PIIGS Roast

Well the escalating crisis in Ireland has gone unsolved; fellow EU member states are pushing the Irish Gov't to accept a bailout. The Irish, who indeed have the cash to endure until next summer, are resisting becoming wards of the IMF and thus condemn it's citizenry to indentured servitude. But make no mistake.. the situation is unbelieveably bad. Irish banks are wildly overleveraged and hemorraging badly, with the Irish state guaranteeing the debts. To put this in perspective: Here in the US, our Gov't borrows one dollar for every three it spends. Ireland's Gov't has revenues of roughly €36 billion.. with projected expenditures of €87 billion, so in effect they have to borrow five out of every eight dollars they spend. Worse, the interest rate is hitting all time highs.. today {again} the Irish Ten Year Bond settled above 8%.. which essentially means Ireland is unable to borrow on the open bond markets. The reason the EU is putting pressure on the Irish to accept a bailout is out of fear that the Irish will simply default.. and this would be insanely bad for European banks, beginning with the ECB itself, which has been lending huge sums to Irish banks, which then turn around and purchase Irish Govt bonds, which are then repo'd back to the ECB. For perspective on just how much the Irish Govt (and their banks) owe foreigners, the figure put out by the CIA just last year lists Ireland's External Debt at $2.287 Trillion {this compares to Greece's $552 billion}. And yes.. Ireland is a small country and this equates to.. get this.. $515,000 per Irish citizen: https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF4bTVs74avS84a29dEXX5IAG1todByh3fsd1KA6h4iSQRQQKlUKaxl7thID0bNlj_aZUuLmUZCCeFM34EDUYCK8_mAOCcu0BWYL7MbfulXJQbxADSiHP4D-P3Geg5qszw6c6WTx2dGu4x/s1600/external+debt.png

Speaking of our good friends the Greeks, a new report out by Eurostat (they do the accounting in the EU as well as national governments) states that Greece's statistics were.. shock.. wrong for a fifth (or sixth ?) time and that the situation is.. you guessed it.. much worse than what the Greeks are saying it is. Eurostat said that the Greek Gov't deficit is 9.6% of GDP (right about what ours is). They also revised the 2009 figure to 15.4%. These figures are well above the EU bailout guidelines. Saving Greece looks increasingly like an open ended commitment instead of the three year plan they all greed upon. But.. will the Greek people put up with more austerity in order to pay off bankers ? That's a big if in my opinion.

Then we come to Portugal, who is waiting on the sidelines for their turn at the bailout trough. Portugal's Finance Minister Dos Santos said yesterday: "The risk is high because we not facing just a national problem. It is the problems of Greece, Ireland and Portugal together.. this has to do with the stability of the Eurozone, and that is why contagion in this framework is more likely.. markets look at this together because we are all in the Eurozone". Mr. Dos Santos hit the nail squarely on the head; look for Portugal to follow Ireland at the EU bailout trough. Portugal's budget deficit last year was 9.7% of their GDP, roughly what our is this year. This year they were to slim this down to 7.3%, but this is looking very unlikely. The markets are thusly punishing Portugal, though not nearly as badly as Greece and Ireland.

But will the other Eurozone members be there to support their brethren ? Today Austria came out and said that since Greece did not meet their budget targets, Austria will not be participating in another Greek bailout package. Within the hour, Finland was rumored to have nixed any aid to Ireland. This was very badly timed to say the least on both of their parts, and a very ill omen. At the hour of greatest need for unity, it appears a few links in the chain are weakening.

The EU's President, Herman Von Rompuy, had this to say yesterday: "We're in a survival crisis. We all have to work together in order survive with the Eurozone, because if we dont survive, the European Union will not survive. But I''m confident we will overcome this". Unfortunately, the Austrians and Finns missed this speech.

Any solution will require large amounts of cash to be made available. In the past, the call was made across the Atlantic to Ben Bernanke, who then opened up what are known as "swap lines", which essentially amount to us printing money to help the EU. In addition, the US is on the hook for what amounts to 20% of any IMF bailouts. Were the EU to make the call again, they might not find us nearly as accomodating; it would put enormous pressure on Bernanke and Obama, though in the end I see them riding to the rescue, but not with the support of the Republican House of Reps, where opposition to this would be intense.

We are slowly approaching a critical moment in the EU. In the end, I see Ireland and Portugal getting bailed out, the US opening the swap lines again and the financial system as a whole surviving this mini crisis. But if Spain and her 9.3% of GDP budget deficit were to falter, the odds of success drop below 50% in my very humble opinion. Given enough time and the fact that none of these nations can solve a problem of debt with more of it in combination with austerity, the chances of the Euro surviving are grim indeed.

In addition to the misery on the Olde Continent, something wierd is happening here; the Muni Bond markets, perhaps spooked by the impending bankruptcy of Harrisburg PA, are seriously tanking.. over 10% in two days: https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKB0oX7ywsI0bgGXiH6Ci3aLkM10PKnxb6vczYoz0aVFEROMF87IAW_TsP7uE_CV4uwzbAQJvSLvW4DZOctAldSZtwM0PcJwz0ii8umE7IhyphenhyphenqCPb2VzqShUGFLMzNX8rlKbnPmTgVRs_U7/s1600/munis.png