Ireland’s People Must Bear The Entire Burden Of Banking, Mortgage And Sovereign Debt

I  … Banking, Mortgage and Sovereign Debt can be neither expunged nor repudiated. It must be, and will be applied to a nation’s and even a region’s people, through austerity measures announced by Government officials. The debt will be applied to every man, woman, and child living in Ireland; and in as much as Ireland is part of the Eurozone, and shares a common economic governance, and a common currency, its fellows in that greater union, will eventually share currency debasement and the austerity that comes through that as well.

Ambrose Evans-Pritchard of The Telegraph reports Ireland should honour its debts, says Irish business federation chief Danny McCoy.

“Ireland’s business federation has joined foreign creditors in warning that a default by Dublin on the junior debt of Anglo Irish Bank and other lenders guaranteed during the crisis would be a breach of faith”

“The country makes a living taking capital from people and looking after it, and you don’t want to get a reputation for carrying out partial defaults,” he told The Daily Telegraph.

“Ireland’s financial services industry is around 9.8pc of GDP, with big players such as Merrill and Citigroup operating from Dublin’s ‘Canary Dwarf’. But foreign investment is also the lifeblood of the country’s manufacturing industry, led by computers and pharmaceuticals.

IBEC’s comments come amid mounting pressure on the Irish government to rethink its plans for a “haircut” on the subordinated debt of Anglo Irish and Irish Nationwide Building Society (INBS).
Millhouse, the asset management group of Roman Abramovich, is the latest foreign fund to express fury, warning that Ireland faces possible legal action and a “huge reputation loss” if it imposes a haircut on creditors. The fund said it had been “misled and deceived” by the Irish government, though this class of debt was quietly dropped when the guarantee was extended last month.

The exact shape of any “burden-sharing” is still unclear. Brian Lenihan, finance minister, has said the junior bondholders should make a “significant contribution toward meeting the costs” of the state bailout.

These investors took extra risk to enjoy extra yield, and cannot expected shield when the bank collapses. The debt of senior bondholders is considered sacrosanct.

Mr Lenihan has to walk a fine line: talk of debt restructuring for Anglo and INBS conflicts with his other message that Ireland is recovering from the crisis and still enjoys reserves of economic wealth.

Yet like finance ministers across the West, he also has to secure political support for austerity measures. This is increasingly hard to do without forcing bondholders to share at least some of the pain.”

II … A global currency crisis commenced today, October 7, 2010, as the Yen rose to above 120 and the Euro fell to $138.60. The chart of the EUR/JPY, as seen in FXE:FXY, manifested the bearish lollipop as well, trading down to 114.60, as the Yen, FXY rose 0.70% to 120.09, which is far, far, far above the level at which the Bank of Japan intervened on September 15, 2010 by selling Yen, in an attempt to stop the rise of its currency. The trading action here today was that some traders took the Yen higher and others threw in the towel to take the Euro higher resulting in the EUR/JPY falling lower, thus starting the world wide global currency crisis.   

Daniel Gross relates that Ireland is Europe’s Biggest Basket Case; this as the chart of Ireland EIRL shows a 3% pop higher on 10-7-2010 as the Euro, FXE, rose in early morning trading; but sold off during the day to 138.62 manifesting a lollipop hanging man candlestick suggesting a reversal of the past rally is at hand.

Chart of Ireland, EIRL

Chart of the Euro, FXE

The chart of the EUR/JPY, as seen in FXE:FXY, manifested the bearish lollipop as well, trading down to 114.60.

Chart of FXE:FXY

Chart of the Yen, FXY

Yen carry trade has continually provided carry trade investing has meant continually rising Junk Bond, JNK, prices. The risk on acceptance of junk may have ended today.

And a continually rising Euro, FXE, has both revived and sustained Semiconductors, Intel, INTC, SMH, USD, SOXL.  

Currency traders may be unwilling to take the Euro higher. If so, there is likely to be a rise in the US Dollar, $USD, traded by UUP, and a fall in value of base metals, DBB, Lead, LD, Tin, JJT, oil, UCO, energy service companies, OIH, copper miners, CU, basic material stocks, such as BHP Billiton, BHP, silver, SLV, silver mining stocks, SIVR, gold, GLD, the junior gold mining stocks, GDXJ, the HUI precious metal mining stocks, ^HUI, traded by GDX, and the gold mining stocks that have risen sharply recently, AEM ASA  … BVN GFI GOLD GSS NGD; these being seen  in Yahoo Finance Chart of AEM, GFI, ASA, BVN, GOLD, GSS, and NGD. The ^HUI closed down 3.0% from yesterday’s 530.84 to 514.79 as the gold ETF, GLD, closed down 1.0% to close at 130.37.   

The chart of the HUI Precious Metal Stocks, GDX, relative to Gold, GLD,  … GDX:GLD … shows that the gold mining stocks disconnected from the price of gold on September 24, 2010 and again today. And the chart of the HUI Precious Metal Stocks relative to US Treasuries … $HUI:$USB … suggests that the gold mining stocks are going to turn lower with US Government Debt as they have in the past at significant market turns.   

The chart of the Junior Gold Mining Shares, GDXJ, relative to gold, GLD, GDXJ: GLD, suggests that the leverage that gold mining stocks has provided over physical gold is done and over.

Today’s rise in the Yen, may mean an end to the rally that has come not only with the rise of the Euro, but also with the Bank of Japan announcement of a Zero Interest Rate Policy, ZIRP, and purchasing of Japanese Bonds as well as J-ETFs, which has caused Japanese shares, EWJ, and EZJ, as well as the Nikkei 225, ^N225, to rise out of the doldrums of ongoing deflation.

Today’s rise in the Yen, may mark, not only an end to the rise in the Euro, FXE, but also other major currencies, DBV, such as the Mexico Peso, FXM, and the Canadian Dollar, FXC, the Brazilian Real, BZF, all of which today are trading down. The downturn in currencies has caused a sell in the corresponding regional and country ETFs: Europe, VGK, Mexico, EWW, Canada, EWC, and Brazil, EWZ, UBR are all trading lower.   

Of note, today, the Swedish Krona, FXS, the Australian Dollar, FXA, the Indian Rupe, ICN, are trading up; but the first two show filled black candlesticks, and the latter a hammer, suggesting a completion in their rise. Sweden, EWD, Australia, EWA, and India, INP, INDL, are all trading lower.

The Australian Dollar, FXA, manifested the lollipop today. The monthly chart of the Australian Dollar shows it has been the currency traders destination for carry trade investment, having risen from 60 to 98 since early 2009.  The days of an ever higher Aussie, may have come to an end today.

The emerging market currencies, CEW, are trading down. Frontier markets, FRN, and emerging markets, EEM, are trading down. One can follow currencies through a Finviz Screener

The lollipop hanging man candlestick in the chart of the Developed Market Currencies Relative To Emerging Currencies … DBV:CEW Daily …. suggests that the October 6, 2010 strong rise in the Euro and other currencies, will not be continued.

There were those who used their risk capital in driving the Yen, FXY, up today … The chart of the emerging market currencies, CEW, relative to the Yen, FXY,  … CEW:FXY … suggests that the rise in the Yen today has upset the status quo of continually rising currencies and that emerging market currencies will now be going down.  

The lollipop hanging man candlestick in the chart of the Small Cap Pure Value Shares Relative To The Small Cap Pure Growth shares  … RZV:RZG … suggests that global competitive currency deflation, that is global currency devaluation, is about to commence.

The 6.6% fall in natural gas, UNG, suggests that a world wide deflationary collapse started today October 7, 2010, to accompany the rise of the Yen, FXY, and the stalling out of the rise in the Euro, FXE, as well as the major currencies, DBV, and the emerging market currencies, CEW.    

It is very noteworthy, on a day when Ireland’s debts are being discussed in the media, that with the exception of short term US Government Notes, SHY, and intermediate US Government Notes, IEF, the longer out US Government Bonds, TLT, and the zeroes, ZROZ, are selling off, as world stocks, ACWI, manifesting the lollipop candlestick and trading lower, at the top of an ascending wedge. Yes, risk aversion is manifesting today towards both world stocks and the longer out US Government Debt, TLT, ZROZ, and their leveraged ETFs UBT, and TMF.  The interest rate on the Ten Year US Government Note, $TNX and especially the interest rate on the 30 Year US Government Bond, $TYX, will be going up.   

The US 30:10 Sovereign Debt yield curve, $TYX:$TNX, manifested a lollipop hanging man candlestick at the top of an ascending wedge at 1.550, whose rise began May 10, 2010, when the Euro, FXE, fell precipitously from 127.51 with the onset of the European Sovereign Debt Crisis. Investors have been seeking rewards, by continually investing from steeping on the long end of the curve.

Today, with the pause and perhaps downturn of the Euro once again, investors may very well go short the longer out debt, to profit from a flattening yield curve.  A flattening yield curve means vastly decreased, well awesomely decreased, government revenues. Government stimulus will not be present to help fund growth.  The “risk on” environment will not continue as the yield curve flattens: the ishares Morningstar Mid Cap Growth ETF, JKH, may very continue to fall lower from here on out.  

A rising Euro has helped even the metric of global trade and growth, the Baltic Dry Index, $BDI, rise from early June; it may now be turning lower on a lower Euro.

Debt deflation is coming to stocks. Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” Value shares such as International Dividends, excluding Financials, DOO, and International Consumer Discretionary, IPD, which have done better than world shares, ACWI, since July 1, 2010, as seen in this chart, are likely to under-perform world shares, that is fall faster than world shares.

Theyenguy says “the currency traders and the central banks have scorched the investment skies” …. “we are living in a new investment matrix” … “we ain’t living in Kansas no more” …. “welcome to the investment desert of the real” … “get ready for some investment shock and awe”. Yes, volatility, VXX, will be rising. And inverse volatility, XXV, will be falling.  

I believe falling currencies, stocks, and sovereign debt will create an investment demand for gold, GLD, and food commodities, FUD. Personally I am invested in gold bullion. One can follow the “fallers” in by creating a paper portfolio using this Finviz Screener. If you have enjoyed this article then you can follow my ChartList on Stockcharts.com

III … In today’s news

Kelly Evans of the Wall Street Journal reports: “Aluminum has joined the metals party. But it likely arrived too late to help Alcoa Inc.’s, AA, third-quarter results. The aluminum company’s earnings, due Thursday, mark the unofficial start of third-quarter earnings season. While the prior two quarters underscored a strong rebound in U.S. corporate profits, this one is likely to be a more muted affair. Analysts expect earnings for S&P 500 companies will increase about 24% from a year ago, compared with 39% in the second quarter. The frequency and size of upside surprises, a catalyst for the stock market, also are likely to diminish. Alcoa’s results are likely to fit that theme. Analysts expect earnings of six cents a share, up from four cents a year ago but below the 12 cents Alcoa earned in the second quarter. The sequential decline stems largely from the 6% drop in average aluminum prices during the period. Citigroup analyst Brian Yu expects that will be a main reason for after-tax operating income for its four main business lines to drop by more than a third to roughly $239 million on a sequential quarterly basis. That performance will be tough for investors to accept. But the recovery in aluminum prices lately should help. Prices, JJA, are up about 18% over the past six weeks and settled.”

Stern reports that that German Finance Minister Wolfgang Schaeuble has offered his resignation to German Chancellor Angela Merkel, which has so far been rejected. Eurointelligence notes that his possible successor Thomas de Maizière is “known for his eurosceptical views.”

While not a libertarian, I do suggest a reading of The Monetary Breakdown of the West by Murray Rothbard on the LewRockwell website.

IV … Summary

A global currency crisis commenced today, October 7, 2010, as the Yen rose to above 120 and the Euro fell to $138.60. The chart of the EUR/JPY, as seen in FXE:FXY, manifested the bearish lollipop as well, trading down to 114.60, as the Yen, FXY rose 0.70% to 120.09, which is far, far, far above the level at which the Bank of Japan intervened on September 15, 2010 by selling Yen, in an attempt to stop the rise of its currency.

Action Forex provides a helpful chart of the EUR/JPY at 114.466 on the morning of October 8, 2010 before the New York stock market open: 113.740 shows as support, that is a level at which one can say with assurance that a global currency crisis has arisen.

VI … Update on Anglo Irish Bank bonds: An 80% Haircut Imposed On Anglo Irish Bank Bondholders 

A … Tyler Durden reports on the haircut Ireland is imposing on Anglo Irish Bank bondholders: Anglo Irish Launches Exchange Offer: Sub Debt Holders To Receive 20% On Existing Holdings: Just under €1.6 billion in sub debt (and $200MM in other sub debt) will be converted into around €300 million of new debt paying 3 Month Euribor (which has recently been surging)+ 3.75%. Bondholders, or opt for a cash alternative, have until November 19 to make a decision if they will agree to booking an 80% loss. 

TheGreatPonzi in comment #666992 remarks: “Reuters:  Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) may need as much as $215 billion in additional capital from the Treasury through 2013 to offset losses and maintain a positive net worth, their federal regulator said on Thursday.” This is disgusting. But the Treasury will pay, and the docile taxpayers will pay, even if they need 5 trillion in 2015.”

Caviar Emptor in comment #667022 remarks: “The whole world is looking at precedents. This could be the first domino in the global bank-debt restructuring tsunami.”

B … Shaun Richards reports: Ireland And Her Banks: Anglo Irish Makes A Move On Its Debt Holders

There has been a lot of debate as to what Ireland should do about the holders of subordinated and non-subordinated debt in her banks. For those who have not been following the story Ireland has been forced to pump ever-increasing sums into her banking system but holders of such debt in Irish banks have not been taking their share of the pain. This has to two lines of accusation. The first is cronyism with Ireland’s political system and that does seem to have been evident at times. The second is that other banks in the euro zone are also involved as holders of such debt and some have suggested that in return for EU help Ireland may have promised not to hurt these banks

Either way the failure of bondholders to take their share of the pain has been a feature of Ireland’s difficulties. Yesterday that changed as Anglo-Irish bank offered 5% payment on what is called Tier one or highest risk bonds and 20% payment on what is called Tier 2 or slightly lower risk bonds. This was then added to by a statement which said that there would then be an EGM and if this voted in favour then those who vote against will get nothing at all. As you can imagine this has rather stirred up a hornets nest!

One suggestion is that these “mutually advantageous talks” may be illegal and matters have gone so far that the Irish constitution has been invoked. I am not a lawyer but Article 43 seems relevant although I will be interested to see if any lawyers read this and whether they think that 2 or 2.2 is more relevant here.

In essence the problem here is that such moves should have taken place some time ago as this type of debt is supposed to share in any pain. The allegations of cronyism hit hard here and it is not to the credit of Ireland’s political class as there is already suspicion that some may have been able to exit these bonds at much better levels. To move now whilst its supporters call it “innovative” may indeed be innovative in that it is a sovereign in effect acting in a possibly illegal manner.

Looking at this further there may be another problem. There is a market for credit default swaps or CDS’s and these should be triggered by what is called a credit event and this looks like a credit event to me. To put this another way the whole CDS market is likely to be called into question if investors can be treated in this way without them paying out.

Fears over what all this “innovative” action might cause have led to Irish bond yields rising strongly again and they rose by 0.2% yesterday to 6.5% for her ten-year government bonds. The potential problems include whether investors might avoid Irish debt in future due to fears about being treated in an “innovative” manner. Also it reminds investors again of Ireland’s underlying fiscal problems as the Economic and Social Institute has just published some worrying figures for the future path of the Irish economy which involve estimating a further 4 billion Euros of fiscal austerity in the emergency budget due in November.

C. Bloomberg reports: Bondholder Immunity To Losses Challenged

D … I envision that out of bank bond defaults like those of Anglo Irish Bank where some bond holders are not paid in whole by the national central bank, and out of a continuing falling, FXE,  from 138.78 will result in further stock deflation, and then a stock liquidity crisis will emerge, where there will not be enough buyers for sellers of bonds as well as stocks, causing small business failures and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone credit seignior” and provider of liquidity to Europe.  Despite the fact that the Deauville Task Force Failed To Provide A Framework Agreement For European Economic Governance, I also believe that framework agreements will be announced in Europe providing for fiscal federalism giving a whole new meaning to the term European Economic Governance. Yes, I foresee a greater fiscal union. Fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty is a concept of a bygone era.

The word Segnior comes from old English and means top dog banker who takes a cut. Many Europeans will come to trust in him, and conduct their economic affairs through him, as he will oversee all banking, lending, credit and investment throughout the entire Eurozone. The word, will and way of the Seignior will be the law of the Continent.

VII … Keywords: globalcurrencycrisis, angloirish, angloirishbank

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