If you've ever been to Club Med, you know that one of the attractions is that you don't have to worry about money. Because you've paid for everything up front (except for the supposedly optional activities of drinking and game fishing), everything seems free. It's a great feeling I tell you.
Imagine, though, that halfway through your holiday it seems that your payment had come short, all activities now have to be paid for, it's all going on your visa card at 28% interest, and you can't leave the island.
Would you be pissed? You bet. Would you tell Club Med that this isn't what it promised? Yup. Would you Molotov cocktail the mean French bastards running the place? It may come to that.
This is how people are starting to feel in the Club Med Countries.
The Club Med Countries are those members of the eurozone that back onto the Mediterranean Sea -- Portugal, Italy, Greece, and Spain (creative geography was used to include Portugal) -- collectively known as the PIGS.
The PIGS were admitted to the eurozone on the condition they keep their budget deficits below 3% or, in the case of Greece, first reduce the budget deficit and then get it below 3%.
Good politicians in all four countries said, "I do" and the governor of the European Central Bank said, "Until death or bankruptcy do you part."
This worked for a while, partly because the economy was growing strongly, and partly because the Greek government got itself involved in complex financial derivatives that hid the actual debt it was piling up.
Now, in order for Greece to get its deficit under 3% -- and no doubt the other PIGS in the future -- the government has to curtail all those activities that were previously considered paid for and seemingly free. And I'm not talking about drinking and deep sea fishing. This is stuff like old age pensions, health insurance, and unemployment benefits that life in socialist Europe is unimaginable without.
Riots in Greece? Yup. People pissed? Yup. Molotov cocktails? You bet.
In Greece, the σκατά has really hit the fan.
That the Irish can't run a bank doesn't really come as a complete surprise. I know a lot of Irish jokes and have found a disproportionate number of them to be true. Not that running banks into the ground is a particularly Irish phenomenon.
This, however, isn't a joke:
Irish banks need another $43 billion in new capital thanks to plunging property prices, which aredown 33.9% since their high in July 2006 -- and still in freefall.
This is because the National Asset Management Agency (NAMA) which was formed to buy EUR80 billion (USD107 billion) of bad assets from banks, found that the first batch was only worth 53% of face value.
Given that this is a government run and funded venture, and that housing prices are still falling, it would be pretty generous of NAMA to assume that the rest of the toxic waste being dumped on them is going to be worth 53% of face value.
Remember, these are loans that banks volunteered (or were forced to volunteer) to sell, so they ain't 30% loan to value primes. These are really smelly toxic second mortgages.
With housing down 33.9% from the top, second mortgages taken out three years ago on top of conservative 66% loan to value primes are now worth close enough to zero -- unless Paddy gave up drinking to keep up payments on his underwater house.
Now this number, $107 billion, is what the government has to come up with somehow. That's to fund NAMA and bail out the banks for the shortfall. Sure, a couple of banks will be able to beg, borrow, or steal from its shareholders, but others such as Anglo Irish Bank in need of EUR18 billion, can only turn to the government because they are already nationalized.
The number $107 billion is:
· $1.5 million per square kilometre for the entire country
· $25,934 per Irish person (even more per person living there)
· 47% of GDP (eerily similar to the discount applied)
· $55,268 per tax payer
· 102% of the entire 2009 budget (oops!)
· 74% of what the entire Irish stock market was worth before the crisis
· 87.8% of current public debt (i.e. this could increase government debt by 87.8% to around 137% of GDP)
This looks pretty dire, which is why Ireland was initially added to the Club Med Countries to create the PIIGS.
One thing that we can look forward to here is further deterioration in asset quality and higher taxes on Guinness.
That means, quite simply the Irish government is going to have to go even further into debt, find even more taxes to pay the interest, and cut back on social spending programs.
This will take a while (i.e. until politicians can convince the electorate that outside forces are making them do things they'd never support otherwise, such as what the Greek government is doing).
But the immediate problem of public sector debt pales in comparison to total external debt.
Total external debt means the public debt PLUS private debt -- what banks, companies, and individuals owe to the rest of the world.
In this particular area, Ireland has a noticeable problem: total external debt as of September last year was $2,287 billion dollars. And no, the comma isn't a typo -- that really is $2,287,000,000,000.00
Ireland has the seventh largest external debt in the world -- slightly less than a sixth of the US, just behind Spain, and narrowly beating out Japan.
For a country of 4.2 million people, that's over a half a million dollars per person. OUCH.
The IMF and World Bank (yeah, I know, not exactly the best economic advisors in the world) consider an external debt to exports ratio of 150% to be sustainable.
Ireland's external debt to exports is currently 1,906% based on 2008 numbers (and worse if using 2009 numbers).
This is nearly twice as bad as the US at 1,077%. And America can simply create dollars out of thin air to pay its debts, while Ireland simply doesn't have access to the same printing press.
Clearly, something has to give here.
I'm bullish on the euro... and would go long on it... but it looks like a few more closets will have to be opened and skeletons disposed of before I'm properly sold on it.
Cheers,
Peter.
