The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[muppet]

http://www.bloomberg.com/news/2010-09-29/irish-banks-hooked-on-ecb-cure-as-lenihan-s-financing-fails-euro-credit.html

The Dail are currently debating whether or not to extend the guarantee. This is being done against a backdrop of not knowing how much Anglo or INBS will cost us. Our parliament is being asked to re-write the same blank cheque that has almost bankrupted us. Meanwhile all the gamblers will get their money back.

The man in the concrete truck might be right.

Edit: Ireland to pump 5.0 bln into Anglo

[Zapatista]

Edit: Ireland to pump 5.0 bln into Anglo

Will a total of 30bn be enough?

[Bogball XV]

Will a total of 30bn be enough?

Who knows?  I'd very much doubt it, i think that's just the losses realised on the transfers to NAMA, then we'll have to see how much is lost by NAMA (or of course a profit could be realised).

As for AIB being nationalised, this could have been done lock stock and barrel in Jan/Feb 2009 when the entire stock of the bank would have cost about 300M, but we didn't want to scare the markets.   Now, I know that significant capital would still have to have been pumped in, but it would have been cheaper, NAMA would not have been needed and the state would benefit from for example AIB's profits for the past year, their profits from the sale of their polish and US assets etc etc etc.

The really scary thing about this morning's announcement was that bond auctions have been cancelled in the hope that things settle down by Jan/Feb.  Imo that increases the likelihood that the IMF will have to be called upon for a bailout.  The next budget is likely to be savage, and it has to be at this stage, I don't see any other way.

[Declan]

Well folks the big day arrived:

Some interesting facts:
1.The guarantee of existing bank debt prevented the Government restructuring Anglo Irish in the final quarter of 2008 before it acquired the bank.
Contrast that with what was done with the floundering General Motors in the US.
The Obama auto industry taskforce pushed GM into bankruptcy in June 2009, wiping out common stockholders and squeezing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM. Bondholders also got warrants to buy more stock in a New GM if its future value exceeds $15bn, and again if it exceeds $30bn.That old bond debt, along with old lawsuits, contracts and other trash, was dumped into Old GM, or Motors Liquidation as it is called.
All this happened in "the land of the free."

2.Irish Bank Rescue: Anglo Irish cost to rise to at least €29.3bn; AIB requires €3bn in additional capital; Irish Nationwide to receive €2.7bn; Ireland's Debt/GDP ratio to rise to 98.6% in 2010.

3. To date AIB has transferred just over €6bn. of loan assets to NAMA at an aggregate discount of 45%.  NAMA has reviewed the quality of loans still to transfer from AIB and has estimated discount to be applied to the remaining €13.5bn. of  loans at 60%. 
A major factor in this increased discount for AIB has been the predominance of land bank loans, many of which were speculative investments that now have little value.
In view of the increased NAMA discount the Central Bank has concluded that an additional amount of €3bn will be required. This brings the new total capital requirement for AIB, after deducting the capital generated on the sale of its Polish subsidiary, to €7.9bn.

Frightening stuff

[Bogball XV]

Well folks the big day arrived:

Some interesting facts:
1.The guarantee of existing bank debt prevented the Government restructuring Anglo Irish in the final quarter of 2008 before it acquired the bank.
Contrast that with what was done with the floundering General Motors in the US.
The Obama auto industry taskforce pushed GM into bankruptcy in June 2009, wiping out common stockholders and squeezing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM. Bondholders also got warrants to buy more stock in a New GM if its future value exceeds $15bn, and again if it exceeds $30bn.That old bond debt, along with old lawsuits, contracts and other trash, was dumped into Old GM, or Motors Liquidation as it is called.
All this happened in "the land of the free."

What really galls me is that Lenihan etc regularly come out and defend the guarantee (and in fact, fg also supported it back in 2008 (ah yes, the financial genius of Richard Bruton).  At this stage, would they at least admit that it was a catastrophically bad decision.  I rarely listen to any of the commentary any more as the arrogance angers me

[seafoid]

AIB could deteriorate even further. At the moment BoI is supposedly safe but how long will that last?   This could go on for ages.

[Declan]

but how long will that last?   This could go on for ages.

ANALYSIS: The Anglo base case assumes a NAMA haircut of 67% for remaining tranches (compares with an average 58% in tranches 1 and 2). The stress calculation increases this to 70%. In relation to stress-testing non-NAMA loans, these have been reviewed from an individual loan and a portfolio perspective. The former assumes a 70% peak to trough decline in Irish commercial property prices, with prices only recovering to 57% of their peak level out to 2020. The macro approach assumes a 65% fall with no recovery out to 2020.
So what are the immediate implications for the Irish sovereign? The final estimate of the cost is huge. We estimate that the total gross cost will be €50bn, not excluding the purchase of NAMA loans (which will be c.€40bn). Assuming the costs of Anglo and Irish Nationwide are included in the deficit this year, the deficit will now increase to 32% of GDP, before falling to less than 10% in 2011. This will result in the general government debt level rising to c.100% of GDP by the end of the year and 115% by 2014.

[seafoid]

I'd like to see the assumptions backing that 115% by 2014. If there are unrealistic growth assumptions built in there and the next 4 years of cuts further damage the economy as they are likely to do, reducing GDP and the denominator, the 115% of GDP could suddenly get very close to the danger zone where further debt is impossible to sell . 

[Declan]

If there are unrealistic growth assumptions built in there

But sure don't we know that all the growth assumptions and other figures given by economic analysts have been right on the money in the past   

[Bogball XV]

I'd like to see the assumptions backing that 115% by 2014. If there are unrealistic growth assumptions built in there and the next 4 years of cuts further damage the economy as they are likely to do, reducing GDP and the denominator, the 115% of GDP could suddenly get very close to the danger zone where further debt is impossible to sell .

I'm not sure of the assumptins either, but we do know they've been hopelessly optimistic about them all the time.  I presume that now that there are some economists working in the department they'll realise that cuts do have a much greater impact than just the initial cut itself.
Personally I don't see any way around making savage cuts, but I'm not the most innovative or creative - what do you or any other posters think?  Is there any other way?

[Rois]

Interesting developments in terms of my workload anyway - my Dublin secondment will be shorter than I'd imagined as they've raised the exposure floor from €5m to €20m.

[FermGael]

Bogball Would a squeeze on the Anglo bondholders not have been a more prudent approach from the start or even now??

Why is Leinhan seemingly so afraid of them??

I would say these latest figures mean the Croke Park deal is out the window

[seafoid]

Ferm Gael

Lenihan is taking orders from Brussels. Senior bondholders are untouchable.

This was on the guardian website

http://www.guardian.co.uk/business/2010/sep/30/anglo-irish-bank-what-the-experts-say

Such sad news about Allied Irish; having sold its Polish operation for €2.5bn (£2.14bn) and its London operation for €1.1bn this former pillar of Irish financial society finds itself short of working capital. The original estimate for fresh capital was €7.4bn, so the government has had to stump up €3bn. Irish bonds have now been downgraded to CCC status. Irish 10-year bonds were trading last night 456 basis points above bunds which yield 2.2%. This cost of borrowing for Ireland beggars belief. You have to wonder how long Fianna Fáil can last. They've held off having three by-elections for the best part of the year. There is little doubt that had these by-elections been held the government would have fallen. European and world leaders hold Messrs Cowan and Lenihan in significantly higher regard compared to the electorate. Voters, not surprisingly, are incandescent with rage.
How Ireland will manage to dig itself out of the manure will remain the eighth wonder of the world. Ireland needs growth. Where does it come from? The strength of the euro stands against it. Though favourable taxation towards international corporations to manufacture and export goods from Ireland is a huge help and exports are going well, Ireland remains a small country of 3.5 million people and clearly this isn't enough to regenerate the economy. Roughly 20% of the workforce is employed in the public sector. Services of this sector are declining by the day. How much longer can they be expected to take cuts in salary and reductions in pensions?

[Bogball XV]

Bogball Would a squeeze on the Anglo bondholders not have been a more prudent approach from the start or even now??

Why is Leinhan seemingly so afraid of them??

I would say these latest figures mean the Croke Park deal is out the window

From the start yes, but once the guarantee was given that couldn't be done with any conviction.  We should never have had any exposure to the anglo bondholders, but now, if we try and put a squeeze on them in any way they can easily say, grand, you're defaulting on your guarantee and that'd be it - we'd be well and truly fcuked, not to mention that we'd eventually have to pay them as we have already promised to do so, and whether that be after a lengthy legal battle or before means nowt.

That aside, the anglo bail out money is significant, but not our biggest problem.  Our problem is that we are running a 25Bn odd annual deficit on our current spending v current income.  Bear in mind that annual revenue is circa 33Bn at present.  This was supposed to be almost balanced by 2013, now we hear them say 2014, but as seafoid pointed out, where the fcuk are they getting their figures from?

Basically each € taken out of the economy in public spending has a massive impact on growth, effectively destimulising the economy further and creating more unemployment etc.  This of course impacts on expenditure in that more people require welfare, medical cards etc.  It also impacts revenue in that fewer people are in employment with resulting drops in prsi/paye/vat etc.  That's a bit simplistic but presumably they've economists on big computers making up huge models of the impact of each € cut in spending.

The problem is that if we don't cut spending we have to borrow more to fund our deficit, but who will lend us more money?  We're not exactly an attractive prospect at present, what we have been doing recently is going to the local lone sharks (no offence LS if you're reading this) who're happy to lend as they get a decent rate of interest, and they reckon that the ECB will come good if we really need them (think rich parents willing to bail the prodigal son out before his fingers are cut off).

[Declan]

Latest research note from Danske bank

Ireland's central bank has put a EUR29.3bn (18% of GDP) price on bailing out Anglo Irish Bank and EUR34bn (21% of GDP) under a worst-case scenario.

As a result of the large bank restructuring costs, the government deficit is set to reach 32% of GDP in 2010.
We project the debt will peak at c120% of GDP in 2014 if everything goes well. In an alternative 'no growth' scenario, debt could peak at 147% of GDP in 2016.
There are negative risks to these estimates as no bank restructuring costs are accounted for beyond 2010.
Ireland is fully funded until late June 2011 and has decided not to proceed with the bond auctions scheduled for October and November.