Wednesday, 30 March 2011 07:42

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

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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

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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.

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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 07:42

3 comments

  • Comment Link Reggie Middleton Thursday, 31 March 2011 10:10 posted by Reggie Middleton

    For those who don't believe haircuts are possible, remember Denmark already took the clippers out. Ireland looks like they may be bluffing, but suppose their bluff is called???
    http://www.bloomberg.com/news/2011-03-31/bondholder-haircut-from-ireland-may-shut-italy-spain-funding.html

    Ireland making good on its threat to impose losses on senior bank bondholders would precipitate a funding crisis for lenders across southern Europe, according to CreditSights Inc.

    “The fallout would be big and it would be bad,” said John Raymond, a London-based analyst at the independent research firm. “The senior unsecured market would shut down, at least for a while. Right now, the bigger and better Spanish and Italian banks can still access the market. That could end.”

    The Irish Central Bank will today publish the results of stress tests, requiring the banks to raise another 27.5 billion euros ($39 billion) of capital, according to the median estimate of 10 analysts surveyed by Bloomberg News. At the same time, the nation’s new government, led by Enda Kenny, is seeking to extract better terms on its bailout loan and secure medium-term funding from the European Central Bank to avoid a fire sale of lenders’ assets, threatening to burn bondholders.

    Irish banks had about 16.4 billion euros of senior unsecured, unguaranteed bonds and another 20.9 billion euros of government-guaranteed notes outstanding as of Feb. 18, according to the Central Bank of Ireland. While governments have typically stepped in to prop up distressed lenders before senior creditors lose money, that has been changing after the cost to taxpayers of the 2008 financial crisis.
    Bonds Decline

    Bonds of Anglo Irish Bank Corp., the lender that’s received more than 29 billion euros of government cash and is being wound down, declined. The company’s 400 million-pound ($645 million) floating-rate note due June 2012 was quoted down 3.5 pence in the pound at 58 pence, according to Jefferies International Ltd. prices on Bloomberg. Its 1.25 billion euros of floating-rate bonds maturing in January next year were down 2.5 cents at 60 cents in the euro, according to Jefferies.

    Senior bonds of Allied Irish Banks Plc (ALBK) and Bank of Ireland Plc, the two biggest lenders, were little changed ahead of a speech by Finance Minister Michael Noonan this afternoon.

    Eoin Dorgan, a spokesman for Noonan, declined to comment before the minister speaks.

    Pressure on bondholders to share the burden of banks’ losses is growing. In Denmark, the government inflicted so- called haircuts on senior creditors and depositors of regional lender Amagerbanken A/S, which failed after losing money on investments including real-estate loans. Moody’s Investors Service cut ratings of five Danish banks, including Danske Bank A/S, the country’s biggest, pushing up funding costs. Ireland’s government has similar powers to Denmark’s under the terms of its banking act.

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  • Comment Link Reggie Middleton Thursday, 31 March 2011 10:08 posted by Reggie Middleton

    I use publicly available info and my own analysts.

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  • Comment Link Nick Wednesday, 30 March 2011 15:31 posted by Nick

    Hi Reggie-

    I've enjoyed following along with your blog and information that it contains. I've found it to be the most direct and unbias from many sources. When determining your analysis, do you base this information off of public records that are posted then interpreted (by you) ?


    Some of the information you post in graphs seems to be information that you have taken then input into a spreadsheet or etc...I was just curious as to how you approach your research.


    I am relatively new to investing and finance is not my actual profession, but something that I enjoy as a hobby that I hope to continue to learn more about. Thanks again.

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