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November 16, 2010

Ireland told: Take EU bailout or trigger crisis

Dublin warned it has 24 hours to make decision as EU emergency talks loom amid fears Irish banks’ contagion may spread to other eurozone countries

* Henry McDonald, Elena Moya and Larry Elliott
* guardian.co.uk, Monday 15 November 2010 17.59 GMT

Brian Lenihan Delivers Ireland’s Budget Brian Lenihan, Ireland’s finance minister, will discuss the situation with eurozone finance ministers in Brussels tomorrow. Photograph Bloomberg via Getty Images

An increasingly isolated Irish government was coming under mounting pressure tonight to seek a European or International Monetary Fund bailout within 24 hours amid fears that contagion from its crippled banking sector might spread through the weaker eurozone countries.

Portugal, Spain, the European Central Bank and opposition parties all urged Brian Cowen’s coalition government to remove the threat of a second crisis in six months by putting a firewall between Ireland and its partners in the 16-nation single currency.

With finance ministers from the eurozone due to hold emergency talks tomorrow night, financial markets were expecting Dublin to finalise negotiations with the EU over the terms of a deal to allow Ireland to rescue banks laid low by the collapse of the country’s construction boom.

“The Irish problem is spreading, but it could get more volatile,” said Ashok Shah, chief investment officer at London Capital, a fund management firm. “They have to get this bailout, they have a period of time before it gets impossible, before nasty things happen. The longer they leave it, the more difficult it will get.”

Portugal has seen its borrowing costs rocket along with Ireland’s as speculation has grown that it too may have to consider a bailout. Its finance minister, Fernando Teixeira dos Santos, told the Wall Street Journal his country had been hit by a contagion effect caused by fears about Ireland’s ability to pay its debts.

“I would not want to lecture the Irish government on that,” he said. “I want to believe they will decide to do what is most appropriate for Ireland and the euro. I want to believe they have the vision to take the right decision.

The Bank of Spain governor, Miguel Ángel Fernández Ordóñez, a member of the European Central Bank’s governing council, told a banking conference in Madrid he expected an “appropriate reaction” by Ireland to calm the markets. He later told reporters: “The situation in the markets has been negative due in some part to the lack of a decision by Ireland. It’s not up to me to make a decision on Ireland, it’s Ireland that should take the decision at the right moment.” Ewald Nowotny, another ECB governing council member, said in a radio interview the EU wanted a “quick, good solution to Ireland, so that there will be no spillover” to other heavily indebted countries such as Portugal and Spain.

Weekend reports that Ireland was holding bailout talks with the EU helped ease pressure on Irish borrowing costs today, with the yield on benchmark 10-year Irish bonds easing to 8.1% from a peak of over 9% last week. The premium that investors demand to hold Irish 10-year bonds over benchmark German bunds (known as the spread) also fell to 545 basis points, down from a record 652 basis points last Thursday.

Analysts warned, however, that the selling would quickly resume if Ireland tried to go it alone. “The expectation of a bailout for Ireland helped its spreads to recover from last week’s capitulation,” said Gavan Nolan, a credit analyst at Markit. “It’s good to talk.” Despite Ireland’s insistence that it doesn’t need to be rescued, investors say the country needs support, given the fragility of its moribund banking system, and the high borrowing costs limiting the capacity of companies to raise funds.

Ireland’s Europe minister, Dick Roche, said rumours that it was on the verge of seeking a bailout could be “very, very dangerous”.

He conceded: “There is continuous talk going on backwards and forwards about the level of our debt but the suggestion that that constitutes going to the IMF or the bailout is just irresponsible.” Ireland’s opposition’s finance spokesman, Michael Noonan, said he believed European intervention was “under way” and matters would come to a head within 24 hours. The government, he said, was “fighting a rearguard action for appearances purposes”.

Noonan said a bailout could lead to Ireland being suspended from the bond markets for three or four years.

Ireland debt crisis worsens as Portugal warns of contagion effect on Europe

Investors pressure Brussels for solution but Irish officials deny any need for bailout

* Elena Moya
* guardian.co.uk, Monday 15 November 2010 19.01 GMT

The unfinished Anglo Irish Bank headquarters in Dublin’s Docklands The unfinished Anglo Irish Bank headquarters in Dublin’s Docklands. Photograph: Kim Haughton for the Guardian

The Irish debt crisis intensified today, after other high-deficit countries such as Portugal warned about a possible contagion effect, and investors pressured European officials to come up with a solution to calm markets. Irish officials reiterated that they don’t need any bail-out.

The crisis moved from trading rooms into the political arena, as European finance ministers are meeting tomorrow and the day after in Brussels. Investors expect them to announce a resolution, or at least to shed some clarity about how much money they would lose were any European country to default.

“The Irish problem is already spreading, but it could get more violent and volatile,” said Ashok Shah, chief investment officer at London Capital, a fund management firm. “They have to get this bail-out, they have a period of time before it gets impossible, before nasty things happen. The longer they leave it, the more difficult it will get.”

Pressure on the EU escalated after Portugal’s finance minister Fernando Teixeira dos Santos said his country was at risk of a possible contagion, as “we are not facing only a national or country problem – it is the problems of Greece, Portugal and Ireland,” he said.

Portugal and Ireland’s cost of borrowing escalated last week to unsustainable levels, of more than 7% -more than twice as much as Britain’s-, given the market’s lack of confidence in the two ailing economies. Last week’s sell-off also followed comments by German leader Angela Merkel, saying that private investors would also have to bear any costs related to any debt restructuring. EU leaders were forced to clarify her comments, stating that private investors’ potential losses would only apply to longer-dated bonds.

“Angela Merkel’s broadside comment was in itself a form of bullying directed towards the more vulnerable sovereigns in Europe,” said Donal O’Mahony, global strategist at Davy Stockbrokers in Dublin. “After that, this very volatile environment has now to be resolved, maybe by moral persuasion, in the interest of Ireland and of the entire system. If Ireland is forced (into a bail-out) or morally persuaded by partners in Europe, it will be discussed” over the next two days, O’Mahony said.

Despite Ireland’s insistence that it doesn’t need any rescue, investors say the country needs support, given the fragility of its moribund banking system, and as high borrowing costs severely impact Irish companies’ capacity to raise funds in the market.

Irish banks, on tax-payer support after a decade of over-lending in risky real estate projects, could be the receivers of any EU support, European Central Bank vice president Vitor Constancio said on Monday.

“We could use the funds, if offered to us, to support the banking system,” O’Mahony said. “The EU has the capacity to provide mid-term funding, and indirect lending.”

Through sovereign bonds or via a more sound banking system, investors want more reassurance before they start lending to the country again. “When budget deficits are not too high you can come up with a plan, but but after a critical point, you need support, you need to say who will hold your hand,” said Shah, of London Capital.

Until now, international investors perceived company bonds as riskier than government debt as few considered a relatively stable European country could go bust. This changed after Greece was forced out of international markets in May, and ultimately bailed-out by the EU and the International Monetary Fund. “They need to decide if there are going to be “haircuts” (losses), at which level of the debt, how big the haircut will be, etc,” Shah said. “It is not only for Ireland to sort this out. The EU needs to do it. What they agree, it can be rolled for Greece and Portugal as well. They need to agree the terms, they need to reduce uncertainty.”

Markets remained expectant to today’s action in Brussels. The premium that investors demand to hold Irish 10-year bonds over benchmark German bunds (known as the spread) fell to 545 basis points, down from a record 652 basis points last Thursday. “The expectation of a bailout for Ireland helped its spreads to recover from last week’s capitulation,” said Gavan Nolan, a credit analyst at Markit. “It’s good to talk.”

Regardless of the outcome of Brussels talks, investors await more turbulence, given the fragility of global economic recovery. “The global financial system needs to be on life support for many years to come,” said Jim Reid, a credit strategist at Deutsche Bank.

Ireland: It’s all bad news

Irish ministers are fighting to retain something they have already lost: sovereignty over the economy

* The Guardian, Tuesday 16 November 2010

A man gets a call from his doctor, who asks whether he wants to hear the good or the bad news first: “The good news is that you have 24 hours to live.” “Jeez, doc, what’s the bad news?” “I should have called you 24 hours ago.” The doc, in the case of the critically ill Irish economy, is not the financial media that have been reporting that it is only a matter of time before an EU bailout. Irish ministers called these reports “dangerous fiction”. Brian Cowen, the prime minister, let it be known that he was furious. The cabinet stuck to the line yesterday that they can get through on financial aspirins until next June. But media reports are not the problem, and certainly not the reason why the credibility of ministerial statements on this issue is now so low.

The doc is the European Central Bank, which has already spent €90bn keeping Irish financial institutions afloat. The ECB vice-president, Vitor Constâncio, clearly wants Ireland to use the fund set up after the Greek collapse, the European Financial Stability Facility (EFSF), sooner rather than later. The governor of the Bank of Spain piled more pressure on Ireland yesterday. Nor was he a disinterested spectator. Though Ireland is out of the bond markets and does not have to go back until it runs out of cash next year, Spain and Portugal both need those markets to fund their debts. While Greece and Ireland are the first victims of the sovereign debt crisis in the eurozone, the deeper fear of the ECB is that an economy the size of Spain or Italy will follow. That would really test their ability to underwrite banking failure.

The response of Brian Lenihan, the Irish finance minister, to the growing number of flashing blue lights outside was to make a distinction between the state, which was insolvent but liquid, and the banks, which were both broke and cashless. It may look like good politics to call this a banking crisis rather than a national one. But there is a problem with this logic. Having underwritten the banks two years ago with a deal that guaranteed virtually all the bondholders’ risk, the Irish taxpayer has seen the cost of the bank bailout rise to between a quarter and a half of GDP. As Morgan Kelly, the economist who predicted the banking crash, wrote recently, this open-ended commitment to cover bank losses plainly exceeds the fiscal capacity of the state. The banks’ problems in determining how much further they have to fall are now plainly Ireland’s too.

Ireland has resisted pressure to ask for help because the terms of the bailout from the EFSF or the IMF would be punitive and the state would be forced to surrender some sovereignty over the budget. It would almost certainly have to increase taxes, particularly its low corporation tax rate of 12.5%, which was credited with attracting Google and its like to Ireland. No relatives at a funeral are mere bystanders. David Cameron certainly would not be if Irish collapse meant lots of that business returning to Britain. But the fact of the matter is that Irish ministers are fighting to retain something they have already lost – sovereignty over the economy. What Iceland went through could be mild in comparison if what follows is a full-scale mortgage default crisis, compounded by a further collapse of property prices.

No government ever wants to go cap in hand to the IMF or the EFSF. It is humiliating, and in Ireland’s case has painful historical resonances. Entry both to the EU and to the eurozone represented a welcome release from the dependency on the much larger economy across the water. The Tiger economy was not just a neoliberal dream. It represented a quick breakout from an old problem. It was a national aspiration, which is now dying as another generation of young Ireland seeks work abroad. The Irish people need to hold to account those who took the decisions that led to this crisis, and draw the right conclusions – never again to allow their economy to be built on dreams and air.

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