When Europe Saves Its Banks: Who Pays?

This is the title of a fascinating documentary produced recently by the Franco-German collaboration arte. Such serious and high-minded programmes are the sort of thing that would once have been produced by the BBC. The questions are deeply political: Who receives this money when the ECB ostensibly bails out countries? Does it really arrive at the poor citizens of Spain or Greece? Unravelling the truth leads to a journey that is protrayed as a thrilling detective story and is certainly a necessary and long overdue piece of investigative journalism.

The documentary is well framed. In Harald Schumann they have a experienced and well informed journalist on the case. He asks the entirely reasonable question: how can we claim to live in a democracy when our money is being given to banks but the banks will not answer questions about how they have spent it. And the politicians and bankers are equally coy about telling us how much money was spent and who received it. This is our money and if democracy is to mean anything we need answers to these questions. He also points out quite rightly that, if banks made bad investment decisions, they should bear the losses. At present they are actually gaining through the injection of public money in return for their bad investments.

The production company advertises the documentary as follows:

'50 billion euros in Greece, Ireland 70 billion, 40 billion in Spain: in the euro area, states are seen being forced one after the other - through astronomical sums - to help banks to compensate losses due to rotten loans. But who are the beneficiaries of such operations? It is asking this simple question Harald Schumann, essayist and brilliant economics journalist, travels Europe. He received a range of frankgly staggering responses. For those who have been "saved" are not - as we are made to believe - in countries in distress, but especially in Germany and France. Indeed, an important part of Payout ends up in the coffers of the creditors of the banks that have been saved. As financiers who made bad investments, they find themselves protected against loss at the expense of the community. And contrary to the rules of the market economy. Why? Who collects the money?'

Leaving aside the content, watching the documentary in either French or German provides a kind of symbolic representation of the beauties and perils of Europe. Culturally we all seem to be on the same side, but linguistically we are so divided. As an English speaker the programme comes across as something of a Tower of Babel, as you are struggling to hear the English speech behind the dominant language voice-over. Do not let this put you off, because the questions asked are the right questions, and the answers will liberate us to behave as citizens of Europe rather than victims of austeria.
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Whose Bailout? Whose Responsiblity?

A guest post from Professor Penny Ciancanelli of Glasgow University

Recently, JP Morgan research estimated that of the €410bn borrowed by the Greek government over the past three years, only €15bn went into the Greek economy.  The rest went to Greece’s creditors.

The first question raised by these facts must be--who got the money borrowed by the Greek government?  The answer is mainly the German and French banks that lent money to Greece (e.g purchased Greek government bonds).

For nearly two years, the ‘troika’ of the ECB, EU and IMF created financial packages to pay off ‘private creditors’ using public money borrowed in the name of German taxpayers.  Just to be clear: The bankrupt German banks were recapitalized with German (and Dutch and Finnish) taxpayer money but via troika repurchase of Greek bonds.   The theatre piece of merit is the mis-representation of the bailout of German banks by German taxpayers as a bailout of Greece by their friends in the Euro club. 

The second question raised is why the narrative?  After all neither the US nor the UK government made any pretence; they announced they would use public resources to bail out their banks.  Indeed, politicians of the right in both countries have sought to make a virtue of increased government debt by forcing through radical changes in the scale and scope of government activity.

The reluctance of the French to admit its banks were bankrupt and recapitalize them could be attributed fears of being shut out of the bond markets, given already high level of public debt.  The reluctance of the Germans is harder to figure since they could afford (technically) to bail out the banks.  It is worth noting, however, that the banks it would have had to bail out the most were precisely those (Landesbanken) most successfully tricked by derivatives traders in London and New York.  Hugely embarrassing really.  So rather than take the hit on derivatives trades, better to get dodgy sovereign bonds taken off the balance sheets.

Once undertaken, the strategy conjured up by Merkozy two years ago (of hiding the de facto bankruptcy of its own banks) elevated the problem into a crisis of the Euro (a pure miscalculation owing much to the surprising financial illiteracy of both).  Both leaders had to carry on regardless of the cost to Greece.  For example, about three weeks ago the Greek government borrowed another €4bn or so from the EFSF (an EU finance facility) to pay €4bn to the ECB (another EU finance facility).  At the same time, cancer patients in Greece could no longer get the drugs they need.  But this is the price Merkozy decreed must be paid to keep up the appearances both thought would hide their own bankruptcies.

What next? After the Greek elections, the same people who agreed the debt burden will ask for better terms from the troika.  They will probably get some headlines.  It won’t last.  After all, it must soon occur to someone that economic growth is unlikely to result from Merkozy imposed at EU level which to date consists of the ECB lending money to the bankrupt banks of Portugal, Spain and Italy so that each bank might stuff its balance sheets with the sovereign debt of its own national lender of last resort--a tactic which implies zero net investment in the real economy. 
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Irish Tribe Buck the Markets

It seems that finally, a developed country has reached the point of saying ‘enough is enough’. Enough of transferring bank losses onto public balance sheets and destroying the public services that a civilised society requires. Enough of allowing the financial sector to create fictitious wealth at our expense. That country is Ireland and the outburst of discontent with the hegemony of the financial markets is emerging from the main opposition party Fine Gael.

Fine Gael Spokesperson on Enterprise, Trade & Employment, Leo Varadkar TD argues the banks took on the risky loans so it should be the shareholders who take the consequences, not the taxpayer. Under the party's so-called Good Bank policy, the National Assets Management Agency 'will pay the banks up to €54 billion for €77 billion of property loans. If the losses on these loans turn out to be very large, as many experts predict, our proposals could save the taxpayer up to €15 billion.' Given the much greater size of the UK banking sector, if we had adopted a similar policy it could have reduced the money paid to banks by a sum similar to this year's public sector borrowing requirement.

Refusing to respond to the shotgun demands of the banks that they receive their next fix of capital at the public expense is a bold but inevitable strategy in a country whose public borrowing is now ten times the size it is permitted by Eurozone rules and which has been on the verge of banktruptcy for at least a year. So much for bank debt, but what of the state? When the governments of Latin America got their people into excessive debt in the 1980s eventually they reached a point of refusal. The result was that the debts were ‘rescheduled’—either extended over a longer term or reduced so that credits got a proportion of their original loans back. Similarly, following Argentina's financial collapse in 2001, a solution was eventually negotiated where creditors received only 70% of their original loans.

In the case of Irish national debt, Fine Gael has been very careful to make the distinction between the debts of banks that are based in Ireland, and therefore backed up by the Irish government, and the debt that the government itself has taken on in the name of the Irish people to pay for its services. This was predictable, since Varadkar knows that the government will be turning to the market to sell more debt and its credibility must be maintained.

The UK government has taken a different tack through its Quantitative Easing policy. This has enabled it to wipe out chunks of our national debt on the sly. Money is created from thin air inside the bank of England and then used to buy bank national debt from the financial organisations who hold it. My assumption is that, since all such debt is time limited, it will quietly decay inside the bank's 'vaults' until it reaches its sell-by debt and goes to 'bank heaven' or perhaps--to keep my metaphor consistent--the rotten-money skip round the outside the back door of the bank. The banks are happy, since they now have 'real' capital that they can use to fill the black hole on their balance-sheets; the government is happy because its debt-to-GDP ratio looks more respectable than otherwise. We should be happy since this is less debt for our children to pay back.

Two questions remain: why are we not negotiating with our banks and their shareholders over how much of their fictitious wealth we agree to take responsibility for; and why should we not use the Quantitative Easing policy more creatively instead of seeing our public services decimated? Tweet

Systemic Failures too Great to Face?

I've been reading John Lanchester's book Whoops! about the financial crisis and finding it entertaining but somehow disappointing. It seems to offer evidence that, as T. S. Eliot would have it, 'human kind> Cannot bear very much reality', and when we cannot bear any more we go into denial.

I have to congratulate Mr Lanchester on fighting his way through the verbiage of abbreviations that hedge around the illicit and immoral activity of the City, but where we part company is at the point where he tells us that credit is essentially good for you, that debt works. Perhaps I should not have been surprised, since the book begins with stories of the young Lanchester and his father, who was not only a banker, but a banker based in Hong Kong.

The extended analogies explaining CDOs or securitization in terms of your mortgage or your neighbour's loft conversion are perhaps necessary, but essentially misleading. As Lanchester makes clear, government debt works more like personal debt than like corporate debt, which means we have to work hard to pay back both, whereas bankers and investors do not. But he does not question this. Eventually he admits that 'In practice, the personal-finance example breaks down here, because you can't lend money to yourself and create credit in quite this way. But large financial institutions can and do.)'

This is just one example of the way in which the book is explanatory but not critical. The author makes no attempt to explore how financing public spending through private finance necessarily advantages those who control capital. Nor does he have any inkling of the environmental problems that debt-based finance causes. In Lanchester's world, the economy would be marked by a steadily rising growth trend and managed by decent men in tweed jackets, not unlike his father perhaps.

But this is to miss the point that the growth of a capitalist economy is self-reinforcing, so that busts are inevitable. And it is to entirely overlook the fact that a limited planet makes it imperative to find a way of creating money that does not rely on such exponential economic growth.

The members of the establishment must have had their faith severely shaken by the financial crisis, when those who manage the messy world of finance on their behalf so riotously messed up. This is enough reality for one decade; to consider that the system of which they are the pillars might be inherently messed up would be too much reality to bear. Tweet