How the market see the Ireland debt crisis

Berry Fleming, who were dismissed from a leading retailer recently, makes sense in the main shopping in Dublin area. Photo: AFP

"Irish bond price action has become infamous Recalling that observed earlier this year with the Greece as investors concluded that problems are simply too great." - David Scammell, head of the United Kingdom and the strategies of the Schroders European interest rates

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"" The strains in the banking system are intensifying, dependence on the ECB, more liquidity and Ireland appears to be under mounting pressure in the euro area to ask for help. ""HSBC

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"Unless the steps of the ECB of its commitment, the probability Ireland must seek external support... will continue to increase,"-UBS ".

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"Until fiscal Ireland challenges are resolved, uncertainty should also keep the euro under pressure," -UBS.

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"EU policy makers appear to be worried that the Ireland problems could spill over to the rest of the so-called economy of swine," - Neil MacKinnon, an economist at VTB capital.

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European Central Bank tightens screw on Ireland, Portugal and Spain

 European Central Bank President Jean Claude Trichet warned Ireland not to depend on long-term support from Europe Photo: Reuters

“The central bank must guard against the danger that the necessary measures in a crisis period evolve into a dependency as conditions normalise,” said Jean-Claude Trichet, the ECB’s president.

Luxembourg’s ECB governor, Yves Mersch, echoed the warnings, saying the bank could not continue “cleaning up” in crises. “If rates are low for too long, this leads to a higher risk appetite. We will pay the price if we fail to confront these inevitable dangers,” he said.

More than 98pc of Spanish mortgages are priced off the floating Euribor rate. Any ECB rate rise would be devastating given that there is already a glut of 1.5m homes coming on to the market, according to consultants RR de Acuna.

The ECB warnings came as a troika of officials from the ECB, the Commission, and the International Monetary Fund began a fact-finding mission in Dublin, examining books to determine whether Ireland is strong enough prop up its banking system.

Finance minister Brian Lenihan admitted that Dublin was considering “substantial contingency capital” to boost banks, but denied that this would burden the Irish state.

Dublin insists that there is no threat to Ireland’s 12.5pc corporation tax rate but Mary Lou McDonald from Sinn Féin said the country was essentially under foreign occupation. “Officials from the EU and IMF and any other vultures circling around this country should be told to get lost.”

Central bank governor Patrick Honohan said a rescue would amount to “tens of billions”. The Irish state is funded until June but this is proving no defence against a run on the banking system.

The euro recovered against the dollar and Europe’s bourses rallied on hopes that the Irish crisis has been contained, but Fitch Ratings said there was still “considerable uncertainty” about the fate of Irish bank debt and bondholder losses.

Credit default swaps on Irish, Greek, Portuguese and Spanish debt continued to hover at high levels yesterday amid confusion over the contagion risk.

Any bail-out depletes the EU’s €440bn (£374bn) rescue fund, reducing the safety buffer for other countries.

Each rescue reduces the number of donor states able to support the EU safety net, and tests political patience in Germany. “There is a danger that once Ireland has been dealt with markets will concentrate even more on countries such as Portugal and Spain,” said Ulrich Leuchtmann of Commerzbank.

Rescue loans for Ireland – as for Greece – add to the debt load without tackling the core problem of solvency. A view is taking hold in the markets that this policy merely delays the inevitable day of EMU debt restructuring.

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Ireland opens door to IMF mission

 Taoiseach Brian Cowen, left, will meet with Olli Rehn, right, but insists that Ireland is fully funded until June. Photo: PA

Olli Rehn, Europe's economics commissioner, said Ireland is not strong enough to back-stop a banking system that has been shut out of capital markets and suffered a haemorrhage of bank deposits. "The Irish banking sector has to be made viable and sustainable," he said.

Chancellor George Osborne said the UK stands ready to play its full part in any rescue. "Ireland is our closest neighbour and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," he said in Brussels.

Brian Cowen, the Irish premier, tried to put the best face on the humiliation, insisting that the Irish state is fully-funded until June and does not need a bail-out. "What we're involved in here is working with colleagues in respect of currency problems and euro issue problems that are affecting Ireland," he said.

Enda Kenny, Fine Gael opposition leader, ridiculed the claim, accusing him of raising the "white flag" and subjecting the country to the "dictates" of foreign masters.

Officials from the European Central Bank, the Commission, and the IMF will take part in the "Troika" mission, which Dublin called a "consultation". French finance minister Christine Lagarde said a package may be agreed within days.

Dublin hopes to dress up any bail-out as aid for banks rather than the state, but the distinction became meaningless when Ireland guaranteed its banks in September 2008.

"The two are inextricably merged: it's an omelette that is impossible to unscramble," said Professor Brian Lucey from Trinity College Dublin. He estimates the total cost of rescuing Anglo Irish and absorbing toxic debt through the 'bad bank' NAMA at €85bn.

Analysts say the state may have to inject up to €15bn into Bank of Ireland and Allied Irish (AIB) after the pair lost almost €20bn of deposits in the early autumn. Central bank governor Patrick Honohan gave a hint of ECB intentions by saying lenders should be "over-capitalised". The ECB wants to extricate itself from the role of propping up the Irish banking system - and therefore the state - with loans equal to 80pc of Irish GDP.

Any bail-out will be on softer terms than the "Memorandum" imposed on Greece. The country has already slashed spending and cut public wages by 13pc. Brussels is clearly pushing Ireland into a rescue before it needs one in order to stem contagion to Portugal and Spain, so Dublin can hope to extract guarantees on Irish sovereignty and its 12.5pc corporation tax rate, which that has been crucial in luring Google, Microsoft, Pfizer, and others to Ireland.

Yields on Irish 10-year bonds dipped slightly to 8.1pc but remain at crippling levels. LCH Clearnet doubled its margin requirement to 30pc for Irish bonds despite the likely rescue.

Julian Callow from Barclays Capital said Ireland faces a "truly daunting task" trying to tackle both its financial and fiscal crises at the same time. "The country still has the highest budget deficit in the eurozone despite austerity cuts. The deficit is 12pc of GDP this year after stripping out bank rescue costs, the same as last year. This is what concerns investors," he said.

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Ireland set to tap €80bn loan as it opens door to IMF mission

Mr Honohan became the first Irish official to publicly say that the country will need aid to rescue its battered banks, as a squad of inspectors from the EU and the International Monetary Fund descended in Dublin on Thursday to go through the books and prepare the way for a likely rescue of at least €80bn (£68bn).

“It will be a large loan because the purpose of the amount to be made available or to be advanced is to show Ireland has sufficient firepower to deal with any concerns of the market. We’re talking about a substantial loan," Mr Honohan told state broadcaster RTE.

“It is my expectation that will happen, absolutely," he said, although he added that a final decision had not been reached.

The yield on the Irish 10-year bond fell seven basis points to 7.55pc after his comments, but remains at crippling levels.

Olli Rehn, Europe's economics commissioner, said on Wednesday that Ireland is not strong enough to back-stop a banking system that has been shut out of capital markets and suffered a haemorrhage of bank deposits. "The Irish banking sector has to be made viable and sustainable," he said.

Chancellor George Osborne said the UK stands ready to play its full part in any rescue. "Ireland is our closest neighbour and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," he said in Brussels.

Brian Cowen, the Irish premier, tried to put the best face on the humiliation, insisting that the Irish state is fully-funded until June and does not need a bail-out. "What we're involved in here is working with colleagues in respect of currency problems and euro issue problems that are affecting Ireland," he said.

Enda Kenny, Fine Gael opposition leader, ridiculed the claim, accusing him of raising the "white flag" and subjecting the country to the "dictates" of foreign masters.

Officials from the European Central Bank, the Commission, and the IMF will take part in the "Troika" mission, which Dublin called a "consultation". French finance minister Christine Lagarde said a package may be agreed within days.

Dublin hopes to dress up any bail-out as aid for banks rather than the state, but the distinction became meaningless when Ireland guaranteed its banks in September 2008.

"The two are inextricably merged: it's an omelette that is impossible to unscramble," said Professor Brian Lucey from Trinity College Dublin. He estimates the total cost of rescuing Anglo Irish and absorbing toxic debt through the 'bad bank' NAMA at €85bn.

Analysts say the state may have to inject up to €15bn into Bank of Ireland and Allied Irish (AIB) after the pair lost almost €20bn of deposits in the early autumn. Central bank governor Patrick Honohan gave a hint of ECB intentions by saying lenders should be "over-capitalised". The ECB wants to extricate itself from the role of propping up the Irish banking system - and therefore the state - with loans equal to 80pc of Irish GDP.

Any bail-out will be on softer terms than the "Memorandum" imposed on Greece. The country has already slashed spending and cut public wages by 13pc. Brussels is clearly pushing Ireland into a rescue before it needs one in order to stem contagion to Portugal and Spain, so Dublin can hope to extract guarantees on Irish sovereignty and its 12.5pc corporation tax rate, which that has been crucial in luring Google, Microsoft, Pfizer, and others to Ireland.

LCH Clearnet doubled its margin requirement to 30pc for Irish bonds despite the likely rescue.

Julian Callow from Barclays Capital said Ireland faces a "truly daunting task" trying to tackle both its financial and fiscal crises at the same time. "The country still has the highest budget deficit in the eurozone despite austerity cuts. The deficit is 12pc of GDP this year after stripping out bank rescue costs, the same as last year. This is what concerns investors," he said.

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Angela Merkel consigns Ireland, Portugal and Spain to their fate

“We must keep in mind the feelings of our people, who have a justified desire to see that private investors are also on the hook, and not just taxpayers,” said German Chancellor Angela Merkel.

Or in the words of Bundesbank chief Axel Weber: “Next time there is a problem, (bondholders) should be part of the solution rather than part of the problem. So far the only ones who have paid for the solution are the taxpayers.”

These were the terms imposed by Germany at Friday’s EU summit as the Quid Pro Quo for the creation of a permanent rescue fund in 2013. A treaty change will be rammed through under Article 48 of the Lisbon Treaty, a trick that circumvents the need for full ratification. Eurosceptics can feel vindicated in warning that this “escalator” clause would soon be exploited for unchecked treaty-creep.

Mrs Merkel needs a treaty change to prevent the German constitutional court from blocking the bail-out fund as a breach of EU law, and a treaty change is what she will get. “This will strengthen my position with the Karlsruhe court,” she admitted openly.

One might argue that bondholders should have been punished for their errors long ago. The stench of moral hazard has been sickening, on both sides of the Atlantic. An orderly bankruptcy along lines routinely engineered by the International Monetary Fund is exactly what Greece needs. It makes no sense to push Greece further into a debt compound spiral by raising public debt from 115pc of GDP at the outset of the “rescue” to 150pc at the end of the ordeal.

If you strip out the humbug, the Greek package allows banks and funds to shift roughly €150bn of liabilities onto EU governments, or the European Central Bank, or the IMF. Greek citizens are being subjected to the full pain of austerity under false pretences, without being offered the cure of debt relief.

It is in reality a bail-out for investors. There is a touch of cruelty in this. Needless to say, the Greek Left has noticed. A socialist dissident from the “anti-Memorandum” bloc (ie anti EU-IMF) is likely to win the Athens region in coming elections.

Note too that the ruling socialists have fallen to 25pc in the Portuguese polls, while the Communists and hard-left Bloco are together up to 18pc. Ain’t seen nothing, you might say.

Yet opening the door to bondholder haircuts at this delicate juncture – with spreads reaching fresh records in Ireland last week, and Portugal struggling to pass a budget – is to toss a hand-grenade into the eurozone periphery.

We now know that that ECB’s Jean-Claude Trichet warned EU leaders on Thursday night that it was dangerous to stir up this hornets’ nest, and moreover that the politicians did not understand what they were unleashing. He was slammed down acrimoniously by French President Nicolas Sarkozy, who later denied that he lost his temper.

“Mr Trichet expressed a number of reserves. There was a debate, there is always a debate, but the European Council took its decision,” he said.

“It is wrong to say I was irritated. You can reproach heads of state for all kinds of things in a democracy, but I don’t think you can reproach them for not being aware of the seriousness of the situation,” he snorted.

Mr Sarkozy was not going to let his Brussels `triomphe’ slip away after stitching up EU affairs once again in a pre-emptive deal with Germany and imposing his will. The notion that the Franco-German axis still runs Europe is potent politics in France, even if the decisions actually reached are often of little value or – as in this case – ill-advised. Such is the chemistry of EU summits, where mad things happen.

Spain’s premier Jose-Luis Zapatero knew he had been mugged. “We need to listen carefully to what the head of the ECB says about the rescue mechanism. Great care is called for because this message is risky,” he said.

Eurozone sovereign states must issue €915bn in new bonds next year, according the UBS, either to roll over debt or to cover very big deficits – though it is hard to outdo Ireland’s deficit of 32pc of GDP in 2009. Yet investors have just been told in blunt terms to charge a hefty risk premium on any peripheral debt that expires after 2013, with great confusion over what happens even before that date. Can any investor be sure what the terms will be if Ireland or Portugal needs to access the EU’s bail-out fund next week, or next month, or next year? Are haircuts already de rigueur?

A study by Giada Giani at Citigroup entitled Bondholders Moving Back Home said data from the second quarter reveals a sharp drop in foreign ownership of debt from Greece (-14pc), Portugal (-12pc), Spain (-8pc), and Ireland (-5pc).

Local banks have stepped into the breach, borrowing cheaply from the ECB to buy their own state debt at higher yields in a `carry trade’ that concentrates risk. These four countries account for the lion’s share of the €448bn in ECB funding for banks (Spain €98bn, Greece €94bn). Frankfurt is propping up this unstable edifice. Mr Trichet may well fret.

A strong case can be made that Spain has decoupled from other PIGS in pain, though the deficit will still be 6pc next year, and the economy is at serious risk of a double-dip recession as wage cuts and higher taxes bite in earnest. But none are safe yet.

An ominous pattern has emerged across much of the eurozone periphery: tax revenue keeps falling short of what was hoped. Austerity measures are eating deeper into the economy than expected, forcing further fiscal cuts. It goes too far to call this a self-feeding spiral, but such policies test political patience to snapping point.

There is little that these nations can do in the short-run as EMU members. They cannot offset fiscal tightening with full monetary stimulus or a weaker exchange rate – as Britain can. All they do can is soldier on, sell family silver to the Chinese and Gulf Arabs, beg the ECB to join the currency war to bring down the euro, and pray that the fragile global recovery does not sputter out.

Chancellor Merkel is ultimately correct. A mechanism for sovereign defaults is entirely healthy. Had it been in place long ago, EMU would have been stronger. The proper timing for this was at the Maastricht Treaty, or Amsterdam, or at the latest Nice, but in those days the EU elites were still arrogantly dismissive about the implications of a currency union. To wait until now borders on careless.

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Ireland should honour its debts, says Irish business federation chief Danny McCoy

Pressure is mounting on the Irish government to rethink its plans for a "haircut" on the subordinated debt of Anglo Irish and Irish Nationwide Building Society. Photo: AFP

"Ireland should honour its debts if it can," said Danny McCoy, head the Irish Business and Employers Confederation (IBEC).

"The country makes a living taking capital from people and looking after it, and you don't want to get a reputation for carrying out partial defaults," he told The Daily Telegraph.

Ireland's financial services industry is around 9.8pc of GDP, with big players such as Merrill and Citigroup operating from Dublin's 'Canary Dwarf'. But foreign investment is also the lifeblood of the country's manufacturing industry, led by computers and pharmaceuticals.

IBEC's comments come amid mounting pressure on the Irish government to rethink its plans for a "haircut" on the subordinated debt of Anglo Irish and Irish Nationwide Building Society (INBS).

Millhouse, the asset management group of Roman Abramovich, is the latest foreign fund to express fury, warning that Ireland faces possible legal action and a "huge reputation loss" if it imposes a haircut on creditors. The fund said it had been "misled and deceived" by the Irish government, though this class of debt was quietly dropped when the guarantee was extended last month.

The exact shape of any "burden-sharing" is still unclear. Brian Lenihan, finance minister, has said the junior bondholders should make a "significant contribution toward meeting the costs" of the state bailout.

These investors took extra risk to enjoy extra yield, and cannot expected shield when the bank collapses. The debt of senior bondholders is considered sacrosanct.

Mr Lenihan has to walk a fine line: talk of debt restructuring for Anglo and INBS conflicts with his other message that Ireland is recovering from the crisis and still enjoys reserves of economic wealth.

Yet like finance ministers across the West, he also has to secure political support for austerity measures. This is increasingly hard to do without forcing bondholders to share at least some of the pain.

Hedge funds also have to watch their step. The political balance of power in Europe is moving against them. If they were to bring a small country like Ireland to its knees, the EU authorities would undoubtedly respond.

IBEC's Mr McCoy said the €40bn(£35bn) total cost of bailing out the banks had landed on the shoulders of 2m people in the Irish workforce, or €20,000 per person.

While this is an understandable cause of anguish, Mr McCoy said savings from a partial default on €3bn of Anglo and INBS subordinated debt, would be a small fraction of this.

Separately, Moody's called for a "credible plan" by the Irish government to bring its budget deficit back to 3pc of GDP by 2014, warning that the country could face a further downgrade. The report had no market impact.

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The hi-tech miracle rescuing Ireland from a banking crisis

Most of the world’s medical device giants have operations in an arc around this Atlantic outpost, where Gaelic can be heard again in the Guinness bars of Shop Street, spoken by the young. Nor are Galwegians cobbling together somebody else’s kit these days, as they did in the 1990s.

“We’re as good as Switzerland, Germany, or anywhere in the world,” said John Power, the founder of Irish start-up company Aerogen and holder of 40 patents.

He holds up his Aeroneb micropump, used to deliver drugs deep into the lungs to keep the airways open. The small contraption vibrates 140,000 times a second, emitting a superfine aerosol spray through invisible holes, each measuring just three microns. It is a surgeons’ tool, ending the need for uber-doses of intravenous drugs. One version is small enough for premature babies.

“We’re saving lives all over the world, it is a great feeling,” said Mr Power.

Besides two accountants, his team in Galway’s leafy suburbs are all scientists or engineers with degrees or PhDs. Production is farmed out. “Our annual revenues have grown 40pc a year for the past three years, and we expect the same this year. Japan is huge for us,” he said. So Japan’s aging crisis is a boon for someone, at least.

Medical products are a structural “play” on the two great trends in the world – the greying of the West and the accelerating health demands of middle-class Asia.

The medical technology plants along Ireland’s west coast – drawing on a small army of young science graduates – are together the world’s third-biggest exporter of medical devices in absolute terms, after the US and Germany.

Life sciences make up a third of Ireland’s €160bn exports. Boston Scientific alone has 4,500 employees in the country, mostly graduates, some making drug-coated stents to stop arteries clogging up.

The sector hardly missed a beat during the “Great Recession”, and will grow 10pc this year. It is insulated from Ireland’s banking debacle.

“We don’t even look at the Irish market in our planning,” said John O’Dea, head of the Galway start-up Crospon, which makes catheters with imaging technology for stomach surgery. Crospon’s products are sold to hospitals in Europe and the US.

“We got fat during the Celtic Tiger era but we’ve woken up pretty abruptly. Wages are not going up anymore – we’re bending the cost curve downwards,” said Mr O’Dea. Wages for entry-level jobs have dropped 10pc to 15pc, tracking cuts in public wages.

Barry O’Leary, head of Ireland’s Industrial Development Agency, said wage restraint has largely reversed the damage from the bubble. Unit labour costs are expected to fall 13pc viz-a-viz the eurozone from 2008 to 2011. Office rental costs

have dropped nearly 45pc. Dublin has fallen from being the world’s sixth most expensive city to 33rd.

Ireland has pulled off the remarkable feat of outright deflation to secure its place in Europe’s currency union without setting off violent protest, or even strikes.

Deflation is double-edged, of course. Ireland’s nominal GDP has shrunk by a fifth, while debt contracts are fixed. Public debt will rise to about 115pc of GDP, including the €40bn hit from Anglo Irish and other banks. The crucial issue is whether Ireland has the export base to trade its way back to life.

“When the global crisis hit, our higher costs came to the fore. We have been slowly clawing it back, giving nothing away,” said Gerry McDonnell, head of Stryker Orthopaedics in Limerick, which makes knees and hips.

Discipline has paid off, as has Swedish-style social solidarity. The US group is selling its plant at Caen in France – plagued by labour strains – and shifting the research operations to Ireland. “We’re moving up the value chain,” said Mr McDonnell.

There will be hitches.

A “patent cliff” is coming as licensing protection expires on best-selling drugs produced in Ireland: Eli Lilly’s Zyprexa for schizophrenia, Bristol-Myers’ Plavix for strokes, as well as Pfizer’s Lipitor for cholesterol – though not yet its patent for Viagra, produced for the whole world at a plant outside Cork. Drug sales tend to crash by 80pc within two months of patent expiry.

“We’ve become the Silicon Valley of the pharma industry, but the next few years are going to be very challenging,” said Eamon Judge, head of supply operations at Eli Lilly.

“It will turn up again from 2013 because we have 70 new products in the pipeline.”

Luckily for Ireland, IBM is to base its “Smart Planet” operations in Dublin, while Google, PayPal, eBay, Facebook and United Technologies are mostly recruiting again. So is Dublin’s “Canary Dwarf” and financial services export industry, ironically a safety net for the economy.

Whatever bond spreads of Irish debt seem to say from one day to the next, there is little doubt that this hub of global companies can pull the country out of its tailspin and contain the cancer of Anglo Irish Bank.

As the Habsburgs used to say: the situation is desperate but not serious.

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