Tag Archives: Central Bank and Financial Services Authority of Ireland

Doctor Evil’s solution to the sovereign debt crisis

There are three stories out this morning regarding the sovereign debt crisis in Europe.

First off is Ireland:

Ireland is likely to end up tapping a loan worth “tens of billions” of euros as a result of talks between the government and officials from the European Commission, European Central Bank and the International Monetary Fund, the head of Ireland’s central bank said Thursday.

The talks aren’t about a bailout, but will lead to a loan to Ireland that the government would have to accept, Central Bank of Ireland Governor Patrick Honohan said in an interview, according to Irish state broadcaster RTE.

The yield on the 10-year Irish government bond fell to around 8% this morning from 8.3% Wednesday, strategists said. European equity markets rallied, with the Irish ISEQ stock index gaining 1.4%.

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?

Now, over to Spain:

Spain sold 3.654 billion euros ($4.943 billion) in 10- and 30-year bonds, but was forced to pay higher yields than two months ago as worries about fiscal problems on the periphery of the euro zone push up borrowing costs. The Spanish Treasury offered 3 billion to 4 billion euros of 10- and 30-year bonds. The government paid an average yield of 4.615% on the 10-year bond, up from 4.144% at a September auction, Dow Jones Newswires reported. The 30-year bond auction produced an average yield of 5.488% versus 5.077% in September. The 10-year auction produced a bid-to-cover ratio of 1.84, versus 2.32 in September, the report said.

The market is relieved that Spain was able to sell its bonds. Again, great news that Spain was not forced to default, but it doesn’t change Spain’s fiscal situation. In fact, one can argue that by lending to Spain is simply enabling one is enabling their addiction.

And over to Greece:

The Greek government on Thursday submitted to parliament a budget plan that it said would allow to stick to its target of reducing its deficit to 7.4% of gross domestic product in 2011 despite a sharp upward revision to its 2009 and 2010 deficit levels. The European Union statistics agency Eurostat earlier this week upwardly revised Greece’s 2009 deficit by nearly two full percentage points to 15.4% of GDP. The government raised its estimate of the 2010 deficit to 9.4% of GDP. The finance ministry said it would further cut spending and boost revenues to meet the 2011 deficit target, taking measures that include a rise in the lower value-added tax rate to 13% from 11%, a levy on highly-profitable firms, cuts in government operating expenditures and a nominal pension freeze.

Greece was forced to take more austerity measures because the economy did worse than expected. I am not surprised by this because the austerity itself hurts the economy, like a medicine that tastes bad but is required to kill an infection. I expect more such bad news over the following years. Government forecasts of narrowing deficits in Europe’s at-risk countries and here too in the United State rely on solid economic growth over the next three to four years. Yet, this optimistic economic outlook will only reduce their deficits, or so they hope, to about 3 percent of GDP. Why aren’t they trying to eliminate their deficits entirely? Why are they relying on optimistic economic growth rates? Has government never heard of “expect the worst, hope for the best?” Instead, they hope for the best and trap themselves in a corner if that does not occur.

All this reminds me of a scene from Austin Powers. Doctor Evil finally captures his nemesis Austin Powers:

Dr. Evil: Scott, I want you to meet daddy’s nemesis, Austin Powers.

Scott Evil: What? Are you feeding him? Why don’t you just kill him?

Dr. Evil: I have an even better idea. I’m going to place him in an easily escapable situation involving an overly elaborate and exotic death.

Later in the scene:

Dr. Evil: Come, let’s return to dinner. Close the tank.

Scott Evil: Aren’t you going to watch them? They’ll get away!

Dr.Evil: No, we’ll leave them alone and not actually witness them dying, and we’ll just assume it all went to plan.

Scott Evil: I have a gun in my room. Give me five seconds, I’ll come back and blow their brains out.

Dr.Evil: No Scott. You just don’t get it, do you?

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.”

Our governmental leaders may not be evil like Dr. Evil, but they certainly are as naive in assuming their plans will work. And they think we are too naive to notice their plans’ inadequacies.

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Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues.

The debt crisis finally forced Ireland into making a decision. Ireland had to choose whether to let its banks fail or bail them out. Neither choice was pleasant and both would have had severe repercussions. Not surprising, Ireland took the easier way out. Marketwatch reports:

The cost of bailing out nationalized lender Anglo Irish Bank could soar to as much as 34.3 billion euros ($46.6 billion), the country’s central bank said Thursday, as it also unexpectedly told Allied Irish Banks to raise a further €3 billion.

The new figures, along with the money already injected into other banks and a possible further capital increase for Irish Nationwide Building Society, could see the total cost of the industry bailout hit as much as €50 billion.

In a highly-anticipated assessment of the cost of the financial crisis, the Central Bank of Ireland said it expects Anglo Irish to need €29.3 billion in total, but added the figure could rise by another €5 billion under a “stress scenario.”

The bank has already received €22.9 billion of that total after suffering massive losses as the country’s housing market and construction industry collapsed, dragging the whole economy down with it.

Here’s the key section for those watching the debt crisis and the increasing socialism and economic fascism occurring around the world:

The extra cash for the banking system means the deficit in 2010 will soar to around 32% of gross domestic product, compared to a previous estimate of 12%. The government will announce a new four-year budget plan in November to ensure it can meet this commitment.

A 32 percent deficit!!! That has to be some kind of record.

But what choice did Ireland have? It could have let the banks fail, which would have sent the country to economic turmoil. Instead, it chose to socialize the banks’ debts and is risking the creation of a huge moral hazard. Ireland chose to trade short-term chaos for long-term chaos.

In reality, Ireland is hoping for an economic recovery that will lift its economy and help it reduce its deficit and pay off some of the debt. But will that recovery come soon enough? Will it be strong enough? Will the Irish government and Irish banks suddenly develop the fiscal discipline that it has lacked so far?

I don’t blame Ireland for the choice it made. The problem was not the choice it had to make last week, it was the choices it and other governments, including the United States, have made over the previous decades of loose money, free spending, and debt accumulation.

But we must remember, this story is far from over. It has simply shifted from one of a gushing flesh wound to a slow and festering wound that has not yet been repaired. I repeat: The sovereign debt crisis is far from over. In fact, it is just beginning.