Ireland, two weeks after the kiss of death... errr... I meant, the bailout

Just about two weeks ago, Ireland got an emergency loan from the IMF and EU so that German, French and Italian banks who bought all the sovereign debt could get bailed out.

Nov. 24 (Bloomberg) -- Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.
[...]
S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.
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Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.
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Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.

Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.[...]

Nov. 24 (Bloomberg) -- Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program that his party may not be around to deliver, as the government’s majority evaporates and a bailout approaches.

Welfare cuts of 800 million euros ($1.1 billion) are among the steps planned to narrow the deficit to 3 percent of gross domestic product by the end of 2014 [...] “The government’s days are numbered,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “What we are likely to see in the next fortnight is growing pressures on the opposition parties to abstain on the major votes and pass the budget for the sake of political stability.”
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The government plans to cut the minimum wage, currently 8.65 euros an hour, by 12 percent, said the person familiar with the package to be announced. Lenihan will maintain Ireland’s 12.5 percent corporate tax rate, criticized by some European governments, as a pillar of national policy, said the person.

Just a few days later:

Nov. 29 (Bloomberg) -- European governments sought to quell the market turmoil menacing the euro, handing debt-strapped Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to cover a share of future bailouts.

European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.
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Ireland said it will pay average interest of 5.8 percent on the loans, which break down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.

“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.

Brian Cowen is a big fat liar. There's a far better solution. The same solution that Greece should have gone for, and the solution that helped Iceland recover quicker: default.

A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.

Including the bill for propping up Irish banks, the deficit is set to reach 32 percent of GDP this year, the highest in the euro’s 12-year history.

Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment near 14 percent. Cowen’s government is also unraveling.
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Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.

Of course Britain is lending to Ireland: it's trying to bailout its own citizens and banks who lent to the Irish banks, the same way that they did to Iceland. It's another stupid decision, as basically British savers who didn't fall for the higher interest rate that these insolvent banks where offering, and decided to play it safe are now punished.

Nov. 29 (Bloomberg) -- Ireland’s banks will get as much as 35 billion euros ($46 billion) of aid while senior bondholders will escape the cost of the bailout led by the European Union and International Monetary Fund, the government said.

Banks will get an immediate 8 billion euros to bolster capital, and will raise a further 2 billion euros by shedding assets, the central bank said in a statement yesterday. Lenders will be able to draw on a further 25 billion euros depending on how they fare in a round of stress tests in the first half of next year, the government said in a statement.
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The banks are getting the money after rising loan losses and shrinking deposits forced the government to seek the rescue. The state pledged to back all deposits in Irish banks two years ago, requiring the government to inject 33 billion euros into the lenders. The estimated cost of rescuing the banks rose to as much as 50 billion euros in September after losses from the collapse of the country’s decade-long real estate boom jumped, fueling concern Ireland couldn’t fund a rescue itself.

Ireland's population is about 6 million. It means that every citizen had to pay about 10,000€, even the old and the babies, to bail out the banks. Is that reasonable? No. Is that likely to ever be repaid? No.

[...] Bank of Ireland, the country’s biggest lender, plunged 45 percent in Dublin trading last week, as investors speculated that government plans to raise banks’ capital reserves would drive it into majority state ownership. The state already owns 36 percent of the lender. The government is also preparing to take majority control of Allied Irish, the nation’s second- biggest bank, people familiar with the matter said this month.

Most of the banking system in Ireland has been nationalized. Ireland will follow Iceland in default, there is absolutely no doubt about that. The question is "when?". But I think they won't be able to keep on that route for another 2 years, as interest rates will rise and interest repayments will not be possible to make.

Nov. 29 (Bloomberg) -- Ireland will pay an average 5.8 percent for international bailout loans as part of an agreement that protected the senior bondholders of Irish banks and preserved the country’s low corporate tax policy.

The state was granted funds amounting to 67.5 billion euros ($90 billion) with an average duration of 7 1/2 years by the European Union and International Monetary Fund, the government said yesterday. The average interest compares with a rate of around 5 percent charged to Greece for three-year loans earlier this year. Subordinated bank bond holders may have to accept “big haircuts,” Finance Minister Brian Lenihan said.
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The deal came after the country’s crumbling banking system threatened to bankrupt the state, sending the yield on Ireland’s 10-year government bond to a 9.2 percent on Nov. 26 and sparking concerns about contagion through the rest of the euro region.

“The interest rate paid is not burdensome and effectively removes Ireland from needing to issue debt for the next 2 years,” said Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank in London. “Clearly it is always about confidence and this should be enough to restore a degree of confidence in Ireland and in particular Irish sovereign debt.”

Yeah, right. Thanks Charles, we are all relieved now, and confident. This is coming from a failed and nationalized UK bank, so there's all the reasons in the world to take this opinion at face value.

The Guardian has posted a very interest report about Ireland, and the amounts lent by various banks and countries, exposures etc. Definitely worth reading. Here's one of the charts (click for bigger image):

Two weeks later:

Dec. 14 (Bloomberg) -- Ireland’s government will be able to force junior bank bondholders to share losses to protect financial stability under legislation published today.

Bondholders should have been wiped out already. Not only juniors, but also seniors. Instead, the citizens and the country itself are getting wiped out.

[...] The bill will allow the government “to take the actions required to bring about a domestic retail banking system that is proportionate to and focused on the Irish economy,” Finance Minister Brian Lenihan said in a statement. “The banking system must play its role in providing the credit to the real economy to support our recovery.”

Another big fat liar: Brian Lenihan. Recover will not be supported by more lending, specially when debt is the problem that they are trying to solve.

Ireland’s government pledged an “intensification” of the restructuring of its banks, including asset sales, as part of an 85 billion-euro ($114 billion) international aid package agreed on Nov. 28. Under the bailout from the International Monetary Fund and European Union, the government may force subordinated bondholders in Irish banks to share the cost of bailing out the financial system.

[...] Bank of Ireland, the country’s biggest lender, fell 4.3 percent to 40.5 euro cents at the 5:10 p.m. close of trading in Dublin, while Allied Irish, the second-biggest, fell 4.6 percent to 43.9 cents. Bank of Ireland’s 248.15 million euros of subordinated floating-rate notes due January 2017 fell 2.4 percent to 44.25 cents in London, according to composite prices on Bloomberg. The securities can be called in 2012. Allied Irish’s 1.5 billion euros of senior floating-rate securities due September 2011 dropped 1.17 cents on the euro to 88.5 cents.

Looks like the market doesn't believe there are going to be major haircuts...

Finally, today: did the "bailout" make Ireland? Here's the answer: Ireland Credit Rating Cut by Moody’s to Baa1 From Aa2

Dec. 17 (Bloomberg) -- Ireland’s credit rating was cut five levels by Moody’s Investors Service after the government last month was forced to ask for external aid.

The rating was lowered to Baa1 from Aa2, Moody’s said in an e-mailed statement from London today. The outlook is negative, it said. Fitch Ratings on Dec. 9 also cut Ireland’s credit rating by three levels to BBB+ from A+.

Irish lawmakers on Dec. 15 voted to accept an 85 billion- euro ($113 billion) aid package from European governments and the International Monetary Fund. The government was forced to ask for support after the cost of rescuing banks soared.

Default is the only way out, and it was a very big mistake in the first place. I will make another post about these facts.