Tuesday, November 9, 2010

Irish 10 Year Yields Blow Out to Nearly 8%, 5.6% over German Rate, Lagging only Greece Amongst EU Countries; Market Shrugs

The global patient is so drugged up with stimulants no amount of facts on the ground matter anymore.  The immune system was built up by the Greece fiasco, and now that there is a central banker buying government bonds in Europe when no one else will, and a bailout package waiting in the wings, stock markets shrug off all crisis because after all, someone will print money and fix the problem.  Apparently the view go forward is there will never be a crisis ever again as world spigots will turn on and money created, therefore the economic cycle has been defeated.  The level of moral hazard created by central banks worldwide is simply astonishing.

If you are a newer reader, the U.S. actually has a worse fiscal condition than Ireland... and barely trails Greece.   [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?]    But unlike those countries who are avoiding the "Zimbabwe" solution since they are stuck in a shared currency, the U.S. can 'print its way out of every problem'.

Via AP:

  • Shares in Ireland's banks hit record lows and national borrowing costs reached new euro-era highs Monday as the government presented its latest plans for financial survival to the European Union's economic commissioner, who has the power to order changes. Investors are shunning Ireland's government and bank debt in expectation that the country will eventually require a bailout by the EU and International Monetary Fund, as happened to Greece in May.
  • The interest rates charged on the treasuries of Ireland, as well as fellow indebted euro-zone members Portugal and Spain, have been rising ever since German Chancellor Angela Merkel last month said she expected any future EU bailouts to come with new rules requiring bondholders to absorb some losses.
Merkel appears to be the last person with any free market idealogy left ... ironically she comes from a democratic socialist state.  Bondholders taking pain and losses for their bad decision making?  Somewhere Bailout Nation U.S. bank bond holders are doubled over laughing. (while screaming how well the 'free market' is working )

  • The yield, or interest rate, on Ireland's 10-year treasuries rose to another record Monday of 7.87%, breaking the previous record of 7.82% set last week. The spread versus equivalent German bonds also reached an unprecedented 5.6%. In the 16-nation euro zone, only Greece's bonds command a higher premium of 11.%.

So who the heck is buying Ireland's debt??  Ah yes.... the 'free market' solution

  • As the traditional owners of Irish treasuries -- chiefly banks in Britain, Germany, the United States and France -- seek to dump them because of their falling value and increased perceived risk, new sellers can be attracted only by offering higher yields. Traders say the main buyer of Irish bonds in recent weeks has been the European Central Bank.
  • The Frankfurt-based central bank confirmed Monday it bought euro711 million ($988 million) of euro-zone countries' bonds last week. It declined to specify how much of that figure involved Irish treasuries.

Again this is a new role for the ECB instituted earlier this year - not something they used to do.  But when you are running a global ponzi scheme, central bankers have to be innovative.  No one wants to buy bonds because the risk premium does not coincide with actual potential costs in the future?  We'll do it!

  • The cost of insuring Irish debt on the world's credit-default markets also rose to new heights Monday. Credit data agency CMA said contracts to insure Ireland's debt against default jumped to 610 points from Friday's record close of 578 points. Buyers of the derivatives, called credit-default swaps, are betting that Ireland will be ordered to renegotiate debts with bondholders as part of a future EU-IMF rescue package.

So who is going to take the hit during the renegotiation?  Only someone dumb enough to buy bonds today.  Since no one is that dumb... the central bank can enjoy the losses.  But in a central banker ponzi it's "no problem" - they'll just print more.

What does this teach the world?  There is no amount of debt that is too much.  Because central bankers will rescue you.  Hence all these pension costs, entitlement issues, state funding issues in the U.S.?  We should not worry one iota - as the Fed is doing the exact same thing here... in fact we should all get to retire at 35 30 with full pension (at least $100K a year, although in theory it could be limitless since the Fed can monetize all debt) funded by govt.  Indeed, we should call into question the need to work - let other countries do that, and we'll just print money to hand to them for services rendered.  

While I am taking it to the extreme, this is essentially the system we are running... and we're now not the only one.

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