Posts Tagged ‘bailout’

DISCLAIMER:  I am no financial analyst, economist and any knowledge that I have in these areas is largely gained by reading. Hence the article below might contain wrong or incorrect conclusions or be just plain hyperbole on my behalf. However the facts mentioned and sources named are correct.

Like so many people I was amazed when I read the news last night that Germany had “found” 55 billion euro which had been overseen through an accounting error. The whole thing just doesn’t make sense. Because, to find 55 billion, you have to first “lose” it. And to put it frankly what moron loses 55 billion?!

So I decided to read a bit more about it and discovered some astonishing facts:

  • Apparently the 55 billion is equal to a ridiculous 1% of the country’s debt to GDP ratio. “Germany’s 2010 debt-to-GDP ratio also drops, to 83.2% from the previous 84.2%…
  • This money obviously only exists electronically so is this just some creative QE?
  • the value represents a quarter of Germany’s new ESFS obligation.
And then I spotted this statement from the Telegraph:
the German government welcomes the substantial progress FMS Wertmanagement has made in reducing the portfolio it took over from Hypo Real Estate a year ago”.

And that’s when a light went on in the back of my head. Something about Hypo and the Irish banking crisis. I recalled reading some references to Hypo & Ireland on the excellent Golem XIV blog. A quick search there led me to the articles I was thinking of. The information contained therein showed a clear historic link between the Irish banking crisis, Depfa and Hype Real Estate.

For those who aren’t already familiar with the Depfa and HRE story, here it is in a very small nut shell.  Hypo Real Estate was the huge German bank which we were all suddenly told, back in 2008, had to be bailed out by the German State at vast cost. But, they said, they had no choice, because Hypo (HRE) was so large and its debts so huge that if it collapsed it would, at the very least, bring down German banking.  It was Europe’s AIG – to big to be allowed to fail. Then the back story emerged.  HRE had bought ‘Irish’ bank Depfa at the top of the market at almost the same time as RBS bought ABN Ambro.  Both purchases were insane and both killed the purchasing bank.

the collapse of HRE was in fact due to a huge funding crisis at Depfa always referred to as ‘its Irish subsidiary’.  From that came the notion that Depfa must have hidden its true state from HRE

The above has apparently created a lot of bad blood in German financial & political circles. Depfa is seen as an Irish problem and hence it is the fault of the Irish that Depfa nearly killed Hypo. Some say that the Irish government should have bailed HRE/Depfa out. This suggestion is in itself ridiculous for one single reason alone. At the beginning of this year Ireland’s IMF bailout was in the region of 85 billion euro. The HRE/Depfa bailout alone stood at nearly 100 billion euro at that point…

The article goes on to explore the reasons why Depfa had located itself in Ireland. Apparently the Irish Financial Services Centre had built up a bit of a name as a “financial wildwest”. Regulation was loose or not enforced.

Money in various shades of shadiness flowed to Ireland.

What gave Ireland the edge over Luxembourg was it offered faster turn arounds on setting up deals and far more lax regulation.

So in short, Depfa was a German bank based in Ireland because of its lack of strict regulation. This allowed a lot of financial transactions and off the books accounting which was not possible in Germany itself. On of the main instruments for raising funds by Depfa was the so-called pfandbrief a triple-A rated German bank debenture. At the time of the Depfa bail out there were €806 Billion in Pfandbrief outstanding! If Depfa had gone down, it would have taken the AAA rated dependability of the Pfandbrief with it. There was no way that Ireland would have been able to absorb this astronomical amount so Hypo buying Depfa was probably the most logical option.

To now read that 55 billion was just found on Hypo’s books that wasn’t there makes me extremely sceptical. In my opinion it’s just another case of smoke and mirrors that EU financial decision-making is full of. For years now we have been forced to pour vile amounts of money into black holes to pay for debts that we didn’t incur. None of the bailouts benefit the people who are actually paying for it and the EU/ECB seems to be set on accelerating this midnight train to nowhere.

It’s time to put a stop to this.

Disclaimer: I am not an economist, finance expert or politician. Far from it. So you won’t see any statistics, graphs, academic references or even the slightest shred of evidence to back up my assertions and conclusions. What you will read however is my view of the current European (and global crisis) based on following a variety of news sources, discussions with people who are much smarter than I am, an ability to recognise bullshit and a healthy dose of scepticism.

Take one look at the current situation: Greece has had one bailout and is looking at a 2nd bailout, Ireland has had one bailout, Portugal is being bailed out and Spain will quite likely follow shortly. In each of the bailed out countries a series of austerity measures is being applied. Services are being cut, taxes are being increased, levies are being introduced etc. In short for the citizens of these countries the cost of living increases drastically. The main cause of the increase of cost of living is an increase in charges by the state for services provided to its citizens. Services that in principle should be funded by the already paid income taxes, sales taxes and social taxes. However the revenue from those sources has been squandered. Instead what we get now are higher & more taxes and fewer services. Private citizens and the private sector are being dealt hammer-blow after hammer-blow. Government deficits have grown to astronomical proportions but even bigger amounts of money are being used to rescue the banks. To what benefit one might ask?

That is indeed the biggest question in this whole twisted tale. Qui Bono? Will this period of austerity caused by fewer services, higher & more taxes and rapidly rising prices bring us to an eventual recovery? The answer is: probably. But another consideration is how long will this take? Will is take 5, 10 or even 25 years? My estimation is that it will most likely be 25 years or more before we see any actual benefits and economic stability if we keep walking down the austerity road.  There is of course a different option. Forget about the “burning the bondholders” argument. Most bondholders have already been repaid. What we can do is restructure the loans, because that’s what they are, that have been forced upon us by the IMF/ECB. We can demand a longer running period, a lower interest rate or even a reduction in the capital. Because that is where the real truth is hidden, neither Ireland, not Greece, not Portugal will ever be able to pay of the loans forced upon them. The EU & the IMF are well aware of this and what we are witnessing is not an attempt to rescue the economies of these countries as it is wholesale asset stripping.

When the shit hit the fan in the world of global finance back in 2007/2008 and it became clear that banks all over the world would just fail overnight the people at the top of the financial foodchain decided that they could never let this happen. So these chose a devious and callous option. In the case of the EU this meant that governments would be strong-armed into accepting loans of an astronomical size and at sometimes punitive intrest rates simply to hand this money to the banks thereby ensuring the continued existence of the financial system. The fact that these loans could never and would never be repaid was not an issue for the (private) banking sector. It was for the IMF/ECB though. Hence they included clauses in the “bail-out agreements” that would hand control of the bailed out countries economic & financial policies over to them. The EU/ECB would dictate internal politics….

What we are witnessing now is wholesale assets stripping on a scale not witnessed since the Soviet armies occupied a large part of Western Europe at the end of WWI. At the direction of the EU bureaucrats formerly sovereign countries are being told to sell of state assets in order to fund loan repayments to the ECB/IMF. The fact that the sale of the these assets will quite possibly leave the country in economic ruination with no state-owned industry or other assets and still insurmountable foreign debts to repay does not seem to matter. It is a case of “get it while you can”. For example Greece has been strong-armed in selling 10% of the state-owned Telecoms company to Deutsche Telekom.  It is no surprise that this is a German company. I expect more chunks to be sold of and also “suggestions” that Ireland sell off Aer Lingus, ESB, Coilte (oh wait that’s already happening) and more. Visions of the Soviets dismantling factories and shipping them lock, stock and barrel to the motherland come to mind. None of this is happening to the benefit of the individual countries or it’s citizens!

So what can be done? There is really only one option; stop playing ball. We need to step out of the EU to regain economic sovereignty and use this renewed independence to dictate the rules of the game. We need to state how much we are paying back, over what time-frame and at what rate. Nothing else will do. This will be a painful step to take as it will bring cause a period of economic hardship but this period will be significantly shorter than the one that will be caused by playing along with the ECB/IMF and whatsmore we will emerge out of this as a healthy economy.

It’s really a simple & straightforward solution but I do not think that any of the governments of the respective countries has the balls or willingness to implement it.


/end rant