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Ireland's Banking Crisis: Ode On A Grecian Turn

By Nico Isaac
Thu, 09 Sep 2010 11:00:00 ET
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At the start of this year, the mainstream financial experts divided Europe's economy into two very different "animals": The PIGS (Portugal, Italy Greece and Spain) were sent off to the market to get slaughtered. But the "Celtic Tiger" of Ireland bared its razor-sharp teeth in a show of fierce autonomy and austerity.

On February 16, 2010, Ireland's Minister of Finance formalized the distinction with this public announcement:
"Ireland is not Greece... This has been reflected in the Irish spreads which have remained relatively steady over the recent crisis. There is a broad new consensus that the economy will bottom out by mid year." (Irish Times)
In the months that followed, the "relative steadiness" in Irish bond spreads continued. Even as the sovereign debt crisis made mince meat out of Spain and Greece's bond markets, Ireland's credit default swaps continued to hug 1.6%-1.75%. The dichotomy seemed s strong that by April, Ireland's financial officials felt surefooted enough to loosen its draconian grip on monetary policy (i.e., cumulative budget cuts totaling 5% of GDP in 2009). That same month, the government approved an initial $34 billion bailout of Anglo Irish Bank Corp. and Irish Nationwide Building Society.
Unlike the open-ended bailouts of the West, however, Ireland's leaders warned its financial institutions not to get too cozy in their stimulus snuggie. In the words of one higher up, "There will be no second act in the recapitalization of Ireland's banks..." (April 1 Irish Times)
Flash ahead to today. On September 7, 2010 the SECOND ACT that would not be, was. On that day, the Irish government announced it would extend bank assistance until the end of this year, while Irish Bank Corp. revealed that it needs an additional $32 billion.
It gets worse. The once steady Irish spreads are no longer so steady. Ireland's credit default swaps now stand at an all-time record high of 402.5 basis points, while the spread between Irish 10-year bonds and the equivalent German Bunds is also at an all-time record of 379 basis points. And, according to one news source, "sheer panic" surrounded the Anglo Irish Bank crisis as investors rapidly woke up to the fact that Ireland was never immune to Europe's debt contagion.
For long-time EWI subscribers, this comes as no surprise. In the June 2010 European Financial Forecasteditor Brian Whitmer issued this bold alert: 
"Today the crisis has begun with the big banks and has seeped into the most marginal sovereign nations. It won't stop there. The ugly truth is that the only thing separating these countries from Greece is the fragile confidence that they are, indeed, distinct. That confidence will erode as markets descend."
Brian Whitmer points out another compelling similarity between Ireland and Greece in the latest, September 2010 European Financial Forecast: This close-up of Ireland's ISEQ Index plotted above one-year credit default swaps:
"Irish swaps began climbing out of their lows near 100 basis points in March 2010, more than one month before the ISEQ's high on April 26. We point this out because the same credit deterioration preceded the top in Greek equities nearly one year ago. Greek swaps bottomed near 65 BP's in late September 2009, one month before the Athens market reached its high on October 15, 2009."

Make no mistake: This is a global story. Find out how the next act will likely unfold via a risk-free European Financial Forecast subscription today

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