$700 Billion - To Bail or Not to Bail...That is the question

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financeguy said:
I'm not sure if you want to know the answer to this. Average prices have dropped 15-20% since peak, but that doesn't tell half the story. Inventory is huge, proportionately as large as some of the most bubblicious US states. Some properties will struggle to sell at any price. Transactions are still happening, but at, by some estimates and in some areas, 90% reduced on peak in terms of numbers of transactions. But, really, assuming your da isn't planning on selling his house any time soon, I guess it doesn't really affect him. Mayo specifically, I don't know too much about the market there. I don't think prices ever got as crazy in Mayo as in Galway. There is carnage in Galway with several large developers there on the verge of bankruptcy.



Yes I'm hearing a lot of anecdotes about this. The construction boom, or as I prefer to call it, unsustainable property bubble, is a dead parrot. Not merely sleeping, but deceased.



There are certainly a lot of immigrants still in Ireland. Shopping in Tesco's earlier, I would estimate 60% of customers probably foreign. Granted, city centre Dublin may not be representative. I tend to think, if you are an immigrant from a 'Third World' country frankly, being on the dole in Dublin is probably better than in a slum in Jakarta. If, on the other hand, you're a young male Pole accustomed to construction work, you'll probably head back home, or, indeed, to places like Canada or Australia.
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Ya my da isn't planning on selling it anytime soon, his brother rents it out to some family. When I was over 3 years ago for a year it seemed out of control. It did'nt resemble the Ireland I knew as a kid. The factory in town had 160 Polish working in it and down in the town it was'nt 'small town Ireland' anymore. Headin over next summer for a few months, hopefully things have picked up. Never fun being on holidays and everyone else is on pogey.

My old man doesn't know what to make of Ireland anymore. He can't even fathom retiring back over there. Which is a bit sad, but when you're gone a long time things change. My dad, bless him, hasn't changed a bit! haha
 
Godamn it, I knew Ireland would be next, I even knew two banks were about to fail, I should have posted my suspicions on here last week and enhanced my reputation as an economic genius.:sexywink:


Irish guarantees were led by fears of imminent bank failure - Times Online

Rumours swept the Dail, the Irish parliament, last night that the Government’s controversial decision on Tuesday to guarantee the debts and deposits of the country’s six largest banks was the result of the threat of imminent collapse of one of its leading financial institutions.

Opposition anger was mounting last night, during debate of the Finance Bill, that the Government was keeping the public in the dark over the real motives behind the extraordinary decision to commit the equivalent of three years of the Republic’s GDP to covering the banks. Outside the chamber the corridors buzzed with details of dramatic meetings in Government Buildings in Dublin on Monday night between representatives of the banks, regulators, powerful business figures and the Government.

Last night it was reported that Brian Lenihan, the Irish Finance Minister, was called twice yesterday by Alistair Darling on behalf of UK banks over fears that Dublin’s blanket guarantee for savers was causing an exodus of funds from UK rivals.

Mr Lenihan is said to have informed the Chancellor that the measures, which will likely be pushed through the Dail this evening, was the result of the threat of imminent collapse of one of its leading financial institutions, which would have led to the failure of a second.

Related Links
UK urged to give savers unlimited guarantees
Savings flow to Irish bank accounts
The background to what has been described as the biggest blank cheque in the history of the Irish state appears to have been the fear that one of Ireland’s biggest banks would declare itself bankrupt at the opening of business on Tuesday morning.

Very senior Irish business figures said that the bank’s insolvency, in the face of a €1.5 billion (£1.2 billion) debt to a German bank that it was unable to pay, would pull down several large companies and possibly a second bank. It was this and the fear that a domino effect would begin – fuelled by the fact that a number of banks are owed billions of euros by property developers – that forced the Government to take action.
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I read somewhere else that the size of the Irish guarantee is twice that of Ireland's GDP - not sure how safe I would feel.
 
ntalwar said:
I read somewhere else that the size of the Irish guarantee is twice that of Ireland's GDP - not sure how safe I would feel.
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Size of guarantee is the size of all deposits, for all the guarantee to be used would require their assets to be reduced to nothing which is unlikely.
 
This probably explains the euro decline:

Financial Crisis: So much for tirades against American greed
Ambrose Evans-Pritchard says it is ironic that European banks have turned out to be deeper in debt than their US counterparts.
...
France's Christine Lagarde called yesterday for an EU emergency fund. "What happens if a smaller EU country faces the threat of a bank going bankrupt? Perhaps the country doesn't have the means to save the institution. The question of a European safety net arises," she said.

The storyline is evolving much as eurosceptics predicted, yet the final chapter could end either way as the recriminations fly. Germany has already shot down the French idea. The nationalists are digging in their heels in Berlin and Madrid. We are fast approaching the moment when events decide whether Europe will bind together to save monetary union, or fracture into angry camps. Will the Teutons bail out Club Med? If not, check those serial numbers on your euro notes for the country of issue. It may start to matter.
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Financial Crisis: So much for tirades against American greed - Telegraph


financeguy said:
Size of guarantee is the size of all deposits, for all the guarantee to be used would require their assets to be reduced to nothing which is unlikely.
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By comparison, the US guarantee is more credible, as it is only a fraction of GDP. Even a single large bank failure would take a large toll in Ireland.
 
ntalwar said:
This probably explains the euro decline:

Financial Crisis: So much for tirades against American greed - Telegraph
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Ambrose P-Evans is a good columnist, and I have posted his articles on here before, but he is a little bit obsessed with doing down the euro.

I think euro's depreciation is partially linked to the issues he talks about, but also the dollar may simply have been undervalued against the euro for quite a while, and is now correcting, plus, USD along with Swiss franc traditionally currencies of choice in time of economic difficulty.
 
bonoman said:
I'm thinking it might be an advantage that UK money is coming to Ireland. It could make the banks stronger in the short term, no?
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In the short term, yes.

Jeez, the rest of Europe hate us though.

Luckily, plucky old Greece has bailed us out by implementing a similar guarantee for its banks.

It's all gettting rather interesting.
 
financeguy said:
I think euro's depreciation is partially linked to the issues he talks about, but also the dollar may simply have been undervalued against the euro for quite a while, and is now correcting, plus, USD along with Swiss franc traditionally currencies of choice in time of economic difficulty.
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The stronger dollar is crushing the stock prices for companies that rely on export earnings (commodity stocks, Apple, etc), so a strengthening dollar would accelerate the stock selloff. I'm surprised the Fed hasn't cut rates again - I think they will soon.
 
ntalwar said:
I'm surprised the Fed hasn't cut rates again - I think they will soon.
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Agreed, but the ECB will cut rates also (eventually), which of course will weaken the euro. Eventually. They'll probably wait until things get a bit messier though.
 
If Europe falls, please God no, does the USA go as well no matter what bill they pass?

Does this hurt the USA? As it makes them seem like their doing less and money might go to Europe?

Can Ireland come out of this looking like geniuses? (hopefully)
 
bonoman said:
If Europe falls, please God no, does the USA go as well no matter what bill they pass?
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There is no question of Europe falling. There is the question of whether the current Euro single currency group will hold.
 
bonoman said:
Where in Dublin you live?
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Nortsoide inner city - like all true Dubs.:mad:

I'm not from there originally though, I'm from one of the posher parts.

You know, to be selfish about it, I'm not sorry property prices are plummeting as I'm planning on moving to a better area at some stage.
 
.
Emergency summit in Paris to focus on pan-European response to credit crisis

By Jeffrey White
Christian Science Monitor, October 3


BERLIN -- As the House of Representatives considers another vote Friday on a historic rescue of the US financial sector, attention in Europe is on whether countries here can agree on sweeping reforms to their own tottering banking systems this weekend.

Leaders of Europe’s biggest economies are expected to meet in Paris Saturday for an emergency summit to discuss stricter rules that the European Union (EU) proposed this week and whether Brussels, too, needs to pass some sort of bailout fund to prop up the European economy. The meeting appears to be a sign that the EU leaders, long thwarted in attempts to create a unified economic policy, believe that only a pan-European response can save the world’s largest economic bloc from sliding into a deep recession. “European economies are much more at risk,” says Stefan Bielmeier, an analyst at Deutsche Bank. “The US is economically more flexible, and therefore they are better suited to maneuver out of a crisis compared to the Eurozone,” he says.

Major European financial markets, from Germany’s DAX to London’s FTSE, showed slight gains Friday. Economists attribute the minor rally to Wednesday’s US Senate approval of the government’s $700 billion bailout legislation, and anticipation that the House, which rejected the measure on Monday, would soon follow.

There have been calls for the European Central Bank in Frankfurt, which sets EU monetary policy, to cut a key rate currently at a seven-year high of 4.25%, but bank officials Thursday decided against it. On Wednesday, Charlie McCreevy, the EU’s commissioner for internal markets, proposed a broad reform to the European banking system, which would prohibit banks from lending more than a quarter of their funds, force lenders who sell precarious loans as securities to assume more risk, and create centralized oversight for institutions that operate in multiple EU countries.

But the sense that Europe is in an economic crisis persists across the continent, following a week in which the Netherlands, Belgium, Luxembourg, Germany, and Britain rallied to rescue their own failing banks. The largest, the privatization of Britain’s eighth largest bank, Bradford and Bingley, got swift approval from the EU on Wednesday. The same day, Italy’s lending titan UniCredit, whose shares had been suspended on the Milan stock exchange, announced it was selling some of its property holdings to allay fears about its solvency. Swiss giant UBS, the European bank hardest hit in the credit crisis, announced Friday that it is cutting 2,000 jobs.

But this weekend the question remains whether the EU can overcome a record of division on other key issues--energy, Russia, and its own constitution to name a few--and find consensus on economic policy. It’s necessary if leaders are to make the kind of sweeping changes that the European financial system needs, which would include creating a EU bailout fund, analysts say.

“The only thing they can do is to take very drastic measures. That’s the only choice they have,” says Karel Lannoo, chief executive officer of the Center for European Policy Studies in Brussels. Mr. Lannoo says failure to do so will result “in the Balkanization of the European financial markets. Every country for itself. That is the danger.”

Members of the European Parliament are split on how to proceed, with liberal members favoring Brussels’ proposed banking reforms and conservatives saying the reforms involve too much regulation. EU states are also floating their own proposals to toughen up the overhaul. France, which holds the rotating EU presidency, wants to require greater cooperation among national regulators. Germany is leading the call for a suspension of EU state aid restrictions, which would give countries more financial muscle to help struggling banks. Leaders are also expected to debate the extent to which governments should guarantee bank deposits, following Ireland’s announcement this week that it would back all deposits in its banks--a move seen as automatically putting other national banks at a disadvantage unless their governments follow suit. “Where should I go if I have €20,000? To an Irish bank, because I know I’ll get bailed out,” says Olaf Gersemann, a financial columnist for the German newspaper Die Welt.

The EU’s call for more centralized financial regulation is a sharp departure from the way things have always been done. Unlike the US Federal Reserve System, Europe lacks a central oversight authority for its financial system. The European Central Bank sets policy and is a lender of last resort, but it does not hold any supervisory mandate. Instead, banks in Europe are regulated on the national level: If a bank fails in France, it is up to France to bail it out. “This has always been a cause for concern,” says Gerhard Illing, research director at the Institute for Economic Studies in Munich. “The question has always been how effective this system is if there are shocks in the international banks” operating in several countries. “Regulatory reform will take some time. This won’t happen fast,” Professor Illing says.
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The House passes the bill. Now we'll get to see if it really has a major impact on the underlying credit problem.
 
Bail-out: Can Japan offer the solution to the financial crisis? - Telegraph


even though America’s problems began in the “sub-prime” sector, it was not the housing system that caused the crisis. The blame needs instead to be laid on ultra-cheap money, over-confident bankers and inadequate regulation. Those were exactly the sort of factors that brought about Japan’s financial crisis in the 1990s, the one that led to more than a decade of economic stagnation.

The trouble began in the stockmarket. Under the international banking rules, the Japanese had been allowed to count equity holdings – shares in other companies – as part of their capital. So when the Tokyo stockmarket lost a third of its value in the first half of 1990, the banks’ capital ratios – the measures of how much security they had against their various deals and investments – also came under pressure.

Despite that, the Bank of Japan was so panicked by a spike in inflation that it carried on raising interest rates until August 1990. It did begin to cut them until July 1991, a full 18 months after the market collapse commenced. Ben Bernanke, the chairman of the Federal Reserve and fully conversant with Japanese history, started to slash interest rates within a few weeks of the credit crunch.

Japan’s biggest mistake, at least with the benefit of hindsight, lay in its treatment of its banks. As their capital shrank and as their loans turned sour, the Japanese Ministry of Finance decided not to intervene, at least not with public money.

It helped banks conceal their losses by massaging their accounts, but otherwise hoped that the market would eventually sort it all out – albeit with the help of a large programme of public works, building new bridges, roads, dams and more in an effort to support growth of which John Maynard Keynes would have been proud.

It failed. The reason why it failed is that as banks’ problems mounted, they started to reduce new lending, sapping the economy’s strength. As the economy weakened, more old loans turned sour, as companies went bankrupt or just stopping paying interest. It became a slow but vicious spiral. More bad loans, more concealment of losses, less trust in the banks, leading to more defaults and to occasional runs on smaller banks.

Ironically, Japan had been infamous during its 1980s heyday as a clubby, tightly regulated place in which companies, bankers, bureaucrats and politicians were in cahoots with one another, while incomes were kept fairly equal. Lech Walesa, Poland’s anti-Communist hero, was reported to have described it after a visit as the world’s only successful example of socialism. Yet in response to the financial crisis and the crumbling of its banks, Japan responded by trying to ignore the problem, hoping it would go away.

The lesson is that once a vicious downward spiral begins in the financial system, with lending being cut and borrowers going bust, the problem will simply get bigger – unless you intervene quickly, with public money. If you don’t act, you will find yourself intervening anyway, as Japan did in 1997-98, but at a much higher cost. The result: a prolonged stagnation and government debts totalling more than 180 per cent of GDP, the highest among the world’s rich countries.

America begins with a smaller debt: around 70-80 per cent of GDP, depending on how you account for the impact of the nationalisation of Fannie Mae and Freddie Mac. In Britain and Germany, debt levels are lower – and it is not yet clear that we will need similar public bail-outs to the Paulson plan, for the build-up of bad debts in our banks has not yet reached danger point.

With America’s GDP of $14 trillion, even the $700 billion in this new package would only push debt up by four per cent more of GDP, The bad news, however, is that the cost may well rise further. In the end, Japan’s crisis, like Sweden’s earlier in the 1990s, was brought to a close only when the government agreed to pump money directly into the banks by providing fresh capital in return for shareholdings. That really will smack of socialism to many American politicians.

So how do we square the circle? There are two principles of public rescue that need to be applied. One is that the government must make sure it saves the banks but not the bankers: boards should be sacked, fraudsters punished and shareholders made to suffer. Otherwise, public support will rightly not be forthcoming, just as it hasn’t been for the $700 billion.

The second is that, in return for taking temporary shareholdings or even ownership of banks, the government must use the opportunity to force reforms in both behaviour and in regulation. Temporary socialism can then turn into a process of refreshing and re-disciplining capitalism itself. By cleaning up the banks and imposing new rules on them, governments can ensure that capitalism re-emerges in whatever new shape feels right for the market at the time, rather than according to some misguided blueprint drawn up in Whitehall or Washington.

Plenty of critics of capitalism, and especially of the process of liberalisation of trade barriers and regulatory restrictions associated with Margaret Thatcher in Britain and Ronald Reagan in America in the 1980s, would like to think that this whole episode of crisis, rescue and reform will bring about the demise of “neo-liberalism” and of the leadership role within capitalism of financial institutions and markets. Yet unless this crisis brings about massive levels of unemployment, prompting a resurgence of interest in public ownership and control, that hope is likely to be disappointed.

We know that Wall Street and the City of London, by which is meant the big investment banks, are not going to play a dominant role again in the American and British economies, for so many investment banks are either bust or discredited or both.

But that is not the same as the demise of liberalism. Banks, pension funds, insurance companies and other financial institutions are all perfectly capable of providing the liquidity, discipline and incentives necessary for a successful capitalist economy.

But they can only do this if they have the capital. That is why the American rescue was necessary and welcome, and why, in due course, European countries may have to do the same.

Bill Emmott was editor of The Economist from 1993-2006 and is the author of 'Rivals – How the Power Struggle between China, India and Japan will Shape our Next Decade’ (Penguin, £20), which is available from Telegraph Books for £18 + £1.25 p & p. To order, call 0870 428 4112 or go to books.telegraph.co.uk
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"We are living in a world distorted by the biggest financial bubble ever seen.....there has to be a deleveraging of the world's financial system'-

- Peter Thiel of Clarium Capital, 2006

NEVER LET THEM TELL YOU NO-ONE PREDICTED THIS.
 
LIBOR bid only, no offer.
Commercial paper market shut down, little trading and no issuance.
Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
Brokers are increasingly not dealing with each other.
Even the inter-bank market is ceasing up.
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F***
 
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