Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???

Reggie Middleton's picture

In January of 2009 (reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank ), and after a trip to the Costa del Sol by way of Málaga
I became highly suspicious of the spillover effects of bubble credit
and excessive reliance on construction that the European nations had and
absorbed from the private sector banks. At first this was focused on
Spain, but then my team of analysts and I widened our scope to all of
Europe, and found that there was a contagion waiting to manifest. This
was a full year and a half before most even admitted there was a
pandemic problem (and to this day, there are still some naysayers).
Here’s a quick time line and link fest of all of the misunderstandings,
misinformation, disinformation and outright lies that have led us up to
this point…

Around February 7, 2010, many sell side analysts and geo-political
pundits stated that there was no European sovereign debt  “crisis”, not
to mention a “pan-European” crisis. I responded with The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, , not a localized not a, not localized one. Of
course, this was absolute blasphemy within the circles of those smart
guys who knew what they were talking about. I then went on with What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect and followed up with:

  1. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be..
    – attempts to illustrate the highly interdependent weaknesses in
    Europe’s sovereign nations can effect even the perceived “stronger”

  2. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

More and more “experts” on the matter explained how the situation is overblown- Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!

“The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, said former European Commission President Romano Prodi.
“For Greece, the problem is
completely over,” said Prodi, who was also Italian prime minister, in
an interview in Shanghai today. “I don’t see any other case now in
Europe. I don’t think there is any reason to think the euro system will
collapse or will suffer greatly because of Greece.””

Reggie says “Liar, Liar, Pants on Fire”.
In all seriousness, while I don’t truly believe Mr. Prodi is lying, he
is also obviously ignoring the facts as they currently exist, whether
purposefully or in error. Let’s walk through a few excerpts from the
most recent addition to the Pan-European Sovereign debt crisis.

Of course, shortly after that, Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino. Of course, Greece stated that they never needed a bailout, consistently until… You know… They were bailed out – Greek Soap Opera Update: Back to the Bailout That Was Never Needed? It really didn’t help Greece’s perceived funding costs as much as expected, The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!! If anyone would have read BoomBustBlog, they would have known since January that Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
You see, the problem is that most of the government’s in the EMU are
outright lying about their fiscal situations, and nearly all of them are

Well, I guess being overbanked is just one of their problems.
Accuracy and honesty in the accounting of their assets and liabilities
may have something to do with the problem:

Now, everyone held Ireland up as a poster child of how do conduct a successful austerity program – Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! The
writing was clearly on the Wall for Ireland as far back as April. For
some reason, everyone was either unrealistically optimistic or simply
late to the party – LTTP
(Late to the Party), Euro Style: Goldman Recommends Betting On
Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After

A clear, objective approach would have warned all to Beware of the Potential Irish Ponzi Scheme! and would have made clear that The Daisy Chain Effect That I Anticipated Appears To Have Commenced! I introduced the BoomBustBlog Sovereign Contagion Model because Europe’s First Real Test of Contagion Quarrantine Was Failing, and BoomBustBloggers Should Doubt the Existence of a Vaccination. I declared in May that BoomBustBlog Irish Research Becomes Reality and the mainstream financial news reports on November 22, that BoomBustBlog was one point. From Bloomberg:

Ireland Is Second Euro Nation to Seek Aid as Banks Wobble

Ireland became the second euro
country to seek a rescue as the cost of saving its banks threatened a
rerun of the Greek debt crisis that destabilized the currency. The euro
rose and European bond risk fell.

The aid, which Irish officials said
as recently as Nov. 15 they didn’t need, marks the latest blow to an
economy that more than doubled in the decade ending in 2006. The
bursting of the real-estate bubble in 2008 plunged the country into a
recession and brought its banks close to collapse. With Irish bond yields near a record high, policy makers are trying to keep the crisis from spreading.

“Clearly because of the size of their
loan books, the huge risks they took, they became a threat not only to
the state but to the” entire euro region, Lenihan told Dublin-based RTE
radio in an interview today. “The banks will be downsized to the real
needs of the Irish economy” to “Irish consumers and Irish businesses.
That has to be the primary focus of Irish banks.”

The whole in the Irish banking system represents c. 50% of the entire financing needs of the country itself…

The U.K. and Sweden may contribute
bilateral loans, the EU said in a statement. Lenihan declined to say how
big the package will be, saying that it will be less than 100 billion
euros. Goldman Sachs Chief European Economist Erik Nielsen
said yesterday the government needs 65 billion euros to fund itself for
the next three years and 30 billion euros for the banks.

Talks will focus on the government’s
deficit cutting plans and restructuring the banking system, the EU said
in a statement. Irish Prime Minister Brian Cowen, who spoke at the same press briefing as Lenihan, said the banks will be stress tested. Ireland nationalized Anglo Irish Bank Corp. in 2009 and is preparing to take a majority stake in Allied Irish Banks Plc, the second-largest bank.

Lenihan and Cowen appeared minutes
after finance chiefs issued a statement endorsing an aid request to calm
markets. Allied Irish emphasized the fragility of the system on Nov.
19, reporting a 17 percent decline in deposits this year.

The reality of the situation is that we probably already have a run
on the Irish banking system which is the first step in contagion.

“In the short term, it will stabilize the situation, there’s no doubt about that,” said Jacques Cailloux,
chief European economist at Royal Bank of Scotland Group Plc in London,
who estimates a package of between 80 billion euros and 100 billion
euros. “But as we’ve seen in the case of Greece, uncertainty will

Actually, Greece has shown us that yields will not drop as the result
of a bailout package as long as uncertainty remains. As a matter of
fact, in some cases, yields have actually increased.

The package for Ireland will total as much as 60 percent of gross domestic product, compared with 47 percent for Greece.

…The bailout follows two years of budget cuts that failed to restore market confidence as the cost of shoring up the financial industry soared.

What does this tell us? Well, for one, Ireland had some of the
staunchest cuts in the name of austerity, and it was done squat in
preventing this (continuation of a) bailout event from happening, other
than induce material hardship upon the Irish populace. With this new
package that is even bigger than Greece’s what will become of those
Irish citizens who will be asked to take even more to the chin. See If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today? Wednesday, November 17th, 2010 for a deeper understanding of what I see is going on here.

Lenihan cancelled bond auctions for
October and November and announced 6 billion euros of austerity measures
for 2011 on Nov. 4 in a bid to restore investor confidence. Those
efforts failed after German Chancellor Angela Merkel triggered an investor exodus by saying bondholders should foot some of the bill in any future bailout.

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, fell to 523 basis points today. It widened
to a record 652 basis points on Nov. 11, with the yield reaching a
record 9.1 percent. In 2007, it cost Ireland less than Germany to
borrow. Its 10-year spread then fell to as low as 77 basis points less
than bunds. The ISEQ stock index has plunged 70 percent from its record in 2007.

Ireland will draw on the
750-billion-euro fund set up by the EU and IMF in May as part of the
Greek bailout to protect the currency shared by 16 countries.

As  implied above, either the senior bondholders or the Irish
populace will have to lose an inch of skin off of their backs. It’s
going to hurt somebody, and its going to hurt them a lot. Who is more
sacrosanct, bondholders or people?!?!?!?!?!?

Irish officials initially resisted
pressure from the EU to take any aid, saying they were fully funded
until the middle of 2011. European leaders sought to head off contagion
from Ireland and reduce pressure on the European Central Bank to prop up
the country’s lenders by providing them with unlimited liquidity.

Cowen defended his reversal on the
need for aid. “I don’t accept I’m the bogeyman,” he said. “Now
circumstances have changed, we’ve changed our policies.”

Ireland and Cowen tried to wait out their problems until the
contagion took down Spain, Italy, or Portugal first. That way, there
would be less political and market-based fallout out for the Irish
acceptance of aid. This has obviously not worked for Ireland (as we
indicated in BoomBustBog in the beginning of the year) was next in line.
Of course, this does not let those other nations off the hook. As a
matter of fact, we get to experiment in whether the ability to print
your own currency allows for those other overbanked nations to
outperform those who are hooked into the Euro. The UK should erect a
shrine of homage to Soros for forcing them our of the EMU…

Yields on bonds of Spain and Portugal
have jumped amid concern that fallout from Ireland would spread. The
extra yield that investors demand to hold Portuguese 10-year bonds
instead of German bunds climbed to a record 484 basis points on Nov. 11.

“It probably won’t halt contagion. The sovereign crisis isn’t yet over,” said Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt. “Ireland is in the middle of a difficult crisis.”

“Halt contagion”??? The contagion is already here and in full motion.
It is far too late to halt it. Most pundits and analysts have yet to
even identify it! The contagion movements will crawl along the lines of
financial, economic, geo-political and socio-economic lines that may
dumbfound those who rely solely on financial analysis and the reportings
of the sovereign states that have shown they are less than forthright.
This is the reason why I threw so many man/months into the development
of the proprietary BoomBustBlog contagion model in the beginning of the

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be
next in the contagion. We believe we can provide the road map, and to
date we have been quite accurate. Most analysis looks at gross claims
between countries, which of course can be very illuminating, but also
tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk
emanating from the cross border exposures, it is essential to closely
scrutinize the geographical break down of the total exposure as well as
the level of risk surrounding each component. We have therefore
developed a Sovereign Contagion model which aims to quantify the amount
of risk weighted foreign claims and contingent exposure for major
developed countries including major European countries, the US, Japan
and Asia major.

I.          Summary of the methodology

  • We have followed a bottom-up approach wherein we have first
    identified the countries/regions with high financial risk either owing
    to rising sovereign risk (ballooning government debt and fiscal deficit)
    or structural issues including remnants from the asset bubble
    collapse, declining GDP, rising unemployment, current account deficits,
    etc. For the purpose of our analysis, we have selected PIIGS, CEE,
    Middle East (UAE and Kuwait), China and closely related countries
    (Korea and Malaysia), the US and UK as the trigger points of the
    financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected
    regions (trigger points), we looked into the probability of the risk
    event happening due to three factors – a) government default b) private
    sector default c) social unrest. The probabilities for each factor were
    arrived on the basis of a number of variables determining the relative
    weakness of the country. The aggregate risk event probability for each
    country (trigger point) is the average of the risk event probability
    due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure.
    The exposures of each developed country were expressed as % of its
    respective GDP in order to build a relative scale for inter-country
  • The risk event probability of the trigger point countries was
    multiplied by the respective exposure of the developed countries to
    arrive at the total risk weighted exposure of each developed country.

Paying subscribers should review these models in detail, for we will be making much use of them in the near future.

File Icon Sovereign Contagion Model – Retail – contains introduction, methodology summary, and findings
File Icon Sovereign Contagion Model – Pro & Institutional
– contains all of the above as well as a very detailed methodology map
that explains what went into the model across dozens of countries.

As promised (although a little late) I will be attempting to deliver
the Ireland haircut analysis by the end of the day. Things have changed
since Ireland is taking on additional debt. Many smart pundits state
that a default or restructuring may not help Ireland sufficiently enough
to overcome the stigma of a default in the market. I say a) the
market’s memory is proven to be amazingly short, b) they will eventually
have very little choice, and c) they will have plenty of company for
this is the 2nd nation in the EMU to get bailed out that didn’t need a
bailout. There are at least 5 more that definitely don’t need a bailout!
When they get bailed out it will overwhelm the faux safety net that is
being erected around the socialization of these private losses. Readers,
retail subscribers and particularly professional and institutional
subscribers (who will have access to the bulk of the analysis) should
stay tuned for the deliverance of the “Fiery Sword of Truth!”

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moneymutt's picture

interesting, so political blowback is the issue...I would have thought that 2 years ago, but from what I have seen in US and Europe since then, it amazes me how much economic pain people will take to keep the rich whole even in these countries/populations that have not traditionally had such pain inflicted on them.... and even when the citizens are active and organized in protest, I'm amazed how deaf their politicians can be to them. But I'm sure you are right, because you have objectively predicted everything else.

There is no knowing how frustration and anger will show itself specifically, but it will come. I read somewhere that the thing that really gets people upset is not the actual, objective level of their poverty or material lack but rather when they have their expectations, no matter high or low, dashed. It seems there is a lot of expectations being dashed and smashed these days.

moneymutt's picture

Nice Reggie, always like the Malcolm X quotes, he had the best analogies ever.

When I think of Ireland, the bailout was not partially pulling the knife out of their back, its was sinking it in and turning, watch the blood pool all the while claiming the knife's a surgeon's tool used to save them...

I'm assuming this game eventually ends when the country that needs a bailout exceeds even an"Ireland austerity" on steriods ability to cover it. And the whole galaxy couldn't bail out JP Morgan.

Reggie Middleton's picture

Thanks. Remember that austerit has material socio-economic and political costs and not just financial costs. When attempting to cram down an unprecedented program the size of the one's proposed, the probablit of failure and undesireable blowback is high and likely guaranteed.

beastie's picture

Nice work as usual Reggie. It's a pity you got bumped off ZH front page so quickly. 

Might be time for you to point out a solution. Just telling everyone they are wrong is not enough. Then again I don't know your motivations beyond recognition and subscription fees. 


Reggie Middleton's picture

I started this whole series off with a basic solution - provide a safety net for the basica services that the banks offer consumers and institions, then mark all assets to market and wipe out the banks that can't stay in business under those circummstances along with financial incentives and support for those new entities that rush in to take the failing banks place.

I will probably go through this in detail some time in the future.

DisparityFlux's picture

Mr. Middleton,

Although I have no connection with financial investing or services, I read your analyses, and those of others, to be informed of events and topics of great economic importance.  What strikes me as odd, is that in all the stories on European Contagion I find no mention of China's position.  Given China's significant economic connection via trade with the European Union, it is puzzling we don't see more overt action from China to protect/affect the health of it's export recipient's economies.  Am I to infer there is covert action (via GS, Central Banks, IMF for example), China is simply not concerned about the economic stability of the European Union, or it's just waiting for the appropriate time for action/influence?

We definitely know where China stands on U.S. trade and Fed's policies, and it's relations with the other BRIC countries.

Is there a story here that I've missed?


Reggie Middleton's picture

I believe China's ability to alter its own course is grossly exaggerated. As a net exporter with relatively minimal internal consumption as a source of economic activity, it is basically at the mercy of importing nation's ability to buy their goods. Any attempt to stoke the ability of these nations importing will be ancillary at best. The "reported" success of their bubble blowing is showing only one side of the equation - the bubble blowing. Signs of a traditional bubble (such as the one whose bursting the US and Europe are struggling to escape from) are everywhere, yet the mainstream media has not focused nearly as much attention on such. Unless the laws of basic human nature has changed, expect to see China suffering from the effects of profligate excesses just as the others that tried to inflate their economies the quick and easy way did.

Eternal Student's picture

Nice article. The first part was an amusing trip down memory lane. I especially liked seeing this quote again: "Now, everyone held Ireland up as a poster child of how do conduct a successful austerity program." A pity that the people handling this have been so spectaculary wrong for so long.

The second part was informative. Very interesting that some of the PIIGS have the biggest claims against the PIIGS. Seems like I've seen something like this during the dot-com boom.

Madcow's picture

Here's a cheery video of a goose being force-fed to death -

jus_lite_reading's picture

Don't show this to LeoKakalakas. He'll flip when he sees the truth. As always, Reg, Good work. One of the best analyses I have seen and exactly what I predicted would occur.

PS- Don't mention anything about solar to Leo or he may go postal! LMAO!

kaiserhoff's picture

Thanks for the charts, Reggie.  It's pretty clear that when Italy and/or Spain go down, the Frogs are toast.  Contagion is a bitch with bells on.

SwingForce's picture

You're a very smart man, Mr. Reggie Middleton.