Tag Archives: Ireland

There is something rotten in the state of Greece. Also in Ireland, Portugal, Spain, and Italy.

Europe is patting itself on the back as they supposedly work out a fix for Greece. Basically, Greece will get billions more Euros in exchange for spending cuts. As a result, Greek interest rates fell slightly, though they are still very very high.

Greece 10-year interest rate:

Greece 2-year interest rate:

Great job Greece and Europe! The 10-year interest rate in Greece is now only 16.81%. And the 2-year rate is down to 29.38%. A job well done, indeed!

But wait a second there Europe. Don’t drink your champagne just yet. What about the rest of Europe?

Ireland 10-year interest rate:

Portugal 10-year interest rate:

Spain 10-year interest rate:

Italy 10-year interest rate:

Very puzzling. Why are those interest rates rising to record highs if you solved the problem? I’m starting to think you don’t know what you’re doing.

Sovereign debt crisis hits record levels. Preview of United States?

A quick look at the charts shows the sovereign debt crisis has hit record levels along with European interest rates:

Greece 10-year yield:

Ireland 10-year yield:

Portugal 10-year yield:

With 10-year interest rates up at 14.9, 10.5, and 9.5 percent (and two-year rates even higher in many cases), it is hard to see how these countries can afford to pay these rates. If the United States were paying a 10% interest rate with debt about 90 percent of GDP, 9 percent of GDP and about a third of federal spending would go just to paying interest on the debt. In Greece, where debt is about 130 percent of GDP, the government is spending about 19.4 percent of GDP on interest. This is clearly unsustainable, which is why everybody expects these countries to “restructure” their debts, a euphemism for defaulting and paying back less than they owe. This expectation is a self-fulfilling prophecy because it pushes rates even higher.

With the situation in the United States only marginally better, how long before rates rise here and the U.S. defaults? Best to cut spending now, when we have a choice, than later when interest rates rise and the government has to divert spending to interest payments.

Sovereign debt crisis update: Yields hitting new highs in Greece, Ireland, Portugal, and Italy.

Interest rates are hitting their highest levels since the euro zone was created. Here are the five most “at-risk” countries, in order of chances of default.

Greece

 

Ireland

 

Portugal

 

Spain

 

Italy

Bull-market highs but still much to fear!

The Dow Industrial and S&P 500 hit new bull-market high yesterday. Clearly, the sovereign debt crisis in Europe is over and there is nothing worry about. Or is there?

Standard & Poor’s Ratings Services on Wednesday cut its long-term rating on Ireland to A-minus from A and lowered its short-term rating to A-2 from A-1. The agency said the ratings remain on CreditWatch with negative implications, where they were placed on Nov. 23. The move comes in the wake of S&P’s revised assessment of risks tied to the Irish banking industry. “Were the labor market to deteriorate further, a rise in the level of delinquencies in the domestic banks’ mortgage books could result in higher new capital requirements than we presently assume,” said S&P analyst Frank Gill. The emergence of a European framework for restructuring sovereign debt could trigger a reconsideration of Ireland’s creditworthiness, he said. The resolution of Ireland’s CreditWatch listing will likely leave the government’s ratings in an investment-grade category, Gill said. The CreditWatch placement is expected to be resolved by April, the agency said.

The recent modest improvement in the world economy has bought these “at-risk” countries some time to fix their books, but little progress has been made. Furthermore, those countries that have been applying austerity measures have not seen the economic gains others have. For example:

The UK economy shrank by a shock 0.5% in the last quarter of 2010 as Britain’s recovery from recession faltered.

Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit.

Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of “stagflation”.

The eagerly awaited GDP figures put the government’s austerity programme under fresh scrutiny, with Labour again arguing that cuts are being made too deeply, and too rapidly.

Now, economists and politicians are arguing the merits and demerits of austerity. They still have not realized they are damned if they do and damned if they don’t. If they continue to run big deficits, interest rates will rise and the country will be forced to default, send the country into economic and political chaos. If they impose austerity measure, it will certainly hurt the economy, but the country will survive.

Austerity is a painful, but necessary medicine. Politicians would rather take the placebo.

Government seizing retirement assets. Machiavelli says this is a big mistake.

The Christian Science Monitor reports that European nations begin seizing private pensions:

People’s retirement savings are a convenient source of revenue for governments that don’t want to reduce spending or make privatizations. As most pension schemes in Europe are organised by the state, European ministers of finance have a facilitated access to the savings accumulated there, and it is only logical that they try to get a hold of this money for their own ends. In recent weeks I have noted five such attempts: Three situations concern private personal savings; two others refer to national funds.

The five countries involved are Hungary, Bulgaria, Poland, Ireland, and France. Apparently, the leaders of these countries forgot to read their Machiavelli. In The Prince, the great political thinker wrote:

But above all a prince must abstain from the property of others; because men sooner forget the death of their father than the loss of their patrimony.

Europe burns! CDS imply 7 to 11 notch credit downgrades. Belgium and France to join the sovereign debt crisis?

First Greece. Then Ireland. Next may be Portugal and Spain. Some are talking about Italy as well. As the sovereign debt crisis spreads through Europe, it is working its way up the food chain. Now, some are talking about Belgium and France too:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.

Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.

Costs to insure French government debt trebled this year, reaching an all-time high of 105.5 today, according to data provider CMA. Credit default swaps tied to Czech securities were little changed at 90 basis points and Chilean swaps ended last week at 89.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

This is eerily familiar. The credit rating agencies gave overly optimistic ratings to collateralized mortgage obligations (portfolios of mortgages) and were then slow to downgrade them. Now, they are making the same mistake on an international level.

What do you think would happen if the credit rating agencies recognized reality and downgraded these countries to where the market believes they should be? The markets would crash. That’s why they are avoiding the painful truth.

However, the credit rating agencies and governments can only deny reality for so long. Eventually, they will have to recognize the truth. The market will force the credit rating agencies to downgrade sovereign debt whether they want to or not. The market will force countries to restructure their welfare state systems or force them into bankruptcy.

I pray that this is done sooner rather than later. It will be painful. Extremely painful. There will be riots in the street as we are already seeing. But it is better to bear the cost now when the situation is still manageable, just barely so, than when all chances of saving western civilization are gone and nations descend into anarchy and tyranny.

Irish Credit Rating Crashes

Just yesterday, somebody told me the Irish credit problem has been solved. With the market indexes trading at or near two-year highs, that would seem to be the case.

But then we get news that Moody’s cuts Irish credit rating by five notches:

Moody’s Investors Service said Friday it has cut its rating on Irish government bonds by five notches to Baa1 from Aa2. The credit rating agency said the outlook for the rating is negative. The downgrade comes after the agency said in November that the most likely outcome for Ireland’s credit rating was a multi-notch downgrade that would leave it within the investment-grade category. “Ireland’s sovereign creditworthiness has suffered from the repeated crystallization of bank related contingent liabilities on the government’s balance sheet,” said Dietmar Hornung, lead analyst for Ireland. As well as the cost of supporting the banking sector, Moody’s said the increased uncertainty over the country’s economic outlook and the decline in the Irish government’s financial strength contributed to the downgrade.

OUCH! Ireland’s credit rating drops 5 notches and the outlook is still negative, which means Moody’s could downgrade it even further.

The sovereign debt crisis is far from over.

Sovereign debt crisis worsening. Governments paralyzed. Solution too hard to swallow.

Despite all the governments’ efforts, or maybe because of them, the sovereign debt crisis is only getting worse. Marketwatch reports:

The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults.

The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%.

The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points.

“Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.”

The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

How long before Europe realizes that bailing out the banks, announcing plans to cut their deficits to 3 percent in four years time, and getting bailouts from EU and IMF will not work? The sovereign debt crisis will continue until these European countries announce balanced budgets effective immediately (2011) or, at the worst case, next year (2012) and that they will never again bail out the banks. They also have to leave the Euro, which is partly responsible for the mess to start with.

Unfortunately, I doubt the European governments will implement these measures. And if they were to do so, the people would be in full revolution. The only easy way out I see is if the economy suddenly stages a huge recovery. Barring that, it looks like things will be getting worse, possibly much worse.

Ireland officially gets its bailout, market gods are displeased.

Ireland finally got its bailout on Sunday and the market is less than impressed. In fact, one could say it is outright disappointed. Marketwatch reports:

The cost of insuring Spanish and Portuguese government debt rose Monday as spreads on peripheral euro-zone sovereign credit default swaps, or CDS, widened to record levels in the wake of a lackluster Italian bond auction, analysts said. The five-year Spanish CDS spread widened by 25 basis points to 350 basis points, according to data provider Markit. That means it would now cost $350,000 a year to insure $10 million of Spanish debt against default, up from $325,000 on Friday. The Portuguese spread widened to 545 basis points from 502, Markit said, while the Italian spread widened to 231 basis points from 215. “Spain and Portugal are now at record wides, suggesting that contagion fears haven’t been assuaged by Ireland’s bailout,” said Gavan Nolan, vice president for credit research at Markit.

When Greece got its bailout, spreads narrowed and the market was happy. But then credit in Europe headed down and spreads hit new highs. Traders are acting smarter this time. If the bailout didn’t work for Greece, they are not going to assume that it will work for Ireland… or Portugal… or Spain.

And the sovereign debt crisis continues.

Ireland was no bastion of capitalism. Here’s what went wrong!

With Ireland sinking under a huge pile of debt, the socialist liberal left points out that Ireland, with its low taxes and supposedly unregulated banking system, is suffering from the excesses of capitalism. Liberals never waste an opportunity to convince you with pleasant-sounding lies.

I’ll give you a couple of examples of where the Irish and European governments, not capitalism, went wrong.

Minimum Wage

AP reports:

Ireland’s 140-page National Recovery Plan proposes to introduce property and water taxes, raise the sales tax from its current rate of 21 percent to 22 percent in 2013 and to 23 percent in 2014, and cut the minimum wage by euro1 to euro7.65 ($10.20).

So Ireland’s minimum wage was 8.65 Euros or $11.46. The minimum wage in the United States is just $7.25 with some states and cities imposing higher rates (the state of Washington has a $8.55 minimum wage, San Francisco is $9.79, and Santa Fe is $9.85) all of which are much lower than Ireland old $11.46 rate and its new $10.20 rate. With Purchasing Power nearly the same in Ireland as in the United States, the minimum wage there was 58 percent higher than in the US.

While everybody talks about Ireland’s extremely low corporate tax rate, much of that benefit was offset by this too high minimum wage. And the minimum wage did not just affect those at the low end of the wage scale. A minimum wage raises costs throughout the economy forcing employees to demand higher wages even at the higher end of the wage scale.

Liberals may argue that capitalism doomed Ireland to failure, but these high minimum wages are most certainly anti-capitalist.

Low interest rates

For years, the Irish economy was hot, earning the nickname Celtic Tiger. Wikipedia explains:

From 1995 to 2000 GNP rate growth ranged between 6 and 11% through 2001 and early 2002 to 2%. The rate then rose back to an average of about 5%. During that period the Irish GDP rose dramatically to equal then eventually surpass that of all but one state in Western Europe.

This economic growth led to speculative excess which led to inflation:

Inflation brushed 5% per annum towards the end of the ‘Tiger’ period, pushing Irish prices up to those of Nordic Europe, even though wage rates are roughly the same as in the UK.

Also:

Rising wages, inflation and excessive public spending led to a loss of competitiveness in the Irish economy. Irish wages are now substantially above the EU average, particularly in the Dublin region. These pressures primarily affect unskilled, semi-skilled, and manufacturing jobs. Outsourcing of professional jobs is also increasing, with Poland in 2008 gaining several hundred former Irish jobs from the accountancy division of Philips and Dell in January 2009 announced the transfer from Ireland, of 1700 manufacturing jobs, to Poland.

Much of this inflation and rising wages can be attributed to the high minimum wage discussed above. But where was the central bank to deal with this rising inflation?

When Ireland joined the Euro, it lost control of its monetary policy. Normally, a central bank would raise rates and decrease the money supply to fight inflation. But while Ireland was growing quickly, the rest of Europe struggled through most of the 1990s and 2000s with low growth rates and high unemployment. Thus, the European Central Bank (ECB) kept rates low in an attempt to promote growth. As a result, through no choice of its own, Ireland had a loose monetary policy at the exact time it needed a monetary tightening. Thus, Ireland’s economy, most notably its property market and banking system, experienced a huge bubble. We are now suffering the consequence of those previous excesses.

In a true free-market capitalist system, interest rates would have risen through investors’ demand and this would have slowed or stopped the Irish bubble. But the artificial government Euro system prevented this important market process from occurring.

Conclusion

Yes, Ireland was more capitalist than most. But errors like the above led the country to excess and then collapse.