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The Footnote On The Irish Bailout Plan
We very much enjoy the view of Michael Cembalest (CIO, JPM Private Bank) when it comes to the sensitive topic of geopolitics, as it tends to provide that incremental perspective over and above what otherwise his and other banks would skirt around due to conflicts of interest (after all they are banks). Today, in his Eye on the Market report, Cembalest looks again at the Irish bailout. And while his summary of the 4 key dynamics (in his opinion) is certainly spot on, it is his footnote that caught our attention, as it carries in it the most pertinent information: namely, that since its bankruptcy and currency devaluation, Iceland's economy and stock market have surged, unbound by the shackles of a zombie monetary system and exponentially growing debt. Ireland, to the contrary, can only hope for at best a gradual decline in its economic output instead of an outright collapse now that European Commission council is the country's new politburo. It can also, at best, hope that its pension fund will have a few penny farthings left for the aging population once it is done rescuing Europe's banks. It is precisely this option that a formerly democratic country refused to offer its citizens, and is the reason why its entire government should be tried for treason: instead of using empirical evidence that default and devaluation is the best outcome, Ireland crumbled to the interests of a few parasite plutocrats, which have just their own interests in mind, and never those of the host nation (which ends up being abused and discarded like a used condom off the side of the road).
The key issues on the Irish bailout per Cembalest:
1. Bailouts don’t change the level of debt that countries owe, it just shifts the creditors around. The latest steps remind me of the desperate attempts by US banks to lend more money on top of prior money during the late 1980s to Latin America, when Citibank chairman Walter Wriston’s “countries cannot default” thesis was left in ruins. For everyone that said last spring that “Greece 2009 is not Argentina 2001”, they’re right; Greece’s budget/trade deficits and debt/GDP were much worse.
2. GDP figures can be misleading indicators of risk. Greece, Ireland, Spain and Portugal (GISP) are small in GDP terms relative to Germany and France. But their banking systems grew to be very large (e.g., a 20% haircut on French bank exposure to GISP countries would wipe out French bank equity). Irish Finance Minister Lehinan intimated that Ireland asked to be able to apply haircuts to senior bank debt, and was told by the EU that it would make no money available if there were any haircuts, due to fears of contagion. What does that tell you about the risk of small countries, or the European banking system?3. This crisis is not just about sovereign debt/deficits. Ireland and Spain were model EMU citizens, with deficits inside of the 3% Maastricht level for years. The problem: total sovereign, corporate, financial and household debt, and each country’s ability to service it. Despite reductions in its budget deficit and reduced reliance on ECB funding, we’re still very nervous about Spain. Why? Its economy is still on the brink of recession. Were it not for the ongoing collapse in imports, Spain’s GDP would have declined in Q3. BBVA and Santander should be able to ride out a recession due to international diversification, but the other half of the banking system (Caja banks) is another story entirely. Risks in Spain are not just about the banks; nonfinancial private sector debt is 220% of GDP, the highest in the world.
4. The politics may get more divisive. The EU imposed a deal on Ireland’s lame duck government that consigns the country to a very painful future. The continued gutting of the Irish national pension fund is, to put it mildly, a controversial decision. Meanwhile, Eurogroup president Jean Claude Juncker said this over the weekend: “I am concerned that in Germany, the federal and local authorities are slowly losing sight of the European common good”. As per last week’s EoTM, I am not sure anyone knows what that really means right now, or if such a concept was ever properly established as it relates to the European Monetary Union.
This is all well-said and very coherent. But it is not what we want to highlight. What we do want to emphasize is the comparison of Ireland to Iceland. Aka footnote one:
The Irish “bailout” plan, with its EUR 54,800 cost per household, is by all accounts a modern-era “Long Day’s Journey Into Night”. Ireland’s future, by the way, looks a lot more bleak than Iceland’s. Iceland took a different path (debt default and a devaluation of 60%). Two years on, Iceland is rebounding: exports and manufacturing are growing by 20%, tourism is back near all-time highs, real wages are rising, unemployment is declining sharply, interest rates fell from 18% to 5.5% and the stock market rebounded 50% from its lows. In Ireland, GDP is contracting at a 9.7% rate; real wages, price levels, the money supply and exports are falling; and unemployment is stuck at 14%.
This is nothing less than yet another example that in the great collapsing game of Keynesian fundamentalist's dilemma, he who defects, defaults and devalues first is the winner. Congratulations Iceland. To everyone else: enjoy the eventual revolutions. They are now inevitable, courtesy of your favorite neighborhood parasite banker.
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That about sums it up.
I totally agree with that last statement from TD. Iceland pretty much said screw it and defaulted (or their banks defaulted) and took the short term pain. Ireland is going to be in revolution mode in no time when the aspects of this plan hits them. To protect France, Germany and UK banks from insolvency and their economies they are requiring the other countries to suffer instead of them.
TD busy day. Thanks for keeping up with all the good stuff
It's all about the CDS on the debt. A default gets the biggest domino falling which won't knock the others ones over one by one, but rather flattens them all at once.
Time to get it over with already. Time for the Irish citizens to tell the banksters "Jump You Fuckers!"
Where is the outrage in the US since we are the biggest piece of the IMF? Enough of this bullshit.
Actually, the Fed (and IMF) are waging war on the EU, and winning. They will topple the ECB, eliminate the Euro, and establish claims on countries to force them to take the new currency (an IMF-dollar).
So, the Fed is quite pleased that Ireland is relinquishing sovereignty.
see putin's comments today - the very definition of phyrric victory
The Bernak is a confirmed (at least previously) Bilderberg. Perhaps the threat of collapse has forced the FED shareholders to set the Bernak straight on his true objectives (preserve FED wealth)...Or is it more sinister, the FED shareholders spotted a weakness in Europe and are going for the juggular?
I wouldn't tell them to Jump, I'd just throw them off myself.
I believe Iceland received 'financial assistance' from the Russians, no?
Devaluing the Icelandic Krona (or whatever it's called), may have been good for the stock-market but it still screwed the people who had their savings in said currency. The Icelandic 'default' left the insolvent British banks hanging who were then bailed out by the British government, thus screwing those with savings in Pounds.
I don't see any winners here.
The Russian loan never actually happened.
You're not looking very hard then. How about the next generation in Iceland? I am guessing that future banking in Iceland will be a bit more, how you say, mundane. The takeaway from your post is that one needs to pay close attention to the financial world they live in, eschew complacency and avoid savings in a volatile store of value.
Correct me if I'm wrong but are not Icelanders still dealing in the recently devalued Krona? How does this help future generations, allowing the government to screw the savers next time the debts cannot be repaid?
Banking in Iceland may be mundane for a few years but I'll wager the government will 'loosen' things up soon enough.
I stand by my statement
while iceland's banks were "publicly owned" at least in part, they were run a lot like fannie mae here in the u.s. in most cases in the world today, the banks are privately owned. why are the bad debts of private banks the debts of the taxpaying public? no good answer is ever given. contagion? bluff and bluster. the contagion comes from the dang banks thinking they will be protected no matter how poor the decisions they make are.
the tbtf are not getting better. did the banks of japan get better? no. did those in the nordic countries that took the receivership route (more like what iceland did) get better? yes.
and the savers (checking and savings accounts, etc.) are not at issue in most cases (here again iceland is an extreme outlier). this is about the bondholders of the bank itself (that and the management and the stockholders). these are people who invested money to make a return. not all investments work out. it's called market risk for a reason. this is the reason. capitalism in a bull market, crony capitalism/socialism for the rich in a bear is no capitalism at all. it is corruption of the worst kind.
but pay enough to make bondholders whole on assets that will not return to solvency in, perhaps, a lifetime and eventually there won't be enough to make good the deposits of "the savers".
How does dealing in any fiat currency keep the gov't from screwing savers anytime a debt can't be repaid?
At least the Icelanders don't have to spend the next 10 years going down to the wharf, blowing queers, trying to get their self-respect back. Unlike the MoFos who are accepting these bailouts and bending over for the IMF.
No, they just pay for it in a devalued currency.
You & several others just don't get it. Default as in refusing to pay will means you pay for it anyway in a devalued currency, which if you have a government forcing you to accept that currency, you're fucked.
Get bailed out & you pay who ever it was that bailed you out, so you're fucked.
My only point has been that the most palatable option for government, who are the ones forcing you to accept their bad debt through legal tender law, is to kick the can down the road via bailouts so that's what will happen whether you like it or not.
There is only one solution. Take your 'money' out of the bank, buy gold & silver & henceforth refuse to accept your governments bad debt for your goods & services. And also be prepared for the shitstorm that follows.
The money isn't there, it never was & never will be.
it is absolutely amazing to the extent which the passive, disconnected and mollycoddled citizens of the western demockeries accept with equal alacrity the carrot stuck in their mouths and then the stick beating them about the head and shoulders . Manipulated, lied to, and finally unceremoniously dispensed of, we go to the shit pile of history ignominiously and ingloriously, mere spectators of our own demise. This nearly universal emasculated capitulation mirrors Elliot's poetic evocation of the fate of humankind quite faithfully. "not with a bang but a whimper".
you forgot about 80's metal
Uh, I believe Iceland's equity market is down about 99% from the peak in USD. Devaluing your currency does not create wealth.
+ a gadjillion sovereigns
Uh, I believe Iceland's equity market is down about 99% from the peak in USD. Devaluing your currency does not create wealth.
I believe this to be true in the historical sense. I wonder how much This depression is different than the Tulip, South Seas, 1930's etc collapses.
The 1930's depression could look forward to 70+ years of constantly increasing oil production at a price so low we use it to blow are leaves around.
This is the First Global, Interconnected, Supply Chain driven, Cheap Energy price required, with Peak oil, and other Resources type collapse.
Read this and see how a sneeze in the distribution supply chain could do. (the computer systems I have been writing for 20 years)
The Truth About Your Local Grocery Store
http://www.survivalblog.com/2010/11/the_truth_about_your_local_gro.html
What if there comes a time shortly where the whole world questions fiat currencies period?
You don't pay your mortage, you will get booted from your house.
But if 10 Million do it, the outcomes may be you live there for 2-3+ years for free.
One country go under, they are rated against the others that didn't (yet).
What if the top 100 countries go bankrupt?
What if "Letters of Credit" dock side are not recoginzed? Everything stops "In Place" Think a week or two of that wouldn't cause the whole system to throw up?
We might be off the normally "Abnormal" charts.
in all fairness, when you devlue currency (and to large extent wages) by 60%, those wages have nowhere to go but up. and what about the savers?
either way, whether austerity or default, it's better to get rid of any and all savings in any paper currency.
austerity and debt restructuring are entirely different ways of dealing with excessive debt. were it not for the euro, the weaker periphery countries would have all defaulted/devalued and moved on.
with austerity the low gdp growth saps tax revenue and the ability to service debt and keeps the economy down. with restructuring the bad debts are written off, the investors take the losses they deserve and good markets require, interest expense declines and the economy can grow again.
This is by far the best passage I've read today:
I heartily agree. I hope we have the courage to excel in our Robert Frost moment and take the path less traveled..
A little OT Maybe not - what the heck - another Frost poem that came to mind:
Fire and Ice
Some say the world will end in fire,
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
Yes, more ZH epicness!
AHAHA too funny. Just want to share this.
Ben Bernanke
http://www.youtube.com/watch?v=npP73QIApFE
I had no idea that Iceland was healing so quickly - sort of gives me a little hope...except that we'll be the last ones in and punished for our ways from the most for the longest...anybody wanna play "kick the can"?
Double fucking POMO and Sacks down 40 - if that don't just make a fella say hmmmmmm.
OT: Pardon my ignorance but do the PDs have to spend the newly monetized debt the same day? I say this after a double POMO day and red close. Could they not spend this money tomorrow or the next day?
Maybe the double POMO money went here:
http://www.frbservices.org/files/centralbank/pdf/termdepositfacility_off...
Since QE2 has begun there hasn't really been a link between POMO and green days that I have seen. There have been 6 red days and 3 green days. Technically, the primary dealers could spend the money any way they want, but QE2 doesn't really free up money for the primary dealers unless they have existing treasuries on their balance sheet. Otherwise, QE2 is simply monetizing the treasury issuance through primary dealers as the Fed takes freshly bought treasuries off the primary dealers.
I didn't realize that primary dealer customers could sell to the Fed too... from Fed site.
Who is eligible to sell Treasury securities to the Federal Reserve under this program?
The Federal Reserve Bank of New York’s primary dealers are eligible to transact directly with the Federal Reserve. Dealers are encouraged to submit offers both for themselves and their customers.
I'm not sure Ireland or its government really crumbled. I think it was bought off. Had they taken the FU approach toward the EU and IMF, they probably would have been viewed as political heroes and thus ensuring their continued claim on political power in Ireland.
So I think cash was waved under their noses, numbered Swiss bank accounts and all, and they went for it. Because what they would have lead after having told the EU/IMF to fuck themselves would be a country that would be subject to a very bad case of the hurt put on it.
We'll see what the Irish people have to say about this on Dec. 7th. Can the oligarch's hurt match that of the people?
Austerity now -- or later. Take your pick.
Note: Later will be more austere.
Buiter's back too. I'll disagree with what he says on p. 29: I don't believe the EU (or at least the parts of the EU in control of Ireland's EFSF package) is/are planning any senior haircuts on Ireland's bank debts before 2013, if indeed there's sufficient support for senior bank haircuts at all. Rehn doesn't sound like a man preparing for senior bank debt restructurings.
Question please: Which entities took losses on Iceland's bankruptcy? Google searched but couldn't come up with much.
IceSave customers in UK and Netherlands are the entities that I know of
http://en.wikipedia.org/wiki/Icesave_dispute
Correction to the article, TD...it's not a "few" parasites, it's a fuckin swarm of them
I don't see the big deal – if things are one tenth as bad as presented (and I suspect they are), a new Irish government will repudiate that deal toute suite.
Bankers make lousy extorsionists - threatening to break soeone's credit rating just doesn't scare people who are contemplating watching their kids miss meals.
It gets stickier when they have major sovereigns wielding the club for them, though.
Meanwhile in the UK, council meeting stormed, police overpowered by anti austerity protestors.
http://www.bbc.co.uk/news/uk-england-london-11870742
The steam is building.
No, Santander is the WORST of the Spanish banks. It's Spain/Brazil fuckups will bring down the British Empire. Why? Well they're linked back to Irish/British banks, not to mention, part of what they've been using as the plus side during all this minus from the rest of the world, is the bullshit monetary bubble in Brazil. So when that pops, not only will you have what was keeping them afloat, sending them under, but also have the whole Spain/Irish/British banking interwoveness that will go under.
Why do you think Spain is being pushed to the front. You better damn well know the Queen knows there's only 1 bailout card left the size enough to handle Spain, and if it doesn't go to Spain, the Brits are FUCKED.
The caja's look bad, but Santander is worse with all their off balance sheet crap and derivatives.
Of course none of this will work, and the monetarists still don't understand that if you save Spain, but let the next euro go, it'll be the same thing as if you let Spain go, to a smaller degree, initially, but not for long. But we are talking about a bunch of idiots here. If Bernanke is that idiot, who are the people that folllow said idiot?