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What if Ireland rejected the bailout?

Posted Monday, November 29, 2010

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This is from Seeking Alpha, a large American Financial website who are looking at what will happen if the bailout is rejected in Parliament.

What if Ireland rejected the Bailout?

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.

Dicey Deals

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.

Wrong

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.

Pissed

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.

Deciding Factor

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.

Frenzy

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.

Saving Private Banks

Therefore, the EU needs to make the December 7 budget vote go smoothly—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.