Ireland

And the award for the most prosaic and "Field Marshall Obvious" statement of the day goes to Irish finance minister Michael Noonan, who just told the Dail that Irish sovereign debt is sustainable if the economy grows. We have just one question: how does the brand new minister, who therefore gets the benefit of the doubt for a few more hours, justify that statement, with the attached chart?

One can be rest assured those Irish haircuts are coming. Will the other indebted EU nations just sit back as Ireland clips its debt without following suit? Doubtful! Remember, I have been warning of this event for over a year, and the daisy chain effect is still being ignored.

When even Goldman's summary update on Ireland, which conveniently ignores today's news that the country may be preparing for a senior bondholder haircut and most certainly ignores last week's dump of Irish paper by LCH Clearnet from the repo market), is unable to find much if anything good to say about Irish bonds it is really time to get out of dodge (not like anyone was still left in it). The kicker in Francesco Garzarelli's just released analysis: "With around EUR 30bn worth of senior bonds maturing in 2011-12 (40% of
which is not already government guaranteed) and under continued
reduction of funding efficiency of the covered bond program, rolling
over maturing debt remains indeed one of the biggest challenges faced by
the Irish banks." Everything else is noise. Add to this the Portuguese government crisis, its own funding crunch, and the rapidly deteriorating German political crisis and Europe will be a very fun place over the next few months. In fact for once we agree with Goldman: "In light of this, Irish bonds [ZH: aka Paddy Paper] will continue to exhibit high volatility, in our view."

And so the great decade + old eurozone game theory project of Europe is about to come crashing down. Following Europe's decision to leave Ireland out in the cold, due to the country's ongoing unwillingness to pander with unilateral concessions to the global banking syndicate, the Emerald Isle has apparently decided to call the EU's bluff. Reuters reports: "Ireland's government wants to impose losses on some senior bondholders in Irish lenders to reduce the burden on taxpayers from a prolonged banking crisis, a senior minister said on Sunday...Analysts widely expect the government to impose losses on senior
bondholders in nationalized lenders Anglo Irish Bank and Irish
Nationwide because they have sold their deposits and are being wound
down. Hitting any unsecured unguaranteed senior bonds in Bank of
Ireland and Allied Irish Banks (AIB), which amount to over 11 billion
euros, would be more controversial." Yet most controversial would be the fact that the Eurozone is now unable to control its wayward son, which seems set on actually following the will of its people than that of the plutocrats. And just like Tunisia set a precedent to the MENA region with an act many thought was unthinkable, should Ireland follow through with this near-revolutionary act of a debt impairing chain-reaction, most other countries are set to follow suit, leading not only to the inevitable end of the one currency block, expected for so long by many euroskeptics, but yet another US taxpayer funded bailout, as was revealed on Thursday of last week, when we observed the upcoming "threat to the international monetary system" as predicted by the IMF.

Auntie Angela has finally snapped at the panhandlers begging for handouts, making it clear what the quid pro quo considerations are for interest rate concessions:

• MERKEL SAYS GREECE MUST SELL ASSETS IN RETURN FOR RATE CUTS
• MERKEL SAYS IRELAND MUST BACK JOINT CORPORATE TAX BASE FOR CUTS
• GERMAN LAWMAKERS CITING MERKEL AS COMMENTING IN CLOSED SESSION
• GERMAN LAWMAKERS SPEAKING ON CONDITION OF ANONYMITY

This is great news for Goldman prop traders and for John Paulson as (a non extradition) Santorini will be back on the market very soon.

You know, timing is everything. If you hit brakes after you pass the red light... Bang! If you pucker up after you press your face against that of your sweetheart's.... You bonk her/him on the forehead. If you downgrade a nation after obvious signs of insolvency...
As the markets slowly wake up to the risks I've been outlining over the last two years, reality will reassert itself in a most assertive fashion. The (re)adherence to fundamentals will feel like the reinvention of gravity.

Dear Minister, Congratulations on your new appointment. As you read the civil service briefings on the present crisis, you will come to appreciate that Ireland's problems would be much easier to manage if your administration could choose the country's own exchange rate and interest rate. However, your officials and your colleagues may believe that there is no practical way to leave the present European monetary union and so achieve this flexibility. In fact, there is. Leaving the euro is politically tricky and economically costly in the short-term. But it is far from impossible. The long-term advantages clearly outweigh the short-term costs, and the politics can be managed. The following outlines how it can be done...

With just 4 days left before the Irish General election, the Irish Times reports that Fine Gael is now guaranteed to be the winner of the upcoming popular vote. The only question is whether the government will be a monopoly one or coalition based. Reports the Irish Times: "When people were asked who they would vote for if there were a general
election tomorrow, the figures for party support (when undecided voters
were excluded) compared with the last Irish Times  poll on
February 3rd were: Fianna Fáil, 16 per cent (up one point); Fine Gael,
37 per cent (up four points); Labour, 19 per cent (down five points);
Sinn Féin, 11 per cent (down one point); Green Party, 2 per cent (up one
point); and Independents/Others, 15 per cent (no change)." Not surprisingly, lagging Labour party is scrambling to get some last minute votes: "Labour Party leader Eamon Gilmore has urged voters not to give Fine Gael
a “monopoly of power” and called on people to “switch to Labour” when
they cast their vote on Friday." Sounds like a call for a vote for hope and change. That worked swell back in the US. So now that the election outcome is certain, and Brian Cowen's tenure has at most 3 more days to go, here is a profile of the new Irish leader: Fine Gael Leader Enda Kenny.

Remember when in December, to much fanfare, the Irish bail out was announced, which included a package of €85 billion financed by everyone, up to an including the country's Pension fund (the NPRF)? Well, less than two months later, it has become clear that the funded component is woefully low as the true extent of losses is starting to be appreciated. According to the Irish National Asset Management Agenc, the country's two key insolvent banks will need a fresh infusion of €12 billion. What this means is that as a result of current estimate of full pay outs by NAMA, the property loans underwritten by the banks, are now being discounted by a ridiculous 58%! For the captcha challenged, this means a more than half write down on loans. And Ireland is solvent how again? At least the country's pension funds are being depleted to fund a good cause: banker (read senior bondholder) well-being...

What if a rating agency downgraded a country and no one listened?

With all of the news outlets focused on tensions in the Middle East, have we forgotten about the elephant(s) in the room? Ireland’s credit rating was downgraded one level to A- today by Standard & Poor’s - leaving it four levels above “junk” status. To add insult to injury, S&P said that the country remains on “credit watch with negative implications.” Nonetheless, the market barely shrugged. In fact, we remain within points of the post meltdown highs. The real kicker was the fact that Ireland’s 5-yr Credit Default Swaps FELL 4.6% today in the face of the downgrade. Perhaps the market has become numb to the rating agencies.

It has been a while since we had one of those "before Asia opens" kind of Sundays. Today just may be one. BBC has just reported that the Irish Green party has pulled out of the ruling coalition with Fianna Fail which is "expected to bring forward the general election from 11 March." In other words suddenly the entire Irish "rescue", taken for granted for over a month, will have to be reexamined, once the new ruling party, which will certainly be from the current opposition reevaluates the terms. Elections are now expected to come some time in mid-February. Look for peripheral bond spreads to go whooosh tomorrow.

The Celtic Tiger has been on the economic ropes since the crash of 2008. In the first hours of the crisis, the US Federal Reserve provided emergency funding to Irish banks, pouring 10’s of Billions of US dollars into the Irish Banking system, providing funds as needed.

It appears that Irish savers are sufficiently smart to realize that their money is no longer safe in a banking system whose existence is now only backstopped merely from referendum to referendum. As it is very unclear what will happen to the IMF/ECB rescue mechanism once the Irish election is held in March, with a material possibility that the whole plan will be unwound, leaving the country's financial system in the wind, a behind the scenes bank run is accelerating. Incidentally while this was the topic of the December letter by Guggenheim's Scott Minerd, which we discussed in a post titled "Scott Minerd's Detailed Pre-Mortem On What Europe's Bank Run Will Look Like, And Other Observations", his just released January missive deals with precisely the same topic (see chart below). So faced with the prospect of accelerating deposit redemptions, what does the Irish Central Bank go ahead and do? According to the Independent it has gone ahead and proceeded with that traditional recourse to all regimes in the bring: print money. "The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money." In other words, whereas Ben Bernanke may be 100% confident that US inflation courtesy of POMO and inflation printing will be absorbed by the "massive" excess slack in the economy (oddly enough it wasn't in Tunisia, as food prices hit records despite surging unemployment), we wonder if he feels the same way about other countries in the world, which are already part of a monetary union, yet which have decided to boost the "other assets" line in their balance sheets.

We are approaching 2008 pre-crash market highs with many stock trading higher than they were then on LESS revenues than they had at the time. Meanwhile, 10% of our population is unemployed, consumer credit is down by over $1,000,000,000 (15%), household wealth is down 20% and income is down while the CPI, even by BS Government measures, is up 5% since then, effectively giving those people who still have jobs 5% less to spend anyway.

As a reminder today is the day when Europeans are supposed to withdraw money from their bank, not necessarily in a beneficial manner. And maybe the action is already having an impact with the Bank of Ireland apparently the first casualty. BBC reports: "Customers of one of Ireland's largest banks have been unable to access their cash accounts through ATMs or online. The Bank of Ireland said it became aware at 1000 GMT on
Tuesday that ATMs were not working and customers were unable to make
online transactions. A spokesperson said the fault lay with the bank's internal system and engineers were working to restore normal services." And by bank's internal system presumably one meant lack of money...Perhaps Eric Cantona will have the last laugh after all.