The Brilliance Of A Bailout

The European Central Bank tried to force Ireland into an EU/IMF bailout, according to Irish Justice Minister Dermot Ahern. Today the ECB is forced to buy Irish bonds in the market to prevent the recently bailed out country’s economy from total collapse. And at the same time the ECB is increasing the bailout pressure on Portugal. Excuse me, but I can’t see the logic.

“The government was cleaned out in the negotiations.”

Michael Noonan


While the 111 billion dollar rescue package to Ireland was supposed to calm the financial markets, the exact opposite has happened. The volatility and the cost of insuring national debt by Credit-default Swaps is just getting higher and higher. Yesterday we saw the biggest slide in Spanish government bonds since the euro’s debut in 1999. Today the ECB is intervening in the market to keep Irish bonds from going down the tubes.

According to two anonymous sources, the ECB have bought a “small amount” of short time Irish government bonds Tuesday morning, Bloomberg reports.

The yield on Irish 2-year bonds are up by 0,14%, as of 1 PM (CET) today.

The cost of insuring Portugal against default rose 11.5 basis points to a record 551 today, according to CMA prices, and the ECB is now putting pressure on the Portuguese government to apply for a bailout, according to the Irish minister Dermot Ahern.

“Clearly there were people from outside this country who were trying to bounce us in as a sovereign state, into making an application, throwing in the towel before we had even considered it as a government,” Ahern says in an interview with the Irish state broadcaster RTE today. Adding: “And if you notice, they are doing the same with Portugal now.”

Asked about who was pressuring Ireland, he says: “Quite obviously people from within the ECB.”

Ireland’s crisis has forced the ECB to buy government bonds and pump money into its banking system.

Irish domestic lenders increased their reliance on ECB funding by 3.3 percent in October and the central bank today purchased more Irish bonds, according to two people familiar with the transaction, Bloomberg reports.

The bailout has sparked a wave of domestic criticism accusing Prime Minister Brian Cowen of giving up the country’s sovereignty for punitive terms.

More than 50,000 people took to the streets of Dublin on November 27, the day before the government agreed an average interest rate of 5.8 percent for the loans from the EU and IMF.

“The government was cleaned out in the negotiations,” says Michael Noonan, finance spokesman for Fine Gael, the largest opposition party.

“The interest rate of 5.8 percent is far too high and verges on the unaffordable.”

The Irish Bailout - Illustrated

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The risk for Europe is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region’s 750 billion-euro bailout fund may not be big enough if the country resorts to aid. Spain’s 10-year government bonds slid yesterday by the most since the euro’s debut.

The extra yield investors demand to hold the securities instead of benchmark German bunds widened to euro-era records.

(See also: Belgium Joins The PIIGS: And Then They Were Six)

“The big elephant in the room is not Portugal but, of course, it’s Spain,” Nouriel Roubini, the New York University professor, said at a conference in Prague yesterday. “There is not enough official money to bail out Spain if trouble occurs.”

The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup’s chief economist, Willem Buiter, wrote  in a note to investors yesterday. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter said.

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10-year sovereign spreads (against 10 year German bunds)

Previous Day Close Yesterday’s Close This morning
France 0.459 0.521 0.535
Italy 1.753 1.993 1.998
Spain 2.538 2.787 2.746
Portugal 4.484 4.564 4.477
Greece 9.299 9.329 9.79
Ireland 6.866 6.966 6.956
Belgium 1.013 1.214 1.192

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