Sunday, February 20, 2011

The Paddy Ponzi

Ireland's situation is terrible. A country of only 4 million people, Ireland's banks have loaned out nearly $867 billion.. much of it to real estate developers.. and many of Europe's largest banks provided much of the money to the Irish banks in the form of loans and deposits. These banks and their hundreds of billions in bad loans are guaranteed by the Irish government, which asked for IMF/EU help to deal with the mess. Remember that the Irish government, which has guaranteed hundreds of billions, only takes in about $37 billion/yr in tax revenues (most of which goes to Social Security and their Medicare systems).. it's rather like watching a ground squirrel try and catch a falling hippo.

Apparently the IMF and Irish government are not keeping up with the losses. In yesterday's Irish Times, we catch a hint of how the Irish banks are keeping themselves afloat. Here's how it works: In Europe, a bank may borrow from Europe's Central Bank {ECB} if you have some investment grade (A or better) bond in which to give the ECB, who then waits for the bond to mature and cashes it in. So... Irish banks began issuing bonds to themselves and turning them over to the ECB as collateral. Thats rather like going to Kinko's, printing up a legitimate looking bond, and giving it to your bank as payment for a loan you are about to take out.

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

Bank of Ireland raised a further €980 million on another bond on February 10th.

The bank said that the issuing of the bonds represented “a technical adjustment” replacing sterling bonds backed by UK mortgages as the ECB stopped accepting sterling loans as collateral from the start of the year.

AIB said that “own-used” bank bonds could be used as collateral from the ECB if Government guaranteed. The banks have leaned more heavily on central bank funding from Frankfurt and Dublin due to the loss of deposits and the closure of the markets to Irish-issued debt.

Banks in Ireland had borrowed €126 billion from the ECB at January 28th, representing almost a quarter of all borrowings drawn from Frankfurt by euro zone banks.

The Central Bank in Dublin has provided a further €51.1 billion to the Irish banks through exceptional liquidity assistance (ELA) at this date on ineligible ECB collateral.

Guess who guarantees that additional €177 billion ? You guessed it.. the Irish people. This is a shell game, pure and simple, designed to buy time and possibly pawn off some of the previous losses onto the ECB's books. Bernie Madoff would give them an award from prison. The bill is coming due in May.. I'll leave it to my readers to guess how this will end. But before we get to April, there is an election in Ireland.. and the government of PM Brian Cowen will certainly collapse. It remains to be seen if the new Irish government will honor the IMF agreement.. an agreement that Ireland should probably reject. 

Onto another ponzi closer to home.. here's a video of my favorite economist, the outstanding Kyle Bass, on how we in America are doing: