Ireland 2011 To Be The Greece of 2010? A Dummies Guide To The Latest Act In The EU Crisis-Irish Troubles, Greek Tragedy
In my November 7th post, How To Profit From Another Year End EURUSD Collapse, I noted the parallels between this time last year and how they suggested a ‘second annual EURUSD collapse.
The evidence continues to gather. It appears that Ireland of 2011 could become the Greece of 2010. Either it gets significant aid or will default on its debt.
Key Articles To Read Include
- If you thought the bank bailout was bad, wait until the mortgage defaults hit home by Morgan Kelly at www.irishtimes.com.
Key points include:
- By waving its legal option to terminate its guarantee of Irish bank debt in September 2010, and avoid a 55 bln Euro bank bailout for the benefit of EU banks holding Irish bank bonds, Ireland essentially headed irreversibly towards default.
- Irish taxpayers are likely still liable for yet another 70 bln Euro in additional bank bailouts. The ramifications, per Kelly:
As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.
- Yet another stage in the Ireland banking crisis is coming in a wave of hundreds of thousands of mortgage defaults, with accompanying further damage to bank assets, real estate prices, and serious risk of social unrest.
- The Wall Street Journal has picked up the issue, so now Irish troubles are in the crosshairs of the major financial media, which means markets will now be fully aware of the trouble and start to price it in.
Both articles are must reads, with more to follow.
Events To Follow
If the past 12 months are any guide, here’s the likely scenario. Note that it could easily once again take months to play out, though with the past 12 months lessons noted by all events could easily unfold faster this time.
- Official attempts to manage confidence, with varying success.
- Some EU officials (especially ECB and PIIGS leaders) claim all is under control. Fear eases, markets rise.
- These soon followed by comments that there will be no bailouts, everything must be repaid, etc. from others, especially leaders representing the taxpayers who will be paying for any aid to come. These leaders hope to somehow avoid political suicide from giving away taxpayer money OR being held responsible for possible global economic collapse. Fear rises, markets tank.
- A bond repayment date nears, drama builds. We know the likely ending already.
- ANY default, no matter how small the sovereign nation, risks a crisis in confidence in the EU banks (they hold the bonds and would be the big losers), which risks destabilizing the EU, the EUR and EU sovereign and bank debt markets. That likely means a global crisis similar to that seen this past spring, because no one is sure who owes what to whom, or which banks/countries could be in trouble as a result. Global credit freezes as interbank lending freezing up as big banks no longer trust each other, credit to businesses seizing up too, markets falling crashing.
- Ultimately fear of contagion and collapse brings an aid package, as German and other core leaders claim there was no choice (and thus they should be re-elected for making the hard choices rather than tossed out for wasting taxpayer funds on mismanaged basket-case economies).
- ECB/IMF (i.e. US) bailout, more USD and EUR printing. China really wants a USD alternative and so may well join in too. Also a rising EUR means a falling USD AND Yuan (pegged to USD), so count on China help too.
Trader /Investor Ramifications: How to Profit
- Short the EUR directly or via related ETFs, FXE, or long the short EUR ETFs like EUO, as well as other risk currencies and their ETFS. The same goes for other risk assets like stocks, commodities (other than the prime currency hedges) and ‘risk currencies’ i.e. those that rise in times of rising stocks and optimism and fall in times of fear. Note however that as long as China’s economy keeps moving well damage to the AUD and other Asian currencies/economies could be limited, though not without some panic pullbacks.
- Long the safe haven currencies and their related bonds, no matter how bad their underlying fundamentals, at least as a short term play. These include the JPY, USD, CHF and their related ETFs and AAA bonds. Note however, that in the last EU crisis the CHF struggled because the EU is its prime export market. No matter how troubled the underlying US fundamentals, if the EUR is week the USD should gain given the size of the EURUSD in forex trade - a third of the entire market
- Long currency hedges like precious metals, and, to a lesser extent, other hard assets and their ETFs. Notice how fast gold rose from $1300-1400/oz. More room still.
DISCLOSURE & DISCLAIMER: NO POSITIONS, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER