Eurozone—the good guys win a few

While it has taken far longer than I would have liked, the idea that the greediest, most corrupt vandals in the world of finance should be allowed to make all the important decisions for the economy is slowly, slowly coming to an end.  Because I try to celebrate every tiny success the rest of us have at the expense of the Über-Predators, I may in fact come across as more optimistic than is warranted.  And as a citizen of USA I must also note that the marchback against the evils of neoliberalism seems to happen most often outside our borders.  The easiest explanation for this situation is our two-party system.  It just easier to turn the ship of state with a parliamentary democracy.

This first article is about the mechanics of "bailing out" the various failing banks around the world.  Taxpayer outrage is demanding that public money must not make gamblers whole.  The Dutch may have given us a method that more satisfies the public who rightly believe that their living standards should never drop to pay for the crimes and carelessness of the banksters.

A Successful Taxpayer Revolt Against Bank Bailouts In the Eurozone

Wolf Richter, Testosterone Pit | Feb. 27, 2013

Bank bailouts in the Eurozone, like bank bailouts elsewhere, have made owners of otherwise worthless bank debt whole through a circuitous process where, in the end, taxpayers transferred their money to investors.

Even in Greece, investors were coddled. Even Proton Bank that had siphoned off $1 billion in a scheme of fraud, embezzlement, and money laundering was bailed [European Bailout Fund For Greek Money Laundering And Fraud].

By contrast, private-sector holders of Greek government debt got ugly haircuts of over 70%. Public-sector holders, like the ECB, got off scot-free. It wasn't fair. But fairness had nothing to do with it. These were bailouts! That’s how it was done. Until now.

SNS Reaal, fourth largest bank and insurance group in the Netherlands, cratering under a huge load of rotting real-estate loans, was bailed out on February 1, after already having been bailed out in 2008, and nationalized with a €10-billion package.

A collapse and bankruptcy “would have unacceptably large and undesirable consequences,” explained Dutch Finance Minister Jeroen Dijsselbloem, confirming that bank bailouts would be the norm in the Eurozone.

Only question: to what extent would taxpayers be sacrificed? In the SNS bailout, all depositors were made whole. But stockholders were wiped out. And so were holders of junior debt!

Tremors went through the system. Stories surfaced of individual holders, such as artists, who’d lost their savings because they’d bought these crappy bank bonds that had been touted as safe.

That junior debt would have been worthless anyway in a bankruptcy, retorted Dijsselbloem and stuck to his semi-hard line—semi-hard because holders of senior debt and covered bonds were still bailed out by taxpayers.

On Monday, the Dutch Council of State blessed that procedure and thus set an example for the rest of the Eurozone: when a bank is bailed out and nationalized, owners of its debt can lose their entire capital. The unwritten government guarantee on bank debt is off.

A government finally drew the line on one of its big banks, instead of flailing about to justify why taxpayers had to bail out bondholders who’d benefitted from the yields that had compensated them for the risks. Why tolerate a situation where the capital “at risk” wasn’t at risk?

That exotic theory is already spreading. Dijsselbloem is President of the Eurogroup that approves country bailouts. And the German government has been toying with the idea of going after bank investors for months. At issue: the bailout of the banks in Cyprus. But there, it’s more ... delicate. These banks didn’t issue a lot of debt. They didn’t have to; they were flooded with deposits from rich Russians, Russian companies with mailbox subsidiaries in Cyprus, and even Oligarchs [Cyprus, ‘A Money Laundering Machine For Russian criminals’].

As more stories about the Russian connection surfaced, the unwritten government guarantee of uninsured bank deposits has been fraying around the edges. The Cypriot government, unlike the Dutch government, cannot bail out its own banks. It’s bankrupt too and needs a bailout. So, which bank stakeholders get bailed out and which get sacrificed will have to be negotiated with the Troika. Even deposit accounts aren’t sacrosanct anymore, and their owners, the “rich Russians,” are being prepped for a haircut, a mild one presumably, not a crew cut. Nevertheless, it would break another barrier.

Next? Senior bank debt. Its unwritten government guarantee has not yet been broken, and any attempts to do so would be met with determined opposition by the banks themselves. Once investors in senior debt realize that they could lose their capital, they would, in theory, demand higher yields to compensate them for the risk—thus raise the cost of funds for banks and squeeze their margins.

So far in the Eurozone, it has just been one major bank, but not a TBTF bank, where junior debt holders lost their shirts. More such bank bailouts would have to take place before investors accept them as reality and price that risk into the equation. Then, they might actually try to look at the crap these banks have hidden in their basements.

In theory. In practice, central banks rule. Their money-printing operations and asset-purchase programs have distorted the markets. Risk has been wrung out of the equation. If a bank is TBTF, it wouldn’t be the taxpayer to bail it out directly, but the central bank, as the Fed had done, beyond the reach of democratic processes or controls, with amounts that dwarf what the taxpayer could do, generating huge profits for bailed out investors and those betting on these bailouts, and in the process devaluing the currency for everyone else.

“I’m sitting on cash,” Felix Zulauf said when he was asked in an interview where he was putting his money. With decades of asset management experience under his belt, he’d founded Zulauf Asset Management in Switzerland in 1990. But now he was worried—and has turned negative on just about everything. Read.... By Midyear, Europe 'Can No Longer Live With This Euro' more

Of course, destroying the Euro is utterly unacceptable to the financial world.  It has made them VERY rich and powerful.  Apparently Grillo understands this and intends to gain the maximum concessions from the banksters by threatening to crash their pet project.

And Now Beppe Grillo Wants Italians To Vote On Leaving The Euro

Matthew Boesler  Mar. 3, 2013

Beppe Grillo, the leader of Italy's nascent Five-Star Movement catapulted into power by last week's Italian elections, is causing a bit of a stir this weekend.

Saturday, Grillo told German weekly news magazine Focus that given the dire straits Italy's economy is in, if things didn't change, Italians would want to leave the euro.

Then, in an interview Sunday with Bild — Germany's biggest newspaper — Grillo said he supports a referendum on euro membership.

Referenda on euro membership in the euro area periphery, which is suffering the pain of record levels of youth unemployment and, in Italy's case, a deepening recession, tend to spook investors.

Reuters correspondent Steve Scherer has the details:

"I am a strong advocate of Europe. I am in favor of an online referendum on the euro," Beppe Grillo told Bild am Sonntag.

Such a vote would not be legally binding in Italy, where referendums can only be used to repeal laws or parts of laws, but would carry political weight. Grillo has said in the past that membership of the euro should be up to the Italian people.

In a recent note, referring to Grillo's party's rise to power, Citi political analyst Tina Fordham wrote, "The outcome [of the elections] also reflects the collision between two macro trends we have long warned of: the rise of anti-establishment sentiment and the increased skepticism towards European obligations in the midst of a slow-growth or no-growth economic situation."

Grillo's comments Sunday introduce the sort of headline risk that the Italian elections have returned to the forefront of the euro crisis storyline.

The Five-Star leader has pledged not to form a coalition with Pier Luigi Bersani's center-left party, which means now Bersani has to forge a coalition with Silvio Berlusconi's center-right party in order for Italy to form a government. The problem with that is that Berlusconi and Bersani don't really agree on much and neither is really incentivized to compromise with the other.  more

There are no folks on earth more business-friendly than the Swiss.  This is the country that invented Calvinism and they are cultural Calvinists to the bone.  Or are they?  They might believe in their souls that God blesses the rich and any action which thwarts this glorious outcome is shaking a fist at the heavens, but they just passed by popular referendum a tough law aimed to curbing excessive corporate perks.  There are a lot of corporations headquartered in Switzerland staffed by people who utterly disagree with this outcome so it will be interesting to see how this plays out.  Calvinism has been around since the 16th century—its roots are very deep in Switzerland.

Swiss voters approve tough limits on corporate pay

A majority of Swiss voters angry at corporate greed on Sunday backed a proposal to give shareholders of Swiss-based publicly traded companies the power to rein in corporate pay and ban “golden handshakes,” according to official results.

By Vicky MORGAN in Switzerland 03/03/2013

Swiss voters voiced their anger at perceived corporate greed Sunday by approving a plan to boost shareholders’ say on executive pay.

Some 67.9 percent of voters backed the “Rip-Off Initiative,” with 32.1 percent against, according to the official count broadcast by Swiss public television station SRF.

The outcome of the referendum was considered a foregone conclusion after opinion polls in recent months showed strong public support for the initiative.

News last month that the outgoing board chairman of Swiss drug maker Novartis AG, Daniel Vasella, was to receive a leaving package worth 72 million Swiss francs ($77 million) further fired up public sentiment against “fat cat” bosses. Vasella later said he would forego the deal, but by that time the incident had dashed opponents’ hopes of stopping the initiative.

“Today’s vote is the result of widespread unease among the population at the exorbitant remuneration of certain company bosses,” Justice Minister Simonetta Sommaruga told a news conference in the capital Bern hours after polls closed.

Swiss lawmakers will now have to draft a law giving shareholders the right to hold a binding vote on all compensation for company executives and directors. The law will also ban “golden hellos” and “goodbyes” - one-off bonuses that senior managers sometimes receive when joining or leaving a company.

It also promotes greater corporate transparency, for example by requiring that all loans to executives be declared and forcing pension funds to tell their members how they voted at shareholder meetings.

The measure targets all Swiss-based companies as long as their shares are publicly traded. Breaching the rules could lead to a fine of up to six annual salaries and up to three years in prison.

“It’s a powerful signal,” said Thomas Minder, an independent lawmaker and businessman who was one of the main forces behind the Rip-Off Initiative.

Opponents conceded that their efforts to warn voters of the possible risks to the Swiss economy had failed.

“We will respect the will of the people,” said Pascal Gentinetta, chairman of the powerful business lobby group economiesuisse.

But Christa Markwalder, a lawmaker with the pro-business Free Democratic Party, said foreign firms could now think twice about moving their headquarters to Switzerland. In recent years the country has attracted firms such as oil rig owner Transocean Ltd., fire and safety company Tyco International Ltd., and bakery conglomerate Aryzta AG thanks to its comparatively low taxes and light-touch regulation.

In Europe, some other countries such as the Netherlands and Denmark already have similar legislation allowing shareholders at least a binding vote on executive compensation. But in the U.S. and Britain such “say-on-pay” votes are non-binding.

The Swiss decision comes on the heels of a European Union decision this week to cap bankers’ bonuses at one year’s base salary except in the case of overwhelming shareholder approval.

The idea that shareholders should have a strong say in their company’s affairs chimes with Switzerland’s tradition of direct democracy. Voters in the country who collect 100,000 signatures can force a binding referendum on any issue. more