We very much enjoy the view of Michael Cembalest (CIO, JPM Private Bank) when it comes to the sensitive topic of geopolitics, as it tends to provide that incremental perspective over and above what otherwise his and other banks would skirt around due to conflicts of interest (after all they are banks). Today, in his Eye on the Market report, Cembalest looks again at the Irish bailout. And while his summary of the 4 key dynamics (in his opinion) is certainly spot on, it is his footnote that caught our attention, as it carries in it the most pertinent information: namely, that since its bankruptcy and currency devaluation, Iceland's economy and stock market have surged, unbound by the shackles of a zombie monetary system and exponentially growing debt. Ireland, to the contrary, can only hope for at best a gradual decline in its economic output instead of an outright collapse now that European Commission council is the country's new politburo. It can also, at best, hope that its pension fund will have a few penny farthings left for the aging population once it is done rescuing Europe's banks. It is precisely this option that a formerly democratic country refused to offer its citizens, and is the reason why its entire government should be tried for treason: instead of using empirical evidence that default and devaluation is the best outcome, Ireland crumbled to the interests of a few parasite plutocrats, which have just their own interests in mind, and never those of the host nation (which ends up being abused and discarded like a used condom off the side of the road).
The key issues on the Irish bailout per Cembalest:
1. Bailouts don’t change the level of debt that countries owe, it just shifts the creditors around. The latest steps remind me of the desperate attempts by US banks to lend more money on top of prior money during the late 1980s to Latin America, when Citibank chairman Walter Wriston’s “countries cannot default” thesis was left in ruins. For everyone that said last spring that “Greece 2009 is not Argentina 2001”, they’re right; Greece’s budget/trade deficits and debt/GDP were much worse.
2. GDP figures can be misleading indicators of risk. Greece, Ireland, Spain and Portugal (GISP) are small in GDP terms relative to Germany and France. But their banking systems grew to be very large (e.g., a 20% haircut on French bank exposure to GISP countries would wipe out French bank equity). Irish Finance Minister Lehinan intimated that Ireland asked to be able to apply haircuts to senior bank debt, and was told by the EU that it would make no money available if there were any haircuts, due to fears of contagion. What does that tell you about the risk of small countries, or the European banking system?
3. This crisis is not just about sovereign debt/deficits. Ireland and Spain were model EMU citizens, with deficits inside of the 3% Maastricht level for years. The problem: total sovereign, corporate, financial and household debt, and each country’s ability to service it. Despite reductions in its budget deficit and reduced reliance on ECB funding, we’re still very nervous about Spain. Why? Its economy is still on the brink of recession. Were it not for the ongoing collapse in imports, Spain’s GDP would have declined in Q3. BBVA and Santander should be able to ride out a recession due to international diversification, but the other half of the banking system (Caja banks) is another story entirely. Risks in Spain are not just about the banks; nonfinancial private sector debt is 220% of GDP, the highest in the world.
4. The politics may get more divisive. The EU imposed a deal on Ireland’s lame duck government that consigns the country to a very painful future. The continued gutting of the Irish national pension fund is, to put it mildly, a controversial decision. Meanwhile, Eurogroup president Jean Claude Juncker said this over the weekend: “I am concerned that in Germany, the federal and local authorities are slowly losing sight of the European common good”. As per last week’s EoTM, I am not sure anyone knows what that really means right now, or if such a concept was ever properly established as it relates to the European Monetary Union.
This is all well-said and very coherent. But it is not what we want to highlight. What we do want to emphasize is the comparison of Ireland to Iceland. Aka footnote one:
The Irish “bailout” plan, with its EUR 54,800 cost per household, is by all accounts a modern-era “Long Day’s Journey Into Night”. Ireland’s future, by the way, looks a lot more bleak than Iceland’s. Iceland took a different path (debt default and a devaluation of 60%). Two years on, Iceland is rebounding: exports and manufacturing are growing by 20%, tourism is back near all-time highs, real wages are rising, unemployment is declining sharply, interest rates fell from 18% to 5.5% and the stock market rebounded 50% from its lows. In Ireland, GDP is contracting at a 9.7% rate; real wages, price levels, the money supply and exports are falling; and unemployment is stuck at 14%.
This is nothing less than yet another example that in the great collapsing game of Keynesian fundamentalist's dilemma, he who defects, defaults and devalues first is the winner. Congratulations Iceland. To everyone else: enjoy the eventual revolutions. They are now inevitable, courtesy of your favorite neighborhood parasite banker.