Ralph Shell @ 1:05 PM, Wednesday November 17 2010
The plight of Ireland and their bank's massive debt has become headline news, and, when that happens the market has usually discounted the event. Maybe this time it is different. Irish government officials are reluctant to accept the bail out as proposed by the euro bankers, perhaps fearing terms of the intrusive rescue. Irish growth during the expansionary go-go years made some of the stodgy elder euro members jealous, and they may be all too eager to pay the Irish back with stern retribution. Is it possible that the euro financial ministers want the Irish to increase the corporate tax rate from the current 12.5%, eliminating the Irish competitive advantage?
The Irish debt problem rests with the private banking sector. Because of this the Irish finance minister Brian Lenihan, regards this is a private debt matter. There are a couple of problems with this approach. First, the Irish Government in 2008 guaranteed all private deposits, so while they may have enough funds to keep the government running, the rescue of one or two Irish bank bail outs would be a daunting task. The second problem with the shaky Irish banks is, they owe the British, German and other banks massive amounts, so Irish bank failures would extend well beyond the shore of the Irish Sea.
Joining officials from the European Central Bank, the European Union, and the IMF, was the British Chancellor of the Exchequer George Osborne who said as reported in Market Watch:
“Ireland is our closest neighbor and it’s in Britain’s national
interests that the Irish economy is successful and we have a stable
banking system,” Osborne told reporters as he arrived for a meeting of
European Union finance ministers in Brussels.
For currency futures speculators, the severity of the problems is Ireland and Greece came at a very inopportune time. Mesmerized by the Fed Chairman Bernanke's QEII caper, speculators had amassed almost 269k contracts of long currencies other than the USD in the latest COT report. Much of yesterday's trade was long liquidation in the C$, pound, A$, euro and the SF, with the total futures contracts down over 20K.
Some of the USD strength may also have been caused by conjecture the intense opposition to QEII might abate if the US enjoyed brighter economic news. This was not the case this morning. The core CPI came in unchanged at 0.0%, less than the anticipated +0.1. Housing starts dropped by 11.7%, the lowest level in 18 months. These negative reports halted the USD advance that were caused in part by the long liquidation. We doubt if Bernanke would find any reason in these reports to alter his QEII plans.
The Irish plight continues to dominate the headlines, but the unsettled Italian situation is slighted. There, Italian Prime Minister Berlusconi's new austerity budget will be brought to a confidence vote in both houses. If they fail to pass, Berlusconi claims he will resign, causing further stress in the euro community.
So far the pound has remained sheltered from the euro difficulties, but the exposure of the British banks in Ireland might make it vulnerable. The pound has had a sell off from about 1.63 to 1.5840. and is now trading at about1.59. We wonder if that is enough of a sell off. Tomorrow, during the London session, we will get British retail sales, and the Public Sector Net Borrowing Report. Should these reports provide a little excitement and a rally back to the 1.60 area, we intend to again try the short side of the pound in this area.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.