The Ireland Crisis and What It Means to the World

by Darwin on November 16, 2010

Presently, we’re seeing a crisis unfolding in Europe somewhat similar to what we saw with Greece earlier this year.  Markets have lost confidence that Ireland will be able to continue to fulfill its debt obligations (as measured by spiking yields on sovereign debt) and thus, it is looking as though it is a forgone conclusion that Ireland will have to accept some sort of aid package in exchange for Austerity promises.  As the world watches riots in France and Greece following austerity initiatives, Ireland has been steadfast in its stance that it doesn’t need a bailout and doesn’t intend on accepting one.

Why Does Ireland Matter?

Similar to why Greece mattered, there are many tough to quantify inter-dependencies based on a restructuring of Ireland’s debt.  Many international banks are holding Irish debt and should Ireland default on its debt obligations, certain banks could be looking at significant losses.  This would also be bad news for neighboring troubled countries like Portugal (recent announcement they may need to be bailed out as well) , Spain, Italy and even France (likely in that order).  Aside from perhaps Germany, it’s becoming difficult to identify fiscally “strong” EU members.  Meanwhile, if and when a bailout occurs, it’s basically shifting the risk of loss from private banks that knowingly took on sovereign debt risk onto public taxpayers – either in the EU, or even here in the US.  See, the US pays a substantial amount of IMF proceeds (20% as cited by most sources), so when the IMF bails out a Greece, Portugal, Spain or Ireland for $100 Billion here, $150 Billion there, that’s $20-30 Billion in US taxpayer funds spent propping up developed western economies – not quite the same thing as saving a strategic developing market from imploding into chaos like people normally associate the IMF with.  This should, and will, rightly fire up Americans and Europeans alike should the troubled EU member states continue to fail and require bailouts.

If things continue on this course, one could imagine a scenario where all indebted nation debt (US VERY Much Included) is called into question and markets demand higher interest rates to roll over debt.  This demand for higher interest rates, coupled with global inflation from a flood of money supply creates a runaway reaction.  As the cycle propogates, each Treasury auction is underwhelming, rates continue to spike and we have a true dollar crisis on our hands.  We already pay Billions per year just to fund the interest on US debt, so as this portion of expenditures increases, alongside our entitlement spending, game over.

This sounds real scary and is the same tune permabears have been singing for well over a decade now, but similar to the day of reckoning we finally saw in home prices, all artificially created eras of prosperity must revert to the mean.  And markets often overshoot.  We could very well see a very ugly scenario play out in EU and North American markets (while Canada often appears “strong”, their debt/GDP isn’t ideal either and Canada is highly linked to US prosperity).

What Are Your Thoughts?
Does Ireland Matter?
Do You Care?

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1 FiscallyPrudent November 16, 2010 at 8:55 pm

Great post. Enjoyed it thoroughly.

As much as the Germans didn’t want bail out Greece, and pay for the early retirements of greek citizens, they had to act to avoid some of the very problems you mention here. I think the same will be true for Ireland, and probably portugal as well. Italy is too big to fail in my opinion, and if Italy needed a bailout you’ll see markets really suffer.

2 Critic November 17, 2010 at 12:41 pm

“what it means to the world”?.
World is a lot more than dumb America
and Europe. In Asia, I see only prosperity
and happiness.

Darwin's Finance Reply:

@Critic, You’re pretty naive to miss the interdependencies btw the West and Asia. Who is Asia exporting product to? Asia is export-driven, very little consumption. Who will you sell to? Who’s indices declined MORE than the US and Europe during the US housing crisis? We’re all connected much more than we used to be.

Btw, how’s Japan working out? And life in China?

3 Joe Schmoe November 17, 2010 at 3:21 pm

1. It is not yet clear if Ireland will require a bailout like Greece, so we have to wait and see.
2. Mark Hulbert had some good comments on what happens after a national default / bailout situation (if it occurs for Ireland): it is bullish for the economy and the stock market (pretty good above-average returns in the following year). Rather than worrying it is a time to rejoice. Good tidings are coming.

4 jim November 17, 2010 at 5:35 pm

Ireland matters. But it doesn’t matter a ton.

EU should and will bail out their individual members.

Ireland is not a huge country. Lets keep it in perspective. Irelands GDP is around $225B. Thats on par with a state like Missouri or Louisiana. Their debt is large compared to their economy but not large enough that EU can’t easily handle it. One report yesterday said Irelands debt was £90B ($143B).

5 Joe Schmoe November 18, 2010 at 1:51 pm

I guess my post yesterday was pretty timely 😉

I bought AIB, btw.

6 Evan November 19, 2010 at 4:53 pm

Not that I am advocating higher taxes/regulations, but wasn’t like 18 months ago that we were being told that we needed to structure our lives like the Irish?

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