Letting the banks fail would have been a highly deflationary event, that presumably has been discounted to some degree by markets. This would include depreciation of Irish bank financial assets, etc.

This helps remove that deflationary risk, and in that sense is ‘inflationary’ in that it works against those deflationary forces.

Also, as you pointed out, there is as yet no new austerity required for this package.

Also reinforced is the notion that any member nation can have a banking crisis that’s too big for it to support.

This further reinforces the notion that the entire euro zone is ultimately supportable only by the ECB.

In any case, it looks like the will is still there to keep the euro zone muddling through at some minimal degree above crisis level, whatever the cost.

Ireland Becomes Second Euro Nation to Seek Aid

By Joe Brennan and Dara Doyle

November 22 (Bloomberg) — Ireland became the second euro country to seek a rescue as the cost of saving its banks threatened a rerun of the Greek debt crisis that destabilized the currency. The euro rose and European bond risk fell.

A package that Goldman Sachs Group Inc. estimates may total 95 billion euros ($130 billion) failed to damp speculation that Portugal and Spain would need to tap the emergency fund set up by the European Union and International Monetary Fund after the Greece rescue. Moody’s Investors Service said a “ multi-notch” downgrade in Ireland’s Aa2 credit rating was “most likely.”

“Speculative actions against Portugal and Spain are not justified, though it can’t be excluded,” Luxembourg Prime Minister Jean-Claude Juncker said today on RTL Luxembourg radio. “In a moment where financial markets have an excessive tendency to punish those countries that didn’t stick 100 percent to an orthodox consolidation, one can never exclude that similar things will happen.”

The aid, which Irish officials said as recently as Nov. 15 they didn’t need, marks the latest blow to an economy that more than doubled in the decade ending in 2006. The bursting of the real-estate bubble in 2008 plunged the country into a recession and brought its banks close to collapse. With Irish bond yields near a record high, policy makers are trying to keep the crisis from spreading.

Threat to Euro

“Clearly because of the size of their loan books, the huge risks they took, they became a threat not only to the state but to the” entire euro region, Lenihan told Dublin-based RTE radio in an interview today. “The banks will be downsized to the real needs of the Irish economy” to “Irish consumers and Irish businesses. That has to be the primary focus of Irish banks.”

Ireland will channel some aid to lenders via a “contingent” capital fund, Finance Minister Brian Lenihan said.

The euro rose 0.5 percent to $1.3740 at 10:30 a.m. in London. Irish 10-year notes rose, sending the yield down 24 basis points to 8.11 percent. Ireland led a decline in the cost of insuring against default on European debt, according to traders of credit-default swaps. Contracts on Irish government bonds dropped 28.5 basis points to 478.5, the lowest level since Oct. 29, according to data provider CMA in London.

“Ireland had no choice,” said Nicholas Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for money managers. “The market will still be waiting for the details of the assistance and the conditionality, but there should be a relief rally.”

U.K., Sweden

The U.K. and Sweden may contribute bilateral loans, the EU said in a statement. Lenihan declined to say how big the package will be, saying that it will be less than 100 billion euros. Goldman Sachs Chief European Economist Erik Nielsen said yesterday the government needs 65 billion euros to fund itself for the next three years and 30 billion euros for the banks.

Talks will focus on the government’s deficit cutting plans and restructuring the banking system, the EU said in a statement. Irish Prime Minister Brian Cowen, who spoke at the same press briefing as Lenihan, said the banks will be stress tested. Ireland nationalized Anglo Irish Bank Corp. in 2009 and is preparing to take a majority stake in Allied Irish Banks Plc, the second-largest bank.

Lenihan and Cowen appeared minutes after finance chiefs issued a statement endorsing an aid request to calm markets. Allied Irish emphasized the fragility of the system on Nov. 19, reporting a 17 percent decline in deposits this year.

Stabilizing Situation

“In the short term, it will stabilize the situation, there’s no doubt about that,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, who estimates a package of between 80 billion euros and 100 billion euros. “But as we’ve seen in the case of Greece, uncertainty will remain.”

The package for Ireland will total as much as 60 percent of gross domestic product, compared with 47 percent for Greece.

Cowen plans to announce the government’s four-year budget plan this week and said an agreement with the EU and the IMF will come “in the next few weeks.” Cowen also faces an election in Donegal in northwest Ireland on Nov. 25 to fill a vacant parliamentary seat. The vote threatens to erode Cowen’s majority. He has the support of 82 lawmakers, including independents, compared with 79 for the combined opposition.

The bailout follows two years of budget cuts that failed to restore market confidence as the cost of shoring up the financial industry soared.

Merkel’s Trigger

Lenihan cancelled bond auctions for October and November and announced 6 billion euros of austerity measures for 2011 on Nov. 4 in a bid to restore investor confidence. Those efforts failed after German Chancellor Angela Merkel triggered an investor exodus by saying bondholders should foot some of the bill in any future bailout.

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, fell to 523 basis points today. It widened to a record 652 basis points on Nov. 11, with the yield reaching a record 9.1 percent. In 2007, it cost Ireland less than Germany to borrow. Its 10-year spread then fell to as low as 77 basis points less than bunds. The ISEQ stock index has plunged 70 percent from its record in 2007.

Ireland will draw on the 750-billion-euro fund set up by the EU and IMF in May as part of the Greek bailout to protect the currency shared by 16 countries.

Irish Reversal

Irish officials initially resisted pressure from the EU to take any aid, saying they were fully funded until the middle of 2011. European leaders sought to head off contagion from Ireland and reduce pressure on the European Central Bank to prop up the country’s lenders by providing them with unlimited liquidity.

Cowen defended his reversal on the need for aid. “I don’t accept I’m the bogeyman,” he said. “Now circumstances have changed, we’ve changed our policies.”

Yields on bonds of Spain and Portugal have jumped amid concern that fallout from Ireland would spread. The extra yield that investors demand to hold Portuguese 10-year bonds instead of German bunds climbed to a record 484 basis points on Nov. 11.

“It probably won’t halt contagion. The sovereign crisis isn’t yet over,” said Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt. “Ireland is in the middle of a difficult crisis.”

7 Responses

  1. Even with the recent crisis, the Euro has been too valuable for member states to let it fall apart.

    For example: Germany’s contribution to the Greek bailout probably paid for itself already.

    German GDP * 2.2% QoQ in Q3 * 30% more exports due to weak euro from Greek crisis = 24bn Euro in 1 quarter due to including Greece in the Eurozone. The total value to Germany of including Greece in the Eurozone must be in the hundreds of billions over the last decade.

    The total cost of the Greek bailout for Germany is probably $50bn Euro. German GDP has increased by easily this much from just having the currency weaker than it should be. The Greek bailout pays for itself in 1 year in increased tax revenue! I don’t know the last project you had that paid for itself in 1 year through revenues, but you don’t see many of those in the corporate world.

  2. The cost is eventually going to bite them like a Russian bear with rabies. It ain’t going to end pretty. And sadly the contagion will spread across boarders.

  3. The bailout is coming from the EU and IMF, not the ECB. The EU funding is coming from the national governments.

    The ECB is not doing much here, other than providing temporary liquidity to some Irish banks as they wait for the IMF capital injection. The ECB has no capital to speak of, and cannot absorb Irish bank losses, so providing liquidity is risky for them, and I’m assuming that they were only willing to do this until they were given assurances by the Irish government and the E.U. that capital injections for Irish banks would be forthcoming. In this sense, the Irish government had no choice but to agree to the bailout before even entering negotiations with the IMF.

    Massive austerity will be required, as the Irish citizens will be asked to effectively fund the capital hole in their own banks. This is a massive transfer from the real sector to the financial sector, and one that Ireland can’t afford.

    We’ll see what cuts will be required after they announce the details.

    They will bleed Ireland, and we will have another crisis when the current capital injections run out, after which there will be another crisis and another bailout, which will again buy a little more time until the next crisis.

    Up and until all the peripheral nations can’t take the austerity or the core stops being willing to fund the bailouts. Neither the IMF nor the EU stability fund contains nearly enough capital to repair the balance sheet of Irish banks, let alone all the EU debtor nations.

    1. the ecb is indirectly providing short term funding when it buys the nat govt paper in the secondary markets.

      and it’s also funding the banking system, for all practical purposes.

      the ecb has infinite capital in that operationally it isn’t revenue dependent when it spends.

  4. Just like the people of Japan, the Irish will sit idly by as their leaders sell them into debt slavery for the next century. The Americans will follow in due time and the world will return to the middle ages. There is nothing new under the Sun.

  5. I have read where big companies like google and intel and such are going to be free from the irish bailout solution, but the citizens are not. I remember one of warren’s old friends – mike lewis of liar’s poker fame saying the mortgage situation in iceland was very unfair, so what does iceland have to say today and what guidance can they give ireland?

    The bible says to forgive debts every 7 years:

    “At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord’s release.” – Deuteronomy 15:1


    Iceland is No Ireland

    Inquiring Irish minds just might be interested to see how Iceland fared after they told EU bankers to go to hell. For the answer, please consider Iceland Is No Ireland as State Kept Free of Bank Debt

    Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued.

    “The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

    “How far can we ask ordinary people — farmers and fishermen and teachers and doctors and nurses — to shoulder the responsibility of failed private banks,” said Grimsson. “That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”

    1. except we didn’t pump money into banks apart from normal deposit insurance payouts. the rest is regulatory forbearance as discussed elsewhere.
      same for Ireland best I can tell, though I haven’t seen details.

      They may have covered actual losses if banks lost more than 100% of their private capital.

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