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Bond Trader Bears Salivate as Euro Totters

Ireland - financial crises
The Irish Republic is insolvent thanks to bad banks,
worse the disease is contagious

Be Afraid, Be Very Afraid (continued)

(This story is continued from here in our News Room)
French football star and actor Éric Cantona took the lead on October 8, when in a newspaper interview with Presse Océan released on YouTube, he fired up a storm in the cyber world by calling for a coordinated withdrawal of deposits from banks. The cry was enthusiastically taken up by Twitterati, Facebookers and Internet activists and clearly rattled the authorities, including French Finance Minister Christine Lagarde, who came out forcefully against Catrona’s “financial advice”. (See "The Organised Bank Run" sidebar). In the event the December 7 international bank run turned out to be far less effective than the protagonists hoped for. In France relieved banks reported little or no disruption to business.

Ironically Cantona and the social web supporting him fomented a viral campaign that went global, using almost the same channels the traders and electronic barrow-boy-bankers had employed earlier to dump subprime mortgage derivatives on trusting counterparties in summer 2007, and precipitate the desperate ongoing Western recession and Eurozone fight for survival. So it would have been poetic justice if the former footballing champ had succeeded in enthusing depositors to dry up banking ATMs across the world. (In reality as European Banking Regulators noted, restrictions in France and most elsewhere in the EU on how much you can withdraw daily from your own account via an ATM, were likely to dampen the impact. Also of course banks operate on trust and don't actually have cash in the branch vault sufficient simultaneously to pay you and every other customer out in banknotes, plotters seeking to bring the system down will first have to place their orders for the cash, in advance!)

Public Anger
Nevertheless the patent anger the public still feels about unrepentant bankers remains unquenched and indeed politicians certainly fear the backlash. Newspapers too are guaranteed a sales surge with banker bashing stories, every time another obscene bonus is announced for executives at what are now mainly taxpayer owned institutions.

Writing in the London Evening Standard recently Anthony Hilton said:
“So badly have the banks played their hand in showing absolutely no contrition for their mistakes, nor displaying any willingness to share the pain they have inflicted on the rest of the economy, that they have made it impossible for politicians to cut them any slack. The bankers don't seem to get this, nor to understand why their pleas to be able to put the past behind them fall on deaf ears. They fail to realise that our leaders fear they would be strung up from the lamp posts by an enraged public if they were seen to be going soft on them. In some ways it is like a grieving process. There needs to be something to bring closure if the public is to move on. In the case of banking, closure requires that the average voter sees convincing evidence either that bankers are suffering too, or that they are making genuine, unselfish attempts to repair the system.”

And as Ireland called in EU and IMF teams to start a bailout programme, Andrew Clare, a professor at London’s Cass Business School, urged the country be forced to recognise its banks are bust. “Only when Allied Irish Bank is shown for the hollow shell it has become will everyone – the Irish and Brussels – be able to move on. The only way to put a stop to this sovereign contagion within the heart of the euro is to recognise the losses in the banking sector, and then to write off those losses at the expense of bank equity and bondholders. It is the investors in bank equity and the holders of bank debt that really need to feel the pain, not the relatively lowly paid workers of the eurozone," he said.

But tough as the EU and IMF package will undoubtedly be for the Irish and the eurozone to bear, the tsunami has not yet exhausted its strength.

On the FT Alphaville blog Arturo de Frias, head of banking research at Evolution Securities is suggesting the euro is doomed. The blog notes an eventual collapse of the euro is currently being priced into the sell-off hitting European Banking stocks following the bailout of Ireland on Sunday November 21.

“That leads de Frias to conclude that investors are not only pricing-in macro disaster in Ireland, but also in Portugal and eventually in Spain.” However de Frias does add a caveat (don’t they all) “undoing the euro would likely trigger a decade-long recession in Europe … we still don’t believe the European Governments will (thus) let the euro collapse…”

"Ireland is Effectively Insolvent"
As Irish sovereign debt grades approached the junk levels of Argentina, Greece and Venezuela, forcing Dublin to agree to an EU/IMF austerity package on November 21, Morgan Kelly, Professor of Economics at University College Dublin said: “Ireland is effectively insolvent – the next crisis will be mass home mortgage default”.

Would that trigger the much feared contagion effect by which traders pick off their targets one by one with intolerable strains on eurozone cohesion? And if it did might the euro and the Europe Union itself then fail? What would that mean to expatriates of many nationalities, who under free movement of labour and capital pledges have upped sticks and settled all round the EU? It is natural that the citizens of this wounded would-be union are worried. For the 10-year-old currency that has made life simpler for EU nationals choosing to live outside their home country — and thousands set up home, life and business in France as a result — is turmoil-riven and wreaking absolute havoc on ordinary people’s lives.

Barrow Boy Bankers
Unfortunately there are no simple or easy answers. The old economic certainties died in August 2007 when Wall Street and City of London barrow-boys crashed the gravy train at full throttle into the buffers bursting an unsustainable credit bubble.

This of course had been preposterously overinflated with the help of greedy and unscrupulous politicians and their cronies and as the IMF noted at the time, precipitated “the largest financial shock since the Great Depression”. What’s more it remains directly responsible for where we are today.

What has subsequently emerged, according to Edmund Conway, writing recently on his Telegraph (of London) blog is both fascinating and terrifying: “There is a half-century cycle at play here: we move from one macro-economic system, it works well for a few decades (due less to the explicit rules at play than the assumption that central banks will enforce them if necessary). Eventually, the system’s credibility breaks down, sometimes in the face of financial crises, sometimes in the face of war, sometimes because the economic superpower dynamics have shifted. What follows is a chaotic period, and then, when everyone’s energy is spent and all the economic emotion cried out, we shift to another system and the cycle starts again. Throughout, what matters more than the institutions, be they gold or managed currencies or Bretton Woods, is the faith in them, which is far harder to ascertain. We are currently at the moment of hand-wringing and tears, which means the next few years will be both fascinating and terrifying. Eventually, we’ll come to a solution. Everyone will believe the system has been repaired, and that Bretton Woods III or whatever we’ll call it will solve our international monetary woes. And they’ll be right. Until they’re wrong.”

Story: Ken Pottinger

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French football star and actor Éric Cantona is one of the more vociferous talking heads of a movement known as “The Organised Bank Run”. As shown in this subtitled YouTube movie, those supporting this protest are urging the French to withdraw all they can from their accounts via bank ATMs on December 7th.

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