Shine A Light

While Bob Diamond performs his act of contrition, Europe gives bankers even greater power

In light of the LIBOR scandal, UK media has paid little attention to the formation of the European Stability Mechanism, an autonomous body which will take over the handling of banking loans from governments across the Eurozone. In a context of interest rate fixing and widespread dodgy accounting, this decision may serve only to deepen the crisis. 

Mel Kelly
10 July 2012

While our news media gives us wall to wall LIBOR scandal – British people are being denied an in depth analysis of the consequences of last week’s vote by European leaders to introduce the European Stability Mechanism (ESM) to control European government lending to stricken banks.

As we begin to learn about the LIBOR manipulation we are being given no facts on the consequences of the introduction of the ESM and another vital change which actually reduces the financial protection for governments (taxpayers) lending to stricken banks.

For the past four years European governments (taxpayers) have been borrowing hundreds of billions of pounds to lend directly to European banks, with governments controlling the conditions of the lending and with the guarantee of “preferred creditor status” over all the banks who want access to these borrowings.

European leaders voted last week to change the relationship to one where governments borrow hundreds of billions of pounds and hand this money unconditionally to a new body - the European Stability Mechanism (ESM) – who will control and lend the money to the stricken banks with the lenders (governments) having no say or control over the lending.

As well as voting to remove government control of banking lending, European leaders also agreed to try to strip governments (the lenders) of their “preferred creditor status” on the new £100 billion loans to Spanish banks (and possibly other loans given by the ESM in the future as, reports claim, this change is “for now at least” only for loans to Spain).

The world bank would not lend £100 million to Thailand without preferred creditor status as this preferred creditor status helps ensures a higher credit rating by International credit rating agencies  - so is it wise to expect European governments to  drop this protection and risk lowering the credit rating of the ESM before it is born on a minimum loan of 100 billion euro, especially as existing bondholders could lose vast amounts of their money without this injection of vital capital?

Add to this the IMF still keeps its preferred creditor status over the ESM meaning if the IMF and ESM lend money the IMF gets their money guaranteed while Eurozone governments don’t!

On news that Eurozone governments would bear an even greater risk liability (and the Spanish banks and private investors less) for the massive £100 billion-plus loan Spanish banks are to receive, Santander’s share price soared.

Just days after Euro leaders agreed to strip taxpayers of their financial protection on lending to Spanish banks, the New York Times reported on 4July 2012 that former head of the IMF Rodrigo Rato was ordered to appear before a Spanish court over his stewardship of the mortgage lender Bankia, forced to restate its 2011 results from a 309 million euro profit to a 3 billion euro loss after it was seized by the Spanish government in May.

This hardly inspires confidence in either the credibility of bankers and their declared accounts, or the quality of governance at the IMF, not to mention European leaders’ hopes that dropping preferred creditor status for government loans to Spanish banks will lower the interest rates private investors charge and perhaps increase the amount private investors are willing to lend to the Spanish banks.

Meanwhile Christine Lagarde, the French head of the IMF, interviewed this past week, urges the Eurozone area to speed up:  “banking union is clearly their target..  but that is not enough and they should move fast for fiscal union.. with maybe one of these days one single minister of finance for the whole Eurozone”.

The European banking crisis is still an unquantifiable black hole and rushing through changes that require governments to borrow to lend to banks, with no financial protection, when bankers are still declaring dodgy accounting figures is surely only going to make the crisis even worse. As the Bob Diamond show closes, our news media should expose the European leaders' dangerous deals to proper scrutiny.

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