December 24, 2011
The last flight from Frankfurt to Dublin last Thursday was jammed. I didn’t expect it. In fact I thought a 10.45pm flight from Germany would have been half empty. But, of course, the flight was jammed with returning young Irish people.
They are all on their way home, but they’re not coming from Germany; they are connecting here with flights from Australia via Hong Kong, Singapore and Dubai. Frankfurt is simply the last hub on their way home.
Listening to young lads in Leinster jerseys talking excitedly about being home in Portlaoise, Stradbally and Naas reinforces the reality of Christmas in a changed Ireland. It’s less a national holiday and more a national homecoming. The tribe is returning. But to what? And what prospects have its members of returning full time?
To answer that question, we have to start, not in Dublin, but down the road from the airport here in Frankfurt.
For the lucky bankers, Santa arrived early. Allegedly, Santa gives presents based on good behaviour over the year; for the banks it is the opposite. The European Central Bank (ECB) is providing unlimited low-interest financing to the banks for the next three years.
This plan was unveiled last Wednesday. The banks lapped it up – and why not? I’d love a bit of low interest rate financing around Christmas, wouldn’t you? So would the one in ten Irish mortgage holders who are behind with their payments.
But yet again, the large banks get special treatment while the average citizen gets nothing. The latest wheeze from the ECB is nothing more than high-octane refuelling of the debt Ponzi scheme in Europe.
Without proper debt restructuring, the latest liquidity moves will evaporate. But hey, it’s Christmas, so let’s not spoil the party by getting into the messy details. At least, the central bank has done something, which is better than nothing.
The new deal is the following: the EU banking system is broken, weighed down by bad sovereign debts, which won’t or can’t be paid. Growth is falling, so these bad debts are going to get worse. The sensible thing to do is to write them off and start again, but this would bankrupt the banks that hold the debt, so we are playing a big game of denial, hoping that something will turn up.
Traditionally, the central bank’s job is to intervene in such situations. But because the main problem is that sovereign debt is tanking, the easiest thing the ECB could do would be to buy up the sovereign debt and, in effect, lend directly to governments. But it doesn’t want to do that because it has rules that prevent it from propping up bust governments.
So what does it do? It props up the bust banks that
lent to these bust governments. And in so doing, it rewards the bust banks for their decision to lend to the bust governments in the first place.
The ECB’s Christmas present to the banks means that it is going to lend to the banks at 1 per cent so that they can in turn lend to distressed governments at 6 per cent. It is an amazing deal for the banks. In finance, this is called a “carry trade” or a free 5 per cent.
In this way, the ECB can lend to governments without actually lending directly to governments, and also subsidises the banks one more time. This is moral hazard on a monumental scale because the more trouble the bank is in – due to its own greed – the more it gets rewarded.
Imagine the uproar if we did something like that for mortgage holders.
Obviously such a subsidy to financial markets is driving all asset prices upwards. The yields on Italian and Spanish debt due in two years have fallen to their lowest levels since October.
Are Italy and Spain suddenly more creditworthy than they were a week ago? Of course not.
However, this trick will allow each distressed eurozone nation to tap for funding, making the banks and the governments look stronger – the banks make a fortune on the carry trade and the governments have a source of financing.
But it is only more of the same. Think about it: the new loans issued by the ECB are made against collateral, but what collateral have EU banks got other than worthless paper?
Ultimately, this is a continuation of the EU’s Ponzi-finance scheme. As long as there is more cash coming in at the bottom of the pyramid, the guys on the top are making money too. Never mind about the ability of borrowers actually to pay down debt.
This will do little for the economy. In fact, the reality is that it will make things worse – or at least it will make the pattern of the past few years, where the citizen pays and the bank wins, worse.
The evidence from Ireland and from the Troubled Asset Relief Programme (Tarp) in the US is that the money gets stuck in the banks and, by playing the carry trade, the banks rebuild their balance sheets, but that doesn’t help the consumer. So the financial markets rally and bankers get paid big bonuses, but this has no relevance for the real economy.
Worse still, this money is being lent “contingent” on more austerity, rather than debt write-off. So the citizen pays the bill for banks’ delinquency and this opens the taps for the banks to make more money on the carry trade where the banks are loan-sharking to the governments and making 5 per cent in the process. That 5 per cent margin comes from your taxes and cuts in your services. Just take that in for a second.
As I came through customs at 12.20am last Friday morning, the sight was reminiscent of the 1980s. There were dozens of mothers and fathers and younger brothers and sisters with huge, homemade ‘welcome home’ signs. I wondered how many years they would do this before the visits became less and less frequent and then eventually stopped altogether.
If we want to put an end to this, we in Ireland have to rethink our entire economic strategy in 2012. Maybe this is something to consider over Christmas. The ECB is standing up for the banks, but after all, that is its job.
Who is going to stand up for the people? Whose job is that?