Sunday, November 14, 2010

Ireland bites the dust

This last week, Ireland's benchmark ten year bond rose to over 8.8%, which means essentially that nobody is willing to buy Irish debt on the open market. There were rumors Ireland was in talks with EU officials for a bailout package. As we speak, only the ECB is loaning money to Irish, Greek and Portugese banks, which then purchase their own government bonds courtesy of this ECB funding. The ECB will not purchase these nations' debts outright, something that is happening with abandon here in the States. But the ECB risks inflation if done to extreme, which the Germans hate.

How did this happen ? In a word, a property boom and bust. Anglo Irish Bank, who's debts were guaranteed by the Irish Gov't, went waaayyy too deep into overpriced mortgages, and the Irish state is now paying dearly for this. Last year, Ireland knew it was in trouble, and did what nobody, especially Greece, did.. they instituted severe budget cuts proactively to nip the crisis in the bud. For most of this year, Ireland was looked at as the poster child for budgetary discipline, a role model. The cuts were indeed severe; most public servants took an immediate 15% cut in pay, there were layoffs, pensions were slashed. It worked; rates on Irish Bonds came down nicely; Greece became the problem child and the world simply forgot about the Emerald Isle.

But of late two things have crept up to bite the Irish: First was the announcement that Anglo Irish's losses were dramatically higher than previously reported, thus making the Irish state responsible for far more than previously thought. Second was from the mouth of Angela Merkel, Germany's Chancellor, who put forth the suggestion that when sovereigns and banks go under, the bondholders should accept a part of the haircut and not simply throw it all on the public. It also seemed like a blueprint to change the EFSF (see below). This particular statement had the effect of spooking bondholders, who began demanding a higher interest rate in response to their increased risk. And the usual suspects.. Greece, Ireland and Portugal.. have been paying the price.

As a result, there are increased concerns that the EU's bailout mechanism, called the European Financial Stability Facility {aka EFSF} could be called in to save the day. This was the $440 billion rescue programme announced in May at the height of the Greek Crisis whereby the governments of the EU all agree to cough up a percentage of the cost of the rescue. The problem is, these things take time to do.. parlaiments don't act within 24-48 hours. Worse, many of these nations are themselves in serious trouble.. I have serious doubts that Spain, Greece and Portugal will willingly cough up tens of billions to save the Irish state, leaving the EFSF burden to be increased on Germany, Holland and other better off Germanic states. This will not sit well in Germany to say the least. Chancellor Merkl walks a fine line; she knows her own people do not like bailing out irresponsible and corrupt governments.. yet she herself knows the possibly cataclysmic consequences of failing to do so. Not only is it these nation's governments that are in trouble, it's also their banks and their state and local governments as well. Irish banks have borrowed over $10 billion from the ECB in just the last month alone.

Another concern is the amount of risky loans (Greek, Irish, Portugese) the ECB is taking on. After all, the ECB is a bank, and it in theory can fail like all others. These concerns have led the Euro to tank this week, going from above $1.40 to under $1.37 at one point. Portugal's bond rates are also creeping up, despite a tough new austerity budget announced just last month. In addition, this came out this morning in Portugal: "Portugal Foreign Minister Reportedly Warns On Euro Exit LISBON—Portugal may be forced out of the euro zone if it fails to tackle its economic challenges, the country's Foreign Affairs Minister, Luis Amado, was quoted as saying in an interview with local weekly Expresso. At some point, the people of these nations will, in their own way, protest the coming Depression. The danger here is that at some point, one of these nations will elect a leader who will simply say "Sorry guys.. we're not gonna pay". Iceland did this just this year in a special election, where over 90% of Icelanders said "No" to paying back some of the money to England and Holland. They then chased their PM out of the parlaiment building. As Ireland and Portugal near the Keynesian End recently reached in Iceland and their version of The Depression sets in, their leaders need to reread their history books on the storming of the Bastille.

So far, as its only Ireland and Portugal, its containable. But should this spread to Spain in a serious way.. well.. I'll let Ambrose give you a scenario:


  1. Portugal is just another Euro basket case. A leftist country with a lot of unions and social benefits, and no real industries, except for wine I guess. Too much drinking in the afternoon, and nothing much productive going on.

    Have to see what happens with Ireland first. But the Portugese Government is very weak, various leftist Parties may not vote for austerity etc. They could move up the line quickly.

    Ireland could go Iceland very quickly, as they are having a few by-elections to fill vacant MP seats, and the Government is going to lose those by a landslide. That will take till Christmas, or maybe early 2011. All it would take is 1 MP to say "I'm not voting for any more Bankster bailouts", or a new 'Tea' Party to form who say that out lou, and they will be done.

    Or how about Italy and Spain, whose CDS on their Bonds are moving up fast, Italy hit records this week.

    And then we have Belgium, who are on the verge of breaking apart, the Flemish speakers and the French speakers really don't like each other much at all.

    France is still in bad shape too, even with all the uproar about their "austerity", which in typical French fashion, is not really that austere, or not enough to balance their Budget anyway, though you would never know that from the way they protest.

    Austria has massive Bank exposure to the periphery, on the Eastern edge, where they lent to locals in Euros, and so do the Swiss, where they lent in Swiss Francs. Now that those currencies are up, repayment of the loans by locals, who have devalued local currencies, is looking highly doubtful.

    It's a race to implosion, place your bets, ladies and gentlemen, 1 minute till the betting windows close.

  2. I'm laying €1,000 on Ireland to win, Portugal to place and Spain to blow out the show. Got odds GaW ?

  3. Mr K and GAW I think I bet on Ireland defaulting first a few weeks ago. Socialism works until there are more taking out than paying in. I am hearing more and more negativity about the US's economic situation these days. This is why Canada is so attractive to me. Australia as well. Both have economic models that seem to work. My grandparents immigrated to the US from Denmark after WWI. How is Denmark doing financially? I have never heard them mentioned .despite high taxation they were recently rated the happiest country in the world. I guess I could consider returning to the home of my ancestors as well.

  4. From my understanding, Denmark is doing OK.. certainly better than Ireland and Greece, but probably not as well as Germany. The problem is, they're all using the same currency.

  5. Ireland "resisting bailout" is throwing a big monkey wrench into the works. Euro area Financial Ministers meeting Tuesday, I bet the talks will be "lively".

    They just won't admit that a currency "union" won't work very well when you have nations with wildly different interests. German voters won't stand for any more bailouts, but PIIGS can't balance their Budgets. Spain is the wild card really, if they go all of Europe goes south.

    It's a mess. Ben is probably thanking his lucky stars that Europe is in worse shape than America, but only by a hair. The US muni Bond situation continues to melt down, so he probably isn't sleeping too well at night anyway.

    Too many bailouts, too little time.