ireland, pig and the eurozone - here we are

8/8/2019 Ireland, PIG and the Eurozone - Here We Are

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Ireland, PIG and the Eurozone: Here we are

1. Bailout, bailout and bailout

A few numbers on loans provided by the IMF and the EU:

Greece: EUR 29 billion (+ EUR 9 billion to be paid in January)Ireland: EUR85 billion (will see during the WE what the final number is)

In January, Greecewill get EUR 9 billion for its third installment (I have no doubt that evenif they are dissent countries, arm-twisting will do the job), representinga total of EUR 38

billion i.e. 35% of the EUR 110 rescue package dedicated to Greece. Ireland will getEUR 85 billion i.e. 11% of the 750 billion EU and IMF backstop line.

The EU/IMF bailout will take total debt to GDP of Ireland to well in excess of 100%, and,realistically, it is most probable that the total burden of debt will be shared withcreditors.

The cost of a bailout on the Irish scale for Portugal would cost EUR 100 billion, based on a

package of 60% of GDP. According to Bloomberg, for Spain a bailout of 60% of GDP wouldcost EUR 632 billion. For Italy, the regions second-most indebted nation after Greece, thefigure would be EUR 820 billion, but I am not so worried about Italy, for reasons I willexplain later, I am more worried about France

The EUR 860 billion double barreled package looks rather thin when the uphilltask is contemplated. Even based on 30% of GDP, there is a shortfall, and dont forgetthat a number of banks would not be able to sustain the shock.

Wednesday in Paris, European Central Bank council memberAxel Weber saidgovernments can increase the size of the European Union-led bailout fund ifnecessaryto restore confidence in the euro. If not [the EUR 750 billion recue], it will haveto be increased. In a worst-case scenario, the fund would need an additional EUR 140billion, an amount that would not jeopardize the survival of the euro, Weber said Thursdayin Berlin. EUR 140 billion? Why not 250 or 300 or 100? And which worst-case scenario is hetalking about? And can governments that are already over-indebted increase theircommitment? I doubt it, and in any case not in the current format.


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2. The Eurozone is a (sad) farce

I note that all the Irish banks successfully passed the EU regulators tests in July;as discussed in this blog at the time, these tests had no credibilitybeing designed todefuse the risk of a EUR collapsing even faster at the beginning of the summer:fact havestayed, waffle has gone. Likewise, ongoing declaration from European leadershave no credibilityat all went they explain that the crisis is under control and that Spainwill not need a bailout: why Spain should be much different from Ireland when they also hada real estate bubble of the same magnitude (true there are difference regarding the solidity ofthe banking sector, but in essence the situation is similar)

On November 18, the Irish Finance Minister said, as reported by the FT:

...Brian Lenihan, Irelands finance minister, told Irish radio early on Wednesday the bankshad no funding difficulties.

On November 25, asked in an interview on Punto Radio in Madrid if Spain risked having toseek a rescue like Ireland or Greece, Salgado said absolutely not.

The euro faces speculative attacks. [Ah! The speculators are back, the usual scapegoat forpoliticians]I should warn those investors who are short-selling Spain that they are going to be wrongand will go against their own interests,

Zapatero said in an interview with Barcelona-based broadcaster RAC1 today.

Bloomberg continues reporting:

Merkel and Sarkozy are impressed by governments budget cutting plans, todaysstatement said.

Really? I am also impressed by their consistent denial of reality. Anyway,during afinancial crisis do not trust banks and politicians the least.

Lets carry on with some spice from Portugals Prime Minister latest declaration:

There are those who think that the best way to preserve the stability of the euro is to pushand force the countries that at this moment have been more under the floodlight to thataidBut that is not the vision or the political option of the countries that are involved


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Add Austria Finance Minister Josef Proell who mid-November said the EU was postponingthe payment to January to wait for a final estimate of Greece's fiscal numbers, since denied.However, the IMF added:

"So far the government has been able to offset these [revenue] shortfalls by underspending ata state level, that's why the overall targets are still being met. That's clearly not a sustainablestrategy going forwardThe sustainability of achievements to date will only be maintained ifthere is a very determined effort to move on structural reform".

Whatever, it shows that dissenting is getting more voiceful, after the Slovak parliament

refused to participate in the bailout for Greece on 11th of August.

This crisis is moving towards a fully blown political crisis.

This is a farce, a sad screen play written by incompetent and dogmatic politicians who aredriving Europe to the wall and its citizen to poverty. Nobody listened when I claimednumerous times to some European elites that the over-indebtedness of Europe will drive tolower standard of living unless tough and unpopular measures were implemented quickly:just watch Ireland, Greece, Spain, France et al. And this is only the beginning since countrieshave no longer money available to soften the effect of the crisis, to the contrary. The chartbelow gives you a flavor.


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3. The foundations of the Eurozone are flawed

As written several times, the one-fits-all does not work. A union that was meantto foster economic convergence has fueled divergence. I can only agree with DavidFuller:The Euro is based on the assumption that one monetary policy would beappropriate for 16 different fiscal policies. The peripheral Eurozone debt crisishighlighted how incorrect that hypothesis is and policy initiatives are currently

being put in place to improve fiscal cohesion. However, this does not heal thevery real debt problems that were allowed to develop over the last decade.

Without currency union, countries such as Ireland, Portugal, Greece, Spain or Italy wouldhave recourse to a significantly weaker currency to help defuse their debt problems andimprove competitiveness. On the other hand, today's Euro is probably considered by many atthe Bundesbank to be too weak to contain nascent inflationary pressures in Germany. This isanother contradiction that will eventually have to be dealt with.German, French and UK banks are most exposed to bank and sovereign debt in theperiphery. Greek and Portuguese sovereign debt, Irish banks and Spanish banks and Cajaspose a serious threat to already weakened financials in the rest of Europe. It is for this reasonthat governments have been forced to absorb private sector debts. The core Eurozone quiterightly expects those who borrowed to pay their debts. Bailouts on the periphery are seen aspreferable to defaults and bailouts in the core. It remains to be seen whether voters inhigh deficit countries will be willing to accept the amount of economic hardshiprequired to bring debt levels back into line with Eurozone requirements.

Over the medium-term, the big question is about competitiveness. The last decadesaw countries such as Ireland, Greece, Spain and Portugal substitute a focus on exports andbalanced budgets for spending and higher wages and inflation. The contraction in labour andother costs, if allowed to run its course, will improve competitiveness and set the stage for amedium-term recovery. Longer-term, it is to be hoped that voters display thefortitude and integrity necessary to make sure politicians with a focus on fiscalresponsibility are put in power, lest the boom to bust pattern of development prove

interminable. [emphasis mine]It is time for weak European countries to sit down with creditors and agree onan organized debt restructuring and an haircut; I have advocated this since thebeginning of this year as I do not see any other proper way out.


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4. Who is really at risk?

The data provided by the Bank for International Settlements provide some usefulinformation which I tabulated in the following table with some added flavor.

France, Germany and the UK are by far the most exposed to PIGS countries with EUR 1trillion. Portugal is rather over-exposed considering the size of its banking sector.One bigsurprise is the very low exposure of Italy, particularly when compared to France.

When the net number is calculated (even if netting does not really work this way, but at leastit provides a better idea of the real exposure and the arm twisting that can be used remember Iceland), Italy and the UK are in an enviable position, being net negative.

This is the first reason why I am more negative on France than Italy.

The next table, borrowed from Morgan Stanly, confirms that French banks are the mostexposed (besides the usual winner: RBS).


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The second reason is derived from the following table:


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Whilst France is less indebted than Italy, the sovereign debt growth is 4 times quickerin France than in Italy, and France will catch up Italy in absolute terms next year.

In addition, Italy has a trade balance in equilibrium whilst France is heavily indeficit, showing that Italy is more competitive, an important ingredient for a recovery andeventually the reduction of the sovereign debt.

A last word, this morning, I was hearing on the French radio that residential real estate inParis was up by 13% so far this yearwith the average square meter above EUR 7,000, , arecord high, thank to low interest rates and revolving credits again available: Central bankslow interest rate and liquidity creation policy is again fuelling asset bubbles (including the

mother of all bubbles: government debt).

Have a nice week-end!

Source:

FT: Dublin fails to dispel eurozone debt fearshttp://www.ft.com/cms/s/0/3595acd4-f7cb-11df-b770-00144feab49a.html#

Bloomberg:http://www.bloomberg.com/news/2010-11-26/spain-depends-on-budget-cuts-to-stem-contagion-by-luring-local-bond-buyers.html

Bloomberg: Portugal Says EU Can't Force Governments to Accept Rescue Aidhttp://www.bloomberg.com/news/2010-11-26/portugal-says-using-rescue-fund-can-t-be-imposed-jornal-reports.html

Bloomberg: Salgado Dismisses Bailout Risk as Borrowing Costs Surge to Euro-Era Recordhttp://www.bloomberg.com/news/2010-11-24/salgado-dismisses-bailout-risk-as-borrowing-costs-surge-to-euro-era-record.html

Moneynews: Greece Cleared to Get Next BailoutInstallmenthttp://www.moneynews.com/Economy/EU-Greece-Financial-

Crisis/2010/11/23/id/377895

BIS: Locational Banking Statisticshttp://www.bis.org/statistics/bankstats.htm

Eurostat: European Economic Forecast - spring 2010http://ec.europa.eu/economy_finance/eu/forecasts/2010_spring_forecast_en.htm

ireland, pig and the eurozone - here we are

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