The Celtic Tiger no more...
It seems the government majority in Ireland, Fianna Fail has finally failed with their slim majority and unpopular austerity measures. There's now open talk of Ireland in talks with the EU for a financial bailout around $60-$80 billion Euros. In Thursday night's recap here at WOWS, I wrote, the “final” government estimates were around $50 billion dollars to save the Irish banks alone and some doubted that was enough. For perspective that turned out to be about $50,000 Euros per Irish household.
Ireland reminds me very much of the US situation a few years ago, “buy now and pay later” with a total collapse in real estate of at least 50% -60% in value; the worst of any developed country. Much like in America, the banks initially came in with low-ball estimates of what they needed to survive. As you'll see in comments below, the nationalized Anglo-Irish Bank was said by the finance minister to need a bailout of $4 billion Euros and much like the US, that number began to rise and now sits at $30 Billion Euros.
In terms of deficit to GDP, including the bad loans at Irish banks their deficit is an astounding 32% of GDP. They hope to get that down to 3% by 2014. The problem facing the majority government, other then deep mistrust and a slim, unpopular, majority is that they need to make deep cuts and raise taxes. They are expected to suffer greatly in upcoming parliamentary elections, but the opposition government has no credibility either. As you'll see by some of the comments below from regular Irish people, it seems the Irish are hoping the EU or IMF will take over the economy; they have lost all faith in their government.
Investors fear that these budget cuts will worsen the Irish economy in the form of falling tax revenues and higher benefit payments. The yields on Irish Bonds are not sustainable or realistic, in other words the interest for borrowing using bonds is simply too high a price to pay for Ireland to sell debt.
The market's fear is that Ireland is just the start as the periphery of the EU once again meets that nasty word in the EU, “Contagion”. If the EU is not already experiencing a double dip recession, it seems very likely that they will be soon, again, that is if they are not already there. So watch the EURO, it's likely to trade down, the dollar up and we know this has a negative impact on everything from commodities, gold, silver and especially US equities. This is why I wrote the article about “Ireland vs. QE2”.
Here's a map of EU countries debt as a % of GDP.
The bottom line...
I'll be providing a more comprehensive outlook of the market Sunday, but for now; Friday we saw a big POMO operation in essence, due the exact opposite of what was expected. I've been saying to watch for any differences between this operation and the last, I was thinking "subtle", but there was nothing subtle about Friday's market performance.
One of three things is influencing the market in my mind at this time or maybe all 3. The first is that this was a one off deal and the market was simply too spooked by news coming out of the Eurozone regarding Ireland and "Contagion". The second would be that the words of Janet Yellin's Columbus Day speech were to be take seriously and they were not. She quotes a former Fed chairman, William McChesney Martin who was the longest serving Fed chairman ever from 1951 to 1970 and under 5 presidents, "the Fed’s job was to take away the punch bowl when everyone was having a good time." Thus my warning to not assume QE2 would be the same as past operations. The third and last reason is that the market makes the most money by making the most amount of people wrong at any one time. With everyone thinking that easy money was simply to front run the Fed' POMO days, investors and traders have been well trained or indoctrinated with a theory that had served them well, as such, humans have a very difficult time letting go of a notion that has made them money. This is part of the reason so many investors crash and burn after a bull market, they can't accept that a bear market has taken hold, they refuse to accept it until they finally capitulate.
There's always two sides of the story, and then the grayish truth in the middle. I always like to hear directly from the people of the country as they embody what everyday life is like, they are feet on the ground and usually closer to the truth of the matter.
What the Irish people are saying....
"This is really bad news. Why should the Irish taxpayer have to bail out reckless private banks to compensate bond holders who were paid to take risk? Ireland has been ruined by bad government and greed and this is the last straw." John O'Brien, Limerick
"Amazingly the government and the media elites here are still saying that we have to make massive cuts to sate the markets. Yet everyone outside of Ireland is saying that the cuts are going to worsen our economy. Frankly this government needs to be brought down by any means necessary to save the economy." Lorcan Myles, County Wexf
"Even the dogs on the street know the bailout is coming. The 7 December budget should be cancelled and the IMF should come to town ASAP. Irish people are keeping their heads in the sand a bit over this. Our finance minister is like Comical Ali saying everything is OK, while the markets laugh at Ireland. 20% of houses lie empty, while crime and drug abuse is sky high. The government will be voted out eventually, but the opposition is not credible. There are at least 10 years of pain to come." Gavin, Dublin
"Nobody here in Ireland is surprised by this. Our government party, Fianna Fail, has finally bust the country. We have to radically change things here to get rid of the cronyism and corruption. All this is the result of trying to save the banking and construction sectors. Bondholders will get away scot-free and the taxpayer will end up footing the bill. Meanwhile, current government ministers and TD's (MP's) will get to retire on nice pensions." Joseph, Skerries
"I hope this is true, and that it is an end to the lies the government has been telling the people here for the last two years. The bailout of the now nationalised Anglo-Irish bank was said to cost 4bn euros by the finance minister at first, and each few months the estimated costs have been rising and rising. It's now said to cost 30bn, and the other two main banks will probably cost a similar amount." Nick, Cork
