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.

Keeping Score

Perhaps some of you saw this article about a nurse who took on the IRS and won.

She took on the IRS regarding her claims that her MBA costs were deductible. She won!

I like the fact that she was able to take on the IRS by herself and win!

She did it by checking the facts, reading the fine print and being anal retentive and sticking to her guns and goals!

Education loans and expenses are one of the two types of debt that I can accept as being OK to keep.
The other is housing.

Both can be tax deductible.
Both are also considered, in my mind, investments and can lead to more opportunity and potential earnings.

When it comes to debt it is important that you keep a few things in mind.

First, A Budget!

You can’t do anything if you don’t have one.

Second, Just as with a budget, set goals for either staying out of credit card debt or goals to get out of debt. And stick to them!

Third, Keep Score. Track your credit report and score.

A credit score is a basis for determining or rating or your risk for assuming debt based on your credit history.

The score is based on certain factors, including payment history, the amounts you owe and the types of credit you’ve obtained.

Personal information like income, occupation, age and marital status are not considered.

Everyone is entitled to one free credit report per year. This report shows everything the credit bureaus use to come up with your score.

NOTE: The only official site to go through all three major credit bureaus is
AnnualCreditreport.com

A credit report will also give you another means of protecting yourself against fraud and suspicious use of your credit and finances.

Check out my post about the Identity Theft Game

If you do an Internet search for free credit report or score, you will get way too many scams listed in your search results.

Having lots of available credit is good. Good for emergencies, purchasing power, obtaining loans and lower rates on said loans, and good for your credit score.

This is where some people first get confused about debt and credit cards.

Debt is bad.

Credit cards are good.

They can:
– Earn you rewards which can be used for other purchases, plane tickets and even vacations.
– Allow you to pay bills on time, even automatically. (this is important)
– Protect against identity theft, and fraudulent activity. (important too)
– Help resolve disputes with vendors and merchants.
– Purchase protection.
– Interest free loans. (if you pay bills in full and on time each month)
– And last but certainly not least – Improve your credit score!

Of course, it is also recommended that you pay off any credit card debt each month, or at least as soon as possible.

Here’s why.

Let’s say I give you a penny today, and promise to double the amount every day for a full month. How much money would I be giving you on the 30th day?
The answer: over $5 million. Check it out:

It all adds up

Lets call this my compounded interest game!

Each day, the “interest” I paid you the previous day earns more interest. At the beginning, the amounts are nominal, but by the end we’re talking big bucks.
Of course, no one’s going to double your money every day. Not even credit cards. But this concept explains how people who save relatively small amounts over the years can build rather substantial nest eggs. After a few decades, their actual contributions represent only a small part of their burgeoning wealth — it’s mostly their returns that are earning returns.

It also illustrates how debts can quickly balloon out of control. If you’re paying interest, rather than incurring it, and you’re not diligent about paying off the finance charges in full every month, the unpaid amount will incur additional interest charges, increasing the total amount that you owe.

This is why so many families who incur credit card debt eventually find themselves in trouble as the amounts they owe explode past their ability to pay.

One of my new years resolutions is to pay off none housing debt. I have been “debt free” before and it is my goal to pay off my credit card balance.

There are a couple ways to go about this.
A) If you have the money and regular automatic savings to recover it quickly if you deplete it. Use the savings.
B) If you have the automatic savings and feel comfortable diverting that to pay off the debt, use the automatic savings each month.
C) After establishing your budget, find where you can make savings and put those savings towards paying off the debt. Chances are, this will have a two fold effect. First cut back on the expenses that are most likely adding to your balances each month and secondly apply these savings towards paying down your debt.
D) Move your credit card debt to an interest free card. This is more tricky now than it used to be.
– There are no more transfer free card programs out there. Everyone is charging 3% – 5% or more as a transfer fee.
– I would only recommend this if you can budget to pay it off during the 0% introductory period.
– Like everything else, do your research. There are a lot of different cards and programs out there with even more “fine print”.

E) Tip: As you pay off the debt, take the savings from you minimum amount (even if it is just pennies) and add it to your next payment. Remember the chart above!

F) And if all else fails and you are unable to come up with a reasonable plan or goal to be debt free, then ask for help. It’s OK. And in the long run you will benefit from it and be better off. A good place to start is here at the National Foundation for Credit Card Counseling.

Of course these are only suggestions. I believe that everyone needs to tailor their budgets, goals, and plans to their own individual life styles.

I would be happy for anybody to make other suggestions if they have them. After all, as with the nurse who took on the IRS, information and education is a valuable weapon.

As Always

Be good. Do well. Have fun.