You entrusted your money to people who eat smoked guillemot?

You entrusted your money to people who eat smoked guillemot?

I was in the UK in 2008 and 2009 when the Icesave banking disaster happened, and the UK government rushed to use anti-terrorism legislation to try and protect the money of British investors. There were something like 300,000 “ordinary” British and Dutch investors with money in Icesave accounts, and when the disaster happened all but the first 20,000 pounds or so were not protected by deposit insurance, so the UK government acted to try and protect the full deposits of the savers. I remember this clearly [although, probably not details of dates and money amounts] because one of my colleagues at the time had 120,000 pounds parked in such an account, the proceeds of selling her house, and was looking forward to using the money – inflated by the high interest – to buy her next one, and she was understandably distraught when she woke up to discover it had vanished into volcanic smoke.

I also remember at the time that there was a lot of anger in the British public, not only at Iceland, but also at the British government for guaranteeing the deposits of people who were basically risking their money to get a higher rate of return. I often heard the refrain “they knew the risks” and many people pointed out at the time that higher interest rates usually correspond with higher risk, and these people could have had their money protected if they had taken more reasonable risks in a UK bank. This rhetoric probably wasn’t based entirely in fact, since British deposits weren’t fully guaranteed, and the UK government had to rush to assure large deposits in Northern Rock after it failed[1], but the general rhetorical principle was correct, British banks were safer than Iceland banks and had a correspondingly lower rate of return. The question was asked: should we bail out people who knew the risks they were taking? (Incidentally, I didn’t actually know at that time that a slightly higher rate of interest in a country that I assumed had good banking laws was a sign of higher risk; as a result of the rhetoric of that period I reassessed my involvement in an ING online account that is now defunct).

I can’t easily find articles online from the time that say these things, but I don’t think my memory is wrong. This comment by an academic from McGill University (Canada) makes the point that investors should wear the risk; this blog roundup suggests that many economists thought it was right for Iceland to refuse to protect investors, and indeed Christine Lagarde of the IMF thought Iceland took the right approach. I can’t find any articles directly demanding that deposit holders should carry their risk, but I do remember it being a commonly-stated view at the time, and the view that Iceland did the “right thing” by telling investors to take a haircut is well-accepted, I think, as is the view that it has recovered better than those economies that did not. A subsidiary view, that deposit insurance creates moral hazard, is widely broadcast I think and is consistent with the idea that if you want to get a high rate of return on your deposit you need to be willing to accept the risk that you will lose it, pour encourage les autres. So I don’t think I’m wrong about this perspective and how it was broadcast at the time even if I can’t find written evidence.

The idea that “investors” should wear the risk they take when chasing big profits seems completely reasonable, until one remembers that in this case the investors (and ultimately the creditors) for Icesave included depositors, that is ordinary people who put money in a high-risk/high-return account hoping for a short term gain. It seemed at the time that a lot of people were comfortable with the idea that creditors should just put up with their haircut, and depositors “knew the risks.”

So it’s interesting to compare this rhetoric with the rhetoric surrounding Greece’s recent troubles. Much of the rhetoric about Greece focuses on its profligacy, the easy-spending nature of the Greeks, their corruption, their crazy ideas that they could just keep taking on more debt and spending it however they want. You don’t see much rhetoric (or at least, I haven’t) questioning why people were willing to lend them all this money, and why their creditors are now so heavily exposed. Remember that for every debtor there is a creditor, and the creditor wouldn’t be lending the money if they didn’t want to, i.e. if they weren’t benefiting from it. When Icesave collapsed the greedy motives of the creditors (and, implicitly or explicitly, the depositors who make up a certain proportion of those creditors) was front and centre in the debate, but it’s strangely absent from the Greek debate. We know that in the early stages of its crisis Greece had to take on a lot of public debt to bail out banks that were in trouble; at the time of writing it appears that private debt constitutes about 60bn euros of Greece’s total, which would have been about 30% of the total debt before the collapse. Why were these people lending money to a country that was cooking its books, had apparently obviously unsustainable pension and welfare systems, and an entire population that we are now told were slurping up ouzo down by the beach rather than working 12 hour days like Germans? These creditors didn’t have to lend this money, they could have bought German bonds or Iranian nuclear futures or something more solid and reliable. They loaned money to Greece because up until the crisis Greece’s economy was growing faster than anywhere else in Europe, everyone wanted a slice of that golden Greek sunshine, and basically they thought they could make their motza[2] and get out before the whole shebang went tits-up. i.e., they were greedy. Yet nowhere do we hear tell of their greediness – even though at the same time as their golden goose was turning barren, Icesave depositors were copping flak in the press and the public for being greedy and reckless.

Why is that?

We also shouldn’t stop with these faceless private lenders, who are no doubt lounging around in a gold-plated yacht off some private Greek Island, fluffy white cat firmly en-lapped. We can also wonder why none of this rhetoric of recklessness extends to the dour and responsible Germans. Germany has 60bn Euros sunk in the Greek project, and it is earning a healthy rate of interest. Germany, the country that has never paid its debts, the ultimate trust fund kid, is now strangely insistent on Greece paying its debts, and no one anywhere is questioning why Germany is so exposed to the economy of a country it has deplored as reckless, irresponsible, intransigent and wayward (indeed, worse than Iran if we are to judge by their negotiating results). A handful of eurozone countries have something north of 200 bn Euros sunk into the Greek project, and we now know that they are making a lot of money from this little act of charity: the Guardian’s live blog today tells us that David Cameron is contemplating demanding some of the 1.9bn Euros in profit that the ECB has made from its loans to Greece (though it doesn’t tell us over what period that profit was made). How come this fact – that the eurozone lenders are making fat scads of cash – is not being broadcast widely, as the Icesave depositors’ greedy winnings were being broadcast in 2008? Instead of this morality play, we are constantly reminded that the German taxpayer doesn’t want to have to cough up his or her hard-earned dollars to cover Greek mistakes. Yet right now the German taxpayer is making money from this debacle, so shouldn’t we be instead asking why the German taxpayer tolerates his or her government sinking 60bn Euros into a high-risk, high short-term profit venture in junk bonds? Germany is a responsible country, we’re told, whose taxpayers don’t take risks – at the same time as the media carefully avoids reporting on the big money Germany stands to make if Greece doesn’t default.

The situations aren’t exactly the same of course, and people could argue that the eurozone nations didn’t have a choice – they aren’t loaning this money because they want to, the poor darlings, they’re doing it to save Greece and the euro project. But they did have choices, many choices: they could have told those (primarily French and German) banks to fail, as Iceland did, back at the beginning of the crisis; they could have rushed through some changes to the welfare transfers in the EU to ensure that Greece received direct payments rather than loans[3]; they could have printed money and handed it to the banks, as the UK and US did; they could have raised debt in their own countries, which are much less financially at risk, and provided it as a grant or something; they could have told Greece to find the money on private money markets. But they didn’t, they chose to lend money to Greece on terms that just happen to deliver them large profits – profits that are likely larger than they could have got from e.g. buying each others’ government bonds, or investing in the kind of low-return portfolios that would be politically acceptable to their electorates. And it just so happens that, since they control the mechanism by which Greece generates the repayments of those debts, they are able to turn the screws to ensure the money keeps coming – unlike those investors in Icelandic banks, who have no direct means of control over Icelandic politics and economy (and anyone from Britain who is old enough to know about the Cod Wars should surely know how hard it is to control Iceland!)

And all while this was going on, we were being told about how irresponsible ordinary depositors were to put their money in a bank that had a high interest rate. It’s almost as if the morality underlying the rhetoric depends entirely on the people who took the risks …

Fn1: Northern Rock was then run by famous climate change denialist Matt Ridley, which one should always remember when one is considering how far our modern banks have sunk, and how much one should trust the risk assessment abilities of climate change denialists.

Fn2: This is a Greek word, trust me, I’m Australian so I know Greek slang

Fn3: Something you might argue is hard to do, but it appears that today the leaders of the ESMF have been able to magic up 20 billion euros from the Common Agricultural Policy, in order to find a way to provide rapid finance without leaning on the ECB[4]

Fn4: Which makes one wonder, doesn’t it? Have these people been listening to the Greek government when it tells them how fucked it is? Had they not noticed? They just spent two days arguing with a Greek dude about whether to give him any money, and after they agree they find they don’t have any mechanism to provide the money, and he needs it now and he’s been telling them that for weeks! Perhaps instead of spending that two days arguing, they could have spent it more productively looking for their wallet.

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