Wednesday, 14 April 2010 11:12

Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

ZeroHedge ran an interesting article yesterday, IMF Prepares For Global Cataclysm, Expands Backup Rescue Facility By Half A Trillion For "Contribution To Global Financial Stability", stating that the IMF will surcharge larger developed countries to raise an enormous amount of money for what apparently is preparation for a massive increase in default risk throughout the world. One of the countries in line for a significant charge is Ireland. This is interesting, for it plays directly into the Pan-European Sovereign Debt Crisis theory that we have been working for all of 2010. It is our belief that the very real threat of defaults will reverberate throughout a material portion of Europe. Even countries that are supposed to be on the right track, are in reality, skating the brink of insolvency. A forensic look of Ireland brings this thesis into focus.

We have performed a cursory overview of the risks inherent in Ireland though previous "preview" posts: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook. For the most part, Ireland has considerable embedded risk through both foreign claims on troubled countries (ex. PIIGS) and significant bank NPAs as a percent of its GDP.


Below is an excerpt from our recent forensic Ireland analysis. Subsccribers, please download the most recent report here:File Icon Ireland public finances projections_040710:

A deteriorating external environment and a correction in the domestic housing market made 2009 a difficult year for the Irish economy. Ireland's GDP growth registered a fall of 7.5% (the highest rate of decline since the country's records have been compiled) with a fiscal deficit of 11.7% of the GDP for 2009. Moreover, amidst an ailing banking system Ireland's economy is further expected to report a 1.3% decline in its GDP and a fiscal deficit of 11.6% of the GDP for 2010, as per the government estimates. Consequent to rising fiscal deficit, government's debt levels have also increased enormously from 24.8% of GDP in 2007 to 44.1% in 2008 and 64.5% in 2009. This rising debt is further fuelling an increase in fiscal deficit through an increase in interest expenditure. Thus, in its 2010 Budget, Ireland's government plans to secure structural improvements to the expenditure base, which is expected to result in a savings of €4 billion. However, considering the current economic slowdown and rising unemployment, deterioration in Ireland's tax revenues is expected to continue in 2010, which will negate the impact of expenditure savings, and result in further widening of the fiscal deficit to 12.6%, as per our estimates.

Moreover, as per the government's "Stability Programme Update - December 2009", the government plans to bring down its fiscal deficit from 11.7% in 2009 to 2.9% in 2014 (below the European Union target of 3%), primarily backed by a strong economic recovery starting 2011. However, we believe that this targeted reduction is based on overly optimistic growth targets, which are difficult to achieve.

The current government estimates fail to take into account additional funding that the government might have to infuse to stabilize Ireland's banking system, which will further increase the government's budget deficit.

  • According to Bloomberg (March 31), "Ireland's banks need $43 billion in new capital after "appalling" lending decisions left the country's financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system."
  • Ireland's banking system is critically dependent on the government for financing. At the end of January 2010, Central Bank of Ireland's lending to banks was €98 billion, which is equivalent of 60% of the country's 2009 annual GDP. Moreover, it represents 13% of total Eurosystem lending to banks compared with Ireland's 2% share of Eurozone GDP. Ireland's lending to banks is much higher compared to other troubled European countries - the Bank of Greece's lending to banks amounts to 20% of Greek GDP while numbers for Spain and Portugal are much lower.


In addition, Ireland (like practically every other country in the EU, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!) unrealistically optimistic in their GDP growth projections.


Moreover, similar concerns on GDP growth estimates were highlighted by the European Commission in its March 2010 report, “The budgetary outcomes could be worse than targeted in 2010 and considerably worse than targeted thereafter. The authorities should stand ready to take additional measures beyond the planned consolidation packages in case growth turned out to be lower than projected in the programme. The biggest problem is the Government's prediction that the economy will expand 3.3pc next year.” We have shown, beyond a shadow of a doubt, that the EU and the IMF have been dramatically optimistic concerning GDP growth and deficits regarding EU member countries ever since this "Asset Securitization Crisis" cum Pan-European Sovereign Debt Crisis (see the end of this post) began. Again, I reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

Consequently, for the aforementioned issues as well as a host of other reasons detailed in our subscriber forensic report (Ireland public finances projections Ireland public finances projections 2010-04-14 02:24:52 568.24 Kb), we believe that the government will over shoot its fiscal deficit target by 1% in 2010 and by much higher in 2011 and 2012, which in turn will result in higher debt and thus higher interest expenditure.

The Pan-European Sovereign Debt Crisis, to date (free to all):

1.     The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.

2.     What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect

3.     The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.

4.     The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

5.     The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

6.     The Beginning of the Endgame is Coming???

7.     I Think It's Confirmed, Greece Will Be the First Domino to Fall

8.     Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

9.     Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

10.   "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!

11.   Germany Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort of...

12.   The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino

13.   As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

14.   Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?

15.   Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

16.   Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

17.   Moody's Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight

Grecian News and its Relevance to My Analysis

A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis

Euro-Gossip Debunked, Courtesy of Trichet and the IMF!

Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

Related Subscription-only materials:

Last modified on Wednesday, 28 April 2010 15:53