Rescuing banks

1. What is the problem?

During the financial crisis of 2007-2008 many banks appeared to be heavily indebted. To such an extent that the economy would have disintegrated if governments world-wide did not intervene. People with savings in failing banks would have lost them and a lot of companies would have gone bankrupt as well… That is why governments preferred bailing out failing banks.

In total, governments world-wide spent more than 9.000 billion Euro to keep banks alive – an amount which is higher than the annual income of the 4,7 billion inhabitants of the south.

One would think banks would be grateful and would maybe do something for society in return. What happened looks more like the opposite.

2. How does it work?

The decision to save a bank is being taken very fast, but the impact of the action is enormous. In 2008 the government bailed out Dexia by putting 6 billion euro in the bank and offering a guarantee of 100 billion Euro. In 2011 Dexia once again found itself on the verge of bankruptcy and got cut into pieces: Belgium paid 4 billion Euro to become owner of the Belgian branch of the bank (renamed Belfius) and gave together with France and Luxembourg a 90 billion euro guarantee to what remains of Dexia, the bad bank Dexia Holding. Belgium is responsible for 54 billion of the 90 billion Euro.

The aim of the guarantee is to restore the confidence of creditors and potential investors: the government will intervene if the bank can not fulfil its commitments. A guarantee of 54 billion Euro means that this is the maximum amount the government will spend to help Dexia to fulfil its commitments. A very high amount that puts a heavy toll on the public budget.

Instead of putting failing banks under control, the government was contempt with the roll of shareholder.

Instead of thoroughly reshaping the financial system, the government takes up the responsibility to get as much money as possible out of nationalised (parts of) banks. Unfortunately, this attitude – maximising shareholder value - is at the root of this crisis! The pressure from shareholders to make as much short term benefits as possible led banks to take more risks before the crisis – taking so many risks that the ensuing losses led them towards bankruptcy.

Moreover, the fact that Dexia had to be saved a second time is the evidence that this bail-out was not profitable at all. Apparently governments do not have the vigour or motivation to make sure bailed out banks sail a sustainable course which is beneficial to society. The government is not happy with owning Belfius either: the government’s vision is to increase its value and to sell it again on the private market.

And it gets even more crazy: once banks were bailed out, financial markets – banks, other financial institutions and investors – flipped the story. They started complaining public debt is too high and demanded higher interest rates to finance public debt, saying there is an increased risk governments will not pay back their debts. Banks and investors are to a large extent responsible for the public debt crisis.

3. What is at stake?

This course of affairs is everything but sustainable. It keeps us from having a stable and economy and can have extreme social consequences. The bail outs were a blank cheque. Although the crisis demonstrated the destructive effects of the way the finance sector is run, most governments did not impose strict rules on banks or other financial institutions. There is no guarantee that a crisis with the force of the one we witnessed in 2008 will not occur again. More crises, more social disruption and more economic victims…

It is the citizen, the common man and woman, who are expected to carry the burden of paying for the financial crisis and bailed out banks which do little more than keeping the system afloat for a little while. Government debt rose spectacularly since 2008 and this is the consequence of the financial crisis. Directly through the funds governments used to bail out banks and indirectly because of the economic crisis that came after the financial crisis in 2009. The economic downturn led to increased social expenditure and lower tax income.

Hypocrite financial markets - which wouldn’t even exist anymore if governments hadn’t bailed them out with our tax money – take hostage of indebted countries. As these countries have to pay higher interest rates, it becomes increasingly difficult for countries to pay back their debts.Markets demand that governments reduce their deficits by decreasing non profitable activities like social security and privatising public services (public transport, water supply, etc…).