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Monday, November 22, 2010

Impact of Irish Bailouts

So the markets are reacting favorably to the Irish agreeing to be bailed out. But I believe this will be short lived.

The bailout has not actually occurred yet so there are plenty of “terms” to be worked out but suffice it to say the market “likes” the stability of an agreement.

The Terms of the agreement will be in the form of loans from other countries such as Germany and these terms will most certainly raise rates and in turn force Ireland to raise corporate and income tax rates.

These rate increases will affect companies such as Microsoft (MSFT), Hewlett-Packard (HPQ), Bank of America (BAC), Merrill Lynch, Google (GOOG) and Intel (INTC).

Of course these companies are in Ireland in the first place because of the lower subsidized rates (the lowest in the Euro-Union) that existed before and only helped to fuel the financial and international trade imbalance which existed and contributed to the need for this bail out in the first place.

The companies are not threatening to leave at this stage, but the statement - signed by executives from the four companies - does point out that while Ireland's tax rate may be low in European terms, it is not when compared with Singapore, India and China.

John Herlihy, head of Google's European headquarters in Dublin, said ''anything that impinges on Ireland's competitiveness is going to be a big thing for Google''.
So how did this mess happen? Well in some ways, it is the same greed and deals that ran rampant in the US which has contributed to the Irish demise.

Ireland has three big insolvent banks and several other smaller, equally insolvent financial institutions we won't bother to mention by name.

Ireland also has a large number of subsidiaries of European, British and American Banks. These subsidiaries are often registered as Irish and therefore on Ireland's tab not the nation of the parent bank. This often gets forgotten in the excitement.
Ireland also houses a very large chunk of the world's Special Investment Vehicles (SIV's) which are the shell companies which house trillions and trillions of dollars and Euros and pounds worth of Collateralized Debt Obligations (CDOs).

These are what Warren Buffett described as "weapons of financial mass destruction".
These CDOs, in turn, house an equal or greater nominal value of Credit Default Swaps (CDS) written upon the CDOs.

These subsidiaries were often registered as completely Irish companies. In other countries these same companies faced tighter and stricter policies. So the Irish registered subsidiaries provided a loop hole.

Rumors have it that banks would work the deals outside of Ireland, then send a banker over to Ireland, get them to sit at 'their' desk in Ireland, in the Irish bank, and do the deal there. The legal registration of the deal and the 'oversight' were all Irish. This is known in the financial world as jurisdictional arbitrage. You and I would call it cheating if we were feeling charitable and lying if we weren't.

The deal was properly overseen and approved by the appropriate Irish financial authorities and the profits would be banked at a very happy Irish bank. If any management of the 'deal' was required an Irish company would be hired, there are many, and an Irish manager often living not far from Cork, would 'manage' the money in and out.

Any bad deals, losses and improper oversight is question of wealthy bankers from all countries and the Irish companies, not the people. It should be the bankers who made the losses who should take them.

But as is the case with the US financial and economic woes, it is often the people who pay in the terms of lost jobs, property, income, and higher taxes.


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