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Posts Tagged ‘Brian Cowen’

IMF Put Irish Bailout On Hold

In Financial Markets, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance on 10.12.10 at 16:54
The International Monetary Fund (IMF) has decided to postpone its approval of the Irish bailout until its been approved by the Irish parliament – Dàil – hopefully after the debate next Wednesday, an IMF spokesperson says in a short  statement issued today.
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“Assuming parliamentary support for the package, the Managing Director could recommend approval by the IMF Executive Board of the proposed €22.5 billion IMF loan as early as December 16.”
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The International Monetary Fund


The Government of Ireland decided yesterday to table a motion on the EU-IMF Financial Assistance Program for Ireland in the Irish Parliament (Dáil). The vote on this motion is scheduled for Wednesday, December 15, 2010. Today the IMF has issued the following statement:
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“The authorities have informed us that while parliamentary approval of the EU-IMF support package is not legally required, the Irish Government has put the motion before parliament to strengthen political support for the agreement.  In deference to Ireland’s parliamentary process, the IMF has decided to postpone consideration by its Board of the proposed loan under the Extended Fund Facility until after the debate. Assuming parliamentary support for the package, the Managing Director could recommend approval by the IMF Executive Board of the proposed €22.5 billion IMF loan as early as December 16.”

“We welcome the first implementation measures of the 2011 budget – stipulating the fiscal consolidation path and important reform measures involved in the program – have recently been passed by the Irish Parliament, confirming Ireland’s strong commitment to the program and the policies involved.”

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The Brilliance Of A Bailout

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 30.11.10 at 16:32

The European Central Bank tried to force Ireland into an EU/IMF bailout, according to Irish Justice Minister Dermot Ahern. Today the ECB is forced to buy Irish bonds in the market to prevent the recently bailed out country’s economy from total collapse. And at the same time the ECB is increasing the bailout pressure on Portugal. Excuse me, but I can’t see the logic.

“The government was cleaned out in the negotiations.”

Michael Noonan


While the 111 billion dollar rescue package to Ireland was supposed to calm the financial markets, the exact opposite has happened. The volatility and the cost of insuring national debt by Credit-default Swaps is just getting higher and higher. Yesterday we saw the biggest slide in Spanish government bonds since the euro’s debut in 1999. Today the ECB is intervening in the market to keep Irish bonds from going down the tubes.

According to two anonymous sources, the ECB have bought a “small amount” of short time Irish government bonds Tuesday morning, Bloomberg reports.

The yield on Irish 2-year bonds are up by 0,14%, as of 1 PM (CET) today.

The cost of insuring Portugal against default rose 11.5 basis points to a record 551 today, according to CMA prices, and the ECB is now putting pressure on the Portuguese government to apply for a bailout, according to the Irish minister Dermot Ahern.

“Clearly there were people from outside this country who were trying to bounce us in as a sovereign state, into making an application, throwing in the towel before we had even considered it as a government,” Ahern says in an interview with the Irish state broadcaster RTE today. Adding: “And if you notice, they are doing the same with Portugal now.”

Asked about who was pressuring Ireland, he says: “Quite obviously people from within the ECB.”

Ireland’s crisis has forced the ECB to buy government bonds and pump money into its banking system.

Irish domestic lenders increased their reliance on ECB funding by 3.3 percent in October and the central bank today purchased more Irish bonds, according to two people familiar with the transaction, Bloomberg reports.

The bailout has sparked a wave of domestic criticism accusing Prime Minister Brian Cowen of giving up the country’s sovereignty for punitive terms.

More than 50,000 people took to the streets of Dublin on November 27, the day before the government agreed an average interest rate of 5.8 percent for the loans from the EU and IMF.

“The government was cleaned out in the negotiations,” says Michael Noonan, finance spokesman for Fine Gael, the largest opposition party.

“The interest rate of 5.8 percent is far too high and verges on the unaffordable.”

The Irish Bailout - Illustrated

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The risk for Europe is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region’s 750 billion-euro bailout fund may not be big enough if the country resorts to aid. Spain’s 10-year government bonds slid yesterday by the most since the euro’s debut.

The extra yield investors demand to hold the securities instead of benchmark German bunds widened to euro-era records.

(See also: Belgium Joins The PIIGS: And Then They Were Six)

“The big elephant in the room is not Portugal but, of course, it’s Spain,” Nouriel Roubini, the New York University professor, said at a conference in Prague yesterday. “There is not enough official money to bail out Spain if trouble occurs.”

The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup’s chief economist, Willem Buiter, wrote  in a note to investors yesterday. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter said.

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10-year sovereign spreads (against 10 year German bunds)

Previous Day Close Yesterday’s Close This morning
France 0.459 0.521 0.535
Italy 1.753 1.993 1.998
Spain 2.538 2.787 2.746
Portugal 4.484 4.564 4.477
Greece 9.299 9.329 9.79
Ireland 6.866 6.966 6.956
Belgium 1.013 1.214 1.192

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EU: No Bail In, Just Eternal Bailouts

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 29.11.10 at 16:42

It ought to be a happy day for the bondholders of the world. The informal Eurogroup decided Sunday that the Irish rescue plan will not bail in senior bank bondholders and force them take a “haircut” on their liabilities. A decision likely to make precedence for the many bailouts to come. However, Germany and France insist on a bail in facility to be implemented when the 750 billion euro bailout fund, created in May this year, becomes a permanent stabilizing mechanism when it expires in 2013.  But this will only apply for debt issued thereafter. The brilliance of this solution is;  since bond issuers and bond investors, pretty much, are one and the same big banks – it becomes an eternal bailout mechanism.

“The rescue plan stands as a forceful response to vulnerabilities in the banking system.”

Dominique Strauss-Kahn


As usual, the IMF-boss Dominique Strauss-Kahn provides us with valuable insight. It is indeed a forceful response to vulnerabilities in the banking system. First; they’re now protected for two more years. And second; if anyone should default on their loans issued after 2013, and forced to take a so-called “haircut,” there will be a permanent bailout mechanism available so that the bailed in banks can be bailed out again. Pure genius!

The EU countries and the International Monetary Fund (IMF) will provide up to €85 billion under the Irish package, which may be drawn down over a period of up to 7½ years, the informal Eurogroup said last night.

About €50 billion is aimed at bolstering Ireland’s public finances. Of the remaining 35 billion, 10 will be used to recapitalize Ireland’s demolised banking system, and 25 will be put in a contingency fund to provide the banks with additional support if necessary.

The IMF will contribute with a total of 22,5 billion. This include three bilateral loans from the UK, Sweden and Denmark.
Along with the rescue package comes a 15 billion austerity package to be distributed amongst the Irish citizens over the next four years.

The interest rates for the loans will also vary on the different parts of the package. ( But is in general close to 6%,  according to the statements).

Merry Christmas!

The EU leaders have almost scared the bond investors to death with their talk of bailing in bondholders to make them share the burden of the supersized debt bubble they’ve been creating over the years.

But at a press conference last night after the informal Eurogroup and EU’s finance ministers had endorsed the Irish rescue package at an emergency meeting, Olli Rehn said:

“I’m aware that the Irish authorities are considering certain discounts for the subordinated debt but there will be no haircut on senior debt, not to speak of sovereign debt”.

Adding: “The programme rests on three pillars. First, there will be an immediate strengthening and comprehensive overhaul of the banking sector. Second there will be an ambitious fiscal adjustment to restore fiscal sustainability of the sovereign. Third, there will be substantial structural reforms enhancing economic growth, especially in the labour market.”

The aim in the banking measures is to create a smaller and more robust financial system with a stable financing structure.

“It notably includes higher minimum regulatory requirements, plus a capital injection early on to bring capital ratios above the minimum. Moreover a new and rigorous stress test will be conducted based on a severe scenario and moreover, new legislation on insolvency and bank resolution will be introduced.”

Neiter this legislation will not include haircuts on senior debt, according to Mr. Rehn.

So, the major holders of Irish (and other sovereign) bonds can enjoy another big fat Christmas bonus.

(See: The Precious Irish Bondholders – Here’s The Full List)

Deutsche Bank has already decided to hand out the biggest bonuses ever this year to its executives.

Bailing In The People

Now – here’s some of the Christmas gifts for ordinary Irish people:

Labor market:

*Reduce national minimum wage by €1.00 per hour

* An independent review of the Registered Employment Agreements and Employment Regulation Orders.

* Reform of the unemployment benefit system

* Streamline administration of unemployment benefits, social assistance and active labour market policies.

* Reform of activation policies:
A: Improved job profiling and increased engagement;
B:  More effective monitoring of jobseekers’ activities with regular evidence-based reports;
C: The application of sanction mechanisms for beneficiaries not complying with job-search conditionality and recommendations for participation in labour market programmes.

Health Care:

* Medical Profession: Eliminate restrictions on the number of GPs qualifying, remove restrictions on GPs wishing to treat public patients and restrictions on advertising.
* Pharmacy Profession: Ensure the recent elimination of the 50% mark-up paid for medicines under the State’s Drugs Payments Scheme is enforced.

Pensions:

* Savings in Social Protection expenditure through enhanced control measures.

* Increase the state pension age to 66 years in 2014, 67 in 2021 and 68 in 2028.

Public Service:

* Reduction of public service costs through a reduction in numbers and reform of work practices.
* A reduction of existing public service pensions on a progressive basis averaging over 4% will be introduced.
* New public service entrants will also see a 10% pay reduction.
* Reform of Pension entitlements for new entrants to the public service
A: including a review of accelerated retirement for certain categories of public servants and an indexation of pensions to consumer prices.
B: Pensions will be based on career average earnings.
C: New entrants’ retirement age will also be linked to the state pension retirement age.

Taxes:
* A reduction in pension tax relief and pension related deductions
* A reduction in general tax expenditures
* Excise and other tax increases
* A reduction in private pension tax reliefs
* A reduction in general tax expenditures
* Site Valuation Tax to fund local services
* A reform of capital gains tax and acquisitions tax
* An increase in the carbon tax

The Enormous Growth Potential

In a joint statement IMF managing director, Dominique Strauss-Kahn, says the rescue plan stands as a “forceful response to vulnerabilities in the banking system”.

And for once, I totally agree with Mr. Strauss-Kahn.

“By shielding Ireland from the need to go to the markets for a considerable period of time, this support places financing at Ireland’s disposal on more favourable terms than it could obtain elsewhere for the foreseeable future,” the statement says.

(Just to be precise: It’s the Irish banks that are being shield)

“This programme articulates a clear strategy for tackling today’s problems and for harnessing the enormous growth potential of this open and dynamic economy.”

The enormous growth potential?

I better stop now, or I might write something rude and offensive.

You can read the full Iris government/IMF statement for your self here.

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Merkel: An Exceptional Serious Situation

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 24.11.10 at 14:23

German Chancellor Angela Merkel says that the euro is in an exceptionally serious situation, adding that politicians a year ago could not imagine what’s happening now. The German Chancellor’s statement Tuesday afternoon pushed the euro further down vs the dollar , and raised the yield on Spanish and Portuguese bonds. Later in the evening Standard & Poor’s lowered Ireland’s debt rating by two steps, with a negative outlook. The nightmare continues today.

“The financial stability of Europe is at risk.”

Lars Løkke Rasmussen

Late Tuesday evening  Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook. The Irish prime minister Brian Cowen prepares to unveil the four-year deficit-cutting plan, as the European Commission warns the Irish politicians not to topple the government.  Meanwhile, the contagion spreads like fire through the rest of the euro zone.

“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’s says in a statement.

Brian Cowen

Adding that putting the rating on review for downgrade reflects the risk that talks on a European Union-led rescue may fail to stanch capital flight.

S&P’s cut Ireland’s long-term rating to A from AA- and the short-term grade to A-1 from A-1+, according to the statement.

The reduction leaves its long-term grade five steps above Greece, which has the highest junk, or high-risk, grade, Bloomberg reports.

Still, the euro – which dropped 1.9 percent against the dollar yesterday – rose 0.2 percent to $1.3336 as of 11:12 a.m. in London.

The yield on Ireland’s 10-year bond was little changed at 8.61 percent after jumping 34 basis points yesterday.

Exceptional Serious

“I don’t want to paint a dramatic picture, but I just want to say that a year ago we couldn’t imagine the debate we had in the spring and the measures we had to take,” German chancellor Angela Merkel said in a speech in Berlin yesterday.

“We are facing an exceptionally serious situation as far as the euro’s situation is concerned.”

Olli Rehn

The European Commission also on Tuesday issued a veiled warning to the Irish political class not to topple the government.

“Stability is important,” EU economy commissioner Olli Rehn said, speaking to reporters in Berlin.

“We don’t have a position on the domestic democratic politics of Ireland but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU-IMF programme in time. The budget needs to be adopted,” Mr. Rehn said, adding:  “Ireland will pass the budget in the time foreseen and certainly sooner than later.”

Financial Stability At Risk

Lars Løkke Rasmussen

Danish prime minister, Lars Lokke Rasmussen, have announced that his government would participate in the euro zone’s bailout of Ireland alongside fellow non-euro-using-states, like Sweden, the UK as well as Switzerland and Norway.

“The financial stability of Europe is at risk so it is very important to make a broader effort to try to stabilise the situation,” Mr. Rasmussen told the Financial Times.

Norway’s finance minister, Sigbjørn Johnsen, says in a statement that Norway will support Ireland through the International Monetary Fund, and suggest that the country might come up with additional support.

Sigbjørn Johnsen

“Norway will contribute to the financing of the IMF part of the loan package to Ireland through the financing arrangements we already have in place with the IMF, including our bilateral loan agreement with the IMF,” Mr. Johnsen says.

“We have not received any request for additional financial support. If we receive a request from Ireland for a bilateral loan, we will of course consider it.”


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European Financial Crisis Is Getting Worse

In Financial Markets, Health and Environment, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 24.11.10 at 00:38

Dow Jones Newswires quotes IMF Deputy Managing Director John Lipsky Tuesday afternoon saying; “euro-zone aid packages should soothe investors.” I suspect the statement is mostly wishful thinking on behalf of Mr. Lipsky. It is, however, yet another sad example of how out of touch with reality these people are. Today the European bond market almost collapsed as the sovereign CDS spreads hit the all-time-high mark for the second time this month.

“All of the peripheral turmoil spelled bad news for the banks.”

Gavan Nolan


The Markit iTraxx SovX Western Europe index cracked up, matching the record wide from earlier this month by exceeding 180 basis points. The Irish CDS spread splashed out another 50 bp’s, closing in on the 600 mark. Portugal is approaching the 500 level and Spanish spreads blasted through the 300’s for the first time in recorded history. Tuesday was NOT a good day in the European credit markets.

Ireland‘s predicament and the threat of contagion in the euo zone’s periphery caused a fresh bout of risk aversion, egged on by North and South Korea exchanging artillery fire,” credit analyst Gavan Nolan writes in today’s Markit Intraday Alert.

A motion of no confidence in the Irish government was tabled by Sinn Fein this afternoon.

“This casts further doubt on the coalition’s ability to push the December 7 budget through parliament, a necessary condition for the bailout,” Nolan points out.

Prime Minister Brian Cowen announced last night that the parliament would be dissolved after the budget vote, but the opposition parties appears to be determined to push the schedule. (No surprise there).

Ireland’s spreads widened to 580 bp’s amid the political uncertainty and the levels reminiscent of pre-bailout times.

“The much-feared peripheral contagion is still uppermost in investors’ minds,” Gavan Nolan writes.

Anyway – Portugal, widely touted as next in the firing line, saw its CDS spreads jump another 30 basis points on Tuesday, approaching the 500-level.

“The sovereign’s cause wasn’t helped by news that its budget deficit had widened in the first 10 months of 2010, despite tax revenues increasing. The government has failed to contain public spending, partly as a result of higher interest costs on its debts,” Nolan adds.

Portugal has considerable funding needs in the next few months, something the market is well aware of.

Spain, seen as an economy of more “systemic importance” than Ireland or Portugal, saw its spreads surpass 300 bp’s for the first time on record. A three and six-month T-bill auction this morning – usually a formality – did not produce a particular impressive results. The yields were up significantly, compared to the previous auctions and the amount of debt sold was at the lower-end of the Treasury’s indicative range.

“All of the peripheral turmoil spelled bad news for the banks,” Gavan Nolan at Markit Credit Research warns.

And both the Markit iTraxx Senior Financials index and its subordinate counterpart widened sharply today, driven by British and Iberian banks.

“The latter index has underperformed in recent weeks, no doubt helped by uncertainty over the fate of Anglo Irish Bank. The punitive exchange offer was accepted by 2017 bondholders yesterday, and it seems likely that other bondholders will now follow suit. A request for a restructuring credit event was made to the ISDA Determinations Committee today, and a decision will be made in due course,” Nolan writes.

The Dutch finance minister was quoted as saying that subordinated bondholders in Irish banks “will have to bleed” in a restructuring.

It seems like the market already have figured that out.

The prize for the “Quote of Today” goes to IMF Deputy Managing Director John Lipsky who says that “euro-zone aid packages should soothe investors”, according to Dow Jones Newswires.

“Perhaps they will in the coming months and years but the market reaction today suggested investors are unconvinced,” Gavan Nolan comments.

Well, I guess the question for Mr. Lipsky and the IMF is; are the investors systemically important, or not?

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  • Markit iTraxx Europe 107.5bp (+4.5), Markit iTraxx Crossover 481bp (+18.5)
  • Markit iTraxx SovX Western Europe 183bp (+6)
  • Markit iTraxx Senior Financials 153bp (+12.5), Sub Financials 263bp (+24)
  • Sovereigns – Greece 1000bp (0), Spain 305bp (+22), Portugal 485bp (+30), Italy 201bp (+9), Ireland 580bp (+51), Belgium 149bp (+8)

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No Rest For The Credits

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 23.11.10 at 02:39

If the EU thought that the bailout announced for Ireland over the weekend would calm the investors in the euro zone then they must have been disappointed by the reaction in the markets today. After an initial positive reception – the financial markets turned negative again. The Markit iTraxx SovX Western Europe was 3.5 basis points tighter, at 162.5bp this morning, but the gains were soon lost and the index finished up 11 points wider, at 177.

“Are bailouts contagious?”

Gavan Nolan


Greek CDS spreads are back up at 1.000 basis points higher than the German benchmark, blasting up by 36 points on Monday. The Portuguese spread blew up nearly 40 bp’s and the Irish widened 25, ending at near record levels of 530. Oh, boy! This is going to be nerve-wrecking…

So, what caused the markets to turns so radically, after the big bailout drama this weekend?

Credit analyst Gavan Nolan at Markit explain:

“Two factors triggered the volatility and are likely to continue to be relevant in the weeks ahead. The first was the intrinsic fragility of the Irish government. Prime Minister Brian Cowen‘s Fianna Fail party has been under intense pressure this year, and it came to a head today when the Green Party – the other partner in the coalition – demanded that a general election be held in the second-half of January. If that wasn’t enough two independent MP’s that currently vote with the government said they would be highly unlikely to support next month’s budget. If Fianna Fail lose a by-election this week – and they are well behind in the polls – their wafer thin majority will be cut to just two seats . This makes the support of the two independents absolutely crucial if the budget is to get through,” Nolan writes in today’s Markit Intraday Alert, and continues:

“The other, closely related factor was the fear of contagion spreading across the euro zone. Portugal is viewed by the markets as the next most vulnerable and its government made efforts today to distance itself from Ireland’s predicament. Unlike Ireland, Portugal has a “resilient and well capitalised” banking sector and won’t require a bailout, according to the government. Nonetheless, the sovereign’s spreads were 40bp wider, at 460 bp’s by the close.”


A general strike against austerity measures could cause further volatility this week, according to Markit Credit Research.

Irish bank CDS was tighter after the bailout announcement due to the anticipation of recapitalisation.

As usual liquidity in these names was poor, and investor sentiment was better reflected in the bond prices. Both senior and sub debt saw increases today, according to Markit Evaluated Bonds, though some of the gains were given back in the afternoon.

“The Markit iTraxx Senior Financials was dragged wider by Iberian banks, which suffered from fears of peripheral contagion,” Gavan Nolan points out.

“A “yes” vote for the 2017 Anglo Irish bond exchange also caused shudders in the financial debt markets.” he notes.

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  • Markit iTraxx Europe 103bp (+2), Markit iTraxx Crossover 462bp (+5)
  • Markit iTraxx SovX Western Europe 177bp (+11)
  • Markit iTraxx Senior Financials 141bp (+6)
  • Sovereigns – Greece 1000bp (+36), Spain 285bp (+24), Portugal 460bp (+39), Italy 193bp (+10), Ireland 530bp (+25), Belgium 143bp (+10)

UPDATE: Euro Strengthens, Stocks Decline On Irish Bailout

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 22.11.10 at 14:00

The European common currency continue to strengthen vs the Dollar while European stocks turns negative after a short rally as a reaction to Sunday’s news of another EU bailout. Here are the comments and updates from some of the leading Nordic and European analysts.

“It’s probably a question of when the next problem will occur, rather than whether there will be one.”

Jim Reid

Prime minister Brian Cowen & Finance minister Brian Lenihan

European stock markets responded positively on Monday to news that Ireland has applied for a rescue package in an effort to safeguard financial stability, but earlier gains were pared back as the market awaited more details of the plan. The euro seems to be following the same pattern.

The Stoxx Europe 600 index is now down by 0.5%, after hitting an intraday high of 271.68 Monday morning. The index posted a loss of 0.3% last week.

Stocks across Europe were already turning negative when Moody’s Investors Service announced a review of Ireland’s Aa2 rating would likely result in a “multi-notch downgrade.”

Moody’s says in a statement that a package of financial aid for Ireland will help standalone credit quality of banks but that it would underline bank-contingent liabilities for the government and weigh on its sovereign debt burden.

Moody’s Investor Service.

Late Sunday, the Irish government formally applied for aid from the European Union, which welcome the request.

The International Monetary Fund says it stands ready to join the support program, including through a multi-year loan.

Here’s a copy of the statement by the Government of Ireland.

Here’s a copy of the statement by the EU officials.

No specific number has been given, but Irish Finance Minister Brian Lenihan says, according to media reports, that it would be less than 100 billion euros ($136.7 billion).

The troubled state of the Irish banking sector had made a bailout deal seem all but inevitable in recent days.

Video report by Reuters:

Vodpod videos no longer available.

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Irish Financial Stocks Drop

However, Irish financial stocks came under heavy selling pressure after Prime Minister Brian Cowen on Sunday said they would need to become smaller as part of the bailout.

He also said they may need to raise more capital.

“The good news for banks is that they have a bit more to go on, but for them, because of the support structure in terms of that, it looks as if there’s a fair chance they will further dilute shareholders,” Bernard McAlinden, strategist with NCB Stockbrokers, says according to MarketWatch.com.

Shares of Bank of Ireland has dropped 16,8% this morning, while Allied Irish Banks PLC is down -1.15%.

Irish Life & Permanent Group Holdings PLC is tumbling down more than 20%.

“As long as no one else needs a bailout, the market gets relief from here,” McAlinden says.

“A restructuring of the banks seems obvious as well as tighten fiscal policy. New stress tests of the banks are likely to be included as part of the plan as the tests undertaken this summer did not prove sufficient. However, the Irish authorities claim the low corporate tax for foreign companies is not part of the deal. In addition the four-year fiscal is likely to be even tighter than planned,” senior economist Knut Magnussen at DnB NOR Markets points out.

Here’s a copy of today’s Morning Report from DnB NOR Markets.

See also: FX Weekly Update, DnB NOR Markets, 11222010.

Who’s Next?

The market turbulence triggered by worries over Ireland had started to spill over in recent days to other high-deficit countries like Portugal and Spain.

Jim Reid, strategist at Deutsche Bank, says it’s probably, though, “a question of when the next problem will occur, rather than whether there will be one.”

“A band-aid solution will take the immediate pressure off from the peripheral risk complex but will not permanently resolve the more fundamental issues of the highly leveraged western financial system,” Reid writes in a note to clients.

“So with Ireland having now joined Greece in the ‘kick the can down the road’ drill, which bails out bondholders at the expense of the Irish tax-payers, markets are likely to turn the attention to the next of the PIIGS. Portugal needs to roll over more than EUR 10 billion of sovereign debt in the first half of 2011 and thus looks more or less like a sitting duck,” market strategist Christian Tegllund at Saxo Bank writes in his Wake-up Call Monday morning.

Here’s a copy of the latest macro analysis from Saxo Bank.

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Ireland Applies For Bailout – IMF Plans Dramatic Spending Cuts

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Views, commentaries and opinions on 21.11.10 at 20:49

The Irish government will Sunday ask for the Cabinet’s approval of a financial bailout from the EU and the IMF, according to finance minister Brian Lenihan. The size of the emergency loan is still unknown. Irish financial politician Michael Noonan predict a dramatic call for spending cuts – all over the board – from the IMF.

“They’ll be looking for the dropping of programmes and a totally new way of delivering services to the public which will cost less with fewer people.”

Michael Noonan

Prime Minister Brian Cowen of Ireland

As the second EU member now prepares to be bailed out of its financial problems by the European Union and the International Monetary Fund, the IMF is getting more worried than ever and are planning a total spending overhaul.

Irish finance minister Brian Lenihan confirms that a formal application for an emergency loan from the EU/IMF is being drawn up.

The Irish Times reports that the Irish government will seek the Cabinet’s approval for the loan today, Sunday.

Following several days of negotiations with IMF/EU officials in Dublin, Mr. Lenihan says he would recommend that Ireland applies for an unspecified bailout loan.

Brian Lenihan

The minister also says he reviewed the negotiations last night and decided that the time was right to make an application for loans for both the State and the banking system.

In an  interview with RTÉ Radio Brian Lenihan says: “I will be recommending to the Government that we should apply for a program and start formal applications.”

He declined to be drawn on the exact size of the loan. When asked about the scale of the loan, Mr Lenihan confirm that the figures would be “tens of billions,” however  “nowhere near” the EUR 70 – 80 billion as indicated by economists and commentators.

The Irish minister points out that the interest rate charged on the loan has yet to be agreed on, but it will be signficantly lower than the rate currently available to the Government on international bond markets.

Mr. Lenihan also admits for the first time that the nation’s banks has become a too big a problem for the country to resolve on its own.

“The key issue all the time for the Government is to ensure that we do not have a collapse of the banking sector,” he says.

The euro zone finance ministers will conduct an emergency conference call Sunday evening to consider the Irish finance minister’s declaration.

According to The Irish Times, things are now moving quickly, and some believe the European authorities may seek to finalize a decision before the markets opens on Monday morning.

Predict Dramatic IMF Reform

In an interview with the broadcaster RTÉ’ earlier this week,  Fine Gael finance spokesman Michael Noonan, said that the IMF is planning a “fundamental restructuring of expenditure.”

Fine Gael is Ireland’s second largest political party, member of the European People’s Party – European Democrats Group and with representatives in the EU parliament.

The International Monetary Fund want “fundamental restructuring of expenditure and that’s where they’ll dictate, rather than on the specifics of the cuts”, the Fine Gael finance spokesman says.

“It’s not like slicing a salami or cutting the end off a cucumber,” Noonan says, adding that the IMF “wouldn’t probably specify a cut in the minimum wage but they’d say you have to get your labour market working properly.

“You have to do like they’re doing in the UK and ensure that work is always more valuable than welfare. And by setting the headlines and by indicating serious expenditure restructuring in a certain area the Government implementing has very few options.”

He believe a similar approach will be chosen to reform the public service sector.

The IMF had no interest in “taking a few civil servants out” here and there. “They’ll be looking for the dropping of programmes and a totally new way of delivering services to the public which will cost less with fewer people,” he says.

Mr. Noonan also predicated a “very dramatic” announcement shortly by the IMF, based on the way they operated in other countries.

He believe the first line of intervention by the IMF and other EU institutions would be the banking system rather than the government’s four-year budgetary plan and restructuring,  “which could be done very quickly,” and will be dealt with before anything else, The Irish Times writes.

He suggest the IMF might follow the “good bank/bad bank” formula used in the US where the good bank traded and took deposits and bad bank took the liabilities.

“It also took the creditors who had lent them money with senior debt and they had to work out their situation over years to get what they could out of it,” Noonan points out.

Last week Michael Noonan made the following statement in the Irish Dãli (parliament/House of Representatives):

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