The Bonds and the Banks

Greece isn’t Ireland. That’s clear.

Six months ago the global equity markets fell by almost 20% in the wake of the Greek debt crisis. Now, with Irish banks threatening to take down another EU government, the markets have declined maybe 5%. What’s the difference?

One big difference is the nature of the debt. Bank debt is private. It’s never enjoyed the assumption of being risk-free. There’s an implicit assumption that government debt is the perfect credit. Even though tax-evasion is a Greek national sport, and hair-dressers draw a full government pension at age 50 because their work is "arduous," investors buying Greek debt entertained the fiction that this credit could not default.

When Greece disclosed that its deficit was 13% of GDP and its debt came to 200%, that assumption was revised. But the Irish don’t play catch-me-if-you-can with their revenue service. They don’t retire at 50. They do give tax-breaks to pub-singers and poets, but their major problem is the banks. Their banks made real estate loans, and when the "Celtic Tiger" stumbled, crashing property markets wiped bank equity. Now they need Euro-TARP because these banks are bigger than their economy.

So for all their Celtic pride, the Irish will take the bail-out money and shore up their financial system. In the US TARP was a spectacular economic success. Temporary capital infusions shored up confidence in a shaky system and prevented a financial meltdown. There’s no reason to expect otherwise from Ireland.

Sometimes the best way out is by offering a hand up. It looks like the Europeans have seen this.

Douglas R. Tengdin, CFA
Chief Investment Officer
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