Series: Governments submit to “Too Big to Fail” banks (part 2)

Governments make Gifts Galore to Private Banks

1 September 2014 by Eric Toussaint


Government aid is made up of guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). , and injections of capital in order to recapitalize the banks. In the period from October 2008 to December 2011, €1,174 trillion (9.3% of EU GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
 [1] ) worth of guarantees were underwritten by European Governments as a contingency measure. To these guarantees must be added €442 billion (3.5% of EU GDP) of public capital support to banks. During 2012 and 2013 the recapitalizations continued: about €40 billion in Spain in 2012 alone, more than €50 billion in Greece, about €20 billion in Cyprus, €4 billion more for Dexia bank in Belgium, €3.9 billion for Monte dei Paschi in Italy, €3.7 billion for the Dutch bank SNS, €4.2 billion in Portugal on top of the Portuguese bail-out of the Banco Esperito Santo in July 2014., not forgetting Ireland, Slovenia, Croatia This assistance was granted without any government supervision of the use made of the funds. [2]

A quick calculation can give an idea of the importance of capital injections if we compare their volumes to the banks’ hard capital Hard capital The capital provided by shareholders plus the undistributed profits (retained earnings). . The 20 largest European banks in 2012 have assets of about €23 trillion, considering that on average their hard capital represents 3% of assets, the total hard capital is roughly €700 billion. If we consider that in recent years, European governments have advanced €200 billion of capital into these banks (a precise calculation would take into account the injections into banks such as Fortis, which were acquired by BNP Paribas), we realize that the contribution is quite impressive.

Some authors refer to State guarantees granted to “Too big to fail” banks as implicit subventions and expose their perverse consequences.

The big banks enjoy implicit subsidies

The banks’ creditors know this as well. They are thus incited to lend to banks knowing there is, supposedly, no risk involved for themselves. They know full well that should one of these banks go belly-up they would escape the losses in so far as the States would take them on, in its quality of lender of last resort. This gilt edged situation permits banks to negotiate their borrowing at the lowest rates of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. (the interest rate being proportional to the risk involved). If the banks did not enjoy this guarantee from the State they would have to pay higher interest rate levels. The difference between these two rates of interest represents an implicit State subsidy to the banks.

A rigorous study by the European Green party has worked out that the implicit State guarantees to the big banks for 2012 amounts to €233.9 billion [3].

This implicit guarantee has perverse consequences:

  • it encourages the big banks to take ever greater risks;





  • these gains are entirely private and do not benefit the population.

Other forms of government aid to banks are:

  • Reductions in taxes effectively paid on banks’ profits. They have declared losses in 2008-2009 (and sometimes for other exercises too) that have permitted tax avoidances over several years. In fact losses are carried forward to following years, thus permitting substantial tax savings. Care must be taken that BNP Paribas does not write down as a commercial loss the $9 billion fine imposed by the US and save the equivalent in tax payments. The French government may cover the fine as it is in close relationship with the banking sector.

- *The refusal to take strict measures against financial institutions, that would avoid repeated banking crises. [9]

- *The refusal to take measures forcing the banks that receive ECB loans to use them in their turn to grant loans to households and small businesses (which are the principal private employers) to stimulate the economy. The banks freely use this money as they see fit without bringing any benefits to the real economy. Since 2012 and 2013 loans to business, especially small business, have decreased. The ECB says that for its next series of loans to banks it will condition them to business and household credits. Wait and see!

Translation : CADTM



Éric Toussaint, is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège. He is the President of CADTM Belgium (www.cadtm.org), and sits on the Scientific Council of ATTAC France. He is the co-author, with Damien Millet of Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He is the author of many essays including one on Jacques de Groote entitled Procès d’un homme exemplaire (The Trial of an Exemplary Man), Al Dante, Marseille, 2013, and wrote with Damien Millet, AAA. Audit Annulation Autre politique (Audit, Abolition, Alternative Politics), Le Seuil, Paris, 2012.

Footnotes

[1European Commission, “State aid : State aid: crisis-related aid aside, Scoreboard shows continued trend towards less and better targeted aid”, Brussels, 21 December 2012. http://europa.eu/rapid/press-release_IP-12-1444_en.htm

[2The Belgian government acquired 10% of the shares of the biggest French bank BNP Paribas (that has been fined $9 billion by US authorities in June 2014), It so becomes the biggest shareholder but without voting rights on the board of directors and its two chosen representatives take part independently!

[4The same banks have been involved in the different abuses and manipulations examined elsewhere .

[6Sovereign bonds of Ireland €9.7 billion; Greece €27.7 billion; Spain €38.8 billion; Italy €89.7 billion; Portugal €19.8 billion.

[7See: Éric Toussaint, Série : “The Banks and the ’Too Big to Jail’ Doctrine (in 9 parts)”. Part 1 published 9 March 2014, http://cadtm.org/Les-banques-et-la-nouvelle

[8According to its CEO, in June 20014, the $9 billion fine that BNP Paribas must pay to US authorities to avoid a condamnation will not affect the bank’s financial health. See Patrick Saurin and Éric Toussaint, “BNP Paribas sanctionnée par les autorités des États-Unis: il faut aller plus loin”, published 13 July 2014, http://cadtm.org/BNP-Paribas-sanctionnee-par-les (in French or Spanish)

[9See: Éric Toussaint, “Comment les banques et les gouvernants détruisent les garde-fous”, published 13 January 2014, http://cadtm.org/Comment-les-banques-et-les (in French)

cadtm.org
Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.

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