Tag Archives: Bailout

Ireland agreed to a bailout already, but it’s still sinking.

Last weekend, Ireland agreed to an 85 billion Euro bailout ($112.5 billion), details of which should be announced this weekend. But that hasn’t stopped the turmoil. Today, Irish bond yields hit euro-era high, banks sink:

Yields on Ireland’s bonds reached a new euro-era high Friday as investors dumped the nation’s debt securities, and Irish bank shares also kept falling in expectation the banks are heading toward greater state ownership.

Analysts said Ireland’s bonds and banks are getting battered because deep skepticism remains that an international bailout loan – whose details are expected to be unveiled Sunday – will be enough for Ireland to resolve its debts.

The Irish Times said an agreement on an euro85 billion ($112.5 billion) IMF-EU loan for Ireland could be announced Sunday, one week after Ireland formally applied for a financial rescue. It would be used as a credit line by Ireland’s government and banks, which both have been priced out of the bond markets.

Yields on Ireland’s 10-year bonds rose to 9.22 percent from 9.02 percent Friday, a new high since Ireland joined the euro in 1999.

Wasn’t the whole point of the bailout to end or at least alleviate this crisis? But now, the crisis is getting even worse as traders/investors lose confidence in Ireland’s ability to resolve its debts and the Eurozone’s ability to help.

Now, the Eurozone and IMF are proposing a bailout of Portugal. Will that bailout fare any better than this one? As I’ve written previously:

And all the bailouts in the world won’t end this madness until these countries get their fiscal and monetary houses in order.

So far, the bailouts have been a reward to countries that behaved poorly by spending more than they had and making bad investment. Conversely, the bailouts are punishing those who successfully avoided the urge to over-leverage and over-spend.

Bailouts will only work when they reward those who made mistakes in the past but are now behaving well. However, all these at-risk countries are proposing to reduce their budget deficits to three percent of GDP. I do not call that behaving well. I call that behaving less badly than before. Until these countries propose balanced budgets and plans to pay off their debts, they should receive no bailout money. But that is unlikely to happen because those “strong” countries that are providing the bailout money, such as Germany and France, have no plans of their own to balance the budget and pay off debt. Thus, we are in a situation where countries needing to bailed out are providing money to those who are in even more desperate need of a bailout.

The blind leading the blind… And the sovereign debt crisis continues.

Am I really that smart? Or is the EU-IMF that stupid?

The EU and IMF had hoped that bailing out Ireland would end the sovereign debt crisis or at least forestall it for the time being. As I explained previously:

I don’t see how this changes anything. It may stave off immediate default, but Ireland is simply borrowing more money, exactly what got it into this mess in the first place. This simply buys them time to get their house in order, but will they?

I then compare the bailout to Dr. Evil:

These bailouts, loans, and austerity measures in Greece, Spain, Portugal, and Ireland are “an easily escapable situation involving an overly elaborate and exotic death.” Instead of eliminating the deficit immediately, they have convoluted plans to reduce it over a five-year period. Will these plans work? Nobody knows. But that’s okay because “we’ll just assume it all went to plan.”

It only took a few days to prove that I am correct. Marketwatch reports:

European government bond markets were in turmoil Tuesday, as Portuguese and Spanish yields followed Irish yields sharply higher on growing doubts about the ability of politicians to contain the euro zone’s sovereign-debt crisis.

Rising bond yields underline fears that the debt crisis, which has already forced Greece and Ireland to seek bailouts, will spread to other high-deficit countries, potentially shutting them out of credit markets.

The yield premium demanded by investors to hold Portuguese 10-year bonds versus German bunds widened to 4.34 percentage points from around 4.08 percentage points Monday.

The spread between Spanish and German yields widened to 2.32 percentage points, exceeding the spread of 2.27 percentage points seen earlier this month.

How could the EU and IMF really be so stupid to believe their bailout would work. They thought their bailout of Greece and 750 billion Euro backstop would end the crisis once and for all. That failed, but they didn’t let that stop them from making the same mistake again.

It is often said that insanity is “doing the same thing over and over again and expecting different results.” Supposedly, Einstein said as much.

This leaves us with three options:

  1. The EU and IMF are stupid.
  2. The EU and IMF are insane.
  3. The EU and IMF have some ulterior motive.

Which do you think it is?

Ireland gets its bailout. You ain’t seen nothing yet!

So Ireland finally got its bailout. I discuss the true cost of the bailout here and how this is only a temporary solution here.

Focus has now shifted to Portugal and Spain. Ireland is a country with just 4.5 million people, whereas Portugal has 11.3 million and Spain has 46.0 million. People are now guessing at how big their bailout will be if they are needed.

According to The Telegraph:

Analysts estimate that a Portuguese bail-out might require less than euro 50 billion, less than the sum lent to Greece or Ireland. But rescuing Spain from crisis would require a much bigger sum.

Cornelia Meyer, CEO & Chairman, MRL Corporation, told CNBC Monday:

She predicted that a Spanish bailout would likely cost up to 500 billion euros; but there is no “real mechanism” to deal with it, Meyer added.

While a bailout of Portugal would likely be small, a bailout of Spain would be five times greater than that of Ireland.

One thing analysts are forgetting is that the PIIGS also includes Italy. If Italy, with it 60.4 million people, needs a bailout, it could eclipse Spain’s total. Nobody is talking about bailout for Italy, but nobody was talking about bailouts for Spain and Portugal just months ago. If Spain and Portugal take bailouts, focus will then shift to Italy.

If all five PIIGS need bailouts, we are talking about well over a trillion Euros. Good thing money grows on trees.

If this story sounds familiar, it should. It is eerily similar to the US banking crisis in 2008. First Bear Stearns went bankrupt. An isolated case. Then Lehman Brothers. OK, a second special situation. Next was AIG. Then Citigroup, Wells Fargo, Bank of America, and the rest suddenly needed help from the government. BofA, Wells Fargo, etc. may not have been in real trouble when the whole thing started. Instead, it was an old fashion bank run where depositors/investors get their money back because they don’t trust the banks and banking system. Now we are seeing the same thing in Europe. Ireland didn’t need a bailout… until last week when depositors withdrew billions of dollars from Irish banks. Today, Spain, Portugal, and Italy may not be in trouble, but if people start thinking they are “at risk,” they’ll withdraw their funds and it will become a self-fulfilling prophecy.

And all the bailouts in the world won’t end this madness until these countries get their fiscal and monetary houses in order. Until then, the sovereign debt crisis will spread from one country to another.

“Ireland on the brink” with no way out

Marketwatch reports:

Ireland on the brink as budget crunch looms

Austerity threatens growth, but markets leave Dublin little choice

After promising a 15 billion euro ($20.7 billion) austerity package of spending cuts and tax hikes, Ireland’s government may be facing its last chance to avoid a bailout by persuading markets that the country can repay its debts.

Yields on government bonds have soared in recent days as investors increasingly fear that the only long-term option for Ireland will be a bailout from Europe. But sympathy for Brian Cowen’s Fianna Fail–led coalition is almost nonexistent among Dubliners, who see the government as the biggest villain in the collapse of the Irish economy…

Please read the whole article, but I’ll summarize it in just a few words: Ireland is damned if they do and damned if they don’t. If Ireland does nothing, it will be unable to repay its debts. In other words, it will default if it is not given a bailout. But the EU will not bail out Ireland if it does not reduce its deficit.

If Ireland chooses to reduce its deficit, which it is trying to do, it will require massive tax increases and/or huge cuts in spending. Either will result in massive protests and economic harm.

Western governments have been spending more than it could afford for nearly a century now. In the US, it started in 1913 with the emergence of the Federal Reserve and ratification of the income tax amendment. It got worse with the two world wars, Great Depression, and breaking from the gold standard. Now, countries like Ireland, Greece, Portugal, and Spain have only years, if not months, to get their houses in order. After 100 years of failure, we are now paying the price.