And now it’s Ireland

Morris Segall      another European debt crisis, failure of EU austerity measures, Irish debt crisis, Irish loan bailout, more debt crises in Spain and Portugal, political upheaval and shift to left in Europe, social unreast in Europe

In our blog articles published in May (May 6, 10 and 31, 2010) we commented repeatedly that the European debt crisis and the responses by central banks and the European Union’s austerity programs were not going to “go away” and would continue to resurface as the solutions offered were untenable and the loan facility made available were not more than “band aids” to keep the countries in the European Union from defaulting on their sovereign debt. We never doubted the European Union, IMF and the European Central Bank would be able to forestall those disastrous occurrences. We were far more suspect of the ability of the European populations to support the austerity measures and the success of those austerity measures to meet the debt reduction goals outlined. Furthermore, we were skeptical the capital markets would continue to be accommodative to the more distressed European economies in providing financing at affordable interest rates. Finally, given the ongoing pressure from high unemployment, weak real estate markets and continued high loan losses, we believed it only a matter of time before the inevitable pressures would create another round of loan losses within European banks. Since we published those articles, Greece has been “bailed out” by the European Union’s-IMF sovereign debt facility which has also helped Spain and Portugal avoid similar fates. However, popular discontent with the austerity programs announced by most of Europe has resulted in demonstrations, riots and strikes from the Aegean Sea to the U.K. including France, Spain and Portugal.

Now it is Ireland’s turn. After hearing all summer and into the fall of Ireland’s financial soundness despite its chronic debt issues, it seems Ireland is not so financially sound at all. Indeed, despite the statements by the Irish government of its “control of the situation” over the last several weeks, the Irish government is about to accept a loan of approximately $100 billion from the European Union-IMF loan facility to stem the weakness in Irish sovereign debt caused by the deteriorating situation in Irish banks. Increased loan losses in the Irish banking system, which is fully backed by the Irish government, have caused Irish debt to increase to almost one-third of Irish GDP. Financing costs have escalated and there has been a virtual “run” on Irish banks. Capital markets were increasingly becoming closed to Irish government and Irish banking financing and capital markets around the world were getting “ hit” on another resurfacing of the European debt crisis. So with another sovereign government bailout, another “band aid” has been applied to salve market fears of a government default. However, the ruling Irish government has become so unpopular as a result of the weak economy and draconian austerity measures due to go into effect next year, that it will likely be replaced in elections due to be held next year by a center-left government even if it is one of a coalition of parties. This is the prevailing shift in politics within Europe as a result of the debt crisis and the tax increases, worker layoffs, pension cuts and other austerity measures enacted by European governments as they attempt to reduce debt levels. We warned of social unrest leading to political upheaval in Europe in our May blog articles and we are getting it.

So if Ireland accepts the EU-IMF bailout we expect a brief period of relief but the unfortunate truth is the European debt crisis is not going away. This month it is Ireland. Over the next several months it will be Portugal and Spain and if European economic growth slows down next year, it could be Italy as well that need EU-IMF support. The question becomes, how much money will the EU-IMF have available if those other countries need loans to avert financial disaster.  We have steadfastly been of the opinion that the EU solutions to the debt crises in their member countries are ill advised and doomed to failure. We will be publishing a major article on our website, www.spgtrend.com after the Thanksgiving holiday outlining in detail the problems in Europe and why we believe the Union will fail.

 Morris R. Segall