Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, and Ireland in Particular!

Reggie Middleton's picture

Ireland has finally admitted the horrendous condition of its banking
system. I actually give the government kudos for this, and await the
moment when the US, China and the UK come forth with such frankness.
That being said, things are a mess, I have forewarned of this mess for
some time now. First, the lastest from Bloomberg: Ireland's Banks Will Need $43 Billion in
Capital After `Appalling' Lending

March 31 (Bloomberg) -- Ireland’s banks need $43 billion in new
capital after “appalling” lending decisions left the country’s
financial system on the brink of collapse. The fund-raising requirement
was announced after the National Asset Management Agency said it will
apply an average discount of 47 percent on the first block of loans it
is buying from lenders as part of a plan to revive the financial
system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and
gave them 30 days to say how they will raise the funds.

worst fears have been surpassed,” Finance Minister Brian Lenihan said in
the parliament in Dublin yesterday. “Irish banking made appalling
lending decisions that will cost the taxpayer dearly for years to

Dublin-based Allied Irish needs to raise 7.4 billion euros
to meet the capital targets, while cross-town rival Bank of Ireland
will need 2.66 billion euros.Anglo Irish Bank Corp., nationalized
last year, may need as much 18.3 billion euros. Customer-owned lenders
Irish Nationwide and EBS will need 2.6 billion euros and 875 million
euros, respectively.

‘Truly Shocking’

The asset agency
aims to cleanse banks of toxic loans, the legacy of plungingreal-estate prices and
the country’s deepest recession. In all, it will buy loans with a book
value of 80 billion euros ($107 billion), about half the size of the
economy. Lenihan said the information from NAMA on the banks was “truly


Capital Target

Lenders must have an
8 percent core Tier 1 capital ratio, a key measure of financial
strength, by the end of the year, according to the regulator. The
equity core Tier 1 capital must increase to 7 percent.

equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank
of Ireland’s at 5.3 percent. Those ratios exclude a government
investment of 3.5 billion euros in each bank, made at the start of 2009.


Credit-default swaps insuring Allied Irish Bank’s debt
against default fell 6.5 basis points to 195.5, according to CMA
DataVision prices at 8:45 a.m. Contracts protecting Bank of Ireland’s
debt fell 7 basis points to 191 and swaps linked to Anglo Irish Bank’s
bonds were down 3.5 basis points at 347.5.

Credit-default swaps
pay the buyer face value in exchange for the underlying securities or
the cash equivalent should a company fail to adhere to its debt
agreements. A decline signals improving perceptions of credit quality.

State Aid

If Allied Irish can’t raise enough funds privately,
the state will step in with aid, Lenihan said. It is “probable” the
government will then end up with a majority stake, he said.


Ireland may not be able to afford to pump more money into the banks.
The budget deficit widened to 11.7 percent of gross domestic product
last year, almost four times the European Union limit, and the
government spent the past year trying to convince investors the state is
in control of its finances.

The premium investors
charge to hold Irish 10-year debt over the German equivalent was at 139
basis points today compared with 284 basis points in March 2009, a
16-year high.

Ireland’s debt agency said it doesn’t envisage
additional borrowing this year related to the bank recapitalization. It
is sticking to its 2010 bond issuance forecast of about 20 billion
euros, head of funding Oliver Whelan said in
an interview.

“The bank losses, awful as they are, represent a
one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based
fixed-income strategist at Societe Generale SA. [What is the
logic behind this statement? Has the real estate market started
increasing in value? Are the banks credits now increasing in quality?
Will the stringent austerity plans of the government create an
inflationary environment in lieu of a deflationary one for the bank's
customer's assets???
] “What’s of more concern for investors
in government bonds is the budget deficit. Slashing the chronic
overspending and raising taxation by the Irish state is vital.” [This
is a circular argument. If the government raises taxes significantly
in a weak economic environment, it will put pressure on the bank's
lending consituents and the economy in general, presaging a possible
furthering of bank losses!




Juckes Says Outlook `Frightening' 
March 31 (Bloomberg) -- Kit Juckes, chief economist at ECU Group Plc,
talks with Bloomberg's Linzie Janis about the outlook for Ireland's
banks after the government set out plans to revive the country's
financial system.

Now, notice how prescient my post of several months ago was, The Coming Pan-European Sovereign Debt

will attempt to illustrate the "Overbanked" argument and its
ramifications for the mid-tier sovereign nations in detail below and
over a series of additional posts.

Sovereign Risk Alpha: The Banks
Are Bigger Than Many of the Sovereigns


is just a sampling of individual banks whose assets dwarf the GDP of
the nations in which they're domiciled. To make matters even worse,
leverage is rampant in Europe, even after the debacle which we are
trying to get through has shown the risks of such an approach. A sudden
deleveraging can wreak havoc upon these economies. Keep in mind that on
an aggregate basis, these banks are even more of a force to be
reckoned with. I have identified Greek banks with adjusted leverage of
nearly 90x whose assets are nearly 30% of the Greek GDP, and that is
without factoring the inevitable run on the bank that they are probably
experiencing. Throw in the hidden NPAs that I cannot discern from my
desk in NY, and you have a bank that has problems, levered into a
country that has even more problems.



Notice how Ireland is the
nation with the second highest NPA to GDP ratio. This was definitely
not hard to see coming. In addition, Ireland has significant foreign
claims - both against it and against other countries, many of whom are
embattled in their own sovereign crisis. This portends the massive
exporting and importing of financial contagion. Reference my earlier
post, Financial Contagion vs. Economic
Contagion: Does the Market Underestimate the Effects of the Latter?

wherein I demonstrate that Ireland's banking woes can easily
reverberate throughout the rest of Europe, affecting nations that many
pundits never bothered to consider. Irish banks will be selling off
assets, issuing assets and bonds in an attempt to raise capital just as
the Irish government (contrary to their proclamations) will probably
be issuing debt to recapitalize certain banks. This comes at a time
when the Eurozone capital markets will be quite crowded.

 Expected higher fiscal deficit
and bond maturities due in 2010 have increased the need for bond
auction financing for all major European economies. Amongst all major
European economies, France and Italy have the highest roll over debt
due for 2010 of €281,585 million and €243,586 million


While Germany
and France are expected to have the highest fiscal deficit of €125.1
billion and €96.0 billion
, respectively in absolute amount for 2010
(this is without taking into consideration any possible bailout of
Greece and/or the PIIGS, which will be a very difficult political feat
given the current fiscal circumstances), Ireland and Spain are
expected to have the highest fiscal deficit as percentage of GDP of 12%
and 11%, respectively
. See our newly released Spanish fiscal
analysis for a more in-depth perspective, see our premium subscriber
report on Spain's fiscal condition and prospects: Spain public finances projections_033010 Spain
public finances projections_033010 2010-03-31 04:41:22
705.14 Kb


Overall, in
terms of total financing needed for 2010 (which includes 2010 bond
maturities, short-term roll over debt and fiscal deficit), France and
Germany top the list with € 377.5 billion and €341.6 billion
respectively while the total finance needed as percentage of GDP is
expected to be highest for Belgium and Ireland at 26.3% and 22.4%,


However, the
recent spate of bond auction failures across Europe is forcing
governments to increase premiums on new bond auctions (higher yields),
which in turn is resulting in a decline in existing bond prices

PIIGS - A troublesome area



  Now, to focus on the contagion effect of Ireland,
specifically, let's borrow from our yet to be released foreign claims
model 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


has the largest claims against the UK as a percentage of the its
respective GDP, the largest in the world. In the rush to raise cash to
sell 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 UK Public
Finances March 2010 2010-03-29 06:20:38 615.90 Kb


can also be expected to pull assets our of the ailing PIIGS group as
well, since they are, bar none, the biggest lender to that group as a
percentage of GDP. No wonder their banks are having problems. There
biggest exposure? Italy! See our premium analysis of Italy's public
finances and prospects: Italy public finances projection Italy
public finances projection 2010-03-22 10:47:41 588.19 Kb
 as well as
their other major exposures:Spain public finances projections_033010 Spain
public finances projections_033010 2010-03-31 04:41:22 705.14 Kb

and Greece Public Finances Projections Greece
Public Finances Projections 2010-03-15 11:33:27 694.35 Kb

particular interest may be the prospects of the various banks caught
in this interwoven web (premium subscription material). To date, these
analyses have proven to be right on the money:


also has the second highest claims (as percent of GDP) against the
central and eastern European nations, who happen to be in a full blown
depression. The withdrawal of assets, banking support and credit will
exacerbate both Ireland's problems and that of these nations. See The Depression is Already Here for Some
Members of Europe, and It Just Might Be Contagious!
to find that
Ireland can exacerbate the problems of Austrian, Swedish and Belgian
banks by pulling capital out of the CEE region, and yes, they are truly
in a depression:


Belgium and Sweden, while apparently healthy from a cursory
perspective, have between one quarter to one half of their GDPs exposed
to central and eastern European countries facing a full blown

Click to Enlarge... 


exposed countries are surrounded by much larger (GDP-wise and
geo-politically) countries who have severe structural fiscal
deficiencies and excessive debt as a proportion to their GDPs, not to
mention being highly "OVERBANKED" (a term that I have coined).  

So as to quiet those pundits who feel I am being sensationalist,
let's take this step by step.

Depression (Wikipedia):
In economics, a depression is a sustained,
long-term downturn in economic activity in one or more economies. It is
a more severe downturn than a recession, which is seen as part of a normal business cycle.

Considered a rare and extreme
form of recession, a depression is characterized by its length, and by
abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and
commerce, as well as highly volatile relative currency value
fluctuations, mostly devaluations. Price deflationfinancial crisis and bank failures are also common elements of a

There is no widely agreed definition for a
depression, though some have been proposed. In the United States the National Bureau of Economic Research determines
contractions and expansions in the business cycle, but does not
declare depressions.[1] Generally, periods
labeled depressions are marked by a substantial and sustained shortfall
of the ability to purchase goods relative to the amount that could be
produced using current resources and technology (potential output).[2] Another proposed
definition of depression includes two general rules: 1) a decline in
real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

Before we
go on, let's graphically what a depression would look like in this
modern day and age...

  A depression is characterized by its length,
and by abnormal increases in unemployment.
Price deflationfinancial crisis and bank failures are also common elements of a
depression. image011.png 

A depression
is characterized by ... shrinking output and investment ... reduced
amounts of trade and commerce.


In order for the CEE region to improve, it must avoid
the shocks associated with financial and economic contagion from far
flung regions such as Ireland. The reality of the matter is that it may
not be that easy. BoomBustBlog premium subscribers may download the
CEE bank exposure analysis to see which banks we feel have the highest
exposure to such an incident, or more realistically, string of
incidents: File Icon Banks exposed to Central and Eastern Europe.


From an empirical perspective, Ireland is in a prime position to
export contagion. Not only does it have the 2nd highest banking NPAs to
GDP ratios in the developed world, it has one of the highest foreign
claim to GDP rations as well. I have already demonstrated how these
foreign claims just happen to be concentrated in today's problem areas,
but Ireland has spread this exposure far and wide as well. It is
second only to Switzerland (due to Swiss private banking industry) in
claims against developed countries. It is also second only to the Swiss
in its total foreign claims as a % of GDP.


up in my Pan-European Sovereign Debt Crisis analysis, a closer look at
Spain, a thorough analysis of Ireland's public finances prospects, an
empirical look at Portugal and the total Foreign claims model. To
illustrate how complex the foreign claims web is, imagine the
intertwined prospects presented here for Ireland, multiplied by all of
the nations of economic significance in the world! 

For the
complete Pan-European Sovereign Debt Crisis series, see:

  1. The Coming Pan-European Sovereign Debt
     - introduces the crisis and identified it as a pan-European
    problem, not a localized one.
  2. What Country is Next in the Coming
    Pan-European Sovereign Debt Crisis?
     - illustrates the potential for
    the domino effect
  3. The Pan-European Sovereign Debt Crisis:
    If I Were to Short Any Country, What Country Would That Be..
    attempts to illustrate the highly interdependent weaknesses in Europe's
    sovereign nations can effect even the perceived "stronger" nations.
  4. The Coming Pan-European Soverign Debt
    Crisis, Pt 4: The Spread to Western European Countries
  5. The Depression is Already Here for Some
    Members of Europe, and It Just Might Be Contagious!

  6. The Beginning of the Endgame is

  7. I Think It's Confirmed, Greece Will Be
    the First Domino to Fall

  8. Smoking Swap Guns Are Beginning to
    Litter EuroLand, Sovereign Debt Buyer Beware!
  9. Financial Contagion vs. Economic
    Contagion: Does the Market Underestimate the Effects of the Latter?
  10. "Greek Crisis Is Over, Region Safe",
    Prodi Says - I say Liar, Liar, Pants on Fire!
  11. Germany Finally Comes Out and Says,
    "We're Not Touching Greece" - Well, Sort of...
  12. The Greece and the Greek Banks Get the
    Word "First" Etched on the Side of Their Domino

  13. As I Warned Earlier, Latvian Government
    Collapses Exacerbating Financial Crisis

  14. Once You Catch a Few EU Countries
    "Stretching the Truth", Why Should You Trust the Rest?

  15. Lies, Damn Lies, and Sovereign Truths:
    Why the Euro is Destined to Collapse!

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M.B. Drapier's picture

Ireland has finally admitted the horrendous condition of its banking system.

Not entirely. For one thing, this is just another downpayment on the full truth, neither the first nor the last. It's not as if the assets were marked to market or anything.

THE DORK OF CORK's picture

Amen to that - Ireland has only two choices , burn the bankbondholders or leave the euro and pay them in punts.

It is that simple really.


Miles Kendig's picture

Clarity from Cork and M.B. Drapier. One thing is certain, we can never believe that we have heard it all or have cleaned it all out when the source is related to those that created the matters at hand.

M.B. Drapier's picture

A short dump of Irish links:

  • A retrospective on the Irish credit bubble by economist Morgan Kelly. Kelly is one of the good guys who predicted the crash in advance (2006 in his case).
  • A muckraking history of Irish banking by politician/journo Shane Ross. The madness goes back long before the last property bubble. You may think that you've heard all this before from other countries, but I promise you things you probably couldn't make up.
    Flynn resigned as chairman of Bank of Scotland (Ireland) immediately. It would hardly be appropriate for the chairman of a division of a publicly quoted bank to be linked to the armed robbery of £27 million from one of its rivals.

    (Ross himself recommends fellow hack Matt Cooper's Who Really Runs Ireland? as a more scholarly option.)

  • A group econoblog from Karl Whelan and other economists.

Note that the drapier is not associated with any of the above. I'm happy to talk someone else's book.

Am I missing something important?

THE DORK OF CORK's picture

Morgan Kelly - he made the mistake of speaking truth to power ,quite a guy really.

Shame we do not recognize integrity in this sad little country.

Shane Ross generally speaks a lot of sence but I always felt he represented London interests in this colony - although my gut instinct could be incorrect. 

THE DORK OF CORK's picture

A interesting analysis of the Irish experience of the boom years - by Fintan o Toole

He is very socially liberal and I do not share all of his politics but he is one of the most incisive and well researched journalists on this small island and is always worth a listen

Scroll down somewhat and look to the right video boxes



also note the enormous private debt in both Spain and Ireland - this is a on a much bigger scale the the Greek fiasco and will kill these sovereigns very quickly if the state insures these dead banks


M.B. Drapier's picture

That should be http://www.progressive-economy.ie/2010/02/irelands-private-debt-is-it-time-to.html I think. Good article.

To be fair to the Germans we did help to torpedo their public finances, so they could almost be forgiven for marking the offence. Come to think of it, maybe we might be better off by now if Depfa had exploded in our hands. There would have been no question of keeping a squeaky-clean record, so we would probably have quietly bundled some or all of the rest of our privately-issued debt in with the Depfa default.

Speaking of which, I'm still far from convinced that Germany (or the UK or whoever) is the main reason for our no-default kamikaze strategy. I'm pretty certain that Deutsche, Angela Merkel etc. are shouting that they want their money back, but I suspect the main reason we're dead-set on paying it all to them is because that's the perfect excuse for the Department of Finance and friends to do what in their hearts they really long to do anyway. Namely, patch the Humpty Dumpty of our cozy little banking world back together again and damn the cost. (Entirely aside from the fact that you can't put all the blame on Eurozone imbalances, or any other iniquitous foreign imposition, for why we went quite so hog-wild loading up on German debt in the first place.)

THE DORK OF CORK's picture

Ah yes Depfa I almost forgot about that gem of a bank - if Dublin had spittoons in the pubs ,sidearms on the bankers and stagecoach taxis to Dublin airport it would have been better fun.

One of the strangest things about this whole mess is that the Irish taxpayer is being asked to bail out nameless bondholders - could we at least find out who are these nameless financial houses before they bugger us to infinity, or is that asking too much.

I agree Fianna Fail and the gang have dead bodies lying everywhere but I am not sure if they wield any power now as I think Dublin Castle has gone into automatic mode with occasional instructions coming from higher up the food chain.

captain sunshine's picture

What do you mean by not being pessimistic?

MarketFox's picture


There is no way that an economy recovers when there is 0% reason to save.

It is not the job or responsibility for the savers to pay the losers.

This is truly a bizarre and wrong phenomena.

However something tells me that when the rewards come back, they will be larger than normal.


ie 1980's style rates.

"Volcker rates" are just around the corner.

It seems to me that it will not be long that $100,000

cash will be more than most have in savings.

Maybe even 95% of the population will not $100,000 cash ?

And thus what are the implications ?


Miles Kendig's picture

Great read Reggie.  We are now witnessing what "man up" & the "law of the street" means for those that led and supervised these horrendous conditions.

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

Classic you pay us when we do right and double or triple when we fail... That is the state of financial & political leadership and if this step by Ireland can be considered a victory of sorts then that in itself says all we need to know.  My desire to see these folks dressed out like these Beasties operating as world societies pooper scooper detail cleaning up after the monsterous squid until their losses are worked off.


One thing is certain, the Catholic Church not only taught their politicians how to molest well in Ireland, but how to assume personal responsibility as well.  Happy Easter!

M.B. Drapier's picture

Pah, we in Ireland already knew all this. Allied Irish Bank[s] (known as AIB - not to be confused with Anglo Irish Bank) is one of the big two Irish banks. It extorted a bailout from the Irish government back in 1985. During the late '80s it ran a systematic and widespread tax-evasion scam on behalf of its customers.* (Most of the other banks in Ireland joined in.) Then it ran a systematic overcharging scam at the expense of its customers. And they all lived happily ever after.

And ... look, what can I say but 'read the book'?

* A digression: The chairman of AIB 1989-2003 was this chap.

Miles Kendig's picture

Pah, we in Ireland already knew all this.

Nice to know we Americans are not alone

Rogerwilco's picture

There is a difference between keeping "the current oligarchy in power", and making it through a dislocation without ending up swinging on a rope. These central bankers are smart people who understand the dynamics and the risks. I have to assume the bankers and other financially-powerful entities want to maintain viable assets, so where is their parking place for wealth when the inevitable dislocation occurs? The oligarchs might hold huge sums of notional debt, but what have they accomplished? If they try to enforce their claims and collect after a collapse, then they will face retribution from a lot of angry, penniless people - that rope thing.


Attitude_Check's picture

He who panics first "wins".  It looks like the Irish understand the game of chicken very well.  They get to sell there assets near the "top" tanking everyone else's.  Say HELLOOOOOO DEFLATION.

eludog's picture

Reggie, with the stock market doing what it is doing, do you think there is something us realists don't see?  It seems so clear that a global depression is at some point inevitable.  All it will take is one of a number of problems to rear its head.  What I as a MM constantly ask myself is if there is a global coordinated plan that may make this debt discussion moot. 

Reggie Middleton's picture

What I see is collusion among the central bankers to push enough liquidity into the system to reflate as much as possible. I don't recall this ever working, and I personally believe this to be an inefficient way of going about things, but it is the only way to do it in order to keep the current oligarchy in power. For more on this concept, see http://boombustblog.com/Reggie-Middleton/1199-Youve-Been-Bamboozled-Hoodwinked-and-Lied-To-Heres-the-Proof.-What-Are-You-Going-to-Do-About-It.html and http://boombustblog.com/Reggie-Middleton/751-Super-Brokers-are-forming-to-push-broken-products-to-make-those-with-High-Net-Worth-Super-Broke.html

B9K9's picture

I don't recall this ever working

Reggie, that is a very polite way of stating things. What we have right now is an historical apex resulting from a confluence of past events.

The two key elements are the original creation of the Fed, and the other being the gradual process by which all governments came to be fully invested in the FIRE economy. If the credit-leveraged asset-inflation model fails (which it will), then entire governments will fail.

The end result is that governments have capitulated to their central bankers as some sort of saviors. At this point, it's all about Ben. Out of this planet of 6b souls, he has been granted the sole & exclusive power to pit his wits against global markets.

The techniques he is employing have no basis in any economic school of thought. It's all seat-of-the-pants in a desperate attempt at finding anything that just might stick. As you said, it hasn't been done before.

I don't think anyone should be counting on those odds, but rather begin preparing for the alternative.

Alexandra Hamilton's picture

Thanks for filling in the blanks. This explains why Bank Vontobel, a Swiss private bank recommends:

bonds from Greece, Ireland, Sweden and
Portugal appear as attractive purchase opportunities.


Obviously, they want to get rid of that stuff and fast.

Ripped Chunk's picture

Reggie, thanks for another great piece.

I have to agree with you.  What purpose has this period of extend and pretend accomplished other than to allow the looters to fortify and hide?

deadparrot's picture

I think you just answered your own question.

williambanzai7's picture

My God, why don't you publish a book!

Rogerwilco's picture

And yet the DX is down while the Euro rallies on this bit of good news. Oh yeah, Greece is getting a "loan" from the ECB at 1%. Move along now, nothing more to see here.

MarketFox's picture

RM, all I can say is wow.

Just awesome.

Destruction of debt in effect is the only way up.

The politicos that want to postpone the day of reckoning are not doing their constituents any favors, as they are only making the truth grayer, and costing more money, and creating more confusion as to "what is".

I give Ireland kudos as well.


The constant across the board is a large loss component for each country, including the China bubble.

Since there is this loss "constant", then currency shifts would seem to equilobrate, fiat or not, in a globalized world economy.

The "tide" raises and lowers all ships.

It is just not happening at the same time. 

Reggie Middleton's picture

I must admit that I sit in awe as much of Europe looks to near self-destruct, insolvent US companies soar on the back of the most debt this country has ever had in a slackening macro environment, and China, the macro-economic savior of the world is blowing a bubble that everybody can see, yet no one (in the markets, that is) apparently wants to recognize. Methinks that if these chips fall in a synchronized fashion, we may face a global depression. That is not my being pessimistic, either.

RossInvestor's picture

Reggie, another great post.  However, with all of money printing by CB's around the world isn't asset deflation with monetary inflation/hyperinflation a more likely scenario than just global depression?

GoldSilverDoc's picture

Does anybody have the gonads to play these swings?  Or is it "buy a farm and hunker down" time?