Next Spain? Analysts consider country next in line for a bail-out

With Europe agreeing a €85bn bail-out for Ireland's banks, analysts consider who, if anyone, could be next.

Demonstrators burn a picture of Ireland's Prime Minister Brian Cowen in front of Leinster House in Dublin.

In a note outlining the 2011 outlook for European banks, analysts at Deutsche Bank said sovereign concerns were "top of the agenda".

"We expect this process to continue in early 2011, as Deutsche Bank’s economics team believes Portugal is highly likely to tap IMF / EU(ESFS) rescue mechanisms next year. But we believe that the dominoes should stop falling at Spain."

Their fixed income colleagues at Deutsche said in a note on Monday that they were not at all surprised to see concerns over Spain rising again.

"The market seems to think it's inevitable Portugal requests assistance next - perhaps in January? - and then after that Spain will be scrutinised with a fine tooth comb over the coming months. In doing the work for the Outlook we've increasing come to the conclusion that whether you think the Sovereign problems stop at Greece, Ireland and perhaps Portugal depends on whether you think this is a problem with the overall Western financial system or whether you think its only a problem with individual over-leveraged entities."

Simon Samuels, an analyst at Barclays Capital said in a note last week:

"The Irish crisis and subsequent bail-out have returned sovereign concerns to the forefront of investors’ minds. But is it simply the case that some harsh comments from Angela Merkel have made bond investors run for cover? We don't think so."

He added:

"Simply put, the Irish sovereign has been dismembered by its banking system...In September, Irish banks faced redemptions of €25bn of government guaranteed debt. Whilst the government could (and did) extend this guarantee, just like Iceland in 2008, it no longer looked credible to the market, bond holders became nervous, and the system began to implode."

Writing about who could be next, he said:

"Our view is that the challenges facing Spain remain substantial – with the likelihood of a positive outcome poor until at least the sovereign and the banks have successfully navigated their way over the funding hump facing them both in Spring 2011. The question marks over asset quality will likely last far longer. By contrast, we are far more sanguine on Italian prospects. The absence of an asset bubble, and limited wholesale funding reliance suggests the banks pose little incremental risk to the Italian sovereign."

He added:

"Many commentators have suggested that Spain is too big to be allowed to fail. Whilst concrete plans on how to resolve a full-blown Spanish crisis remain opaque, should the tail risk of a Spanish bail out materialise, it is likely that the (stronger) French and German economies will bear the brunt of rescuing Spain, and by extension, the Eurozone."

Germany faces its awful choice as Spain wobbles

Desperate moments call for desperate measures. In June 1940, the British War Cabinet led by Winston Churchill offered a total national merger to a shattered France.

“France and Great Britain shall no longer be two nations, but one Franco-British union,” read the declaration.

“The constitution of the Union will provide for joint organs of defence, foreign, financial and economic policies. Every citizen of France will enjoy immediately citizenship of Great Britain, every British subject will become a citizen of France.”

The text was drafted by Jean Monnet, the father of the European Project. If alive today, he would be pounding on the door of the Kanzleramt, exhorting Angela Merkel to offer a total fiscal union to all members of the eurozone before everything falls apart, and to be enshrined in EU treaty law forever.

“All debts of Greece, Cyprus, Italy, Spain, Portugal, and Ireland will be fused immediately with German debt; a single treasury will control spending, and issue euro-bonds for all Euroland,” or some such formula.

This is the sort of game-changer that may now be required to save EMU and the Monnet dream. Germany must contemplate doing for Euroland what it has done for its own Volk in the East over the last 20 years – pay big transfers – or watch its strategic investment in the post-War order of Europe collapse with a bang, and in hideous acrimony. Tough call.

It is clear to those working in the bond markets that the debt crisis in the EMU periphery is nearing danger point, and risks spiralling out of control as quickly as the Lehman-AIG-Fannie-Freddie crisis in 2008.

Prof Willem Buiter, chief economist at Citigroup, said last week that Portugal is likely to need a rescue before the end of the year and that Spain will follow “soon after”.

Klaus Baader from Societe Generale issued a report the same day entitled “Eurozone sovereign debt crisis: next stop Spain”. He suggests that the EU bail-out fund raises money to buy Spanish bonds pre-emptively. Nice idea, but what would the German constitutional court have to say about that?

At Deutsche Bank, Thomas Mayer said Spain might soon need a flexible credit from the IMF. Informed opinion has turned.

Markets are already pricing a 23pc chance of default in Spain (34pc for Portugal, and 39pc for Ireland). If the country needs a rescue, it instantly exhausts the credible financial and political firepower of the EMU system.

The EU’s €440bn (£372bn) rescue fund “looks small, very small, too small”, says Dr Buiter. Alleged plans for a double-up are circulating “en coulisses” in the Berlaymont, but Berlin squashed the idea as “completely over the top”.

In any case, we are beyond the point where escalating bluffs can achieve anything. Markets doubt that it makes sense to heap further debt on states that cannot service existing debt.

The EU strategy of hair-shirt austerity and 1930s debt-deflation for crippled economies has been tested in Ireland, and has led to the same doleful outcome as the 1930s. Tax revenues have collapsed. The deficit has hardly shrunk at all. The policy is based on mechanical theories of the “fiscal multiplier”, and is patently self-defeating. Sinn Fein’s landslide victory in Donegal is a condign response to this academic hocus pocus.

Should the EU really impose a 6.7pc interest charge on Ireland’s bail-out loans, it should not be surprised if the new Irish government in January walks away from the whole stinking arrangement, and pulls the plug on Europe’s banking system. Many might cheer.

However, it is Spain that determines EMU’s fate. Spanish premier Jose Luis Zapatero said there is “absolutely” no chance that his country would need a rescue. “Those investors shorting Spain are making a big mistake.”

As Keynes once said, blaming economic crises on speculators is “not far removed, intellectually, from ascription of cattle disease to the “evil eye”.

Has Mr Zapatero read the IMF’s devastating Article IV report on his own country? It states that the government’s “gross financing needs” for 2011 will be €226bn, or 21pc of GDP. “Spain’s financing requirements are large and, retaining market confidence will be critical. Spain has exhausted its fiscal space. Targets should be made more credible.”

Madrid must attract €226bn of good money from Spanish savers, German pension funds, French banks, Japanese life insurers, and China’s central bank, so that an incompetent government (this one happens to be socialist, but the Greek conservatives were worse) can continue to run budget deficits of 7pc to 8pc of GDP in 2011. Why should they lend a single pfennig, having already been told by EU leaders that they will face scalping if Spain ever needs a rescue?

“The economy is highly indebted and has one of the most negative international investment positions (IIP) among advanced countries,” said the IMF. Its external accounts are under water by 80pc of GDP.

Furthermore, Spanish banks will need to roll over €220bn in 2011 and 2012, according to Enrique Goñi, head of Banca Cívica. “We’re in the antechamber of a new liquidity crisis. We’re living through a financial pre-collapse,” he said.

Now, before yet more Iberian brickbats fly my way, let me say that Spain’s public debt will be a modest 63pc of GDP this year (though total debt is over 270pc, which is what matters). The savings rate is high.

The Banco de Espana has been heroic, but then it needed to be given that Spain no longer has control over its policy levers. The country had to contend with real interest rates of minus 2pc during the long boom, and cannot offset the horrendous bust with monetary stimulus or a properly valued peseta.

Spanish readers like to point out that British failings are comparable or worse. Whether or not that is true, it is irrelevant. Britain is not a prisoner of EMU. You might as well compare chalk and cheese.

We can argue whether the overhang of unsold properties in Spain will reach 1.5m, or six years’ supply, as claimed by Madrid consultants RR de Acuna, but there is little doubt that the "Cajas" and smaller banks have played a game of “extend and pretend” to disguise the true scale of losses on their property loans.

This then is the headache facing Angela Merkel. By the time she inherited the EMU debacle, imbalances were already chronic, and she certainly does not have popular mandate for Churchillian gestures right now.

Even so, it is remarkable that Berlin is not even allowing the European Central Bank to pursue the first and obvious line of defence, which is to calm eurozone bond markets by using its financial stability powers to buy Irish, Portuguese, and Spanish debt on a nuclear scale.

As the storm rages, the ECB is tightening monetary policy by draining liquidity (the Eonia rate is up from 0.4pc to 0.8pc since mid-year) and by signalling that they may soon shut the lending window that keeps Greek, Irish and Iberian banks alive.

Frankfurt is doing this even though the eurozone’s M3 money supply contracted on a month-to-month basis in both September and October, as did private credit. Is this just incompetence, or is somebody pushing PIGS into the slaughterhouse?

As for Britain’s offer in 1940, it is hard to see how such a union could ever have worked over time. It was rejected by the French cabinet, though premier Paul Reynaud pleaded in favour. One Gallic patriot said that utter destruction was better than becoming a “dominion of the British Empire”.

By the same token, today’s eurozone patriots might ask whether it is really worth giving up ancient sovereignty to keep a currency.

If Ireland Doesn’t Take The Bailout . . .

Update I, below. Update II, below.

So a week ago as I write this, the Irish formally asked for a bailout from the European Union, acting in concert with the International Monetary Fund and the British government.

And now, a week after that request, the EU finance ministers just approved the bailout of the Republic of Ireland—

—however . . . However, in those seven days in between, a serious shitstorm broke out in Ireland—it has been one hell of a week, over there in the Emerald Isle.

And though the bailout has been approved by the EU finance drones, we still do not have an approval from the most important player of them all:

The Irish people.

Let’s recap:

On Monday, immediately after the announcement that the Irish government had formally asked for the bailout, the Greens—partners of Prime Minister Brian Cowen’s Fiana Fáil party—left the governing coalition, forcing Cowen to call for an election in January.

The Green’s leader, John Gormley, isn’t stupid: He knows that, in politics, association is the very definition of guilt—and the Greens are guilty of having been in bed with Cowen. So Gormley and the Greens want to put as much daylight between themselves and Fiana Fáil before the election.

Even members of Cowen’s own party are trying to put distance between him and them—they’re openly calling for his resignation. That’s gotta hurt.

But Cowen’s holding on like Nixon—barely, but tenaciously. And even though they’ve left the governing coalition, the Greens are saying that they’ll support Brian Cowen’s budget—including the austerity measures being imposed as part of the EU/IMF bailout.

They say that—now. But what about later? ‘Cause later’s gonna be bad for everyone associated with the Cowen government. The Donegal by-election on Thursday proved that.

Donegal—traditionally a safe seat for Fiana Fáil—saw them lose in humiliating fashion to Sinn Féin. How humiliatingly? By a margin of more than two-to-one. Irony of ironies, the seat became vacant when the Fiana Fáil MP for Donegal, Pat Gallagher, left to become a European Parliament minister. Now Gallagher is stranded in Brussels, and Sinn Féin has his old seat locked tight.

Speaking of Sinn Féin: On Friday, their leadership sent a couple of MP’s to talk to IMF representatives. The Sinn Féin told the IMF—literally—that “they are neither wanted nor needed in Ireland.”

Ominous words, those.

Finally, on Saturday, somewhere between 50,000 and 100,000 Irishmen and women protested, marching on Dublin’s streets against the bailout. Even if it was only 50,000 people, that’s still about 1% of the population—imagine if 3 million people marched on the U.S. Capitol, protesting an upcoming budget deal: Get the picture? Big.

There wasn’t any violence in the protest—but there was anger, especially over the interest rate that the bailout is going to cost.

During the week, reports were that the bailout would come to around €90 billion, but with an interest rate of possibly 6.7%. You know that a country’s financial situation is dire when the tabloids start quoting bond market interest rates on the front page: The whole of Ireland was having a cow over that possible 6.7%. To top it off, the EU and the IMF negotiating position was that the Irish had to cut their fiscal budget deficit to no more than 3% of GDP by 2013—

—the Irish were pissed. No wonder they all marched on Dublin’s streets on Saturday afternoon in the freezing cold.

Tonight, Sunday night, the negotiations were supposed to be concluded and the bailout approved before Asian markets opened—and the Euro-drones did not disappoint: Brian Cowen went on TV and gave the hard-sell on the bailout package less than an hour before Asia opened.

The key details were: €85 billion total package (for comparison, Ireland’s 2009 GDP was €167 billion), with €10 billion available immediately to shore up the tottering Irish banks—which were the cause of this entire mess. Additional funds to prop up those banks would be made available on an as-needed basis, to a ceiling of €25 billion—that ought to prevent any near-term run on those banks. However, Irish pension funds would have to be raided to the tune of €17 billion. The Irish would have until 2015 to reduce their fiscal deficit to less than 3% of GDP, as per EU rules. And finally, the interest rate would be 5.8%.

This is what was negotiated. This is what the EU finance ministers approved. This is what’s on deck now.

However, we have a long week ahead of us—a very lo-o-o-o-ong week, to be sure. Because although this is the deal that’s been approved by the EU finance ministers, the deal negotiated by the Cowen government, there is one final hurdle to this bailout:

The Irish. Specifically, the Irish parliament.

The key date that’s coming up insofar as Ireland is concerned is December 7: “A date which will live in infamy!” really is living up to its moniker, because that’s the day the Irish are supposed to pass their budget—their budget with the EU/IMF bailout conditions: The Austerity Budget.

Now, here’s a question—the obvious question:

What if the Irish can’t—or won’t—pass the austerity budget?

What if the Irish don’t take the bailout?

Cowen’s government is teetering—the Greens could just as easily go back on their word and reject the austerity budget—or any of the other coalition parties could walk out—Sinn Féin wants no part of any IMF austerity deal—hell, just a couple of Fiana Fáil’s own MP’s could bolt and wreck Cowen’s parliamentary majority—

—and Fine Gael? Well, there’s the rub: Fine Gael, the center-left party which has traditionally been pro-European, stands to win huge in January. They currently have 51 seat in the Irish parliament, to Fiana Fáil’s 70; considering the Donegal results, it is not unreasonable to think that Fine Gael might win an outright majority in the 166-seat Dáil Éireann (lower house)—if they play their cards right.

Now, over the weekend, the Fine Gael finance spokesman, Michael Noonan, limited himself to urging Cowen’s governmet to take a “hard line” in negotiations with the EU and the IMF.

Clearly, Fine Gael realizes the mine field they’re traversing. They are pro-Europe, but they are Irish politicans too—with seats they have to win, and constituents they have to appease.

If push comes to shove, will they jump to the Irish side, or jump to the European side?

The question is no question at all—it’s obvious: They’ll jump to the Irish side. Fiana Fáil took the beating it did in Donegal because of the widespread perception that they’re the IMF’s lackeys—Fine Gael isn’t going to make that same mistake. Not with the noises Noonan is making on their behalf.

Therefore, the next week will be crucial, in Ireland. The next week could likely decide the fate of the Eurozone.

If the popular perception grows over the coming week that the Cowen government sold out the country to the IMF and the EU, then it is possible—very possible—that the austerity budget will not pass on December 7.

This would be a disaster to the European Union.

Is such an outcome likely? Will the Irish reject the austerity budget on December 7? Will they instead force the Irish banks to default on their debt?

There are already such calls. The Sunday Independent, the largest Sunday broadsheet in Ireland by a comfortable margin, has an editorial calling for an outright default. This call isn’t a lonely voice: The 50,000 march on Saturday proves that.

See, the problem in Ireland really isn’t so much the state’s deficits—rather, it’s the state’s guarantees of the Irish banks. That is what led to this mess. Yes, the Irish public sector is bloated, but it’s the banks that are busting the fiscal budget.

The Irish government allowed the banks to grow too big for too long, and to get mixed up in too many dicey deals—and so when the crisis hit in 2008, instead of letting them fail, Brian Cowen and his Fiana Fáil government backstopped those banks.

Much like in the United States in 2008, the Irish confused an insolvency issue with a liquidity issue. They thought their banks were having a cash crunch, when really, they were broke.

Cowen is reaping what he sowed: Even if the 2008 crisis had been a cash crunch and not an insolvency issue, Cowen never should have backstopped those banks—not when their combined liabilities were twice the GDP of Ireland. But that’s for another conversation.

Right now, the Irish people know that they are footing the bill so that British, German and American banks don’t suffer for having been foolish enough to be caught with Irish bank bonds. Here is a terrific breakdown of what the Irish owe, and to whom.

Rightfully, the Irish people are pissed. Now the question is, Will the various political factions in Ireland manage to maneuver Irish public opinion, and get them to accept the austerity budget?

This is what we spectators have to be looking at: Whether Irish public sentiment will go along with the deal—or turn against it.

This is very, very possible—after all, the Irish have already flipped off the EU once before, on a very big-ticket item: They gave The Big Middle Finger to the EU Constitution back in 2008, by a margin of 53% to 47%—and that’s when times were good and everybody wanted to be European. Now? Not so much.

What happens in the streets of Ireland will likely not be the deciding factor in the continuation of the EU and the Eurozone; not in my estimation. I still think, as I have argued, that Spain is the key to the Eurozone’s survival.

But if the Irish reject the austerity budget on December 7, it is obvious that the Spanish problems will come to a head a lot faster.

An Irish rejection of the bailout would send the bond markets into a frenzy—Spanish debt would immediately come under pressure, likely crashing before Christmas. Italy would come immediately next. The whole Eurozone could be ablaze by the New Year’s.

Therefore, the EU needs to make the December 7 budget vote go smooth—they need to pull out all the stops and make the Irish understand the situation. They need to make them see the wisdom of making sacrifices for the well being of British and German banks.

After all, as everyone knows, the Irish have always loved the British. And the Germans.

• For other pieces I’ve posted regarding the Eurozone crisis, see the “Europe Zoorope” section in my Directory of Posts.

Update I: Monday, 7:00am EST:

So the point of contention turned out to be the raid on the pension funds: The opposition parties have all severely criticized the Fiana Fáil negotiations, focussing on the pension fund raid, but also hitting them on lack of haircuts for foreign bondholders, the high interest rate of the package, and the color of the ties the Fiana Fáil people wore to the negotiations. According to the Irish Times, which gives a nice recap of overnight political reaction in Ireland, Fine Gael, Labour and Sinn Féin are all likely at this point to vote against the budget on December 7.

Update II: Monday, 9:15am EST:

Reader Shay sent a link to a series of amazing photographs of the Saturday protest in Dublin, which I highly recommend. This is the slideshow of those photographs on flickr.

Irish Pension Reserve funds to be spent on banks

UP to €15 billion from the National Pensions Reserve Fund, set aside when the Celtic Tiger was still roaring, is likely to be used to recapitalise three of the country’s banks.

Amid speculation last night that the rate of interest to be charged on the EU/IMF bailout could be as much as 6.7%, Fine Gael’s finance spokesman Michael Noonan said that kind of rate was "far too high" and unaffordable on any reasonable projection of growth.

The Department of Finance said the interest rate had still not been finalised, but given that much of the loan would be repayable over nine years the rate could be higher than the 5.2% charged to Greece but would not be as high as the 6.7% being quoted by some brokers.

Meanwhile, Anglo Irish Bank, which was downgraded to junk status yesterday evening, is expected to be closed swiftly, together with the Irish Nationwide Building Society, under the EU/IMF loan plan.

Officials hope to finalise the details of the €85bn package later today and have EU finance ministers approve it tomorrow.

The emphasis in the plan is to avoid drawing down money from the bailout and rely in the first place on money from the Pension Reserve Fund for the banks, and on the €20bn the state borrowed earlier this year to part-fund next year’s national budget.

Economist at the Economic and Social Research Institute, John FitzGerald, said he believed it would be a good idea to use the money in the pensions fund to recapitalise the banks, and keep the EU/IMF funds in reserve in case they needed further money later.

"Using the €20bn in cash we have first would be good for the country in the short run. It would leave the opening debt for 2012 €20bn lower and interest payments would be €1bn less. It would also leave the national debt lower than forecast at the end of next year," he said.

About €35bn of the total EU/IMF loan was being earmarked last night for the banks.

The Government would prefer not to tap this sum but keep it in reserve for contingencies during the three-year programme.

Instead, they will use the €15bn available to them in the pension fund to recapitalise Allied Irish Bank, Bank of Ireland and the Educational Building Society. They have already used the remaining €10bn from the pension fund to buy shares in AIB and BoI.

The Government had planned to split Anglo Irish Bank, which has already received €22.9bn of state money, into a bad bank destined to be shut down relatively quickly and a good bank that would hold the deposits Anglo still had.

The European Commission, however, said while the good bank could hold the deposits, it could not operate as a bank and must be shut down over the next decade. Now, however, under the terms being worked out with the EU/IMF/ECB team, the entire operation is likely to be shut down but it could still cost several more billions of euro to do so.

The Irish Nationwide Building Society, into which the state pumped €2.7bn, will also shut.

Since Allied Irish Bank has been unable to raise the €10.4bn it needs to recapitalise, the pension fund money will be used instead, while strengthening the also nationalised Bank of Ireland will cost about €1.5bn.

About €50bn is expected to be available from the EU- IMF package to cover the country’s funding needs over the next three years. But it is likely that the Government will first use the €20bn it raised on the markets over the summer.

If the markets have calmed and reduced Ireland’s borrowing costs closer to the 4.8% it averaged this year and last, the exchequer may decide to return to the markets rather than tap what could be more expensive money from the EU/IMF bailout.

Picture: Fine Gael’s finance spokesman Michael Noonan



This story appeared in the printed version of the Irish Examiner Saturday, November 27, 2010


Read more: http://www.irishexaminer.com/home/pension-reserve-funds-to-be-spent-on-banks-137796.html#ixzz16gDS1wKg

If Ireland Doesn’t Take The Bailout . . .

Update I, below.

So a week ago as I write this, the Irish formally asked for a bailout from the European Union, acting in concert with the International Monetary Fund and the British government.

And now, a week after that request, the EU finance ministers just approved the bailout of the Republic of Ireland—

—however . . . However, in those seven days in between, a serious shitstorm broke out in Ireland—it has been one hell of a week, over there in the Emerald Isle.

And though the bailout has been approved by the EU finance drones, we still do not have an approval from the most important player of them all:

The Irish people.



Let’s recap:

On Monday, immediately after the announcement that the Irish government had formally asked for the bailout, the Greens—partners of Prime Minister Brian Cowen’s Fiana Fáil party—left the governing coalition, forcing Cowen to call for an election in January.

The Green’s leader, John Gormley, isn’t stupid: He knows that, in politics, association is the very definition of guilt—and the Greens are guilty of having been in bed with Cowen. So Gormley and the Greens want to put as much daylight between themselves and Fiana Fáil before the election.

Even members of Cowen’s own party are trying to put distance between him and them—they’re openly calling for his resignation. That’s gotta hurt.

But Cowen’s holding on like Nixon—barely, but tenaciously. And even though they’ve left the governing coalition, the Greens are saying that they’ll support Brian Cowen’s budget—including the austerity measures being imposed as part of the EU/IMF bailout.

They say that—now. But what about later? ‘Cause later’s gonna be bad for everyone associated with the Cowen government. The Donegal by-election on Thursday proved that.

Donegal—traditionally a safe seat for Fiana Fáil—saw them lose in humiliating fashion to Sinn Féin. How humiliatingly? By a margin of more than two-to-one. Irony of ironies, the seat became vacant when the Fiana Fáil MP for Donegal, Pat Gallagher, left to become a European Parliament minister. Now Gallagher is stranded in Brussels, and Sinn Féin has his old seat locked tight.

Speaking of Sinn Féin: On Friday, their leadership sent a couple of MP’s to talk to IMF representatives. The Sinn Féin told the IMF—literally—that “they are neither wanted nor needed in Ireland.”

Ominous words, those.

Finally, on Saturday, somewhere between 50,000 and 100,000 Irishmen and women protested, marching on Dublin’s streets against the bailout. Even if it was only 50,000 people, that’s still about 1% of the population—imagine if 3 million people marched on the U.S. Capitol, protesting an upcoming budget deal: Get the picture? Big.

There wasn’t any violence in the protest—but there was anger, especially over the interest rate that the bailout is going to cost.

During the week, reports were that the bailout would come to around €90 billion, but with an interest rate of possibly 6.7%. You know that a country’s financial situation is dire when the tabloids start quoting bond market interest rates on the front page: The whole of Ireland was having a cow over that possible 6.7%. To top it off, the EU and the IMF negotiating position was that the Irish had to cut their fiscal budget deficit to no more than 3% of GDP by 2013—

—the Irish were pissed. No wonder they all marched on Dublin’s streets on Saturday afternoon in the freezing cold.

Tonight, Sunday night, the negotiations were supposed to be concluded and the bailout approved before Asian markets opened—and the Euro-drones did not disappoint: Brian Cowen went on TV and gave the hard-sell on the bailout package less than an hour before Asia opened.

The key details were: €85 billion total package (for comparison, Ireland’s 2009 GDP was €167 billion), with €10 billion available immediately to shore up the tottering Irish banks—which were the cause of this entire mess. Additional funds to prop up those banks would be made available on an as-needed basis, to a ceiling of €25 billion—that ought to prevent any near-term run on those banks. However, Irish pension funds would have to be raided to the tune of €17 billion. The Irish would have until 2015 to reduce their fiscal deficit to less than 3% of GDP, as per EU rules. And finally, the interest rate would be 5.8%.

This is what was negotiated. This is what the EU finance ministers approved. This is what’s on deck now.

However, we have a long week ahead of us—a very lo-o-o-o-ong week, to be sure. Because although this is the deal that’s been approved by the EU finance ministers, the deal negotiated by the Cowen government, there is one final hurdle to this bailout:

The Irish. Specifically, the Irish parliament.

The key date that’s coming up insofar as Ireland is concerned is December 7: “A date which will live in infamy!” really is living up to its moniker, because that’s the day the Irish are supposed to pass their budget—their budget with the EU/IMF bailout conditions: The Austerity Budget.

Now, here’s a question—the obvious question:

What if the Irish can’t—or won’t—pass the austerity budget?

What if the Irish don’t take the bailout?

Cowen’s government is teetering—the Greens could just as easily go back on their word and reject the austerity budget—or any of the other coalition parties could walk out—Sinn Féin wants no part of any IMF austerity deal—hell, just a couple of Fiana Fáil’s own MP’s could bolt and wreck Cowen’s parliamentary majority—

—and Fine Gael? Well, there’s the rub: Fine Gael, the center-left party which has traditionally been pro-European, stands to win huge in January. They currently have 51 seat in the Irish parliament, to Fiana Fáil’s 70; considering the Donegal results, it is not unreasonable to think that Fine Gael might win an outright majority in the 166-seat Dáil Éireann (lower house)—if they play their cards right.

Now, over the weekend, the Fine Gael finance spokesman, Michael Noonan, limited himself to urging Cowen’s governmet to take a “hard line” in negotiations with the EU and the IMF.

Clearly, Fine Gael realizes the mine field they’re traversing. They are pro-Europe, but they are Irish politicans too—with seats they have to win, and constituents they have to appease.

If push comes to shove, will they jump to the Irish side, or jump to the European side?

The question is no question at all—it’s obvious: They’ll jump to the Irish side. Fiana Fáil took the beating it did in Donegal because of the widespread perception that they’re the IMF’s lackeys—Fine Gael isn’t going to make that same mistake. Not with the noises Noonan is making on their behalf.

Therefore, the next week will be crucial, in Ireland. The next week could likely decide the fate of the Eurozone.

If the popular perception grows over the coming week that the Cowen government sold out the country to the IMF and the EU, then it is possible—very possible—that the austerity budget will not pass on December 7.

This would be a disaster to the European Union.

Is such an outcome likely? Will the Irish reject the austerity budget on December 7? Will they instead force the Irish banks to default on their debt?

There are already such calls. The Sunday Independent, the largest Sunday broadsheet in Ireland by a comfortable margin, has an editorial calling for an outright default. This call isn’t a lonely voice: The 50,000 march on Saturday proves that.

See, the problem in Ireland really isn’t so much the state’s deficits—rather, it’s the state’s guarantees of the Irish banks. That is what led to this mess. Yes, the Irish public sector is bloated, but it’s the banks that are busting the fiscal budget.

The Irish government allowed the banks to grow too big for too long, and to get mixed up in too many dicey deals—and so when the crisis hit in 2008, instead of letting them fail, Brian Cowen and his Fiana Fáil government backstopped those banks.

Much like in the United States in 2008, the Irish confused an insolvency issue with a liquidity issue. They thought their banks were having a cash crunch, when really, they were broke.

Cowen is reaping what he sowed: Even if the 2008 crisis had been a cash crunch and not an insolvency issue, Cowen never should have backstopped those banks—not when their combined liabilities were twice the GDP of Ireland. But that’s for another conversation.

Right now, the Irish people know that they are footing the bill so that British, German and American banks don’t suffer for having been foolish enough to be caught with Irish bank bonds. Here is a terrific breakdown of what the Irish owe, and to whom.

Rightfully, the Irish people are pissed. Now the question is, Will the various political factions in Ireland manage to maneuver Irish public opinion, and get them to accept the austerity budget?

This is what we spectators have to be looking at: Whether Irish public sentiment will go along with the deal—or turn against it.

This is very, very possible—after all, the Irish have already flipped off the EU once before, on a very big-ticket item: They gave The Big Middle Finger to the EU Constitution back in 2008, by a margin of 53% to 47%—and that’s when times were good and everybody wanted to be European. Now? Not so much.

What happens in the streets of Ireland will likely not be the deciding factor in the continuation of the EU and the Eurozone; not in my estimation. I still think, as I have argued, that Spain is the key to the Eurozone’s survival.

But if the Irish reject the austerity budget on December 7, it is obvious that the Spanish problems will come to a head a lot faster.

An Irish rejection of the bailout would send the bond markets into a frenzy—Spanish debt would immediately come under pressure, likely crashing before Christmas. Italy would come immediately next. The whole Eurozone could be ablaze by the New Year’s.

Therefore, the EU needs to make the December 7 budget vote go smooth—they need to pull out all the stops and make the Irish understand the situation. They need to make them see the wisdom of making sacrifices for the well being of British and German banks.

After all, as everyone knows, the Irish have always loved the British. And the Germans.

Pension reserve funds to be spent on banks

UP to €15 billion from the National Pensions Reserve Fund, set aside when the Celtic Tiger was still roaring, is likely to be used to recapitalise three of the country’s banks.

Amid speculation last night that the rate of interest to be charged on the EU/IMF bailout could be as much as 6.7%, Fine Gael’s finance spokesman Michael Noonan said that kind of rate was "far too high" and unaffordable on any reasonable projection of growth.

The Department of Finance said the interest rate had still not been finalised, but given that much of the loan would be repayable over nine years the rate could be higher than the 5.2% charged to Greece but would not be as high as the 6.7% being quoted by some brokers.

Meanwhile, Anglo Irish Bank, which was downgraded to junk status yesterday evening, is expected to be closed swiftly, together with the Irish Nationwide Building Society, under the EU/IMF loan plan.

Officials hope to finalise the details of the €85bn package later today and have EU finance ministers approve it tomorrow.

The emphasis in the plan is to avoid drawing down money from the bailout and rely in the first place on money from the Pension Reserve Fund for the banks, and on the €20bn the state borrowed earlier this year to part-fund next year’s national budget.

Economist at the Economic and Social Research Institute, John FitzGerald, said he believed it would be a good idea to use the money in the pensions fund to recapitalise the banks, and keep the EU/IMF funds in reserve in case they needed further money later.

"Using the €20bn in cash we have first would be good for the country in the short run. It would leave the opening debt for 2012 €20bn lower and interest payments would be €1bn less. It would also leave the national debt lower than forecast at the end of next year," he said.

About €35bn of the total EU/IMF loan was being earmarked last night for the banks.

The Government would prefer not to tap this sum but keep it in reserve for contingencies during the three-year programme.

Instead, they will use the €15bn available to them in the pension fund to recapitalise Allied Irish Bank, Bank of Ireland and the Educational Building Society. They have already used the remaining €10bn from the pension fund to buy shares in AIB and BoI.

The Government had planned to split Anglo Irish Bank, which has already received €22.9bn of state money, into a bad bank destined to be shut down relatively quickly and a good bank that would hold the deposits Anglo still had.

The European Commission, however, said while the good bank could hold the deposits, it could not operate as a bank and must be shut down over the next decade. Now, however, under the terms being worked out with the EU/IMF/ECB team, the entire operation is likely to be shut down but it could still cost several more billions of euro to do so.

The Irish Nationwide Building Society, into which the state pumped €2.7bn, will also shut.

Since Allied Irish Bank has been unable to raise the €10.4bn it needs to recapitalise, the pension fund money will be used instead, while strengthening the also nationalised Bank of Ireland will cost about €1.5bn.

About €50bn is expected to be available from the EU- IMF package to cover the country’s funding needs over the next three years. But it is likely that the Government will first use the €20bn it raised on the markets over the summer.

If the markets have calmed and reduced Ireland’s borrowing costs closer to the 4.8% it averaged this year and last, the exchequer may decide to return to the markets rather than tap what could be more expensive money from the EU/IMF bailout.

Picture: Fine Gael’s finance spokesman Michael Noonan

The Big Lie: Governments Have to Save the Big Banks

Many of the world's top economists and financial experts have said that the too big to fail banks are destroying the world economy, that they must be broken up in order to restore stability, and that small banks can easily pick up the slack and make all of the loans which are needed needs. See this, this and this.

And yet many people still believe the myth that the giant banks have to be saved at all costs.

How could that be?

Well, as Adolph Hitler wrote in Mein Kampf:

All this was inspired by the principle--which is quite true in itself--that in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily; and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation. For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying.

Similarly, Hitler's propaganda minister, Joseph Goebbels, wrote:

That is of course rather painful for those involved. One should not as a rule reveal one's secrets, since one does not know if and when one may need them again. The essential English leadership secret does not depend on particular intelligence. Rather, it depends on a remarkably stupid thick-headedness. The English follow the principle that when one lies, one should lie big, and stick to it. They keep up their lies, even at the risk of looking ridiculous.

Science has now helped to explain why the big lie is effective.

As I've previously pointed out in another context:

Psychologists and sociologists show us that people will rationalize what their leaders are doing, even when it makes no sense ....

Sociologists from four major research institutions investigated why so many Americans believed that Saddam Hussein was behind 9/11, years after it became obvious that Iraq had nothing to do with 9/11.

The researchers found, as described in an article in the journal Sociological Inquiry (and re-printed by Newsweek):

• Many Americans felt an urgent need to seek justification for a war already in progress

• Rather than search rationally for information that either confirms or disconfirms a particular belief, people actually seek out information that confirms what they already believe.

• "For the most part people completely ignore contrary information."

• "The study demonstrates voters' ability to develop elaborate rationalizations based on faulty information"

• People get deeply attached to their beliefs, and form emotional attachments that get wrapped up in their personal identity and sense of morality, irrespective of the facts of the matter.
  

• "We refer to this as 'inferred justification, because for these voters, the sheer fact that we were engaged in war led to a post-hoc search for a justification for that war.

• "People were basically making up justifications for the fact that we were at war"

• "They wanted to believe in the link [between 9/11 and Iraq] because it helped them make sense of a current reality. So voters' ability to develop elaborate rationalizations based on faulty information, whether we think that is good or bad for democratic practice, does at least demonstrate an impressive form of creativity.

An article yesterday in Alternet discussing the Sociological Inquiry article helps us to understand that the key to people's active participation in searching for excuses for actions by the big boys is fear:

Subjects were presented during one-on-one interviews with a newspaper clip of this Bush quote: "This administration never said that the 9/11 attacks were orchestrated between Saddam and al-Qaeda."

The Sept. 11 Commission, too, found no such link, the subjects were told.

"Well, I bet they say that the commission didn't have any proof of it," one subject responded, "but I guess we still can have our opinions and feel that way even though they say that."

Reasoned another: "Saddam, I can't judge if he did what he's being accused of, but if Bush thinks he did it, then he did it."

Others declined to engage the information at all. Most curious to the researchers were the respondents who reasoned that Saddam must have been connected to Sept. 11, because why else would the Bush Administration have gone to war in Iraq?

The desire to believe this was more powerful, according to the researchers, than any active campaign to plant the idea.

Such a campaign did exist in the run-up to the war...

He won't credit [politicians spouting misinformation] alone for the phenomenon, though.

"That kind of puts the idea out there, but what people then do with the idea ... " he said. "Our argument is that people aren't just empty vessels. You don't just sort of open up their brains and dump false information in and they regurgitate it. They're actually active processing cognitive agents"...

The alternate explanation raises queasy questions for the rest of society.

"I think we'd all like to believe that when people come across disconfirming evidence, what they tend to do is to update their opinions," said Andrew Perrin, an associate professor at UNC and another author of the study...

"The implications for how democracy works are quite profound, there's no question in my mind about that," Perrin said. "What it means is that we have to think about the emotional states in which citizens find themselves that then lead them to reason and deliberate in particular ways."

Evidence suggests people are more likely to pay attention to facts within certain emotional states and social situations. Some may never change their minds. For others, policy-makers could better identify those states, for example minimizing the fear that often clouds a person's ability to assess facts ...

The Alternet article links to a must-read interview with psychology professor Sheldon Solomon, who explains:

A large body of evidence shows that momentarily [raising fear of death], typically by asking people to think about themselves dying, intensifies people's strivings to protect and bolster aspects of their worldviews, and to bolster their self-esteem. The most common finding is that [fear of death] increases positive reactions to those who share cherished aspects of one's cultural worldview, and negative reactions toward those who violate cherished cultural values or are merely different.

I would arguably that the fact that the governments of the world have given trillions to the giant banks has invoked the same mental process - and susceptibility to propaganda - as the war in Iraq.

Specifically, many people assume that because the government has launched a war to prop up the giant banks, it must have a good reason for doing so.

Why else would trillions in taxpayer dollars be thrown at the giant banks? Why else would the government say that saving the big boys is vital?

And I would argue that the fear of another Great Depression (an economic death, if you will) is analogous to the fear of death triggered in many Americans by 9/11.

This creates a regression towards old-fashioned thinking about such things as banks and the financial system, even though the giant banks actually do very little traditional banking these days.

In other words, the big lie appears to be as effective in financial as in military warfare.