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Catching a Falling Financial Knife

Ireland’s IMF/EU Bailout. The Financial Crisis Has Not Gone Away

Interest-Rates / Credit Crisis 2011 Jan 19, 2011 - 01:00 PM GMT

By: Christopher_Quigley

Interest-Rates Best Financial Markets Analysis Article(Reuters: 18th. January 2011) -: “EU finance ministers agreed on Tuesday they wanted tougher stress tests for the region's banks to restore confidence in the bloc's financial system, but remained locked in dispute over how strict they should be.

"We discussed bank stress tests ... and we are really agreed that the new stress tests should include more banks," said German Finance Minister Wolfgang Schaeuble.


"This is the clear position of the German government but also most of the others, and we should try to avoid that which happened last year," he added, commenting on July tests, branded irrelevant after they gave Irish banks a clean bill of health.

Michel Barnier, the European Commission official attempting to broker a deal with the EU's 27 countries on how the checks would work, highlighted continued disagreement on how this should be done. "We need to have more time to work on this," he said.

"We do need a few days on the issue of liquidity to see whether or not to go further on the question of sovereign risk," he added, flagging the most contentious point in the debate -- whether or not the taboo subject of a default on debt in Greece,  for example, should be one of the test scenarios for banks.

Ministers also failed to reach a final decision on whether banks should be tested for a liquidity crunch to predict whether they could tough out borrowing difficulties should markets freeze.

A diplomat from Hungary, which currently holds the EU presidency, said ministers were near agreement on testing liquidity, even though no formal decision had been made.

The European Central Bank, which has spent billions supporting credit markets, and the European Commission want this check. But some countries fear it would present too bleak a future for banks and trigger calls for big capital injections.

LIQUIDITY CHECKS

There was uncertainty as to whether the liquidity checks would be published as investors want. The European Banking Authority, which will coordinate the new checks, said last week they would not.

"I am for liquidity being tested, but whether we should publish this must still be discussed," said Schaeuble.

"The question of what details we should publish is another question, and you have to keep in mind what kind of consequences this can have on the behavior of investors."

Late on Monday, the EU's economy chief Olli Rehn had promised the test results would be delivered by June.

"The results will come this summer," said the Hungarian diplomat on a timetable which could disappoint some investors who have been hoping for results as soon as next month to reduce uncertainty over the euro zone’s banking system.”

Just when you thought it was safe to think things were back to normal with European banks the recent announcement regarding new banking stress tests from the mandarins in Brussels indicate that the sovereign debt crisis is far from over. The solutions to date have not comprehensively solved the core weakness of the Euro. New bank stress test will not solve the problem. An idea floated late in December to issue multi-state backed Eurobonds would have been an ideal solution. Germany balked due to the possibility that this maneuver could have jeopardized her debt rating thus raising her cost of borrowing. This failure in German leadership indicates that Berlin is not committed to a fully federal Europe and I believe that this lack of solidarity will eventually lead to a two tier Europe and a possible breakup of the Euro. The current policy allows peripheral states fall directly under IMF/EU control without concomitant democratic checks and balances and amounts to a dictatorial solution to what ultimately is a democratic problem.

Instead of moving forward comprehensively to develop a “Euro Bond”, which would be guaranteed by all member states, Brussels came up with a half-baked theoretical synthesis conceived during the Greek crisis. Following the meltdown in Athens the European commission set up the European Financial Stability Facility. Each member state contributes to the facility. Currently it stands at 440 billion Euro. This war chest is sufficient to rescue Greece, Ireland and Portugal. However the elephant in the room is Spain. This could be the financial story of 2011. Spanish regional banks are very very shaky.  It is reckoned that Madrid has so far only allowed 50% of potential mortgage losses to be recognized. In the event of default the funds needed by Spain would dwarf those soaked up by Ireland and Greece. If the new bank stress tests really do their job the amount of losses required to be written off could push Spanish banks, reeling from property losses, over the brink, particularly if interest rates start to rise. Inflation rates are trending out of control in England and this does not augur well for the European continent. The mixture of crippling austerity measures, potential sovereign debt default, ballooning structural unemployment and rising interest rates indicates that 2011 will be a challenging year for the hapless Euro officials.

Here in Dublin the economy has more or less “frozen” due to economic uncertainty caused by a draconian budget introduced in December at the behest of IMF/EU officials. Yesterday a vote of confidence in the Prime Minister Brian Cowan passed. Had it failed the government would have fallen and with it the whole budgetary process. The IMF/EU funding is contingent on this financial package moving successfully through the Irish Parliament. Failure to conclude this legislative agenda would have reintroduced chaos into Euroland given its predisposition for contagion. The Irish parliament hangs on a wafer thin majority and it will be at least four weeks before this whole IMF/EU budgetary process is finally nailed down. Until then more surprises could be in store from Dublin.

As in Greece morale in Ireland is at rock bottom. Businesses continue to fail at a remarkable rate due to constrained cash flow.  Emigration, a former feature of the Irish social history, has returned with a vengeance. It is estimated that 50,000 souls departed from Irish soil in 2010 for London, New York, Boston, San Diego, Toronto, Melbourne and Sydney. Most of these folks are young and educated and to lose this resource is regarded as a national tragedy. Every person who leaves wrenches families, sunders friendships and fractures communities. However, this situation is not unique to Ireland as it is playing out in Greece and Spain and Portugal as we speak.

More and more Europeans are beginning to question the whole European project due to the disasterous manner in which this whole financial crisis has played out. They blame the lack of financial regulation for allowing the problem gestate and they blame an overly bureaucratic pampered Brussels elite for failing to correctly diagnose and resolutely solve the crisis in a fair and equitable manner. Many believe guilty banks are being bailed out at the expense of the average working taxpayer. This was not how it was meant to be and more and more folk are wondering what ever happened to liberty, equality and fraternity the supposed core ideals of the European movement formed out of the ashes of World War II fascism. Many feel dictatorial bankers and politicians have replaced dictatorial army generals.

By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin and holds a Batchelor Degree in Accounting and Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in 1989. in Belmont, California where he lived for 6 years. He developed the Wealthbuilder investment and trading course over the last decade as a result of research, study, experience and successful application. This course marries Fundamental Analysis with Technical Analysis and focuses on 3 specific approaches. Namely: Momentum, Value and Pension Strategies.

Mr. Quigley is now based in Dublin, Ireland and Tampa Bay, Florida.

© 2011 Copyright Christopher M. Quigley - All Rights Reserved

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.

Christopher M. Quigley Archive

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Catching a Falling Financial Knife