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Generational Dynamics Web Log for 23-Nov-2010
23-Nov-10 News -- Ireland in chaos as euro crisis grows

Web Log - November, 2010

23-Nov-10 News -- Ireland in chaos as euro crisis grows

Saudi Arabia facing a possible succession crisis

Ireland's prime minister defiant after bailout protests

Left-wing or communist riots and protests, reacting to austerity budgets, have been fairly frequent in countries across Europe, and now Ireland is no exception.

Dozens of protesters, led by left-wing opposition party Sinn Féin, confronted police and pushed into government buildings in Dublin, according to the Irish Times.

They were demanding the resignation of Taoiseach (Prime Minister) Brian Cowen, so that there would be new elections. The Green Party, part of Cowen's ruling coalition, said it will pull out of the government, according to Spiegel.

The expected austerity steps will be brutal -- cutting the budget by some $20 billion, cutting around 20,000 public sector jobs, raising taxes, reducing welfare.

And with 300,000 "ghost houses" -- unoccupied or partially finished homes left over from the real estate bubble -- there's worse to come.

However, Cowen is remaining defiant for the time being. He's refusing to call new elections until the austerity budget has passed the Parliament. Originally, the budget was supposed to be passed this week, but now it's been postponed, and with growing opposition to the austerity steps, it may be delayed further.

In the meantime, negotiations are still going on with the European Union, the European Central Bank (ECB) and the International Monetary Fund (IMF) on the bailout. The bailout is not a done deal, and there are still bitter negotiations to come over what Ireland will have to give up in return for the bailout.

Portugal and Spain are the next targets

The EU and Ireland were forced into bailout negotiations because Irish bond yields (interest rates) were going parabolic, at one point going briefly above 9%, as shown in the following chart from Spiegel:

Bond yields on PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) and Germany last week <font face=Arial size=-2>(Source: Spiegel)</font>

Bond yields on PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) and Germany last week (Source: Spiegel)

As you can see, Ireland was following the path that Greece followed last spring. Finally Greek bond yields exceeded 12%, threatening to put Greece into default, and causing a chain reaction around Europe. After the bailout in May, Greek bond yiekds fell below 8%, as you can see above, but are now approaching 12% again.

This weekend's announcement of bailout negotiations caused bond yields to fall slightly on Monday, but nothing as dramatic as what happened in May.

Theoretically, it doesn't matter now if Greek bond yields are above 12%, because Greece will not be selling any additional bonds on the open market. Instead, the bailout allows Greece to sell bonds to the EU for a much lower interest rate, around 5%.

Ireland's bailout plan, if it comes to fruition, will work the same way. So Ireland won't have to enter the open bond market for two or three years, if all goes as planned. The amount of the bailout is expected to be around 90 billion euros.

As you can see from the above chart, Portugal is almost exactly where Ireland is. And there's a great deal of fear that the yields on Spain's bonds could start rising to crisis levels.

Here are some snippets of things that I heard from various analysts on Monday:

Now that Ireland is getting bailed out, other countries can expect their automatic bailouts as well.

It would be best to bail out Portugal right away, without waiting for a crisis, and a bailout will be necessary anyway, according to the NY Times.

It would cost 40 billion euros to bail out Portugal.

It would 300 billion euros to bail out Spain.

Greece has requested an extension on the previous agreed deadline to pay off its debts to the EU. Other people have suggested that Greece will never be able to repay its debts to the EU. This suggests that Ireland won't be able to do so either.

There are 440 billion euros in the EU's stability fund that was created following the bailout of Greece. However, 40% of that money will not be available, because it's owed by countries that are too far in debt to contribute. Thus, Germany and France will be asked to bear most of the burden of further bailouts.

The euro currency may not survive.

Everybody is hoping that prosperity is just around the corner, and that the fabled V-shaped recovery will begin any day now, so that none of these debts will matter. From the point of view of Generational Dynamics that's impossible, for reasons I've stated many times.

In 2008, I posted the article "One, Two, Three ... Infinity," in which I compared to the ever-increasing government spending plans to a book by George Gamow that I read in school in the 1950s. My use of that particular phrase was to convey the idea that each new bailout or stimulus program would be larger than the last one. As each one failed, new and larger ones would be demanded, and this process would not be stopped except by a major financial collapse and crisis.

Now we see the same concept in a different way. Not only are the bailouts getting bigger, but the number of bailouts is growing, and the bailouts are spreading over a wider domain.

The situation is that Greece and Ireland will never be able to repay their bailouts, nor will any further bailed out countries. Europe will continue to "throw good money after bad," as the old saying goes, until a panic brings down the whole system.

Additional links

Hewlett-Packard will reconsider its investments in Ireland, if Ireland is forced to raise its 12.5% corporate income tax rate. Bloomberg

The mysterious Stuxnet computer worm that was suspected of targeting Iran's nuclear installations is now believed to work by making quick changes in the rotational speed of the motors in centrifuges used to enrich uranium. Rapid changes can cause them to blow apart. NY Times

Relations between Iran and Russia are souring, as Russia has suspended the planned delivery of the S-300 missile system to Iran. Jamestown Foundation

As Saudi Arabia's 80+ year old leaders show ill health, a succession crisis may be coming soon. My own expectation is that a younger generation of leaders in Saudi Arabia would be far more confrontational with the United States, Israel and Iran, thus pushing Iran and the United States closer together. Washington Institute

The U.S. military is sending heavily armored battle tanks to Afghanistan for the first time, signalling a further escalation in the aggressive tactics that have been employed by American forces this fall to attack the Taliban. Washington Post

Japan's justice minister was forced to resign on Monday because of a joke that he told last week. He said that when he was facing questions from members of parliament, he only needed to remember two comments: "I do not comment on specific cases," and "We are dealing with the matter appropriately based on law and evidence." Associated Press

Think you've read the worst about foreclosures? Read this. Sacramento Bee

(Comments: For reader comments, questions and discussion, see the 23-Nov-10 News -- Ireland in chaos as euro crisis grows thread of the Generational Dynamics forum. Comments may be posted anonymously.) (23-Nov-2010) Permanent Link
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Generational Dynamics Web Log for 23-Nov-2010 23-Nov-10 News -- Ireland in chaos as euro crisis grows

Ireland's prime minister defiant after bailout protests

Portugal and Spain are the next targets

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Generational Dynamics Web Log for 23-Nov-2010
23-Nov-10 News -- Ireland in chaos as euro crisis grows