Sovereign debt bubble thread

[Iormlund]

I'm guessing shares are worth less than crap. No idea about bondholders, but seeing how the guarantee is being broken despite almost €40 billion in uninsured deposits I wouldn't be surprised bondholders get to keep some or most of their money as well.

[Admiral Yi]

I'm guessing shares are worth less than crap.

But it should go/have gone further than that.  Before any depositors take a hit shareholders should get wiped out via nationalization. 

[alfred russel]

I got that Fredo.  What I was trying to rebut (in a manner perhaps even less clear than your horribly botched attempt  ) was that it's not a black and white issue.  Yes, any time lenders get penalized it will deter future lending.  On the other hand it's more natural and just for for the beneficiaries of a bank's reckless lending (such as bond holders and owners) to take the hit than it is for Syt and Zanza to do so.  This is true when the borrower is a bank, a sovereign, a corporation, an individual, anyone.

Okay, but I think it is an apples and oranges comparison.

Yes lenders accepting losses will deter future lending. But lenders are investors who supposedly weight risk and reward to make decisions. The public subsidizing losses will only lead to excess loans and debt.

There is an angle where you can argue that it is the same with depositors. That angle has largely been defunct since the 1930s, but regardless, in this case that means the banks of Spain, Italy, Greece, etc. are unsound and by this way of thinking the citizens of those countries should instead keep their money in German banks. Aside from the practical obstacles of not banking in the country where you live, I don't think it is in anyone's interest to move eurozone banking to frankfurt.

[Admiral Yi]

Okay, but I think it is an apples and oranges comparison.

Yes lenders accepting losses will deter future lending. But lenders are investors who supposedly weight risk and reward to make decisions. The public subsidizing losses will only lead to excess loans and debt.

There is an angle where you can argue that it is the same with depositors. That angle has largely been defunct since the 1930s, but regardless, in this case that means the banks of Spain, Italy, Greece, etc. are unsound and by this way of thinking the citizens of those countries should instead keep their money in German banks. Aside from the practical obstacles of not banking in the country where you live, I don't think it is in anyone's interest to move eurozone banking to frankfurt.

Now you really have lost me.  Previously I thought you were arguing against punishing bank creditors, now it sounds as if you're arguing in favor.

Iorm: You seem to be suggesting that bond holders are bad, and deserve to take a hit, whereas as other types of bank creditors, such as holders of time deposits (we call them certificates of deposit here, time deposits are what i think they're called in Yuroland) are virtuous, and deserve to be kept whole.  If so, I would take exception with that.

[alfred russel]

Now you really have lost me.  Previously I thought you were arguing against punishing bank creditors, now it sounds as if you're arguing in favor.

I'm arguing against hitting bank depositors.

[Admiral Yi]

I'm arguing against hitting bank depositors.

And in favor of hitting holders of bank bonds?

[alfred russel]

I'm arguing against hitting bank depositors.

And in favor of hitting holders of bank bonds?

I don't really have an opinion. I understand the theory. But in reality, after so many years of crisis, are the holders government institutions and insolvent institutions backed by governments (basically, other banks)?

[Admiral Yi]

I don't really have an opinion. I understand the theory. But in reality, after so many years of crisis, are the holders government institutions and insolvent institutions backed by governments (basically, other banks)?

Banks are huge holders of government debt (partly because they're stupid and partly because the capital requirements rig the game in favor of holding sovereigns) and the government of Cyprus probably doesn't have a stack of money to lend out, so I'm guessing not.  My guess would be that bank bond holders are run of the mill institutional investors--bond funds, pension funds, etc.

On a tangent, I bought some JPMorgan bonds for my mom and some BoA bonds for myself back when there was that miniscare about US bank exposure to Europe and rates jumped.  Got about 6 1/2 yield.

[alfred russel]

I don't really have an opinion. I understand the theory. But in reality, after so many years of crisis, are the holders government institutions and insolvent institutions backed by governments (basically, other banks)?

Banks are huge holders of government debt (partly because they're stupid and partly because the capital requirements rig the game in favor of holding sovereigns) and the government of Cyprus probably doesn't have a stack of money to lend out, so I'm guessing not.  My guess would be that bank bond holders are run of the mill institutional investors--bond funds, pension funds, etc.

On a tangent, I bought some JPMorgan bonds for my mom and some BoA bonds for myself back when there was that miniscare about US bank exposure to Europe and rates jumped.  Got about 6 1/2 yield.

I really don't know anything about cyprus, but I would think that the banks lost access to traditional private debt markets roughly 5 years ago.

[Iormlund]

Iorm: You seem to be suggesting that bond holders are bad, and deserve to take a hit, whereas as other types of bank creditors, such as holders of time deposits (we call them certificates of deposit here, time deposits are what i think they're called in Yuroland) are virtuous, and deserve to be kept whole.  If so, I would take exception with that.

I'm not saying bond holders are bad. I make no moral judgment on them. But as investors, they should bear the risk of their operations.

Depositors, OTOH, enjoy an explicit guarantee up to €100k. In addition, it is impossible to operate without an account these days, at least in Europe. And finally, you are hitting yourself in the foot, inducing bank runs and submerged economy. They should only take a hit when everyone else has been wiped out. This is not the case in Cyprus.

[Admiral Yi]

I'm not saying bond holders are bad. I make no moral judgment on them. But as investors, they should bear the risk of their operations.

Depositors, OTOH, enjoy an explicit guarantee up to €100k. In addition, it is impossible to operate without an account these days, at least in Europe. And finally, you are hitting yourself in the foot, inducing bank runs and submerged economy. They should only take a hit when everyone else has been wiped out. This is not the case in Cyprus.

But as I pointed out earlier, killing institutional lending to banks can have the same effect as a bank run.

And I guess the other point I'm trying to make is that mom and pop depositors with balances above 100K euros aren't that much different from bond holders.

[Iormlund]

But as I pointed out earlier, killing institutional lending to banks can have the same effect as a bank run.

I have to disagree. Bankia still has a humongous amount of deposits, and thus a crapload of potential clients. You scare those off, and who are you going to sell your products to?

Plus the only institution that will lend any money to a Cypriot bank is the ECB in any case.

And I guess the other point I'm trying to make is that mom and pop depositors with balances above 100K euros aren't that much different from bond holders.

I have no issue with rich depositors taking it in the rear. They don't fall under the guarantee.

I have an issue with fucking everyone else so those Russian oligarchs can enjoy the fruit of their "labor".

[alfred russel]

And I guess the other point I'm trying to make is that mom and pop depositors with balances above 100K euros aren't that much different from bond holders.

I disagree. Bondholders have options, and it is a good thing to encourage them to take into account risk when they invest.

Your mom and pop depositors have some practical problems if they want to stop banking in their own country, and in any event the implication of them doing so (banking moves out of the eurozone periphery) is quite bad.

[Admiral Yi]

Your mom and pop depositors have some practical problems if they want to stop banking in their own country, and in any event the implication of them doing so (banking moves out of the eurozone periphery) is quite bad.

As Iorm pointed out one function that banks perform is much like a utility: having access to a recognized method of making payments and transferring funds is more or less a prerequisite for living in an advanced economy. 

But individuals with balances above 100K euros are doing more than than maintaining a pool of funds to pay expenses as they are incurred.  They're seeking a return.  Grandpa and grandma with 200K euros in CDs are not very different from an institutional bond holder.  Actually I would go so far as to argue that 100K euros might be too high a limit for deposit insurance.

[alfred russel]

Your mom and pop depositors have some practical problems if they want to stop banking in their own country, and in any event the implication of them doing so (banking moves out of the eurozone periphery) is quite bad.

As Iorm pointed out one function that banks perform is much like a utility: having access to a recognized method of making payments and transferring funds is more or less a prerequisite for living in an advanced economy. 

But individuals with balances above 100K euros are doing more than than maintaining a pool of funds to pay expenses as they are incurred.  They're seeking a return.  Grandpa and grandma with 200K euros in CDs are not very different from an institutional bond holder.  Actually I would go so far as to argue that 100K euros might be too high a limit for deposit insurance.

Grandma and Grandpa with 200k euros may be working class people that saved all their lives and don't know the first thing about evaluating the risk inherent in financial institutions or how to move their banking offshore. I don't think it is accurate to compare them to institutional bond holders.

Part of the reason it is important to have deposit insurance is that people can participate in the financial system without being financially sophisticated. Grandma and Grandpa losing confidence and putting their money under the mattress isn't healthy for anyone (except perhaps the criminal element).