Friday, 15 April 2011

Ireland's folly

Moody has today downgraded Ireland's debt to one notch above junk status. Given Ireland's debt is being almost entirely purchased by the ECB this means a lot of European taxpayers money is being flushed away.

I really don't understand what Ireland is doing (nor Greece, Portugal). They can't pay their debts and need to declare bankruptcy - or at least a 'restructuring' which is the national equivalent of a CVA.

I think Ireland is in a great position to do this now. All they have to do is call the Germans and say the game is up. The Germans will properly panic as it is THEIR banks (UK banks too, but they have written off big chunks this past year) which are most exposed by a long way. The Germans have been using EU funds to protect their own defunct banking system.

The whole pretence at the moment is incredible really. The debts are too great to pay back and the austerity only works in Countries like the UK where the levels of debt are sustainable. In Countries where the debts are too high then an outright default is necessary.

The sooner they get on with it the better. I have no idea why they continue to do otherwise. Then again, the Irish Government underwrote its entire banking system which has to be the worst decision made during the entire financial crisis across the whole world - and that is saying something.

14 comments:

Blue Eyes said...

My guess is that the Irish government at the time thought something along the lines of "a guarantee won't cost us much in cash because they banks aren't in that bad a shape". Oops.

Problem is that if Germany allows default the Euro is effectively over because there will be nothing to stop countries from doing it every time there is a spot of bother. A very good argument that was raised at the time of EMU and which we thought had been thought about with the Stability Pact. Unfortunately Germany allowed France to breach the Stability Pact after about five minutes giving the green light to the countries involved in the present mess.

There are two obvious ways out of this: default by massive Eurozone inflation (the traditional continentnal way) or default by writing off the debts followed by the break up of the Euro.

Anonymous said...

A weak Euro is in Germany's interest given their exporting prowess. Why would they want to give up the chaos that is feeding their export boom?

Steven_L said...

The funny bit it that they are demolishing all the real things (i.e. houses) that they gained in the bubble.

Demolish the assets and keep the debts, bonkers.

Barnacle Bill said...

One has to wonder what promises were made to certain members of the then government of Eire behind closed doors?
Because they certainly had the upper hand if they had threatened to default.

Demetrius said...

If much of international "finance" is now in fact junk and worthless dangerous stuff, where does that leave normal trading patterns and the rest of us?

Electro-Kevin said...

Couldn't America help to bail them out ?

I'm sure plenty of movie directors and Hollywood actors would help with the publicity.

Or does their largesse extend only to providing the funds to bomb the shit out of us ?

Timbo614 said...

CU: "The whole pretence at the moment is incredible really".

Absolutely. My favourite expression on this is "The numbers are too big" and they seem to be growing exponentially with every new move! Just look at the US deficit number: $1,450,000,000,000. and UK debt 1,500,000,000,000.

These are very big numbers to apply any interest rate too! I keep hearing the gov't MPs quoting that £120 million a day interest figure we are paying that is 43.8 billion a year. in 22 years it is £1 Trillion! That's some mortgage!

Ireland €70Bln - Yet when I read the terms (that I can find) their reforms and taxation seems to only amount to an increase of about 2-3 Bln / year max. and yet they are talking about a 3 or 4 year plan, huh?? Can they sell bust banks for the remainder? and who to?

Portugal - they need what €440Bln??? Euro. Say it takes 20 years to pay back at 5.5% that's interest of €289 Bln alone! Payments will be near 36 Bln a year. from a GDP of 160 Bln = 22.5% of GDP a year, every year or €6,000 for every taxpayer a year. Austerity? AUSTERITY??? for 20 years??

How much will Spain need? and what will Greece cost when it finally goes pop?

"The numbers are too big" The big red reset button is in need of use urgently, or am I missing something with my pocket calculator figures?

Inflation will help, growth (if achievable under these conditions) will too, but can the world achieve 20 years of exponential 3% growth (80%+ growth) without running out of stuff to process, oil to burn ect? And we do all this in the name of ephemeral "money" something that we (humans) created so we didn't have to barter. And in the name of banks, something we also created to keep track of our creation called money.

Apologies I ramble, but it seems blatantly obvious to me that a new start or some better thinking is required.

Anonymous said...

Timbo614,

The Irish loan was I think around 5% interest...


So they pay 4Bn in interest for the four years.. and then guess what - the 70Bn is due.. do they roll it over again...


The point being that at the moment the only figures being talked about is servicing the interest... there's just no thought to ever paying the capital off... it just seems like a permanent millstone...

As just like the UK, people look around and apart from some expensive posh flats in the middle of nowhere, what the hell do wee have to show for it?

Timbo614 said...

@Anon
Sooo.... how does an EU bailout help except for a lower interest rate? They still owe 70 Bln just to a different creditor. They are still just as bust.

And then... the EU pays off the original creditors (German/UK/US and sundry Banks) who do not take a haircut on their mad property boom lending and they stuff it in their mattress [capital accounts] and refuse to lend to anyone because they are aware there is more of the same to come shortly, where the country [banks] do not get a bailout because "the numbers are too big" :)

[Finally understanding dawns]

Anonymous said...

Cityunslicker: "(UK banks too, but they have written off big chunks this past year)"

Ah, that would be British tax payers money been flushed away then.

Guido Fawkes said...

"the Irish Government underwrote its entire banking system which has to be the worst decision made during the entire financial crisis across the whole world - and that is saying something."

Sadly I think that is true.

Anonymous said...

Come on Guido give them a hand, with your expert knowledge , I am sure that Ireland would back on the straight a narrow, YOU COUNTRY NEEDS YOU.

Lord Blagger said...

But Guido doesn't need them.

The problem exists in the UK too.

The reason is the off balance sheet debts that have been hidden.

Another 4.5-5 trillion on top of the trillion of borrowing, with an tax income of 0.5 trillion. Not included, bailing out the feckless in their retirement.

Try getting a mortgage on those multiples.

Lord Blagger said...

Why do they have to do it now?

The new loans do not have interest due for a few years. Far better to sort other things out now, and then default later.

Watch out for the debts being rolled over.