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Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default…
The BoomBustBlog Ireland Haircut Model has been posted, and it is a
doozy. For those who anticipate the Euro being a slow train wreck, it
may not be so slow after all. The haircut model is SOOOO damn revealing that I can't keep it all to
just site subscribers, thus I have pulled a few bits and pieces out for
the general public. Professional and institutional subscribers
can access it here as a live, spreadsheet embedded into a BoomBustBlog web page. Other users can subscribe or upgrade to gain access.
As any who have been following me know, I believe that several
European countries are bound to default, ie. restructure their debt.
Ireland is in that camp. What makes me so sure about this? Well, its
simple math. I can illustrate incontrovertible evidence that shows that
Ireland is on an unsustainable path - a path made even more
unsustainable by the recent bailout.
Let's take a look at the cumulated funding requirement of Ireland over the next 15 years.
As you can see, the amount Ireland would have to borrow to run the
country (even after harsh and punitive austerity measures) is literally
more (and substantially more) than the country's projected GDP. These
GDP projections are (in part) IMF projections which I have already
demonstrated to be grossly over optimistic, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!).
As a matter of fact, the tab for Ireland is even greater AFTER the
IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding
bailout! This is what happens when you try to save a debt laden country
with more debt!
Even after the IMF/EU/Bilateral state leveraged into Ireland
loan/Pension fund raiding bailout, Ireland is forced to raise an
unsustainable and most improbably 110% of its GDP from the debt markets.
These debt markets are starting to become highly uncooperative.
Over the next year, Ireland would have had to tap the public markets
for between 15 and 20% of its surplus cash flow. Again, unsustainable,
and probably not doable in this environment either.
This is why the IMF/EU/Bilateral state leveraged into Ireland
loan/Pension fund raiding bailout was implemented. Let's not get it
twisted though. This is not a solution, nor a cure - it is a method of
buying time. It is the European version of what the Americans have been
doing for a few years, kicking the can down the road. Alas, the roads
are pretty short in Europe, at least in Ireland!
As reported by Bloomberg: Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds
European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.
...
Germany, which built the euro on the principle of budgetary rigor, unleashed
the latest phase of the crisis by demanding a “permanent” system as
of 2013 that would enable fiscally troubled countries to restructure
their debts and cut the value of bond holdings.
The German push ran into criticism from policy makers elsewhere, who called it mistimed, and from European Central Bank
President Jean-Claude Trichet, who warned it would unsettle
bondholders. Merkel, who has faced domestic criticism for aiding EU
neighbors, yesterday backed away from the pitch for an automatic
penalty, agreeing to give the International Monetary Fund a role in
determining losses on a case-by-case basis.
The new proposal, fast-tracked from a debate set for December, would
introduce “collective action clauses” for debt sold as of 2013,
enabling fiscally hard-hit governments to renegotiate bond contracts.
EU governments aim to enshrine it in the bloc’s treaties by mid-2013
and pair it with a new emergency liquidity fund to replace the one
expiring then.
Trichet
yesterday called the compromise a “useful clarification” and the ECB’s
Governing Council said in a statement that the Irish program will
“contribute to restoring confidence and safeguarding financial
stability in the euro area.”
The text above came from the post Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! wherein BoomBustBlogger Nick asked:
Reggie-
Do you have any reason as to why they are choosing 2013 as a deadline ? Seems like an arbitrary date.
Well, Nick, just follow the money or the lack thereof...
So, what debt raising and servicing that was unsustainable in 2010
was lent even more debt to become even more unsustainable. The chickens
come home to roost in 2013, post IMF/EU/Bilateral state leveraged into
Ireland loan/Pension fund raiding bailout! What Angela in Germany was
alluding to was what all in the know, well... know, and that is that
Ireland is already in default and those defaults have been purposely
pushed out until 2013. Angela simply (and wisely from a local political
perspective, although unwisely from a global geopolitical standpoint)
admitted/suggested was that the defaults will be pre-packaged and
managed ahead of time. The EU politbureau insists that politics rule the
day, and no prepackaged structure be in place for the Irish defaults to
be. This means the potential foe even more carnage through the
pipelines of uncertainty!
So, what we have done with the Ireland Sovereign Debt Haircut Model was
to compare the unsustainable path that Ireland is on now (yes, with the
IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding
bailout) with 6 scenarios that have been used by other countries in the
past to cut their debt service. These scenarios entail:
- Restructuring by Maturity Extension
- Restructuring by Maturity Extension & Coupon Reduction
- Restructuring by Zero Coupon Roll up
- Restructuring by Maturity Extension w/Haircut
- Restructuring by Maturity Extension & Coupon Reduction w/Haircut
- Restructuring by Zero Coupon Roll up w/Haircut
Click image below to enlarge a screen shot of the model.
For those of you who are currently not subscribers (but are about to
hit that button momentarily), let's drill down into what Ireland's
prospects are sans a default/restructuring...
This is how we derived the first to colorful eurocharts in the beginning of the post.
Real World Examples of the Social Science Concepts Described in "If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today?"
I described the Milgram experiments in the post above, and how the
leaders of Ireland have taken the place of the "teachers" in said
exercise. I quote the post as follows:
The
similarities between “Teachers” referenced above and the leaders of the
sovereign nations in Europe, as well as the implications of
considering the “authority figures” referenced above as being the
defacto heads of mulit-national agencies such as the ECB and IMF are
literally inescapable to anyone who approaches this with a clear,
autonomous and objective mind. In other words, anyone not bound by the
straps of “authority”!
This is page 2 of our Subscription only Ireland Public Finances Projections Document, available to all paying subscribers – 
Ireland public finances projections.
If one were to exercise one’s imagination, one could cast the EIU and
the IMF as authority figures, and the Irish government as the
“teacher”. As you can see, Ireland’s (the teacher’s) view of their
prospects are much, much rosier than both the EIU and the IMF’s. So
rosy as to be probably unbelievable in many a context, including the
current one.
What
makes this so bad is that the authority figure’s, the EIU and the IMF’s
forecasts throughout this crisis have been so optimistic as to have
been downright laughable. I am offering this single page sbove to
those who do not subscribe to our services to fully drive the point
home that was so graphically illustrated in “Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!”
(which is a definite “must read” in and of itself). Of course, our
internal team of analysts have come up with numbers nowhere as rosy as
the EIU, the IMF, nor Ireland’s. Go figure. Oh year, while you are
figuring, you should wonder who has been the most accurate over the last
three years – the IMF, EIU, banking analysts or BoomBustBlog. Here’s a cheat sheet.
As a hint to exactly why we would be more bearish than the EIU and the
IMF (despite the fact they have been consistently wrong to the
optimistic side since the beginning of the crisis) is a careful forensic
glance at how they (the authority figures), and Ireland (the teacher),
calculate Ireland’s debt. It is the farce as follows…
The Farce!
The
government has set up an asset management agency – NAMA, which will buy
toxic assets from banks at a discount and will in turn issue
government-guaranteed securities. NAMA was expected to buy about $81
billion of toxic assets at a price of $43 billion and issue
government-guaranteed securities in return. Since these securities have
collateral backing and are likely to be repaid through pay back of
underlying loans, these securities are considered off-balance-sheet and
are not part of general government debt by Eurostat. According to Davy
research, while the projected gross government debt excluding the
impact of promissory notes and NAMA bonds is 84.8% in 2012, including
the impact of promissory notes and NAMA bonds (in other words,
including the truth), the gross government debt can rise to 117.4% of
GDP. This either competes with or bests Greece, 2010’s poster child of
flagrant spending.
This
means that the teacher has created a very harsh austerity plan for its
“learner”/student/tax paying populace that has materially lowered the
standard of living – all based upon numbers that were bogus to begin
with. In other words, it ain’t gonna work!
The
original austerity plan was based upon pie in the sky numbers planted
in pure optimism, and those numbers themselves were based upon an
incomplete picture of the countries true debt. This has now come to
light as the country faces the prospect of having to again turn to
outside entities to assist in the bailing out of their banks. This also
wraps up all of the concepts described above in one fell swoop:
credibility – none, social proof – lacking, authority – acting in lock
step to the ECB/IMF.
It is not as if BoomBustBlog subscribers didn’t see this coming a mile and a year away – Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! We, at BoomBustBlog, have delved into this concept in exquisite detail in our Pan European Sovereign Debt Crisis series, particularly as it concerned nations such as Ireland.
I will
continue this Irish “mini-series” with a forensic look at the likely
haircuts to be taken by holders of Irish debt, a snippet of our Irish
public finances model, and then follow it up with a post on the likely
contagion and knock-on effects as we have calculated them.
In the meantime, I suggest that paying Subscribers review our Irish analysis and related contagion material:
- Ireland public finances projections
- Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)
- Sovereign Contagion Model – Pro & Institutional
- Irish Bank Strategy Note
- Euro Bank Sovereign Debt Exposure Final -Retail
- Euro Bank Sovereign Debt Exposure Final – Pro & Institutional
- Sovereign Debt Exposure of European Insurers and Reinsurers (Empty 2010-05-19 01:56:52)
There is
plenty (and I do mean plenty) of material for those who don’t
subscribe to see how the current Irish situation was essentially
manifest destiny (Euro-toxic asset edition), as excerpted from Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! Wednesday, April 14th, 2010
Related reading:
Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up??? Monday, November 22nd, 2010
The BoomBustBlog Contagion Model: How We Predicted 9 Months Ago That The UK and Sweden Would Rush To Bail Out Ireland, and Why Friday, November 26th, 2010
Next, up we release BoomBustBlog currency models, secrets very few
know about the ECB and then we go after Spain with a forensic
microscope! We will then wrap up this chapter with a hands on
application of the BoomBustBlog Sovereign Contagion model
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"And they say its gonna be, all right".
You gotta get this to the Irish People! The dealbreaker is the interest charged, no?
Agreed, debits much greater than credits = eventual default. Who will save them?
There are only two choices: 1) default, and 2) debt slavery.
This is a choice that most of the world faces.
Let's hope this cry in the EU parliament for the Irish corporate rate to double ends up with Ireland flipping the bird across the channel!
I've seen the way the EU diplomats behave in Brussels and if there's ever been a bunch of pigs with their snouts further into a trough I'd be very surprised.
REGGIE YOU HAVE A FUNDAMENTAL FLAW IN THIS ANALYSIS!!
YOU CAN NOT USE THE OFFICIAL GDP NUMBERS FOR ANALYSIS.
YOU MUST USE GNP NUMBERS.
Upwards of 20%+ of the GDP of Ireland is foreign corporate shell corporation transfers , of which the average tax rate is low single digits. Results in a GNP at less than 80% of GDP.
I'l try to find the analysis of the Ireland GDP vs GNP numbers, but I've read so much I can't remember the source. It was just published this month.
EDIT: Found the piece:
http://baselinescenario.com/2010/11/25/will-ireland-default-ask-belgium/
"At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.
The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P."
Or I suppose Ireland could default without quitting the Euro. It would then struggle just to bail out its insured bank deposits, while still-inflated wage levels would draw no investment, and the economy imploded over the next decade or so.
There is just no non-miserable way out of this for Ireland. But they'll have plenty of time to mull over the harsh lessons.
Reggie, you are a rockstar!!!
"Angela simply (and wisely from a local political perspective, although unwisely from a global geopolitical standpoint) admitted/suggested was that the defaults will be pre-packaged and managed ahead of time. The EU politbureau insists that politics rule the day, and no prepackaged structure be in place for the Irish defaults to be. This means the potential foe even more carnage through the pipelines of uncertainty!"
They could save themselves if they would buy TQQQ.
They should have bought more NFLX BIDU TIF ANN NKE and AMZN and they wouldnt be in this mess...
I sure like your analysis on financials better than your analysis on Apple.
It would be very interesting if the Irish threw out this government and elected one with a clear mandate to default. But I doubt they'll do it.
To really make it clearly worthwhile, they would have to also quit the Euro, and to do that, they would have to quit the EU (EU law doesn't allow quitting the Euro). Given the hostility it would create, it's unlikely they could negotiate a replacement partial-union status similar to Norway, Iceland and Switzerland. Don't think the Irish can really look to the US for much help here either. So to whom would Ireland export its way out of ruin? Looks very dicey.
I don't think the Irish majority are really up for something that ballsy and defiant. The pluck of the Irish is exaggerated. A lot of it went to America.
2013...my...thats long time from now....
More truth in that one quip, than I've heard in a while from plenty of those lauded as financial soothsayers.
As ya kick the can, laddy, may the wind be at your back and the very short road rise up to meet ya.
Bill Gross says it's o.k. for Ireland to default AFTER the IMF pays him par plus interest for the bonds he holds.
Once the bondholders are paid off, made whole, then it's o.k. to repudiate all other debts.
So spaketh the Zionists.
what happens to euro/gold when one defaults?
The Euro tanks into total oblivion and gold goes to the moon.
Gold is 15% of the EUR, marked to market.
Careful....
France seizes €36 billion of pension assets.
Is the Feds POMO really intended to help insiders sell shares before collapse?
And since they have to use the illegally robbed pension pot first, what then for the old people!!
Robber banksters
default, already you celtic lads and lasses; fukkemgood.
was wondering where you were Reggie..