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Why Europe Is Picking Up Ireland’s “Bar Tab”

Sean Hyman (March 17, 2010)

You may not know this, but before I was a trader; my background was in the ministry.

So when I think of St. Paddy’s, I tend to focus less on green beer and more on St. Patrick himself.

He was the British slave turned Irish missionary, who preached to the Irish people. In fact, he actually escaped slavery in Ireland, only to return years later as a priest. I find that amazing!

In doing so, St. Patrick converted much of the nation to Christianity using the shamrock as an image for the Father, Son and Holy Spirit. Great man.

But I must say if St. Patrick were alive today, he would be seriously disappointed. He may even be praying for Ireland’s “fiscal sins” that are plaguing the entire EU…

The “I” of the PIIGS on St. Paddy’s

Everyone has been focusing on Greece lately, but the truth is the majority of countries in Europe are drunk on debt.

In fact, Ireland holds the distinction of being one of the debt-ridden “PIIGS” nations in the EU. And for good reason…

Ireland is in a heap of trouble right. This island nation could very well be one of the reasons the EU dips back into a recession in the coming months.

Why? First there’s Ireland’s “bond problem.” We all know that you need to sell bonds to pay off your debts but the problem is you have to offer higher interest rates on that debt.

Right now, the Irish have to pay way too much to finance their debt.

Take a look at the chart below. It racks the difference in the spread between Irish 10-year bonds to the German 10-year bunds.

Ridiculously High Bond Spreads = More Debt Troubles in Ireland

When your government has to pay such high interest rates to finance government debt, it acts like a weight on your economy. That’s exactly what’s happening in Ireland right now. These high bond yields are pricey, so the Irish are having problems paying off their debts.

Also, corporate debt is in no better shape.

Costs are high and companies are having issues paying off their debts. The higher a corporation’s costs are, the less they are inclined to make in profit. The lower the profit, the lower the stock price over time.

Therefore, it’s expensive for the government to try to maintain operations and it’s expensive for corporations to expand. That’s a bad combination when both companies and the government are in trouble, and that alone will hinder the Irish economy.

In case you’re wondering how much this has impacted them, take a look at the Ireland stock index (Dow Jones Ireland Stock Index) below.

Irish Stocks Are Trading for a Third of What They Were in 2007

So in short, Irish sovereign and corporate bonds are struggling, while stocks are sinking.

On Top of All This, the Fighting Irish Are Ready to Strike!

But right now, there’s another “added dimension” to this equation that’s making Ireland’s problems even worse.

Ireland is trying to cut down its enormous debt. However, when you are trying to rein in expenses, you have to make cuts in the budget.

That means that you have to cut back or cut out some programs that you had before. It also means that you will have to cut government employee’s pay or benefits (or worse yet, both)!

While that sounds good at a governmental level, it stinks if you’re a government employee. Imagine if your boss cut your pay or benefits just because your government bit off more than they could chew. You have to pay the price for their mistakes whether you like it or not.

You would be mad right? Well, the Irish definitely are. Right now Irish public workers are threatening to strike over these pay cuts. (By the way, the same thing is happening in Greece.)

So right now, Irish politicians have to scamper off to union meetings and try to put out these union fires. But strike or no strike, these pay cuts will happen.

However, if they strike, it slows down their economy even more and when that slows down, even more jobs will be lost, etc. It’s a sad, vicious cycle.

In fact, if or when these workers strike, the economy really will come to a screeching halt. It’s because Ireland can’t afford to lose the public workers threatening to strike – like hospital employees and education staff.

Wow! Now that’s rough! And these strikes could come as soon as next month.

But again, regardless these pay cuts HAVE to happen. The government has no choice because they have to start hacking down the huge deficit (now at 11.7% of GDP right now).

As an EU member, their deficit is supposed to be at a MAX of 3% of GDP. (Oops!)

The Euro Is the Real Loser Here

This is why I say that Europe and the euro now has to pick up the bar tab for Ireland’s drunkenness!

So if you think this euro downtrend is over…think again! I don’t care if they do bailout Greece…they will have to do something about Portugal, Ireland, Italy and Spain too! This thing is far from over and that’s why the euro’s downtrend is far from over.

Can it have a “bear market rally” in the euro? Of course! It can have short-term upswings within the larger downtrend. But this trend isn’t changing for a while for these horrible fundamental reasons.

Right now there are talks going on that the strikes could start at the end of the first week in April. If this happens, then it will just reopen the euro’s wounds once again and the next round of sell-offs will begin.

Happy St. Patrick’s Day!
Sean Hyman, aka Professor FX

P.S. By the way, this euro crisis could actually turn out to be a HUGE payday for a few exotic traders out there. You can get more details in my buddy, Evaldo’s latest report.

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