Quite frankly, I am a little bit afraid.
It's easy to see why the British would be furious with the Irish guarantee but from what I can tell it looks like it falls well within the rules of what is permitted by the EU regulations on competition. Under those rules the state is allowed to intervene and support an entity or entities for two reasons. One is in the case of an emergency and allows intervention for a period of no more than six months. The other is in the case of a restructuring and has a two year time limit. The British government used both these clauses themselves to rescue Northern Rock, first as an emergency case and currently as part of a restructuring plan. The only problem the Irish government may face might be due to a technicality of not following the correct procedures for implementing their plan or notifying all relevant parties. They will also need to show some sort of restructuring plan such as increasing the deposit/lending ratio of the banks to give it more credibility but all things considered it looks pretty sound.On the competition issue, the BBA in the UK have already launched a complaint to Europe. Gordon Brown was clearly furious on the news last night. Neelie Kroes didn't sound best please either.
I think you are misunderstanding this guarantee, sfag. The banks are totally exposed to their losses until the shareholder equity runs out, as is always the case with a limited liability company. It is the depositors who are guaranteed against losses after the shareholders have been wiped out. This is not a silver bullet to bank profitability, but it did stave off immediate collapse by restoring some sort of confidence.But why the continuing sell off – aren’t the banks covered against any loss?
Actually - I'll part answer one of the questions my self. Have just heard on the radio that the terms of the guarentee are not yet established and that the EU are sounding more favourable on it - which can mean only one thing - its not the guarentee they originally promised.
sfag the move was to improve the liquidity of the banking system by assuring depositors/wholesale funders that, come what may, the Irish government will see them okay. It was not a guarantee to banks that, come what may, they will be protected from too many bad debts or insolvency.
First the "shorties" were sent to the sin bin, and we got a 30% boost, only to be wiped out in a short space of time. Then we got the government guarantee. Another 30% boost, but now after an even shorter honeymoon period they have fallen back to their lowest levels. What further rocket fuel is left? And what about when them shorties get outa the sin bin?
[broken link removed]A poster on the Global Edge Investors discussion board who goes by the name of Cgnao spelled out a possible road map brilliantly and I reprint this with his permission:
1) Short sellers are mostly hedge funds and other highly leveraged speculators, betting using borrowed money.
2) They went short because they anticipated bank failures and they were making huge profits because they were right.
3) Central banks and governments step in and change the rules.
4) Regardless of fundamentals the shorts have to cover, sending shares of insolvent banks higher.
5) The general public believes the market has turned and buys those banks, sending shares even higher and hedgies' losses spiralling.
6) The huge losses the hedgies are taking make them default on their leveraged loans.
7) But think about it, who lent them the money? The same banks they were shorting!
8) More bank collapses follow. Investors get scared and dump their positions. No shorts left means no more short covering rallies and the ensuing crash is all the greater.
Ah now, it lasted somewhere between 30 seconds and 30 minutes. BoI for example, sold at 4 euro (from it's price of 3.20 before the announcement) to close at 3. Now call me a cynic, but I think that someone was trying to rig the price by making a small purchase at an inflated level in the hope that it would set the new level. Or maybe I'm a cynic and there's a some investor who is going to be a little surprised that his small purchase of shares just happened to be at the high point for the day when his stockbroker calls...Another dose of rocket fuel, 1/2% cut in interest rates across the globe. This time there was no bounce left in that poor inanimate feline.
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