Market participants are giddy today on the great news that Ireland will go deeper in debt in a foolish attempt to bail out the German and UK bondholders who were in turn foolish enough to lend ridiculous amounts of money to Irish banks in various real estate schemes.
The Irish government was of course foolish enough to guarantee all of this foolishness which means that Irish citizens many of whom were sucked into buying property at foolish prices are now on the hook to bail out the bondholders, rubbing salt into the wounds of Irish taxpayers, not all of whom were foolish enough to freely participate in the general foolishness.
Here is a short video from the Wall Street Journal that explains why the bailout will not work.
Ireland Nears Bailout
Now let’s consider details of this foolishness in greater detail, starting with Crude Oil Rises From Four-Week Low as Ireland Nears Bailout
Crude oil increased from a four-week low as Ireland moved closer to a European Union-led financial bailout, strengthening the euro and boosting commodities.
Irish Central Bank Governor Patrick Honohan said in an interview with state broadcaster RTE today he expects the country to ask the EU and the International Monetary Fund for “tens of billions” of euros to rescue its banks.
“If these talks were to result in a substantial contingency capital funding” pool that didn’t need to be drawn down, that “would be a very desirable outcome,” Finance Minister Brian Lenihan said in the Irish parliament in Dublin today. He said no agreement has yet been reached.
Fairy Tale Nonsense
Check out that fairy tale silliness from Finance Minister Brian Lenihan, then answer this question: What are the odds that a “substantial contingency capital funding” would not be drawn down?
If you answered zero percent you are a winner, which makes the Irish taxpayer a loser.
Allied Irish Bonds Have Face Value Bid of 45 Percent
Bloomberg reports Allied Irish Bonds Fall on Concern IMF ‘Bad Guy’ to Impose Loss.
Allied Irish Banks Plc’s 12.5 percent subordinated bonds due 2019 were quoted at a bid price of about 45 percent of face value, according to Jefferies International in London, down from 100 percent in September. Credit-default swaps insuring 10 million euros ($13.6 million) of the debt cost 5.9 million euros in advance and 500,000 euros annually, according to CMA.
Irish central bank Governor Patrick Honohan said he expects the country to ask for aid from the European Union and the IMF worth “tens of billions” of euros to rescue its battered banks and stop contagion across the region. The government already pledged to impose losses on junior bondholders at Anglo Irish Bank Corp. and Irish Nationwide Building Society.
Anglo Irish was nationalized in January 2009 as loan losses spiraled after a property bubble burst. The government also has taken a 36 percent stake in Bank of Ireland Plc and is preparing to take a majority stake in Allied Irish.
Credit-default swaps on the junior debt of Bank of Ireland Plc cost 2.9 million euros in advance and 500,000 euros a year, signaling a 58.75 percent likelihood of default within five years. Contracts on Anglo Irish’s sub debt cost 8 million euros upfront, showing a 99.99 percent probability of default. Swaps on Allied Irish signal a 90.24 percent chance of default.
UK Wants to “Help” Ireland
Please consider Ireland May Be Next Greece as Europe’s Economic Superstar Fades
“Ireland is our closest neighbor, and it’s in Britain’s national interest that the Irish economy is successful and we have a stable banking system,” says George Osborne, the U.K. chancellor. “So Britain stands ready to support Ireland in the steps that it needs to take to bring about that stability.”
The Irish underestimated the severity of the losses for the past two years. In September, the government said that the bank bailout may cost as much as 50 billion euros. NAMA says it will absorb an estimated 73 billion euros of loans from the banks at a discount of about half of their value.
The figures sound small relative to the U.S. rescue of its banking system, except that Ireland’s population hovers at 4.4 million, according to the World Bank; the bailout so far equals 30 percent of the country’s 158 billion-euro gross domestic product. EU officials say Ireland’s emergency aid package may tally $136 billion, roughly the same amount given to Greece in May.
While the U.S. economy was driven off a cliff by the reckless securitizing of subprime mortgages and Greece collapsed under the burden of misrepresented government spending, the Irish traveled a simpler road to ruin: by taking out enormous, unregulated loans. Ireland’s economy has contracted for three consecutive years, and the Irish Central Bank governor has declared his country’s fiscal deterioration “worse than almost any other country.”
Today, according to former Central Bank of Ireland economist David McWilliams, the average Irish family owes 132,000 euros to banks.
Many Irish people won’t be able to pay off their debts in their lifetime, and almost all commercial developers are broke.
New Buzzword “Namatized”
NAMA stands for National Asset Management Agency, Ireland’s “bad bank.” Bloomberg notes that NAMA was created by the Irish government in 2009 to help stanch a crisis within the Irish banking system that has pushed the country to the edge of insolvency.
NAMA clearly did not work. I am saddened to report Irish citizens have been “Namatized”, a fitting tribute to the fools in Irish government that authorized the nonsensical guarantee of Irish bank debts.
How Bankers Ruined Ireland
Please consider Why the Irish Crisis is Going Global for a nice synopsis of how bankers ruined a once thriving Ireland.
On the surface, it’s reminiscent of the problem Greece had with its unmanageable federal debt early this year, which shook world markets, ended a global rally in stocks and ultimately led to a $146 billion bailout by the European Union and the International Monetary Fund. Greece spent more money than it took in for years, papered over the gap, and essentially became insolvent when it could no longer borrow the money needed to finance its debt.
Ireland is on the brink of insolvency too, which has helped drive down the S&P; 500 stock index by nearly 4 percent over the last few days. But unlike Greece, Ireland is a relatively wealthy country, with per capita GDP of nearly $38,000. That’s 21 percent higher than per capita GDP in Greece, and in the top third for European countries. Low corporate tax rates and a skilled workforce have made Ireland a haven for some of the world’s biggest companies. And its public debt, about 65 percent of GDP, is far below Greece’s crushing load, which is 126 percent of GDP. Ireland’s debt levels are even lower than those in France, Germany and the United Kingdom.
But Ireland has one huge problem that may soon make it a supplicant to its European brethren: A failed banking sector that Ireland’s government can no longer rescue on its own. Ireland is in the midst of a real estate bust that could trump even the ruinous downturns that turned parts of southern California and Nevada into suburban ghost towns, with home-grown banks stoking it all. Now, those banks are trying to manage catastrophic losses. The Irish government has effectively nationalized the nation’s biggest banks by guaranteeing their debt, which would be akin to the U.S. government taking over Citigroup, Bank of America, J.P. Morgan Chase and Wells Fargo.
That means the Irish government is also on the hook for the losses those banks endure–which have risen far beyond initial estimates, and may have a lot farther to go. So far, the Irish government is obligated to cover losses amounting to 175 percent of Irish GDP, which is becoming an unsustainable burden. “If the Irish banks go down, the Irish government also goes down,” says economist Jacob Kirkegaard of the Peterson Institute for International Economics.
Rat’s Ass Perspective on “Help” from UK, EU, and IMF
Finally, I would like to repeat something I said in European Banks have $650 billion Exposure to Ireland; Germany’s Economy Minister says “EU Cannot Throw Money from Helicopters”
Rat’s Ass Perspective
The other countries in the EU do not give a rat’s ass about Ireland. All they really cares about is $650 billion in loans on the books of UK, German, French, Italian, and Spanish banks.
The US is of course the third most interested party and will no doubt apply pressure on the IMF to apply pressure on Ireland to accept some sort of bailout.
Ireland is sitting on a pile of cash. That cash will last much longer if Ireland defaults and that I believe is just what Ireland should do.
The IMF may be prepared to “Help” but I repeatedly ask and answer whether or not it can do any such thing in IMF Ready to “Help” Ireland; Can the IMF “Help” Anyone?
The short answer is for Ireland to tell the EU and IMF to “Stuff It”.
Every country for itself. There is simply no reason for Irish citizens to bailout UK, German, French, and US banks.
Postponed is Not Solved
Bailout “help” will do nothing but overburden Ireland while making its problems worse down the road. Resentment will build up and hopefully Irish voters will do the same thing Icelandic voters did: throw the bums out and tear up the agreement.
Meanwhile, Spain is waiting in the on-deck circle. The proverbial s* hits the fan when Spain comes up to bat.
Mike “Mish” Shedlock
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