Eurozone crisis deepens as Ireland drags fee over fiscal bailout

News - Banking

Written by Ray Clancy

Thursday, 18 November 2010 09:50

The eurozone is facing a further crisis as talks continue over a potential financial bailout for Ireland although Irish officials continue to deny that it is needed.

The fiscal problems in Ireland are throwing focus on other troubled eurozone states including Portugal and Spain and at the same time reminding investors that the Greek bail out could also be on dodgy ground.

The eurozone bail out for Greece has begun to unravel. Austria has suspended her aid contributions over a perceived failure to comply with the rescue terms. Meanwhile, Germany has warned Athens that its patience is running out.

Analysts are pointing out that debt crisis in Europe is now escalating and this is having a bad effect on financial markets as bourses tumble and the euro slides.

European Union and IMF inspectors are currently in Athens amid claims from Austria’s finance minister Josef Proll said that Greece has failed to meet the tax revenue targets agreed under the EU Memorandum.

There are now worries over whether or not the next €6.5 billion tranche of money for Greece will be approved. And a war of wor4ds has broken out between Athens and Berlin with Greek premier George Papandreou accusing German Chancellor Angela Merkel of driving the weaker EMU states into bankruptcy and scaring investors.

The Irish Prime Minister Brian Cowen said Ireland has not made any application for external support and is fully funded until June. Privately officials said Dublin is hoping a formula that would dress up any aid package as a move to recapitalise banks and stabilise EMU bond markets, rather than a rescue for Ireland, can be worked out.

Some believe that Ireland is being pushed into a pre-emptive bailout to ensure that the crisis does not reach Portugal and Spain. But analysts at Citigroup said it was far from clear whether an Irish bailout would in fact lift the pressure off other countries since they share the same problem of excess debt and the markets may simply shift their focus onto the next place.

Ian Standard from BNP Paribas pointed out that the EU’s €440 billion rescue fund was never designed to be used. ‘The sheer existence of the fund was supposed to be enough, but that has not happened. It is only a matter of time before the Spanish economy slips back into recession and that is when the spotlight will turn to Spain,’ he said.

Financial aid for Ireland is unavoidable according to Peter Geikie-Cobb, fund manager at the Thames River Global Bond Fund. ‘In my view, Ireland is perhaps in denial regarding the full severity of the situation they are faced with. They believe that they have enough funding to see them through to the middle of next year and that they will be able to grow their way out of the problem. However, the reality is that as the economy falters their debt to GDP ratio continues to increase. Furthermore, as markets begin to price in defaults, they will be forced into a classic debt trap as market interest rates increase,’ he explained.

‘It’s quite clear to us that financial aid is unavoidable and the ultimate end game will see bondholders being forced to take a haircut, bearing the brunt of the restructuring and refinancing. As to the timing of the bailout, this could drag on until the middle of next year when Ireland does finally find itself amidst a funding crisis,’ he said.

‘Alternatively, they could see sense sooner than that, meaning the situation could be resolved quickly. Until we have a situation where the Government, the ECB and EU policymakers agree that cuts and restructuring is the right way to go forward, in our view these markets lack credibility and there is almost no price at which we would be attracted into those markets. Perversely, the higher the yield the less attractive those markets become whilst they’re on the brink of falling into a debt trap,’ he added.

He believes the longer the situation goes on the more vulnerable other countries become. ‘Worryingly, the longer the situation with Ireland continues, there is greater potential for contagion across Portugal, Spain, Italy and even France where their deficit credentials are deteriorating by the day. This highlights the drawback to the current Eurozone structure where you have a single currency, a Europe-wide monetary policy and independent fiscal policies. The whole make up of the Eurozone is now being tested,’ he said.

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