Ireland Debt Rescue
Research for Online Investors

by John Dalt

11/29/10

Ireland appears to be off the credit hot seat for now.   A deal was announced on Sunday to extend credit to their banks and government over the next four years.  The EU Finance Ministers and International Monetary Fund (IMF) fashioned a bailout for the country and its banks to the tune of $115 billion dollars.

Ireland got in trouble by guaranteeing the losses of their banks in Sept. 2008 during the initial stages of the credit crisis.  As the losses mounted it became impossible for the small country of 4.5 million people to cover them all without bankrupting the country.  Deficit spending for Ireland has reached 32% this year.

A surprise condition to the rescue package is that Ireland use $23 billion from pension reserve funds to shore up the country’s banks.  The IMF noted this was the best use of the money as it was only drawing 1% interest.  The interest rates on rescue funds averages 5.2% and the market priced Ireland’s 10-year bonds at just under 10.0% on Friday.

Ten billion dollars will be available immediately from the IMF; the balance can be drawn as necessary.  The “rolling blackout” on sovereign debt seems ready to move to Portugal and Spain.  Spain is set to sell three-year bonds on Thursday.  Their interest rates are moving higher along with Portuguese and Italian bonds.

Ireland’s citizens are angry over the situation.  The government is proposing a reduction in the minimum wage to spur economic activity.  According the Guardian, the payments on the rescue package will amount to 20% of government revenues.  A poll conducted on Sunday found 57% of respondents were in favor of default to bank bondholders.

Ireland has until 2015 to reduce their deficit to 3% of GDP.  The European Finance ministers agreed to a framework for future bailouts.  On debt issued after mid-2013, bondholders may be subject to a haircut.  Wording on this is vague, as it only kicks in if the country is broke.  Bondholders are not affected if the country is in a "short term liquidity crunch."

I have re-read it, and don’t understand the difference between being “broke” and “can’t borrow money” (because the government is out of money).  Sources for today’s MarketToday are Reuters, USA Today and the Associated Press.

The market is down today.  We are watching 1177 on the S&P 500 for support.  This is the 50-day moving average.  We have plenty of economic news in the U.S. to move the market higher this week.  Black Friday appears to have brought shoppers out in force.  It seems that bad news always trumps good news.

The Korean situation is set to literally blow up in our faces.  Tread carefully.  Our subscribers are making strategic buys in undervalued assets and sectors, but the risk cannot be minimized.

To the mailbag:
Your new recommendation in the Long-Term portfolio is one of my favorites.----paid up subscriber T.M.

I owned that stock for 15 years and the CEO would never use his cash hoard for a dividend, so I finally sold out.---paid up subscriber D.J.

John’s reply:  We ought to make an easy 20% in the next year on this market leader.  If you don’t subscribe to the Long-Term Portfolio, get on board NOW for this great recommendation.

I really appreciated your comments about our acceptance of our movement towards total Socialism. I hope and pray that when our debt overtakes our ability to pay, the dollar becomes worthless, and we are unable to pay our debts, the majority of the people do not turn to the government for help, do not take to the streets in protest, but take on courage to rebuild our country. We will need to be self-sufficient and courageous to get our country back.---subscriber G.C.

John's reply:  I think you overestimate the spine of 47% of our population.  They already depend on the government.

Thanks for the History lessons last week.---subscriber F.C.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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