Wednesday, February 18, 2009

European Banking & Deposit Guarantees

There is justifiable discussion surrounding the Irish (and other EU members) banking industry and the government guarantees supporting customer deposits. 

This is a very important issue for Intrade.  It is one that we monitor closely on a daily basis. We do not take risks with customer funds.  We have diversified the institutions where we hold segregated customer funds and the underlying government guarantees are not all from Ireland. 

In the unlikely event of a single bank where we maintain funds defaulting and the government (Irish, Danish, UK or wherever) who has guaranteed those funds being unable to honor its guarantees (including an inability to access national reserve fund assets, support from the markets, from fellow members of the EU or the ECB itself etc) it is theoretically possible that all funds we have placed on deposit would not be easily accessible. In such a remote eventuality then the company from its own capital base (held at various institutions) would cover any theoretical shortfall. 

While I appreciate the above is hypothetical, and I believe highly remote, on a far more practical level let me make a very respectful suggestion, one that I do not make facetiously or glibly. For anyone who is seriously worried about the full recoverability of their funds at any institution, Intrade included, they should periodically test the institution in question by seeking a withdrawal in whole or part. 

Perhaps the above comment may be taken and reported on as a recommendation to withdrawal funds from Intrade or other institution, but my motivation is not to cause withdrawals but to encourage the people who have understandable concerns to remove those concerns by considering risk reduction actions. 

As additional information becomes available I will post it here. 

Personal note:  I personally bank at the retail level the same banks where Intrade segregated customer funds are maintained at the corporate level. I do not believe the banks where Intrade segregated customer funds are maintained have any material default risk although I do believe further recapitalizations will be required. Furthermore I do not believe the Irish government will be unable to access additional funds to finance our growing deficit but I am aware that Irish credit default swaps.  

The following article from Bloomberg this morning is insightful. 

Germany and France may be forced to contemplate the bailout of entire nations rather than just individual banks as European government budgets buckle under the weight of recession.

German Finance Minister Peer Steinbrueck became the first senior policy maker to broach the topic this week, saying some of the 16 euro nations are “getting into difficulties” and may need help. French officials are also concerned about market tensions as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen.

The nightmare for Angela Merkel and Nicolas Sarkozy is that widening deficits will prompt investors to shun the debt of some countries, sparking a region-wide crisis. While few investors are yet forecasting any defaults, the mere risk of it may prompt the bloc’s two richest economies to ignore the European Central Bank and announce their willingness to come to the rescue.

“When push comes to shove Germany, France, the larger players will bail out those smaller peripheral players,” said Alex Allen, chief investment officer of Eddington Capital Management. “You can’t let one part of the system fail because it leads to failure of the whole system.”
Allen’s betting that the risk at least one nation will leave the bloc is higher than the market currently expects.

Swelling Deficits
European deficits have ballooned as governments from Berlin to Dublin committed more than 1.2 trillion euros ($1.5 trillion) to save their banking systems from collapse. The situation will be underscored by the European Commission today, when it publishes a progress report on budget policies at 11.15 a.m. in Brussels.

The European Union’s executive arm forecasts a deficit of 11 percent in Ireland, 6.2 percent in Spain and 4.6 percent in Portugal this year. The euro region’s average budget gap was just 0.6 percent in 2007.

European officials have already expressed concern that their bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers Holdings Inc. in September. ECB board member Lorenzo Bini Smaghi said Feb. 12 there’s a “risk that the mistrust that there is today in financial markets” is “transformed into mistrust in states.”

“I would be very reluctant to say: ‘O.K., let Ireland or Greece default, the market will sort it out, punish them for their irresponsibility of the past,’” said Thomas Mayer, co-head of global economics at Deutsche Bank AG in London. “They tried it with Lehman and realized that was not a good idea.”

Bond Spreads
The gap between the interest rates Greece, Austria and Spain must pay investors to borrow for 10 years and the rate charged Germany yesterday rose to the widest since before they adopted the euro. Credit-default swaps on Ireland rose to a record on Feb. 16, climbing to 378.4 points.
Greek credit-default swaps, 270 points on Feb. 16, show a 4.5 percent chance that the country will default in the next 12 months, according to ING Bank NV.

Eddington Capital’s Allen, who runs a fund of hedge funds, says the market currently “vastly underestimates” the risks and expects credit-default swaps for Greece, Italy, Spain and Portugal to double in the next 12 months.

Any state-funded rescues may meet with opposition from the ECB, which has repeatedly said the Maastricht Treaty forbids bailouts.

“The no bailout rule is an important pillar on which the European Union was founded,” says ECB Executive Board Juergen Stark, who helped draw up the fiscal rules underpinning the euro.

No Bailout?
At the same time, the treaty says that EU nations can grant financial assistance to a member state if a country is “threatened with severe difficulties” caused by “exceptional occurrences beyond its control.”

“The member countries are working hard on a ‘pre-emptive de facto bailout’ to prevent the test of the ‘‘no bailout’’ clause,” said Juergen Michels, an economist at Citigroup Inc. in London.
Part of the problem policy makers now face stems from the fact the currency union does not have a single treasury and relies on the Stability and Growth Pact, which has been breached in the past, to keep budgets in check. Billionaire investor George Soros said yesterday the region’s economy must confront the problem posed by the lack of a Europe-wide finance ministry.
For now, finance officials say that market concerns are not justified. ECB President Jean-Claude Trichet said in Rome on Feb. 14 he’s confident countries will work towards sustainable public finances.

State Rescue
Greek Finance Minister Ioannis Papathanasiou said three days earlier the extra interest rates on his country’s debt were unjustified. Spain’s Deputy Finance Minister Carlos Ocana categorically ruled out a default on Feb. 16, and the Irish Finance Ministry warned yesterday against drawing conclusions about public finances from the CDS market.
Steinbrueck’s comments nevertheless suggest that views in Berlin are shifting as the financial crisis worsens.

“In reality the other states would have to rescue those running into difficulties,” he said Feb. 16. Steinbrueck said that Ireland was in a “very difficult situation.”

“There will have to be some kind of support package for some of the smaller economies to avoid the tension and speculation about breakup,” said Ken Wattret, senior economist at BNP Paribas SA in London. “The bigger national governments will say this isn’t our problem. But when push comes to shove they might need to provide some kind of financial support.”

To contact the reporter on this story: Emma Ross-Thomas in Madrid


Intrade said...


Irish and European Banking Update
The recent concerns expressed about some EU sovereigns, including Ireland, should not be disregarded as may have happened before, but many better informed in such matters than I think this the explosion in CDS is an overreaction.

It was significant when Peer Steinbrueck, the German Finance Minister, became the first EU politician to address the issue of EU individual country solvency. While there is an EU rule prohibiting the EU bailing out an EU state there is no prohibition on other EU countries offering support for countries that are "threatened with severe financial difficulties".

Additionally, the EU Commission is expected to reprimand France, Spain, Greece and Ireland for breaching the Stability and Growth Pact budget deficit set at 3% in the next day or so.

In eastern Europe (Intrade holds no funds in any eastern European bank) bond yields widened further yesterday and it is expected that more bad news will come from this area.

There will be more news to come on these events in the coming weeks.

John Delaney

Intrade said...

John Delaney said :

    Ireland not euro zone's weakest link, says Trichet

IRELAND IS certainly not the weakest link of the euro area,” the president of the European Central Bank (ECB) said yesterday.

Speaking at the European-American Press Club in Paris, Jean-Claude Trichet said: “There is no weak link. The euro area is a very intertwined, single-market economy with a single currency. Speaking of any particular country in the euro area as a weak link is an error of judgment.”

The German finance minister, Peer Steinbr├╝ck, suggested on Monday that members of the euro zone might have to bail out countries facing payment difficulties, though this was not foreseen in euro-zone regulations.

Mr Trichet seemed to discount the possibility. “I consider that it is extremely important that each government is fully responsible for its own policies, and for its own fiscal policies particularly,” he said.

“The first responsibility lies with the various governments concerned. It seems to me implicit in what minister Steinbr├╝ck said. I have no other comment.”

The European Commission on Wednesday initiated disciplinary procedures against Ireland, France, Greece, Latvia, Malta and Spain for running excessive public deficits. Mr Trichet did not mention any of the six by name but said that “the fact the commission has initiated excessive deficit procedures is a good thing”.

“The commission had to do it,” he added. “Confidence today depends on correctly calibrating decisions, and on the ability of leaders to demonstrate that . . . things will return to normal. We must never lose sight of the medium and long term.”

The ECB president chose his words carefully, speaking of “tension” rather than “crisis”, and “turbulence” instead of “recession”.

Asked how long the crisis was likely to last, he said: “Since the start of the turbulence, I’ve been asked many times: ‘Is the worst over? Is the worst ahead of us?’”

He said he always replies: “We are experiencing a market correction of first magnitude. It is an ongoing process, largely an uncertain process. We are in uncharted waters.”

Mr Trichet called the crisis “the first full-scale, very, very difficult test of the globalised economy we built progressively, almost biologically, by spontaneous evolution, under the pressure of globalisation, extraordinary technological innovations and the unification of the world after the collapse of the Iron Curtain.”

Historic, economic, technological and scientific factors “contributed to profoundly change the structure of the world economy. He advised against looking for scapegoats, because the responsibility was diffuse and widespread.

“All must change. We must consider that the entire system has shown itself to be too fragile, not resilient enough. We must patiently build a world market system, with no quick fixes. Of course it will be a market, the only system that creates wealth, but with what is needed to resist crashes and fluctuations.”

The “primary objective” of the ECB was maintaining price stability, which Mr Trichet defined as price increases of below, but close to, 2 per cent. Since the euro was created, inflation in the euro zone has averaged 2.2 per cent.

The ECB is responsible for steering short-term interest rates, but since last September, when money markets virtually ceased to function, it has prevented a liquidity crisis by providing unlimited refinancing to the banks of the euro zone, Mr Trichet said.

The ECB has temporarily extended the list of assets eligible for use as collateral. Through an agreement with the US Federal Reserve, it is providing unlimited access to dollars. Because of these steps, “the Eurosystem’s balance sheet rose by around €600 billion since June 2007”, Mr Trichet noted.

ECB measures were able to overcome the liquidity shortage in the interbank market. “However, they cannot eliminate the increased concerns regarding credit risk,” he said. “In this regard, the conditions in the money market have not yet normalised and remain strongly affected by an elevated degree of risk aversion.”

Prior to the crisis, repeated warnings by central bankers were not heeded, Mr Trichet said. Now there is “an emerging consensus” that central bankers, who “have no short- or medium-term vested interests”, should be given more responsibility for economic policy-making.

“I have indicated publicly that we are available, if Europe thinks we can be useful. Article 105.6 of the Maastricht Treaty foresees the possibility of giving more responsibility to the European Central Bank.”

Mr Trichet referred repeatedly to the necessity of restoring confidence in economic and financial systems. It was “an abrupt loss of confidence striking simultaneously the financial system as well as the real economy, the industrialised countries as well as the emerging economies”, that precipitated the crisis last September.

“Confidence is the condition for returning to a normal situation. We are doing everything in our power to strengthen it,” he said.

Intrade said...

John Delaney said :

    * Trichet says idea of Ireland defaulting "absurd"
* Jump in Irish CDS not representative of reality
* Period of negative Irish inflation not negative
* Irish banks not alone in suffering damage to reputation

Read the full story here

Intrade said...

JD Update said :

    I promised to keep you informed of developments at Irish Banks.

Here are some recent highlights…
Ireland last year became the first country in Europe to guarantee the deposits and borrowings of its largest lenders.
Coupled with a sluggish economy and widening deficit, the guarantee raised concerns that the government may struggle to repay its debt.
The cost of insuring against a default on Irish sovereign debt rose to a record last month, with credit-default swaps on the government’s debt climbing to 396 on Feb. 17.
Irish credit-default swaps fell to 273.6 from 280.3 today.
"Ireland is facing a very difficult recession, somewhat worse than the rest of the world because there's a domestic housing contraction taking place at the same time. That has put pressure on the banking system and on the state finances," Mr. Lenihan said.
“We’ll be in a position to fund ourselves as a state this year and the European Central Bank stands behind our banking system,” Brian Lenihan, Irish Finance Minister.