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I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!
So, S&P finally gets around to Cutting Ireland’s Rating on the Cost of Bank Support, as reported by CNBC:
Ireland’s financial headache worsened on
Wednesday after Standard & Poor’s cut its credit rating in a move
criticized by the country’s debt management agency.
…
The premium investors demand to hold Ireland’s 10-year bonds over German bunds has been steadily widening in the past few weeks and remained elevated at 327 basis points on Wednesday.
The spread finished at 330 bps on Tuesday, its highest level since the Greek financial crisis broke in May.
Brenda Kelly, an analyst at CMC Markets, said she expected Irish borrowing costs to climb on the back of S&P’s move.
“I think we are going to have to an awful lot more in interest payments,” she said.
Although Ireland has raised virtually
all of the 20 billion euros of long-term debt targeted for 2010,
S&P’s move may make it more difficult for the country’s banks to
extend the maturity of their funding later this year and eventually
wean themselves off a state guarantee on their debt.
…
S&P cut Ireland’s long-term rating
by one notch to ‘AA-’, the fourth highest investment grade, and
assigned the country a negative outlook late on Tuesday saying the cost
to the government of supporting the financial sector had increased
significantly.
Rating agencies have been steadily
hacking away at Ireland’s credit rating and S&P’s is now on a par
with Fitch and one notch below Moody’s, which cut its rating to Aa2
last month.
S&P said it expects Ireland will
need to spend 90 billion euros to support its banking system, up from
its prior estimate of 80 billion euros including capital used to
improve the solvency of financial institutions and losses taken from
loans the government acquired from banks.
Ireland’s budget deficit ballooned to 14
percent of gross domestic product, the highest in Europe, last year
due to the cost of propping up nationalized lender Anglo Irish ANGIB.UL
and it could climb higher if Dublin injects an additional 10.05
billion euros into the bank…
I’m not going to say I told you so, but I did throw some pretty strong hints…
On April 29th, I was quite blatant in stating “Beware of the Potential Irish Ponzi Scheme!”, urging my susbscribers to review the 
Irish Bank Strategy Note and the Ireland public finances projections
that I made available earlier that month. You see, unlike many of the
pundits in Europe who state that Ireland has moved beyond the worst of
its problems and is an example of how austerity should work, I believe
that Ireland is in very, very big trouble and I outlined the reasoning
behind such in my very first posts on the Pan-European Sovereign Debt Crisis.
At
the very beginning of the year, I visually illustrated how bad off
Ireland was, with considerably more that 6% of its GDP being mired in
bank NPAs (non-performing assets). This number is quite conservative,
for my research team only canvassed the larger banks in Ireland – you
can rest assured that the smaller ones contain a similar (if not
greater) proportion of NPAs to total assets. Add to this the fact that
these banks are probably overstating assets and understating liabilities
and you can probably throw another 150 basis points on top of the
figures above and still be a tad bit conservative.
As a matter of fact, I went further into the topic in mid-April with Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! where
I showed that Ireland is heavily leveraged into the problems of the
PIIGS group faced. A picture (and/or graph is worth a thousand words!
From the afore-linked post…
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. Subsccribers, 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.
I then followed up with a recap of my
findings along with a snapshot of the social unrest that economic
turmoil is bound to bring about in BoomBustBlog Irish Research Becomes Reality…
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?
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.
So if Ireland is really that bad off, what’s up with that tall stalk
next to it in the bank NPA chart at the beginining of the post? Oh,
those are the guys (and gals) who lent Ireland all of that money, and
Ireland’s issues are probably a significant portion of those NPAs you
see towering over that of Ireland. Here’s a look at their public
finances (for subscribers only UK Public Finances March 2010). I am not picking on Ireland and the UK, for much of Europe suffers from similar anathema, reference Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, wherein I delve into this topic in detail.
It is not as if no one could see the Euro-bank issues coming. In
January of 2009, I explained to readers that the real estate bust in
Spain could not be avoided by the banks and there will be a time when
the piper comes a callin’ (see The Spanish Inquisition is About to Begin…, and then Spanish Banking Macro Discussion Note 2010-02-09 02:48:06 519.40 Kb).). This, of course, will be subsidized by the Spanish state, as subscribers can reference out study of the Spanish Government’s Public Finances. This didn’t just start with Greece, although I Think It’s Confirmed, Greece Will Be the First Domino to Fall.
So what does it all mean?
Well, from my point of view, things rarely happen in a vacuum. Many
European nations are over leveraged, overbanked, highly indebted, social
powder kegs literally and economically sitting right next to each
other. Lord forbid someone inadvertantly lights a match! Whether that
match be of financial or economic origin (see Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?) a very unpleasant domino effect will ensure. On that note, we revisit a BoomBustBlog proprietary stratagem… Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
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.
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
comparison. - 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.
- Sovereign Contagion Model – Retail – contains introduction, methodology summary, and findings
- 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.
My next post on the Pan-European Sovereign Debt Crisis
will outlined the likely haircuts many investors will take on their
European debt, using our proprietary in-house models. Interested parties
can click here to subscribe to our research materials.
- advertisements -
Reggie - what is the total UK claims in Nominal terms in either euros or Pounds on Irish bank and or sov debt ?
It looks big in % terms.
As first suggested on Thurs 26th, further upside for DOW/SP500 is expected.
http://stockmarket618.wordpress.com
I rest my case your honor....
isn't there a leprechaun with a pot o' gold at the end of the rainbow? there was in all the fairy tales read to me!
In a word, sell.
Nice piece, Reggie
Just one remark: The Irish are angry with S&P
for being disingenous about their valuation
a) of the bonds issued by the 'Nama'to the banks
b) for their assessment of the cost of 'saving'their banking
system c) end-result: overshooting their debt to
GDP estimate vs the Irish government's.
Following the EU's approval of the 10 billion euros injection
into Anglo-Irish, the governor of the Bank of Ireland was fuming
was fuming publicly over the fact that this bail-out represented 15 or 16 %
of GDP. If such ' flawed logic' is applied elsewhere,you can
downgrade the U.K any minute, and this will not happen...
If you mean Honohan, he's the governor of the Central Bank of Ireland. The Bank of Ireland is a private-sector retail bank. Similarly, don't confuse Anglo Irish Bank with Allied Irish Bank[s]! One of those hasn't even been nationalised yet.
Well, you see the bank NPA graph, right? There is only one nation there worse off than Ireland, and you know who that is...
yes reg, you are right on. excellent work, as usual. does this mean that the greeks are better protesters than the irish. they seem to be be getting a better deal on their debt costs. maybe some imf people have villas in greece?