My old pal Nick Leeson (of Rogue Trader fame) made headlines again the other day when he urged the Irish people to reject the proposed ECB-IMF bailout and allow Ireland to default on its sovereign debt. The disgraced ex-trader, who spent years in prison after bringing down Barings Bank and is now the CEO of Galway United football club, pointed out the impossibility of such a small population repaying such a giant debt.
“Ireland has to default on its debt to the bond holders, and the time to do that is now – if you get involved with the IMF, it will be too late,” said Mr Leeson, who now works as CEO of Galway United.“The Government needs to postpone the budget, resign and call a General Election, because any other course of action will be too severe for the country. The size of the bailout being discussed cannot be repaid by a country with a population of less than five million people, it just can’t be done."
He's absolutely right, by the way. When you just do the math on a population of 5 million being forced to repay €85 billion through taxes, there's no way it works out. He's also right about it being game over once the IMF gets their hooks into you. The entire continent of Africa can be used as an object lesson in that regard.
Sinn Fein is trying to force the bailout proposal to a parliamentary vote, where I'd personally put the chances of passage at 50-50. Obviously, Irish Prime Minister Brian Cowen doesn't want to run that risk and he's doing everything he can to avoid letting the Irish people have their say in the matter.
It's an interesting situation. It's hard to imagine an Irish sovereign default being the catalyst of global economic End Times, as their current bondholders would have you believe. This probably won't surprise many of you, but I'm with Leeson. Tell the creditors to get bent and start over.
Two final notes:
Nick Leeson isn't actually an old pal of mine. I've never even met him, though I'd welcome the opportunity. However, when I was a commodities trader and he was doing his time, my old boss (who's now six months into a nine-year jolt in the federal pen for wire fraud - How's the food, buddy?) used to get pissed off and berate me on the trading floor whenever I'd disagree with the firm's research department on a given trade (an almost daily occurrence). He'd say something like, "Oh yeah, we don't know shit. We haven't been doing this for years. Listen to Nicky Leeson over there, he knows all." You can imagine how steamed he'd get when I was right and research was wrong. And, yes, it happened a lot.
Second, and this is for those who don't know Nick's story, watch the following and tell me you wouldn't let this guy run your country's finances:
In all seriousness, I'm interested to hear from traders and others with an opinion on the matter. Should Ireland just default? What would the consequences be? How would it effect the Eurozone? Would the resulting drop in the Euro take the wind out of Bernanke's QE2 dollar debasement sails? The bailout is clearly bad math for the Irish people. Should Ireland just shut up and take one for the team?
Did he really say 164 TRILLION dollars on the over the counter market?! That's mind blowing if its accurate...
Well, I think it's 862 million pounds....
A default might be better for Ireland's future household planning, but it would be hell for the Euro zone.
While Ireland is small, a default would massively increase uncertainty throughout governement bond investors of other European states. Spreads on Portugese and Spanish securities would explode, short-sellers would accelerate the down turn once again, and these countries would probably have to default themselves or jump under the umbrella. If this happens, Italy would probably be next.. and in that case, the IWF and EU umbrella won't be sufficient to cover the damage. And I doubt German tax payers would be willing to pour in more cash and guarantees in a situation of such a high degree of uncertainty like this.
Additionally, an Irish default would hit European banks like DB pretty hard and might trigger a new financial crisis.
In the end, a default of tiny Ireland indeed has the potential to be the end of the Euro and induce another worldwide economic recession. So better provide and take those 85bn, even if all involved parties know that it's very unlikely it will ever be paid back. This basicly means that tax payers are financing bond investors.. for the higher good..
I'd also be curious to know some traders' opinions in regards to Ireland, been reading various end game scenarios that can play out, and would like to see some of the arguments to support or refute these ideas... anyone?
A complete default has the potential to be a catalyst that rocks the EU to its core. However, the government of Ireland did its population a huge disservice when they guaranteed all their debt. They are in effect making the general population pay for the failure of the banking sector. If they follow the IMF plan and enact harsh austerity they will be in a terrible situation as the deficit will continue to increase as a percentage of GDP due to the effects of the austerity measures. I think a compromise of getting the debt holders to take a haircut would make sense for all the parties involved.
I'm all for a complete default by Ireland on its debts. While I don't like Sinn Fein, I think that they are right in trying to force a parlamentary vote on the matter instead of accepting a check from the IMF and the strings it comes with. As has already been said, an IMF Bailout may actually do more harm than good, as it will increase Ireland's debt burden more than it will reduce is as it does nothing to protect against future debt being issued and causing more strain to resolve this.
The reason I am all for this is that it proves that as a monetary union, the EU cannot stand together as a collection of seperate countries, each with its own seperate set of monitary policies and central banks, and expect to have one coutnry take over the burden for the rest of the failed nation states involved, which is what Germany looks like it is doing. If Ireland defaults, it will be the straw that breaks the camels back regarding the Euro, and proof that the concept was great on paper but failed in reality.
As to giving a haircut to bondholders, it's a reasonable approach to handling this matter. I'm all for it, but I dislike the uncertainty that it can produce, especially when these matters can be brought before the courts in order to resolve and substantial costs to the haircut with any legal fees that can be applied.
Re Nick Leeson here is a 1996 docu on the collapse with interviews with him.
[quote=JimYoung]Re Nick Leeson here is a 1996 docu on the collapse with interviews with him.
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Fascinating video, I'd never seen that before.
Love the way Brits talk about things:
When asked if Barings turned a blind eye to Leeson trading because of the enormous profits he was supposedly making, the CEO of Barings Investment Bank said "critical faculties were less engaged than they might have been."
I am not a trader, but I want to chim in on this as this matter really interests me lately.
I beleive they have no choice but just to follow their presricptions. Yes, it is not right, especially for the Irish people, but that's how we can at least weather the short-term period. Otherwise, as other people mentioned above, it will contaminate rest of the peripheral regions. And these days, especially after witnessing Lehman's bankruptcy, regulatory bodies are more concerned with contagious risk than any other negative flow-on effects that it can possibly bring in the long run.
And while outright default will bring about abrupt devaluation of the Euro, and thereby nullifying any efforts the Fed is currently pursuing, this prolonged sovereign weakness in the Eurozone is already gradually undermining the Fed's endeavors now.
Stick it to the bondholders. Default and start over fresh. The global financial system is balanced on a pinhead, and that won't change until there is significant restructuring in the developed world. I think if Greece fails to see any sizable growth in the coming quarters/years, it will be a no brainer to restructure instead of taking a package from the IMF that promises to "solve the problem of too much debt with more debt." No one thinks curing a heroin addiction can be done by using more heroin, I'm not sure why this is any different.
I completely agree with your notion, but that is not how the international agencies think. They think in a "macroprudential" way to avoid any possible liquidity dry-ups. And unfortunately, without a bailout, I believe there will be another market shutdown; then, there will be repricing of every asset classes, leading to further fierce collateral damages. In short, it will only aggravate the current situation. We should only hope and expect that things will get better and they eventually will grow out of this downturn.
You are correct, all those things will happen if a country elects to default and set off a financial atom bomb so to speak. However, where I would disagree with the international orgs who are trying to stop this through loan packages is that they are not preventing the inevitable, they are simply kicking the can down the road. In my mind there are two options. One is where a country defaults now, sets off the entire developed world financial network, multiple multinational banks fail, but the developed world gets out from under a huge debt overhang. The other is taking these aid packages, slumping in decades of no/minimal growth, and defaulting anyway when tax revenues fail to generate any "free cash flow."
I prefer the first option. Financial markets, sovereign nations, and large banks and insurance companies have collapsed many times in history. It didn't end the world then, it won't end the world now. The bankers and politicians would like you to believe that if one of these countries fails, we will all die in fiery apocalyptic doom. That is simply not the case.
Why would they not take the money? I wouldn't want to be the straw that broke the camel's back. The global financial system, and the global economy for that matter, are too weak to handle such an event. I'm of the opinion that the system will collapse, that borrowers from the individual all the way up to the state will need to default, that the resulting CDS mess will need to be taken care of, and that the debt deflation cycle will need to play out on its own.
Kicking the can down the road is in Ireland's best interest because then they can save some face. Especially when they know Spain is in deep shit as well and years from now everyone will look back and see Spain as the scapegoat.
Come on, LIBOR. You really think "saving face" is worth what they're going to be burdened with? FXTrading is absolutely right - the current situation is so fragile that if they Irish don't destroy it, the Spanish or Portugese or Italians will. You guys need to come to grips with the fact that this thing can't be saved, and only by destroying it can it be built again (and hopefully with better controls).
No I totally agree that the whole thing will crash (soon). But if the Spanish are going to break it anyway, why would the Irish go through with the default and take the blame. No one blames the fall of Bear for the financial crisis. They blame Lehman. Bear was small like Ireland, and it was spared by merging into JPM. Ireland is small and is "merging" into IMF. Lehman was larger like Spain, and Lehman is the (at least perceived) cause of the financial crisis.
If the whole system comes crashing down, I don't think it will matter if Ireland gets the bailout because all the rules will change. So they should take Bondarb's advice when it came to Refco, grab the money now, and deliberate later.
I believe this is actually the right answer, but isn't this too extreme? If the overall effects could turn out really costly, I believe it is better to fix the system marginally while waiting for the aggregate demand to pick up.
I believe this is actually the right answer, but isn't this too extreme? If the overall effects could turn out really costly for everyone, I believe it is better to fix the system marginally while waiting for the aggregate demand to pick up.
And if the Portuguese, Spanish, or Italians don't do it, the French, Dutch, Austrians (not the economists), Turks, or Hungarians will. With each bailout, the marginal power of policymakers decreases until it just won't work anymore. Case in point, the Greek bailout lifted the Euro 400 pips before it fell for the next month. The Irish bailout lifted the Euro 100 pips before it fell 700 in the next WEEK. When it comes Spains turn to eat from the IMF trough, I'm not sure if anyone will care.
To Sanjose4, yes it will be very painful. But I think it will be painful for a few years as opposed to being painful and uncertain for decades (see Japan).
Exactly. Perhaps I didn't articulate myself well enough above. If Spain is going to default anyway, why would you, as Ireland, not take the bailout? In a few months it won't matter much anyway...
They should have never ever backed the bank bonds with government guarantees in the last round, but rather forced the bondholders to take it in the shorts. Now we get to talk about the financial sovereignty of Ireland. All aboard the fail train!
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