Tuesday, November 16, 2010

The Irish Choice: Inexpensive Cure or Expensive Bailout Part III

The New York Times published an article today that confirms the need for providing investors with the loan-level performance information necessary so investors can independently analyze and value the bad assets.

The facts presented in the article support the need for the inexpensive cure to restore the loss of investor confidence: 
  1. Investors are operating in fear, as shown by the widening risk premium between Spain and German government bonds, because they having a "growing inability to get a precise read" on the Irish or Spanish losses from the global real estate boom and bust; 
  2. Without observable event based performance data on the troubled loans, there is no logical stopping point in the devaluation of these exposures other than zero and as a result there are questions about the solvency of the Irish and Spanish banks and their governments.
The article noted:

"In Ireland, banking troubles lie at the root of what many in Europe are now calling a solvency crisis, reflecting long-term concern over Ireland’s ability to repay its debts, as opposed to the lack of short-term funds that forced the Greek rescue last spring.

“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. 

...Ireland is unlikely to let its banks fail, but it has been unable to accurately forecast its banking losses — or say whether bondholders will pay part of the bill.

Irish banking losses are estimated at up to 80 billion euros ($109 billion), depending on the forecast used, or 50 percent of the economy. As long as housing prices continue to fall, these losses cannot be capped."

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