European government bond spreads have widened dramatically with the second country going bankrupt: Ireland.
10 year Irish government bond yield. Source: Bloomberg.com
An example of low indebtedness as recently as 2007 (25% debt-to-GDP
ratio compared to 65% for Germany) – the country has descended into
financial chaos within 3 years. And, contrary to Greece, Ireland has not
overspent, nor falsified government statistics.
This year alone, saving its banks from collapse will cost Ireland 32% of GDP.
But the EU/IMF rescue package saddles the country with another EUR
85bn of debt – more than 50% of GDP (remember, Maastricht criterion was
60%). The ratio would look even worse if you used the gross national
product (GNP) instead (EUR 139bn vs. GDP 170bn for 2009[2]).
A lot of global firms have shell companies in Ireland, where – due to
the low corporate tax rate of 12.5% – profits are being booked.
Royalties are charged towards holding companies in higher-tax countries
to avoid paying higher taxes. These tax shells are run by few employees
and do not add much to the industrial output or tax base of the
country. Hence GNP would be a better measure of economic strength.
It seems Ireland tried to resist a bail-out, but was forced to accept
(Irish banks are hanging on by a thread of EU 130bn of loans from the
ECB).
But wait a minute – non-Irish banks make up EUR 35bn of this amount[3].
And didn’t some foreign banks (among them German Depfa, which was
bought by Hypo Real Estate which in turn had to be rescued by the German
government and has so far cost more than EUR 100bn) move their
headquarters to Dublin to escape stricter regulation at home? And now
the EU/IMF forces the Irish tax payer to bear the cost of bailing out
those banks?
The government is doing its citizens a disservice by accepting a
bail-out. The “National Recovery Plan 2011-2014″ intends to save EUR
15bn (“front-loaded” 6-5-4bn for the years 2011-13) by cutting expenses
(10bn) and raising taxes (5bn) in order to reduce the budget deficit to
less than 3% by 2014.
The budget plan sees GDP increasing by 1.75%, 3.25%, 3% and 2.75% in the years 2011-14.
Can anybody explain to me how an economy, which was shrinking by 11%
(GNP) last year, that will be saddled with austerity (demand-reducing)
measures of another 10% of GNP is supposed to grow? Not only have
government tax revenues declined by 33% since 2007[4] but also will increased interest burden (because of the bail-out loans) eat up 20% of revenues by 2014 (up from 8% in 2009)[5].
The sanity of the authors of this “recovery plan” has to be questioned.
Everything happens for a reason. Probably the Irish tried first
avoiding a bail-out. Then, as it became unavoidable, putting “fantasy”
numbers in the budget just to get over with it and to be able to sell it
to the people as a “recovery” story. The plan could have been to take
some EU/IMF money (paid out in tranches) and then default (or hope for a
miracle). Or, more elegantly, let the banks go bust (like Iceland) and
avoid bearing the costs for bailing them out.
The guys from the IMF/EU are no amateurs. Seeing through this
possibility they mischievously demanded the Irish contribute EUR 17.5bn
of money from the National Pension Reserve Fund and from the country’s
own cash reserves. Perversely, Ireland is rescuing itself with its own
money. Hence, should the government dare to default, those pensioners
will feel the cold as their money goes up in smoke.
I have rarely come across anything so blatantly opposed to the
interests of the people. Comments by readers of Irish newspapers reflect
the outrage, but a protest after the bail-out announcement counted only
50,000 participants.
One last chance to escape from this draconian bail-out is the
government vote on December 7. The government could fall apart,
individual members could defect – anything is possible. If the plan
passes - good luck and all my sympathies to you, Irish people.
The bond market has already reached its verdict: Ireland will
eventually default. The 10-year government bond yield (9.35%) is now higher than before the bail-out announcement (roughly in the 8-9% range).
Why would the EU and IMF subordinate a country to such an endeavor guaranteed to fail?
Some point towards the 12.5% corporate tax rate being a thorn in
other governments’ sides. Some point towards EUR 139bn owed to German
banks, among them apparently some Landesbanken (WestLB is said to
stagger after Bayerische Landesbank recently walked away from a merger).
The message seems to be that one country’s people has to pay because another county’s people doesn’t want to pay for its banks’ mistakes.
When, according to credit default swap prices[6],
Greece and Ireland have, despite bail-outs, the second and third
highest default probability (55% and 40%) on earth, something has to –
and will – give. We are talking about bankruptcies of entire countries.
And, as outlined in earlier letters, the cohesion of the Euro zone.
Which leads us to the next topic: how complacent must equity investors
be not to see the imminent risks in Europe? Are they waiting for the
German Constitutional Court to possibly veto any bail-out (as demanded
by the “no bail-out clause”) in February 2011?
The only solution for a last-minute attempt to save the Euro would be
to abolish individual sovereign debt issuance and to replace by a
supra-national issuer. Of course, Germany’s credit rating would suffer,
and its government bonds would tumble significantly. And even such a
move would not solve one of the main problems: divergence in unit labor
costs within the Euro zone over the last decade.
Half-hearted solutions could be a split into a “North-Euro” and “South-Euro” as proposed by Hans-Olaf Henkel[7]. But even that would lead to a run on banks within the weaker currency zone.
[2] Quarterly National Accounts, CSO Irish Central Statistics Office, March 25, 2010, page 1
[3] “Sharp rise in Irish banks’ ECB borrowings” in: RTE News, October 29, 2010
[4] “The National Recovery Plan 2011-2014″ by the Irish Government, page 10
[5] “The National Recovery Plan 2011-2014″ by the Irish Government, page 8
[6] “Highest default probabilities” by: CMA, November 30, 2010
[7] “Wirtschaftsexperte Henkel fordert “Euro-Nord” und “Euro-Sued”, dpa-AFX November 26, 2010
Can somebody please explain to me how, with this as the backdrop, equities are rallying?
Lot's of chatter today abt ECB going full retard with QE. Figure mentioned today was 1-2 trillion euros. All the periphery countries rallied (cash and cds) and of course equities. Well, equities rallies anyways these days, so this just gave the market more fire. Funny thing is that with a figure of 2 trillion the ECB would end up owning almost all Greek, Spanish, Irish and Portuguese bonds and some Italy on the top. I really wonder if JCT is happy with that not to mention Weber or German constitutional court.
What's really really funny is that the latest crisis was provoked when the ECB decided to yank its support from the Irish banks and dump the problem into the lap of the fiscal authorities.
Bennybucks courtesy of the PPT?
OT: The market.. ramp and hold it. Computers trading prob 95% of market from 10:00 - 3:45.
Right, all market activity happens before the markets open, from DOW 6,500 to today.
1200 today, 1175 yesterday. 1200 last week again, probably 1175 eod tomorrow.
Unless QEeu gets us out of the range.. In which case many many romance explosions to the upside.
its all rainbow colored unicorns - shitting skittles, no other questions needed...
THAT IS THE ANSWER
Dude... it's not supposed to work! It's just a "kick the can foreword". We are past the point of being able to fix anything. So, the only alternative from complete default, is delay the inevitable as long as you can. That way, those who are raping and pillaging the serfs can continue to do this for a while longer.
I sometimes suspect it's even worse than that - that it's ideological and the plan is to gut public pensions and pillage public assets until the guys in the Big Club (referencing George Carlin) own it all.
No question about it. The pirate captains are looting their own ships as they burn to the waterline.
"Perversely, Ireland is rescuing itself with its own money."
Not quite. Ireland is rescuing UK, German, US and French banks with Irish money. If the Irish put up with this, then the IRA is really, truly dead.
The headline will be the only thing anybody reads...the PTB are "counting" on it...
Sold my my XRT today. Jos. A. Bank missed today, and most other specialty retailers are way overextended.
Don't want to get greedy. Pretty much "made my year". Maybe I'll go bottom fishing in the crappiest sectors, like solar stocks or something.
Who knows? Not in any hurry. I should just take it easy and coast the rest of the year.
Buy a pair of socks, get 12 suits FREE. But wait there's more...
http://www.youtube.com/watch?v=7KbB3111WbE
Do you think anyone cares Robo?
Some disgruntled bears on the board goaded me a few days ago, asking me to inform them when I was going to sell my "leveraged" retail play.
So I did.
Uh, I didn't sell my silver today. It's up 63% since Jan 1st. Just thought you might like to know.
Well Played Robo...I hate what the market has become, but still if you can profit from it then I salute you. Let the little man have some action to I say.
Congrats.
FYI Chris Whalen (author of the new book Inflated: How Money and Debt Built the American Dream)
will be interviewed during the noon hour on bloomberg TV
http://www.bloomberg.com/tv/
0r
mms://a627.l2479952251.c24799.g.lm.akamaistream.net/D/627/24799/v0001/reflector:52251
Thanks, he's a very smart man, I hope they ask him about what Bove said.
lets get this show on the road, I have planted some spuds already.
Ireland govt doing a dis service accepting bailout? No, its just like our govt its treason against its own people.
"The sanity of the authors of this “recovery plan” has to be questioned."
That's a pretty bold statement. That's presumming they intended this to fix something. I believe that was never the intention. So, maybe it's the sanity of anyone who believes this was a fix that needs to be questioned.
Yep exactly, its obviously a plan from the beginning to take down the worlds economies.
I think Ted Nugent summed it up best with the immortal words: "I got you in a stranglehold baby, and then I crushed your face!"
The real answer is that Ireland was required to pledge hundreds of billions in national assets, including real estate and highway systems, to get the loan.
In other words, the ECB ends up holding the mortgage to Ireland. When this bailout fails, they take them even deeper into bondage.
That is a great post. I imagine the ECB is trying to arrange the transfer of funds directly to the banks now, before the next election, so that the money is actually already in the banks hands when the current government is tossed out. The money goes from the ECB to the zombie banks and the IOU goes to the citizens. Wow - are they getting the shaft.
I so earnestly hope the next Irish government tells the ECB to stuff their IOU, declares Euro debts void and issues new currency. It would be more fair than what's happening now. What is the EU going to do? Send in their army?
paragraph taken from Forcastfortomorrow:
(info from elite bankers.)
JOE : (ruffles paper) Ok the first one I have written down here and they talked about a lot
was do not worry about the stockmarket. It is heavily manipulated, and will go up and
down and eventually change entirely. Especially after the whole economic system
collapses. They gave no timelines, but say it is coming soon.
They were also joking about the media, saying that the lies will continue, and that we are
actually back in a depression right now and it will get worse!. Not recovering like the
mainstream media keep telling us. If the markets do sell off again to deep dark levels the
stockmarket will seem meaningless anyway. That is because they see so many changes
coming.
Picked this from the press:
"Finland’s largest opposition party, the Social Democrats, says it will not support a government-planned bailout package for Ireland. The party’s parliamentary group says the cabinet’s plan fails to secure adequate conditions for Finland.
The SDP adds that the government has fallen short in its handling of the financial crisis in other ways. The party plans to call for a vote of no confidence. The opposition Left Alliance has also expressed resistance to the bailout package.
On Wednesday, the cabinet presented parliament with a plan to offer 740 million euros in guarantees to bail out Ireland. Parliament must approve the plan in order for it pass"
http://yle.fi/uutiset/news/2010/12/opposition_plans_to_vote_against_irel...
but a protest after the bail-out announcement counted only 50,000 participants.
50,000 in a small country like Ireland seems like a lot of folks. Compared to the whole US, it'd be like 3M. Compared to just the folks who could get to DC in a day, it'd still be several hundred thousand, which we consider a lot of folks to show up in DC.
Or is there a history of larger protests in Ireland that would justify calling this a small protest?
I'm optimistic with pretty much everything across the board until close to xmas. There are a couple of fly in the ointments short term.
1. The EU looks like they are ready to do their own serious printing (details tomorrow maybe) which will push up the Dollar and push down the general markets. If it's really crazy Bernanke stuff there may be a flight into Dollars, and Gold. Gold has passed the 1000 EU mark with conviction. This is a turning point IMO.
2. Dec 7th may see some hiccups with Ireland's bailout and people withdrawing money from the banks. Funny they are happening on the same day. So far the only commitment of funds has come from the Irish pension system which is solvent unlike Social Security here.
3. I expect Sinn Fein and the "Real IRA" to stay quiet until Ireland's general election mid Jan. If they don't get into a position of political power then they will start shooting bankers and worse. If they can achieve the same aims through the ballot box (which is rejecting the bailout and retaining sovereign status) that's the route they will take. Make no mistake though the Irish population is pissed. Not pissed enough to get violent except towards bankers and politicians. The "Real" IRA will not hesitate to pull the trigger though.
Anglo Irish Bank employees received a memo a couple of weeks ago not to mention where they work to avoid potential violence. They are biggest screw up BTW.
A by election (equiv of a state election here) brought home 57% vote for Sinn Fein. Ruling party and opposition got decimated. This is pretty damning for the ruling party. The only caveat here is it was held in a border county/state which typically has a strong nationalist vote but nothing like this. In general the Irish voter avoids extremes and votes conservative/ middle of the road. Next Jan may be very different.
"Only 50,000" people at the protest? Based on the relative populations, that equates to about 3m US citizens. Is he saying that a 3m turnout here wouldn't get attention? Hopefully, the Irish will put an end to all this by a "no" vote on 12/7. To the barricades!
For whatever it's worth, the Guardian claimed that there were 100,000 present.
Highlighting the obvious; Wouldn't a fix come sooner if the government refused the addition of more debt and proceed with the austerity measures anyway, or are the austerity measures a result of accepting more debt?
The austerity would be necessary to control the deficit even if Ireland were to repudiate the bank debt.
ECB is making an anouncement tomorrow morning at 8:30. Will it be that they will fund another 1 to 2 trillion for banks or will it be them buying the garbage debt from the countries. Who will be stuck with this junk, or more importantly which countries will be stuck with it.