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If you believe recent press reports, the International Monetary Fund and European Commission are now poised to bail out Ireland. Putting things in perspective, Ireland's population is roughly the same as greater Philadelphia (4.5 million). With a Gross Domestic Product (the value of all goods and services in a country) of approximately 221 billion euros (US$309 billion), its economy is roughly the same size as Massachusetts. Despite its size, Ireland's recent problems have resulted in wild fluctuations in share prices across the globe and a weaker euro. While good news for clients taking Spyns Tour de France tours, imagine what will happen when California or Italy have similar problems.
I haven't worked in finance for years but I can still count. And the numbers in this situation don't lie. International banks financed Ireland's real estate boom by lending money both abundantly and cheaply to Irish banks. These banks loaned recklessly to Irish companies and consumers. The collateral was property however property values are down sharply from the boom years. We've seen this shell game before on a much larger scale in the Greek bailout and Fed's quantitative easing.
Bankruptcy is an admission one can no longer service or repay debts. This is a game changer. Lendors accept this reality and debts are either written down or written off. This is called a haircut in financial circles.The former bankrupt is deprived of credit, for a time, and forced to reign in spending. This was the standard blueprint for an IMF bailout. Most recently, the IMF bailed out Russia (1999: $20 billion) and Argentina (2002: $15 billion). Debts were reduced or written off, budgets slashed, and taxes raised. Unfortunately, the IMF didn't lead the bailout in Greece because the politicians re-wrote the bailout manual.
Greece will never repay its debts. Clocked at $140 billion and rising, the joint IMF-European Union bailout was like handing a brand new credit card to a shopaholic and, I daresay, dropping her off at the local mall. While everyone focuses on Ireland, just six months into the Greek bailout, the goverment in Athens has missed every deficit reduction target and actually revised up total debt. And yet they're still receiving IMF loans. Why? Blame it on France and Germany.
French and German banks loaned billions to Greece. France and Germany run the European Union. The EU and IMF saved Greece and with it French and German banks. Let us turn to Ireland which is a little different. French and German banks are heavily exposed to Irish debt. Great Britain is also at risk through its banks. That changes things because the UK isn't part of the EU's monetary union and doesn't use the euro. They didn't have to help bail out Greece but they've got a lot more invested in Ireland. The EU technocrats aren't very pro-British. Not surprisingly, the UK's Chancellor of the Exchequer George Osborne (a British version of Ben Bernake) volunteered to help Irish banks and even provided a figure of seven billion pounds (about US$11 billion). It's all just a shell game as governments shift private sector (bank) liabilities to the public purse via bank ownership. This will eventually unravel.
A haircut is inevitable. Irish loans were mainly for property and property development. That property is now worth 30-40% less and falling. Someone somewhere is going to have to get less than what they loaned. I have a few predictions. First, Irish bank's subordinated debtholders will take a haircut. Second, British, French and German banks will then disclose some loan reorganisation. But they'll try very very hard to say this isn't a haircut. I'd look to the Royal Bank of Scotland to issue a statement. RBS is heavily exposed in Ireland and its shares are down 10% since the onset of Ireland's crisis. And finally, interest rates everywhere will start to rise - first slowly, and then drastically.
I wrote this was merely the end of the beginning. Greece and Ireland are small players when it comes to world finance but their bankruptcies (and subsequent haircuts) would have pushed up borrowing costs for larger countries like France, Germany and the United States. These countries don't want to pay more to borrow nor do they want markets focusing on their deficits. Unfortunately, they no longer have the growth and with growth the financial means to repay their debts. The Greeks were lucky to be the first because the bailout was the biggest and least onerous. Ireland's bailout will come with stricter conditions, and so on with Portugal, Spain, and Italy. Meanwhile the core European economies will continue paying higher interest rates.
Spyns is an active travel company based in Whister, BC (Canada) and Beaujolais France. Spyns specializes in Tour de France packages for both riders and non-riders. Spyns offers active holidays to Europe including trips to the 2011 Tour de France. For more information about Spyns 2011 Tour de France tours, please visit http://www.tdf-tours.com/ or http://www.spyns.com/. Please also feel free to call us toll-free 1.888.825.4720.
