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Urgent Stock Market Message

Ireland E.U. IMF Bailout Loan 6.7% Interest Rate Shocker? Belgium Joins PIGIBS

Interest-Rates / Credit Crisis Bailouts Nov 27, 2010 - 04:39 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThere is widespread speculation in the mainstream press that Ireland's Euro 85 billion bailout loan could carry an interest rate as high as 7% with most suggesting 6.7%, which is far higher than the expected rate of 5% that Greece agreed to in May and currently averages at 5.2% and therefore represents an 33% premium and thus would place a far higher annual debt interest burden on Ireland.


Reuters - Irish bailout interest rate around 7 pct-RTE TV

Nov 26 (Reuters) - The interest rate on bailout funds for Ireland negotiated with the IMF and EU is likely to be around seven percent, Ireland's state broadcaster RTE said on Friday.

Herald.ie - Interest on bailout could cost us one fifth of our tax take

IRELAND could end up paying one out of every five euro raised in tax on interest on the €85bn EU/IMF bailout

There was intense speculation this weekend that interest charged on the bailout could be as high as a punitive 6.7pc.

Indepentant.ie - Penal interest rate the price of €85bn bailout

SOME of the €85bn bailout loans Ireland is to get will cost us a penal 6.7pc in interest -- far in excess of what was expected.

There was shock last night as it emerged taxpayers will have to shoulder a much higher-than-expected interest cost that will run into billions of euro a year.

Negotiations between the Irish government and the E.U. / IMF are underway to agree the terms and interest rate for the bailout loans to be concluded before the markets open on Monday morning.

Why Could Ireland's Bailout Interest Rate be as high as 6.7%?

The primary reason for why Ireland could carry a far higher interest rate than expected is to send a message to other countries lining up for an E.U. / IMF bailout loan that they also will pay an increasingly heavier price so a bailout will be seen as less of a soft option and therefore put pressure on prospective bailout countries such as Portugal and Spain to get their own financial and economic houses in order before triggering a bailout.

The second reason would be to prepare the bond markets for debt restructuring as basically the higher interest rates withdraw the 5% ceiling from the market and imply that bond holders can expect a hair cut on maturity that would be in line with debt market yields on the basis of the bailout interest rate, which could result in maturing debt holders losing as much as 50% of the value of their capital. This will not go down well with bond market investors, but unfortunately there is little they can do about it as the market interest rates are far higher than the bailout interest rates i.e. Greece's 10 year bonds are trading at 12%, Irelands at 9.2% and Portugal's at 7.1%, therefore bond markets are already pricing in probable debt restructuring for Greece and Ireland at least.

Bailout Interest Rate Propaganda for a Favourable Market and Political Reaction?

A high interest rate of 6.7% would result in a flight to safety from holders of other PIIGS sovereign and bank debt as the market would price in future bailouts with far higher rates than 5%, therefore prompting more ECB intervention to keep bankrupt banks afloat which leads me to believe that the mainstream press commentary of a 6.7% rate is wrong and that what we are reading is propaganda which is probably emanating out from within Ireland to prime the financial markets (and the population of Ireland) for a more favourable response to the bailout after last weeks debt market wobbles in response to the German Chancellor, Angela Merkel's statement implying a partial debt default was possible.

“Do politicians have the courage to place the risk burden on those who make money? Or is trading in sovereign debt the only business in the world in which there is no need to take risk?” and “This is about the primacy of politics, this is about the limits of the markets.”

Therefore, I do NOT expect the interest rate agreed to be anywhere as high as 6.7% and will probably be precisely in line with the rate that Greece pays which averages at 5.2%.

Belgium, the PIGIBS Newest Member

Belgium could rank as the newest member of the soon to be renamed to PIGIBS debt bailout club, that could see its bond yields surge far higher than current rate of 3.70% over the coming weeks.

Belgium's debt situation would be nothing new to readers of my articles over the past year (walayatstreet.com), as the country remains in political limbo, unable to form a government 5 months after their general election as the country remains split between the Dutch and French speaking halves. Unfortunately Belgium's biggest industry is the bureaucracy of the European Union, without which it would have been ahead of Greece in terms of being an economic basket case. Belgium's debt has already passed above 100% of GDP, though this does not take into account Belgium banks exposure to the other PIIGS which amounts to Euro 22 billion just for Ireland alone so any PIIGS debt restructuring would hit Belgium hard.

Whilst the mainstream press has only over the past few days started to wake up to the debt crisis brewing in Belgium, I ranked Belgium as being third in line of countries most at risk of going bankrupt / being bailed out during 2010 some 9 months ago (30 Mar 2010 - Global Sovereign Debt Crisis, Country Bankruptcy Relative Risk of Default).

The waste of space Belgium politicians need to immediately get their act to together or they may find that the Markets will pull the rug out from under them within a matter of days, resulting in the control of the Belgium economy being taken away from the Politicians and handed over to the ECB and IMF and then the foolish politicians will have little left to fight over!

The risks of bankruptcy graph is now 9 months old and requires an update in the light of economic and political developments during 2010, as markets have since adjusted to the potential risks of debt default bankruptcies and bailouts. For instance the situation for Portugal, Spain and Italy has since deteriorated whilst improved for the UK.

The Euro-zone Bankruptcy / Bailout Queue

As per the recent article (26 Nov 2010 - Euro Debt Crisis Bankruptcy Bailout Queue, Protect Savings & Deposits From Banks Going Bankrupt! ) the countries most at risk of requiring a debt default preventing bankruptcy bailout are :

Greece - Bust requiring bailed Euro 110 bailout

Ireland - Bust requiring Euro 85 billion Bailed out

Portugal - Pending an imminent bailout of approx Euro 40-80 billion

Belgium - Pending bailout of approx Euro 50 billion.

Spain - Pending bailout of approx Euro 400 to 500 billion.

Italy - Pending bailout approx Euro 1 trillion+.

Stealth Debt Default Continues

As I have iterated many times during the year, the only reason that the PIGIBS require a bailout is because they are stuck within the Euro-zone where they cannot print money and competitively devalue their currencies, whereas the UK and USA and other countries outside the Euro-zone can print money and devalue, which is a STEALTH DEBT DEFAULT, as these countries population cannot see that a debt default is taking place by means of loss of purchasing power of their wages and Earnings which may or may not be visible in bogus official inflation indices such as the CPI (29 Jun 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt).

And THAT is the only difference between PIGIBS and the UK and USA. In the UK and USA your wages are being eroded by REAL inflation. In the PIGIBS your wages are being eroded by WAGE cuts i.e. an INTERNAL devaluation within the Euro-zone is taking place. For over a 100 years, populations have been conditioned to view Inflation as being GOOD and Deflation as being BAD when Inflation is pure and simple THEFT of the purchasing power of EARNGINGS and accumulated LIFETIMNE SAVINGS. Whilst the mainstream financial press obsesses over currency market movements, it completely misses the BIG PICTURE THAT ALL CURRENCIES ARE IN PERPATUAL FREE FALL AGAINST ONE ANOTHER. Therefore all that current market trends represent is volatility between the differing rates of free fall between currencies. For example the British Pound in exchange rate terms is roughly where it was against the U.S. Dollar 20 years ago, however the following graph shows that sterling has lost over 40% of its purchasing power on the RPI inflation measure over the past 20 years.

The Inflation Mega-Trend

The Inflation Mega-trend continues to manifest itself as UK CPI nudged higher to 3.2% for October from 3.1%, whilst the Bank of England continued with its deflation threat propaganda so as to prevent a wage price spiral from taking hold as it continues government policy of debt default by means of high inflation. Whilst the highly doctored CPI came in at 3.2%, the more recognised RPI came in at 4.5% with real UK inflation still at a high 6% as illustrated by the below graph.

As elaborated in the Inflation Mega-trend Ebook (FREE DOWNLOAD), I am expecting high inflation for many years, whilst the forecast for 2011 is pending, however there is every sign that the average inflation rate for 2011 will be higher than that which was for 2010, which is contrary to the Bank of England's forecast for CPI 1.7% for December 2011.

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Comments and Source: http://www.marketoracle.co.uk/Article24610.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Filip
01 Dec 10, 06:29
Belgium

Nice article,

But you don't take in consideration that Belgium will profit from his geographic location and connections with the German market.

Also there is not a chance Eu will let Belgium dropping over the ledge. The fall of Belgium would be the Fall of the EU.

The lack of governement is indeed a serious problem but what is happening now is that the flemish people want to act against the crisis by reducing expenses and boosting economics what is a good thing. Sadly the french part wants to keep hold on the old model so it is a good thing they keep discussing even if it takes 3 more months. The democratic model has to change and will change. Belgium people have a way in finding solutions (after endless discussing).

What I also don't can trace in your article is the fact that the total amount of saving money in Belgium can fill the debth 3 times.

So Belgium is still far away from dropping of the ledge.


Nadeem_Walayat
01 Dec 10, 13:45
Belgium Bailout

Hi

Belgium is heading for a bailout.

The markets do not like political uncertainty.


Filip
02 Dec 10, 06:52
RE: Belgium Bailout

To be honnest I realy don't see that happen.

But time will tell...

Regards


moonspice
13 Sep 11, 16:13
Banks

World bank & the IMF or just banks in general = Day light thieves


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