Ireland formally appealed for a rescue by the European Union and the International Monetary Fund on Sunday November 21. The European Union and IMF quickly agreed to the request. Irish Prime Minister Brian Cowen said he expects talks on the package to be completed in the next few weeks.
Details were sparse, to say the least. The loan, said Cowen, will be more less than 100 billion euros ($137 billion), but that’s about all the Cowen would say, even refusing at a Dublin press conference to release any more details.
The financial markets in Asia were cheered on the announcement with the euro climbing in Tokyo to $1.3738 in early morning trading on Monday, November 22. The euro had closed at $1.3673 in New York on Friday. The euro rose against the yen as well (by 0.3%). The dollar fell against the yen as well as the euro.
But in New York any relief rally had dissipated by 10 a.m. At 10 a.m. New York time the euro was down 0.2% against the dollar.
I think the short answer is that markets have already started looking past Ireland to Portugal, the site of next euro debt crisis. Credit-default swaps on Portuguese government debt, a measure of what it costs to insure against a default on Portugal’s bonds, jumped by 0.295 percentage points this morning to 4.47 percentage points. The record high, set on November 11, is 4.78 percentage points. Credit-default swaps on Greek debt climbed 0.36 percentage points to 10.04 percentage points.
The price of Irish credit-default swaps, in contrast, rose just 0.01 percentage points.
The long answer is a little more complicated. It seems that the markets aren’t particularly impressed by an announcement with so little content, especially on what the plan is to bailout Ireland’s banks, the big cause of the current Irish crisis. You can see it in the price of Irish bank stocks, this morning. Bank of Ireland shares dropped 19% and shares of Allied Irish Banks dropped 5.8%.
The lack of just about any details in the announcement leads me to wonder whether the package has any content at all at this point. That Ireland has finally actually asked for a rescue is a step forward on reaching a deal on a rescue package. It is difficult to work out a package when one side refuses to say that it wants one. But that doesn’t mean that any of the pesky details—such as any rise in Ireland’s low corporate tax rate, how much of a haircut, if any, will be forced on owners of Irish government and bank debt, and the exact nature and size of guarantees to Ireland’s banks–have been settled.
The combination of skepticism about the deal and worry about Portugal has, at the least, postponed any relief rally to another day.