Collapse of the Global Economy

U.S. Stock Futures Fall After Ireland Asks for Help from EU; Traders Ask Who's Next

November 22, 2010

AP - Stock prices fell Monday as investors worried that Ireland's application for financial assistance from its neighbors may not be the last bailout needed in Europe.

After falling into a financial crisis brought on by mounting losses at three of its nationalized banks, Ireland formally requested help from its neighbors Sunday. The rescue package from the European Union and the International Monetary Fund will likely total $100 billion.

The request initially pushed stocks higher in Europe. But the Euro Stoxx 50, an index of blue chip companies in countries that use the euro, fell 0.7 percent in afternoon trading there.

The Dow Jones industrial average was down almost 50 points in early trading.

This is the second time that the European Union has come to the rescue of one of its 16 members that use the euro. In May, the EU and the IMF committed $140 billion to Greece to prevent the country from defaulting on its debt. Euro zone members have been willing to prop up each other's finances in hopes of avoiding a financial crisis that could cause the value of the euro to plummet.

Ireland's request for assistance does not put an end to the questions facing the euro zone. Fellow members Spain, Portugal and Italy are also saddled with heavy debt burdens and investors fear that they may also need a financial lifeline, putting additional pressures on the budgets of EU members. The euro fell 0.6 percent against the dollar.

"It's been difficult for the European Union to get ahead and stay ahead of the market's concerns, despite the large sums they are clearly willing to dedicate," said Robert Tipp, the chief investment strategist for Prudential Fixed Income. Ireland's announcement that it would seek assistance contributed to stock losses because it was not detailed enough to restore investor confidence, he said.

Irish to Shrink, Merge Banks as Part of Bailout

November 22, 2010

AP - Ireland's banks will be pruned down, merged or sold as part of a massive EU-IMF bailout taking shape, the government said Monday as a shellshocked nation came to grips with its failure to protect and revive its banks.

Crucially, some experts say the rescue may have come too late to save the next weak link, Portugal, from a similar fate. Ireland's crisis also appears likely to force the early departure of its deeply unpopular government, calling into doubt the credibility of Prime Minister Brian Cowen's four-year austerity plans.

Finance Minister Brian Lenihan said the bailout was necessary because Ireland's banks have become wholly dependent on loans from the European Central Bank and, just like the government, look likely to be frozen out of normal credit markets for at least a year.

The banks invested aggressively in runaway property markets at home and abroad for a decade and were hit hard when the bubble burst. The estimated cost of bailing them out has been repeatedly raised beyond euro50 billion — too big for the Irish to finance at a time when they were being pushed out of bond markets.

The shock of Ireland's decision to seek a bailout, after weeks of denying it needed one, has proved too much for the fragile government.

The junior member of the coalition, the Green Party, stunned Cowen and his Fianna Fail party by announcing Monday they want parliament dissolved in January for an early election. A Green withdrawal would destroy Cowen's three-vote parliamentary majority.

Green Party leader John Gormley said his party would support Cowen through the Dec. 7 vote on the 2011 budget as well as the related four-year plan and the expected flow of the bailout money in coming weeks. However, he expected Fianna Fail to concede Ireland needs a new government.

"Leaving the country without a government while these matters are unresolved would be very damaging and would breach our duty of care," Gormley said. "But we have now reached a point where the Irish people need political certainty to take them beyond the coming two months."

The Greens' six lawmakers since 2007 have propped up Fianna Fail, which has been hoping to cling to power until 2012.

Earlier, Lenihan stressed that Ireland has no plans to force senior bondholders of the five state-supported banks to absorb losses, as Germany insists will happen under new EU rules to be enacted in 2013.

"We've always acknowledged as a sovereign state that we pay our senior debt. I've not seen any push to have senior debt dishonored," he said.

Europe's stock markets and the euro initially rose in relief that a long-rumored bailout would finally happen, but reversed course in the afternoon as the focus switched to wider unresolved problems across the eurozone. The cost of borrowing for the most debt-burdened eurozone members — Portugal, Ireland, Italy, Greece and Spain — all dipped modestly on bond markets.

The stock of Ireland's two healthiest banks plummeted in expectation of increased state involvement and forced mergers and divestments. Ratings agency Moody's said it expects soon to slash the credit ratings of Ireland by two or more notches — to just above junk-bond status.

Ireland already has nationalized three banks, holds major stakes in Bank of Ireland and Allied Irish Banks, and will likely seize majority control of the latter next month. Only one bank, insurer and mortgage specialist Irish Life & Permanent, has avoided any bailouts so far.

Shares in Irish Life & Permanent fell 28 percent to euro0.83, Bank of Ireland 22 percent to euro0.37. Allied Irish — which has already dumped its two prized foreign assets, stakes in Poland's Bank Zachodni and New York's M&T Bank — fell 10 percent to euro0.39.

Alan Dukes, chairman of Anglo Irish Bank, said he expected most, if not all, of Ireland's six banks to end up in state hands. Unions have warned of probable mass job cuts — the unemployment rate of 13.6 percent is already the second-highest rate in the eurozone behind Spain.

Analysts cautioned that Ireland's financial rescue was likely to provide little, if any, relief for Portugal and Spain, the next two potential dominos of Europe's debt crisis.

"A bailout for Ireland does increase the chance that Portugal will tap the facility as well," said Marco Valli, chief eurozone economist at UniCredit in Milan. "It will be a matter of time."

Valli said he was more optimistic that Spain could avoid an EU-IMF intervention, citing the strong performance of Banco Santander and Spain's other major banks ...

EU foreign ministers gathered in Brussels said they had no real choice but to help Ireland because, just like Greece in May, the eurozone cannot allow one of its members to default.

"We are in this boat together and we will find a solution to this crisis together," said Finnish Foreign Minister Alexander Stubb. "The reason is very simple — we cannot afford to leave one single country alone."

Both Sweden and Britain offered bilateral loans even though they aren't in the eurozone. Britain is Ireland's No. 1 trading partner and British banks are even more exposed than eurozone kingpin Germany to the borrowings of Dublin banks.

Nonetheless, the willingness of European governments to lend to Ireland is already causing disquiet across a continent where all governments are struggling with finances. Britain just passed its toughest austerity budget since the 1970s, when it was recovering from its own IMF bailout.

Lenihan said Ireland still has more than euro20 billion in reserves and hopes it can emulate South Korea, which got an IMF bailout in 1997 and returned to borrowing from open markets a year later.

"We're not bust. We have substantial cash reserves and the EU recognize that," he told Irish state broadcasters RTE.

He emphasized that Ireland hoped to keep as much of the EU-IMF loans on deposit as possible, because that could encourage normal lending at lower rates to resume sooner rather than later.

The EU-IMF fund taking shape would "demonstrate that Ireland has facilities available to it to enable it to go to the market ... that Ireland has a last resort," he said.

Analysts said Ireland's evolving bailout demonstrated that Europe must do much more to demonstrate its competence in capping the crisis. The eurozone in May created a euro440 billion fund called the European Financial Stability Facility, or EFSF, that will be a chief source for Irish support.

"There can be no denying that Europe has taken a significant credibility blow by having to activate the EFSF. Its chief, Klaus Regling, stated on many occasions that the EFSF would never be activated and that the mere knowledge of there being a safety net in place would be enough to stabilize the eurozone debt markets," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi.

"So the EFSF has already failed based on what the original objective was."