Ireland: "We Have Surrendered Our Sovereignty"

The Irish-EU bailout talks in Brussels have really upset the Irish people, at least the people of The Irish Times, who writes in an editorial Friday that the country now have surrendered its sovereignty to the European Commission, the European Central Bank, and the International Monetary Fund. Others call for prime minister Brian Cowen to resign.

“Politicians should certainly share some of the blame for Ireland’s ignominious position.”

Gavan Nolan

The Irish government has pledged to publish its four-year budget plan early next week as talks continue with IMF and EU officials in Dublin over a rescue package for Ireland, running into tens of billions of euro. Commentators call the whole thing a “shame,” while prime minister Cowen rejects the calls for his resign.

The dozen-strong IMF delegation includes several banking experts who are taking part in the discussions with more than 20 officials from the European Central Bank (ECB) and the European Commission and Irish officials at various locations in Dublin.

Prime minister Brian Cowen said Friday the talks were “going well in terms of being open and constructive,” saying the Government was conducting the talks “in a way for which the best outcome for Ireland can be achieved.”

Mr Cowen also rejected Opposition calls for him to resign, The Irish Times reports.

“The Government has a job to do here. We have a four-year plan that we are finalising which we are required to do,” he said. “We have a Budget to bring forward on 7th December. We believe we have a majority for that Budget and we have a job to do in relation to ensuring that the present issues affecting the euro, and as it is affecting Ireland, are resolved,” he says.

The Irish Times, however, makes a devastating attack on Cowen and his government in an editorial Friday morning.

“There is the shame of it all. Having obtained our political independence from Britain to be the masters of our own affairs, we have now surrendered our sovereignty to the European Commission, the European Central Bank, and the International Monetary Fund,” the newspaper writes, referring to the impending bailout – or loan, as the government would prefer to call it.

Prime minister Brian Cowen, fighting for his political life, commented: “I don’t believe there’s any reason for Irish people to be ashamed and humiliated”.

The sight of the IMF delegation arriving in Dublin have left many with mixed emotions.

“While politicians should certainly share some of the blame for Ireland’s ignominious position, it is the banks that are viewed as the prime instigators of the country’s slump,” credit analyst Gavan Nolan writes in Friday’s Weekly Credit Wrap from Markit.

The cost of supporting the sector has pushed Ireland’s budget deficit to a projected 32% of GDP this year.

Anglo Irish Bank is now 100% owned by the state and Allied Irish Bank is approaching that status.

“The latter bank posted an interim trading statement today, and it confirmed what the markets had feared. AIB has haemorrhaged EUR13 billion euros in customer deposits since the start of the year,” Gavan Nolan notes.

“This wasn’t a great surprise given the deposit withdrawals reported by Bank of Ireland and Irish Life & Permanent earlier this week. But it underlined the dependence of the Irish banks on funding from the ECB, a fact that is integral to the pressure being placed on Ireland to accept external assistance.”

AIB’s subordinated bonds dropped sharply after the news.

Subordinated debt was already falling in value following the “yes” vote for Anglo Irish’s debt exchange. This vote wasn’t for the exchange itself but a change in the terms that will allow the exchange to proceed.

Prices for lower tier 2 bonds were declining across Irish banks and elsewhere in Europe amid fears that such punitive exchanges could be implemented in other countries.

“It might be asked why bonds are being used as an indicator of sentiment rather than CDS. The derivative is often more liquid than the underlying bonds and thus more reliable. Often, but not always,” Nolan points out.

The chart above shows the number of subordinated CDS daily quotes received by Markit’s parsing service over the last few months.

It is clear that there has been a marked drop in recent weeks, particularly in AIB.

In truth, the Irish banks have never been among the most liquid in Europe.

But all three banks now have Markit Liquidity Scores of “4”, the second worst ranking.

“Liquidity has evaporated in tandem with the banks’ credit deterioration,” Gavan Nolan comments.

The bonds, on the other hand, paints a different picture. The number of weekly quotes for the three most liquid subordinated bonds issued by the banks has been on the rise in recent weeks.

“All have Markit Liquidity Scores of “1”, the highest ranking. This indicates that trading activity is centred on the bonds and in this case therefore they are better indicators of sentiment than the CDS,” Nolan writes.

But it’s the opposite for the Irish sovereign, which has highly liquid CDS.

Reports suggest that the EU/IMF delegation will reach an agreement with the government next week, according to Markit.

But the weekend will no doubt be a maelstrom of rumours and comment from undisclosed sources about the government’s four-year plan, which promises yet more pain for the Irish people.

“The soul-searching has just begun,” Gavan Nolan concludes.

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