Death by a Thousand Irish Cuts: The Poster Child of Austerity Measure Success Gets Downgraded After Several Devastating Expenditure Reductions That Really, Really Hurt the Irish People!

For the first two quarters of this year, we’ve been pounding the
pavement on the risks inherent throughout Europe. The 50+ article (and
counting) series known as the Pan-European Sovereign Debt Crisis is
rife with opinion, analysis, commentary (albeit rather smart ass
commentary), and data that is hard to come across from objective
sources. The series also tends to accurately predict the moves of the
major rating agencies approximately 3 to 5 months in advance with
uncanny precision (ex. Moody’s
Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks).
This is not a good thing for those very few, wayward souls who still may
actually follow the whims and predilections of said agencies (by hook
or by crook, whether through naive belief or by mandate or charter) for
by the time the agencies get around to a downgrade or upgrade it is
really too late from a fundamental perspective – particularly if it is
your own capital you are trying to save. Just remember, those who get
paid directly by you are the one’s whom you will get the most loyalty
from. Those of you who have lost the most in the Pan-European Sovereign Debt Crisis, I query,
“Exactly how much did you pay those ratings agencies?” Remember
the old saying, “You get what you pay for”??? It appears that the shell
game of free (yet highly conflicted and faulty) information pervasive
on the Web was a material problem in the finance world way before the
Web itself.

On that note, I bring you this CNBC article: Ireland’s Credit Rating Cut on
Weak Growth, Banks:

Moody’s Investors Service has
downgraded Ireland’s sovereign bond ratings by one notch to Aa2, citing
loss of financial strength, weak growth prospects and banking system
problems, the credit rating agency said in a press release Monday. The
government’s “gradual but significant” loss of financial strength is
reflected by the “substantial” rise in the ratio of debt to gross
domestic product and a weakening of debt affordability, Moody’s said.

The country faces weak
growth prospects because of a severe downturn in financial services and
real estate, as well as a continued contraction in credit to the
private sector, it said.

And persistent weakness in
the banking system is represented by “a series of recapitalization
measures” and the need to create a government-backed special purpose
vehicle to buy bad loans from banks, Moody’s added.

Ireland’s general government
debt-to-GDP ratio increased to 64 percent by the end of 2009 from 25
percent before the crisis, and is continuing to rise, it said. The
country’s rating outlook is stable, Moody’s added. The euro hit
session lows after the announcement.”The timing isn’t great, given the
bond auction tomorrow and certainly this will add to the premium that
will need to be paid to raise money,” Alan McQuaid, chief economist at
Bloxham, told Reuters.

Hmmmm!!!! Let’s have have the DJ remix this song…

The country faces weak
growth prospects because of a severe downturn in financial services and
real estate, as well as a continued contraction in credit to the
private sector, it said.

And persistent weakness in
the banking system is represented by “a series of recapitalization
measures” and the need to create a government-backed special purpose
vehicle to buy bad loans from banks, Moody’s added.

To be absolutely clear, and go where no
rating agency spokesperson has ever dared to go before… It’s not as if
Ireland (nor several of the western, northern or central European EMU
members) have any chance in hell of unilaterally saving their banking
system if it actually collapses. The banks are an order of magnitude
larger than the actual countries themselves. Who’s running who, here?
See Ovebanked,
Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
and take particular note of pretty graphs such as these…

Sovereign Risk Alpha: The Banks Are
Bigger Than Many of the Sovereigns

This is just a sampling of individual
banks whose assets dwarf the GDP of the nations in which they’re
domiciled. To make matters even worse, leverage is rampant in Europe,
even after the debacle which we are trying to get through has shown the
risks of such an approach. A sudden deleveraging can wreak havoc upon
these economies. Keep in mind that on an aggregate basis, these banks
are even more of a force to be reckoned with. I have identified Greek
banks with adjusted leverage of nearly 90x whose assets are nearly 30%
of the Greek GDP, and that is without factoring the inevitable run on
the bank that they are probably experiencing. Throw in the hidden NPAs
that I cannot discern from my desk in NY, and you have a bank that has
problems, levered into a country that has even more problems.

Notice how Ireland is the nation with the second highest NPA to GDP
ratio. This was definitely not hard to see coming. In addition, Ireland
has significant foreign claims – both against it and against other
countries, many of whom are embattled in their own sovereign crisis.
This portends the massive exporting and importing of financial
contagion. Reference my earlier post, Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter? wherein I demonstrate that Ireland’s
banking woes can easily reverberate throughout the rest of Europe,
affecting nations that many pundits never bothered to consider. Irish
banks will be selling off assets, issuing assets and bonds in an
attempt to raise capital just as the Irish government (contrary to
their proclamations) will probably be issuing debt to recapitalize
certain banks. This comes at a time when the Eurozone capital markets
will be quite crowded.

In Many
Institutions Believe Ireland To Be A Model of Austerity
Implementation But the Facts Beg to Differ! I attempted to
drive the point home:

We have performed a cursory overview
of the risks inherent in Ireland though previous “preview” posts:
Ovebanked,
Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
and Reggie
Middleton on the Irish Macro Outlook. For the most
part, Ireland has considerable embedded risk through both foreign
claims on troubled countries (ex. PIIGS) and significant bank NPAs as a
percent of its GDP.

Below is an excerpt from our recent
forensic Ireland analysis. Subscribers, please download the most
recent report here: Ireland public finances projections_040710:

A deteriorating external environment and a
correction in the domestic housing market made 2009 a difficult year
for the Irish economy. Ireland’s GDP growth registered a fall
of 7.5% (the highest rate of decline since the country’s records have
been compiled) with a fiscal deficit of 11.7% of the GDP for 2009.
Moreover, amidst an ailing banking system Ireland’s economy is
further expected to report a 1.3% decline in its GDP and a fiscal
deficit of 11.6% of the GDP for 2010, as per the government estimates.
Consequent to rising fiscal deficit, government’s debt levels have
also increased enormously from 24.8% of GDP in 2007 to 44.1% in 2008
and 64.5% in 2009. This rising debt is further fuelling an increase in
fiscal deficit through an increase in interest expenditure. Thus, in
its 2010 Budget, Ireland’s government plans to secure structural
improvements to the expenditure base, which is expected to result in a
savings of €4 billion. However, considering the current
economic slowdown and rising unemployment, deterioration in Ireland’s
tax revenues is expected to continue in 2010, which will negate the
impact of expenditure savings, and result in further widening of the
fiscal deficit to 12.6%, as per our estimates.

Moreover, as per the government’s “Stability Programme Update –
December 2009″, the government plans to bring down its fiscal deficit
from 11.7% in 2009 to 2.9% in 2014 (below the European Union target
of 3%), primarily backed by a strong economic recovery starting 2011.
However, we believe that this targeted reduction is based on overly
optimistic growth targets, which are difficult to achieve.

The current government estimates fail to take into account
additional funding that the government might have to infuse to
stabilize Ireland’s banking system, which will further increase the
government’s budget deficit.

• According to Bloomberg (March 31), “Ireland’s banks need $43
  billion in new capital after “appalling” lending decisions left the
  country’s financial system on the brink of collapse. The fund-raising
  requirement was announced after the National Asset Management
  Agency said it will apply an average discount of 47 percent on the
  first block of loans it is buying from lenders as part of a plan to
  revive the financial system.”
• Ireland’s banking system is critically dependent on the
  government for financing. At the end of January 2010, Central
  Bank of Ireland’s lending to banks was €98 billion, which is
  equivalent of 60% of the country’s 2009 annual GDP. Moreover, it
  represents 13% of total Eurosystem lending to banks compared with
  Ireland’s 2% share of Eurozone GDP. Ireland’s lending to banks is much
  higher compared to other troubled European countries - the
  Bank of Greece’s lending to banks amounts to 20% of Greek GDP while
  numbers for Spain and Portugal are much lower.

In addition, Ireland (like
practically every other country in the EU, see Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
Collapse!) unrealistically optimistic in their GDP growth
projections.

Moreover, similar concerns on GDP
growth estimates were highlighted by the European Commission in its
March 2010 report, “The budgetary outcomes could be worse than
targeted in 2010 and considerably worse than targeted thereafter. The
authorities should stand ready to take additional measures beyond the
planned consolidation packages in case growth turned out to be lower
than projected in the programme. The biggest problem is the
Government’s prediction that the economy will expand 3.3pc next year.”
We have shown, beyond a shadow of a doubt, that the EU and the IMF
have been dramatically optimistic concerning GDP growth and deficits
regarding EU member countries ever since this “Asset Securitization Crisis” cum Pan-European
Sovereign Debt Crisis (see the end of this post) began. Again, I
reference Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
Collapse!.

Consequently, for the aforementioned
issues as well as a host of other reasons detailed in our subscriber
forensic report ( Ireland public finances projections 2010-04-14 02:24:52
568.24 Kb), we believe that the government will over shoot
its fiscal deficit target by 1% in 2010 and by much higher in 2011
and 2012, which in turn will result in higher debt and thus higher
interest expenditure.

Of course, many can say this is just a bunch of blogger mumbo-jumbo,
but then again there are probably a few Irishmen who may disagree.
Reference BoomBustBlog Irish Research Becomes Reality:

Last month I posted both a public and premium subscription analysis of
Ireland’s public finances, along with a focus on the banking system (
Irish Bank Strategy Note
). This month we can bear witness to…

Banks protesters storm Irish parliament

Wednesday, 12 May 2010

Gardai Clash with protestors marching against government
cutbacks outside the Gates of Leinster House in Dublin tonight

Have they read my report?

Read more: http://www.belfasttelegraph.co.uk/breaking-news/uk-ireland/banks-protesters-storm-parliament-14804947.html#ixzz0nh5g9M7M

The title of my research really says it
all (Many
Institutions Believe Ireland To Be A Model of Austerity Implementation
But the Facts Beg to Differ!), yet the pictures really do drive
the point home.

Subscribers should take heed to the
strategy implied in the Irish banking report. Methinks things may come
to a head too quickly to implement last minute positions efficiently. For those who wish to be, but are not yet part of our club, you may click here to suscribe to BoomBustBlog's Investment Research!

Comments

[RKDS]

Sorry, people like you wanted a "service" industry and government "services" are part and parcel of that fraud.

[M.B. Drapier]

Some considerations:

Thanks to NAMA, most of the Irish banks' property ... assets are about to be owned by the Irish state - about a third have been transferred already - and so even letting the banks fail wouldn't shield the public purse from further "unexpected" property losses.

Despite the gift of NAMA, the big two Irish banks (AIB - Allied, not Anglo - and Bank of Ireland) are going to require further "recapitalisation" to stay open. This is partly, but only partly, because our new financial regulator, Matthew Elderfield, is very keen to make his mark, and so has set exciting new capital minima for the banks. (Having advertised Elderfield as a new broom, the civil-service/banking/political establishment can't be seen to stymie him just yet.) The real news here is that the government has probably run out of ways to bail out AIB and BoI without taking a majority shareholding in them.

If you see the Irish budget deficit rocket from 11.5% to 19.75% shortly, don't worry, it's just Anglo Irish Bank. (And Irish Nationwide.)

As I pointed out at the time, the demo was a non-event, a routine Socialist Worker pantomime, and it's been even quieter since then. There's no civil unrest and little angry energy here, just cynicism and resignation. Ireland has had decades of experience with a certain kind of austerity, the kind that doesn't hurt farmers, public servants, or lawyers and other professionals. Or, of course, the country's incestuous business elite. Everyone else can emigrate if they don't like it.

So it's not a particular surprise that the government has postponed plans for a long-overdue property tax (and domestic water metering). And that nonetheless the government will (very probably) manage to make up the promised €3bn in deficit reductions in this year's budget - it will just make extra cuts to services and capital expenditure. Not to public-sector pay and benefits - the government is striking another sweetheart deal with the public-sector unions to protect those. The 2011 targets are probably going to be met too, at least unless there is an early election.

So, in Ireland as elsewhere, the /ancien regime/ has won the recession so far, and now it looks more unassailable than ever. Almost all the pain has been visited on the private-sector employees and especially the newly unemployed. Although to be fair, so far unemployment benefits remain high, something that was never true in previous decades of austerity. But there are some obstacles on the horizon. When the government is the majority owner of AIB and BoI it's going to be difficult to avoid having a few board resignations in order to appease the vulgar masses. The general will to make further deficit reductions (especially after 2011) is weakening a bit, partly because of growing awareness of the Krugman-style pro-deficit-spending campaigns in other countries. The country's nearly-dominant political party, Fianna Fáil, is going to be thumped at the next election and may be on a slow course of permanent decline. Fianna Fáil has basically martyred itself to save the other ruling powers, especially the banks. But the real waterfall is of course the likelihood (the certainty?) that the banking and property losses will become too much for the government to bear and a proper sovereign debt crisis will ensue. Maybe a deficit overshoot will help to bring that about, but again I wouldn't expect one until the 2011 budget at the earliest. It's more likely that the catalyst will be double-dip recession or renewed banking crisis elsewhere in the world. Don't expect a major change of course in Ireland, until the waterfall is hit.

[beastie]

When do think the Irish people as whole will wake up Iceland style and refuse to pay?

Most people I know there are on the bury head in sand course. Any hope that wil change in your opinion?

[M.B. Drapier]

As I said, probably the country will continue along the path of least resistance until (and unless) it hits something hard. The most likely change before then is that a new government tries to ease the austerity a bit. But that won't change things fundamentally unless it unintentionally triggers (or accelerates) an acute debt crisis. Remember that Iceland's voters didn't really choose to let their banks fail, and neither did their politicians: the government just suddenly discovered that the banks were so broke it couldn't rescue them.

[THE DORK OF CORK]

 There  are many differences between our cultures and maybe the Icelanders are made of tougher stuff then us Irish -even so the Icelandic currency collapsed so it swallowed up both savers and borrowers.

In Ireland the currency is kept alive and strong via a artificial mechanism exported via the ECB whose goal is to keep the patient alive for as long as possible as the vampire can obtain a larger volume of blood over time.

The micro political outcome of this is that many of the Irish elite and indeed older middle class who hold both the savings and power have a vested interest in complying with their masters wishes.

[Gimp]

"The country faces weak growth prospects because of a severe downturn in financial services and real estate, as well as a continued contraction in credit to the private sector, it said.

And persistent weakness in the banking system is represented by “a series of recapitalization measures” and the need to create a government-backed special purpose vehicle to buy bad loans from banks, Moody’s added."

Are we talking about Ireland or the U.S or both? Seems like most of the Western World could be listed under this Moody's comment.

[Bill Lumbergh]

Quite ironic the rating agencies that helped promote the false boom are now causing the bust.

[THE DORK OF CORK]

This disaster was predictable.

www.youtube.com/watch?v=a37sRjkLtWw    

[virgilcaine]

Thats some good research/analysis Reggie. Bring on Phase II.

[Temporalist]

RE is going down in the UK again as additional fuel to the fire:

U.K. House Prices May Decline as Cuts Sap Confidence

http://www.bloomberg.com/news/2010-07-13/u-k-house-prices-may-decline-as...

[Samsonov]

What is the point of these warnings?  No sentient being can be unaware that these problems exists, and that there is no solution.  If it was detected that a large asteroid was on collision course with our planet, what would be the reaction?  Would we stop eating, sleeping, watching t.v., mowing the lawn?  Of couse not; maybe the asteroid will miss.  That's what's happening with this financial situation: we've all got our collective fingers crossed.  Nothing else to do, so why trouble yourself about it.

[anony]

....not so much the mowing the lawn point.....

And the asteroid destroys some or all of life, whereas great profit and means to use it is already being implemented by the 30,000 elite of the world.

I don't have my fingers crossed.  The financial situation if played right will result in the 30,000 being increased by a quite a few.  Granted most will not do very well at all, but from my own anecdotal research, not one in a thousand will actually attempt to do anything but keep their fingers crossed.

At a grad party yesterday someone who knows that I have been seriously involved in learning something helpful about the markets asked me this question:

Where is the best place to put one's money with all the confusion, the negativity, and the banks offering zip for return?

I told her that to think of putting one's money into any "buy and hold" scenario is going to provide a lot of tears and little else.

I asked her if she knew anything about options? Her answer was that it was too complex for her to get involved with.  I said, what is so difficult about buying a thousand shares of Bristol Myers at 25 1/2, and then selling someone the right to buy those shares from you at 27.00 on the third friday of 1/11? And simultaneously selling 24.00 puts, 1/11 January?  

She said, "Nothing. Is that all there is to it?" I said that's it. Try it and see what happens.

The level of knowledge and the learning curve required to stay on top of one's financial situation, presuming one has saved at least some money to invest, would take about one hour a night out of their boob tube viewing.

Ignorance is not going to be looked on kindly by mother nature, she will penalize those who do not pay proper attention to the fruits of their labors.

[dan22]

The latest ESRI Quarterly Economic Commentary projected that the 2010 general government balance will be a deficit of 19.75 percent of GDP, which is the sum of the ‘underlying’ deficit of 11.5 percent of GDP and the capital transfer into Anglo/INBS of 8.25 percent of GDP. In short, the government will need to raise more taxes and/or cut spending. The Coming Euro Collapse- The Irish Budget Deficit is Projected to be 19.75% of GDP!

[LeBalance]

Gee...

How is it possible for a population that has taken full responsibility for its own individual eduacation and self government to have given away its power and placed itself in such a position?

Are they receiving therefore to perfect measure exactly what they have requested?

So who exactly is "at fault" for acting out their role to a tee here?

Yeah, no one.  That's enough said about that.

[Reishi-self]

one could suggest that the people of Ireland and many other places were tricked-and-deceived

( lied to) by the satanic source problem : banker-bought politicians.

plus to stand-down and reclaim responsibility and power with "default" on false "debts" is always a free will choice.... 

( see Iceland )

[bugs_]

Has there really been enough time for the "austerity" to really really hurt people?

[EscapeKey]

"Really hurt people, 2010 style" = can afford EITHER an XBox 360 or a Playstation 3. Not both.

[snowball777]

We're talking Ireland...think PS2 / GameCube if not PS1 / SNES.

[M.B. Drapier]

Dude.

[beastie]

and you are talking shit.

[EscapeKey]

Oh, ok then. Colecovision and BBC Micro.

[beastie]

and you continue to talk out of your ass.

[M.B. Drapier]

How's your little country doing, sunshine? Per capita income? - north of Birmingham, say? Bank bailouts? Public debt?

[docj]

Axiom 1: The Banks Never Lose.

When you consider that, this lunacy - the very real possibility that an entire nation (in this case, Ireland) will implode in order to make the banks whole, or even to avoid their taking a serious haircut - starts to make sense.

Coming to a Constitutional Republic near us.  Soon.

[M.B. Drapier]

Well, the bank shareholders have taken a beating. But almost none of the banks' creditors have taken a haircut: not even in Anglo Irish Bank! Some subordinated debt may be getting a trim when the bank guarantee comes up for renewal in the second half of this year (exactly when the current one expires is uncertain).

[MarketFox]

RM nails another one....

There is only ONE solution....

And that is to rebuild competitive businesses....

This means dramatically reducing the size of government to no more than 10 to 15% of the economy....

Those countries that do it first....

WILL be the future WINNERS....

The rest will just be more of the same....

Going NOWHERE....

[THE DORK OF CORK]

Marketfox did you read this report.

The Irish banks dwarf the Irish Government by a order of magnitude - most of the Irish external liabilities are privately owned.

Government spending is now just holding this shit house together by preventing starvation and giving basic medical care.

Also its much worse then the above as Reggie seems to be using GDP figures when GNP figures are a more accurate portrayal of the domestic economy as the large multinational sector here use Ireland's low corporation tax to run their profits through Ireland and pretend that those profits were generated in Ireland.

In fact I believe the difference is in the order of 20% and rising as the GNP continues to decline and as the GDP is stabilised.

Just look at the amount of US treasuries running through this tiny country for Gods sake - we have consistently more dollars within this jurisdiction then France and are just below Germanys total. 

We have become the whore house for the Multinational and finance business and are now paying a heavy price for our immoral activities by contracting economic syphilis.

[EscapeKey]

Absolutely. However, all the freeloading public sector workers with their ridiculous "deserved" final salary pension scheme will be the first to strike when implemented.

That's why I'm getting really tired of listening to Labourites over here in the UK. The public sector has grown WAAAAYYY too big under Labour. This has brought with it huge deficits. To solve these, cut public sector spending, and therefore public sector jobs. Public sector workers overwhelmingly vote Labour. Labour can't argue the size of the public sector is too big, and hence uses the "OH LOOK AT THOSE GREEDY BANKERS" red herring argument time and time again. And their voters swallow it whole, as it's a convenient scapegoat (the standard "capitalism doesn't work" school of reasoned bullshit, ignoring that large public sector = socialism).

The banks certainly were a catalyst. But that doesn't change that Labour's disastrous policies has caused the problem in the public sector. But hell will freeze over before Brown, Blair, or any of the morons who voted for them will accept that responsibility.

[anony]

Moving people from the public sector to the unemployment lines is going to increase the millions on the dole. 

The irrefutable fact is that many countries have reached Saturation Employment, meaning that there isn't enough productive work to be done any longer by human beings.  There are billions of people that need and are going to need something to do with their time, since there isn't much left for them to do. 

Whether we yet want to admit it or not, we have attained in the western world and asia, a post-labor environment, a gradually burgeoning globe with billions of people in it with no way to earn a living. 

That is the crux of the REAL problem to be dealt with, public sector employment being only one solution.

[EscapeKey]

If I had a quid for every time "reached Saturation Employment" has been erroneously stated throughout history, I'd be a rich man.

There is no limit to the amount of work that needs to be done. But ridiculous levels of taxation on small businesses, and too buoyant a relief system cuts into people's enthusiasm and hunger for new enterprises.

[seventree]

Can you provide an example of employment that would become available with lessened tax & relief?