Thursday, 2 October 2008

Will The Irish Bring the Euro Down?

"Irish lawmakers passed a controversial emergency law guaranteeing bank deposits Thursday, despite protests that the move gives its financial sector a competitive advantage over neighbouring countries.

The guarantee, estimated to be worth over 400 billion euros (563 billion dollars), safeguards retail and commercial deposits, as well as bonds, for two years. It is designed to protect Irish banks amid the global economic turmoil

What the French are saying:

"Ms Lagarde - French Finance Minister - said "a measure decided in one [European Union] member state has to be shared in advance with other member states".

"Because when something happens in one member state it affects everybody else around, so there needs to be that level of cross-sharing of information," she added

So Ireland is passing a bill that is about two times GDP! Why did they do that? because suddenly the credit default swaps (CDS) went to the roof in the past few days. CDS are financial contracts conceived to protect bondholders against default.
In a nutshell, the risk of debt defaulting of Ireland suddenly became greater than the one of Mc Donald... We are currently witnessing something very dangerous.

Some are pointing out the finger on the over leveraged financial institution, highlighting the fact that the trigger was the abolition by the American congress of the Glass Steagal act

"The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation.

Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act, which passed in Congress with a 343-86 vote in the House of Representatives

So we will have to come back to a period where leverage will slowly disappear. It will as well mean that the recovery will not be as phenomenal as in the past. So do not expect stock market return of over 20 % per year or house price going to the roof as they did in the past decade and a half.

Deleveraging might have to be painful but cannot be avoided.
The policy makers cannot avoid what will be a deeper recession that the one in 2001. All they could do is to avert a depression, how they are going to do that? we will know it in the next few months to come and how they respond to market stress...


Andrew said...

Well it is curious. The broken spanish and irish were feeding at the warm breast of their mother in euroland living in Germany directed by a jolly frenchman. The broken rock was happy to be fed deposits with Euroland blessing. The German Hypo fell and was rescued because of some broken irish deal. At the same time the Broken fortis of belgium was rescued by French belgium and dutch interests with direction from the jolly frenchman. Meanwhile Quelle horreur! back in the jolly french mans home the biggest municipal lender of them all was collapsing and had to be rescued by le chef himself.

But when the hypo fell he seemed to have taken down a few of the irishmen and it seemed humpty dumpty was in danger of not being put together dispite all of the efforts of all the ex kings horses to put him back together after his fall. So the broken irish were rescued.

And the le chef and the german and the english man and uncle tom cobbly and all each looked at the other and said why did you do that! These things need to be done with agreement.

Meanwhile the Russian said it was the fault of the guy over there. And the fin with big frames said well i hope those over there can sort this out, it is a bit disappointing and his colleague with smaller frames pointed out that we are not looking at massive unemployment.


All the same i think we can assume that Macdonalds is problably good for a better rating than the irish and we really have nothing at all to worry about. C'est la vie!

HousingFinland said...

;-> Here is the problem.

Europe is not the United States, as JC Trichet highlighted today. By that He meant that a decision to bail out a bank or not is solely a problem of each government in each country. We have seen it in Belgium, Luxembourg, Netherland:Fortis, in France, Belgium: Dexia and Ireland with this package. There is no one government. Same apply with fiscal policy...

The U.S. has a better structure that can rapidly respond through legislation...

So the weakness of Europe has been hit and highlighted in daylight. Now it's up to Europe to answer to that challenge otherwise time to come will be uncertain...doom doom doom ;->