Bankers: draining funds from taxpayers courtesy of finance ministers

Irish Finance Minister Noonan and Luxembourg Treasury Minister Frieden attend an EU finance ministers meeting in Brussels. Image source: www.reuters.com

I find it hard to write about the crisis in Greece….because the tragedy unfolding there is so reminiscent of the tragedies that unfolded in Africa, Latin America and South East Asia in the 80s and 90s – and I was very close to those. Seeing the same economic mismanagement replicated in well-armed Europe is scary. Watching as tensions rise between the peoples of Europe…given our bloody history….is frightening.  So I have been silenced by rage.

But my outrage boiled over today, because of what the FT wrongly calls a ‘subtle’ change unveiled by EU finance ministers to the terms of the massive Eurozone bailout fund – a fund backed by European taxpayers. This is how the FT explains it:

Any bonds issued in future by the eurozone’s new €500bn rescue fund on behalf of Ireland, Greece or Portugal will not enjoy “preferred creditor status” – an alteration to the fund intended to help those nations return more swiftly to private capital markets.

For those who do not dabble much in sovereign debt, let me explain. Common to the whole of the international financial architecture/system for sovereign lending, there is one principle that overrides all others. That the IMF/World Bank are ‘preferred creditors’. Just as when a company goes bankrupt, the supplier that sold it widgets, is ranked lower than the bank that provided the overdraft – so in international ‘law’ – taxpayer-backed lending from the IMF and World Bank is ‘preferred’ when it comes to repayment – over all private commercial lending. And it is preferred because it is public money.

In other words, when the public cough up – via an international institution such as the IMF or the ECB  – then the sovereign (e.g. Greece/Argentina/Rwanda) has to pay taxpayers back first.

Yesterday, on behalf of EU taxpayers, EU finance ministers obliged private bankers by overturning that ‘principle’.

Instead they agreed effectively, that private bankers will get preference and will be repaid before taxpayers.

Michael Noonan, the Irish finance minister, described it as

“very good news for Ireland that this scheme has been amended” so that anybody who borrows will have the same ranking whether there’s an ESM programme or not.”. He was told by investors in the US that Ireland and other countries subject to bail-outs “would find it virtually impossible to get back into the market and access private funds as long as this provision remained”.

Now, my understanding is that Michael Noonan is a democratically elected finance minister. What he is agreeing to here -enthusiastically – is that taxpayer funded loans will have a lower repayment status than private commercial loans – debts owed to private banks/hedge funds etc. These private banks lent recklessly to e.g Irish private banks and colluded with e.g. the previous Greek government in concealing the true status of its foreign debts.

They are private bankers that expect the rules of the market to be replaced by a form of Soviet economics  – that removes all risks associated with the private business of lending and borrowing  – and instead provides taxpayer guarantees against all losses. And with those guarantees – and this new ‘preferred status’ – these financial institutions continue to recklessly speculate and gamble in EU debt.

There will be very little outrage about this apparently ‘subtle’ change to the international financial architecture by our elected politicians. But, be sure, it is another nail in the coffin of EU democracy. An example of bankers usurping power (and money) from the people of Europe – with the collusion of democratically elected EU politicians.

It will all end, I fear, very badly – and not just for the politicians.

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9 comments to Bankers: draining funds from taxpayers courtesy of finance ministers

  • Thank YOU Ann, for all your efforts to provide us with clear analysis, however painful. Adding your link to my facebook page
    does not seem potent enough to bring about alleviation of suffering in the wings . V open to other suggestions.

  • larry

    Ann, I am as outraged as you and can understand your hesitation. The Irish case, if we believe Fintan O’Toole and others which I can see no reasons not to, the alliance among the rich, the politicians, and the financiers was so gross that the only choice open to the political class that would not undermine their own financial position and that of their “friends” was to do what they have in fact done, and the electorate “allowed” it to happen. Unlike Iceland, which looks better and better every week from a democratic perspective.

    Moreover, the standard explanations, such as those by the FT, generally ignore the fraud that was involved, one notable exception being Bill Black, who highlights this aspect of the crash as often as he can.

  • Brian P. Smith

    To be honest, Ann, I am not surprised by this development. Outraged, yes, but surprised, no.

    For far too long the emphasis has been on making money by having money and gambling it, not by producing something that somebody wants to buy! Of course those that have the money also have the power – that’s why they make it their business to get more. (I was going to say earn more, but realised this is far from the truth, they just amass wealth by taking risks with other people’s lives)

    I, too, am outraged, but I am also powerless to do anything about it. I wish the implications of this “subtle” change could be more widely recognised, but there seems little I can do. If government finace ministers see this as good news, who is going to believe anything I say to the contrary? The only possibility I see at the moment is that the general public begin to understand what is going on and, as in the Middle East, start a general resistance to the way they are being governed and controlled.

    One thing I do have, however, is an unshakeable faith in the ability of my God to bring to nought the schemings of men. So maybe their plans will not be so much to their benefit in the long run anyway.

  • Jeffrey Lam

    In this case Michael Noonan represents the borrower rather than the lender, so from his current point-of-view this is just who he should repay first. I don’t know much more than this though.

    However, how on earth did the other EU finance ministers agree to this? Are they misguided? Do they stand to gain because of interests in the banks (plausible, as many banks are nationalised, or would have to be nationalised)?

  • Plamen

    Although I can understand your points, there is still a huge debt Greece have to pay. For decades greeks are benefiting more than they prduced and now is the time to pay the bill! They did not protest when they were paid (salaries, pensions) disproportionaly, did they?

    Do you know that in Greece houses under 200,000 EUR are tax free?!! TAX FREE! They are sad if someone from the family has no his own car? A lot of things inn Greece are wrong. And yes, including the government, responsible for all of this.

    It’s just time to pay the bill! And yes, Europe will (sadly) pay the bill, because they allowed this mess to happen! Again, for decades they KNEW very well what’s going on in Greece, but turned away blindly…

    Anyway, just my humble, non-financial comment. Facts from the real life.

  • AndyM

    @Plamen

    First of all, WE ALL have benefited from more than we have produced, we have a debt based economy, that’s the problem.

    Second, you are swallowing the mainstream media’s blasé, and racist view of Greece. Greece is classified by the World Bank as a “high income economy”, and in 2005 boasted the 22nd highest human development and quality of life index in the world – higher than the UK, Germany or France.
    As late as 2009 it had the 24th highest per capita GDP according to the World Bank.

    Also, according to the University of Pennsylvania’s Centre for International Comparisons, Greece’s productivity in terms of real GDP per person per hour worked, is higher than that of France, Germany or the US and more than 20% higher than the UK’s.

    What is happening is not Greece having to pay the bill, it is an asset “land-grab” by the financial elite, a silent invasion.

    Wall street helped the Greek government hide it’s debts from Europe, and are now betting on it to fail.

    Have a read of http://sturdyblog.wordpress.com/2011/06/18/democracy-vs-mythology-the-battle-in-syntagma-square/ and http://www.nytimes.com/2010/02/14/business/global/14debt.html before you make any more non-financial comments.

    Facts from the real world

  • Hoover

    I’m afraid I agree with Plamen.

    I like the Greeks, and I’d like them to get rid of their debt without huge efforts and pain.

    But deep down, I know that they simply spent too much and voted for politicians who promised them wondrous riches. And now the bill has arrived, and it must be paid.

    That is the unpleasant truth.

    And when the writer says this is all done to protect private banks, that’s only hald the truth: wealthy private bankers are not only trying to protect their own incomes and jobs, but also to protect the money they’ve been lent. And in the end, those billions really belong to other ordinary people around the world – not necessarily millionaires, but pensioners, labourers, the middle classes who save…

    That is another reality which is ignored when people attack the banks and say they’re greedy for wanting to rescue their loans to Greece. That the vast majority of money lent to Greece really belongs to ordinary people.

  • AndyM

    @Hoover

    “And in the end, those billions really belong to other ordinary people around the world – not necessarily millionaires, but pensioners, labourers, the middle classes who save…”

    The investment banks that have been circling like vultures with their predatory lending were leveraged up to 30 times. For every one Euro you or me have saved, they have magically created 30 from thin air to lend. So to say forcing Greece into 50 years of peonage to protect ordinary investors is totally inaccurate.

    Banks make money from lending, because there is an element of risk. In a civilised world, the lender of money has a duty of care to ensure the standard of lending, and this should manifest through the acknowledgement of accountability in times of poor judgement.

    It’s a massive con trick, they thought they had eliminated risk, so managed to persuade governments to roll back regulation with the help of complex algorithms and pretty graphs.

    Politicians and their lap dog economists seem to think the only way out of this crisis to to create a new bubble.

    This is the ideal time to get to the root of the problem, and stop it happening again.

  • Benedict@Large

    This doesn’t surprise me a bit. The only question I had was how they were going to do it.

    You see, I’ve got a pretty good nose for a con, and it was smelling rat big time. What was the point, I was thinking, in all of this charade? The Greeks were going to default no matter what, and although it might be delayed, this could only be done by a massive infusion of good money after bad. No, I thought, there had to be another angle. Some kind of money moving around that no one was much supposed to notice. Some kind of money that someone could lay their grubby little fingers on. And then it came to me; they were buying time while they set up President Clueless and Tiny Tim, intending to leave them (no, the American people) holding the empty money bag while the bankers from the Master Race skated away with 100 cents on the dollar PLUS INTEREST! (Nice work if you can get it.)

    And you just told me how they were going to do it.

    BTW: I just heard they’ve found gas in the Aegean. Anyone want to buy an island?

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