A few people have asked me* what is going on with the new government’s approach to the EU and the ECB/IMF deal and dealing with bondholders. Well, this is what I reckon is happening and is going to happen.
The expectation around Europe and the financial world is this, at some point either Spain or Italy (we don’t hear much about it but it is there) will end up having to avail of the special EU stabilisation fund at which point the numbers involved becomes so impossibly massive that the northern Europeans who are in large part funding this go “Wah!” very loudly and in a politically sensitive way. At that point, there simply has to be some sort of write down of the debt principal especially when German and French taxpayers realise that they are not giving money to us, or the Spanish, the Greeks and so on but are in effect handing it over to cover the losses of their own German and French banks. Our governments are merely middle men in all this.
Did our banks make bad lending decisions? Yes, but so too did the German and French institutions when they aided and abetted our banks bad decisions. It’s similar to what happened when AIB and Bank Of Ireland decided to follow the example of Anglo instead of steering clear of it. All of the European banks liked the sound of what was happening here and wanted in and they wanted in quick. I’d love to see what discussions large institutional shareholders in Ireland had with the larger banks to bring pressure onto them to follow Anglo’s lead. And what pressures did pension funds across Europe place on European banks to invest in Irish banks.
It’s a bit like the teacher in school going through the class and giving out punishments to the bold children, we put chewing gum under our desk and the kid next to us cracked a window pane, but we know the kid down the row burnt down the damn science room. As her dad is a teacher in the school so she can’t get expelled and thus neither can we. So since no one is getting expelled in this situation, it pays to wait for the arsonist to own up to their misdeed before we get to argue over our own punishment.
Of course the real problem isn’t bondholders at all, it’s depositors but we can’t touch that topic for the moment.
*You’ll be aware of my long standing involvement in such matters and my inside due to that paper round I had close to the city of London when I was a toddler living in Croydon.