Wednesday, 30 March 2011 11:42

It Looks Like Ireland Is About To Get Those Leprechaun Clippers Ready - Haircuts, Here We Come!

Ireland has been one of  the weakest points in the EU from a financial standpoint, and is well positioned to quickly and efficiently transmit contagion to its economic and geographic neighbors. I have been warning about Ireland for well over a year now and things are unraveling pretty much as I anticipated. Our modeling and research should have left all interested parties quite prepared. Going through the BoomBustBlog warnings in chronological order as excerpted from the Pan-European Sovereign Debt Crisis series...

  1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  2. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  3. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  4. Beware of the Potential Irish Ponzi Scheme!
  5. Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor!

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

[youtube kME6xuf_RKg]

As excerpted from Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:

Now, notice how prescient my post of several months ago was, The Coming Pan-European Sovereign Debt Crisis:

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns


This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.


Notice how Ireland is the nation with the second highest NPA to GDP ratio. This was definitely not hard to see coming. In addition, Ireland has significant foreign claims - both against it and against other countries, many of whom are embattled in their own sovereign crisis. This portends the massive exporting and importing of financial contagion. Reference my earlier post, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? wherein I demonstrate that Ireland's banking woes can easily reverberate throughout the rest of Europe, affecting nations that many pundits never bothered to consider. Irish banks will be selling off assets, issuing assets and bonds in an attempt to raise capital just as the Irish government (contrary to their proclamations) will probably be issuing debt to recapitalize certain banks. This comes at a time when the Eurozone capital markets will be quite crowded.

To make a long story short, Ireland is basically all bank, no physical economy. That leveraged facade of progress was bound to come crashing down, and it currently is. The scary part is that Ireland is in no way alone in this predicament. Now, with that out of the way, let's see what's happening in today's news...

Irish Stress Tests May Leave Government in Control of Banks

The Irish government may be forced to take controlling stakes in Bank of Ireland Plc and Irish Life & Permanent Plc, the last of the country’s biggest lenders to escape state control, following tomorrow’s stress tests.

“They’ve clearly got most to lose,” said Oliver Gilvarry, head of research at Dublin-based Dolmen Securities, who has “sell” rating on both banks. “It’s difficult to see how either will end up less than 50 percent owned by taxpayers.”

The Irish Central Bank will at 4:30 p.m. tomorrow publish its third round of stress tests. The results will determine if the two can avoid joining four of the country’s biggest banks in majority state ownership after they all logged record losses as the country’s decade-long real estate bubble burst.

Ireland may require banks to raise an additional 27.5 billion euros ($39 billion) of capital, according to the median estimate of 10 analysts surveyed by Bloomberg News. The government has pledged to provide that money if banks fail to raise it themselves from a 35 billion-euro fund set up under the country’s international bailout in November. Shares of the two lenders have declined by more than 50 percent since that rescue.

Also, Irish Bank Suspends Shares in Nationalization Fears. Boys and girls, this potential nationalization of the remaining banks essentially means that Ireland will be taking the clipper to bondholders. The new government made it very clear in their campaign and actually published their intentions after being elected...

As excerpted from "":

For the hopium smoking, ratings agency following crowd who still believe such an event may not take place, reference the new government over in Ireland. Our friends over in Ireland have issued a new roadmap for the country which is not very different from what they can campaigned on when they were running from office. It's good to know politicians can keep their word for more than a few weeks... Check this out though... "Towards Recovery: Programme for a National Government 2011-2016 - as excerpted and annotated (click, then click the image that opens up in new page again to enlarge):

You better get those clippers ready... The new government is gonna' get to cuttin'! Of course, we anticipated this about this time last year as well - a little more than a year ahead of the ratings agencies - remember that timing thing! Subscribers should see File Icon Ireland public finances projections.

We have prepared BoomBustBlog subscribers for said haircuts nearly a year ago. I suggest all interest parties delve into the models again. Professional/institutional subscribers can go through the multitude of haircut scenarios and the economic losses to be taken under each scenario by the respective bondholders here: Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts.

We all (or at least all who read BoomBustBlog) saw this as a forgone conclusion. The key question is "What happens next"? My  chips are put on the inevitable square. Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.

All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”

Last modified on Wednesday, 30 March 2011 11:42