Germany guarantees all deposits

Apparently governments are made of money. Today Germany has taken far reaching action, following more problems at Hypo Real Estate.

The pressure is on the UK by the media to announce a similar guarantee. That is what we were effectively offered when the run on Northern Rock became serious.

At some point governemnt and Regulators have to find a way to get the banks back into sensible shape without government underwriting or nationalising them. The banks together are too large for even the taxpayers and governments to take them on. The sooner they get on with the task of recapitalising themselves the better. All these gurantees and special lending facilities have to be time limited, and there needs to be some more pressure on banks from the authorities to raise capital. The banks also need to establish a new level of prices and values for types of debt and property so they can start to trade with each other. These mortgages and corporate loans mainly have some value. Most of these loans will be serviced and ultimately repaid. The system is behaving as if they would not.

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5 Comments

  1. Mark Wadsworth
    Posted October 5, 2008 at 11:23 pm | Permalink

    The sooner [the banks] get on with the task of recapitalising themselves the better.

    Exactly – but recent rights issues have been a bit of a disaster, it's too late for that.

    Politicians now bandy around the stark choice of either letting them fail (bad); nationalising them (plusbad); nationalising them and then letting them fail (as in N Rock or B & Bingley, doublebad); or bailing them out/propping them up with taxpayers' money (doubleplusbad).

    There's a simple, old fashioned solution to all this. M'learned colleague Prof Willem Buiter explained the merits of the debt-for-equity-swap on his FT 'blog.

    I, humble bean counter, did a worked example based on the Bradford & Bingley, just to show what this means in practice.

  2. APL
    Posted October 6, 2008 at 12:22 am | Permalink

    JR: "Today Germany has taken far reaching action, following more problems at Hypo Real Estate.2

    Funny, deafening silence from the European Union. Just as they were getting up with a head of steam over the similar Irish guarantee too.

  3. michael, islngton
    Posted October 6, 2008 at 1:21 am | Permalink

    Seems your earlier request for British banks to be recapitalised has been actioned but the form of cash injection is likely to make you choke on your rice crispies this morning.

    Taxpayers will be doing the decent thing.

  4. mikestallard
    Posted October 6, 2008 at 8:46 am | Permalink

    I do not understand banking and I do not understand deleveraging.
    Is short selling always bad? Ought, at the end of each day, a bank to prepare, for the government, a spreadsheet showing its assets and is this what the EU (through Basel II) is demanding?
    I have not got a clue.
    How much does Gordon Brown really owe? And how much does, say, Barclays, or NatWest really owe? I have not got a clue.
    So why has, say, a Treasury official? They may have figures in front of them. But are those figures real? Do they have any sense of the unintended consequences? Quite often, such officials (see Rod Liddle this week on the Guardian's list of forbidden words) are not even allowed to speak the truth!
    At the end of the day, the Chancellor, Mr Darling, is not a banker, not a financial wizard. He is a lawyer from Edinburgh with a lot of political experience.
    I suspect the EU officials are just the same.
    So are they driving us onto the rocks? Time will tell. But things do not look good.

  5. Lola
    Posted October 6, 2008 at 3:44 pm | Permalink

    Yep, they must recapitalise – but not at my expense as either a taxpayer or bank customer. They need very careful watching to ensure that they just do not simply improve their balance sheets by wrecking mine.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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