The EU and ECB try to strengthen their defences – the UK helps the ECB

 

              The EU has been busy. Whatever they may say – and they say plenty of risky and unhelpful things as well – they are worried about further banking losses, asset write downs, and sovereign debt problems.  On 16 December they announced the establishment of the European Systemic Risk Board  to undertake “macro-prudential oversight  of the financial system within the Union”. Note it is within the Union, not the Euro area. It includes the Governor of the Bank of England as Vice Chairman. Clearly they intend to call the shots over banking activities, along with the Euro regulators. 

            On 17th December the Bank of England granted a temporary liquidity facility to the European Central Bank . The Bank of England may provide  £10 billion in exchange for Euros to the ECB. On 29th December the  subscribed capital of the ECB will go up by Euro 5 billion to Euro 10.76 billion.  At the same time the ECB will increase its provisions by the full amount of the new subscribed capital. The UK’s subscribed capital will rise from Euro 836 million to Euro 1562 million, but as a non Euro member the amount we actually have to pay up on December 29th  will be very small.

            Professor Tim Congdon has recently pointed out that the ECB has been cutting back on the amount of special assistance it offers to banks with Euroland, cutting it by around Euro 150 billion this year. However, he also points out that most recently after the Irish crisis the amount of special assistance seems to have gone up. He suspects there has been a large increase this year in the proportion of the total going to distressed banks in stretched countries.

          It was, it appears, ECB worries about the amount they were lending to Irish banks that led  to the Irish loan. The UK was engaged not in saving Ireland but in helping refinance risks the ECB had entered into. Now we learnt that’s not all we are doing to help the European Central Bank.

            The UK government needs to make clear what limits it does intend to pose on help we offer the Eurozone. After all, the Eurozone contains several large rich countries who should be capable of sorting out their own affairs. One of the benefits those of us who helped keep the UK out of the Euro thought we were winning was limiting the UK’s risk to what was obviously a very risky single currency project. We need to take sensible action to avoid getting dragged into any next phase to the crisis, be it sovereign debt led or commercial banking led.

           The Bank of England seems keen to involve us rather more in the Euro area. It says we need “a comprehensive, rather than a country -by- country solution ” and more EU stress tests for banks.  It points out that UK exposure to Spanish banks is larger than to Irish ones. They do not portray a happy new year ahead when you read about all the risks they see us running.

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24 Comments

  1. lifelogic
    Posted December 19, 2010 at 6:50 am | Permalink

    “The UK government needs to make clear what limits it does intend to pose on help we offer the Eurozone.”

    Could we limit it to zero please – We never hear the government say anything much on Europe they just do expensive daft things quietly behind the scenes and we have to judge them on their actions.

    • lifelogic
      Posted December 19, 2010 at 10:35 am | Permalink

      On another topic I understand from contacts that HMRC is now starting to take a very tough line on companies despite supposedly still having the “Business Payment Support Service” which had been very helpful to many small businesses – since the banks stopped any sensible business lending and started clawing funds back.

      In many cases they are taking unduly hasty action against perfectly good companies causing pointless redundancies and loss of jobs and tax revenue – then often leaving the tax payer to pick up the redundancy and unemployment costs (another budget I assume). Rather like a fungal parasite killing off the tree that feeds it.

      Who says turkeys don’t vote for Christmas?

      • Ralph Musgrave
        Posted December 19, 2010 at 4:33 pm | Permalink

        That is just more evidence of the drawbacks of using low interest rates (i.e. bank supplied credit) to escape recessions. The better alternative is to feed stimulus money direct into household pockets (i.e. stimulate Main Street not Wall Street). That way more business would be equity financed, not bank financed. Bank assets expanded tenfold relative to GDP between 1970 and 2006. All it’s brought is trouble.

  2. norman
    Posted December 19, 2010 at 8:05 am | Permalink

    It’s as plain as the nose on my face that we’ll be involved in future bailouts. As for the amount, that’s up to our European partners to decide. I imagine they’ll allow us to pay a lower sum than Euro members but since we have a large economy the amounts won’t be trivial.

    It makes one wonder why the government is embarking on a programme of cuts, such as they are. By finding a few billion here, a few more there, maybe Labour was right all along and there was no need for cuts? It certainly seems that way.

    Instead we are now cutting British spending to subsidise EU spending. What a funny business, except no one in Britain is laughing.

    • zorro
      Posted December 19, 2010 at 6:14 pm | Permalink

      Quite frankly, this is a disgrace. Is Cameron, our ‘Eurosceptic’ PM….hahahaha…. trying to incite people to action? Whilst he pontificates about ‘these austere times’ he merrily comes up with this nonsense which is nothing more than an open ended commitment to bail out a basket case (no matter how it is presented). How can he go on about austerity when he is committing us like a fool to open ended bailouts? …….Where is the UK’s national interest here, and please don’t say that Armageddon will come if the Euro fails? It is clear that Cameron is a Europhile who is doung the bidding of his masters

      • edgeplate
        Posted December 19, 2010 at 9:20 pm | Permalink

        We don’t have a national interest while we are part of the EU, or rather the interests of the EU are the national interest and the interests of the UK are merely regional concerns.

  3. alan jutson
    Posted December 19, 2010 at 9:04 am | Permalink

    This merry go round of bailouts, and or financial musical chairs of money guarantees seems to know no end.

    If the Governor of the Bank of England is involved, then sure as eggs are eggs, it will cost us (the UK Taxpayer) money.

    What ever happened to being able to stand on your own feet, by living within your means.

    The simple fact of life for Governments, families, individuals, Business or Local Authorities is if you spend more than you earn in income, you get into debt. Borrowing without cutting back on some of your expenditure, and without increasing your income, gets you further into debt.

    Whilst governments and local Authorities can raise Taxes to a degree, that becomes unsustainable and produces less income, as the population loses the incentive to work, as it does not pay enough extra to do so. Likewise Businesses think the reward is not worth the risk.

    The first duty of any Government should be to defend its own boarders and uphold Freedom and Democracy, the second is to provide sound money.

    We seem to be failing on both counts, as well as many others.

    When will any Political party understand.

  4. Geoff not Hoon
    Posted December 19, 2010 at 10:47 am | Permalink

    Mr. Redwood, as you may possibly have seen here previously I love using relevant quotations from history. Can someone please tell me why the following does not hold good today? Thomas Jefferson–“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labour the bread it has earned—this is the sum of good government”
    To my simple way of looking at the EU and ECB “antics” we are not only committing our children to future untold amounts of debt but their children and grandchildren. All in the name of what? Please, someone explain.

  5. Bob
    Posted December 19, 2010 at 11:11 am | Permalink

    Had UKIP won the election we would not be having this conversation.
    Bear that in mind if we ever have another chance to vote.

  6. Gary
    Posted December 19, 2010 at 11:37 am | Permalink

    by some estimates we have a notional $1quadrillion worth of derivatives. If that number is even remotely correct then we will end up throwing all of europe’s money down that black hole, then all the world’s money, and still we would not fill the hole. Time to cut that dog loose.

    • libertarian
      Posted December 19, 2010 at 1:40 pm | Permalink

      Gary,

      Do you even know what derivatives are?

      • Gary
        Posted December 20, 2010 at 3:39 pm | Permalink

        Unlike you , I do know what a derivative is. It is a zero sum leveraged bet on an underlying. Its price is based on Nobel prize winning Black-Scholes formula, determined by time to maturity(negative relation), volatility(postive), price of the underlying(positive), distance ffrom strike price(positive), risk free rate usually the govt long bond(negative), and it is assumed there is a normal distribution.

        The biggest problems are : even a child can see the normal distribution (all prices are equally likely in a bell distribution around any point) does not hold in a trending underlying.The most liekly prices are in the direction of the trend. The “risk free rate” has become a joke, in a manipulated govt bond market. But, when it was noticed that there was a bi-directional bias between the underlying and the derivative , they soon became used to massage the underlying, including reserve ratios. And that lead to a bubble in lending and artificially low rates and the Mother of all Bubbles. Applying to Black-Scholes to LTCM in a revert to mean model, caused the whole fund(and half the world) to blow up in 1998.

        BTW : Is Douglas Carswell still throwing your junk off his blog ? I hope not because it will be fun to see such an ignorant record as yours stand for all to see, for years.

        • Gary
          Posted December 20, 2010 at 3:47 pm | Permalink

          I might correct this : time to maturity , the shorter time to expiry the more the price of the derivative decays(exponential and positive correlation) and add this qualifier, derivative price is positive with strike price if the derivative price is moving in the direction of the bet, in a geometric relation. Down for puts/short, up for calls/long.

    • Simon
      Posted December 19, 2010 at 4:06 pm | Permalink

      Yep ,

      I don’t see how the taxpayer can guarantee deposits in banks that intend to honour losses on synthetic products like synthetic credit default swaps .

      Some of it looks like unsophisticated fraud designed to suck public money into the financial services industry .

      (names of 2 companeis involved removed, as no proof of fraud offered-ed)
      These are not socially useful products like hedges against changes in exchange rate for companies which are genuinely exposed to International suppliers and customers .

      If no social use can be shown for these contracts , couldn’t laws be passed to cancel them for institutions which have taken public money ?

  7. Mark
    Posted December 19, 2010 at 1:22 pm | Permalink

    According to the BoE Stability Review, Table 3A shows UK banks’ exposure as a percentage of their total assets to be 50.8% within the UK, 1.8% to Ireland, but just 1.4% to Spain, with the rest of the PIIGS at 0.9% (Italy), 0.3% (Portugal) and 0.2% (Greece). By comparison, the USA is at 15.4%, France 3.7%, Germany 2.4%. Presumably the idea of Spanish exposure comes from the position of e.g. Santander in the UK market particularly as a mortgage provider. The suspicion would be that they were a conduit for overseas funds to the UK – i.e. the risk is that their subsidiaries might need additional BoE support in the event of problems in Spain.

    Where situations of this kind occur, effectively the BoE is providing support overseas: effectively exactly what it dead when Lehmans collapsed. Because Lehmans was purely a wholesale provider of funds the issue looked slighty different from a case where a parent supplies funds to a subsidiary. Perhaps if subsidiaries need support the parent should sacrifice ownership. Oh – and no bonuses until support is no longer required (no need for bonus taxes).

  8. Lindsay McDougall
    Posted December 19, 2010 at 1:50 pm | Permalink

    What’s the matter with the UK government? Just say ‘no’ and sack the Government of the Bank of England if necessary. Increasingly I doubt whether the rich members of the Euro zone can bail out those in distress; the level of government debt in the Euro zone is simply too high. Germany’s government debt is 73.4% of GDP. In what sense is that a ‘rich country’?

    Every individual Euro zone (and Western world) government must progressively reduce its deficit and stabilise its overall debt to the maximum extent possible. This is the essential act. If the distressed countries feel the need to leave the Euro, that is to be welcomed.

  9. Brigham
    Posted December 19, 2010 at 1:59 pm | Permalink

    We are getting so involved with the EU that we will never be able to extricate ourselves even if we are eventually given a referendum. This is probably the way this “going back on it’s word” government, wants to take us.

  10. CW
    Posted December 19, 2010 at 5:34 pm | Permalink

    Ah the imaginery digital debt !
    Grow our own food again.
    Scrap pointless wastefull green policies and stop promoting it as truth.
    Start manufacturing again.
    The experiment of global governance has failed ,that’s what’s causing all this mess.
    The wealth of Britain is the land of Britain it’s so lush moss grows on walls.
    ps
    Default when necessary.

  11. Johnny Zero
    Posted December 19, 2010 at 5:51 pm | Permalink

    Robert Peston of the BBC quotes on his Blog that we, as taxpayers, subsidized the UK Banks to the tune of £100 Billion last year. Without this huge sum, the Banks would be bust.

    Surely this Government should be telling RBS, Lloyds and HBOS that NO bonuses are to be paid to Bankers, now or in future, whilst we continue this subsidy? The Ratings Agencies now have two values for British Banks, one with the Taxpayer behind the Banks and the other as stand alone. “Call their Bluff” and be damned.

  12. Javelin
    Posted December 19, 2010 at 7:35 pm | Permalink

    Have a look at this link. It’s the publically available information for reference entities that are part of Credit Default Swaps – in English that means all the companies and Governments that financial companies have insured against going bankrupt.

    What’s of Interest is the data only goes up to June, plus how many trillion are bet against banks and Governments going bust. I’m posting this on my iPhone so cant really go into details. But it’s worth a look.

    http://www.dtcc.com/products/derivserv/data/index.php

    • Javelin
      Posted December 20, 2010 at 8:12 am | Permalink

      If you look at these figures you will see $2+ trillion has been insured against Governments and $3+ trillion against financial companies. The insurance risks are held by banks. When a Government or Bank fails the holder of the policy can claim this amount – in the value of the entities bonds.

      This simply means negative feedback loops in the financial sector. So any bad news is multiplied. The on balance sheet liabilities are the 3 monthly payments for paying for the insurance.

      • Mark
        Posted December 21, 2010 at 10:11 am | Permalink

        I presume you are referring to Table 2 and/or Table 3. What is actually striking is the degree to which CDS trades appear simply to be pass the parcel between “Dealers” who account for nearly 90%. If you examine the net trade between dealers and customers by subtracting the data for buyers of risk from that for sellers of risk in the two tables we find that net trade is small between the two groups. What is unclear is the degree to which these trades are acting like risk syndication and pooling with e.g. bank A selling risk for Ireland, but buying it for Portugal, or whether they are dominated by a mille feuille of trading transactions whereby bank A sells a risk to bank B while bank C sells the same risk to bank D and later bank D sells to bank A, leaving a net position of small profits and losses for banks A and D and the equivalent of bank C having sold to bank B when the transactions are netted off (real examples may be much more complicated). The suspicion is that the net positions are much smaller: the evidence comes from Table 7 which shows net notional outstanding positions to be about 10% of the gross figures on CDS index trades. Of course, indices are used as a temporary hedge when a suitable name trade offset can’t be immediately concluded with advantage.

  13. adam
    Posted December 20, 2010 at 3:07 am | Permalink

    I am seeing numbers 17-33 billion for the cost of the EUs imperial railway across Britain (has Eurostar ever made any money?).
    Come on now, what will the true cost be, I am guessing the spread will be 100-150 billion, as all the vultures feed on the trough of government spending (got to get GDP up after all!).
    And the plebs will foot the bill, VAT up to 20%.

  14. Boudicca
    Posted December 20, 2010 at 8:36 pm | Permalink

    I rather seems that Cameron is softening the UK up to take us into the Euro, whether we like it or not, by making us part of the Euro-debt-union.

    Did any of us vote to prop up the Euro single-currency-folly? No. So why is our hard-earned money going to save the Euro instead of going towards cutting the deficit and reducing the UK debt burden.

    Cameron has turned out to be the most Europhile PM since Heath. I used to quite like him – but that is rapidly turning to disgust at his treachery.

  • About John Redwood


    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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