Begosh and Begorrah!

With Saint Patrick’s Day looming in the near future, there’s great cause to be drinking in Ireland … not exactly in celebration but to numb the pain. The question being bandied about in financial circles is whether Ireland is about to become the next Iceland, a country that flipped completely upside down financially.

The credit default swap market – that little financial instrument that you pay for to get “insurance” that a debtor will not default – is applied to the debt of nations as much as it applies to corporate borrowers and is generally seen as a measure of how “creditworthy” a debtor is perceived by the financial markets. Given the soaring cost of buying a credit default swap for anything Irish, including the government, the perception of Irish creditworthiness is falling as fast as a stone tossed off a cliff into the Irish Sea .

The cost (measured by the CDS market) of insuring paper issued by the Republic of Ireland has risen by almost 40% in the last two weeks (over fifteen times higher than a year ago)! The February 16^th Los Angeles Times: “[P]ledges made by Ireland to support its crumbled banking sector amount to 220% of the country’s annual economic output. Loans outstanding at Irish banks are more than 11 times the size of the economy.”

But unlike Iceland , Ireland , as a euro-zone nation, has access to the European Central Bank and the funds that go with it. Its credit rating isn’t horrible (Aaa), but that’s according to Moody’s, the company that rated more than one derivative package of subprime mortgages as A. True, Moody’s has placed the rating on a “negative outlook” watch in January, so it would not come as a big surprise if the rating dropped in the immediate future. Still the nations of the European Union have a strong interest in stabilizing the Emerald Isle’s financial condition.

For those of us worried to death about Ireland, let us take comfort, as the State of California continues its seemingly irreconcilable budget battle and faces a huge deficit any way you look at it, that California now has the worst credit rating (sixth from the top) of any state in the United States.

According to the February 17^th Bloomberg.com, “Richard Larkin, research director at Herbert J. Sims & Co., a municipal-bond firm in Iselin, New Jersey, said he expects California will face further credit reductions to near speculative-grade status given the record size of the deficit and the likelihood that the state’s fiscal condition will deteriorate through this year… ‘Given the unprecedented magnitude of California ’s projected deficits and cash flow shortfalls, [the February 16^th] rating actions are minor adjustments, likely to be followed by future rating agency downgrades,’ Larkin said in an e-mail. ‘Although S&P characterizes California ’s rating outlook as ‘stable,’ the size of the deficits and the political gridlock in solving them can be characterized as anything but stable.’”

The Golden Bear is evoking very bearish reactions. And yes, California ’s credit rating (a trembling A) is worse than Ireland ’s as well… at least for now.

I’m Peter Dekom, I live in California , and I still approve this message.