Feuding European officials signed off on a bailout of Ireland’s banking system on Sunday night, but it failed to calm financial markets on Monday morning, according to EuroIntelligence.
10-year bond yields for Spain, Portugal, Ireland and Greece as of November 26, 2010 (Bloomberg)
The bailout will provide 85 billion euros to Ireland’s banks, with 17 billion euros coming from Ireland’s pension plan funds. A demand by German Chancellor Angela Merkel that investors be required to lose money was rejected. But Ireland will have to pay an interest rate of 6%, much higher than Greece will have to pay for its bailout.
Even with all that going on, the big story these days isn’t Ireland. The big story is Portugal and Spain.
The graphs above show 10-year bond yields (interest rates) for each of the PIIGS countries, excluding Italy. The yield is the interest rate that each country must pay to borrow money. The yield is highest if investors believe that the country is so far in debt that it might default.
Last spring, we were writing about what appeared to be an all-out panic over Greek bonds, as yields reached over 12%. When the $1 trillion super bailout was announced in May, yields fell in all four countries, as investors accepted the claim that their bond investments were safe.
Now Ireland’s bond yields are above 9% and Portugal’s are over 7%. These figures are extremely high, when you consider that the yields on Germany’s bonds are around 2.7%.
The European Union is increasingly in disarray, with the most angry differences focused on Germany, the largest economy, and the one weathering the crisis best. Last week, Chancellor Angela Merkel expressed the opinion that countries should be allowed to default, rather than be bailed out. Merkel’s remarks have been “as damaging as they have been inexplicable,” according to an analysis by the Irish Times:
“Vicious cycles are becoming visible. Frustrations are boiling over and openly critical statements by political leaders are being made of their counterparts. …
No intervention has been as damaging or as inexplicable as Chancellor Angela Merkel’s call earlier this month to create a framework to impose losses on holders of government bonds. The statement poured petrol on the fire in the bond market.
There can be little doubt now the correct-but-appallingly-timed call triggered the panic that did it for Ireland.”
In the end, Merkel caved in on the Ireland bailout, and creditors will not be expected to lose anything. The political impact in Germany of this cave-in may be dramatic.
The next country to receive the world’s attention is Portugal, and the situation is providing one bit of dark humor.
Portugal’s finance minister Fernando Teixeira dos Santos said that Portugal doesn’t need a bailout, and the European Union can’t force Portugal to take one, according to Bloomberg.
Dos Santos said, “There are those who think that the best way to preserve the stability of the euro is to push and force the countries that at this moment have been more under the floodlight to that aid. But that is not the vision or the political option of the countries that are involved.”
The reason that his statement is very, very funny is because it was just a week ago that Ireland was saying it didn’t need a bailout, and dos Santos was saying that Ireland HAD to accept bailout money, for the good of everyone. “I want to believe they will decide to do what is most appropriate together for Ireland and the euro. I want to believe they have the vision to take the right decision,” he said, according to Reuters.
So, this week the worm has turned, the shoe is on the other foot. Now it’s Portugal that appears to be headed for certain default, and many analysts are calling a quick bailout of Portugal to calm the markets.
But Ireland’s strategy showed how the game is played. When a country is going to be bailed out by the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF), this troika has the right to demand certain things in return, usually an extremely harsh austerity budget to reduce the country’s debt. So Ireland held off asking for aid as long as possible, in order to retain its negotiating leverage, and now Portugal is doing the same. The objective of each country is to be forced to take as few steps as possible to prevent a further crisis.
But what’s really capturing everyone’s attention now is Spain. Bond yields are around 5.2%, but they appear to be going parabolic, as you can see from the graph. A bailout of Spain would cost more than the other three bailouts combined.
That’s why there’s more and more talk lately that the euro currency may not survive, or that some countries will have to leave euroland and return to their national currencies.
It’s becoming more and more obvious even to Pollyannas that Greece and Ireland will never be able to repay their bailout loans, nor will any further bailed out countries. Even so, governments in Europe and America may take the advice of people like Paul Krugman, who once used to be an economist, and who now is advocating spending $10-15 trillion dollars in stimulus and bailouts in America alone. America and Europe will continue to “throw good money after bad,” as the old saying goes, until a panic brings down the whole system.
The Irish Times analysis concludes, “Policymakers may need some dramatic action early next week if the slide is to be halted.”
Well, policymakers in America and Europe have been taking a series of dramatic actions in the last three years, with each stimulus or bailout package larger than the last one. The most dramatic action occurred in May, when Greece was bailed out, with the announcement of the spectacular trillion dollar bailout fund.
Last spring, Greece was insisting it didn’t need a bailout — until it did. Then Ireland said, “We’re different from Greece, and we don’t need a bailout.” But now they do. And now we’re hearing that Portugal and Spain are “different,” and don’t need a bailout. We’ll see.
Anyone who looks at the above graphs can see that there isn’t a snowflake’s chance in hell that this crisis isn’t going to end any time in the near future. Bond yields have been surging all year, despite bailouts. The Europeans will have to try something even more dramatic, even more expensive.
There’s a good reason why I frequently refer back to my 2008 article, “One, Two, Three … Infinity.” The point of that article is that each bailout would fail, and the next one would have to be larger, and would achieve a smaller effect.
The point that I’ve been making for years is that there’s NO SOLUTION to this situation. You have politicians and analysts who say that if Merkel had only said or not said something, or if the EU had only done or not done something, then the problem would be solved. But the problem is never solved, because there’s NO SOLUTION.
This crisis is generational. It was caused by decades of the debased and debauched use of debt by the risk-ignorant Boomers and Generation-Xers, who replaced the risk-averse generations that survived the 1929 crash and the Great Depression. The financial crisis did not begin last year. It didn’t begin with the real estate bubble or the 1990s tech bubble. It began when the Boomers came of age and began abusing credit, and it got much worse when the Generation-Xers came of age and turned credit debauchery into an art form, creating the worst credit bubble in the history of mankind. (See “Markets fall as investors are increasingly unsettled by bad economic news.”)
Now a price has to be paid for that debauchery, and there is nothing that any politician can do to stop it.
Here’s a message that I’ve given many times: No politician can stop what’s coming, any more than they can stop a tsunami. You can’t stop what’s coming, but you can prepare for it. Treasure the time you have left, and use it to prepare yourself, your family, your community and your nation.
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