Death by a Thousand Irish Cuts: The Poster Child of Austerity Measure Success Gets Downgraded After Several Devastating Expenditure Reductions That Really, Really Hurt the Irish People!

For the first two quarters of this year, we’ve been pounding the pavement on the risks inherent throughout Europe. The 50+ article (and counting) series known as the Pan-European Sovereign Debt Crisis is rife with opinion, analysis, commentary (albeit rather smart ass commentary), and data that is hard to come across from objective sources. The series also tends to accurately predict the moves of the major rating agencies approximately 3 to 5 months in advance with uncanny precision (ex. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks). This is not a good thing for those very few, wayward souls who still may actually follow the whims and predilections of said agencies (by hook or by crook, whether through naive belief or by mandate or charter) for by the time the agencies get around to a downgrade or upgrade it is really too late from a fundamental perspective – particularly if it is your own capital you are trying to save. Just remember, those who get paid directly by you are the one’s whom you will get the most loyalty from. Those of you who have lost the most in the Pan-European Sovereign Debt Crisis, I query, “Exactly how much did you pay those ratings agencies?” Remember the old saying, “You get what you pay for”??? It appears that the shell game of free (yet highly conflicted and faulty) information pervasive on the Web was a material problem in the finance world way before the Web itself.

On that note, I bring you this CNBC article: Ireland’s Credit Rating Cut on Weak Growth, Banks:

Moody’s Investors Service has downgraded Ireland’s sovereign bond ratings by one notch to Aa2, citing loss of financial strength, weak growth prospects and banking system problems, the credit rating agency said in a press release Monday. The government’s “gradual but significant” loss of financial strength is reflected by the “substantial” rise in the ratio of debt to gross domestic product and a weakening of debt affordability, Moody’s said.

The country faces weak growth prospects because of a severe downturn in financial services and real estate, as well as a continued contraction in credit to the private sector, it said.

And persistent weakness in the banking system is represented by “a series of recapitalization measures” and the need to create a government-backed special purpose vehicle to buy bad loans from banks, Moody’s added.

Ireland’s general government debt-to-GDP ratio increased to 64 percent by the end of 2009 from 25 percent before the crisis, and is continuing to rise, it said. The country’s rating outlook is stable, Moody’s added. The euro hit session lows after the announcement.”The timing isn’t great, given the bond auction tomorrow and certainly this will add to the premium that will need to be paid to raise money,” Alan McQuaid, chief economist at Bloxham, told Reuters.

Hmmmm!!!! Let’s have have the DJ remix this song…

The country faces weak growth prospects because of a severe downturn in financial services and real estate, as well as a continued contraction in credit to the private sector, it said.

And persistent weakness in the banking system is represented by “a series of recapitalization measures” and the need to create a government-backed special purpose vehicle to buy bad loans from banks, Moody’s added.

To be absolutely clear, and go where no rating agency spokesperson has ever dared to go before… It’s not as if Ireland (nor several of the western, northern or central European EMU members) have any chance in hell of unilaterally saving their banking system if it actually collapses. The banks are an order of magnitude larger than the actual countries themselves. Who’s running who, here? See Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and take particular note of pretty graphs such as these…

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

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This 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.

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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.

In Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! I attempted to drive the point home:

We have performed a cursory overview of the risks inherent in Ireland though previous “preview” posts: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook. 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.

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Below is an excerpt from our recent forensic Ireland analysis. Subscribers, please download the most recent report here:File Icon 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. Moreover, amidst an ailing banking system Ireland’s economy is further expected to report a 1.3% decline in its GDP and a fiscal deficit of 11.6% of the GDP for 2010, as per the government estimates. Consequent to rising fiscal deficit, government’s debt levels have also increased enormously from 24.8% of GDP in 2007 to 44.1% in 2008 and 64.5% in 2009. This rising debt is further fuelling an increase in fiscal deficit through an increase in interest expenditure. Thus, in its 2010 Budget, Ireland’s government plans to secure structural improvements to the expenditure base, which is expected to result in a savings of €4 billion. However, considering the current economic slowdown and rising unemployment, deterioration in Ireland’s tax revenues is expected to continue in 2010, which will negate the impact of expenditure savings, and result in further widening of the fiscal deficit to 12.6%, as per our estimates.

Moreover, as per the government’s “Stability Programme Update – December 2009″, the government plans to bring down its fiscal deficit from 11.7% in 2009 to 2.9% in 2014 (below the European Union target of 3%), primarily backed by a strong economic recovery starting 2011. However, we believe that this targeted reduction is based on overly optimistic growth targets, which are difficult to achieve.

The current government estimates fail to take into account additional funding that the government might have to infuse to stabilize Ireland’s banking system, which will further increase the government’s budget deficit.

  • According to Bloomberg (March 31), “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.”
  • Ireland’s banking system is critically dependent on the government for financing. At the end of January 2010, Central Bank of Ireland’s lending to banks was €98 billion, which is equivalent of 60% of the country’s 2009 annual GDP. Moreover, it represents 13% of total Eurosystem lending to banks compared with Ireland’s 2% share of Eurozone GDP. Ireland’s lending to banks is much higher compared to other troubled European countries - the Bank of Greece’s lending to banks amounts to 20% of Greek GDP while numbers for Spain and Portugal are much lower.

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In addition, Ireland (like practically every other country in the EU, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!) unrealistically optimistic in their GDP growth projections.

Moreover, similar concerns on GDP growth estimates were highlighted by the European Commission in its March 2010 report, “The budgetary outcomes could be worse than targeted in 2010 and considerably worse than targeted thereafter. The authorities should stand ready to take additional measures beyond the planned consolidation packages in case growth turned out to be lower than projected in the programme. The biggest problem is the Government’s prediction that the economy will expand 3.3pc next year.” We have shown, beyond a shadow of a doubt, that the EU and the IMF have been dramatically optimistic concerning GDP growth and deficits regarding EU member countries ever since this “Asset Securitization Crisis” cum Pan-European Sovereign Debt Crisis (see the end of this post) began. Again, I reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

Consequently, for the aforementioned issues as well as a host of other reasons detailed in our subscriber forensic report (Ireland public finances projections Ireland public finances projections 2010-04-14 02:24:52 568.24 Kb), we believe that the government will over shoot its fiscal deficit target by 1% in 2010 and by much higher in 2011 and 2012, which in turn will result in higher debt and thus higher interest expenditure.

Of course, many can say this is just a bunch of blogger mumbo-jumbo, but then again there are probably a few Irishmen who may disagree. Reference BoomBustBlog Irish Research Becomes Reality:

Last month I posted both a public and premium subscription analysis of Ireland’s public finances, along with a focus on the banking system ( File Icon Irish Bank Strategy Note ). This month we can bear witness to…

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

Gardai Clash with protestors marching against government cutbacks outside the Gates of Leinster House in Dublin tonight

Have they read my report?

Read more: http://www.belfasttelegraph.co.uk/breaking-news/uk-ireland/banks-protesters-storm-parliament-14804947.html#ixzz0nh5g9M7M

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.

Subscribers should take heed to the strategy implied in the Irish banking report. Methinks things may come to a head too quickly to implement last minute positions efficiently. For those who wish to be, but are not yet part of our club, you may click here to suscribe to BoomBustBlog's Investment Research!