Let us start with an adaptation of an old rhyme:
Small fleas have bigger fleas
Upon their backs to bite 'em,
And bigger fleas have bigger fleas
And so ad infinitum.
In Ireland's case, the small fleas are the mortgages on the new properties that Ireland built in the Celtic Tiger years. Rising house prices were a Ponzi scheme, sustained by its own expansion, which duly collapsed when the expansion stopped. The biggest fleas are the derivatives.
The collapse of the property markets has left Ireland with a lot of debt.
Its total debt - banks + public + private - amounts to 700% of Ireland's GDP.
Politicians like Osborne are fond of (falsely) comparing the budget of countries with the budget of households. When a household has debts 7x greater than net income, the householder is inclined to look at what is involved in declaring bankruptcy. And so it is with Ireland.
So what happens if, say, the two weakest Irish banks should be declared bankrupt?
They are the Anglo Irish Bank and the Allied Irish Banks.
First, this would annihilate the monies that the good-hearted taxpayers of Ireland put into those banks to shore them up. I gather that 23.8 bn Euros have been put into Anglo Irish, and about 7bn Euros into Allied Irish. Say 30,000,000,000 Euros in all. Gone. Poof! Annihilated. Finito! Kaput! Tax payers money. The same taxpayers that have been screwed by the savage Irish cutbacks.
But wait! Banks are insured! They have Credit Default Swaps which are derivatives that bet on banks not going bust. If they go bust, Ireland can claim on the CDS's can they not?
Well, apparently not. CDS's are not like your average insurance where you have an insurance company that actually pays out when your house collapses. No. Instead, the risk has been bundled up and resold (at a profit) then rebundled and resold (at a profit again) innumerable times. There is a multiplier effect each time it is sold. The total effect of this multiplier is such that the value of the total derivatives market before the Credit Crisis in 2008 was 10 times the global GDP. 10x. 1000%.
So if the Irish banks go bust, it is going to create lucrative job-creation schemes for bean-counters world wide as they try to work out who owes whom what. Many of these CDS's will be held by pension funds and high street banks (except cool banks like Co-op and Triodos), so it is not just the hedge fund managers who have to sell their Ferraris, but old Mrs Groggins who will have to keep warm by burning the furniture.
And not just that.
There are direct creditors of Irish banks at risk for $170 billion.
- $46 bn in Germany
- $41 bn in UK
- $25 bn in USA
- $21 bn in France
- Danske bank has 92% of its net assets in Irish loans
- RBS has 90%
- Lloyd's 60%
- Barclays 16%
The conclusion is that Irish banks cannot be allowed to go bust.
Therefore a bailout is indicated, which will come from the EU and/or Eurozone, and or the IMF.
Ireland is delaying this bailout, because it does not want to be the first to go whimpering to the Big Boys. It would rather that Portugal, Spain or Greece should be first.
But a bailout there will be, for sure. And then another one for Portugal Spain and Greece.
All of which calls into question the nature of money. And the best thing you can do to get your head around that little conundrum is to watch the Money as Debt videos here.
A last word. I am not an economist, just a jobbing GP and green party blogger. What gets up my nose, apart from the arrogance of "The Markets" who have buggered the economic system, and have the insufferable audacity not just to not be grateful for the bailouts, but to require that the people should be punished for the crimes of the market, is that professional economists (a) did not spot this coming, and (b) are not reporting clearly on what is happening - apart from a few like Robert Peston and (c) have not created a computer model that can describe and predict macroeconomic developments, as the climate scientists have done.
I am going to stop now, because this is a very long blog post, and you must be getting tired. Before I go, a very mild summing up of my feelings about the banking system.
Update: further helpful suggestion here.
Update: Guardian letter from Greg Quiery adds corruption, tax evasion by the super rich, whistle-blowers ignored, offshore investigations abandoned, and other all-too-familiar failings.