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Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor!
As reported by Bloomberg: Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds
European governments sought to quell
the market turmoil menacing the euro, handing Ireland an 85 billion-euro
($113 billion) aid package and diluting proposals to force bondholders
to bear some cost of future bailouts.
An oxymoronic comment in and of itself since the market turmoil stems
from excessive indebtedness of sovereign states and this event marks
the dumping of $85 billion of debt on said indebted state.
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.
If bond traders were a tad bit more fundamentally analytical in their
perspective, they would realize that the Germans were simply being
forthright and honest about an inevitable truth. With the current debt
load, Ireland will most likely restructure its debt by 2013 anyway. The
German proposal is actually a marked positive in that the restructurings
(read, “haircuts”) would be uniform, universally agreed upon ahead of
time, standardized across the board and known by all market participants
– basically a sovereign prepack bankruptcy deal. The so-called “bond
traders” as referred to by the MSM, are apparently reported to prefer
the anarchy of piecemeal, default as you go, restructurings with no
standardized form or fashion. Argentina, here we come!
Is it that some believe that if they stick their heads in the European sand and ignore the problem it will go away in due time?
The first test of the twin decisions
came as markets resumed trading after speculation intensified last week
that Portugal and perhaps even Spain will require support.
If Ireland continues to have the problems that I believe they will
have, not only will Spain and Portugal face their market comeuppance,
but other European countries outlined in my Pan-European Sovereign Debt Crisis series as well.
I have been 100% correct year to date, much more so than the more
widely publicized pundits, investment bank analysts and the IMF/EU
themselves:
- The BoomBustBlog Contagion Model: How We Predicted 9 Months Ago That The UK and Sweden Would Rush To Bail Out Ireland, and Why
- Merkel Points to `Serious’ Bailout Risk as Spanish Bonds Drop, Reggie Middleton says “Ya Damn Skippy” – Here’s How We Called It
- Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???
- If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today?
Six months after the Greek rescue
exposed flaws in the euro’s makeup and fueled doubts whether 16
countries belong in the same currency union, policy makers again found
themselves meeting on a Sunday racing to calm markets. They convened
after a week in which the cost of insuring Portuguese, Irish and Spanish
government debt against default rose to a record and the 10-year bond
yields of those nations, Italy and Greece averaged more than 7.5
percent, a euro-era record.
The fact that those flaws have not been rectified should not be lost on the more astute market participants.
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.”
As I stated earlier, the German idea is actually superior
for it enforces a standardized vigor of discipline against imprudent
risk taking, both against the governing bodies of sovereign states and
those market participants who choose to fund them both directly and
indirectly. By allowing a piecemeal, “default as you go”, subjective
perspective, the problems of the Eurozone will not only continue, but
may actually be exacerbated. You see, just as the article intimated
above, there were major flaws exposed upon the onset of the Greek debt
crisis, in that 16 distinct, disparate and individual nations were
forced into one common monetary and economic system under a relatively
strong, export based economic (Germany). This flaw, which in retrospect
should have been very easily recognized, has yet to be addressed. As a
matter of fact, by watering down the German initiative, the flaw may
very well be exacerbated due to political influences – as I re-quote
from the Bloomberg article…
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
Piss off the effective monetary masters of the European Union “Unsettle bondholders” and long
over due and quite appropriate although contrary to the interests of
those who hold the leash of the entities that control the lives and
livelihood of European citizens and tax payers “mistimed”… Indeed!
The folly of disparate nations forced into a single economic block
under Germany that I opined on earlier in this missive is certainly no
secret and is even mentioned in this very same article…
Germany’s export-led economy has powered through the euro crisis, with business confidence
at a record high in November and the government projecting expansion of
3.7 percent this year, the fastest pace in more than a decade. That
resilience contrasts with recession in Greece and Ireland, splitting the
euro region between better-off countries in Germany’s economic
slipstream and poorer ones on the continent’s fringes.
Exactly what does one expect to come of this, particularly
considering the geo-political proximity and the interconnectedness from
an economic and trade perspective?
Yesterday’s decisions bring “hope of
preventing contagion spreading to other countries but do not address
long-term solvency issues,” said Andrew Bosomworth,
a Munich-based fund manager at Pacific Investment Management Co. “It’s a
kick-the- can-down-the-road solution as opposed to acknowledging and
confronting the here-and-now insolvency problems.”
As is customary, there is a blurb of practical and common sense. This
guys has actually understated the issue. The following is an
interesting excerpt from the article…
Ireland said it will pay average interest
of 5.8 percent on the loans, which break down into 45 billion euros
from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.
Notice, how the statement is “average interest paid”, and not a
stated interest rate. In addition, a very material amount of the bailout
is actually coming from the Irish taxpayer! That’s right, Ireland is
borrowing from itself by dipping into cash reserves (but then what will
it use as cash reserves???) and its pension fund (which was most likely
already underfunded) – to the tune of about 11% of total outstanding debt.
Now, if Ireland does default (or restructure, as the fancy pants
professionals like to put it) as I actually anticipate, then it is
virtually a double whammy for the Irish taxpayer, and particularly the
Irish pension holder. The indebted borrows from itself and then
defaults. Fact is truly stranger than fiction, isn’t it? In addition,
one can be nearly assured that the interest rate paid to the Irish
pensioners inadvertently being set up for the shaft is less than that
being paid to the IMF, which is most likely how the “average interest
paid” statement was able to come in at 5.8%. Is the Irish pension fund
being used to reduce the blended average interest rate? These tactics
(or dare I say, antics) are indicative of moves of desperation. Anyone
who observes this and then turns around and says that things are NOT out of control are either disingenuous or arithmetically challenged. Here it is from Cowen, himself…
“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.
A day after more than 50,000
protesters marched through Dublin to denounce Cowen’s budget cuts to
stave off financial ruin, the EU gave Ireland an extra year, until 2015,
to get its budget deficit to the euro limit of 3 percent of gross
domestic product.
Including the bill for propping up
Irish banks, the deficit is set to reach 32 percent of GDP this year,
the highest in the euro’s 12-year history.
About Great Britain…
Close banking links led Britain, a
non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue
in May, to contribute 3.8 billion euros to Ireland’s package.
“That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne
told reporters in Brussels. “It’s in everyone’s national interest and
it’s in Britain’s national interest that we get some economic stability
in Ireland and indeed across the euro zone.”
I doubt they expect that. I believe they expect the money to help
cushion the potential for an Irish “run on the bank” that will hurt
their interests…
Ireland has the largest claims against
the UK as a percentage of the its respective GDP, the largest in the
world. In a rush to raise cash by selling assets, expect some fire
sales in the UK. For those who may be wondering how this may affect the
UK, see our premium subscription report on the UK’s public finances
and prospects (recently updated to include the last round of government
projections): 
UK Public Finances March 2010 2010-03-29 06:20:38 615.90 Kb.
Of course, this is the reason why the UK rushed to Ireland’s aid. This
inter-crossed aid will be prevalent over the next year with different
sets of countries running to each other’s side. The focus is now on the
contagion effect of Ireland, specifically (jumping on a monthly basis
from Greece, Portugal, Spain, etc.). We have performed a lot of work in
this area in the beginning of the year. Let’s borrow from our foreign
claims model ( Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46) and Sovereign Contagion Model – Pro & Institutional)
in order to see who may be effected from the rush to pull capital out
of extant positions to fill the leveraged NPA holes left by the
banks…
I am putting the finishing touches on the Irish Haircut Model and
will post it in a few hours. Between now and then, I will give an
example of how those that are pushing this bailout are relying on (or
actually betting on) the ignorance of the investing public, in general.
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Reggie - did you see this article...looks like they are reading your blog
http://gigaom.com/2010/11/18/its-gonna-be-an-android-world-and-well-just-live-in-it/
Reggie -the stuff on the average interest rates and the likelihood that the pension fund is getting lower return is great stuff....
I'm assuming at some point that has to be made public if its public pensions...and that is something easily understood by people: "you mean our pension gets less interest than IMF/EU? and you are using that to make it seem like Ireland isn't paying high rates to IMF, WTF?"
As always, your information is greatly appreciated.
To find out more about the Imminent Collapse of American Capitalism, watch this video " WIKILEAKS, QE GAZILLION, OBAMA'S FAT LIP, AMERICA DEAD !! at (http://youtu.be/N0fRlwL2pnQ).
by Anonymous
Most likely this is so they can justify censoring the internet.
Your right about the banks, they should have? failed, now they are taking over everything with our money.
Anyway, America has had at least 3 major depressions.
Are the Irish now suddenly pussies? Is there no firebrand who can rally the people. If my children and grandchildren were being forced into involuntary servitude for generations, I would be the first on the wall.
I expect the Irish will soon respond by dipping into their IRA. And no, I don't mean their Individual Retirement Accounts ....
I expect the Irish will soon respond by dipping into their IRA. And no, I don't mean their Individual Retirement Accounts ....
I expect the Irish will soon respond by dipping into their IRA. And no, I don't mean their Individual Retirement Accounts ....
If you're in the U. S. you'd better start getting on that wall...
But Reggie, where's the problem?
If every EU state needs a 'bailout' and ends up losing its sovereignty in the process, doesn't that lead to fiscal union and fulfil Delors' dream?
God, I hope not.
ROFL and what do these Lucky Irish 'win' Rod?
Well, you just won a life of austerity and hell with declining wages, services, and you're parents thrown on the NHS scrapheap. That's right everybody loves the new lower minium wage, and this is the first model with property taxes. Who cares if it was private entities taking risks that are fraudulent in nature. It's shiny finish, will be more fraudulent bailouts, from ECB, IMF, and Uncle Sam. The value of these items is literally infinity since they will print as much as needed, and this can all be yours, if for you Lucky Irish, the Price is Right.
Now channel your inner happy gilmore and say 'The price is wrong BITCH!'
The EU wanted Ireland to be their posterchild of economical success when a member joins the EU.
The EU took in charge part of the taxation load (under the form of subsized training programs and other things) which allowed Ireland to lower their corporation taxation.
The money coming from the Irish tax payers... Cant be alone... European cash money in it.
The story about defaulting.
The default is permanent.
Calling for ending the perpetual default scheme is like calling a guy who is borrowing money to pay back its previous loans and so forth that he would be better if he stops right away. No, the guy is better if he manages to keep up the scheme, finding someone else to borrow from to repay the previous loan and get more money.
Ponzi schemes never get better by ending them.
Are you crazy? Ponzi schemes only get better by ending them. There is nothing there in the first place. It is better to man up and face reality instead of living in denial and making the problem worst. It is like a drug addict. "I only need one more hit before quitting." Ireland, default now. It is going to be even more painful later!
That is very different from a drug addict. A drug addict destroys herself.
Ponzi schemers destroy others. Ending a Ponzi might help others (people who sustain the Ponzi) but I cant think how it could help the Ponzi schemer better than extending it.
Ponzi schemes are a sequence of defaults. You cant default on them. Only ending the defaults sequence.
A guy borrows 100. He hides that he is defaulting by borrowing from a second 200. He hides his default to the second by borrowing from a third and so on.
In the sequence, the guy has only defaulted on his debt. He has found ways to cover this but there is never repayment of his debt in it. At no point.
Defaulting can not be done as he is only defaulting.
The reality is that if this guy can afford a grand life style with his scheme, he is better off as long as he can maintain it.
Rejecting this little fact will lead to serious miscalculations and a bad investment strategy.
There will be no default in the Eurozone as members are already defaulting on their debt.
Every member knows that the perpetuation of the scheme is the way to go. Going deeper in debt is the way to go.
If there really was nothing there, then people wouldn't make the ponzis in the first place. No, there is something there - given by or taken from fools - and the originator most certainly benefits from extending it.
Remember, this isn't about what is right, it's about how many private jets you can afford. Possession isn't just 9/10ths of the law... it's everything, as long as you still possess.
It simply comes down to how far you're willing to go.
"If there really was nothing there, then people wouldn't make the ponzis in the first place. No, there is something there - given by or taken from fools - and the originator most certainly benefits from extending it."
Yep, those who originated the Ponzi want to extend it to the very end and those who allow it and even promote it because they benefit from it politically want to push judgment day as far into the future as possible, never mind that they're only making the inevitable fall much worse by doing so.