The Bankwatch

Tracking the consumer evolution of financial services

Thinking the unthinkable – will Ireland produce the next credit crisis?

John Mauldin produces some great research and analysis in weekly emails.  Thoughts from the Frontline.  He has been focussing on Ireland, and this little snippet summarises the situation there.  The history here is that the Irish Government guaranteed all bank deposits and bank bonds in 2008.  This bubble chart shows the implication.

The guarantee that the Irish took on is worth 30% of their GDP.  As John points out if that was America that would equate to $4 trillion.  In effect the Irish government has taken on bank bailouts to UK, German and other banks from around the world (the blue, orange and brown bubbles on the right).

Irish elections are upcoming and a growing assumption is that a new government will form based on reneging on that unaffordable guarantee.  This implies enormous new problems for banks around the world to the extent shown.  Johns reaction to that shock follows the chart.  Emphasis mine.

Britain is particularly exposed. What would it do to the pound if the Bank of England had to bail out British banks to the tune of almost $200 billion? Note that Royal Bank of Scotland and Lloyds are almost wards of the state, as it is. And the euro could come under intense pressure.

If eurozone leaders do not act, such a confrontation could spiral out of control rather quickly. Think November 2007. Think Bear Stearns and Lehman. Interbank lending could dry up almost overnight.

Written by Colin Henderson

January 15, 2011 at 15:28

Posted in Uncategorized

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