Who Blinks First? Ireland, Greece, the ECB, and the Bank Guarantee

The rules of the game have changed for Ireland.  Should Ireland respond to this new risky-game environment by selling off some or all of its domestic banks to large foreign bank holding companies?  I believe that it should.  We can keep the names on the high street bank offices, but lose the liability guarantee.

Both bank runs and sudden stops (when all lenders suddenly cease lending to an entity such as a sovereign state) can be usefully modelled as coordination games.  It is rational for depositors to withdraw their savings from a weakened bank if and only if most other depositors are doing the same.  The particular “signal” which starts the co-ordinated run by depositors can be anything – new information about bank fragility, or something irrelevant such as a temporary blip in the length of queues inside a high-street bank office.  Once a run starts, a bank can be crippled by the short-term illiquidity of its assets, so a run is often a self-fulfilling prophecy.

The same logic applies to sovereign-debt sudden stops – the inability of the state to borrow strangles domestic economic activity and thereby greatly weakens the state’s ability to pay back borrowing. So it is rational not to lend if others will not lend. There is also a dynamic co-ordination feature to a sudden stop, since medium and short-term lenders will not lend unless they have full confidence that the state will be able to roll over their repayments using future borrowing. 

Lenihan’s bank guarantee changed Ireland’s co-ordination game.  By insuring all the domestic banks’ liabilities, he substantially lowered the probability of a bank run against any or all of the domestic banks.  On the other hand, the magnitude of this contingent liability makes its actual payment infeasible.  The potential cash flow claim on the government is larger than twice the annual Irish GDP.  If the continent liability is exercised by bank claimants, there is no feasible way for the government to pay it.  The government, already over-extended in terms of tax revenues versus committed expenditures, could not extract even a small proportion of this claim from Irish taxpayers.  With the liability guarantee in place, the real risk for Ireland is a sudden stop, not a bank run.

The Irish problem with Greece’s growing troubles is that financial crises tend to be contagious. One of the “signals” that could instigate a sudden stop in Ireland is a sudden stop somewhere else, particularly somewhere with regional or trade connections.  This is why bad news for Greece is bad news for Ireland.  If Greece hits a sudden stop, Ireland will wobble, and will be the next in line for a sudden stop in Europe.

There is another simultaneous game being played: the ECB and its bailout policies playing a reputation game against member sovereign governments and their fiscal discipline.  Again, the Greek situation is bad for Ireland.  Ireland and Greece are at the very top and very bottom of the ECB’s Christmas gift list.  Ireland has done everything (so far) that the ECB could reasonably ask of her to impose fiscal discipline and restore competitiveness.  If it were only Ireland at risk of a sudden stop, the ECB could be very accommodating about bailout assistance.  The ECB would not let a well-behaved minnow like Ireland cause market turmoil.  If a sudden stop was brewing and Irish bond yields rocketed up, the ECB could easily mop up any excess of Irish sovereign bonds, killing the run, and later tell some convenient story about why this did not violate EMU no-bailout guidelines.  On the other hand, we now know that the Greek government has deliberately and substantially falsified its national accounts over recent years.  Also, Greece shows no political will to impose any meaningful discipline on tax and spending.  Her adherence to the Growth and Stability Pact is a charade.  If the ECB bails out Greece, all semblance of future fiscal discipline throughout the Euro zone is lost.  Again, bad news for Ireland.  How can the ECB bail out Ireland if it refuses to bail out Greece?  In this reputation game, we are greatly harmed by the company we find ourselves in.

Take My Banks …… Please!

Henny Youngman was the comedy-king of the one-liners, best known for his signature line “take my wife ….. please!”  The irony is that he loved his wife and they stayed happily married for sixty years until her death.  In my opinion anyone who truly cares about the Irish banking system and its role in the economy should be encouraging the government to sell off the Irish domestic banks, shorn of the liability guarantee, and with the worst of their excesses spun off into NAMA.  If this were done, the risk of an Irish sudden stop would fall close to zero, and our sovereign borrowing rates would also fall sharply.  A sudden stop is an ugly thing and we should do everything we can to prevent it.  If the banks were safely inside large foreign holding companies then these insolvent Irish banks, and the risk they engender for the whole Irish economy, would cease to weigh down Irish economic recovery. 


52 replies on “Who Blinks First? Ireland, Greece, the ECB, and the Bank Guarantee”

@Gregory O’Connor
This is a very well made proposition. As I completely oppose NAMA I won’t say much. I would feel though that if we have already spent all the money necessary to fix them it would be better to hold onto the banks until the economy recovers and we get a good price for them. The legacy of scandal in Irish banks has culminated in their mass insolvency. Their arrogance and lack of reform – perhaps partly because they know FF had to intervene to save the megadevelopers – have made foreign ownership of the majority of our banking sector seem not only unthreatening but welcome. As with DEPFA if anything goes wrong the foreign owners can bail them out.

@ Gregory

“Should Ireland respond to this new risky-game environment by selling off some or all of its domestic banks to large foreign bank holding companies?”

Oddly me and E65bn are on the same page here – completely agree that they should be sold off, with the state possibly maintaining either direct ownership of or support for domestic Irish owners of something like the proposed Third Force entity, which would only be supplying basic mortgages and savings accounts and would have certain caveats relating to the scale and scope of its offering (ie no more than 25% of the mortgage market, limits on mortgages of 85% ltv, €500k max etc).

Look at the example of Finland – they have virtually no domestic banking industry, and have suffered an enourmous drop in GDP (not much better than us) during this recession, but because they have no bailout relating to their financial system, the sovereign debt is ranked almost as high as Germany.


I think the risk of such a “sudden stop” is much more unlikely than you allow. Putting aside the bank liability guarantee for a moment, it is important to note some protections against falling into the bad equilibrium you describe: prudent management by the NTMA of the term structure; cash balances that largely match short-term borrowing; a national pensions reserve fund that could be tapped in a liquidity emergency; the absence of exchange rate risk; and a still modest debt/GDP ratio for an advanced industrialised economy.

The guarantee certainly does complicate things. But falling into the bad equilibrium would start off as a bank run, with the guarantee being called only if the banks are unable to to meet demands. Although it is regrettable that taxpayers are now on the hook for the ultimate losses of the banks, the probable burden is painful but managable. This should allow the ECB to provide liquidity support in the face of a run, which makes it much less likely that a run would get started in the first place.

Having said that, I don’t have a strong objection to your proposed takeover solution. But given the (excessive?) unwillingness to impose loses on bank bond holders, in the present climate it would surely be very costly to even get the banks to a state in which they could be even given away.

@Gregory O’Connor
(Are you the estimable Greg by the way or a different Greg?)
We are always being told that the NTMA has borrowed enough money to get us through even a nuclear holocaust. Presumably we’re still borrowing the €59Bn for NAMA from the ECB, aren’t we? I’m getting worried.

@ Gregory

Our government have already blinked more than once.
Greece have blinked a number of times. Most seriously for Ireland was the EU Commissioner Nelly Kros in Amsterdam on Nov 28th telling the Amsterdam Financial Forum backed by the (DNB) that state debt is a “time bomb” that could bring down banks if governments default on state bonds”. She wanted the money back now from the banks, a bit ahead of little old Irelands schedule I would have thought?

As we write there are riots on the streets of Athens and the fact that our SDS’s depend on events like this does not augur well for Ireland. NAMA should be halted and Morgen Kelly, Brian Lucy and Constantine Gurdgiev brought into the department of Finance. In jig time they would start to put order on this chaos and impending state bankruptcy scenario.

@ Greg
At the end of the day irrationality may well decide Irelands fate as a country. But then again did some one say, you cannot fool the markets.

@John McHale
Shouldn’t it be possible to make the subordinated bondholders the new bank shareholders since they are no longer guaranteed?

I think the state would have to guarantee the outstanding loans of the banks for international groups (or anybody else) to be in a position to take them over. I suppose this would be less of a burden than the guarantee that is in place at the moment.


As our Government should never have made the reckless guarantee to our banks in the first place, it might be appropriate now, given the danger of imminent default by Greece or Austria, to decommission NAMA and dump the banks any way we can.

If a cascade of Sovereign defaults were to kick off, we would look pretty stupid have borrowed E65b to rescue our shower.

Better get our retaliation in first so to speak.

Any solvent bank left standing will de facto become a “good bank” With some assistance from the Government and some hardball legislation to fast track sequestration of dead bank assets, we will see these enterprises prosper over time.

Follow quickly with a quango cull. Halve the number of Departments. Sell RTE. Build some nuclear power plants.

Get moving Cowen. Show some courage and move faster or get out of the way.


If you could only have seen the chaos on the “government” side when they proposed, twice, that the notorious memo to inspectors of taxes, revealed by me and no one else, not to go into banks to check DIRT, was written by persons who had since died, ie could not defend themselves!

Their colleagues threatened to ask to testify if the official side did not withdraw the two allegations. They withdrew, but the chaos! Once they screw up, it is everyone for themselves! No teamwork! Just for God’s sake p[ass the parcel onto the next idiot as fast as you can!

Of course that is the permanenent government, the public service. The pollies have a backbone of iron!

Robert Browne

In times of war, Athens would appoint a Tyrant. He, no womens lib then!, had total power for the war.

We are losing the current economic war. Good suggestion. The current administration are headless chickens.

I actually think that we are in no real danger of sovereign default, provif=ded that the ECB act consistently.

As they may have been bought, that may not be possible. The colossal sums involved for the private owners of capital, the merchant baks and shadow banks, means that they will likely trigger such a default if it comes to a parting of the ways for their own interests.

I have previously suggested that there is a two track finance system in existence, Fed modesty as a prop to this argument, that means that funny money will be created as and when necessary across the G20. Fiat money has its strengths! Individual countries will find that their banks are insolvent and need rescue but there will be no shortage of rescue capital, backed by junk bonds if necessary. There will be no European Union default as a whole, until towards the end, and only if as I say the divergence between private capital and the proles, us, voters etc, is too great. Ultimately the resolution of the church vs state conflict is easier than the state vs shadow banking conflict! Money corrupts! But money only exists if there is a state structure. Rothschild and Gold in Sacks both know this at a senior level. Ultimately, the state whichever one is relevant, can visit pain upon someone’s ass. Mao was not the only one to say it. If this does get dirtier, expect strange series of deaths. Roberto Calvi style. Very entertaining to see power exercised in this way after all they play with our money for big stakes.

Err…again the 21 and the 46 (Greg amongst them) alluded to this way back when. I know prophets are rarely honoured in their own land, but as another “46-er” said to me recently, the day when we can say “i told you so” is coming very close.
Whats depressig is how little coverage the msm are providing the emerging changed banking environment – focused on 4. 5 or 6% pay cuts for 1/6 of the workforce…

This proposition is fine and definitely sensible but provokes some comments, particularly concerning your eyebrow-raising suggestion concerning Nama.

1) Why in heaven’s name would we gift taxpayers money to shore up (private) share value, with a view to selling those shares to some big foreign bank? Surely we could just not run Nama, let the ordinary shares fall to zero and give the banks away to the same foreign banks?

2) Question (1) posed again, but this time taking into account the context – that we are trying to avert a soviegn default. How can giving taxpayers money away for free help us avert a situation in which the exchequer becomes liquidity constrained?

3) Anyway, how can the govt sell off the banks if we don’t even own them? The whole point of Nama is that we don’t take majority stake in the banks? Or are you only talking about Anglo here?

I’ve recently moved to Germany & I have not been able to follow all that is happening in Ireland. Reading this suggestion (it is good), I’m just curious:

Was the banks bought/nationalised by the Irish state? If not, then surely the banks are not for the Irish state to sell?

The takeover of the banks seems to be the necessary first step for this suggestion and then the price of the impaired assets taken over by the state is no longer relevant. NAMA irrelevant and back to the Swedish model 🙂

Eoin’s comment about Finland might be seen to illustrate the cost of the Irish bank guarantee. The presumed losses in the Irish banks are to be covered by the Irish state and this might be causing the Irish state borrowing to be more expensive. Has anyone any estimate of the numbers involved?

@ Greg

given that the downward review is due to “fears its bondholders will have to shoulder some of the troubled lender’s losses as the EU considers its restructuring plan”, i thought you’d consider this to be good news?

@ Pat,

If that’s so, then I guess I misunderstood the whole Nama debate. For me, the whole point was we weren’t going to take ownership of the banks. We were just going to overpay for their bad assets – effectively giving them free money – instead of nationalising (i.e. taking equity stakes)

Maybe we should model what is going to happen with Nama funds being transferred to “our” banks?

When do we start transfers of interest to the lender? Can we fund them? Only by borrowing more? Have we seen the original documents involved in this transaction? The ECB may well turnover our commitments if there is any danger of market backlash? Have we not then secured all our borrowing needs for the foreseeable?

I have in mind a “force majeure” event that means we would sadly, have to put Nama away and divert funds?

Would it

@ Eoin

Not much of this is good.

It is however getting worse for the government strategy of trying to put everything on the backs of the Citizen/Taxpayer.

Anglo & Nationwide should never have been covered.

Yes it is good that bondholders may have to contribute (let’s hope substantially) to restructuring the Irish banking sector. They lent the money. They’re big boys and girls. They knew what they were doing.

@Graham Stull
I think the hope , in Merrion Street , was that we would “overpay for their bad assets – effectively giving them free money – instead of nationalising (i.e. taking equity stakes)”
however, that now looks like not being enough and we will, as many here said, have in any case to nationalise.
The sad part is that had we done this 9m ago when 21 of us first suggested this, to howls of derision, the potential existed for several billions to be saved. Oh well…..


I see. I seem to be behind on the news all of the sudden.

But surely the terms of this nationalisation matter? What price will the govt pay for the equity? Will the BGS be repealed before the govt moves to take a stake?

@Brian Lucey,

You may well be right about the inevitability of nationalisation – the passage of the NAMA Bill has not stopped the interest-meter running and the amount of rolled-up interest is increasing, but Merrion St. seems dead set against it – except in extremis (as with Anglo). The reluctance of the UK Government to go the whole hog with RBS and Lloyds might be relevant in this respect. I suspect the Government is hoping to play the same game with AIB and BoI. Anglo will be wound down quietly – and with minimum public scrutiny – over time and there may be some side-deal on Permanent/Nationwide.

My expectation is that every effort will be made to shore up AIB and BoI (short of nationalisation) to get them to a point where they will be able to attract external capital without an excessive risk premium. In the meantime – instead of advancing credit in the Irish economy – they will be calling in outstanding advances and expanding non-Irish activities to rebuild margins and internally generated capital.

Irish citizens get screwed twice over – once to underwrite the NAMA liabilities and any resulting recap and then by a reduction in credit advances – and all to prevent external ownership and management of these “crown jewels”.

Greece has widened 24bps this morning while Ireland has widened 13bps.

The last few days have seen Greece move way out past Ireland again after tightening previously.
Greece is now at 245bps while Ireland is at 183bps.

@ DE

Fitch’s comments this morning essentially sum up the feeling/fears in the market:


Strangely amidst all of this the Govenor of the CB seems to think private investors will be beating each other up to get into the banks…Nearyesque or what? Maybe they’re planning a raffle!

@Jesper and others

To clarify my ambiguous wording, when I said “sell off some or all of the Irish domestic banks to foreign bank holding companies” I meant “arrange the sale of some or all of the Irish banks to foreign bank holding companies.” It is common practice for government financial authorities to arrange the takeover of insolvent or troubled domestic banks by stronger banks. I should have said “arrange the sale” rather than “sell,” for clarity.


Could the Government revoke the Guarantee insofar as it benefits Irish holders of bank bonds, i.e. domestic bondholders? If they are systemic we can bail them out…

The Greek budget deficit is currently 12% of GDP.
Greek government debt will reach 130% of GDP next year.

Just like Ireland, the Greek banks have been playing the carry trade by borrowing from the ECB and then investing in Greek government bonds. This is where you borrow low and lend high and then laugh all the way to the bank. Well, actually they are the bank. So they just laugh.
That’s all very well until someone downgrades the bonds that you’re buying!
In the last month 10-year Greek government bonds have sold off from 137 basis points over 10 year German bunds to 220 points. That’s nearly a full percentage point in a month.

When interest rates go up the value of the bond naturally goes down, a full percentage point sell off in yields corresponds to a large fall in the value of the bonds and Greek banks are full to the rafters with Greek bonds.
Then suddenly, the fun game of making free money is fun no longer.

The US banks are also borrowing money from the Fed at really low interest rates and loading up on long term government debt, consequently interest rates are kept low by all of this buying by the banks.
This is a carry trade of gigantic proportions, but the government gets what they want by keeping their interest rates low at a time when they need to borrow huge amounts of money.
The Chinese aren’t buying as many bonds as they used to because they’re not selling as much stuff to the US. Plus they are getting worried about the direction of the dollar.

In addition, the price of oil is a lot lower than it was so the Middle East isn’t recycling as many petro dollars into US bonds either and as I pointed out previously a lot of the Sovereign Funds are now avoiding financials.
Therefore the banks have been enticed into buying US bonds by lending them money for practically nothing so that they can make the difference in the yield.

The only problem with this game is that the banks are loading up on bonds at a time when interest rates are at historic lows and have nowhere to go but up. Especially as yesterday we were told that both the UK and the US are at risk of having their AAA credit rating downgraded, a classic ‘squeeze play.’

Suddenly some of the big players are beginning to look a lot like Ukraine, Greece Ireland and Latvia, only on a far greater scale. What appears to be free money for the banks now could actually be the rope that hangs them, because there is nobody left to bail them out.

Solution to date; keep printing money. We all know where that’s going to end.
In the short term the US will want to keep interest rates low because to raise them would lead to substantially increased funding of their massive debts, but they have to watch their rating.

Initially Iceland was believed to be an isolated incident but then Dubai was found to be swimming naked.
As the tide goes out further, all the other skinny dippers are going to begin to be exposed.
Credit default swaps on sovereign debt are rising around the world.
Treasury ‘yields’ are nonexistent and stock markets are at their highs, fuelled mainly by international stimulus packages and quantitive easing leading to almost straight line increases in all stock markets since March 6th.
There is very little upside in any of these markets at this stage and a high risk of major downside.

There is an interesting story in FT Deutschland about the adoption of the Bad Bank proposal by WestLB, the largest of Germany’s Landesbanken, this has apparently prompted Moody’s to threaten a downgrade, using the following argument. As WestLB shifts its toxic assets into the bad bank, WestLB becomes systemically less relevant, and this means that the bank is less likely to receive public aid in case it gets into trouble.
The problem with all these rating downgrades is that we are getting into a position of negative feedback loops, where downgrades raise the interest rates and this in turn makes further downgrades more likely.

Wolfgang Munchau, an associate editor of the FT, said it should be considered a criminal activity to trade in naked CDS’s (swaps without underlying securities). He said; the purpose of these instruments is to destabilise governments and companies, not to create efficient markets, their economic value is extremely negative, and therefore should be banned.

George Soros says that credit- default swaps are “toxic” and “a very dangerous derivative” because it’s easier and potentially more profitable for investors to bet against companies using them than through so-called short sales.

But we now have a situation developing where it is proposed that carbon trading will be largely centred around derivatives.
This is being driven by a lady named Blythe Masters, the very same person who as a JP Morgan employee actually invented credit default swaps, and is now heading JPM’s carbon trading efforts.

Nobel economist George Akerlof predicted in1993 that CDS’s would cause international economic meltdown.

But getting back to the question ‘Who Blinks First’ on sovereign default.

My own guess is Ukraine, for the following reasons.
The ECB will probably support Greece for the time being, because of the danger that any default in the Eurozone will have a domino effect, Latvia, Ireland etc.
I believe Greece will default, I just don’t think it will be first.
Christopher Pryce, the Fitch Ratings analyst who yesterday downgraded Greece’s credit rating, said on Bloomberg this morning that Fitch believes Greece will find it difficult not to default on its debt.
Buiter also said on Bloomberg this morning “It’s Five Minutes to Midnight for Greece, if they slip to BBB- that will be the end of the game.”

The critical day for Ukraine is January 17th, that’s when they hold their Presidential elections and discord between current President Yushchenko and his Prime Minister Tymoshenko, have thrown policies off course and this has led to suspension by The IMF of its $16.4 billion bailout programme.

Ukraine’s State finances are being stretched by heavy spending in backing the debt laden state gas company Naftogaz as it buys ever more expensive gas which it is selling to domestic consumers at heavily subsidised prices.
In September Naftogaz effectively defaulted on a $500 million Eurobond issue after it failed to make a payment on time. They paid the interest, but not the principle. Consequently the rating agency Fitch downgraded Naftogaz’s rating to a so-called “restricted default,” which means a default on a particular security, but not the entire company. “It’s not the end of Naftogaz, it’s the end of that particular bond,” said Fitch analyst Anton Krawchenko.
Petr Grishin, an analyst with the investment bank Renaissance Capital said; “Markets have a very short memory this won’t have any effect on anything.”

(Mr. Lenihan take note, defaulting on bondholders is not the end of the world. Remove the guarantee on the bankers debts, keeping it on deposits and forget about NAMA. That way we have some chance in the time ahead.)

The EU brokered a deal on November 5th for Naftogaz to swap its foreign debt for a 5-year $1.595 billion Eurobond issue. This was to help Kiev pay for gas and modernise the sector, provided that the government raises the subsidised domestic gas price. Kiev promised to comply, but has failed to do so. The deal offers explicit state guarantees for the new bonds.
Brussels also said it would lend $500 million to help the Ukraine economy, but on condition the $16.4 billion suspended IMF programme was got back on track.
In November, the state railway firm failed to repay $110 million of the remaining $440 million of a $550 syndicated loan. There is also a state-guaranteed $700 million credit from Deutsche Bank under review.

Ukraine`s economy is expected to shrink by up to 15% this year, it`s heavy industry has been hit hard, millions are unemployed leading to worries by Central European banks that have invested heavily here.
The currency is already down over 60% in a year and it’s inflation rate is running at about 15%.

There was an EU/Ukraine summit last Friday attended by EU President Barroso, President Yushchenko and also members of the Cabinet of Ministers, officials of the Foreign Ministry and Economics Ministry.
Barroso accused Ukraine of dragging its feet on reforms and Yushchenko complained about a delay in a promised EU-Ukraine accord.
Barroso said;”It seems to us quite often that the promises of reforms are only partially respected,” and he added: “In the end, the responsibility for the reform in Ukraine is not for the EU, but for the Ukrainians themselves.”

Barroso and other EU officials also advised Ukraine’s leaders to make every effort to gain access to aid from the International Monetary Fund (IMF) by carrying out economic reforms.
Yushchenko placed blame for Ukraine’s failure to meet its obligations to the EU on the country’s government, which is led by his archrival, Prime Minister Timoshenko, who is running against him in the January 17 presidential vote.

When Ukraine won its bid to co-host the 2012 European Championships, it saw the decision as smoothing its entry to EU integration. Ukranian’s don’t seem to understand that becoming a member of the EU is not something that can be achieved at the negotiating table alone, but also requires reform and political will.
The Ukrainians seem to hope that the EU will step up and modernise the country on their behalf, something they obviously have to do for themselves.

The question is, are they up to the job?
Well if the 2012 European Championships are anything to go by the answer is NO.
Preparations are running way behind schedule, due mainly to problems of corruption, bureaucracy and mismanagement which are endemic in Ukraine. There is a genuine willingness to see that the Championships are staged correctly but they are now realising how difficult that can be without properly functioning institutions. Which comes back to the whole issue of reforms and it now looks like this will not be achieved without public pressure.
The current Ukranian leadership are great with words but their deeds don’t match the rhetoric.

So who is blocking this reform?
All available evidence would suggest an elite group of Ukraine’s richest businessmen, who have powerful influence in politics and who control much of the country’s economy. They made huge fortunes from the privatizations of government-owned assets after the nation gained independence in 1991.
They have amassed billions in profits out of Ukraine, and are accused of stalling changes to tax laws, effective law enforcement and less bureaucracy. These are all necessary objectives if Ukraine is to have a more just and competitive economy.

These are some of Ukraine’s richest men and are basically the same type of oligarchs who control much of the Russian economy at present.
Not very nice people and certainly they certainly don’t seem to have the wellbeing of the vast majority of their countrymen at heart.

These men directly benefit from sweetheart deals on gas, electricity and railway tariff’s. The government recently extended a price freeze on these which have been in effect since November 2008 and which will now last until the end of 2010 and include steel and iron ore producers.

This is probably why the IMF funds have been pulled and also why the EBRD has delayed a $300-million loan.
France’s European affairs minister, Pierre Lellouche, said earlier this month; “Europe wants a return to a state of law, an end to corruption in Ukraine and electoral promises must not be financed with money from the international community, from the IMF and EU taxpayers,” he explained.

A Ukraine teetering on the edge of sovereign default is something we here in Ireland should be worried about.
So January the 17th is a date to watch, it could have implications for all of us.
On the upside that’s also the day the salmon fishing opens in Kerry.

President Yushchenko’s support has evaporated, and opinion polls suggest he has very little chance of winning.
Five years ago the streets were packed with hundreds of thousands of protestors, chanting slogans, braving the winter cold during the Orange Revolution. They believed that their presence could make a difference.
Today, the mood is one of deep disappointment.
People in the streets are saying “after the Orange Revolution the problem was, Yushchenko became the President and our new leaders have not been held to account. We didn’t change the system, and Yushchenko became a part of the old system in Ukraine.”

One of the front-runners is Mr. Yanukovych, the man Russia backed five years ago, and who eventually lost out to the Orange Revolution. Today, he is trying hard to shed the image of being “Moscow’s man”.

His nearest rival is Prime Minister Tymoshenko. Back in 2004, she was firmly in the Orange camp, she was a fierce critic of Russian involvement in Ukraine. Now, though, things have changed.
At a recent meeting on gas trade between Russia and Ukraine, the Russian Prime Minister, Mr. Putin, said Ms Tymoshenko was a woman he could do business with. “We are happy working with the government of Yulia Tymoshenko,” he announced. “In the time we have worked together, our relations have been strengthened and become more stable.”
Ukraine could slip back into Russia’s grasp again on January 17th and the West seems powerless to do anything about it.

Meanwhile, a handful of European banks that hold a 40% market share in Ukraine are nervously watching the political fight escalate as non-performing loans hover at double digit levels.
If Ukraine does default there will be an immediate impact on Western Europe as a quarter of the EU’s gas comes from Russia, 80% of which is currently transported via Ukraine.

All you guys in the Irish private sector who are wondering how will the Irish banks get out of the current mess should instead be thinking about how you can preserve the value of any cash you may have.
The Canadian and Australian dollars look good as both countries have very large reserves of natural resources.
India also looks good.
The Reserve Bank of India has bought lots of gold recently. It purchased 200 metric tons from the IMF in October to add to its previous reserves of 360 tons and this was only 4% of RBI’s total foreign exchange reserves in September.

Irish Times: Greek troubles hit Irish bond spreads:
“The spread between Irish and German bonds widened today, as the fallout from Greece’s downgrading affected the market.

The spread is now 1.8 per centage points, or 182 basis points, and remains the second highest in Europe.

Traders blamed the fallout from Greece’s recent troubles, saying it acted as a “contagion” for the market. Investors feared a domino effect, they said, if Greece does default.”



Interesting perspecitive. Not sure where you get the time to write this – but thanks anyway.

Regarding a Greek default, when you just look at the numbers there is a certain grim invitability about it BUT I cling on to the hope that it won’t happen given the contagion effect for the Eurozone and others.

Regarding selling the banks – forget about it! Other than the bankassurers no-one will buy our banks without strong ongoing tax payer support – in other words we would still be stuck with significant future unquantifiable risks (at least) on top of an even greater contraction in local credit.

@JohnD15 Greece will not default in my opinion for all the knock-on reasons mentioned above but sub-sovereigns and domestic corporates/utilities look very risky to me. Don’t be suprised to see talk of restructurings and loan extensions.

A tour-de-force Cearbhall – worth repeating this as I doubt BL will read it all the way through
“(Mr. Lenihan take note, defaulting on bondholders is not the end of the world. Remove the guarantee on the bankers debts, keeping it on deposits and forget about NAMA. That way we have some chance in the time ahead.)”

Cearbhall O Dalaigh
I agree with what you say but you neglect the even more powerful individuals in USA EU etc who have yet to complete their safe haven plans. If they were worried by the locals in UKR, they might take direct action. Blackwater and the like are merely privatized extensions of a mercantilist government, taking out more resources for TPTB. UKR has also been the scene of some interesting outbreaks of a new type of plague. Destabilizing suits many and the end effect may be a default, but also the complete undermining of UKR.

As Canada has a border with USA, I prefer Australia!

I still stand by the idea of funny money printed and created, by fiat at enormous rates between governments and their bank systems. The accounting for the banks is being more relaxed all the time despite rhetoric to the contrary. TPTB really have no choice on this. The oceans of easy credit for those banks will extend to systemically important sovereigns. You assume on a great deal of past evidence, that the bond market is king.
I assert that it too like the NYSE can be manipulated. Much more complicated but as you rightly point out CDS’ and the like are there for a purpose and guess what that is? They will destroy anyone stepping out of line and shield all the others by hanging together. Possibly a just fate, but given the alternative, I sympathize with them. The air in the bubble has to be let out smoothly?

The end result is that they will certainly delay your scenario, which is still valid if a surprize arrives. They also have a few psyops going to add to all the other circuses we currently enjoy. They will try to keep the dominoes upright and this may work well for some time. TPTB will then pull the plug splitting the consensus but reducing those who are TPTB! Just another game of musical chairs?

You think all the printing will cause inflation. Well of course but only in certain commodities? These will crash when the plug is pulled. Do you agree that there is planning involved to a greater degree than in your analysis?

Bob Chapman sold out his NY real estate in the early 2000s! He too was amazed how long it took before the GFC second stage arrived.

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