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The plank in Schäuble’s eye

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From the look of it, the Irish bailout is taking another chunk of another one of FT Alphaville stalwart Neil Hume’s weekends. From Peston

European finance ministers are struggling to reach agreement on the interest rate to be paid by Ireland for the €85bn of rescue finance it is set to receive from the EU and IMF – although they appear to have reached a settled position there should not be losses imposed on providers of senior debt to Irish banks.

The rate Ireland pays for its bailout is to be announced very soon, apparently after some wrangling between the UK government, which wanted 5%, fearing 7%+ was unaffordable, and can see a total bank exposure UK to Ireland of around EUR200Bn, plus trade, and the German government, which, according to their finance minister Wolfgang Schäuble

feels that any rescue loans should not look like cheap money, but should be charged at an interest rate that contains an element of punishment for the reckless borrowing spree of Ireland’s banks, which took the Irish economy to the brink of bankruptcy.

Read this bit again:

…an element of punishment for the reckless borrowing spree of Ireland’s banks…

Umm, who gets punished, exactly? And who gets off?? And whose banks??? Is Schäuble perhaps confused about the nationality of the well-known not-particularly-Irish bank, DEPFA, which changed domicile from Munich to Dublin in 2002, evading the regulatory scrutiny of both Ireland and Germany, adopted a risky, short-term funding model, and then, when the CP markets it depended on stopped dead, in August 2007, worked its contacts, and sold itself, a mere month later, to the definitely 100% echt-deutsche Teutonosuckerbank, aka Hypo Bank? Which ended up in a EUR100Bn black hole by mid 2008:

…Hypo was engulfed by the crisis, with its Depfa operations in Dublin at the centre of the chaos as it failed to find short-term funding as the financial crisis spiralled out of control.

Or is Schäuble confused about the other not-Irish bank Sachsen LB, which nearly collapsed

…after its Dublin-based special purpose vehicles — which fell between the stools of two regulatory regimes — was found to be stuffed with speculative investments in US subprime mortgages.

The EUR35Bn lost by German banks lending to Iceland has slipped Schäuble’s mind, too; or fried it.

Of course, we Brits most definitely have a dog in this fight; a EUR200Bn+ dog. But irrespective of that interest, the German government might want to take it easy with the moral opprobrium and the punitive line. It looks hypocritical and insulting; and imprudent, as well, to anyone who remembers the financial results of the Treaty of Versailles.

Of course, if the Irish state is bust anyway, none of that matters quite so much.

Update: overview and quick take from FT Alphaville

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24 comments

  1. kares jhangiani

    Good to know you are a brit; am enjoying your blog quite a bit. At least it is real;;; krugman does not believe in speculators jacking up the price of oil;; he says it is the demand!

    1. craazyman

      That was where me and my husband used to work as co-portfolio managers before we moved on to to the workout desk at Hypercredit Volkensmashen.

      Sincerely yours,
      Ivanna Lute and Fuc Yoo, PhDs, AAA, CCC-
      Germania, Holy Roman Empire

      bowahaha, seniors and senioritas

  3. bmeisen

    They nationalized Hypo, rather than giving them billions and praising management a la Treasury, and tightened up compensation at Commerzbank.

    By the way Kares, Yves beat you to the beef against Krugman – read Econned.

    1. Richard Smith

      I’m all for clobbering useless bank management and dumb bond investors.

      But in Schaeuble’s scenario for Ireland, the dumb bond investors get out with their skins intact, and it’s the Irish people who pay. Over the short or long term, that’s wicked folly.

    2. Hugh

      I’ve writing about excess speculation in oil markets since 2007. I actually came rather late to this subject considering that such speculation has been going on since 2004.

      It isn’t just Krugman who is blind to this. So are a lot of the people at a site like the Oil Drum. They are brilliant on the physical side of the oil business but really kind of clueless when it comes to the market side.

  4. Hubert

    Hi Richard,

    yes very stupid remark from Schäuble, for domestic consumption probably; stupid anyway.
    1. As far as I can guess “German Bund- HRE – Depfa” is the way the money runs. Do you have any indication that Depfa will be funded by the Irish bailout?
    2. Where did you get the 35 billion Iceland-damage-to-Germany figure? I had never seen it. SOunds high to me on first sight …
    3. 6% is unservicable mid- to long-term. Either it gets renegotiated à la AIG, or the Irish will default. That is not to say that there is a “solution” with 4%, or 3% but it would make more sense and have more chance ….. The next Irish government may demand lower rates or default. That could be soon …..

    1. Richard Smith

      Hi Hubert,

      1. I don’t think there’s any more to come from DEPFA now. Perhaps there is some tucked away in a bad bank somewhere. But there’s more Irish exposure in Germany – I’ve seen recentish figures of $32Bn (Datablog: http://tinyurl.com/28gxt75) and EUR200Bn (BIS: http://tinyurl.com/29wvhrd page 16), so take your pick. Oddly the big UK exposure is broadly the same in both sets of figs, so whatever netting or consolidation is being done affects the German numbers much more than the UK ones.
      2. There was a creditors’ meeting in Iceland late Q4 ’08, attended by representatives of all the bust Icelandic banks, by my source, and by a large number of German bankers; from memory definitely Bayerische LB, Deutsche; I *think* Commerzbank and WestLB too, perhaps other Landesbanken. There may have been creditors from elsewhere but my source mentioned only Landesbanken and Deutsche – they were definitely the main participants. What certainly isn’t vague in my memory is the total sum under discussion – EUR35Bn – and my source’s recovery expectations – two or three cents. Maybe they got more back than that, but not much more, I would have thought, given the prices and markets when they were liquidating. None of the participants in that meeting are still employed by the entities they were representing, which isn’t too surprising, I suppose.
      3. I agree with you.

  5. Josh

    If I’m an Irish citizen, I’d be so effing ticked off right now. I can see some fresh terrorism emanating from the Irish over this BS.

  6. MichaelC

    Glad to see you calling them as you see them.

    It’s bondholder’s all the way down.

    In the Irish case its a little easier to grasp (and I’m sure its not lost on even one Irishman)that the Irish taxpayers are bailing out the bankster’s bondholders. At the same time, I’m pretty sure most Irish appreciate that their Tiger status owes a lot to their tax haven business, and as you pointed out the other day, their financial sector’s role (your point 4 IIRC) in the global CDO/CDS debacle. So I think the Irish understand politics ain’t softball and will find a way to outfox (or at least box in)their European allies and navigate a path out.

    I long for a simplifying meme on this side of the pond that more clearly links the bondholders of the banks to the schemes their debtors hatched (crap MBS/CDOs/toxic CDS) that brought the global system down. I don’t think the above average American has a clue yet that the gov’t is bailing out the banks bondholders, rather than the “banks” in their efforts to save civilization as we know it.

    They’re getting a glimpse as the foreclosure crisis gathers steam, but the full horror is a long way from being widely recognized.

    1. Paul Repstock

      MichaelC;
      It cannot be all the ‘bondholders’, otherwise we wouldn’t be hearing willingness to do 50+ mods. I also don’t think there is much difference globally. The same dirty fingerprints in each case.

      It would appear that many national entities have been completly mortgaged to financial institutions (gods) which will only remain on earth so long as they are worshipped with offerings of more free debt. How long before the “Rapture” is unknown to most of us.

          2. Skippy

            Ha! Does Jabba the Hut have a trap door in his lair, w/a massive beast to rip consume all naysayers and folks late on their interest payments.

            or…or[?] is it…

            Sally Struthers in the South Park episode in which she resembles, is becoming a Hut. After hording all the UN/NGO/Red Cross foodstuffs in an isolated warehouse in Ethiopia.

            Either way it all theirs, at very moment one is born the interest accrues, were using their stuff…

            Skippy…Choose wisely…

  7. b.

    Schäuble has always been a poser. He has personal tragedy going for him, but before or after he never could think his way out of a wet paper bag.

  10. Rick Halsen

    Iceland, Ireland, Italy, they’re all starting to look and sound alike.

    What kinda amazes me so far is that Icelanders reacted like I expected the Irish to.

    What a topsy-turvy world we live in when Icelanders act like militants and the ‘Fighting Irish’ act like pacifists.

    I’ve given up trying to figure out this place.

    RH

  11. Hugh

    First, I’m not sure that the Irish bailout is a done deal. Second, even if it were, it’s just more extend and pretend. I don’t see anything here that will keep Ireland from blowing up. At best, the bailout will delay the explosion but make the Irish people suffer in the meantime.

  12. Jim in MN

    Germany: No bond haircuts.
    Ireland: Er, OK….pause…election…DEFAULT
    Germany: zjiojdfojzpjdzzzzzzzzzzzzzzzzzzzzz…..

    The Irish public will turn out any government that agrees to screw them for banker bonuses.

    Go Ireland
    Go Iceland (seen any reports on Iceland lately??? Didn’t think so. Very happy since giving the bankartel the shove)

    1. Rick Halsen

      Wholeheartedly agree.

      Here’s hoping Iceland, Ireland, and Italy don’t eventually become i-sores.

      RH

      *Iceland indeed told the bankartel to shove it. I do think however that the bankartel in the meantime has gone on to juicier and easier prey but nonetheless will return there someday to finish their business.

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