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

[muppet]

http://www.rgemonitor.com/globalmacro-monitor/255556/the_g7_needs_to_act_this_weekend_on_ireland

Are we about to hear something drastic in Ireland? 

[bcarrier]

I presume you are refering to rising cost of insuring govt debt.

The whole anglo irish scandal (in particular latest revelation of £300m in non recourse loans)  reminds me of the guinness share support scandal of late 80s .

http://news.bbc.co.uk/1/hi/business/34910.stm

[Hardy]

I don't imagine anyone really thought we'd heard all the scams going on in Anglo. Well, you were right, there's more ... and probably more after that too. This one's a beauty. They get 10 "well-connected businessmen" to take out loans from Anglo to buy shares in Anglo, with property as collateral. Then when it becomes obvious that the shares are worthless, the change the collateral to the now worthless shares, so that the property is safe and the lads just give back the shares in lieu of the 30 million each!

A key question is the bit in bold - did the government collude in this defrauding of the taxpayer to the tune of €300 million?

(Health warning - the source is Sunday Independent . This paper has published lies as front page news before, so we'll wait and see if reputable sources corroborate.)


Anglo shares boosted by €300m loan to 10 tycoons
Taxpayers left with bill as investigators probe terms of loans to well-connected businessmen

Sunday February 15 2009

ANGLO Irish Bank loaned a total of €300m to 10 wealthy individuals last July in a controversial arrangement designed to support the bank's share price, the Sunday Independent can reveal.

In what is feared in Government circles to be a potential new banking scandal, which may have political implications, the 10 millionaire business people, including several household names, each borrowed €30m from Anglo Irish to buy shares in the bank.

The Sunday Independent understands that the regulatory authorities in Dublin are currently investigating whether Anglo Irish subsequently changed the original non-recourse loan terms by substituting as collateral the then plummeting, now virtually worthless, shares purchased by the loans.

The taxpayer is currently exposed to the €300m debt at the now nationalised bank.

Details of the controversial arrangement are understood to be contained in an unpublished Price Waterhouse Cooper report provided to the Government in October.

It is understood to be also referred to in a draft copy of Anglo Irish Bank's annual report which has been received by the Department of Finance. That document is to be published on Friday.

It is understood that the loans were initially offered and accepted on what, in banking circles, is known as "non-recourse" terms.

A non-recourse loan is secured by a pledge of collateral — typically property — for which the borrower is not personally liable. If the borrower defaults at a later date, the lender can seize the collateral — but the lender's recovery is limited to the then value of that collateral.

The purpose of nonrecourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.

The bank's 10 high-profile clients used the €300m to purchase shares in Anglo Irish Bank in an ultimately unsuccessful attempt to support the bank's share price.

It is understood that when the share price continued to fall the borrowers negotiated a new arrangement with Anglo Irish which had the effect of substituting as collateral the Anglo Irish bank shares purchased using the loans from the bank. Those shares are now virtually worthless.

The Government is expected to come under pressure to reveal its knowledge of the arrangement.

Specifically, the Opposition will want to know if the Government had knowledge before it introduced its bank guarantee scheme last September. The scheme guaranteed all debts and deposits in Irish banks.

The Opposition parties will also want to know if the Government was aware of the transactions before Anglo Irish Bank was nationalised in January.

In relation to this arrangement alone, the introduction of the guarantee scheme and the nationalisation of Anglo Irish Bank both separately exposed the taxpayer to potential losses of €300m.

The Sunday Independent understands that the 10 clients are well-connected business figures.

The Government will argue that the guarantee scheme and subsequent nationalisation of Anglo Irish Bank were in the national interest.

It is understood that Anglo Irish entered into the arrangement with the 10 clients at a time when billionaire business man Sean Quinn and his family were in the process of converting their interests in the bank from Contracts for Difference (CFDs) to ordinary shares, which represented close to 15 per cent of the bank.

CFDs are high-risk investment products where investors can bet on the future direction of a stock without having to actually buy the shares.

At this time, in the middle of 2008, the Quinn family said they had decided to convert their holdings in Anglo Irish to reflect their long-term commitment to the investment.

"The family regards these shareholdings in Anglo Irish Bank as long-term holdings with significant opportunity for capital growth over such a period," Mr Quinn said.

At the start of July 2008, Anglo's share price had fallen to €4.08. With 769m shares in issue, that still valued Anglo at €3.13bn. In a matter of weeks, by July 23, the shares rose to €6.73 each. However, they soon afterwards began to fall dramatically.

Mr Quinn has confirmed that his family has sustained losses in excess of €1bn on its investments in Anglo Irish.

But he has vigorously denied any impropriety in relation to his share dealings.

[pintsofguinness]

It's getting ridiculous.

[Main Street]

This thread should called the Big Failout.


If you want to understand a bit of how the money supply and inflation works in a country then you have to get access to M1 M2 and M3 figures that a country's Central Bank publishes in its quarterly/annual accounts.
M1 is cash  real money in circulation
m2 is cash deposits  
m3 is what the CB allows for loans/investments  for private/ business    credit.
The Fed actually hasn't published M3 figures since mid 2005. The crucial M3 figures are a Fed secret.
What's happening in the US is that the Fed have cut down on giving Banks  M3 money supply to loan out in exchange for loan collateral from the client.
ie. house value, the business plan  or the investor/gambler.
The CB/Fed have no confidence in the value of the collateral or the clients capacity to repay.
The Banks can't loan out, therefore the USD is in severe short supply, eg business/individual have to sell assets to raise cash.
They are not getting it from the Bank.
That is why the USD has not collapsed in value.

Obama's solution is to start the money supply. The Fed will print all that money and make it available. The money will be added to the money supply but there are no assets being offered as collateral.
It is the equivalent of Gov borrowing.
Loss in value to the USD is inevitable.
This Obama plan will not revitalse the US economy but keep it mainlined for a short period.

[Declan]

Anglo was the developers bank ergo it was the FF bank - It's a given that that knew about this but they'll bluster and waffle and no one will hold them to account. If people care about this country and our futures they will take to the streets next Sat - don't care what the initial "cause" was unless the people show something these bastards will get way scottfree. 

[bcarrier]

Fritz to the rescue...

http://www.bloomberg.com/apps/news?pid=email_en&refer=home&sid=aGwRmgq6Tz7w

[muppet]

The Chairman of Irish Nationwide Michael Walsh has just resigned. there wasn't even a public witch hunt for him, yet.

Falling like flies now, except for the Minister of course.

Well.....if the Cap Fitz, eh Brian?

(BCarrier could legitimately ask if the cap Fritz?)

Where will this end? Total nationalisation of all the banks? Collapse of the ISEQ? Collapse of the .........?

Edited to add link: Irish Nationwide Chairman Resigns

[muppet]

Read the link I posted a couple of days ago and read BCarrier's link above.

It seems reasonable to assume that our banking sector is on it's last legs and we are possibly talking weeks rather than months.

The question is what is going to happen next? Anyone have any ideas?


Meanwhile the staff biggest union at IL&P has called for the resignation of the Chairperson
http://www.independent.ie/breaking-news/national-news/business/unite-says-staff-have-no-confidence-in-ilp-chair-1642619.html

I personally think the union should be positioning itself to hang on for dear life.

[armaghniac]

from Irish Times.
Bank guarantee likely to deal a crippling blow to the economy

ANALYSIS: Government borrowing is not an immediate problem, but the extent of banks' bad debts may prove catastrophic, writes MORGAN KELLY

BETWEEN COLLAPSING house prices, bankrupt banks and spiralling unemployment, you might be forgiven for thinking that fate has already dealt Ireland every misfortune in its hand. However, there may be one more unpleasant surprise in store for us, the prospect that international investors unexpectedly stop lending to the Government.

Economists call this a "sudden stop". The original sudden stop occurred in 1998 when a default by Russia panicked lenders away from Latin America and plunged their economies into prolonged crisis.

The consensus among Irish economists is that government borrowing is not an immediate problem. Ireland has a low level of public debt by international standards, and even a few years of heavy borrowing will still leave it below Greek and Italian levels.

To understand why this view is too complacent, imagine that you are a bank manager and somebody that we will call Brian (not his real name) comes in looking for a loan.

Brian's income is €30,000 and he would like to borrow €20,000 to cover living expenses. This sounds like a lot in these nervous times but, because Brian is not carrying much debt, you think you might lend to him.
However, Brian then lets it slip that, because his income is falling sharply, he will need to borrow at least as much each year for the foreseeable future. He also admits that, late one night and for what seemed like good reasons at the time, he somehow agreed to insure the gambling losses of some "banks".

Brian has no idea how large these losses might be, but is starting to fear that they might be substantial. At this stage, you realise that Brian is on a trajectory into bankruptcy and show him the door.

Multiply the numbers in this story by a million and you begin to understand why Ireland makes bond markets nervous. First, the Irish economy is heading into a severe and prolonged slump that will force the Government to borrow heavily at a time when markets are increasingly reluctant to lend heavily.

Secondly, the Government's delay in revealing how much its bank liability guarantee is likely to cost is making markets suspect that the final bill will be crushing.

After a decade of a credit-fuelled property bubble, the economy is not so much crumbling as vaporising: were we the size of Britain, January's rise in unemployment would have been over half a million.

As the economy collapses, so does the Government's tax revenue. This year the Government will have to borrow about €20 billion – everything it spends on wages or on social welfare – or about 15 per cent of a falling national income.

With no chance that the hopelessly uncompetitive economy will recover in the next five years and little sign that the Government has any appetite for serious cuts in spending or increases in taxation, borrowing looks set to continue at around this level for the foreseeable future.

If this borrowing was the limit of the Government's liabilities, Ireland would probably just about weather the storm in the bond markets. Unfortunately, an elephant is lurking in the corner in the form of the bank liability guarantee, and this looks increasingly certain to sink the economy.

In my view, the Government has made insufficient effort to estimate how much its banks have lost. We have therefore had the bizarre experience of nationalising Anglo Irish Bank and recapitalising Allied Irish Banks and Bank of Ireland without knowing precisely the extent of their bad debts.

The Government has not updated its estimate of losses since Brian Lenihan's boast that the liability guarantee was "the cheapest bailout in the world so far", an assurance that already ranks in the annals of supreme political irony alongside Neville Chamberlain's "peace in our time".

The ability of the State to continue funding itself ultimately depends on the size of these bad debts. If they are of the order of €10–€20 billion, we will survive. If they are of the order of €50-€60 billion, we are sunk.

Irish banks could easily lose this much. If we suppose that most of the €20 billion lent to builders will not reappear this side of Judgment Day, along with 20 per cent of the €90 billion lent to developers, and 10 per cent of the €120 billion in mortgages, then we are already up to €50 billion.

These are only guesses. However, the continuing stream of revelations from Anglo Irish – which bear out the old investment dictum that there is never just one cockroach in a kitchen – suggest that they could be optimistic guesses.

To see what would happen to Ireland if foreign lenders suddenly pull the plug, we only need to look at what happened in Latvia last December. We would be forced to seek an international bailout, with the International Monetary Fund and European Union playing bad cop and good cop. We could expect cuts of one-quarter to one-third in public sector wages and social welfare benefits, and draconian tax rises to bring the deficit back to around 5 per cent of national income in two years.

There is actually a worse scenario where international bond markets suffer a general panic, like 1998. Not only does Ireland gets torpedoed, but also Portugal, Italy, Greece, Spain and Austria. The IMF and EU simply would not have the resources to bail out so many economies and we would be entirely on our own.

In circumstances where the Government could not even pay public sector salaries, the bank guarantee would immediately become worthless and we would see an uncontrollable run on all the Irish banks.

Watching the ineptitude and complacency of Lenihan's bank bailout, we can understand increasingly how the people of New Orleans must have felt as they watched George Bush rescue their city: "Brianie: you're doing a heck of a job."

Particularly galling are the Government's efforts to feign surprise and indignation at the behaviour of the banks, when the reality is that this is how we have always done business here. All that the Anglo affair has done is to hold up our grubby brand of crony capitalism for international ridicule.
For increasing numbers of ordinary people, the Irish economic miracle has turned out to be as worthwhile as a share in Bernard L Madoff Investments.

In return for working hard and paying their taxes, the lucky ones who keep their jobs can now look forward to pay cuts, negative equity and savage tax rises; while the unlucky ones face prolonged unemployment and losing their homes, their cars and everything for which they have worked.
If, on top of this, we suffer a sudden stop, people will see their pensions and Government spending slashed to pay off the gambling losses of Seán FitzPatrick and his pals. The Irish social fabric would certainly rip and unprecedented civil disorder ensue.

Bill Clinton's feared enforcer James Carville once said that he would like to be reincarnated as the bond market, because that way you get to intimidate everyone.

Without decisive and intelligent Government action in the next few weeks, by the end of this year we will understand exactly what he meant.

Morgan Kelly is professor of economics at University College Dublin

[orangeman]

Without decisive and intelligent Government action in the next few weeks, by the end of this year we will understand exactly what he meant.


What ammunition have the govt left ?

[tyronefan]

what a year to look forward to. maybe we should go on holidays and come home when its over

[Rois]

The final Zavvi store in NI closed today.  The second or third retail unit in Belfast's Victoria Square that has hit the wall.

[Hound]

In the Indo today, news that KPMG are effectively letting go over 100 chartered accountants. People coming out of their training contracts are not being offered permanent contracts.

Last week it was announced AL Goodbodys were doing similar with over 50 newly qualified solicitors.

I'm sure there's plenty more to come from other firms in those sectors.

[Rois]

In the Indo today, news that KPMG are effectively letting go over 100 chartered accountants. People coming out of their training contracts are not being offered permanent contracts.

Yep, trainees were told on Monday apparently.  Offered temporary 4 contracts to June is what my source told me.

It's been mentioned to me already that we've been OK so far but if some transactions don't occur in the next few months, it might hit me too.