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Many Are Still Underestimating the Damage That Can Be Done By Ireland’s Bank Troubles
Update: This just in, Anglo Irish Will Be Split Into Two Banks With Portion Wound Down or Sold.Talk
about timely articles. The reason the bank was split is actually
explained in a few lines down in this post – an attempt to prevent a run
on the bank while in run-off mode. Now, do we get to see what’s under
the hood? Cause if we do, expect more splits from a UK bank near you!
We can only warn about Ireland so many times (It’s been done nearly
monthly since January), with the latest iteration coming just a week ago
in the form of “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!”
Ireland has captured headlines TWICE since then. It appear that the
mainstream media is catching on, but are they missing the forest because
of all of that bark in the way? First, this story from Bloomberg: Ireland Default Swaps Surge to Record on Bank Funding Concerns:
Sept. 8 (Bloomberg) — The cost of insuring against losses on Irish sovereign debt surged to a record on concern the government will struggle to support the nation’s banks.
Investors are losing confidence in
the ability of governments to absorb mounting costs from bank bailouts.
Ireland’s cabinet is today discussing the future of nationalized Anglo
Irish Bank Corp., which last week said it needs about 25 billion euros
($32 billion) in state funding.
“The problems of Irish banks are seen as the problems of Ireland,” said Zoso Davies,
a credit strategist at Barclays Capital in London. “The market is
focused on debt coming due at Irish banks and the impact this could have
on the Irish government.”
Credit-default swaps on Ireland
surged 21 basis points to a 402.5, surpassing a previous closing high of
396 in February 2009, according to data provider CMA.
Bank of Ireland Plc and Allied Irish
Banks Plc, the country’s two biggest lenders, have 16.7 billion euros of
debt maturing this year, according to data compiled by Bloomberg. Banks
in Europe’s most indebted nations need to refinance $122 billion of
bonds this year.
Credit-default swaps on Anglo Irish
soared 58.5 basis points to 774.5, the highest level since March 2009.
Contracts on Allied Irish jumped 29.5 basis points to 521.5 and Bank of
Ireland increased 21 basis points to 409, CMA prices show.
Bank Split
The Irish government has told the
European Commission it’s considering a number of options for Anglo Irish
including winding it down, retaining it in its current form and
splitting it into “good” and “bad” parts. Ireland’s Finance Minister Brian Lenihan said yesterday the government will extend parts of its banking guarantee to help lenders tap international money markets.
The spread between Irish 10-year
bonds and the equivalent German bunds, Europe’s benchmark, has widened
about 60 basis points since Standard & Poor’s downgraded the
nation’s debt last month. It was a record 379 basis points today,
according to Bloomberg generic data.
Concerns about the Irish banking
system helped drive indexes of credit-default swaps on European
government and bank debt higher.
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.
The problem with winding down banks is that you really can’t do it
without causing a run on the bank and potentially a run on banks in
similar conditions (and there are a few of them). You see, banks are
structures built on the ephemeral concept of confidence, and not actual
bricks, stones, widgets are any other physical products that can be
touched or stored. Once word gets around that you are winding down a
bank, what little confidence in it that was left dissipates as investors
and depositors withdraw their capital, thereby further weakening the
already weakened bank giving justification for more entities to withdraw
their capital and support. With a weakened capital structure,
counterparties start calling in collateral agreements and the death
spiral begins as everybody panics and doesn’t want to be the last one
standing in line.
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.
Even more pertinent, yet missed by many is the little chart that I
have used to demonstrate why I am so bearish on Ireland and other
sovereigns. There banking system’s non-performing assets are so massive
that they actually constitute a material portion of the sovereign
domicile’s GDP. If you remember, I queried whether the mainstream media
was missing the forest due to tree bark blindness??? Look who’s banking
system is worse off when considering NPAs in relation to the size of the
economy…
Now, looking at both the charts above, the UK is second only to
Portugal in terms of claims against Ireland as a % of GDP and is first
in terms of NPAs as a percent of GDP. Shouldn’t more focus be directed
against the UK? It’s not as if they weren’t the first ones to bail out
and nationalized those behemoth mortgage banks. Methinks this story is
far, far from over.
Relevant Pan-European Sovereign Risk Subscription Research
Actionable Intelligence Note For All Paying Subscribers on European Bank Research
A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf
A Review of the Spanish Banks from a Sovereign Risk Perspective – professional
Ireland public finances projections
Spain public finances projections_033010
UK Public Finances March 2010
Italy public finances projection
Greece Public Finances Projections
Banks exposed to Central and Eastern Europe
Greek Banking Fundamental Tear Sheet
Italian Banking Macro-Fundamental Discussion Note
Spanish Banking Macro Discussion Note
- Deutsche Bank vs Postbank Review & Summary Analysis – Pro & Institutional
- Deutsche Bank vs Postbank Review & Summary Analysis – Retail
- Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)
- Sovereign Contagion Model – Pro & Institutional
- Irish Bank Strategy Note
- Euro Bank Soveregn Debt Exposure Final -Retail
- Euro Bank Soveregn Debt Exposure Final – Pro & Institutional
- Sovereign Debt Exposure of European Insurers and Reinsurers (Empty 2010-05-19 01:56:52)
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Awesome call, Reggie.
What's new about the "bad bank" idea? That was floated around in the U. S. for a while. But I can see the reduction in confidence once that path is taken. It's defaulting by degree.
I posted this to another thread, but this is probably the best place for the discussion:
Discussion on sovereign debt:
BNN.ca
Part 1
http://watch.bnn.ca/clip345386#clip345386
Part 2
http://watch.bnn.ca/clip345389#clip345389
Thanks for the link. Good interview; however I was unable to get part 2 to load. It could be my computer.
Every nation is trying to kick the can down the road. The can keeps getting sharper and sharper from being worn by the pavement at the edges. Pretty soon odds are at least 2 nations start bleeding seriously.
They are in a weakened state and lack the ability to heal, much like a diabetic (Ireland and Greece), while the other ones will just keep bleeding like a hemophiliac (Portugal, Spain) until they too weaken into a default state of mind.
Fact is all this debt is unpayable,the powers that be have nothing to replace the game with,so they keep the game going.Draw your money out,in the UK supposedly only 6% of cash exists ( maybe a bit more at the rate they are printing ),bank accounts only pay a pittance anyway.The public will close the game when enough people have no confidence left,buy Gold and Silver physical while you still can.
I wish Reggie had a crappier track record.
I live in deathly fear of waking up one morning and clicking on a post entitled: 'Many People Are Underestimating The Threat To Humanity Now That Dolphins Have Developed Opposable Thumbs'
Excellent post (as always) - However, as part of the Anglo-Irish seperation activities I would recomnmend that the asset mgmt component be compelled to release all financials with the use of Absolute Value Function - in this way you get the magnitude & the direction can be provided by Erin Burnett - because SHE KNOWS BITCHEZ!
Your 'in the zone' Reg! Credit is where the action is.
FWIW I remember reading an article on mises.org about 2 years ago which warned to keep one's eyes on Ireland, it is the poster child of Europe's debt problems.
Here's an interesting question. How can Ireland get away with splitting this thing into a good and a bad bank? Arn't the Brits and the Portugese going to have something to say about this? I mean they just peeled all of the few remaining assets Anglo Irish Bank had left out of it into the good bank. So next thing up the bad bank defaults and says sorry we don't have any deposits left...oops..is that a problem. I mean is this shit even legal?
As recently as Afghanistan's bank run, the CB's led by the Fed swooped in to save the day and keep the bank "solvent".
As for Ireland,
Why would it be any different? Why would the FED, ECB and the BoE not do the same thing? Why would they let this spiral out of control? I'd like some clarity.
If it isn't they will just make a law to make it legal!
It's good to be king.
I didn't know Ireland had a King although I have heard "Iceland has Vikings."
Get away with it? Hell, their actions will be celebrated as the new model for modern European finance. Celebrate the solvent and good, and simply hide or ignore the rest. What a clever concept!
Want a good laugh? Visit www.ponzi.com .
Why should anyone put any money in ANY bank if you get a pittance if you are lucky, for the risk of doing so?
They pay virtually nothing and lend it out at huge rates, sometimes even 45% or more... that is obscene.
so take your money out of ALL banks
"systemic risk." be careful or you might find yourself advocating buying equities.
Well yesterday there was 'Ireland bank troubles', but this morning Im informed by the Whore St media that the troubles are magically gone and its time to load up on overvalued equities!
Wait, I was told last May that all of the problems went away with the $1 trillion EU bailout. /sarcasm
Dam, they screwed it up. Bernanke said divide the assets into two, not the bank. Just like they did here.
The Fed buys the bad assets and the bank keeps the good ones. All gone. "That was Easy."
Expect a meltup on this news since the "market has priced" this event in, the shoe has dropped and the bad is now good.
And you were told correctly. All the trouble with the banks have gone away. Plus, you are healthier, wealthier, and better looking than you were in May. So just keep shopping like there is no tomorrow.