Ireland is high on the list of, “Things that Could Go Wrong Big Time”. The numbers are so scary that they are encouraging. Ireland is a TBTF. If there were to be a problem it would cripple the rest of Europe’s banks. Therefore they can’t let if go.
Robert Peston (BBC) wrote a blog about his conversation with Irish finance minister Brian Lenihan. He spells out the death grip of debt that Ireland is in. A good read. Some cut and pastes:
Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output.
BK: By way of comparison the CIA puts total external debt of Germany at 1.5X’s GDP. The US is 1:1 Canada has a ratio of 0.7. And Ireland is 5X’s? How did they get so deep into hock? (That same ratio for Russia, India and Brazil: 0.4X, 0.2X and 0.2X respectively. Ahem….)
German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively.
BK: About $600b. Just the UK and Germany. What’s a good “haircut” estimate on this? My answer is it starts with 20% and could be as high as 30%. That would come to $150b. This would be a lights out event for the banks.
The Irish economy is hideously and perilously balanced between recovery and Armageddon.
Mr. Lenihan didn’t rule out in his interview with me that the Irish government might eventually be obliged to ask for financial support from the European Financial Stability Facility.
BK: When any Finance Minister says, “I wouldn’t rule that out”, he is really saying, “We are trying to kick the can down the road a bit longer, but really the lines have crossed and we are going to need help.”
The Ireland story has been popping up in the press and with folks who trade CDS and Bund swaps of late. It has not hit the EURDLR. A few short months ago if Ireland was in the spotlight as it is today the dollar would have been soaring. Today it is ho hum. The reason for the change in sentiment is Ben Bernanke and his obsession to devalue the currency. The idea out tonight (From Ben to the WSJ) is that the Fed is planning to buy $100b a month of Treasuries. For as long as Ben likes. We are now completely without limits. What central bank or foreign investor will willingly accept that policy? Why should they? They will vote with their feet.
Europe is in deep trouble. America wants to destroy itself. America will prevail in the race to the bottom thanks to the mindless persistence of Bernanke. And in the process we will all lose. Things are getting downright silly. The price of gold could too.