RandomGuy
11-10-2010, 10:14 AM
Ireland is sinking
(from Economist blog: http://www.economist.com/blogs/freeexchange/2010/11/european_debt_crises )
http://media.economist.com/sites/default/files/imagecache/original-size/igby.png
IRISH government bond yields have spiked to new records (the chart for the ten-year is [above]), behind what some are calling a "buyers' strike".
EU Economic and Monetary Affairs Commissioner Olli Rehn arrives in Dublin today for a two-day visit after the government laid out a plan last week to cut spending and raise taxes by as much as 6 billion euros ($8.4 billion) in 2011.
While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May.
“It’s close to a buyers’ strike at this point,” said Jens Peter Soerensen, chief analyst in Copenhagen at Danske Bank A/S, a primary dealer in Irish government bonds. “Something needs to happen in the next few weeks to change the dynamic.”
Ireland's own Doctor Doom, Morgan Kelly, paints a vivid picture of the scene:
As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.
For a country or company, insolvency is the equivalent of death for a person, and is usually swiftly followed by the legal process of bankruptcy, the equivalent of a funeral.
Two things have delayed Ireland’s funeral. First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.
Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks. Not only have Irish banks had to repay their maturing bonds, but they have been haemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do.
Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”.
It's an ugly situation. The ECB will likely make sure a broader financial crisis is averted, but Ireland will be unable to avoid several years of really punishing austerity. And there will be no help from devaluation this time. The underlying business environment in Ireland might be fine, but talent may be difficult to hang on to as young people leave the country to avoid the mess. It's really remarkable to think about the probable decline in living standards from just a few years ago, when Ireland was among the richest places in Europe. On paper.
[note: the higher yields on bonds means that buyers are asking for greater returns on bonds/loans due to some risk factor, in this case default risk. Risk=return=demanded yields. Risk takes many forms and many kinds of risks are factored into such decisions, sometimes making it hard to filter out the net effect of any one given risk. In this case the risk is fairly obvious, and a suddent spike such as the graph above is of grave concern-RG]
Yikes.
Related material:
http://www.economist.com/node/17414142
If anyone wants, I have a few more links. This was brought to my attention by a Swiss acquaintance with a PhD in finance, who gave me an article in German that outlines in a bit more detail Mr. Kelley's concerns.
I can post a bit more background if anyone wants. There are some mitigating factors that differentiate Ireland somewhat. This may be a case of a self-fullfilling prophecy. The WSJ blogger makes some fair points that it isn't quite as "doom and gloom" as one might think from the stark numbers, but the bond yields are hard data, as opposed to mere opinion. (albeit hard data based on the cumulative opinions of many experts, if one holds to "efficient" market theory [specific finance/economics term])
(from Economist blog: http://www.economist.com/blogs/freeexchange/2010/11/european_debt_crises )
http://media.economist.com/sites/default/files/imagecache/original-size/igby.png
IRISH government bond yields have spiked to new records (the chart for the ten-year is [above]), behind what some are calling a "buyers' strike".
EU Economic and Monetary Affairs Commissioner Olli Rehn arrives in Dublin today for a two-day visit after the government laid out a plan last week to cut spending and raise taxes by as much as 6 billion euros ($8.4 billion) in 2011.
While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May.
“It’s close to a buyers’ strike at this point,” said Jens Peter Soerensen, chief analyst in Copenhagen at Danske Bank A/S, a primary dealer in Irish government bonds. “Something needs to happen in the next few weeks to change the dynamic.”
Ireland's own Doctor Doom, Morgan Kelly, paints a vivid picture of the scene:
As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.
For a country or company, insolvency is the equivalent of death for a person, and is usually swiftly followed by the legal process of bankruptcy, the equivalent of a funeral.
Two things have delayed Ireland’s funeral. First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.
Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks. Not only have Irish banks had to repay their maturing bonds, but they have been haemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do.
Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”.
It's an ugly situation. The ECB will likely make sure a broader financial crisis is averted, but Ireland will be unable to avoid several years of really punishing austerity. And there will be no help from devaluation this time. The underlying business environment in Ireland might be fine, but talent may be difficult to hang on to as young people leave the country to avoid the mess. It's really remarkable to think about the probable decline in living standards from just a few years ago, when Ireland was among the richest places in Europe. On paper.
[note: the higher yields on bonds means that buyers are asking for greater returns on bonds/loans due to some risk factor, in this case default risk. Risk=return=demanded yields. Risk takes many forms and many kinds of risks are factored into such decisions, sometimes making it hard to filter out the net effect of any one given risk. In this case the risk is fairly obvious, and a suddent spike such as the graph above is of grave concern-RG]
Yikes.
Related material:
http://www.economist.com/node/17414142
If anyone wants, I have a few more links. This was brought to my attention by a Swiss acquaintance with a PhD in finance, who gave me an article in German that outlines in a bit more detail Mr. Kelley's concerns.
I can post a bit more background if anyone wants. There are some mitigating factors that differentiate Ireland somewhat. This may be a case of a self-fullfilling prophecy. The WSJ blogger makes some fair points that it isn't quite as "doom and gloom" as one might think from the stark numbers, but the bond yields are hard data, as opposed to mere opinion. (albeit hard data based on the cumulative opinions of many experts, if one holds to "efficient" market theory [specific finance/economics term])