The Death of Direct Bank Re-capitalisation: Europe’s (newest) day of shame

The idea was to de-couple the banking from the debt crisis. The reality is that they propose to do nothing of the sort.

In June 2012 Mario Monti had demanded that banks in need of capital injections should source capital directly from the ESM, without the involvement of states and, of course, without these funds counting as part of the member-states’ national debt. Faced with a front comprising Spain, France and Italy, Mrs Merkel relented but added a precondition: Banking Union  (BU). Ever since, Germany has been proclaiming the idea of a BU in principle in order to deny its formation in practice. The more BU is debated and pushed into the future the easier it was to undermine the direct ESM recapitalisation of banks. Now, the Eurogroup has handed down its blueprint for direct ESM recapitalisation of banks. The gist is it will not happen. At least, it will not happen in any manner that helps decouple the present banking crisis in the Periphery from the crisis of debt and of the imploding social economies of the Periphery. And this is not just because the agreed upon scheme will not begin before the end of 2014 – see below for the deeper reasons. In short, today is nothing short of a(nother) black day for Europe.

Here is the essence of what they agreed to:

When a bank needs capital injections, the first thing that happens is that the national government provides the capital needed to raise the bank’s minimum capital ratio (T1) to 4.5% of its assets. After that, a sequence of haircuts must follow. First to be haircut are the shareholders and bondholders and then come the uninsured depositors (i.e. the Cyprus model is enacted). Beyond that, the ESM and the national government pout more money in the bank, with the latter participating at a rate of 20%, which can later be reduced to 10%.

What does this mean? And why am I arguing that this is the death of the spirit of what was decided in June 2012? Two points need to be made here, and shouted from the rooftops:

The Eurozone’s fragmentation is to continue: Member-states that are not insolvent will be able to bailout their banks’ unsecured depositors, just as the head of the Eurogroup did with Dutch SNS-Real recently. On the other hand, insolvent member-states will have to follow the above blueprint, with deposits above €100,000 savaged and the member-state going further into debt.

Legacy losses will be used as a disciplinary device: The Eurogroup reached no decision on whether the above can operate retrospectively. They announced that banks already recapitalized by insolvent states will be dealt with on a case-by-case nature. Thus, Greece, Spain and Ireland will now have to tussle, to beg, to plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks. As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60 billion, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a better ‘model prisoner’ than the rest.

Lastly, you do not have to take my word, dear reader, that this scheme does nothing to decouple the banking from the debt-deflationary crisis of the Periphery in particular and of the Eurozone in general. Mr Olli Rehn, the EU’s economic overlord, has said it himself, in describing this scheme as an attempt not to decouple the two crises but, rather, to “dilute the link” between them. It is like telling a hanging man that you will not cut the rope choking him but that you will remove a couple of layers of string from it. A truly shameful day for Europe.

31 thoughts on “The Death of Direct Bank Re-capitalisation: Europe’s (newest) day of shame

  1. I believe the agreement states that requesting member states will have to EITHER raise the bank’s capital ratio OR, if the bank already meet the capital ratio, make a 20-10% contribution. Not that it makes things much better (partly so); just to clarify.

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  3. Dr Varoufakis ,

    Could you please give us your views on the “perfect storm” brewing and what will happen to the Greek Economy

    Storm 1 :

    Extract from the UK Daily Telegraph : “time to sober up as America and China remove the punch bowl ”

    The US Federal Reserve has refused to blink. The Chinese central bank has refused to blink
    .
    The authorities in the world’s two biggest economies appear determined to strike a blow against moral hazard and clear the froth in asset markets, at least until this exhibition of virtue blows up in their faces.

    The term “Perfect Storm” is banned by the Telegraph as a lamentable cliché, so let us just say that this is the moment we long been fearing or waiting for – depending on taste – when markets are no longer given what they want.

    Full link : http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100024952/time-to-sober-up-as-america-and-china-remove-punch-bowl/

    Storm 2 :

    A new set of regulations that most people have never even heard of that was developed by an immensely powerful central banking organization that most people do not even know exists is going to have a dramatic effect on the global financial system over the next several years. These new regulations are going to be phased in between 2013 and 2019.

    The new set of regulations is known as “Basel III”, and it was developed by the Bank for International Settlements. The Bank for International Settlements has been called “the central bank for central banks”, and it is headquartered in Basel, Switzerland.

    All the major central banks (including the Federal Reserve and The Bank of England ) belong to the Bank for International Settlements, and the decisions made in Basel often have more of an impact on the direction of the global economy than anything the president of the United States or the U.S. Congress are doing.

    All you have to do is to look back at the last financial crisis to see an example of this. Basel II and Basel 2.5 played a major role in precipitating the subprime mortgage meltdown. Now a new set of regulations known as “Basel III” are being rolled out. The implementation of these new regulations is beginning this year, and they will be completely phased in by 2019.

    These new regulations dramatically increase capital requirements and significantly restrict the use of leverage. Those certainly sound like good goals, the problem is that the entire global financial system is based on credit at this point, and these new regulations are going to substantially reduce the flow of credit. The only way that the giant debt bubble that we are all living in can continue to persist is if it continues to expand. By restricting the flow of credit, these new regulations threaten to burst the debt bubble and bring down the entire global economy.

    Not that the current global financial system is sustainable by any means. Anyone with half a brain can see that the global financial system is a pyramid scheme that is destined to collapse. But Basel III may cause it to collapse faster than it might otherwise have.

    These new regulations are going to be phased in between 2013 and 2019. You can see a chart which shows the implementation schedule for the Basel III regulations :

    http://www.bis.org/bcbs/basel3/basel3_phase_in_arrangements.pdf

  4. Over the last two years online discussion forums have choked with flimsy economic arguments, and even flimsier moral ones, for why Germany should stand as lender of last resort to discredited and corrupt banks, and countries. Elections in the periphery countries of the EU have become a choice between putting the left hand or the right hand into the German pocket. Greece and Cyprus should never have been admitted to the EU let alone the Eurozone. But we are where we are. Greece could start tomorrow to raise capital by selling long leases on some of her islands, uninhabited ones first but if necessary displacing some residents. I am a Briton living in Berlin and have only praise for the German way of doing things – efficient, intelligent, analytical, and above all honest. If the Greeks could swallow their much-vaunted pride, which to me smacks of amateur dramatics, they would do well to invite Germany to administer their country for a couple of decades and try to install some institutions and methods for a more prosperous and less corrupt future.

    • A Briton living in Berlin is calling for “the Greeks” to stop their “amateur dramatics (sic)” and “invite Germany to administer their country for a couple of decades and try to install some institutions and methods for a more prosperous and less corrupt future”. All that in response to a piece by Dr. Varoufakis!!

      You really cannot make this up!

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  6. Dear professor Varoufakis,

    While I agree that the proposed bank recapitalization scheme doesn’t totally decouple banking from sovereign crises, and that we should aim for am FDIC-style truly *direct* recapitalization fund, shouldn’t we also question the *very idea* of unconditionally bailing out failed/failing banks with taxpayers’ money, and demand that the too-big-to-fail banks be broken up so that we end up with smaller banks that we can actually afford to let go bust (only saving the depositors) when their casino-style bets go bad? Besides from being a moral imperative, it seems like a technical necessity to me: isn’t the average balance sheet of 30 the largest European banks something like 13 times larger than the proposed €60-billion-per-bank limit? I know you’ve spoken about this before, and that you support a Glass-Steagall-style reform, but don’t you think the two arguments (criticizing the limited scope of the current recapitalization scheme but *also* criticizing the very assumptions that it’s based on) go hand in hand?

    • I am not proposing unconditional bailouts. The ESM should take over directly every bank that needs its capital and, together with the ECB, it should have the right to resolve that bank, shrink it, do whatever it chooses with it. But it must apply the same rule to all banks, regardless of jurisdiction within the Eurozone. And without involving member-state governments in the slightest.

    • Dr Varoufaki ,

      Would like to get your views on the role of the Bank of International Settlements ( BIS ) on the current issues facing Greece and the role of the Greek Central Bank in supporting their position :

      Background :

      When Dr Carroll Quigley wrote his scholarly , 1300 page book of dry history , it was not intended for the masses ( Tragedy and Hope: A History of the World in our Time – New York , Macmillan 1966 )

      It was to be read by the intellectual elite and to that select readership he cautiously exposed one of the best kept secrets of all time – but unexpectedly it began to be quoted in the journals of the John Birch Society ( http://www.jbs.org ). On December 9 , 1975 Dr Carroll Quigley wrote in a personal letter :

      ” Thank you for your praise of Tragedy and Hope , a book which has brought me headaches as it apparently says something which powerful people do not want known “. To understand why “powerful people” would want to suppress this book , note carefully what follows. Dr Quigley describes the goal of a secret network of world financiers as follows :

      ” nothing less than to create a world system of financial control in private hands able to dominate the political system of each Country and the economy of the World as a whole. This system was to be controlled in a feudalist fashion by the Central Banks of the World acting in concert , by secret agreements arrived at in frequent meetings and conferences ”

      The elite believe that the “big decisions” are far too important to be left “to the people”, and so most of the “international institutions” that have been established by the elite operate independently of the democratic process.

      Today most Central Banks belong to the Bank of International Settlements ( BIS ) , and it has far more power over how the U.S. economy (or any other economy for that matter) will perform over the course of the next year than any politician does. Every two months, the central bankers of the world gather in Basel for another “Global Economy Meeting”. During those meetings, decisions are made which affect every man, woman and child on the planet, and yet none of us have any say in what goes on. The Bank for International Settlements is an organization that was founded by the global elite and it operates for the benefit of the global elite, and it is intended to be one of the key cornerstones of the emerging one world economic system.

      An immensely powerful international organization that most people have never even heard of secretly controls the money supply of the entire globe.

      It is essentially an unelected, unaccountable Central Bank of the world that has complete immunity from taxation and from national laws.

      The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s Central Banks which were themselves private corporations. ( http://www.bis.org/cbanks.htm )

      Ownership of the Federal Reserve : http://www.lawfulpath.com/ref/federal_reserve.shtml

  7. Dr. Varoufaki,

    who should be paying for the mismanagement of the Greek Banks with their appointed or “friendly” BoDs? with their “easy” loans” to political parties, bankrupt state enterprises, to affiliated businesspeople, …….

    i trust that you keep your savings in some Greek bank, having full trust in their custodianship of your monies there.

    regards
    Costas

    • I have been arguing for years that the Greek banks must be taken over by the ESM, broken up, shrunk, have their BoD dismissed and, finally, sold to the highest bidder. As for my savings, I have none, unfortunately…

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  9. Cyprus should drop the dead BoC at the foot of the Eurogroup. The situation will change immediately. And Cyprus will reduce its debt for 11 bn EUR

  10. A clarification please regarding future (not legacy) bankruptcies. . You say the insolvent member states will go further into debt, but from where does the debt come? Not from the share/bond holders and uninsured depositors who lose their money I assume. Beyond that the ESM puts in 80%, the national government 20%. Are you referring to the 20% and, if so, isn’t that an 80% improvement?

  11. I have always disagree sharply with Yanis in his support of the European Union. Historically forced integration in Europe has always had a bad end because it denies European people their natural rights of self-determination and always ends with repressive schemes like the Soviet system and today the Eurozone with its zombification of the European Periphery.

    The EU and Eurozone deserve to die. Bring back the European community of countries and EFTA! Fire Van Rompuy, Bozo Barroso and stupid aparachniks like Olli Rehn!

    • Yes, your second paragraph puts the whole issue neatly in a nutshell.

  12. Thank you for these important information. Indeed, it´s a dark day for Europe and another dark day for the Democracies. Merkel is in the meantime in Moscow complaining about repatriating German Artworks from WWII. I am German and consider this approach shameful in the face of the losses Russia had to suffer in WWII. But Merkel loves the USA and everything it represents, and is always ready to lecture the evil Russians…

    My question to you: How would a haircut for shareholders of a Bank look like.
    F.e. if I hold 50.000. Euros of shares of Bank X priced 100 Euros a piece.
    What precedure would follow? Who would impose these measures?
    And, would this haircut change anything, since the Banks in europe have these ridicilouse Ballance sheets with the size of Jupiter.

  13. Thank you for these important information. Indeed, it´s a dark day for Europe and another dark day for the Democracies. Mrkel is in the mentime in moscow complaining about German Artworks from WWII. I am German and consider this approach shameful in the face of the losses Russia had to suffer in WWII. She loves the USA and everything it represents.
    My question to you: How would a haircut for shareholders of a Bank look like.
    F.e. if I hold 50.000. Euros of shares of Bank X priced 100 Euros a piece.
    What precedure would follow? Who would impose these measures?
    And, would this haircut change anything, since the Banks in europe have these ridicilouse Ballance sheets with the size of Jupiter.

  14. “Thus, Greece, Spain and Ireland will now have to tussle, to beg, to plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks.”

    That´s what you gotta do, if you want other people to pay for something they have no responsibility for.

    • That’s what sovereign states (yeah, right) “gotta do”, is it? What responsibility do the citizens of Greece, Spain and Ireland have for “funds already borrowed for the EFSF-ESM” of the banks IN Greece, Spain and Ireland?

  15. Well I am not that pessimistic yet anyway until after German elections we can see the revived German face. Of course everybody that expected an immediate ESM response for a Bank in crisis is disappointed.What about all ZOMBIE Banks everybody talking about that needs to be closed down! I think National Governments like in Spain that after Bailout capitilization is in a position to simply demand those Banks to start lending again or Top Management FIRED next week. This have been used in other countries with success.!
    We face a mixed resposibility for BANKS in the Eurozone. I fully agree that responsibility when a Bank is defaulting is a matter for EU if Bank is systemic . Non systemic Banks with bad balance sheets can be victims of closure! In the end taxpayers are not to be responsable for BANKSTER frauds or direct democracy is exchanged for the political correctness begging for deeper unión without mandate from taxpayers.The forward route for Eurozone still not clear but need a solid footing sooner than later!

  16. Yanis

    Spot on my friend. But the key element in the wording is that power passes from the States to the ‘institutions’. It is technocracy by stealth.
    Above all, it is absolute power for Mario Draghi….now easily the most powerful man in Europe with zero accountability. These fools have handed a dictatorship to a sociopathc crook.

  17. Germany probably dont want the real Banking Union and inflict punishments on the insolvent member states whenever anti-crisis mechanism is to be created… real economic solutions have nothing to do with morality and punishments or madam Merkels political goal for re-election …but in Europe this is the way of thinking and doing and this must change…

    • Why and how are you going to convince a democratic club of lenders to stand in for the taxes that Greece does not collect from its rich citizens and pay for its innumerable state employees?
      You may want Draghi to make the EU pay instead of Greek rich
      and forget about democracy in the payor countries (more mildly “Get over with the elections in Germany!”).
      However, if you do not care about democracy elsewhere, why in Greece? An Erdogan-like administration like in Northern Cyprus might benefit the poor Greek poor even more than Draghi. Look at the BIP-growth in Turkey during the Erdogan – decade.
      How about solving the Greek economic problems in Greece and accept as solidarity help some on-the-job training of Greek tax collectors by German consultants.
      I cannot believe that Greek sovereignty is a cover for Greek corruption.

    • I would love German tax experts to train their Greek counterparts. Still, you are missing the point. Even if all tax evasion is defeated, the Greek social economy is insolvent. In other words, it cannot repay its debts because its income has caved in. What the Bailouts did (and intended to do) was to shift the losses from the German and French bank asset books onto the shoulders of taxpayers – Greek taxpayers initially and, once it is discovered that they just do not have the money, German ones later.

    • The Greek (non)-tax payers that moved their millions off-shore do have the money :-)

    • @MartinInFrankfurt

      It really is kind of hypocritic to speak about Democracy and “democratic club of lenders” when this very club did anything in its powers to affect the outcome of the elections in Greece.Manipulation of the public opinion is anything but democratic.

    • No, why? Do you want to use the money of the Chinese with offshore accounts to fix the problems in Greece?

  18. You are compeltely right, this scheme is not going to decouple failed banks from their in some respects also failed nation states.

    But then, there is no reason at all that the taxpayers and savers of some nations should prop up the banks in other countries; let alone foot the bill for losses which these banks accumulated in the past.

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