German Press: EU forges Emergency Plan for Ireland bankruptcy

UPDATE: 12 Nov 2010 – More press accounts are confirming that, indeed, a bailout is in the offing. The British have signed up for it as well despite insisting that this is a euro zone problem. But they needed to get on side to show solidarity (and given the British exposure to Ireland). Here’s the best report so far on this.

The well-regarded German financial daily Handelsblatt has an article out today claiming that the EU is making plans for a potential Irish default.  I see this report as hearsay at this point. But it bears mentioning because it shows how the problem with Ireland’s bond yields is being construed in the German media. The article is couched in negative terms, of course and talks of national bankruptcy even though really its analysing a bailout using the existing mechanism. The article supports my argument for cutting subordinated bondholders loose and going to the IMF and EFSF now before this spins fully out of control.

Here’s my translation and a link to the article in German below.

The euro zone is preparing for a cash injection for a debt-ridden Member State for the second time. After Greece, Ireland may soon have to ask for help. The reason is the dramatic pressure from financial markets on Irish government bonds.

"The increase in yields of Irish bonds is worrying," it is said in government circles in Berlin. Therefore, the euro countries will now examine whether Ireland needs liquidity assistance from the rescue fund for cash-strapped Euro states.The fund, created in May of this year, has a size of € 750 billion, € 250 billion of which comes from the International Monetary Fund (IMF), € 60 billion from the European Commission, and € 440 billion from the euro area.

A formal appeal for assistance from Ireland has not been made, it  is said in Berlin. Nevertheless, one prepares for emergencies: "We are in a position to help Ireland at very short notice." In Brussels as well, diplomats acknowledged that liquidity support for Ireland could not be ruled out.

The Irish government still hopes to get the situation under control on its own. It would under "no circumstances" take international aid, asserted Finance Minister Brian Lenihan. Using its own resources, Ireland will push down its budget deficit from the current 32 per cent of gross domestic product (GDP) by 2014 under the EU limit of three percent.

The government have not convinced the markets though. This was even acknowledged by Ireland’s central bank president Patrick Honohan. The government have not yet managed to regain the confidence of investors. The yield for Irish government bonds rose yesterday on to a record high of 8.6 percent.

The high rate does not directly impinge on Irish funding costs because the country does not need to issue new government bonds until mid-2011. But the tensions in the euro-zone are accelerating so quickly that a quick solution could still be necessary, warn economists. The main reason is investors’ fear of a ‘haircut’.

EU leaders had decided at the summit a week ago that private creditors would participate in the cost of government insolvency in the euro zone. According to estimates by the Italian bank Unicredit, Irish bond yields signal Irish government bonds creditors expect to lose at least 30 percent of their claims. Investors are also nervous because Irish budget austerity plans could fail in Parliament in early December. The government coalition with the conservative Fianna Fail only has a thin majority.

There is no way the Irish are going to be able to make the budget adjustment "aus eigener Kraft." This is not credible. Denial is only going to make this worse. The time to act is now.

Source: EU schmiedet Notfall-Plan für Irland-Pleite – Handelsblatt

See also: „Irland ist faktisch insolvent“

  1. Blankfiend says

    Speaking in Seoul, where she is attending the G20 summit, Dr Merkel acknowledged her demands have upset the markets but insisted it was unfair for taxpayers to be saddled alone with the cost of sovereign rescues. “Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Dr Merkel said.

    “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”*

    *Offer may vary. Not valid in all states. Taxes, title and registration fees may apply. Not applicable to sovereign debt before mid-2013. Taxpayers still subject to full cornholious reaming until that time, at least.

    1. Marshall Auerback says

      She’s right, but she’s attacking the symptoms, rather than the underlying
      disease. Suggesting that bond holders will take a hit in the future
      represents a reaction to a pre-existing problem? Why not attack the practices
      that created the crisis in the first place? Why does Angela and her
      government insist on retaining the “universal bank model”, rather than moving
      toward a narrow banking model which regulates the asset side of the banks’
      balance sheet? It’s OK to tough a talk game, but Angela seems to become a cream
      puff when it comes to listening to the complaints of Josef Ackerman.
      Germany is one of the key parties which worked to weaken the regulatory
      provisions proposed in Basel III. The Chancellor talks a tough game, but when it
      comes down to it, it remains a case of “Deutsche Bank uber alles”

      In a message dated 11/12/2010 10:02:49 A.M. Mountain Standard Time,

  2. Daniel says

    there’s nearly no media coverage (unless you read handelsblatt or ftd) about the irish bailout. Maybe Ireland is really too small and/or the people are getting tired to read something about credit spreads.

    Audi, Opel und VW kommen mit Autobau kaum nach,1518,729042,00.html

    1. Marshall Auerback says

      I think Germany looked into the abyss and backed off their insanely destructive posture.

      1. Edward Harrison says

        Here’s a good post on the Irish situation by AFOE.

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