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Monday, December 11, 2023

Ireland’s “String and Sealing-Wax Fix”; Irish PM Loses Confidence of Own Party; European Sovereign Default Risk Hits All Time High

Mish reports on Ireland’s "String and Sealing-Wax Fix"; Irish PM Loses Confidence of Own Party; European Sovereign Default Risk Hits All Time High.

irelandCourtesy of Mish

News in Europe regarding Ireland, Spain, and Portugal is ominous. Credit Default Swaps (CDS) are soaring in Spain and Portugal. European sovereign risk jumped to an all-time high.

Lloyds TSB says "Ireland’s debt woes may spread because investors have lost confidence in policy makers".

Members of his own party are calling on Irish Prime Minister Brian Cowen to resign.

The quote of the day goes to Bill Blain, a strategist at Matrix Corporate Capital LLP in London who said "“Bailouts are nothing but a short-term string-and-sealing-wax fix”.

With that let’s take a look at some specific news.

Zero Confidence in Irish Solution

Lloyds says Ireland’s Woes May Spread on ‘Zero Confidence’

“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis even though fiscal austerity measures in both Portugal and Spain have been severe and prima facie, sufficient to ease market concerns,” Charles Diebel and David Page, fixed-income strategists in London, wrote in an investor note today.

“With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole,” they wrote. That may also raise “valid questions about the prescriptive policy measures being sufficient to deal with issues of such magnitude.”

Credit Default Swaps Soar in Spain, Portugal

In spite of the Irish bailout, Spain, Portugal Bank Debt Risk Soars as Traders Look South

The cost of insuring Spanish and Portuguese subordinated bank bonds soared as traders of credit-default swaps turned their focus to southern Europe following Ireland’s bailout.

Swaps on Portugal’s Banco Espirito Santo SA rose to a record while contracts on Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, climbed to the highest in more than five months. The benchmark gauge of European sovereign risk also jumped to an all-time high, while two indexes tied to bank debt surged the most since June.

Ireland’s rescue “achieves completely the opposite of what it allegedly tries to achieve, namely to calm markets,” Tim Brunne, at UniCredit SpA said in a report.

“Instead, the credit profile of both the sovereign and the impaired financial institutions has been weakened,” the Munich-based strategist wrote. “The disentanglement of the sovereign and the financial sector solvency issue is the pivotal factor to manage the European periphery’s debt problems.”

“Bailouts are nothing but a short-term string-and-sealing- wax fix,” Bill Blain, a strategist at Matrix Corporate Capital LLP in London, wrote in a client note. “We into the next stage of the euro sovereign crisis. It’s now a struggle between the political will of the Brussels elites to maintain the euro as is, versus the markets betting they can’t.”

Irish Prime Minister Brian Cowen Loses Confidence of His Own Party

Members of his Fianna Fail Party may ask Cowen to Resign.

Irish Prime Minister Brian Cowen may be asked to resign by some members of his Fianna Fail party as the parliament prepares to pass the country’s 2011 budget, a lawmaker in the party said.

“Tonight I’ll be telling him that I’ve lost confidence in you, the public has lost confidence in you and for the sake of the country and the party, give us an indication when you will resign and let us select somebody to lead us into the next election,” Noel O’Flynn told Bloomberg News in Dublin today. “Several members will stand up and ask him to go after the budget” on Dec. 7.

Cowen’s position is weakening as he opens formal negotiations with the European Union and the International Monetary Fund over a rescue package to help stabilize the country’s banking system. Fianna Fail lawmakers will meet tonight, a day after the Green Party, Cowen’s junior coalition partners, called for a January election, saying he “misled’ voters over the past two weeks.

Ireland Borrowing Costs 5%, Same as Greece

Dutch Finance Minister says Ireland to Borrow From EU at Same Rate as Greece

Ireland will pay about the same interest rate on emergency loans from the European Union as Greece, Dutch Finance Minister Jan Kees de Jager said.

“We agreed that it will take place at about the same conditions and pricing as with Greece,” De Jager said in an interview at the ministry in The Hague yesterday. Ireland will have to pay interest of “about” five percent on the emergency loans, he said.

Dilution Concerns Plague Bank of Ireland

Over bailout dilution concerns, shares of Bank of Ireland Plunge 31 Percent

Bank of Ireland Plc, Ireland’s largest bank, fell to a 20-month low on concern that shareholders will be diluted in any government bailout.

Bank of Ireland slid 31 percent to 27 cents at 12:45 p.m. in Dublin trading after dropping 19 percent yesterday. Allied Irish Banks Plc, the country’s second-largest lender, fell 19 percent to 33 cents and Irish Life & Permanent Plc, which has avoided a bailout so far, fell 4.8 percent to 80 cents.

“That the banks will be obliged to raise further capital now looks assured,” Emer Lang, an analyst with Dublin-based securities firm Davy, wrote in a note today. “The timing of any increase will hinge on the balance struck between ‘immediate’ additional capital injections and ‘top-ups’.”

Rescue Package Set at $114 Billion, 85 Billion Euros

The cost of the bailout keeps going up. The original estimate was for a $50 billion bailout. Now, Ireland Said to Need 85 Billion Euros for Rescue

European Union officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.

The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.

Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. Spanish bonds tumbled, pushing the extra yield that investors demand to hold its 10-year debt over German bunds to a euro-era record of 236 basis points. Irish bonds also dropped today.

A tip of the hat to Bloomberg for every one of the above links.

Ireland at Crossroads

Here are my thoughts expressed in Irish PM Dissolves Government; Spanish Banks Face Debt Challenge; Greece May "Shut-Down"; Meaning of "Guarantee"; Should Ireland Ditch the Euro?

Ireland is at a major crossroads. The fact that Irish Prime Minister Brian Cowen is willing to step down helps.

I agree that Ireland certainly needs reforms. Lowering the minimum wage will help create jobs. So will reducing benefits. Both need to happen regardless of what labour parties might think.

However the biggest job creation effort will come from Ireland telling the ECB and IMF to stuff it. There is no reason Irish citizens should have to pay back the foolish guarantees made by Brian Cowen.

Cowen will be gone soon enough, and the next PM can and should have different thoughts about the meaning of "guarantee".

German Chancellor Angela Merkel last month called for bondholders to foot more of the bill of European bailouts. I agree. It’s time to hold her to her word.

Mike "Mish" Shedlock

Images courtesy of William Banzai7


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