The Irish crisis keeps getting deeper—at least as judged by spreads on Irish government bonds.
Yields on Irish government bonds hit records on Tuesday, September 28. The yield on the 10-year government bond climbed by 0.25 percentage points on the day to 6.72%. Germany’s benchmark 10-year bond yielded 2.24% that day.
One thing scaring financial markets is that at 6.72% the yield on Irish bonds is about where the yield on Greek bonds was in April 2010 just about a month before the European Central Bank and the IMF (International Monetary Fund) had to step in with a rescue package to stabilize the financial markets. Greek bonds on September 29 were paying a yield of 11.02%.
The immediate cause of the jump in Irish yields was an announcement that on Thursday the government will unveil a plan to pump more money, a projected $6.7 billion, into Anglo Irish Bank. That would take the government’s total injection of capital into Anglo Irish up to $40 billion. And according to Standard & Poor’s that won’t be the end of the capital the government will need to pour into the bank. S&P estimates that the bank will need a total of $47 billion in government money.
Financial markets are worried that, first, the government’s plans will leave taxpayers saddled with billions in losses. The government wants to inject capital into Anglo Irish and other banks and then to split them into a government guaranteed savings and deposit institution and an asset-recovery bank that would manage whatever riskier assets are left after the worst loans have been transferred to the National Asset Management Agency.
And second, financial markets are worried that this plan will ultimately undermine the government’s own program for reducing Ireland’s national budget deficit. That program is built around a combination of growth and, mostly, cuts in government spending. The financial markets fear, rightly I think, that selling an austerity budget (with more cuts in the offing) to voters who see billions going to prop up the banks that led the country into this crisis could become, what shall I say, problematic.
You don’t have to look far for a concrete example of what protest of budget cuts would look like: On September 29 workers in Spain staged that country’s first general strike in eight years to protest government budget cuts.
Hi Jim, Thanks for the article
i think that Ireland are currently taking on their troubles, i’ve read that they are restructuring some of their banks debt (some of it owned by hedge funds) and are reaching deals which include haircuts on bonds. They are lucky that they are covered during all this by the rescue plan.
A ‘bad bank’ system is a positive move on the long long road towards normalcy, especially if there is transparency. A good friend who lives in a new housing development near Kilkenny told me that the 3 bedroom houses there have been recently valued at 40% down from the peak
As for the Euro strength, I have seen rumours of china’s active intervention to strengthen the Euro, the EUR/USD has really recovered significantly, I would have expected some kind of retrace by now, but so far nothing. It would be in Chinas interest in that they seem to care foremost about keeping their balance of payments surplus.
I am somewhat mystified by the surge in the Euro also (I suppose it may be more a fall in the value of the dollar). The cost of the bank bailout in Ireland is estimated to be roughly 1.5B Euro per annum (over 10 years). If the economy recovers in 10 years time then the assets accumulated by government under NAMA will be sold.
The bigger problem is that the gap between income and expenditure in the Irish economy is currently 18B Euro. The general public will relate the cuts to the bank bailout and believe me are very unhappy about Anglo in particular as most of its lending was outside of Ireland. I don’t think you will see the same type of protests in Ireland as there were in Greece. Public servants have already taken a salary cut of over 30% and are expecting more, but there really haven’t been too many protests. The worst protest was last week when a cement lorry was abandoned in the gates of government buildings! That is it.
Irish people generally understand the problems that they are facing and will deal with them. The most likely protest will be a forced change in government (it may not be a bad thing given the way he is being ridiculed on US CNBC TV shows due to one bad interview) – and we know that the alternatives will have to follow the same austerity path. Jim, a change in government, who presided over the economy for the past 12 years, boom and bust, will be enough to avoid the type of protests you are taking about.
I am mystified. You keep posting stories about the euro being rattled by Greece, Hungary, Spain, Ireland … yet all I see the euro do is rise, rise, rise … ever since its low against the dollar earlier this year!