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 aterossthomas@bloomberg.net

The Intrade World Crisis Index

The Intrade World Crisis Index will tell us whether the Davos World Economic Forum Matters!

As business and political leagers gather at the five-day Davos meeting we will measure whether many of those who presided over blunders in business and policy can credibly lead us in 'Shaping the Post-Crisis World' - the theme for the meeting.

To measure the immediate impact of dozens of presentations and workshops by 2,500 business and 42 political leaders we have constructed the Intrade World Crisis Index.

Our admittedly unsophisticated sentiment index priced at 50.0 at the official opening of the meeting is comprised of eight equally weighted markets that measure the likelihood of recessions, depressions, increased unemployment, lower stock markets, and greater international tensions.

A higher post meeting index means our markets predict a more disastrous 2009 than before. A lower post-meeting index means our markets predict global leaders have reduced the probability that 2009 will be the disaster we previously thought.

You can see the updated Intrade World Crisis Index HERE.

Deposits Guaranteed

Intrade Member Deposits Guaranteed by Governments Guarantee Scheme:

On or about the 30 September 2008 the Irish Government put in place a guarantee arrangement to safeguard all deposits at major Irish banks including Anglo Irish Bank.

The guarantee is for 2 years.

More information on the guarantee is available here:
http://www.centralbank.ie/nws_article.asp?ID=401
http://www.itsyourmoney.ie/index.jsp?1nID=93&2nID=100&nID=153&aID=620
http://www.finance.gov.ie/documents/publications/statutoryinstruments/2008/si4112008.pdf

In addition, National Irish Bank's parent, Danske, is covered by a Danish Government Guarantee Scheme.

Therefore all member deposits are now guaranteed by the Irish and Danish governments.

Member Funds Segregated: All member funds are held in specific and designated member segregated accounts with National Irish Bank (a subsidiary of Danske Bank), and Anglo Irish Bank. These accounts are separate and distinct from Company funds.

Individual Member Segregated Bank Accounts: To provide additional transparency any member can request a specific account be established in their own name within the suite of segregated member funds accounts. The Company incurs a cost to provide this service and passes on the cost only to members availing of this service.

This service enables you to receive on an individual Bank Statement in from a bank guaranteed by the Irish or Danish governments your balance.

More information on Irish Public Finances is available here:
http://www.slideshare.net/ollie100/irish-public-finance-presentation

But what about Ireland itself?
Well Ireland's 'AAA' credit rating was affirmed on Jan 20th 2009 and said the outlook for Ireland's ratings was 'stable' while Standard & Poor's said it was reviewing the triple-A rating on Ireland, and Moody's has also indicated it is considering the triple-A sovereign rating. Ireland's GDP grew by 6pc in 2007, but contracted by over 1pc in 2008, and a further circa 5pc decline this year is likely.

Any questions / comments feel free to post below or email me on john.delaney@intrade.com

New Contract Rule Commentators Sought

We are going to implement (initially on a trial basis) the solicitation of comments from active traders and subject matter specialists on contract rules for new markets before we list them.

This will not apply to every new market but will more often apply to new categories or new events.

The objective of this innovation will be obvious to many but it’s consistency with the wisdom of crowds is appealing as we are looking to tap into a greater and more diverse knowledge base.

If you wish to receive by email notification of new markets with draft rules where you will have a short time to comment please let me know and I will add your name to the list.

email john.delaney@intrade.com

G.W. Bush: Biggest Regret?

After reading this article I started to think about the good and bad things that G.W. Bush presided over.

While his stated biggest regret is the failure of intelligence in Iraq it got me wondering if people believe this should be his biggest regret if he should have any at all.

Whatever your view it would be great to hear them on this topic.

Futures on Intrade's Future

These are uncertain times when we should place a premium on transparency.

Knowing the likelihood that your customer, supplier or counterparty will be in business in a year or two is valuable information. Being able to hedge against the closure of a business that you are exposed to have risk management and wealth preservation potential.

Intrade has always strived to list innovative markets that give maximum transparency in real-time on uncertain future events.

We have now just listed 4 new markets on whether Intrade.com will open and operational at the end of June 09, December ’09, June ’10 and December ’10.

The markets can be accessed here…

https://www.intrade.com/index.jsp?request_operation=trade&request_type=action&selConID=659099

We may list additional markets on other businesses in the future.

"This Too Shall Pass"

And when it does, what follows can be the best if we use our best resource.

The phrase "This too shall pass" and the associated ring story were made popular by Abraham Lincoln. King Solomon searched for a cure for depression. He tapped the collective wisdom of his wise men for advice: Make yourself a ring and have thereon engraved the words "This too shall pass" they advised. The King carried out the advice and every time he felt depressed, he looked at the ring and his mood would change and he would feel cheerful.

A wise crowd behind a wise man.

Like me you may be jaded by the non-stop talk about financial crisis, recession, wealth destitution, damaged societal welfare and worst of all depression. But let’s put things in perspective.

Yes, our global financial systems have suffered what may be described as a near fatal heart attack, and while they are still very ill the best financial surgeons are pooling their talents to solve the problems. The surgeons, aka government leaders and central bankers, are working hard together to stabilize and reduce the likelihood of another financial heart attack.

The origins of the financial crisis (a credit but more latterly a liquidity crisis) is that we all have bought vast amounts of property that produced toxic by-products that clogged the arteries of the financial system. It is true that we could not have bought these properties had money not been lent to us. It is also true that some of our lenders, although not all, were aware that the lending they facilitated was risky.

Before the financial crisis our economies were not in great shape. Yes they were growing a little, but many economies had become "fat and happy" and very inefficient after almost 10 years of prosperity. Ireland was the poster boy of the" fat and happy" club.

Now, partly as a result of the crisis, our economies are not growing or worse are actually contracting. This means that people are losing jobs, losing homes, losing “nest-eggs” and a sense of security for the future. Millions of people are stressed and worried about their future and their contentment and peace of mind are damaged. We may still be fat, but not nearly as happy.

The financial and economic shocks to our systems, and indeed our psyches can perform a very useful service. Yes they will be painful, but pain whether it is financial or physical alerts us to our problems.

While we all (you, me, bankers, regulators, the media etc) are responsible for the current correction what’s important now is focusing on the specifics of the problems, to ensure we do not undermine the positive impact that a recession can have while avoiding the evils of a depression.

We all caused our current problems, and we must all be involved in the solution, not just the government or regulators.

Those we have placed in leadership positions in our countries are stepping forward but neither they nor we should be short-termist. They should not keep economically defunct industries, practices and procedures alive with borrowings, but they should increase investment in our competitiveness and productive capacities. It that means an increase in borrowing which it will then so be it.

Our countries have huge amounts of natural and neural basic resources, but to increase our wealth we must increase our intellectual and physical capital, i.e. we really need to make changes to our education system, our attitude to work, our attitude and use of resources, and national and international infrastructure. Education seems #1 to me.

A laser focus on such matters is no magic pill. These are medium and longer term deliverables (i.e. more than can be achieved in 4 years). They will not provide the immediate feel good factor as we suffer withdrawal from the almost instant gratification that the explosion in consumer credit facilitated.

Our #1 untapped resource is the vast collective intellect that we have only started to use. Harnessing the "wisdom of the crowd" has a very big potential role in improving all of our lives. If we do it, we all have a voice and will feel part of the solution as well as the problem. We can solve some wicked problems, like climate, resource, growth, social, and economic challenges. In simple terms, there exists between us the best information on how we solve our key challenges. If our leader’s embrace and permission new systems like prediction markets to operate in a transparent prudent way I am convinced that we can contribute in no small part to the solution.

Recall, that US Department of Defence believed a prediction market could provide valuable information on growth, risks and social issues. Hundreds of academics, dozens of Fortune 500 companies, and millions of people believe that prediction markets can help provide valuable information on economic, financial, social and environmental issues.

Improved ways of working, regulating, and consuming are all within our grasp if we tap into our greatest resource. Our intellect! And the great thing about I.Q. reserves as distinct from our oil reserves is that they increase the more we use them.

We have harnessed the energy of a small atomic globe in the last century, and we can harness the collective intellect of our much larger one in this century. The only question is when? The leader's that we have or are about to elect need to be as brave and innovative we are.

And whether you are a president, a plumber, or a regular person just like me no matter what today or tomorrow holds never forget the wisdom that a wise group gave a wise king.