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The Geithner Effect

Aside from worrying about his bosses re-election, Mr. Timothy Geither's idea of a 'solution' to the Eurozone crisis is best described in Simon Carwell's  excellent "Anglo Republic - Inside The Bank That Broke Ireland.'

I paraphrase Chapter 19 - particularly page 312.

In mid-November 2010 Ireland's then Finance minister - the late Brian Lenihan - was (privately) negotiating the terms of the nation's impending bailout with the ECB & IMF. To his eternal credit Mr. Lenihan insisted that senior bondholders in Anglo Irish Bank & Irish Nationwide (Building Society) - both bust; both nationalized - should face substantial haircuts. The deeper the haircuts, the lower the already onerous cost of the bailout.

The IMF - to their credit - believe 'lenders should pay for their stupidity before it has to reach into its own pocket'  - a quaint, seemingly old fashioned idea unless you are a ordinary home owner - and presented a plan that would impose haircuts of up to 2/3rd's upon Euro 30billion of unguaranteed bonds. Lenihan was reportedly 'overjoyed' and told the IMF: 'You are Ireland's salvation.'

Its worth noting that this 'notional saving' of Euro 20billion represents 10-15% of Irish GDP (depending on your timeline) and almost equals the (2008-2015) fiscal adjustment. This is not a small (relative) number.

According to Morgan Kelly (a well known Irish academic/economist - writing in the Irish Times) the IMF's proposal was: ''torpedoed by US Treasury Secretary Geithner, who 'believes bankers take priority over taxpayers.' Unsurprisingly, the US government denied Kelly's account, but Irish government sources confirmed senior European figures were also strongly opposed to burning senior bondholders who had lent money to Irish banks.

As Carswell writes - we will never know. But we do know: 'that every key event from the guarantee (September 2008) to the EU-IMF bailout (November 2010) was structured in a such a way as to make the Irish taxpayers responsible for the massive private losses of the banks and for protecting the vast majority of institutions and investors that lend to them.'

Earlier today Mr Geithner proclaimed; 'Financial crisis are resolved when governments and central banks create conditions that make it compelling for investors to take the risk involved in lending to governments and banks.'

Earlier today Martin Wolf (NYSE:FT) wrote (amongst much else): 'The decision (the so-called Merkozy compromise) seems to include not compelling private bondholders to take losses on Eurozone bailouts.'

Geithner (& the ECB) have had their way. Greece is 'an exception.' For now.

When these guys talk austerity - they mean it.