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European Bank Jitters As Spain Steps In To Save Cajasur

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The Bank of Spain intervened over the weekend after merger talks with Unicaja broke down. Cordoba-based Cajasur can draw €550m (£477m) immediately from the state's Fund for Orderly Bank Restructuring. "This will guarantee that it can continue to operate and fulfil its obligations," said the central bank.

The collapse of Cajasur is likely to revive fears over the health of Spanish banks, which skirted the US subprime crisis but are succumbing to local property busts. Cajasur is heavily exposed to second homes on the Costa del Sol, where prices are in free fall. Goldman Sachs said Spain's property companies have debts of €445bn, or 45pc of GDP, mostly owed to savings banks known as cajas. The stock of unsold homes reached 926.000 at the end of last year.

"Banks may not be able to recoup large parts of these loans. These losses will have to be recognised eventually, bringing down many institutions," it said. The bank added that the two giants, Santander and BBVA, are in good health.

The rescue follows a move by the Bank of Italy last week to suspend mark-to-market accounting for eurozone government bonds, thus alleviating strains on banks' capital ratios.

The rule change brings Italy closer in line with other eurozone states and keeps the lending taps open, but has raised eyebrows in the City.

"It means that they don't have to take a capital hit, which makes you think one or more Italian banks have very significant exposures to countries whose debt is under pressure," said John Hitchins, a banking expert at PricewaterhouseCoopers.

Ireland was rattled by warnings from Morgan Kelly, professor of economics at University College Dublin, that the open-ended rescue of the Irish banks would ruin the country. "What will sink us, unfortunately but inevitably, are the huge costs of the bank bailout," he wrote in the Irish Times. "Even under the most optimistic assumptions about government spending cuts and bank losses, by 2012 Ireland will have a worse ratio of debt than Greece."

The next leg of the banking crisis about to kick off?

Still I'm sure it's contained..

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What will sink us, unfortunately but inevitably, are the huge costs of the September 2008 bank bailout, writes MORGAN KELLY

IT IS no longer a question of whether Ireland will go bust, but when. Unlike Greece, our woes do not stem from government debt, but instead from the government’s open-ended guarantee to cover the losses of the banking system out of its citizens’ wallets.

Even under the most optimistic assumptions about government spending cuts and bank losses, by 2012 Ireland will have a worse ratio of debt to national income than the one that is sinking Greece.

On the face of it, Ireland’s debt position does not appear catastrophic. At the start of the year, Ireland’s government debt was two- thirds of GDP: only half the Greek level. (The State also has financial assets equal to a quarter of GDP, but so do most governments, so we will focus on the total debt.)

Because of the economic collapse here, the Government is adding to this debt quite quickly. However, in contrast to its inept handling of the banking crisis, the Government has taken reasonable steps to bring the deficit under control. If all goes to plan we should be looking at a debt of 85 to 90 per cent of GDP by the end of 2012.

This is quite large for a small economy, but it is manageable. Just about. What will sink us, unfortunately but inevitably, are the huge costs of the bank bailout.

We can gain a sobering perspective on the impossible disproportion between the bailout and our economic resources by looking at the US. The government there set aside $700 billion (€557 billion) to buy troubled bank assets, and the final cost to the American taxpayer is about $150 billion. These sound like, and are, astronomical numbers.

But when you translate from the leviathan that is America to the minnow that is Ireland, it would be equivalent to the Irish Government spending €7 billion on Nama, and eventually losing €1.5 billion in the process. Pocket change by our standards.

Instead, our Government has already committed itself to spend €70 billion (€40 billion on the National Asset Management Agency – Nama – and €30 billion on recapitalising banks), or half of the national income. That is 10 times per head of population the amount the US spent to rescue itself from its worst banking crisis since the Great Depression.

Having received such a staggering transfusion of taxpayer funds, you might expect that the Irish banks would now be as fit as fleas. Instead, they are still in intensive care, and will require even larger transfusions before they can fend for themselves again.

More at the link.

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A WARNING from economist Prof Morgan Kelly that the bank bailout will ultimately leave the State insolvent is based on serious inaccuracies, according to the Department of Finance.

Writing in Saturday’s Irish Times , Prof Kelly, who originally predicted the crisis, said the open-ended guarantee of banks’ liabilities and the Nama bailout will leave the Republic with a “a worse ratio of debt to national income than the one that is sinking Greece” by 2012.

A department spokesman said yesterday that the academic’s analysis was extremely pessimistic and based on a number of very serious inaccuracies. He said that two weeks ago, Central Bank governor Patrick Honohan told the Small Firms’ Association the cost of getting the banks out of trouble was manageable and that most of them started the boom with a cushion of shareholders’ funds that would enable them to pay their debts from their own resources.

The department said Prof Kelly’s assertion, that the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium. The State has guaranteed the bank’s bond debts. The department also argued that Prof Kelly’s call to measure the State’s debt against gross national product (GNP) instead of gross domestic product (GDP) made no sense.

“Prof Kelly should be aware that GDP measures the output of the Irish economy and thus what the Irish Government can tax,” the spokesman said. “GNP measures the output of Irish citizens and companies, including that which is earned abroad and taxed abroad.”

Meanwhile, Labour Party leader Eamon Gilmore said he hoped the UCD professor of economics was wrong. Mr Gilmore was worried because it came “from the same Morgan Kelly who, very correctly, predicted what was going to happen with the property market’’. When Mr Kelly had predicted there would be a 50 per cent drop in property prices, many people had said it could not be. “What I found interesting about the article is that he attributes the difficulty directly to the nature and extent of the banking guarantee that was given in September 2008.’’

And now we have the convincing govt denial.

Thank god this Morgan Kelly is a complete idiot who doesn't understand the difference between GDP and GNP I bet he's kicking himself this morning....

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If there is no water why would you need to bail out the boat?

water= money

boat = banks

there is no water.

the boat needs water to be a boat

Edited by Bloo Loo

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Perhaps better to say that you can't bail out a boat that is already underwater..

I disagree.

they say the problem is liquidity.

the boat is high and dry on the bottom of the sea.

the water was fake...the boat is 20 miles from the lake where real water lay.

pouring in more fake water cant refloat the boat.

the soundbite was pretty deep, even for me, he said modestly.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
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      • up 5%

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