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Standard & Poor’s downgraded the U.S.’s AAA credit rating

Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

U.S. Response

The U.S. immediately lashed out at S&P, with a Treasury Department spokesman saying the firm’s analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn’t elaborate, saying the mistake speaks for itself.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obamasigned a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

“This move should not be much of a surprise to markets, though the timing is at a point where market sentiment is fragile after the drop in stocks this week,” said Ajay Rajadhyaksha, a managing director at Barclays Capital in New York. “What really matters is whether the markets are willing to ‘downgrade’ the U.S. bond market. As this week’s move showed, U.S. Treasuries remain the flight-to-quality asset of choice.”

Asian Investors

Asian investors are likely to retain their Treasuries holdings for now, with options limited by the region’s foreign-exchange rate policies. Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.

Policy makers from China to Japan to Southeast Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion in the securities and the nation’s official Xinhua News Agency said in a commentary that the U.S. must cure its “addiction” to borrowing.

“They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.“There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”

U.S. Economy

S&P’s action may hurt the U.S. economy over time by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. The U.S. spent $414 billion on interest expense in fiscal 2010, or 2.7 percent of gross domestic product, according to Treasury Department data.

“It’s a reflection of the fact that we haven’t done enough to get our fiscal house in the order,” Anthony Valeri, market strategist in San Diego at LPL Financial, which oversees $340 billion, said in an interview before the cut. “Sovereign credit quality is going to remain under pressure for years to come.”

The agreement between Republicans and Democrats raised the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce the $2.4 trillion in spending reductions over the next 10 years.

Even with the accord, S&P said the U.S.’s debt may rise to 74 percent of gross domestic product by year-end, to 79 percent in 2015 and 85 percent by 2021.

S&P also changed its assumption that the 2001 and 2003 tax cuts enacted under President George W. Bush would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”

American Policymaking

“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating,” S&P said.

S&P put the U.S. government on notice on April 18 that it risked losing the AAA rating it had since 1941 unless lawmakers agreed on a plan by 2013 to reduce budget deficits and the national debt. It indicated last month that anything less than $4 trillion in cuts would jeopardize the rating.

“There was still a very narrow cross section of common ground between the parties and we don’t think that this agreement really changes that equation,” David Beers, a managing director of sovereign credit ratings at S&P said in a Bloomberg Television interview.

Capital Weightings

The treatment of Treasuries and other securities backed by the U.S. in terms of risk-based capital weightings for banks, savings associations, credit unions and bank and savings and loan companies won’t change, the Federal Reserve and bank regulators said in a statement following the downgrade.

Obama has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Fed research and data.

“The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid,” Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in a Bloomberg Television interview before the announcement.

Treasury Yields

Ten-year Treasury yields fell to as low as 2.33 percent inNew York yesterday, the least since October. Yields for the nine sovereign borrowers that have lost their AAA ratings since 1998 rose an average of two basis points in the following week, according to JPMorgan.

Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

“Yields are low in the face of a downgrade because there is nowhere else for people to go if they don’t buy Treasuries because they want to be in safe dollar assets,” Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed, said before the announcement.

Bond Dealers

The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency “appears to be slipping” in quarterly feedback presented to the government on Aug. 3.

The U.S. currency’s portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.

“The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,”page 35 of the presentation made by one member of the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pimco. “The fact that there are not currently viable alternatives to theU.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”

Members of the TBAC, as the committee is known, which met Aug. 2 in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. “None of the members thought that a downgrade was imminent,” according tominutes of the meeting released by the Treasury.

Remaining AAAs

S&P gives 18 sovereign entities its top ranking, includingAustralia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt to GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in the statement yesterday.

New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 basis points to 70 basis points over the “medium term,” JPMorgan’s Terry Belton said on a July 26 conference call hosted by the Securities Industry and Financial Markets Association.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Comment:

This move is a surprise to me as I did not believe the S&P would have the balls to do so .

This is bad for the markets, expect to see wild gyrations in the Dow .This is the kind of move that could cause the Dow to take a further nosedive down to about 9400ish a 2000 point drop .It’s time to get out or get some more insurance! The new rating of AA+ is not justified with all of the printing going full blast the Americans are already broke many times over and should really have a rating of Junk status . But if this happened we could see global  war.

Stocks drop on Libya, surprise Chinese deficit

LONDON -The battle for control of Libya and weaker than expected Chinese economic data weighed on markets Thursday while a debt rating downgrade of Spain hit the euro, a day ahead of a crucial meeting of EU leaders.

Sentiment over the past few weeks has been driven by developments in North Africa, most recently in Libya, which in normal times produces a little under 2 percent of the world’s global oil needs.

Though the regime of longtime leader Moammar Gadhafi appears to be recapturing ground lost to rebels, investors remain cautious of staking out fresh positions given worries over oil supplies and how the crisis in the Arab world will spread.

The main impact has been in oil markets, sending prices up to their highest levels for around two and a half years. By early afternoon London time, the benchmark oil contract on the New York Mercantile Exchange was down 98 cents at $103.40 a barrel, while Brent crude in London fell $1.36 to $114.58.

Both figures are somewhat lower than where they were on Monday but remain elevated and a threat to global growth prospects. That fear has hung over stock markets recently — equities are a leading indicator of perceptions for economic expansion.

It’s clear that rising oil prices are having an impact in China, which has been one of the main pillars behind the global economy over the past few years. Many analysts argue that buoyant Chinese economic growth effectively prevented the economic recession from becoming a depression.

The world’s second biggest economy, however, reported a surprise trade deficit in February as surging prices for oil and other commodities pushed up its import bill.

“Confidence in equity markets is being shaken once again as China’s surprise posting of a trade deficit combined with the ongoing geopolitical uncertainty — something that’s still focused very much on Libya — is pushing traders very much into a bearish mindset,” said Harley Salt, head of sales trading at IG Markets.

In Europe, the FTSE 100 index of leading British shares was down 1.1 percent at 5,874 while Germany’s DAX fell 0.7 percent to 7,081. The CAC-40 in Paris was 0.6 percent lower at 3,969.

Wall Street was poised for a retreat at the open — Dow futures were down 42 points at 12,132 while the broader Standard & Poor’s 500 futures fell 6.4 points to 1,309.

Hardly helping matters was the news that Moody’s has downgraded its credit rating on Spain by one notch to Aa2, citing worries over the cost of the banking sector’s restructuring, the government’s ability to achieve its borrowing reduction targets and grim economic growth prospects.

The euro retreated in the wake of the downgrade, trading 0.5 percent lower on the day at $1.3832.

The downgrade came amid signs that Europe’s debt crisis is flaring up again ahead of the March 24-25 summit of EU leaders in Brussels. Portugal’s cost to borrow 10-year bonds stands near a euro-era record.

Though a “comprehensive solution” to the debt crisis has been trumpeted, there are growing fears that the 17 countries that use the euro will not agree a revamped bailout mechanism, set new rules on budget deficits and a system of support funds to flow from richer countries in the single currency bloc to the poorest.

“Eurozone issues have returned to the fore as we approach a period of critical decisions on the funding facilities and bank stress tests,” said Richard Cochinos, a foreign exchange strategist at Bank of America Merrill Lynch.

News that the Bank of England kept its main interest rate unchanged at the record low of 0.5 percent was not a huge surprise.

However, the bank is expected to start raising borrowing costs in the next couple of months in response to inflation running at double the 2 percent target.

Earlier in Asia, Japan’s Nikkei 225 stock average ended 1.4 percent lower at 10,434.38 after the government said the economy shrank 1.3 percent in the fourth quarter.

Chinese shares fell too, with the Shanghai Composite Index closing down 1.5 percent to close at 2,957.14 while the Shenzhen Composite Index of China’s smaller, second exchange fell 0.7 percent to 1,302.65.

Hong Kong’s Hang Seng index retreated 0.8 percent to 23,614.89.

Kelvin Chan in Hong Kong contributed to this report.

See full article from DailyFinance: http://srph.it/g2Ck6m

Vincent Browne

On Last night’s program we got some shocking revelations that we the Irish have in fact lost our sovereignty, with the news that the Germans have taken up residency in the Department of Finance and at the treasury buildings. Our government have in fact Lost our national independence and should now resign and face treason charge in the courts.

http://www.tv3.ie/videos.php?video=29124&locID=1.65.169&date=2010-11-10&date_mode=0&page=1&show_cal=&newspanel=&showspanel=&web_only=&full_episodes=1

Whay did Merrill Lynch say the Cowen and lenihan ?

see article below from the Irish Times

DEAGLáN de BRéADúN, STEVEN CARROLL and SIMON CARSWELL

The Taoiseach and the Minister for Finance were sharply criticised today by Fine Gael‘s Michael Noonan who said they ignored advice against providing a blanket guarantee to Anglo-Irish and other banks in the crisis that arose at the end of September 2008.

He said Public Accounts Committee documents showed they were warned five days in advance by Department of Finance Secretary General David Doyle that the banking system potentially faced not just a liquidity but also a solvency crisis.

“The very next day Merrill Lynch’s top advisers, hired by the Government at great expense to advise on the crisis, recommended against a blanket guarantee at a meeting attended by the Finance Minister,” Mr Noonan said.

However, speaking to reporters yesterday, Taoiseach Brian Cowen said: “There were a number of options actually set out by Merrill Lynch.”

He added that, “The Central Bank Governor’s report confirms that the guarantee option was the way forward.”

Asked about Merrill Lynch’s view that a blanket guarantee would be a mistake, Minister for Finance Brian Lenihan said the advisers outlined a number of options, including that Anglo Irish Bank’s subordinated debt – funding provided by investors in return for a risk premium – be included in the guarantee to show it was a systemic institution.

Mr Lenihan tonight said advice received from Merrill Lynch on September 26th 2008 suggested a guarantee for the six Irish banks would be the “most decisive” and “most impactful from market perspective”.

He said the only option which Merrill Lynch discounted, after full consideration, was the option of allowing an Irish Bank to fail. “This is the option that Fine Gael has advanced since 2009,” Mr Lenihan said.

The Government paid €7.3 million in fees to Merrill Lynch, including €5 million in 2009, for its advice on the banking crisis between September 2008 and June 2009.

A Labour member of the Public Accounts Committee, Deputy Roisin Shortall said: “There is no evidence in the documentation to suggest that alternatives to the blanket guarantee were properly considered in spite of the very expensive advice being sought from advisers, such as Merrill Lynch.”

Sinn Fein Finance Spokesman Arthur Morgan said: “The information supplied by the banking system in the run-up to the guarantee was falsified and the banks dramatically over-estimated the value of their assets. The mis-information and inaccuracy of forecasts surrounding these assets tainted the considerations of officials in the run-up to the guarantee. The result of these false truths is that the taxpayer has been exposed to a litany of debt of generations to come.”

Bank of America Corp

Bondholders are penalizing Bank of America Corp. the most of any of the largest U.S. financial firms as the investigation into the foreclosure crisis expands. Credit-default swaps on the country’s largest bank by assets rose above those of its peers by a record margin, according to data provider CMA. The contracts, which imply Bank of America has lost its investment-grade rating, exceed Citigroup Inc.’s by the most ever and surpassed Morgan Stanley’s this week for the first time in a year.

 Attorneys general from all 50 states joined to open an investigation into whether lenders and mortgage companies falsified documents as they sought to repossess homes. Charlotte, North Carolina-based Bank of America said Oct. 8 it would curtail foreclosure sales nationwide, as speculation rose the lender would have to buy back home mortgages with faulty documentation. “As we look at the financial landscape and try to put pen to paper and figure out who might be most exposed to problems associated with foreclosure moratoria, with robo-signers, with mortgage put-backs,

Bank of America’s at the top of the list,” said David Havens, a financial institution debt analyst at Nomura Holdings Inc. in New York. Bank of America is being singled out for expanding its real-estate operations and acquiring Countrywide Financial Corp., then the biggest U.S. mortgage lender, in 2008 during the worst housing slump since the Great Depression, Havens said. The bank also increased its mortgage assets through the $29 billion purchase of Merrill Lynch & Co. in January 2009 under pressure from the Federal Reserve, which was trying to prevent failure of the U.S. banking system. ‘Nothing Different’ “There’s nothing different about our company today than yesterday,” Chief Executive Officer Brian T. Moynihan said after a speech in Boston yesterday.

The bank’s review of foreclosures will take “a few weeks to get through,” he said. Jerry Dubrowski, a spokesman for Bank of America, declined to comment further. Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt rose 1 basis point to 168 basis points, or 1.68 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has narrowed 13 basis points since Aug. 31. Yields averaged 3.396 percent yesterday, the index shows.

Structured Notes Structured notes issuance in the U.S. reached a record, with banks selling $38.4 billion of the securities this year as investors turn away from stocks and toward fixed-income products. Sales of the products, which are bonds bundled with derivatives, compare with $33.9 billion last year and $37.6 billion in the previous record year of 2008, according to database StructuredRetailProducts.com. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, were little changed, rising 0.08 basis point to a mid-price of 98.54 basis points as of 12:58 p.m. in New York, according to index administrator Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 1.93 to 102.5.

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. ‘Political Implications’ The cost to protect Bank of America’s debt for five years climbed for a fourth day, touching yesterday’s record of 205 basis points, according to Phoenix Partners Group. The difference between the swap price and the average of the five largest banks grew yesterday to 41.1 basis points, the most on record. Citigroup’s swaps rose 3.2 basis points to 177 today and contracts on New York-based Morgan Stanley fell 2.2 basis points to 173, Phoenix data show.

In February, Citigroup’s contracts were 94.4 basis points higher than those of Bank of America’s, according to CMA. “For all of these residential real estate issues that are dominating the headlines today and have significant political implications in the 19 days going into the election, Bank of America sits there more exposed than Citigroup right now,” Nomura’s Havens said. Implied Ratings Prices on Bank of America’s credit-default swaps imply the debt is ranked Ba1 as of Oct. 13, five levels below its actual A2 grade, according to Moody’s Corp.’s capital markets research group. That’s the first time the firm’s swaps have signaled a junk ranking since May 6, the data show. Bank of America’s $2.5 billion of 4.5 percent notes due in April 2015 fell 0.381 cent to 103.89 cents on the dollar as of 11:36 a.m. in New York, Trace data show. The bonds were issued at 99.9 cents in March to yield 215 basis points more than Treasuries.

 The bank has $360 billion of bonds outstanding, Bloomberg data show. The rising price of swaps reflects potential costs that banks may face on so-called mortgage put-backs from investors. Put-backs occur when a mortgage lender is forced to repurchase a loan that’s been sold for securitization. Banks may also have to pay for legal challenges. Loan-Servicing Grade The Association of Financial Guaranty Insurers, a trade group for bond insurers, said in a letter last month toMoynihan that his bank should repurchase as much as $20 billion in home loans that were based on wrong or missing information. Moody’s put Bank of America’s loan-servicing grade on review for a possible downgrade on Oct. 4, citing irregularities in the foreclosure process and deterioration of loss mitigation and collections.

The bank’s swaps have doubled this year, adding 106.4 basis points. That’s still down from 400.7 basis points in March 2009, CMA data show. “You’ve had balance sheet repair but the work isn’t done,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. “People need to get their hard hats back on.”

Comment:

If the market is now taking heed of the problems of Bank of America and mortgage defaults why are the Irish Banks ignoring the same problems here in Ireland? I believe the problem of negative equity is not entirely all the fault of the mortgage holders there is percentage of the fault on the lending intuitions as I believe they did not carry out due diligence on all transactions and standards were not enforced. Standard procedures were not adhered to in a lot of cases. We the taxpayers are going to have to face the problem sooner or later with a mass default of mortgages or a mass bailout, a kind of NAMA for homeowners and the Department of Finance knows it but the banks are pussy footing around the problem. This very possibility was discussed to –day on radio one

Recent Market “Events”

If like me you have become puzzled by the recent Market “events” you should find this excellent article sent to me to-day helpful

Recent Market “Events”


Following quite a number of requests from students and clients this brief will deal with my understanding of what transpired last Thursday the 6th. May when just after 2.30 PM the Dow Industrials collapsed by nearly 10% and then suddenly recovered in 11 minutes.

The implications of what occurred are far reaching and unless the regulatory issues are resolved we can expect similar “events” of like nature.

In the main to comprehend the situation in the “Market” one must realise that there are now many markets. In the good old days, in America, all we had was the New York Stock Exchange where real people dealt with real market makers in real time. But computers in general and the internet in particular have changed all that. In addition as well as the “public market” we now have the (OTC) Over the Counter Market. The OTC is basically a private market between banks and large institutions which has little or no active supervision. I find this development strange because the trading activity on the OTC is 60 trillion dollars annually, while turnover on the public market is 5 trillion. Now in addition to public markets and private markets let us now bring in “Dark Pools” to our explanation.

“Dark Pools” What are they? ” Dark pools of liquidity” are crossing networks that provide liquidity that is not displayed on order books. This situation is highly advantageous for institutions that wish to trade very large numbers of shares without showing their hand. Dark liquidity pools thus offer institutions many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their actions to other parties. This is achieved because neither the price nor the identity of the trading entity needs to be displayed. Many of the OTC “exchanges ” used by the dark pools use high frequency trading programmes to minimise order size and maximise order execution. Now you may think that this manner of doing business on the “stock market” is carried out by minor unknown entities but this is not the case. Below I list the Independent dark pools, the broker-dealer dark pools and exchange-owned dark pools.

Independent dark pools: Instinet, Smartpool, Posit, Liquidnet, Nyfix,Pulse Trading, RiverCross

and Pipeline Trading.

Broker-dealer dark pools: BNP Paribas, Bank of New York Mellon, Citi, Credit Suisse, Fidelity, Goldman Sachs, Knight Capital, Deutsch Bank, Merrill Lynch, Morgan Stanley, USB, Ballista ATS, BlocSec and Bloomberg.

Exchange-owned dark pools: International Securities Exchange, NYSE Euronext, BATS Trading and Direct Edge.

When you understand that all the big players in banking and finance are using the OTC system and have a turnover 12 times that of the “public” markets you get to wonder why there is a New York Stock Exchange at all. Well you see there is a big difference between the OTC “private” market and the NYSE “public” market. The NYSE is comprised of market makers. These market makers are specialists who are obliged to buy and sell on their own and the publics’ account to create a liquid active market. The OTC market faces no such obligation. Over the past number of years attempts have been made to abolish the specialist role and remove the “human” engagement.

What happened on Thursday was the high frequency OTC trading programmes

created “trades” which did not make sense to the NYSE specialists. Accordingly the NYSE stopped handling orders so that the situation could be analysed. The OTC computerized networks then began rerouting orders to other “markets” and with no “public” markets participating prices collapsed through sell stops and the rest is history.

There are many lessons to be learned from this event. But for me the main question is whether a “market” that is only 8% “transparent” is actually a market (5 trillion as a ratio of 60 trillion). Going forward it is obvious that additional “circuit breakers” must be brought in to modify the exchange activity of high frequency dark pools. Whatever the eventual fallout from last Thursday’s events are it is clear that the issues I have touched upon are only the tip of the iceberg and any trader or investor worth his salt must reflect upon what happened and adjust his or her strategies appropriately.

Wealthbuilder.ie


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