The Irish crisis heats up

Although some diplomats say it is to Ireland’s advantage that the Government is not at present borrowing from the investors, fear of contagion emerged again yesterday as the premium on Spanish and Italian debt jumped to record levels.

The article is here.  The Irish have enough funds on hand to finance their government through next summer and they mention this repeatedly.  But is that good?  The lack of an ongoing market test increases uncertainty about market opinion and perhaps leads more people to wonder about the worst.  From other sides it encourages denial about the basic problem.  What will that first bond auction look like when it comes?  (What will China ask for in return?)  Extant bonds are traded, but that market is thin.

Ireland used to say "We are not Greece."  These days it is Greece saying "We are not Ireland."

Here are data on Irish competitiveness.  The unofficial word is that the hat is being passed for the actual bailout.  Merkel is holding tough, which is building pressure on the other weak euro economies.  It is a common mechanism that denying a bailout raises the ultimate cost of the bailout you must make.


It is a complete phony war with the Irish implying because they are funded until next year all will be well. They can't refinance next year at those yields and the yields will not go down without clarity. It has been obvious since the summer that the private sector are not financing the Irish banking sector with non-deposit funding. They are totally dependent on the ECB for funding. The state might not need refinancing until next year but that does not apply to private sector companies.

The market is picking off the periphery one by one. Until the ECB learn that the crisis requires more than their arrogantly dismissive words things will only get worse.

"The debts should be written off and the likes of Ireland, Greece, Spain, Italy, Portgual, UK, USA et al should just declare themselves bankrupt because that's essentially what they are."


The reason the NTMA cancelled auctions for the rest of 2010 was that the auctions that occurred in the summer raised funds at an exceptionally high iterest rate - not as high as today, but still too high to be sustainable given Ireland's medium term growth and inflation prospects. These auctions went ahead because the fear was that if they were cancelled it would send out the message that Ireland was running scared. But this came with a steep price tag. Going to the markets now would bring with it an even steeper price tag, with very little to gain.

It has been simply hilarious watching the inevitable being denied over and over. The sovereign debt of most of Europe will eventually have to be restructured at some point, and this includes the Germans and the French.

I think the Irish state would be more creditworthy-- i.e., would now be able to borrow at much lower rates-- if it had allowed some or all of the banks to fail. For any given bond issue, the question is whether the issuer is likely to pay the loan back. If the Irish state had not assumed the banks' debts, the Irish exchequer would be in good shape. Lenders would not punish the Irish state for standing aloof from commercial banks' debts.

"If the banks had been allowed fail, is it not probable that the immediate market reaction would have been such that the Irish government could not access funding on the bond markets? If that had turned out to be the case, Ireland could have been forced to default even before the setting up of the EFSF."

Do I understand this right? The government pays for the bankrupt banks, and that means the government gets the bond money it needs to continue operations. The government does not pay for the bankrupt banks, and that means the government itself is bankrupt.

What a strange world.

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