As an interim measure there could be opt in and opt out with those opting into such a scheme getting AAA rated accordingly…

Anyways that doc goes no way to address the real problems in the banking system!

Here’s ‘major reform’ proposed

“This seemingly lack of consistency in the approaches of prudential supervision and reorganization and resolution of cross border banks raises the question of whether a common decision-making structure to deal with cross-border banks and, more in general, financial conglomerates in crisis is needed (see Mayes, Nieto and Wall, 2008 for a proposal of a collegial approach to bank resolution).

The creation of a bridge banking group would be roughly equivalent to a government recapitalization of the bank, except that the shareholders in the failed group would permanently lose their claim on the group and losses may be imposed on some classes of creditors. 57 Someone will have to have managerial authority over the bank and in almost all cases the home country supervisor will be the logical party to appoint the new management. The bank’s management should be overseen by a board with representatives from all of the affected countries. In these authors´ views, this function can be performed by the resolution college.

“and Winding-Up Directive (2001/24/EC) and it explores areas of coordination with other EU directives that also deal with relevant aspects in the bank financial crisis management. Our main recommendations focus on the following aspects:
• In the absence of a centralized prudential supervision for cross-border institutions, policy makers should give priority to ensuring the convergence of supervisory powers and disciplinary actions for the reform of the EU safety net and the revision of the reorganization and winding up Directive are to be effective. Moreover, such convergence should ideally encompass a framework for early intervention by colleges of supervisors based on common triggers that include also market indicators while acknowledging that this approach has limitations in the case of systemic crisis.
• Greater harmonization of depositor protection schemes is also warranted and, among other aspects, in relation of their role as resolution agencies. Consideration should be given to establishsing not only minimum level of deposit insurance coverage, but also to cap deposit guarantees and ensure adequacy of funding.”

Finally, in parallel with the developments on the potential centralization of supervision in the EU, consideration should be made to create an EU wide deposit guarantee fund with capabilities to reorganize and resolve cross-border banks licensed in the EU.”


Meanwhile there has been some cheer leading in Ireland over an improvement in our growth rate  that marginally put us barely on the plus side from a negative

The Sovereign Debt Problem – Speech by George Soros
October 05, 2010

World Leaders Forum at Columbia University

“”There are a number of variables involved. To start with, the debt burden is not an absolute amount but a ratio between the debt and the GDP. The higher the GDP the smaller the burden represented by a given amount of debt. The other important variable is the interest rate: the higher the interest rate the heavier the debt burden. In this context the risk premium attached to the interest rate is particularly important: once it starts rising, the prevailing rate of deficit financing becomes unsustainable and needs to be reigned in. Exactly where the tipping point is located remains uncertain because it is dependent on prevailing attitudes.”

“There is a real danger that the premature pursuit of fiscal rectitude may wreck the recovery.”

While Japan seems off the chart when it comes to GDP related to its debt burden, but it has access to home grown low interest rate bonds, so its debt burden is manageable.

Ours is not, because at 5.8% our ‘growth’, approaching minus as it will shortly, when inflation(again this is a minus) is added to offset the 5.8%, the figure comes up way short of any sustainable repayment.

So, correct me if I’m wrong, but according to Soros, we would be caught in the grip of a twin vice:

1. Debt burden surge to 100% in 2013,  as a consequence of ratio of debt to GDP, see below…

2. The high risk premium interest rate of 5.8% increasing the debt burden above.

Not sure how up-to-date this is with our ‘bailout’, but its recent:

“Devine said it seems clear that promissory notes should form part of the deficit and debt. As such, the debt to GDP ratio will reach 87% by the end of 2010 before peaking at just over 100% in 2013, assuming the Government sees through in full the outlined fiscal consolidation (Chart 19, Appendix 1 above).

The decline in the nominal value of the economy will make it more difficult for the Government to reach its target of reducing the deficit to GDP ratio to below 3% before 2014 without additional measures being implemented.”

The additional debt burden imposed by the banks, the IMF/ECB bailout, the contraction of the economy due to €6 bn budgetary cutbacks, on an economy verging on zero to minus growth, will inevitably send the economy into further decline that will make default inevitable.


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