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Bad debt is debt that was not justified on the basis on which it was granted.

An Irish bond issued in 2007 was not necessarily a bad debt, if it was issued to pay for legitimate expenses of the Irish state. It was a bad debt if it was issued as part of a swap for bad private debt.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 4th, 2011 at 08:33:54 AM EST
[ Parent ]

Debt which was justified on the basis of the economic environment at the time of issue may cease to be justified at some point in the future.

Debt becomes bad when it becomes clear that future earnings will not retrospectively validate the valuations made at issue.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 08:38:31 AM EST
[ Parent ]

But then all the debt of the Irish State is bad debt. And it has to default on all of it or partially default on all of it.

So the foreign devils get only, say, 80% of their capital back and the true born Irish men too.

by IM on Fri Feb 4th, 2011 at 09:07:34 AM EST
[ Parent ]

Re: Dumbing it down (4.00 / 4)

Not all debt is the same in terms of seniority. When a bank fails, the depositors gets paid first, then the bondholders in decreasing order of seniority of the bond (not of the creditor).

I agree discriminating on the basis of nationality will instantly run afoul of the EU courth of justice.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:12:17 AM EST
[ Parent ]

But are there really any bondholders left? or that many depositors? The capital of the (troubled) irish banks is now either ECB or irish government. The ECB has lent more then 110 Pound sterling to irish banks according to your guardian source.

by IM on Fri Feb 4th, 2011 at 09:22:10 AM EST
[ Parent ]

The ECB has lent more then 110 Pound sterling to irish banks

I assume you mean Billions. In any case, the Guardian claimed the exposure of foreign banks was 5 times that, as late as March 2010. So foreign banks still have an exposure of 400 billion.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:30:46 AM EST
[ Parent ]

The foreign exposure also "includes derivatives and other credit commitments", the seniority of which is not entirely clear to me.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:31:42 AM EST
[ Parent ]

There shouldn't be any. That's a private contract - I think but IANAL - between the bond holder and two or more parties. The State should only perhaps, depending, guarantee the underlying bond.

The Neo-libs are always shouting the State should not interfere with private contracts so ... the State should not interfere and let the derivatives go south.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Feb 4th, 2011 at 01:30:27 PM EST
[ Parent ]

The Irish state might have to deal with the negative consequences of derivatives to Irish institutions. But in general, yes, let those who made the bed lie in it.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 4th, 2011 at 11:18:50 PM EST
[ Parent ]

But of course that is not the problem of the creditor. Money is fungible. If Ireland borrowed x billion in 2008 or 2009, it used y billion for it's normal spending and z billion for the banks. But they didn't told me - the fictional bond buyer - about that. They just sold me a bond.

If you say "banks!" I will say "my credit paid for the unenmployed!"

by IM on Fri Feb 4th, 2011 at 09:05:01 AM EST
[ Parent ]

Debt which cannot be paid will not be paid, whatever the money was used to pay for.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:07:52 AM EST
[ Parent ]

Yes, but in a bankruptcy all creditors will suffer. Including private persons in Ireland.

by IM on Fri Feb 4th, 2011 at 09:52:08 AM EST
[ Parent ]

Private persons in Ireland are already suffering because of the conditionalities of a bailout designed to give the foreign bondholders time to offload their bonds on the ECB without improving the solvency of Ireland.

Bankruptcy would be a better deal.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:55:49 AM EST
[ Parent ]

The Irish mess started when foreign banks and other financial institutions lent money to Irish banks who turned around and created a real estate bubble. If anyone in that chain had done due diligence they would have KNOWN they were sending good money into a black hole.

Simply put: there's a case to be made the Irish and foreign financial institutions are guilty of malfeasance. In which case they can go whistle for their money. Illegal acts do not constitute a binding contract.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Feb 4th, 2011 at 01:37:29 PM EST
[ Parent ]

Illegal act? So loaning money to the irish state in 2003 or 2005 or even 2009 was illegal exactly why?

Because the Fiana Fail dictatorship was not the legal government? Because everybody had to know how exactly the "Celtic Tiger" would crash?

Nationalistic nonsense. Next up: How the ECB caused the Famine.

by IM on Fri Feb 4th, 2011 at 02:11:12 PM EST
[ Parent ]

Nationalistic nonsense

You might want to note that most here are not irish. So it seems wrong to claim that nonsense on behalf of the irish is nationalistic.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Feb 4th, 2011 at 03:00:47 PM EST
[ Parent ]

The last Irish in my family tree, to my knowledge, was a great-great grandmother from Ulster who arrived in the mid 19th century. The Scots-Irish-Welsh on my father's side arrived earlier.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 4th, 2011 at 11:24:58 PM EST
[ Parent ]

Two things happening.

The first was malfeasance by not doing due diligence by the Irish banks and the foreign financial institutions who lent money to the Irish banks to fund the real estate bubble.

The second was the improper action by entities in the Irish government who bailed-out the Irish banks and loaning foreign institutions. Proper financial regulation and oversight would have would never allowed the Irish banks to get into this mess in the first place; proper financial regulation and oversight post-mess would have let the banks fail with the Irish government "picking-up the pieces" as Migeru has already outlined elsewhere in this discussion.

Debt is paid off by the cash stream generated from the productive (goods and services) assets the debt was used to purchase XOR the cash stream generated by a vibrant economy and then redirected to debt service. Consumer real estate purchase is a perfect example of the latter. (At least as long as the house, whatever, is held by a consumer. I note purchase for rental is different.) Consumer real estate does not generate cash but, rather, is a net drain of cash when viewed from the total amount of discretionary consumer income. This means:

As the cash stream generated by the Real Economy is diverted to debt service the total amount of consumer spending MUST fall by that amount. This, in turn, lowers economic activity (eventually) in exactly the place where the cash comes from to service the debt: the "Real Economy" where people create wealth by producing goods and services and get cash for so doing.

The result of this has been analyzed (no link, for which I apologize) to conclude banks and other financial institutions withdraw, roughly, 7 pounds for every pound of debt issued. No economy in the world, including the global economy, can withstand that rate of predation. Eventually marginal borrowers will be forced into non-performance initiating a positive feedback loop in the negative direction and the bubble bursts.

No one 'round here, I should think, is saying debt is necessarily evil. Debt assumption for increasing production generating an Internal Rate of Return (IRR) (cash) capable of debt service is a vital part of a non-barter economy. Debt assumption that doesn't generate an IRR and simultaneously reduces the ability of the micro-economy to service that debt is stupid because it WILL, eventually, crash the economy.

As a former banker, I can tell you there are known methods and procedures for determining the credit-worthiness of borrowers. Running those is what Due Diligence is. Since 2004 I have been warning the ever-increasing amount of money flowing into real estate was going to crash the global economy because I ran those methods and procedures. The various financial institutions did NOT go through that process and, IMHO, should be held accountable.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Feb 4th, 2011 at 03:14:21 PM EST
[ Parent ]

IM:

How the ECB caused the Famine.

I thought that famine was caused by the ethanol subsidies to US ethanol refiners which has driven up the price of corn.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 4th, 2011 at 11:22:06 PM EST
[ Parent ]

No, by the CRA and Fannie Mae.

by IM on Sat Feb 5th, 2011 at 06:28:37 AM EST
[ Parent ]

Oh, dear, you now subscribe to the Republican theory that the cause of the crisis was Fannie and Freddie forcing the private banks to give mortgages to n****rs?

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Feb 5th, 2011 at 06:32:03 AM EST
[ Parent ]

That was a obvious joke. I am a regular Krugman reader too.

by IM on Sat Feb 5th, 2011 at 07:44:14 AM EST
[ Parent ]

How dare they pay for the unemployed!

That was then, this is now. The question is whether, in the next couple of years, Irish government revenues should be used to pay the unemployed or not.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Feb 5th, 2011 at 12:57:28 PM EST
[ Parent ]

But that is my point: Debt used for paying the unemployed (or to make up for falling taxes) can hardly be odious debt.

by IM on Sat Feb 5th, 2011 at 01:51:01 PM EST
[ Parent ]

The only way the Irish state is likely to be able to pay unemployment benefits or anything else that benefits the Irish is if they default. Else they are trapped in an impossible attempt to repay unpayable debt.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 5th, 2011 at 04:49:51 PM EST
[ Parent ]

You are conflating legitimate and illegitimate debts.

The vast, vast majority of the Irish government debt is illegitimate, taken on in the process of bailing out insolvent German banks. The fact that legitimate Irish debt exists does not change the fact that the vast, vast majority of the Irish debt is not legitimate.

Unfortunately, what with sovereign debt being fungible, it is not necessarily possible or meaningful to annul the bonds that were used in the bailout. So you will have to annul an equivalent amount and let the bondholders who are least important to the Irish (and European) economy take the hit first. In the greater scheme of things, the result is almost the same. Yes, a Landesbank here or there is going to take an unfair hit, and an oligarch or two is going to keep a nest egg squirreled away in Lichtenstein. Take that up with DeutcheBank and the ECB, who pressured Ireland to honour the insane guarantee. If Ireland had defaulted on the guarantee instead of defaulting on its debt, the default would have been targeted much more narrowly at the guilty parties.

But that was then and this is now.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 5th, 2011 at 05:37:44 PM EST
[ Parent ]

"The vast, vast majority of the Irish government debt is illegitimate, taken on in the process of bailing out insolvent German banks."

Now that is uttermost nonsense. Ignoring the role of the irish banks,their irish creditors, their french, british, american creditors. Or do you want to claim that the average irish bank had no deposits at all?

The vast, vast majority of irish debt was taken on in the process of coping with the results of the bust of the property bubble. Like in the UK or the US. It is a legitimate as any other countercyclical borrowing.

I am really dealing with nationalistic myths here.

by IM on Sat Feb 5th, 2011 at 07:37:24 PM EST
[ Parent ]

Ignoring the role of the irish banks,their irish creditors, their french, british, american creditors. Or do you want to claim that the average irish bank had no deposits at all?

No, but the depositors are not illegitimate claimants. The interbank lenders are. Depositors should never lose their shirts - interbank lenders should.

The vast, vast majority of irish debt was taken on in the process of coping with the results of the bust of the property bubble.

This is simply false. Contrary to fact. Not true.

And even if it were true, it would not help your case. Because if it were true, the ECB should be carrying it at 0.0 % interest - a major point of having a fiat currency is to permit unrestrained countercyclical spending.

Either the debt is from the bailout - and then it should be defaulted on as a matter of principle, or the debt is from countercyclical spending, and then Ireland should not be paying 5.7 % interest to the ECB for having the ECB do its fucking job and print money to fund countercyclical spending.

Either way, Trichet, Weber and Stark need to STFU and start the printing presses already. And Merkel especially needs to STFU with her neoliberal "debt brake" garbage.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 5th, 2011 at 07:58:10 PM EST
[ Parent ]

See, another idiotic claim.

"should not be paying 5.7 % interest to the ECB"

Nobody is paying 5.7% to the ECB. The ECB is lending to the banks, not to the state at 1.75%.

And the ECB can hardly to anything about the fact that the Irish state has since independence but especially in the last years at 3, 4, 5% at the capital markets. They get,perhaps, 5.7%.

by IM on Sun Feb 6th, 2011 at 12:18:35 PM EST
[ Parent ]

the ECB can hardly to anything about the fact that the Irish state has since independence but especially in the last years at 3, 4, 5% at the capital markets.

And that would be wrong.

As a central bank issuing a non-redeemable currency, the ECB can and should fix the price of any sovereign bond.

Sovereign bonds are interest rate policy instruments, not fiscal policy instruments - there is no excuse for allowing the international money markets to constrain fiscal policy, and there is no excuse for allowing the international money markets to set policy rates.

The ECB is derelict in its duties as a central bank because it isn't buying Irish bonds at above market value. The Irish need to put the thumbscrews on the ECB. Which means putting the thumbscrews on Mrs Merkel. Which means making German banks insolvent, since that is apparently the only thing Mrs Merkel gives a shit about. She certainly doesn't give a pot of piss for European solidarity or the plight of Irish widows and orphans.

And if taking the German banking system hostage to get Mrs Merkel to stop screaming bloody murder whenever somebody tries to get the ECB to do its fucking job results in some collateral damage to German savers... well, you can go take it up with your own neoliberal CDU/FDP government that precipitated the crisis in the first place by insisting that the ECB can't do its job.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 6th, 2011 at 07:14:41 PM EST
[ Parent ]

JakeS:

Sovereign bonds are interest rate policy instruments, not fiscal policy instruments - there is no excuse for allowing the international money markets to constrain fiscal policy, and there is no excuse for allowing the international money markets to set policy rates.
The ECB is derelict in its duties as a central bank because it isn't buying Irish bonds at above market value. The Irish need to put the thumbscrews on the ECB. Which means putting the thumbscrews on Mrs Merkel.

The problem with this is that the ECB is not doing this out of its own volition, it's right there in Article 123 of the Lisbon Treaty. Of course, one can collude one's way around that.

The irony of the situation is that Merkel is pushing for treaty change to solidify the Austrian Economics shock therapy drivel by adding her "competitiveness agenda" to the constituent treaties. There is a need for treaty change, but the needed treaty change is not more German-inspired nonsensical macroeconomics, but for instance a repeal of Article 123.

As you can well realise, this is either recipe for gridlock assuming (big if) that a coalition of member states can be assembled around the demand to not only not accept Merkel's competitiveness pact, but rather more difficult, roll back what Germany (I'd bet good money that Article 123 was written by the Bundesbank) has already written into the EU constituent treaties.

So such a coalition can only lead to gridlock. Germany might even take its marbles away in a huff. I'm not sure they wouldn't if some other member state's default crashed their banks.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 8th, 2011 at 04:32:12 AM EST
[ Parent ]

The problem with this is that the ECB is not doing this out of its own volition, it's right there in Article 123 of the Lisbon Treaty. Of course, one can collude one's way around that.

That would be a lot more persuasive if the ECB were actively telling people how mind-numbingly stupid Art. 123 is. But in fact they are doing the opposite.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 8th, 2011 at 05:05:58 AM EST
[ Parent ]

From the other thread:

"Mr. Trichet is a European civil servant. He's a very important European civil servant and any civil servant will of course always stick to the plan that is there at the moment, just as he will stick to the plan that is renegotiated when it is renegotiated."

(sez someone in the Irish Labour Party)

Frank Schnittger:

There is a view in Ireland that we are seriously pissing off all the people who matter in the EU

However, Buiter haz observed that

President Trichet of the ECB is already so far down the road of telling governments what to do and what not to do in the fiscal and structural reform domains, that one is hardly surprised by yet another lecture on budgetary policy from the Eurotower. Traditionally, continental European central bankers speak very little about monetary policy in public, and are often unwilling to engage in public debate or answer questions about their monetary duties, but carry on endlessly about budgetary and structural reform matters. It's always easier to speak about things you have no responsibility for, that are not part of your mandate and about which you probably don't know very much.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 8th, 2011 at 05:26:09 AM EST
[ Parent ]

European Tribune - Non à Weber!

Well, the thing is, even when the ECB tries to workk within the rules it gets sabotaged from within by the hawks.

Quatremer points out that Trichet has been criticised by both Chirac and Sarkozy for "rigidity and obsession with inflation". However, Trichet is now recognised as being more flexible - Quatremer credits him with this:
BCE: après Trichet, à qui le tour ? - Coulisses de Bruxelles, UE ECB: after Trichet, whose turn? - Backstage Brussels, EU
Dans la nuit du 9 au 10 mai, pour sauver une zone euro au bord de l'explosion, le président de la BCE a convaincu le conseil des gouverneurs de jeter par-dessus bord l'un de ses dogmes et a obtenu de pouvoir racheter sur le marché secondaire, celui de la revente, les obligations d'États de la zone euro attaqués par les marchés afin de casser la spéculation et stabiliser les cours. During the night of 9 to 10 May, to save the eurozone at the brink of explosion, the chairman of the ECB convinced the governing board to throw overboard one of its dogmas, and obtained the right to buy on the secondary market (where bonds are sold on), eurozone sovereign bonds attacked by the markets, so as to break speculation's back and stabilise prices.
Quatremer also credits Trichet with the decision not to take ratings agency notation into account when eurozone bonds were offered as collateral for borrowing from the ECB. Axel Weber, (and Jürgen Stark, the ECB's German chief economist) were both opposed to these measures and got in Trichet's way time and again -- and publicly:
Le président de la Buba n'a pas hésité, dès le 11 mai, à faire connaître publiquement son désaccord avec la décision de la BCE, rompant ainsi un principe pourtant imposé par l'Allemagne lors de la négociation du traité de Maastricht, celui du secret des délibérations. Désaccord depuis répété sans relâche, Weber allant même jusqu'à plaider pour le retrait des facilités de financement accordées aux banques et pour une augmentation des taux d'intérêt... The Buba chairman didn't hesitate, 11 May, to let it be publicly known he disagreed with the ECB decision [re secondary market buying], thus breaking a rule that had all the same been imposed by Germany in the Maastricht Treaty negotiations, that of the secrecy of ECB deliberations. The disagreement has not ceased since, Weber pushing it as far as to argue for withdrawal of financing facilities extended to banks, and in favour of an increase in interest rates...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Feb 8th, 2011 at 05:33:50 AM EST
[ Parent ]

I am really dealing with nationalistic myths here.

From the Icelandic-irish-greek nation?

(Soon to be Icelandic-irish-greek-portugese nation.)

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Feb 5th, 2011 at 08:02:54 PM EST
[ Parent ]

Not to mention their Danish-Swedish-English-Spanish fifth column...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 5th, 2011 at 08:42:46 PM EST
[ Parent ]

Don't forget the commie USians!

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 5th, 2011 at 10:46:32 PM EST
[ Parent ]

But you are buying in to nationalistic conspiracy theories., letting Ireland, neoliberal example Nr. 1, of the hook. That is policy moral hazard: The neoliberal policies are defended and Ireland can go on merrily on its neoliberal road.

That is not a good example, not for Ireland and not for "our" countries

by IM on Sun Feb 6th, 2011 at 12:24:42 PM EST
[ Parent ]

Re: Dumbing it down (4.00 / 4)

Did you miss the point that in the Irish domestic debate it's the neoliberals who are pushing for Ireland to honour its bogus debts?

Default would be a bloody nose to the Irish neoliberal agenda. It would be a bloody nose to "the markets." And it would be a bloody nose to Mrs Merkel and her neoliberal agenda.

Why is it more important to punish the Irish for electing neoliberal assholes last decade than it is to discredit the policies and ideology of neoliberal assholes in this decade?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 6th, 2011 at 07:21:01 PM EST
[ Parent ]

Re: Dumbing it down (4.00 / 4)

I see you claim this, but I still find it strange. I do not need any nationalistic conspiracy theories (indeed, I have not read any) to think it would be better for Ireland and Europe if Ireland does not do follow the Shock Doctrine.

Your argument is so similar to that of regular contributor redstar in regards to Iceland, that I will quote some.

redstar:

Look, we can talk about odious debts and whatnot all we want, but the thing is, Iceland is a representative democracy, arguably the oldest on the planet, and I've not read that this is changed and in fact a red/coalition is now in charge.
Its economic elites who managed the banks which have bankrupted the country (and make no mistake, the Icelanders are still in denial on this point, but their country is, in fact, bankrupt, playing by normal rules) were overseen by regulators put in place by the people they elected. And so, any malfeasance is ultimately on the people. Understandably no one wants to admit they put in place people who gambled their money and now they are on the hook for 4 or 6 months salary in debt....but..they are.
If they had taken steps to put some bankers in jail, or better, served them to the English for UK-style Daily Mirror-reported justice, you know, I'd think this a mitigating factor excusing Icelander's shirking of their responsibility. Or, a complete middle finger to Europe, the UK and NL and withdrawal from Schengen (let's be consistent), making Iceland the Cuba of Scandinavia. Or both.
But this attitude of "screw of Dutch and the British" (because that is what they are doing) without any thought of real financial consequences (bye bye IMF guarantees, EU accession, Eurozone membership, bye bye favorable trade treaties allowing Iceland export to Europe virtually tariff-free) and also without assuming responsibility regarding punishing the guilty...fine Iceland, you can have the butter (renounce your debt) and the money from the butter (punish no one and pretend to be "independent") but et's see how Icelandic living standards are after a Cuba-style credit and tariff embargo for a couple of decades.

redstar:

The political objective of all of this would to put sanctions on what frankly amounts to lawlessness, and which has damaged the interests of citizens of the EU which had been granting the law-breaking country special status and trade rights. You can simply think of it as fairness. And it was EFTA's trade treaties with the EU which made Iceland's theft possible - their banks couldn't be kept out, so damn straight that's how it should play. (Assuming Brussels has balls...big assumption...)
This isn't about getting a small nation to repay its debts, it's about getting the elites who ran that small nation into the ground to repay money they stole. There's a difference. A big one. And of course it's up to the Icelanders to figure out how to make those who are guilty pay. Sounds like property expropriation, punitive progressive taxation and jail time would be in order but again, that's up to them.
I am somewhat bemused by your defense of the Icelander's behavior, seeing them as some sort of small hero against the evil, imperial EU. The EU didn't bankrupt them, their elites did. And now, the same political tendencies which facilitated the looting are at the heart of the campaign to screw depositors in the UK and NL by rejecting the deal. With this, you seem ok. As long as Iceland is standing up to the big bad EU and large NL and UK, they are the hero, even if they are essentially robbing from the poor and middle classes (the depositors they largely screw by reneging on this deal) to bail out their own wealthy elite's responsibility for this mess.
I'm not following how that is heroic, myself...

My argument is and was that it does not work like this, in fact the austerity is the other side of the neoliberal policy. First you expand credit and fuel a bubble where everybody gets a little but the elite get a lot, then when it explodes you cut back social services and support for the poor. And the worse the external pressure, the more austerity for the poor.

Also this essentially applies another moral standard to small nations that can be blackmailed then to large nations (like France in the case of redstar). Perhaps shortest put in this comment:

A swedish kind of death:

~~Bomb bomb bomb~~ Starve starve starve externalized scape goat.

So to turn it around: How much do you think the german people need to be pressured in order to elect a more leftwing government? Are you calling for a boycott of german goods?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Feb 7th, 2011 at 04:14:42 AM EST
[ Parent ]

Yes, starve, starve starve, And the externalized scapegoat is the EU, and in the case of Iceland the Netherlands and the UK. The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent. As redstar pointed out, you agitated for the rescue of the Icelandish oligarchs at the cost of dutch and british tax-payers. Indeed, the Icelandish neoliberals thrown out of government, retreated to their positions in the press and engineered this famous referendum to weaken the new left-wing government.

And you supported this neoliberal swindle as some progressive movement. And now you propagate the same model: >Defend "our" oligarchs against the foreigners< for Ireland.

redstar had good arguments. Still posting?

Boycotting german goods: Well, you can buy more Scania and less MAN. That will impress VW mightily. In the age of the multinational company...

by IM on Mon Feb 7th, 2011 at 10:05:21 AM EST
[ Parent ]

The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent.

No, that's not fraudulent. That's how you resolve an insolvent bank: You take all the assets and all the depositors and put them in a new bank, and let the liabilities stay with the old bank, which then gets a 100 % equity share in the new bank. The non-depositor creditors then get to eat shit and die, because they invested their money in an insolvent institution. That's called "taking a bank into receivership." It's a perfectly ordinary process that happens every month somewhere in the OECD.

And it is actually in no way unusual that it's foreign creditors who get to take the biggest haircut: The less able a bank is to fund in its home market, the greater its incentive to fund abroad, among banks who have less detailed local knowledge (and among a wider set of banks, thus ensuring a larger chance of finding a sucker). So quite often the most junior debt of an insolvent bank will be foreign. And the most junior debtholder gets to eat shit and die an a bankruptcy. That's the whole point of bankruptcy: Letting the bondholders eat the losses so you can salvage a going concern at the end.

Now, the Icelandic case was special because the Icelandic banks' assets plus the Icelandic depositor guarantee fund weren't even sufficient to cover their depositors. This is highly unusual, as deposits are normally only a smallish fraction of an insolvent bank's total liabilities, and a single bank is normally only a smallish fraction of the deposits covered by the guarantee. But because there were only three Icelandic banks, and because they had been abusing the lax bank regulation in the UK and Netherlands to conduct € and £ carry trades via depositors (as opposed to the usual case of conducting carry trades via interbank loans), the depositors ended up having to take a haircut.

In the Icelandic case, there's plenty of blame to go around. The Icelandic central bank should have killed the € and £ carry trades stone cold dead ahead of time, by devaluing the currency in proportion to the volume of carry trade (this creates a negative feedback loop that chokes the carry trade). The British and Dutch, for their part, should never have allowed a bank to take deposits from their citizens without forcing it to participate in their own deposit guarantee schemes. So there really weren't any innocents in that game.

Now, given that there were no obvious innocents, why should the Icelandic government protect Icelandic depositors first? Quite simple, actually: Any government has a duty to its own citizens above and beyond any duty to foreign creditors. Foreign creditors have their own governments, who may be presumed to look after their interests, and who are able to bail them out if they need to be bailed out.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 7th, 2011 at 12:57:42 PM EST
[ Parent ]

JakeS:

IM:
The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent.
No, that's not fraudulent. That's how you resolve an insolvent bank: You take all the assets and all the depositors and put them in a new bank, and let the liabilities stay with the old bank, which then gets a 100 % equity share in the new bank. The non-depositor creditors then get to eat shit and die, because they invested their money in an insolvent institution. That's called "taking a bank into receivership." It's a perfectly ordinary process that happens every month somewhere in the OECD.

The general public is in dire need of education on Bank resolution. Refer to VoxEU

VoxEU.org is a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites.

In particular, Zombie solutions: The Good Bank vs Bad Bank approaches by Willem Buiter, 14 March 2009

Zombie banks need fixing. Good Bank and Bad Bank solutions are the leading contenders. This column reviews the implications for distributional, incentive, and financial stability effects. It argues that too-big-too-fail bank should immediately be taken into public ownership and restructured decisively through a mandatory debt-to-equity conversion or debt write-down. The Fed and Treasury have been captured by save-unsecured-creditors reasoning pushed by special interest groups.
...
The Bad Bank solution
Under the Bad Bank approach, the authorities either purchase toxic assets from the banks that made the toxic investments/loans, or they guarantee (insure) these toxic assets.
Toxic assets are assets whose fair value cannot be determined with any degree of accuracy.
Clean assets are assets whose fair value can easily be determined.
Clean assets can be good assets (assets whose fair value equal their notional or face value) or bad assets (assets whose fair value is below their notional or face value). When the authorities acquire the toxic assets outright, they establish a legal entity to manage these assets - the Bad Bank. The publicly-owned Bad Bank either sells these toxic assets as and when they cease to be toxic and a liquid market for them re-emerges, or holds them to maturity.

The Irish NAMA is a bad bank solution.

The Good Bank approach
Under the Good Bank approach, the state creates a new bank, the Good Bank, which gets the deposits and the clean assets of the old banks. The old bank gets compensation equal to the difference between the (known) value of the clean assets it loses and the value of the deposits it gives up. The state may also inject additional public capital into the Good Bank, or it may invite in additional private capital. Government financial support is given only to new lending, new investment, and new funding by the Good Bank. The legacy (ex-)bank has its banking license taken away and simply manages the existing stock of toxic assets. The legacy (ex-)bank does not get any further government support.

The good bank solution is analogous to the bankruptcy of General Motors, which led to the creation of a new solvent "General Motors Holdings" and the renaming of the old GM as "Motors Liquidation Company", an entity dedicated to liquidating the bad assets (Wikipedia).

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Mon Feb 7th, 2011 at 01:16:42 PM EST
[ Parent ]

The key is in the word "deposits", though

The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent.

In this case the issue hinges on the different between a branch of a foreign bank, and a subsidiary bank of a foreign entity. Subsidiary banks are regulated by the host country and covered by its deposit guarantee, as they are incorporated in the host country. Branches need not be regulated or insured by the host country. In the case of Icesave, the controversy is around whether it was covered by a UK deposit insurance scheme called "passport" which allowed branches of foreign banks to buy into British deposit insurance for a fee.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Mon Feb 7th, 2011 at 03:04:06 PM EST
[ Parent ]

>The British and Dutch, for their part, should never have allowed a bank to take deposits from their citizens without forcing it to participate in their own deposit guarantee schemes.<

But after Iceland was a member of the EEA, other governments had no input in that. Eu-member or in this case EEA member and your banks can operate everywhere. meanwhile they are still regulated and deposit-insured by their national states. And that, as as Iceland and up to a point Ireland shows, is a problem.

And once you have opened for savers out of other EU-countries, they are as senior as your domestic savers and you have to treat both the same way.

by IM on Tue Feb 8th, 2011 at 10:05:17 AM EST
[ Parent ]

Eu-member or in this case EEA member and your banks can operate everywhere. meanwhile they are still regulated and deposit-insured by their national states.

As Iceland demonstrates, that is a bad rule.

and up to a point Ireland shows, is a problem.

No depositors have so far been in danger in Ireland - only bondholders who should lose their shirts.

And once you have opened for savers out of other EU-countries, they are as senior as your domestic savers and you have to treat both the same way.

No, they really shouldn't.

The British depositors can still petition their own government for restitution. Since the British government is more likely to cover British depositors than Icelandic depositors, the Icelandic government is justified in giving domestic depositors preferential treatment.

Management and bondholders should, of course, lose their shirts no matter their nationality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 9th, 2011 at 01:07:01 AM EST
[ Parent ]