Ireland in the need of a lucky Shamrock...

Anglo Irish Bank is definitely a black hole for the Irish Government.

I wrote about zombie banks and zombie hotels in Ireland recently.

It looks the zombie bank is decaying more rapidly than expected, pushing the Irish budget in very dangerous waters.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8033960/Ireland-faces-34bn-bill-for-Anglo-Irish-Bank-forced-to-redraft-budget.html

"Ireland faces €34bn bill for Anglo Irish Bank, forced to redraft budget."

"The country has so far ploughed €29.3bn into Anglo Irish Bank, and the country's Central Bank said on Thursday the lender could need an additional $5bn under a worst-case scenario."

In the previous post about Zombie banking in Ireland I indicated the below:

"Total support for Anglo Irish amounts to 22.9 billions Euros so far and will cost 25 billions to the Irish taxpayers according to its CEO Mr Aynsley but S&P put the figure at 35 billions Euros."

Looks like the CEO was a bit too optimistic on his forecast...

But there is also Allied Irish bank and Irish Nationwide in the need of additional support...

"Allied Irish Banks will need to raise an additional €3bn by the end of the year. Support for Irish Nationwide will rise to €5.4bn from €2.7 bn. The €40bn bailout of the banks has cost Irish taxpayers the equivalent of 20pc of GDP."

This is an horror blockbuster movie in the making...When fiction goes beyond reality.

The worst case scenario according to the Guardian is summarised below. I'll go for the worst case given the previous excellent forecast from Anglo Irish's CEO thank you very much.

Murphy's law: 'Everything that can possibly go wrong will go wrong'."

Murphy Junior's law: "My father is too optimistic."

http://www.guardian.co.uk/business/2010/sep/30/irish-bank-bailout-costs-breakdown

Bailout breakdown:

"Anglo Irish Bank €29.3bn (including €22.9bn already committed by government) – could rise to €34.3bn in worst-case scenario
Allied Irish Banks up to €6.5bn (including €3.5bn already invested by government)

Bank of Ireland €3.5bn (it says it does not need any more capital from government)

Irish Nationwide Building Society €5.4bn (including €2.7bn already committed by government)

Educational Building Society €350m (further requirement for €440m and possibly more expected to come from its new buyer)

Total €45bn, rising to €50bn in worst-case scenario."

By the way NAMA is also taking over 3.35 Billions GBP worth of Ulster loans...

I started drafting this post on the 30th of September, and given I was travelling, a lot of news have been unravelling during my trip:

Allied Irish was nationalised and on the 6th of October, Fitch downgraded Ireland from AA- to A+...

http://online.wsj.com/article/SB10001424052748703735804575535651744296256.html

"The ratings could be downgraded further if the economy stagnates and broad-based political support for and implementation of budgetary consolidation weakens," Fitch said.

Get ready for some more downgrades...



http://www.ft.com/cms/s/0/d7bcff58-cf1c-11df-9be2-00144feab49a.html?ftcamp=Popu_story3/NL/UKOctober2010/Vanilla_irehng/0/

"Unlike Greece this spring, it has cash. It has already secured all its borrowing needs until mid-2011. “We’re absolutely funded until next July and we’re not obliged to go to the markets,” says Mr Lenihan. Ireland’s average cost of borrowing this year, moreover, is the same as last year at 4.7 per cent – not the 6.9 per cent reflected by the spike in spreads last week, at which, obviously, no borrowing was taking place."

Well, Mr Lenihan, given the obvious downgrades Ireland just been hit with, get ready for a surprise in mid 2011 when you come back to the market for more funding...

Anglo Irish is a monster that should had never been let to grow unchecked. Where were the regulators and why the government did not step in earlier?

The Financial Times article quoted above goes through the rise and fall of Anglo Irish:

"Anglo Irish Bank, the bank responsible for 90 per cent of Ireland’s €40bn taxpayer-funded bail-out, was originally involved in financing the import of fridges and washing machines for Irish housewives after the trade reforms of the 1960s, writes John Murray Brown."

"By 2007 the bank was half the size of Bank of Ireland and, on a market capitalisation basis, it was briefly Ireland’s largest bank in July that year, valued at a scarcely credible €13.3bn."

"But, like the property market, Anglo was heading for a fall. Essentially a monoline business, it was concentrated in land and development property lending. It is thought 10 developers accounted for half its loan book."

What a sick joke...10 developers = 50% of the loan book. Have they heard about risk concentration?

"It was only later in January 2009 that the government was forced to nationalise Anglo, after another run on deposits following revelations that Sean FitzPatrick, its powerful chairman and former chief executive, had not disclosed to auditors that at the end of 2008 he had €87m of personal borrowings from the bank."

Conflict of interest for Sean FitzPatrick?

I would like to advise Mr Abramovich to get a new team of portfolio managers for his investment vehicle Milhouse.

"Roman Abramovich’s investment vehicle is threatening to sue Ireland over its treatment of junior debtholders in this week’s bail-out of several Irish banks."

http://www.ft.com/cms/s/0/be0897ce-cda6-11df-9c82-00144feab49a.html

Very amusing indeed...

"The bond held by Millhouse was yesterday trading at about 62 per cent of face value, implying that holders do not think they are likely to be paid back in full. But it is above similar bonds from Anglo, which are trading at between 20 and 30 per cent.

Subordinated bonds pay higher yields than senior debt to reflect the fact that they are more likely to take losses if the issuer gets into difficulties."

There are some greedy people, they are some stupid people, and they are also some stupid greedy people.
There is no free-lunch when you buy risky sub debt...If his team had done a proper risk assesment of their investment (which they are supposedly paid for...), they would have seen that the government guarantee's expiry was running out on the Thursday 30th of September.

There should not be bailout for stupid investors....

My very first post on this blog in 2009 was about Dubai and the stupidity of some "portfolio managers":

"Perception of the credit worthiness on Dubai World was all about implicit guarantees from the Dubai Government. Investors invested believing in implicit support. Probably the same investors who believed in the sacro-saint AAA rating issued on dodgy CDOs and CLOs as a gauge of credit quality of the underlying pool of assets in the structure. Probably the same investors who believed that a callable LT2 bond will be called on the call date by the issuer, because it has been market practice in the past. How suprised they were when Deutsche Bank, nearly a year ago in December 2008, decided not to redeem some sub debt on the date of the call! Investors trade sub debt based on the date of the call to calculate the price of the bond."

For Dubai World Debt, if the credit analyst or portfolio managers had done "properly" their job in assessing the risk, they would have read in the bond offering documents that there never was no implicit guarantee from Dubai government and not even a legal guarantee. They just assumed it.

Same applies for the "talented" portfolio managers running Milhouse, they got attracted by the yield of the risky sub debt and believed in an implicit guarantee which had an expiry date which everyone knew about, except them maybe...

My message to them: get real. My message to Mr Abramovich, I know some very talented portfolio managers out there, out of job and very cheap. It might be time for Milhouse to upgrade...

Ireland 5 years CDS is trading wider todat at 451.78 bps, Cumulative Probability of Default is at 32.50 % (Source Credit Market Analysis Ltd).



Anglo Irish Debt Swaps May Pay Out on Burden Sharing:

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aJ6LEncQh.2w

"There are 674 credit-default swap contracts insuring a net $390 million of Anglo Irish’s senior and subordinated debt, according to Depository Trust & Clearing Corp. data. It now costs 5.2 million euros in advance and 500,000 euros annually to insure 10 million euros of the bank’s junior bonds for five years, implying a more than 82 percent probability of default, according to data provider CMA."

Bye bye Anglo Irish...The game is over.

"The Anglo Irish rescue package will cost every man, woman and child in Ireland as much as 7,500 euros."

The Irish Taxpayers must be thrilled.

And Abramovich should start writing down some of his investment in risky Irish Bank sub debt:

"Lenihan said that, while senior bondholders will be paid in full under the bailout, legislation is being prepared to “address the issue” of junior bondholders taking a loss on their investments."

"After the U.K. government nationalized Bradford & Bingley Plc in 2008, it changed the rules to allow the troubled lender to defer interest on its subordinated debt without that legally constituting a default. Its failure to pay still triggered credit-swaps protecting all the Bingley, England-based bank’s bonds in July."

There will be a restructuring on the debt and a CDS event.

I don't think the current Irish Government will get re-elected...

Debase Jumping...

No it is not that all doom and gloom. There are still some bright spots in the World Economy.

While the US and the UK are busy debasing their currencies to revive their exports, Asian currencies are booming and their currencies are surging ahead. While European countries and the US are struggling to power ahead given their respective stricken economics, the Asian story is impressive.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aKic3eJym9nk

“The economic growth story has spurred fund inflows into Asia,” said Yuji Kameoka, a Tokyo-based senior economist at the Daiwa Institute of Research. “That adds to the appreciation pressure for Asian currencies.”



Marc Faber : I think that the Yuan will continue to appreciate against the US Dollar along with the other Asian currencies because China with its large reserve can basically force the other currencies in Asia also upwards by buying them , I do not think that China is terribly concerned by say ten or twenty percent appreciation of the Yuan against the US dollar but what I do not like is to be pushed around by someone like Mister Obama ......well basically we are in an Olympic game in the world to depreciate currencies we do not have trade wars like in the thirties when you have import restrictions and essentially trade barriers , but countries , in my opinion a mistake they try to remain competitive by having a low currency , and so everybody in the world try to lower the value of its currency ....i think the Asian currencies including the Chinese Yuan will continue to appreciate , this year the Malaysian Ringgit is up ten percent the Thai Baht is up almost nine percent and the stock markets of Malaysia Thailand Philippines Indonesia are all up in US dollar terms between fifteen and thirty five percent ..., I think we live in a new world in which emerging economies will have a larger and larger share of wealth , stock market capitalization it doubled in the last ten years already and stands now at twenty two percent of global market capitalization , I think in ten years time emerging economies could be fifty percent of the global stock market capitalization ....etc....
Sept. 24 (Bloomberg) -- Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the outlook for the Chinese yuan. Faber, speaking from Chiang Mai, Thailand, with Deirdre Bolton on Bloomberg Television's "InsideTrack," also discusses gold prices and expectations for the Standard & Poor's 500 Index.

I agree with Marc Faber, and so would have agreed Angus Maddison, author of Contours of the World Economy 1-2030 AD (great book!).

I previously focused on long term macro trends.
I previously posted on the 1st of May that in this environment Asian Currencies would do very well:

"In terms of macro investments, Asian currencies will rise against the Euro, USD and GBP. Fixed Income Emerging Markets funds will do very well in this new environment given their lower probability of defaults depending on the country they are exposed to (South Korea, Singapore, Taiwan, Maylasia, Indonesia are attractive)."

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=akLw12dhIDhw

"The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-traded currencies excluding the yen, climbed to a two-year high. The Philippine peso gained 0.3 percent to 44.055 per dollar and India’s rupee was up 0.4 percent at 45.65 as of 2:53 p.m. in Mumbai. China’s yuan climbed 0.1 percent to 6.7121 and reached 6.7085, its strongest since official and market exchange rates were unified at the end of 1993."

And it is only the beginning for Asian currencies due to the debasing game being played in the West.


http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aDuYmAQLeuyE

"South Korea’s gross domestic product grew 1.4 percent in the three months through June from the first quarter, compared with a July estimate of 1.5 percent, the Bank of Korea said yesterday. The International Monetary Fund on Sept. 1 increased its forecast for the nation’s 2010 gross domestic product to 6.1 percent from a July estimate of 5.75 percent. The won remains “undervalued” and the central bank can still raise interest rates, it said."

2010: Where is the Growth?





and where will it be tomorrow?



Asian Sovereign Bonds and Quasi Sovereign Bonds are still offering nice returns for limited risk:

http://avilacmg.wordpress.com/2010/07/19/bn-asian-bonds-offering-double-bund-return-leads-pictet-to-triple-fund-assets/

Outperforming Bunds:

"JPMorgan Chase & Co.’s index of Asian local-currency debt excluding Japan returned 13.2 percent in 2010. Global sovereign bonds returned 3.8 percent in that period, Bank of America Merrill Lynch indexes show. Bonds gained 6.2 percent in the U.S., 6.6 percent in Germany and 2.3 percent in Japan. An index tracking Greece, Ireland, Italy, Portugal and Spain fell 1.9 percent.

Asian bonds beat stocks by the most since JPMorgan started tracking the figures in 2003 as the MSCI Asia Pacific Index of shares excluding Japan fell 4.5 percent, including reinvested dividends. China’s yuan debt gained 3.2 percent in 2010, according to an HSBC Holdings Plc index, while the Shanghai Composite Index of stocks dropped 25 percent as the government curbed lending to avert a real-estate bubble."

Currencies, Yields:

"Malaysia’s ringgit, Indonesia’s rupiah and China’s yuan are among the 10 best-performing emerging-market currencies this year. Ten-year government bonds yield 3.88 percent in Malaysia, 4.92 percent in South Korea and 8.23 percent in Indonesia, compared with 2.95 percent on U.S. debt."

Gold, Asian currencies...the only way is up.

Bid me up Scotty!

Junk Bonds Reach Par for First Time Since 2007: Credit Markets

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=apHYI.IqyM2k

"Investors in U.S. junk bonds are wagering they’ll be fully repaid for the first time since before the credit-market seizure, dismissing concerns the economy will return to a recession and trigger a rise in corporate defaults.

Average prices on high-yield debt rose above 100 cents on the dollar yesterday for the first time since June 2007 after falling as low as 55 cents in December 2008, Bank of America Merrill Lynch index data show. Bonds due in 2031 from Ford Motor Co., which fell 22 months ago to 12 cents on concern the automaker would fail, are trading above par for the first time in more than five years."

At the same time:

"Commercial paper outstanding declined for a fourth straight week, reaching a record low. The seasonally adjusted market for commercial paper, which typically matures in 270 days or less and is used to finance everyday business activities such as payroll and rent, fell $22.9 billion to $1.036 trillion in the week ended Sept. 15, the Federal Reserve said yesterday on its website. The market has contracted from $1.377 trillion in October 2009."

The market, which companies typically use to finance routine costs such as payroll and restocking shelves, is at its smallest size in two months and is roughly half its 2.2 trillion USD peak in August 2007 when the credit crisis broke.

This not a good sign given commercial paper is the cheapest and most flexible way for corporations to get their hands on cash!

In fact US bankruptcies are still rising:



Business and Non-Business Filings
Years Ended June 30, 2006-2010:

Year Total:
2010 1,572,597
2009 1,306,315
2008 967,831
2007 751,056

And the Asset Backed Commercial Paper market is a shadow of itself:



So how do americans cope with the current downturn? Consumer loans...



GRAPH: US consumer loans expanded more than 42% since the beginning of 2010 and 36% YOY:



Can you read into this? I'll help you, DOUBLE-DIP!


The excellent David Rosenberg sums it all nicely in in the latest "Breakfast with Dave" MARKET MUSINGS & DATA DECIPHERING from the 20th of September 2010:

https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_092010.pdf

"What more can you say? I mean, can we really sit back and conclude that government policies have been successful when real median household incomes are down 4.8% over the 2000-2009 decade? That’s even worse than the 1970s when under Nixon, Ford and Carter we saw real median incomes drop 1.9%. We are at a point where so many people have fallen below any acceptable level of income that half the country doesn’t pay any tax. Even with record use of food stamps and stepped-up jobless insurance benefits, the number of folks living below the so-called poverty line jumped 10% last year — an apparent economic recovery year — to 43.6 million people.
So, we have 1 in 6 Americans either under or unemployed and another 1 in 7 who live in poverty and somehow we have a legion of economists and strategists who see what we are in some typical recession-recovery cycle on our hands. Just read the editorial of the current Economist for how mainstream the “muddle through” view has become — downside risks are widely seen as marginal because we have never seen a real “double-dip” recession before.
Reminds us of how everyone was saying back in 2006 not to worry too much about housing risks because national home prices have never declined before on a year-over-year basis. Remind us of how we shouldn’t worry about recession risks in 2007 because the Fed never did tighten rates sufficiently to really invert the yield curve all that much and that there has never been a recession without a policy-induced inversion of the yield curve. And then, through 2008 all we heard was that history teaches us “not to fight the Fed.” So it’s really encouraging to hear how everyone is back to the “it’s never happened before so don’t worry about it” mentality."

"Everyone has this view that growth will merely be slow but that there will be no double dip. Nobody seems to entertain the notion that we may still be in a recessionary state. After all, the UofM confidence index averages 73.7 in recessions and 90.9 in expansions. So not only is the index 24 points below what is consistent with growth, it is also seven points below what is typical of actual recessions. That is why this is more likely a ‘single-scoop’ recession than a ‘double dip’ ... we likely never fully emerged from the one that began in late 2007."

On Gold beating record after record, David once again sums it up perfectly:

"GOLD BREAKS OUT ... AGAIN
What is amazing is that there are just about as many naysayers about gold out there as there are bond bears. Until the investment elite catches on, the odds of these two asset classes continuing as relative outperformers are quite high because no bull market ends until the masses fall in love with the asset or security in question.
What makes the gold story so interesting is that bullion has so many different correlations — with inflation, with the dollar, with interest rates, with political uncertainty — and it also has different faces. This year, for example, gold has shifted from being a commodity towards being a currency — the classic role as a monetary metal that is no government’s liability. This year, there are three events have catapulted gold into currency status, and they all involve attempts by governments around the globe to devalue their own currencies or at least jeopardize the sanctity of the central bank balance sheet:
1. The ECB’s decision to allow non-investment grade bonds as collateral on its balance sheet.
2. The Fed’s decision not to allow, as was planned, an unwinding of its pregnant balance sheet with obvious implications for the growth rate in the monetary base.
3. The decision by the Japanese government to unilaterally intervene in the foreign exchange to reverse the yen’s strength.

Nobody wants a strong currency, and nobody, outside of a few small countries, wants higher interest rates, and now, we have rising U.S.-Chinese trade tensions. Greek bond yields remain at punitive levels and are currently pricing some probability of default. In addition, Ireland seems to be experiencing intense financial difficulties that have compelled the ECB to step in for support. The Mideast peace talks don’t seem to be going anywhere. The U.S. political backdrop is one of intense uncertainty and the most likely scenario post-November 2nd is one of gridlock. How can gold not thrive in this environment?"

Ireland CDS 5 year is now trading at 445 bps, which represents now a 32% of Cumulative Probability of Default. Ireland was trading at 387 bps on the 15th of September. The yield on Irish 10-year notes stands at 6.48 percent from 6.29 percent, compared with 2.47 percent for German bunds that mature the same year, amid concern that nation will need more financial aid.



and Irish banks are doing just fine...

As long as countries are busy debasing their currencies, as long as countries are in the process of lowering the standard of living of their population like I discussed in my previous post, Gold will continue to go up.

VIX is now getting cheaper still at 21.47. Complacency seems to be prevailing again, as in April this year.



"My dear brothers, never forget, when you hear the progress of enlightenment vaunted, that the devil's best trick is to persuade you that he doesn't exist!"

Charles Baudelaire, French poet, "Le Joueur généreux," pub. February 7, 1864