Yep, that’s pretty sensible stuff.
What will be interesting is the effects of a ‘restructuring’ - it will, no doubt, be seen as an ‘event of default’, so CDS contracts will be paid out on. But the effects can be variable. Despite the big collapse, the fallout from Iceland’s default was low.
Just something to bear in mind now that Buiter has moved from the LSE to Citi:
We probably won’t be getting much more of this type of analysis:
And probably none of these type of quotes:
“Countries have been above the debt limits without exploding but there is always hope…”
“We don’t know if there will be global warming or global cooling because the Gulf Stream might disappear. I don’t know if my kids will be windsurfing down Oxford Street or skating down Oxford Street… but it’s going to be one of the two.”
I doubt the Icelandic people would agree…
ah - who says that? No really - who says that? There are many EU countries who aren’t in the Euro. EU membership <> Euro membership.
again I’m confused - surely if we were to exit the euro there would to me to be much *less *pressure on the other member states to bail us out.
Am I wrong?
I think that the UK etc dont have to join the Euro to stay in the EU - I agree
But once IN the euro, not easy to leave the euro without leaving the EU? that is what they are getting at?
There is no legal mechanism for exit from the euro without also leaving the EU. Welcome to Hotel California.
Mercedes Benz? Pink Champagne on ice?
We are all just prisoners here of our own device?
Another one for the Bubble Hits boxset!
I can’t find it online but the Indo has an article quoting Mr Buiter saying “If you put too much of a discount on the value of assets then the banks that are left will be under-capitalised and who’s going to capitalise them? Well, the taxpayer”. He says that forcing the banks to take an excessive discount is ultimately a stupid thing to do.
I don’t get this. The taxpayer is going to have to put up the cash no matter what, surely it’s better that they get a chunk of the banks plus the NAMA loans in return rather than just the NAMA loans. It’s not as if Mr Buiter is dead set against nationalisation, he says in the article that he would have nationalised the banks at the outset.
Beyond a certain amount, say 80% ownership, you get very little in return.
Say a bank is ‘worth’ 2 bn
80% ownership would cost 8 bn (for total equity of 10 bn)
90% ownership would cost 18 bn (total equity of 20 bn)
So for an extra 10% you pay 10 bn, compared to 1 bn for each 10% before that.
So making a return on this is, basically, impossible. You would do a lot better to pay more for the loans and work them really hard.
But what Mr. Buiter fails to appreciate is that there is near zero chance of the loans being worked really hard…
Or working evn if they are.
But what if preferred securities were used to recapitalise above a certain level. Would that just cripple the banks?
They don’t count towards tier 1 equity? Perhaps CoCos would do the job?
Anyway, I don’t know that it really does make any difference. The loans are only going to be worth what you can extract from the borrowers. That’s unlikely to come to their full value. The shortfall is likely to cause insolvency in the banks.
Pumping money in to avert formal insolvency is always and everywhere going to involve a loss of money, since you are paying out on the losses. As Mr. Morgan Kelly says, you might as well burn it…