by Reggie Middleton
So, S&P finally gets around to Cutting Ireland’s Rating on the Cost of Bank Support, as reported by CNBC:
Ireland’s financial headache worsened on Wednesday after Standard & Poor’s cut its credit rating in a move criticized by the country’s debt management agency.
The premium investors demand to hold Ireland’s 10-year bonds over German bunds has been steadily widening in the past few weeks and remained elevated at 327 basis points on Wednesday.
The spread finished at 330 bps on Tuesday, its highest level since the Greek financial crisis broke in May.
Brenda Kelly, an analyst at CMC Markets, said she expected Irish borrowing costs to climb on the back of S&P’s move.
“I think we are going to have to an awful lot more in interest payments,” she said.
Although Ireland has raised virtually all of the 20 billion euros of long-term debt targeted for 2010, S&P’s move may make it more difficult for the country’s banks to extend the maturity of their funding later this year and eventually wean themselves off a state guarantee on their debt.
S&P cut Ireland’s long-term rating by one notch to ‘AA-’, the fourth highest investment grade, and assigned the country a negative outlook late on Tuesday saying the cost to the government of supporting the financial sector had increased significantly.
Rating agencies have been steadily hacking away at Ireland’s credit rating and S&P’s is now on a par with Fitch and one notch below Moody’s, which cut its rating to Aa2 last month.
S&P said it expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimate of 80 billion euros including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.
Ireland’s budget deficit ballooned to 14 percent of gross domestic product, the highest in Europe, last year due to the cost of propping up nationalized lender Anglo Irish ANGIB.UL and it could climb higher if Dublin injects an additional 10.05 billion euros into the bank…
I’m not going to say I told you so, but I did throw some pretty strong hints…
On April 29th, I was quite blatant in stating “Beware of the Potential Irish Ponzi Scheme!”, urging my susbscribers to review the Irish Bank Strategy Note and the Ireland public finances projections that I made available earlier that month. You see, unlike many of the pundits in Europe who state that Ireland has moved beyond the worst of its problems and is an example of how austerity should work, I believe that Ireland is in very, very big trouble and I outlined the reasoning behind such in my very first posts on the Pan-European Sovereign Debt Crisis.
At the very beginning of the year, I visually illustrated how bad off Ireland was, with considerably more that 6% of its GDP being mired in bank NPAs (non-performing assets). This number is quite conservative, for my research team only canvassed the larger banks in Ireland – you can rest assured that the smaller ones contain a similar (if not greater) proportion of NPAs to total assets. Add to this the fact that these banks are probably overstating assets and understating liabilities and you can probably throw another 150 basis points on top of the figures above and still be a tad bit conservative.
As a matter of fact, I went further into the topic in mid-April with Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! where I showed that Ireland is heavily leveraged into the problems of the PIIGS group faced. A picture (and/or graph is worth a thousand words! From the afore-linked post…
So if Ireland is really that bad off, what’s up with that tall stalk next to it in the bank NPA chart at the beginning of the post? Oh, those are the guys (and gals) who lent Ireland all of that money, and Ireland’s issues are probably a significant portion of those NPAs you see towering over that of Ireland. I am not picking on Ireland and the UK, for much of Europe suffers from similar anathema,.
It is not as if no one could see the Euro-bank issues coming. In January of 2009, I explained to readers that the real estate bust in Spain could not be avoided by the banks and there will be a time when the piper comes a callin’ This, of course, will be subsidized by the Spanish state,. This didn’t just start with Greece,
So what does it all mean?
Well, from my point of view, things rarely happen in a vacuum. Many European nations are over leveraged, overbanked, highly indebted, social powder kegs literally and economically sitting right next to each other. Lord forbid someone inadvertently lights a match! Whether that match is of financial or economic origin a very unpleasant domino effect will ensure.
Reggie’s analyzes is spot on and a must read for all serious citizens who want to get the real facts on our countries financial situation and not the spin coming from an increasingly out of touch government