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The Irish bailout, announced last night with the rider, "details to follow", finally gives us some kind of clue as to when and how the whole euro shebang will fall apart.
If we look at the numbers (which Ireland hasn't yet published and, I suspect, doesn't want to publish) we have about €90bn going into save Ireland/the Irish banks (the two are now virtually synonymous, given that Ireland has promised to back the debts of the banks).
The sources of this funding are various. Now, although we can blame Merkel for triggering this crisis, one of its fundamental causes was ECB boss Trichet going to Merkel and Sarkozy and saying: "Look, the ECB is being used by Ireland for a purpose for which the ECB was not designed. If you don't help, we will pull the plug".
So, money had to be found from somewhere else. About a third of the €90bn will come from the International Monetary Fund. The UK will pay a proportion of this. A further few billion will come from the UK and Sweden in the form of bilateral agreements. For the UK this will probably be inextricably linked to the UK loan book and the vulnerability of RBS and Lloyds TSB. Since the UK can't let RBS fail (which, should the nuclear financial scenario occur in Ireland, would be a serious threat for RBS) it's putting a few billion in now to save a few more billion later. Some of the money will come from the €60bn European Financial Stability Fund, but the majority will come from the completely different €440bn European Financial Stability Facility – put together this summer at the time of the Greek rescue and, I recall, meant to stop contagion by its very existence.
No such luck.
It's this final piece of information that tells us where, in a way when, and in a way how, the euro will cease to exist in its current form.
Greece (years of living well and not working) was first. Ireland (banks that lent long and borrowed short) was second. Portugal (cannot get the books to balance, Greece Mark II) will be next.
If the Irish bailout will cost the EFS Facility about €50bn, we have to expect the Portuguese bailout, when it comes (February 2011) to cost about the same. That will be a full €100bn of the €440bn ESF Facility. The ESF Fund (€60bn) will also be nearly broke by this time.
If Portugal is Greece Mark II, then Spain is will be Ireland Mark II, AKA "Ireland, but this time it's serious". Come next October or November, it will be clear that the Spanish property bubble has burst nearly as comprehensively as the Irish property bubble. The banks will be unable to fulfil their cash flow requirements. They will be technically insolvent and "too big to fail". The Spanish government, proportionately not quite as badly, but in absolute terms on a much larger scale, will need help from the rest of the EU. Spain's GDP this year will be about €1,000bn. The eurozone will be about €9,000bn and the EU as a whole will be €12,000bn. Ireland is about €200bn, or one fifth the size of Spain (Portugal is about €220bn, btw).
Ireland's deficit at the moment is about 12% of GDP and is expected to rise to 15% before coming back down. Portugal's is running at about 9% of GDP – but these are the official numbers. Although I don't distrust them as much as I distrusted Greece's official figures, I don't have absolute faith in them, not by a long way.
And the Spanish deficit for 2010? About 10% of GDP, or €100bn,
Now, we can slice and dice these numbers lots of ways (e.g., the Spanish deficit this year comes to more than 1% of the eurozone as a whole), but logic and rationality isn't really that important here. There was a very good article inthe FT on Saturdday on the build-up to the current crisis, where a senior German official was quoted as saying that "logically" the markets should not have reacted to Merkel's statement re bond "haircuts" in the way that it did. To which the answer is: "tough shit, welcome to the real world".
No, what's important here is what will happen when the Spain situation becomes "critical, emergency stage red". Let's pencil that in on our Outlook calendar for October 26 2011.
Spain's cap-in-hand request to the ESF Facility will be, say, four times higher than that needed by Ireland. If it turns out to three times higher or less, then we might squeak through. But at four times higher, the cupboard will be emptied. The €440bn (after Ireland and Portuugal, €340bn) chest will not be enough.
Now, there is talk of a €750bn cash reserve -- in other words, even if the ESF Facility is all used up, there's just a little bit left behind. But will the German public stand for this? Will the German leadership stand for this? What will happen to the Italian bond market if and when it does happen? And what implications does that have for France, which has about 20% of its annual GDP stored in Italian bonds?
If you think the past week has looked like a full-blown crisis (and if you allow for the fact that, in the grand scheme of the global economy, Ireland is very much a minnow) it doesn't take much of a leap of the imagination to see that a similar bailout for Spain would bring the world to realize that the euro simply isn't working. At that point the contagion becomes unstoppable. That doesn't mean that the euro would collapse v the dollar or the yen. Indeed, it might actually strengthen on the grounds that the market could see all the shit economies being thrown out. The movement of the euro would depend entirely on the level which it would be pegged to the new German Deutschmark (which will probably still be called the euro).
But for the smaller European economies, everything will be changed. On the plus side, devaluation will become an option (bad news for the UK), while on the minus side, their bonds will become piles of worthless shit (ok, I exaggerate slightly) and borrowing costs will go through the roof (good news for the UK).
So, there you have it, 2011 in a nutshell. Fun, eh?
+++++++++++
If we look at the numbers (which Ireland hasn't yet published and, I suspect, doesn't want to publish) we have about €90bn going into save Ireland/the Irish banks (the two are now virtually synonymous, given that Ireland has promised to back the debts of the banks).
The sources of this funding are various. Now, although we can blame Merkel for triggering this crisis, one of its fundamental causes was ECB boss Trichet going to Merkel and Sarkozy and saying: "Look, the ECB is being used by Ireland for a purpose for which the ECB was not designed. If you don't help, we will pull the plug".
So, money had to be found from somewhere else. About a third of the €90bn will come from the International Monetary Fund. The UK will pay a proportion of this. A further few billion will come from the UK and Sweden in the form of bilateral agreements. For the UK this will probably be inextricably linked to the UK loan book and the vulnerability of RBS and Lloyds TSB. Since the UK can't let RBS fail (which, should the nuclear financial scenario occur in Ireland, would be a serious threat for RBS) it's putting a few billion in now to save a few more billion later. Some of the money will come from the €60bn European Financial Stability Fund, but the majority will come from the completely different €440bn European Financial Stability Facility – put together this summer at the time of the Greek rescue and, I recall, meant to stop contagion by its very existence.
No such luck.
It's this final piece of information that tells us where, in a way when, and in a way how, the euro will cease to exist in its current form.
Greece (years of living well and not working) was first. Ireland (banks that lent long and borrowed short) was second. Portugal (cannot get the books to balance, Greece Mark II) will be next.
If the Irish bailout will cost the EFS Facility about €50bn, we have to expect the Portuguese bailout, when it comes (February 2011) to cost about the same. That will be a full €100bn of the €440bn ESF Facility. The ESF Fund (€60bn) will also be nearly broke by this time.
If Portugal is Greece Mark II, then Spain is will be Ireland Mark II, AKA "Ireland, but this time it's serious". Come next October or November, it will be clear that the Spanish property bubble has burst nearly as comprehensively as the Irish property bubble. The banks will be unable to fulfil their cash flow requirements. They will be technically insolvent and "too big to fail". The Spanish government, proportionately not quite as badly, but in absolute terms on a much larger scale, will need help from the rest of the EU. Spain's GDP this year will be about €1,000bn. The eurozone will be about €9,000bn and the EU as a whole will be €12,000bn. Ireland is about €200bn, or one fifth the size of Spain (Portugal is about €220bn, btw).
Ireland's deficit at the moment is about 12% of GDP and is expected to rise to 15% before coming back down. Portugal's is running at about 9% of GDP – but these are the official numbers. Although I don't distrust them as much as I distrusted Greece's official figures, I don't have absolute faith in them, not by a long way.
And the Spanish deficit for 2010? About 10% of GDP, or €100bn,
Now, we can slice and dice these numbers lots of ways (e.g., the Spanish deficit this year comes to more than 1% of the eurozone as a whole), but logic and rationality isn't really that important here. There was a very good article inthe FT on Saturdday on the build-up to the current crisis, where a senior German official was quoted as saying that "logically" the markets should not have reacted to Merkel's statement re bond "haircuts" in the way that it did. To which the answer is: "tough shit, welcome to the real world".
No, what's important here is what will happen when the Spain situation becomes "critical, emergency stage red". Let's pencil that in on our Outlook calendar for October 26 2011.
Spain's cap-in-hand request to the ESF Facility will be, say, four times higher than that needed by Ireland. If it turns out to three times higher or less, then we might squeak through. But at four times higher, the cupboard will be emptied. The €440bn (after Ireland and Portuugal, €340bn) chest will not be enough.
Now, there is talk of a €750bn cash reserve -- in other words, even if the ESF Facility is all used up, there's just a little bit left behind. But will the German public stand for this? Will the German leadership stand for this? What will happen to the Italian bond market if and when it does happen? And what implications does that have for France, which has about 20% of its annual GDP stored in Italian bonds?
If you think the past week has looked like a full-blown crisis (and if you allow for the fact that, in the grand scheme of the global economy, Ireland is very much a minnow) it doesn't take much of a leap of the imagination to see that a similar bailout for Spain would bring the world to realize that the euro simply isn't working. At that point the contagion becomes unstoppable. That doesn't mean that the euro would collapse v the dollar or the yen. Indeed, it might actually strengthen on the grounds that the market could see all the shit economies being thrown out. The movement of the euro would depend entirely on the level which it would be pegged to the new German Deutschmark (which will probably still be called the euro).
But for the smaller European economies, everything will be changed. On the plus side, devaluation will become an option (bad news for the UK), while on the minus side, their bonds will become piles of worthless shit (ok, I exaggerate slightly) and borrowing costs will go through the roof (good news for the UK).
So, there you have it, 2011 in a nutshell. Fun, eh?
+++++++++++
