EU Banks still get subsidies from impoverished citizens

Press conference by Michel Barnier, Member of the European Commission, on the establishment of a Single Resolution Mechanism for the Banking Union. He is probably showing the dimensions of connections between governments and banks. (EC Audiovisual Services).

Press conference by Michel Barnier, Member of the European Commission, on the establishment of a Single Resolution Mechanism for the Banking Union. He is probably showing the extent of connections between governments and banks. (EC Audiovisual Services).

Five years after the melt down of the western financial system, triggered by the bankruptcy of Lehman Brothers in September 2008, and the European taxpayers still pay the price. According to European Commission’s estimates the cost of government (aka taxpayer and all citizens) support to failing banks in Eurozone reached €4.5 trillion during the first years of the crisis. Unfortunately there is not an end to this.

Eurostat, the EU statistical service, released yesterday a survey portraying government deficit and debt data for 2011 – 2012. A special part of this Eurostat survey is devoted to the estimates of subsidies accorded to banks. According to those estimates, during the two-year period of 2011- 2012, the impact of the support to financial institutions on government deficits was 0.7% of Eurozone’s GDP, or €67 billion. In the EU28 this impact was a bit less at 0.5% of GDP. No doubt then that a good part of government deficits is still attributed to government aid to failing financial institutions, many years after the crisis. Let’s dig a bit deeper into this.

Who pays the price?

All along during the past five years, many Eurozone and other EU countries had to introduce severe austerity programmes, cutting down wages, pensions, social protection and increase taxation, in order to arrest deficits and debts. Eurostat found that this endeavour was successful. No reference is made of course by the statisticians, to the great social and political costs which now shake badly the south Eurozone countries.

According to this source, “In the euro area the government deficit to GDP ratio decreased from 4.2% in 2011 to 3.7% in 2012 and in the EU28 from 4.4% to 3.9%. In the euro area, the government debt to GDP ratio increased from 87.3% at the end of 2011 to 90.6% at the end of 2012 and in the EU28 from 82.3% to 85.1%”.

In 2012, seventeen member states had budget deficits higher than 3% of GDP, “with the largest registered in Spain (-10.6%), Greece (-9.0%), Ireland (-8.2%), Portugal and Cyprus (both -6.4%). In all, fifteen Member States recorded an improvement in their government balance relative to GDP in 2012 compared with 2011, twelve a worsening and one remained stable”. Invariably ,all the worst hit countries by government deficits had to support their banks. In Greece, the part of deficit attributed to aid to the financial system was 3.1% of the GDP in the two-year period of 2011-2012. For Spain the relevant figure was 4% of GDP, for Ireland 4.5% of GDP, Portugal 1.1% of GDP and Slovenia 0.5%.

It’s always the banks

The impact of government aid to financial institutions on sovereign debt was also important. It affected though a much larger number of EU countries and not only the ‘usual suspects’. According to Eurostat, “The largest impact on the government balance sheet is observed in Ireland (an increase in liabilities by 28 percentage points of GDP in 2012). The impacts are also large in Belgium, Denmark, Germany, Greece, Spain, Cyprus, Latvia, Luxembourg, the Netherlands, Portugal and the United Kingdom, with the highest annual impacts exceeding 4pp of the GDP.

However, apart from the straight forward liabilities undertaken by governments, resulting from their direct aid to financial institutions, there are more hidden ones. Eurostat calls them “contingent liabilities”. According to this source, there are “contingent liabilities which may contribute to government liabilities in the future, but are not currently recorded as government debt. In the majority of the 18 EU member states that undertook such interventions, they result exclusively from guarantees granted on financial institutions’ assets and (or) liabilities.

In two member states (Greece and the United Kingdom) significant amounts of contingent liabilities arose due to securities issued under liquidity schemes. In France the most important component of contingent liabilities is the value of financial instruments transferred to a special purpose vehicle. A further five member states (Denmark, Ireland, Spain, Austria and Portugal) report liabilities relating to special purpose vehicles, but they constitute a lower proportion of their total contingent liabilities”.

In reality, there is no end to this close interconnection, between exchequers and financial institutions. Hopefully, the enactment of the European Banking Union and the institutionalisation of the Single Supervision Mechanism over Eurozone’s banking system under ECB, will cut off this catastrophic umbilical cord connecting governments and banks.

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