As you can see, the UK has little choice but to come to the aid of Ireland, for in reality it is simply coming to its own aid. As a matter of fact, Ireland is so intertwined into the other members of the PIIGS members that its fall (or their fall) literally ignites the contagion effect that we warned is literally a foregone conclusion (Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? and Introducing The BoomBustBlog Sovereign Contagion Model).

The European mainstream media sees this obvious motivation on the part of the UK, as this article from the Financial Times demonstrates.

Unlike the UK, Sweden has little direct exposure to Ireland’s crippled financial sector but Mr Borg said it was in the country’s interest to prevent Irish problems spreading to other parts of the eurozone.

“For a country like Sweden, that is so open and dependent on Europe, it is impossible to sit on the sidelines when this kind of risk occurs.”

Mr Borg indicated that Sweden’s contribution to the Irish rescue would be on a similar scale to its participation in earlier bail-outs for Latvia and Iceland – implying a loan of SKr5bn-SKr10bn (€530m-€1.06bn).

Of course, the Swede’s generosity can also be explained by their exposure to their own banking system and that of other countries which Ireland would be forced to destablize, which would be roiled by the activity throughout Europe. If we bring back the original charts from the post Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe…

As you can see, Sweden is in the bad assets bank camp as well as Ireland, the UK and Spain. This actually puts them in a rather precarious predicament, but that predicament may not be apparent on its surface (outside of outsized NPAs as a percentage of GDP, of course). This is probably why the European MSM reports such benevolent actions as the FT did, and I repost just for the effect:

Unlike the UK, Sweden has little direct exposure to Ireland’s crippled financial sector but Mr Borg said it was in the country’s interest to prevent Irish problems spreading to other parts of the eurozone.

“For a country like Sweden, that is so open and dependent on Europe, it is impossible to sit on the sidelines when this kind of risk occurs.”

Mr Borg indicated that Sweden’s contribution to the Irish rescue would be on a similar scale to its participation in earlier bail-outs for Latvia and Iceland – implying a loan of SKr5bn-SKr10bn (€530m-€1.06bn).

Well, since it appears that the FT doesn't subscribe to BoomBustBlog (and they really should), let's break it down for them, shall we?

The focus is now on the contagion effect of Ireland, specifically (jumping on a monthly basis from Greece, Portugal, Spain, etc.). We have performed a lot of work in this area in the beginning of the year. Let’s borrow from our foreign claims model ( Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46) and Sovereign Contagion Model – Pro & Institutional) in order to see who may be effected from the rush to pull capital out of extant positions to fill the leveraged NPA holes left by the banks…

Ireland has the largest claims against the UK as a percentage of the its respective GDP, the largest in the world. In a rush to raise cash by selling assets, expect some fire sales in the UK. For those who may be wondering how this may affect the UK, see our premium subscription report on the UK’s public finances and prospects (recently updated to include the last round of government projections): UK Public Finances March 2010 2010-03-29 06:20:38 615.90 Kb. Of course, this is the reason why the UK rushed to Ireland's aid. This intercrossed aid will be prevalent over the next year with different sets of countries running to each other's side.

Ireland can also be expected to pull assets out of the ailing PIIGS group as well, since they are, bar none, the biggest lender to that group as a percentage of GDP. No wonder their banks are having problems. This is the main reason why the ECB has jumped into the fray. Their biggest exposure? Italy! See our premium analysis of Italy’s public finances and prospects: Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as their other major exposures: Spain public finances projections_0330102010-03-31 04:41:22 705.14 Kb and Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb.

Of course Spain, Italy and the other members of the PIIGS group are in no condition to rush to the aid of Ireland since they are most assuredly anticipating the need of aid being rushed to them in the near future - all public protestations to the contrary withstanding...

• Portugal Denies Report on Bailout, Eyes Budget
• Spanish Prime Minister 'Absolutely' Rules out Bailout

Of particular interest may be the prospects of the various banks caught in this interwoven web (premium subscription material). To date, these analyses have proven to be right on the money:

• Greek Banking Fundamental Tear Sheet
• Italian Banking Macro-Fundamental
  Discussion Note
• Spanish Banking Macro Discussion Note

Of course, none of this goes to explain why Sweden has been so generous with the offer of aid to Ireland. So, let's dig in to some of the innards of the BoomBustBlog foreign contagion model to see how successful it has been in its predictive powers...

Ireland also has the second highest claims (as percent of GDP) against the central and eastern European nations, who happen to be in a full blown depression. The withdrawal of assets, banking support and credit will exacerbate both Ireland’s problems and that of these nations - along with those sovereign states who have large claims into said states. Who is the largest claimant. You guessed it, SWEDEN! This also explains the Swedish loans to Latvia. The content from this post and the resultant models was originally published on (and around) Tuesday, March 30th, 2010 at 11:00 pm. Those who subscribed to BoomBustBlog had plenty of time to prepare.

See The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! to find that Ireland can exacerbate the problems of Austrian, Swedish and Belgian banks by pulling capital out of the CEE region, and yes, they are truly in a depression:

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

Click to Enlarge…

These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly “OVERBANKED” (a term that I have coined).

So as to quiet those pundits who feel I am being sensationalist, let’s take this step by step.

Depression (Wikipedia): In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle.

Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crisis and bank failures are also common elements of a depression.

There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.^[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).^[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

Before we go on, let’s graphically what a depression would look like in this modern day and age…

A depression is characterized by its length, and by abnormal increases in unemployment.

Price deflation, financial crisis and bank failures are also common elements of a depression. 

A depression is characterized by … shrinking output and investment … reduced amounts of trade and commerce.

In order for the CEE region to improve, it must avoid the shocks associated with financial and economic contagion from far flung regions such as Ireland. The reality of the matter is that it may not be that easy. BoomBustBlog premium subscribers may download the CEE bank exposure analysis to see which banks we feel have the highest exposure to such an incident, or more realistically, string of incidents:
Banks exposed to Central and Eastern Europe.

From an empirical perspective, Ireland is in a prime position to export contagion. Not only does it have the 2nd highest banking NPAs to GDP ratios in the developed world, it has one of the highest foreign claim to GDP rations as well. I have already demonstrated how these foreign claims just happen to be concentrated in today’s problem areas, but Ireland has spread this exposure far and wide as well. It is second only to Switzerland (due to Swiss private banking industry) in claims against developed countries. It is also second only to the Swiss in its total foreign claims as a % of GDP.

You can see some forced solidarity amongst the brethren. BoomBustBloggers will not be surprised to hear Denmark, Spain and Italy pop up in the news in the next quarter or two. Oh yeah, Spain is already in the news…

Over the weekend, I will attempt to release the Irish Haircut model for professional and institutional subscribers, which I can tell you now is looking uglier and uglier. I have warned of these impending haircuts as Wall Street's sell side assert that they are improbable. The reason why the haircuts are likely is because without them it will be virtually impossible for Ireland to bring its debt level to below 100% of GDP on a sustainable basis without them. Yes, the banking situation is actually that bad! It is really all about the math.

After the Irish haircut release, I will delve deeper into the contagion effect using our proprietary models, which have worked like a (not so Irish) charm thus far.

In the meantime, peruse the entire Pan-European Sovereign Debt Crisis history from the BoomBustBlog perspective. Any who have not followed me in the past can learn more about me here: Who is Reggie Middleton and What is BoomBustBlog?

For those who want to see how I have seen Ireland throughout the year...

Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???

Monday, November 22nd, 2010

If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today?

Wednesday, November 17th, 2010

As We Have Clearly Anticipated Since Early 2010, Ireland is About to Go

Monday, November 15th, 2010

Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Friday, October 15th, 2010

How Likely Is Greece to Default? It Would Be a Downright Miracle If They Didn’t! Numbers Don’t Lie, Although Some Sovereign Reporting Agencies Do! Let’s Walk Through the Math…

Thursday, October 7th, 2010

Many Are Still Underestimating the Damage That Can Be Done By Ireland’s Bank Troubles

Wednesday, September 8th, 2010

I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!

Friday, August 27th, 2010

Here’s More Proof of the Sheer Lunacy of the European Bank Stress Tests: Passed Banks are Already Trying to Collect on Defaulted Claims of European Nations

Tuesday, July 27th, 2010

European Bank Stress Test Joke: This Insolvent Euro-Bank and Group of Central Bankers Met at a Bar and…

Friday, July 23rd, 2010

Death by a Thousand Irish Cuts: The Poster Child of Austerity Measure Success Gets Downgraded After Several Devastating Expenditure Reductions That Really, Really Hurt the Irish People!

Monday, July 19th, 2010

Introducing the Not So Stylish Portuguese Haircut Analysis

Wednesday, June 2nd, 2010

With the Euro Disintegrating, You Can Calculate Your Haircuts Here

Monday, May 17th, 2010

BoomBustBlog Irish Research Becomes Reality

Wednesday, May 12th, 2010