Spanish Banks Face Debt Challenge;
Greece May "Shut-Down";
Meaning of "Guarantee";
Should Ireland Ditch the Euro?
Things continue to simmer in Europe with problems appearing on multiple fronts in Ireland, Spain, Portugal, and Greece.
Prime Minister Brian Cowen said late Monday that he would step down once a series of fiscal packages and budgets were in place next month, acceding to the demands of the opposition and its coalition partner, and injecting the threat of political instability into a financial crisis that already has markets on edge.
Earlier in the day, the minority Green Party declared that the public had lost faith in the government after its acceptance of a $100 billion rescue package over the weekend and that it would pull out of the government. It called for elections early next year, when a second round of austerity measures, forced on Ireland as a condition of the bailout, will be put before voters who have already suffered through three years of recession.
Ireland faces a stark choice between accepting cutbacks in popular middle class social programs or rejecting them and jeopardizing the rescue package, which would invite default. Most analysts expect that Mr. Cowen, whatever the condition of his coalition, will be able to pass the budget — even though it will have put into law such severe measures as a decrease in the minimum wage (one of the highest in Europe) and changes to the country’s generous child benefits.
The always churning Dublin rumor mill is now in overdrive, with speculation mounting that a back bench revolt might be brewing as Fianna Fail ministers contemplate the possibility of going into a new election with a new party leader.
The 2011 budget is to be presented before the Irish parliament on Dec. 7. It will call for six billion euros in savings and will be the first major hurdle that the government must clear to prove to the European Commission and the international Monetary Fund that this recession-battered country can come together and pass brutally painful budgets.
Bloomberg reports European Banks Drop on Concern of Ireland Contagion
European banking stocks fell, led by Bank of Ireland Plc and Banco Santander SA, on concern that countries including Portugal and Spain may need external help to fix their finances.
Bank of Ireland, the country’s largest lender, plunged 19 percent to 39 cents in Dublin trading. Santander, Spain’s biggest, dropped 4 percent to 8.19 euros in Madrid. The 53- member Bloomberg Europe Banks and Financial Services index fell 2 percent.
Portugal Says Will Do Everything to Meet Deficit Goal
Portugal will do all it can to meet its target of cutting the budget deficit to 4.6 percent of gross domestic product next year, Finance Minister Fernando Teixeira dos Santos said after Ireland became the second euro country to seek a rescue.
The yield premium that investors demand to hold Portugal’s 10-year bonds instead of German bunds narrowed to 404 basis points today, on track for a seventh straight daily decline, after a euro-era record of 484 basis points on Nov. 11. Portugal carried out its last bond sale of the year on Nov. 10 and faces its next redemption in April.
“The Irish bailout announced over the weekend will likely provide some relief to peripheral bonds, but this could be short-lived, with Portugal likely to soon return under the markets’ spotlight, as the government is finding it hard to meet its fiscal targets,” said Luigi Speranza, an economist at BNP Paribas SA in London.
Credit-default swaps tied to Portuguese debt jumped 29.5 basis points to a one-week high of 447 basis points, the biggest increase since Sept. 27, according to data provider CMA.
Portuguese Prime Minister Jose Socrates on Nov. 24 will face the country’s first joint general strike in 22 years as the two biggest labor organizations protest the austerity measures.
Spanish banks may struggle to refinance covered bonds as the European Central Bank’s plan to reduce liquidity supports forces lenders to tap debt markets at record-high yield spreads, Moody’s Investors Service said.
The higher cost of refinancing is a “credit negative development” for covered bond issuers, “especially if the ECB pulls back its support,” Moody’s analyst Tomas Rodriguez-Vigil Junco wrote in a report today. Spanish lenders have about 70 billion euros ($96 billion) of covered bonds coming due in the next two years, the analysts wrote.
Spanish Banks rated below A1, the fifth-highest investment grade, face the biggest refinancing burden because they account for about 50 percent of the total mortgage covered bonds due next year, the Moody’s analysts wrote.
Parts of Greece’s government may be forced to “shut down” as early as next week if the country isn’t able to cover a revenue shortfall after its European Union partners delayed its next tranche of aid money, High Frequency Economics Ltd. said.
“With a big tax revenue shortfall, cash requirements are surely greater than the 6.5 billion euros ($8.95 billion) Athens was meant to receive next week,” Carl B. Weinberg, chief economist at Valhalla, New York-based High Frequency wrote in a note to clients today.
“Unless the government gets funds soon after Nov. 30, it will run out of cash,” Weinberg said. “If so, the government will have to shut down, at least in part.”
Ireland is currently experiencing a 14.1% unemployment rate. As a result of bailout conditions that will require more cuts in government spending and tax increases, the unemployment rate is almost certain to go higher. The Irish people are likely to wonder what their economy would look like if they had not been rescued.
The pain being inflicted on Ireland by the ECB/IMF is completely unnecessary. If the ECB committed itself to make loans available to Ireland at low interest rates, a mechanism entirely within its power, then Ireland would have no serious budget problem. Its huge projected deficits stem primarily from the combination of high interest costs on its debt, and the result of operating at levels of economic output that are well below full employment – both outcomes that can be pinned largely on the ECB.
It is worth remembering that Ireland's government was a model of fiscal probity prior to the economic meltdown. It had run large budget surpluses for the 5 years prior to the onset of the crisis. Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The economic wizards at the ECB and the IMF either couldn't see the bubble or didn't think it was worth mentioning.
The decision to make Ireland's workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country's bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.
This should be a huge warning flag for progressives and, in fact, anyone who believes in democracy. If the ECB puts conditions on a rescue package, it will be very difficult for an elected government in Ireland to reverse these conditions. In other words, the issues that Ireland's voters will be able to decide are likely to be trivial in importance relative to the conditions that will be imposed by the ECB.
The other point that should be kept in mind is that even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt.
Today the Irish Government sold its citizens into debt slavery by agreeing to guarantee stupid loans made by German, British, and US banks. Those loans fueled one of the biggest property bubbles in the world. Ireland has since crashed.
Why the average Irish citizen should have to bail out foreign bondholders is beyond me, but I do note that the same happened in the US with taxpayers footing an enormous bill for Fannie Mae, Freddie Mac, and AIG.
No matter what stupid thing banks do, prime ministers and presidents are all too willing to make the average taxpayer foot the bill for the mess. That by the way, is one reason why we get into these messes in the first place.
By agreeing to take on that debt, and sticking it to the Irish taxpayers who will be forced to accept various austerity measures to pay back that debt, Irish Prime Minister Brian Cowen and Finance Minister Brian Lenihan just sold Ireland down the river.
For additional insight on how the crash affects Ireland, please see Ghost Estates and Broken Lives: the Human Cost of the Irish Crash
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Law professor Charles E. Rice of Notre Dame University likewise issued a formal opinion, also based on Article 2, that the British had committed genocide.
The most important historiographical debate revolves around the issue of British responsibility for the Famine. (4) Irish nationalist have long charged the British with the crime of genocide. Among more recent examples of such views, the New York-based Irish Famine/Genocide Committee commissioned in 1996 a report by F.A. Boyle, a law professor at the University of Illinois at Urbana-Champaign, which concluded that:
Clearly, during the years 1845 to 1850, the British government pursued a policy of mass starvation in Ireland with intent to destroy in substantial part the national, ethnic and racial group commonly known as the Irish People.... Therefore, during the years 1845 to 1850 the British government knowingly pursued a policy of mass starvation in Ireland that constituted acts of genocide against the Irish people within the meaning of Article II (c) of the 1948 [Hague] Genocide Convention.