The story is familiar to anyone who has read Michael Lewis’s bestseller "The Big Short." As it turns out, a Dusseldorf-based German bank called IKB Deutsche Industriebank really was on the other side of many of these trades—including the Abacus deal that resulted in Goldman Sachs paying a record fine to the Securities and Exchange Commission.
Something similar was occurring at the same time with the debt of Ireland’s banks. French and German financial institutions were gorging on the debt—and now that the Irish financial system has cratered, they are benefiting from a series of bailouts that have ensured they haven’t lost a dime.
The European version of Wednesday’s Wall Street Journal tells the story:
The latest figures from the Bank for International Settlements show that euro-zone banks had $285.7 billion in claims on Ireland as of September 2010. Burning these creditors would inevitably cause pain, not least in France and Germany, whose banks hold the bulk of the euro-zone exposure to Ireland according to the BIS.
But pain in German banks ought to be Germany's responsibility to mollify, not Ireland's. If losses on Irish debt would cause German banks to require recapitalization, then German taxpayers should pony up to fill the gap, and likewise across the euro-zone core countries. The threat of "contagion," that favorite bugbear of officials at the EU and the International Monetary Fund, is a reason to spread cleanup responsibility around, not to plug it up at the edges.
Despite already having received $64 billion of bailout money, many Irish banks are still on the brink of failure. Many Europeans have taken to looking down their noses at what looks like the profligacy of the Irish banking sector. But this profligacy was made possible by the profligacy of the creditors of the Irish banks—especially the Eurozone banks.
To put it differently, the bailout of Ireland's banking system is much like the bailout of AIG: the rewards are largely being reaped by the banks behind the scenes.
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