Spring cleaning

The EU has today released its spring forecast, which updates last autumn’s economic forecasts for EU (and related) countries.

Despite our (relatively) chirpy title it’s far from happy reading.

The EU now expects Greek debt to reach 157.7% of GDP in 2011 and 166.1% in 2012. We can’t help but think that this backs up our (and many others') claim that the bailout has been a complete failure in Greece (combine this with talk of a second bailout only a year after the first and they’re almost making our point for us).

It’s not just Greece either. Irish debt is expected to reach 112% this year and 117.9% next. While Portugal’s debt is forecast to hit 101.7% by the end of the year and go on to 107.4% in 2012. Only a few months ago Portugal’s debt was expected to be around 82% this year, that’s a whopping 20% increase in only a few months!

All in all the figures and the report make fairly grim reading. Over the past year we have seen these sets of figures continuously revised upwards, yet the EU and the ECB continue to maintain that the adjustment programmes they’ve laid out for these countries are achievable and are having a substantial impact.

We think it’s about time the EU started accepting the reality of its own figures and added a debt restructuring to its tools for cleaning up the eurozone debt crisis this spring.

You call that austerity?

We imagine that will be the response by many in Athens and Dublin to the conditions which have been announced along with the €78bn bailout deal for Portugal. Jose Socrates, the caretaker Portuguese PM, was almost boasting on TV last night about how much more favourable the terms were for Portugal compared to Greece and Ireland. In the cold light of day though, most of the details we’ve seen so far focus on what won’t happen rather than what will, raising the question: Where are the necessary savings actually going to come from? That should be slightly concerning for taxpayers across the EU.

The point that has attracted most attention is the easing of the deficit cutting programme. But in actual fact the targeted cut is higher than before, given the change in the level of the deficit.

Previous 2010 estimate and 2011 target: 7.3% and 4.6% = change of 2.7%

New 2010 estimate and 2011 target: 9.1% and 5.9% = change of 3.2%

Most observers, including us, didn’t expect Portugal to be able to achieve its original level of cuts, let alone a higher level - especially when combined with lower growth prospects. That was before we even found out what was not going to be cut…

According to Socrates the conditions will not include cuts to: minimum wages, public sector pay, education spending and healthcare. In addition, there will be no additional public sector job cuts and the retirement age will not be increased. That is a huge list of things that will be left untouched, especially since savings of 3.2% of GDP are expected.

So, seriously, where is the money coming from?

Well, there are expected to be some, limited, cuts to higher scale state pensions as well as a decrease in the amount and duration of unemployment benefit. There is also a plan to raise VAT on electricity. In terms of increasing revenue, there was talk of privatising €5.3bn in public assets but not Caixa Geral de Depositos, the largest credit institution, which was widely expected to be sold to raise funds. So all in all not exactly an earth-shattering plan for saving 3.2% of GDP.

To be fair, there are more details and plans to be announced but considering what has already been taken off the table we’re not overly optimistic.

Admittedly, too much austerity would definitely be bad for the economy and finding the right balance is a hard line to tread. But for those of us who already believe the bailouts to be a waste of money, since they won’t solve any of the long term problems, these kinds of conditions are almost just adding insult to injury.

Irishman, the last person executed in Rhode Island set to be exonerated 166 years after

“Poor Johnny Gordon”, the wronged Irish Catholic immortalized in this infamous ballad by the same name, may find some good fortune yet. That is 166 years after the Irishman was unfairly hanged on a murder charge.

State officials are looking to exonerate him after opening the cold case. The Catholic Church and the American Civil Liberties Union are lending their support.

Mr. Gordon was the last person to be hanged in Rhode Island. The death penalty was abolished 7 years after his death on February 14th 1845. In 1870 capital punishment was reinstated but abolished in the 1980s.

Rhode Island Governor Lincoln Chafee may be called upon by legislators to pardon Gordon. The governor supports this measure. “I think it's appropriate as a symbolic gesture. There could have been errors. There could have been emotional issues at play."

Anti-Irish sentiment was rampant during the late 19th century in Rhode Island. This is believed to be the motive behind Gordon’s death. History and law professor Patrick Conley commented on the social climate for Irish Catholics during this time. 'It was the temper of the times. Bigotry, hostility toward Irish Catholics was widespread.'

Gordon sought a better life in this country after escaping the potato famine in 1943. His brothers ran a profitable bar. A well-heeled Yankee mill owner, Amassa Sprague, wanted the tavern closed because he claimed his workers spent too much time at the tavern. He used his family connections in the Senate to shut down the pub. Mysteriously Sprague was murdered.

Johnny Gordon was arrested on the grounds of conspiracy to murder Sprague in retaliation for having the bar’s license revoked. The circumstances surrounding his 9 day trial were suspect. For starters the jurors were instructed by the judge to “give more weight to the Yankee jurors than the Irish ones”.

Also a gun was discovered near the body. Witnesses claim they saw the brothers carrying a weapon days before.

A prostitute testified that she heard one of the brothers vowing to kill Sprague in spite of her inability to tell any of the brothers apart. It was later revealed that this woman was in the employ of Sprague.

After 75 minutes of deliberation Gordon was found guilty and sentenced to death by hanging. The sentence was carried out against the wishes of the governor and the General Assembly.

His funeral prosession was attended by thousands. He is buried in a church cemetery in Pawtucket.

The effort to find Gordon innocent is important in preventing this history from repeating itself.

Father Bernard Healy echoes this sentiment. 'John Gordon was put to death because he was Catholic. It was Catholics in the 19th century. Who will it be this century?'

Source: Irishcentral.com, April 8, 2011

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Emerald Isle stress tests get a gold star (for now)

Yesterday afternoon Ireland announced the results of its recent round of banking stress tests. They showed that the banks need €24bn to recapitalise; that is undoubtedly a huge number for an economy the size of Ireland’s. So why are investors not running for the hills?

Well, from our perspective at least, the Irish stress tests seem to do something that none of the ones that have gone before have – make a genuine attempt to fully estimate the potential losses which banks could face.

This is a good start and the stress tests should be commended, but more important is how the banks and the government respond to the results. Unfortunately, that has been less commendable.

The government was expected to announce a series of measures to raise the necessary capital and set the banks on a sustainable course. However, there was only talk of ‘some’ capital being raised by investors and private lenders, with the main chunk expected to still come from the €35bn allotted to the banks by the original Irish bailout. There was also no mention of bondholders taking losses or of the widely reported new ECB medium term liquidity mechanism. So what we have is some more clarity of the state of Irish banks - which is good - but we're still missing a solid, revised plan to to address the mess.

The response of the banks was also slightly worrisome. Both AIB and Irish L&P suggested that their losses will not be as high as estimated due to the nature of the Irish mortgage market and real estate sector. This is essentially a reference to forbearance – when a lender allows a borrower extra time to repay a mortgage rather than foreclosing on the property. This allows the lenders to delay the realisation of losses, while giving the impression that the extra time given is designed to give a break to struggling taxpayers. Whatever the motivation, this is only a short term policy and, unless the Irish economy has a miraculous turnaround, most borrowers will be unable to repay these loans despite an extension in maturity.

Lastly there is the issue of the deleveraging – the sale of assets to bring the deposit-to-loan ratio back to a sustainable level – or as some people are terming it, the ‘fire sale’. Irish banks will need to shed €72bn of assets by 2013, which is a massive amount to dump into fragile financial markets. The losses on these assets will, in many cases, be substantial although the stress tests claimed to have accounted for this. Whether or not they were fully able to accurately predict the market value of some of these assets, especially since they will be sold over time, remains to be seen.

So a gold star for the stress tests (relatively at least) but they’re only a start. How the government and banks respond will deter whether Irish banks can recover quickly or whether markets will lose faith in them completely - meaning that an Irish restructering and/or another bail-out could be around the corner.

Irish Workers Leave the Emerald Isle
The great recession has triggered yet another wave of Irish emigration. WSJ's Don Duncan reports on how that is playing out in the national election

How to prevent bubbles

The new year sees the launch of the EU’s new financial supervisors: the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. If you haven't already done so, have a look at our take on the new EU supervisors here.

Green MEP Sven Giegold (Germany), who took the lead on the issue in the European Parliament, seems to be their most ardent supporter. He told German TV channel ARD that the huge structural problems in Ireland's banking sector "could have been prevented by the new European banking supervisors, thanks to their new legal possibilities".

Hmmm, a bit of a simplistic explanation, no?

Giegold doesn't have to look very far to spot the reason why his reasoning is painfully incomplete. In fact, casting his eyes to Frankfurt and the ECB would do the trick.

As often repeated nowadays, low eurozone interest rates, essentially designed for a sluggish Germany, led to an abundance of cheap credit in Ireland, in turn fuelling a property bubble that burst with the financial crisis in 2008, while the Irish government turned a blind eye. The Irish banks became insolvent, and private debt became public debt through bank bail-outs.

Inappropriate interest rates weren't the only issue, but to ignore the problems they caused Ireland is just silly. Therefore, there are several problems with Giegold's view:

1. It's heroic to assume that the EU's financial supervisors - somehow by virtue of being ran at the EU level as opposed to the national level - would spot the credit dangers looming, and act accordingly. It's also not clear why EU supervisors would be less vulnerable to commercial or political "hijack" than their national counterparts.

2. Regulators often find it difficult to spot bubbles, not matter where they sit (in the Spectator, Johan Norberg does a good job of breaking down the flawed assumptions underpinning the thuinking ahead of the 2008 crash). Ireland, for example, had been experiencing sound growth since the beginning of the nineties, thanks to some brave economic reforms. Booming house prices could be seen as 'normal' in such economic circumstances. It's not at all clear that the new EU supervisors would possess the kind of competence needed to really dig into the markets, or know where to look (American regulators quite clearly didn't pre-Lehman).

Having said that, however, in a best case scenario, the European Banking Authority, alongside the European Systemic Risk Board, could in theory serve as important facilitators of information sharing to help regulators/supervisors keep up with new developments, such as the rise of the shadow banking system, and control leverage accordingly. The EBA could also coordinate cases where cross-border banks expose taxpayers and savers in different countries to risks, ideally leading to wind downs of insolvent banks at the minimum cost, rather than more taxpayer-backed bail-outs (solving nothing).

3. But, and here's the thing, even if the EU supervisors were to spot, say, a housing bubble and stop it (through taxes at the national level and regulating the housing market, for example), the problem of excessive cheap credit, fuelled by low interest rates, would not be addressed. There are other things to spend your cash on apart from houses. If money is cheap, risk-taking is easy. And the more risks the greater the scope for bubbles.

The only effective way to stamp out excessive cheap credit in a boom is to make money more expensive, through higher interest rates. But here the familiar dilemma appears yet again: in a currency union it's impossible to tailor the interest rates like this, meaning that the EU supervisors can scream "bubble" all they want.

This is of course a difficult conclusion to reach if you have an ideological commitment to centralised decision making and a single currency for everyone...

New Irish Exodus To America
SKY NEWS: The number of people travelling from Ireland to New York to find work is rising, according to the city's Irish community leaders.

Moody’s Slashes Ireland’s Credit Rating
THE NEW YORK TIMES: BRUSSELS — Even as Europe’s leaders were praising the Irish government’s deficit-cutting efforts, the country received a dramatically different verdict Friday from a credit rating agency: a steep downgrade and a warning of more to come.

Having pledged late Thursday to do “whatever is required” to contain the debt crisis and defend their embattled currency, European Union leaders reconvened for the final day of a summit meeting. In the draft of a closing statement, the leaders welcomed the “impressive progress” in Dublin toward meeting the stiff conditions set for its recent bailout, including adoption of steep budget cuts.

Moody’s Investors Service had a different assessment, however. It cut Ireland’s credit rating by five notches to Baa1, with a negative outlook, from Aa2 and said further downgrades could follow.

The downgrade represented a further blow for a county that has enacted deep austerity cuts — and it is likely to raise questions about whether the rating agencies are exacerbating the efforts of struggling euro countries to emerge from the crisis. >>> Stephen Castle and Matthew Saltmarsh | Friday, December 17, 2010

The Roof Falls In On Ireland's Millionaires Row
THE OBSERVER: In 2007 Shrewsbury Road in Dublin was the sixth most expensive street in the world. Now, post-crash, homes have been abandoned and the tycoon residents have run for the hills

Walford on Shrewsbury Road in Dublin, the most expensive residential street in the Irish capital, where prices have crashed by 50% or more. Photograph: The Observer
There is a padlock on the gate of Walford, the most expensive house in the priciest street in Ireland. Graffiti adorn the conservatory windows, the lawn is overgrown and old mattresses are piled up in the front room.

In a well-publicised deal at the height of Ireland's economic boom, this red-brick mansion, which sits on a one-and-a-half-acre plot, was sold for an eye-watering €56m (£48m) to a mysterious trust called Matsack Nominees, widely reported in the Irish media to be controlled by the wife of a millionaire property developer, Sean Dunne. The neighbours include telecoms tycoon Denis O'Brien, the biggest shareholder in Independent News & Media, who bought Belmont, a house a few doors down, for €35m.

Walford, which sits abandoned after a failed redevelopment application, is on Shrewsbury Road – a pleasant, tree-lined avenue in the Dublin inner suburb of Ballsbridge which, in the extraordinary gold rush that gripped Ireland, ranked as the sixth most expensive street in the world, ahead of Beverly Hills's Carolwood Drive and St Moritz's ritzy Via Suvretta. >>> Andrew Clark in Dublin | Sunday, December 05, 2010

€90bn Irish Bailout Ends in Turmoil – Now Europe Fears Crisis Will Spread
THE GUARDIAN: Brian Cowen defies calls for resignation / Fears that Portugal and Spain may need aid / International rescue plan does little to calm markets / Datablog: how will the bailout be funded and how exposed is each economy?

Markets thrown into ­turmoil amid fears of a collapse in Ireland’s ­government. Photograph: The Guardian
Financial markets were thrown into turmoil today amid fears that an imminent collapse of Ireland's beleaguered government would have a knock-on effect across the eurozone.

The announcement of the potential €90bn international bailout for debt-laden Ireland – of which the UK could contribute up to £10bn – offered only a temporary respite to nervous markets.

By tonight, concerns that Portugal and even Spain might also need their own rescue packages were rising and sent the euro and shares falling while the risk of holding the debt of potentially vulnerable countries rose alarmingly.

After a tumultuous day in Dublin, where protesters tried to storm the parliament building, the prime minister, Brian Cowen, defied calls for his resignation but conceded he would call an election in the new year. The move was forced upon him after the Green party pulled out of his fragile coalition government, unnerving markets on a day which was supposed to restore confidence in Europe's decade-old single currency.

Instead there was a sense of growing unease in the markets amid evidence that investors felt Portugal would not survive without aid., Dealers said sentiment in the markets was reminiscent of the days after the collapse of Lehman Brothers in September 2008. Read on and comment >>> Jill Treanor, Nicholas Watt and Henry McDonald in Dublin | Monday, November 22, 2010

Will an Irish bailout actually solve anything?

Open Europe has today published a briefing asking the simple question: will an Irish bail-out actually solve anything?

A healthy Irish economy is quite clearly in the UK's interest, and to extend loans to a struggling neighbour (to use Osborne's rhetoric) is in itself nothing controversial. Sweden offered cash to Iceland after that country hit the rocks following a banking meltdown (not unlike that of Ireland) for example.

And Ireland is clearly in better shape than Greece, Portugal and Spain, and a rescue package could, at best, buy Ireland some time to get their house in order - courtesy of its open economy.

However, it's also true that euro membership alters the logic - and potential effectiveness - of a bailout. As we argue in the briefing, there are five reasons why a one-off bailout for Ireland will not solve the eurozone's problems:

1. Temporary loans or greater budget discipline across the eurozone will do very little to help countries such as Greece, Ireland or Portugal regain competitiveness, the main problem these countries face.

2. In essence, what was asked of Greece, and soon Ireland, is two-thirds of a traditional IMF package - cuts in expenditure and increased taxes. However, the third, vital ingredient - currency depreciation - isn't permitted within a single currency. Instead, currency devaluation has to be replaced by so-called "internal depreciation", meaning even more squeezes to jobs and wages which aren't politically or socially affordable.

3. The ECB is likely to continue to pursue a German-style monetary policy, leading to an undervalued currency for Germany (fuelling German export-led growth) but an equally overvalued currency for the weaker economies such as Portugal and Spain (although Ireland itself could be helped by a weaker euro). This, in turn, locks in a multi-speed eurozone, with the same type of tensions we've seen over the last year coming to the fore again in future.

4. The politics of a loan bailout and stronger supranational budget rules are unsustainable. The lending countries, most importantly Germany, can only sell a de facto debt union to their electorates if it comes with strict rules and terms. But such terms imposed from the outside seriously undermine the ability of the borrowing countries to democratically govern themselves.

5. The role currently being played by the ECB is untenable, both for political and economic reasons:

• Politically, the ECB's decision back in May to start buying 'junk' government bonds from the secondary market has compromised its independence - which the Germans were promised would never happen. A bailout using loan guarantees from other EU states may allow the ECB to withdraw its emergency funding for now, but without a long-term solution the ECB is likely to be called on again to prop up ailing states.

• Economically, the situation is unsustainable as well. The Eurosystem of eurozone central banks that underpins the ECB is leveraged 24 times, while the average hedge fund is only leveraged 3 to 4 times. A fall in assets of only a few percent would wipe out the ECB's reserves, which could lead to the ECB itself being in need of a "bail-out".

As we conclude,

There are no obvious long-term solutions that do not come with huge political and economic costs. The dilemma facing the eurozone remains whether it is to become a fully fledged United States-style fiscal and therefore political union with huge continuous transfers from the German-led bloc to those on the periphery - which would inflict serious damage on the German economy; or prepare for a messy divorce possibly in the form of a two-tier euro and even some countries exiting altogether.

Irland bittet IWF und EU um Milliardenhilfe
WELT ONLINE: Jetzt also doch: Irland wird unter den Euro-Rettungsschirm schlüpfen. Das hochverschuldete Land braucht "mehrere zehn Milliarden Euro".

Die hohen Staatsschulden der Iren bedrohen die Stabilität der Euro-Zone. Bild: Welt Online
Irland wird als erstes Land offiziell um Finanzhilfe aus Mitteln des Rettungsschirms der Euroländer und des Internationalen Währungsfonds bitten. Finanzminister Brian Lenihan sagte am Sonntag im irischen Sender RTE, es gehe um „mehrere zehn Milliarden Euro“, nannte jedoch keine konkrete Summe. Griechenland hatte im Mai 110 Milliarden Euro erhalten, allerdings gab es damals den 750 Milliarden Euro umfassenden Rettungsschirm noch nicht. Er werde einen entsprechenden Vorschlag noch am Sonntag im Kabinett machen, sagte Lenihan. >>> dpa/cat | Sonntag, 21. November 2010

FRANKFURTER ALLGEMEINE ZEITUNG: Irland bittet um Hilfe: „Mehrere zehn Milliarden Euro“ >>> bes./wmu. , F.A.Z. | Sonntag, 21. November 2010

THE NEW YORK TIMES: Ireland Asks for Aid From Europe, Minister Says: DUBLIN — Ireland has formally applied for a bailout from the European Union and the International Monetary Fund, Brian Lenihan, the country’s finance minister, said Sunday. >>> Landon Thomas Jr. | Sunday, November 21, 2010

The Hunt for Jobs Sends the Irish Abroad, Again
THE NEW YORK TIMES: DUBLIN — Antoinette Shields had a plan to keep her tall, blue-eyed son, Kevin, close at hand. When she took over her boss’s construction company in 2002, she hoped to retire at 55 and give her son the business.

But it is not working out that way. Mrs. Shields’s company, which once employed 26 people, is now down to 8, still afloat in Ireland’s collapsed economy, but barely. Though Kevin graduated from college two weeks ago, she has no work for him, and he expects to emigrate to the United States or Canada next year.

“That is where we are,” Mrs. Shields said. “Sad, isn’t it?”

Just three years ago as Ireland’s economy boomed, immigrants poured in so fast that experts said this tiny country of 4.5 million was on its way to reaching population levels not seen since before the great potato famine of the mid-19th century. The conditions that prompted the Irish statesman Éamon de Valera to express the hope that Ireland’s children would no longer “like our cattle, be brought up for export” seemed like quaint history.

That has abruptly turned around. >>> Suzanne Daley | Saturday, November 20, 2010

THE TIMES: Ireland goes cap in hand to IMF >>> Sadie Gray | Sunday, November 21, 2010 | (Behind a paywall: £)

THE SUNDAY TIMES: Who killed the Celtic tiger? >>> James Ashton and Iain Dey | Sunday, November 21, 2010 | (Behind a paywall: £)

THE SUNDAY TIMES: Death of the euro >>> David Smith and Richard Woods | Sunday, November 21, 2010 | (Behind a paywall: £)

"Europe is more than a nine year old currency"

Yesterday saw some interesting reactions from the German papers, in response to the increasingly likely Irish bail-out.

A leader in Die Zeit dismisses Herman Van Rompuy's “exaggerations” and “apocalyptic” comments (“if the Euro doesn’t survive, then the EU won’t survive”, he said earlier in the week), and so those of Chancellor Merkel who made a similarly dramatic statement only a few days ago. The leader asserts that “the European idea is more than an almost nine-year-old monetary community", arguing that the EU could function perfectly well without a single currency (hear, hear!).

It argues,

...you can thank the common market that anyone can, Europe-wide, sell their goods and services and be treated as if they were local there. And all of that would be the same without the Euro. A permanent change to a different currency would only make life a little bit more strenuous for your average citizen.

Dirk Heilmann in Handelsblatt captures many of the issues on the table in his piece’s titled: “Yet again we are saving Europe’s banks.” As the powerhouse of the euro zone, the Germans are expected to be picking up a reported third of the rescue package (!).

Now, with the rescue of Ireland, it has been clear from the beginning that it is essentially a bailout…The banking problems are so large that they overwhelm the land. So, again, we rescue banks: the Irish, their foreign creditors and the owners of Irish government bonds.

Yet Heilmann is sympathetic to the Irish plight:

The taxpayers should help Ireland’s credit institutions and their creditors, because Europe's banks are still ailing. Their compulsory rehabilitation is urgently needed.

He's also quick to dismiss Greek comparisons,

We are not talking about a country that has squandered these advantages like the Greeks and frittered away the Euro dividend...we are talking about a country, that, like Iceland, let its financial sector grow unattended for a long time, until the monster turned around and ate its master.

Britain may not be able to avoid bailing out the Irish

Irish central bank governor, Patrick Honohan, said this morning that he expects Ireland to be given a "very substantal loan" from Europe. There's still much to play for, but an Irish bail-out is looking increasingly likely.

Over on the Spectator coffee house blog, we argue:

In the UK, of course, backbench MPs and others have been quick to condemn any move which would force British taxpayers to cough up cash under the EU’s various bail-out arrangements. Only problem is: the UK may not have a choice. The part of the eurozone bail-out package which Britain could be underwriting to the tune of £6-7 billion - the so-called European Financial Stability Mechanism – is not protected by a UK veto. This means that the mechanism can be triggered by a majority vote amongst EU ministers, and that the UK could be outvoted."

We go on to argue:

But let’s not kid ourselves: the UK is hugely exposed should the Irish economy sink, irrespective of how difficult we all find it to prop up a single currency which we knew all along was heading for trouble.

Leaving aside the need for Ireland to clean up its banking system and the accompanying too-big-to-fail discussion – admittedly two big issues to leave aside – the Treasury is therefore right to look at ways to assist Ireland bilaterally. If anything, bilateral rescue arrangements between similar economies have a far better chance to end happily than messy multilateral bail-outs which come with ideologically fuelled demands (i.e. German or European Commission demands for raising the corporate tax rate which would be economic suicide for Ireland). The joint loan given by the Nordic countries to Iceland when that country hit the wall in 2008 could be one model.

In its own strange way, a UK-Irish deal could also serve to strengthen the UK’s position in Europe. But alas, the terms and conditions for UK taxpayer-backed loans to Ireland no longer rest solely with the British government.

Read the full post here.

Finnish reservations

[Financial] aid isn't sufficient if a country's own correcting measures aren't tough enough. That's why Finland wants to introduce guarantees. This would ensure discipline in the borrowing countries. It would also send a strong signal to the citizens that it's not the EU but the country's own measures that are saving them.

Finnish Finance Minister Jyrki Katainen continues to insist that any eurozone loan to Ireland should come with strong guarantees to ensure that the money is paid back. According to Finnish media it's still possible that Finland will oppose loans to Ireland unless such guarantees are attached.

The view from Benelux

Belgian Finance Minister Didier Reynders today said that aid to Ireland is "inevitable", claiming that it's impossible for Ireland to get out of this pickle without some sort of cash injection. He added that for the ECB it would become "difficult" to remain providing liquidity to banks in Ireland and in other countries.

His Dutch counterpart, Jan Kees de Jager, was more cautious and refused to comment on Reynders' assessment, merely saying that "Ireland will ask for help when it's necessary (...) If you're with your back against the wall, you will be forced to ask for help."

Greek Rescue Frays As Irish Crisis Drags On
THE DAILY TELEGRAPH: The eurozone bail-out for Greece has begun to unravel after Austria suspended aid contributions over failure to comply with the rescue terms, and Germany warned Athens that its patience was running out.

Thousands of Communist Party supporters wave flags during the protest rally in central Athens on November 15 against the IMF-EU troika visit in Athens and the expected new austrity package. Photo: The Daily Telegraph
The clash caught markets off-guard and heightened fears that Europe's debt crisis may be escalating, with deep confusion over the Irish crisis as Dublin continues to resist EU pressure to request its own rescue.

Olli Rehn, the EU economics commissioner, said escalating rhetoric in Europe was turning dangerous. "I want to call on every responsible European to resist the centrifugal tendencies and existential alarmism."

Swirling rumours hit eurozone bond markets, while bourses tumbled across the world. The FTSE 100 fell 2.4pc to 5681.9, and the Dow dropped over 200 points in early trading. The euro slid two cents to $1.3460 against the dollar as the US currency regained its safe-haven status. Read on and comment >>> Ambrose Evans-Pritchard | Tuesday, November 16, 2010

TELEGRAPH BLOGS – JEREMY WARNER: Austria Tells Greece to Get Stuffed: Europe’s hastily assembled bailout fund already seems to be coming apart at the seams, and that’s before Ireland has even tapped into it. Austria is refusing to contribute to the next tranche of bailout money for Greece, citing the country’s failure to meet conditions. Yesterday it emerged there is serious slippage in Greece’s deficit reduction programme. >>> Jeremy Warner | Tuesday, November 16, 2010

Europe Fears That Debt Crisis Is Ready to Spread
A newspaper vendor in Dublin on Monday. Photograph: The New York Times
THE NEW YORK TIMES: LONDON — European officials, increasingly concerned that the Continent’s debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago.

Any such plan would have to be preceded by a formal request for assistance from each country before it would be put in place. And for months now, Ireland has insisted that it has enough funds to keep it going until spring. Portugal says it, too, needs no help and emphasizes that it is in a stronger position than Ireland.

While some important details are different, the current situation feels eerily similar to what happened months ago in Greece, where the cost of borrowing rose precipitously.

European authorities stepped in with a rescue package, expecting an economic recovery and the creation of new European rescue funds to fend off future panics by bond investors whose money is needed by countries to refinance their debt.

But with economic conditions weakening, markets are once again in turmoil. Rescuing Ireland may no longer be enough.

Stronger countries and weaker countries using the common currency of the euro are being pulled in different directions.

Some economists wonder if unity will hold or if some new system that allows countries to move on one of two parallel financial tracks is needed. Read on and comment >>> Landon Thomas Jnr and James Kanter | Monday, November 15, 2010

WELT ONLINE: Deutschland wird zum Zahlmeister der Eurozone: Ein Ausstieg aus dem Euro kommt für die Kanzlerin nicht infrage. Jetzt wetten die Finanzmärkte auf eine Transferunion. Das wird teuer. >>> Autor: D. Eckert und H. Zschäpitz | Dienstag, 16. November 2010

Images: Google Images
Ireland Debt Crisis Worsens as Portugal Warns of Contagion Effect on Europe
THE GUARDIAN: Investors pressure Brussels for solution but Irish officials deny any need for bailout

The Irish debt crisis intensified today, after other high-deficit countries such as Portugal warned about a possible contagion effect, and investors pressured European officials to come up with a solution to calm markets. Irish officials reiterated that they don't need any bail-out.

The crisis moved from trading rooms into the political arena, as European finance ministers are meeting tomorrow and the day after in Brussels. Investors expect them to announce a resolution, or at least to shed some clarity about how much money they would lose were any European country to default.

"The Irish problem is already spreading, but it could get more violent and volatile," said Ashok Shah, chief investment officer at London Capital, a fund management firm. "They have to get this bail-out, they have a period of time before it gets impossible, before nasty things happen. The longer they leave it, the more difficult it will get."

Pressure on the EU escalated after Portugal's finance minister Fernando Teixeira dos Santos said his country was at risk of a possible contagion, as "we are not facing only a national or country problem - it is the problems of Greece, Portugal and Ireland," he said. >>> Elena Moya | Monday, November 15, 2010

Should the UK contribute to an Irish bailout?

The increasingly likely prospect of an Irish bailout is looming and that is also likely to have an impact on the UK.

While the UK was not involved in the Greek bailout, British taxpayers are liable for one of the two bailout funds agreed in its aftermath: the €60bn European Financial Stabilisation Mechanism (EFSM), founded on a very dubious reading of the EU treaties, is a lending facility guaranteed by all EU member states, including the UK, using the EU budget as collateral. The other bailout fund, the €440bn European Financial Stability Facility (EFSF), was agreed outside the EU treaties, and can also issue loans guaranteed by eurozone governments.

According to Downing Street officials, the UK's share of the €60bn fund is 12%, so British taxpayers are potentially liable for between £6bn and £7bn at current exchange rates.

If Ireland asks for help it is up to the European Commission to propose the use of the EFSM with EU finance ministers making the final decision. However, the vote is taken by qualified majority, meaning that the UK has no veto and effectively no choice in whether to contribute to a bailout using the €60bn fund.

A UK Treasury official has already been quoted in the Times saying that the UK will its play its part to help Ireland. “This is not like Greece — they are close trading partners,” the official said. The Mail also quotes an official saying, "There are several ways it can be done, but it looks like EFSM will be used - that's the one we participate in".

It seems likely that the EFSF would be used as well, with additional funding coming from the IMF, to which the UK also contributes.

David Cameron has said today that stability in the Irish economy is "very much in Britain's interests". Shares in RBS reportedly fell 5% this morning over investors' fears of the banks' exposure in the country and Bank of International Settlements' estimates from June highlighted that the UK's exposure to Ireland was greater than Germany's.

But while it's in the UK's interest to see Ireland through, a bailout must come at a price. The eurozone's one-size-fits-all exchange rates contributed significantly to Ireland's fate, with a huge property bubble fuelled by low interest rates. This private debt problem is now becoming a public debt problem as the government struggles to cope with the ailing banking sector.

The question is what will change in the future to ensure that this doesn't happen again? Serious questions need to be asked about whether Ireland's membership of the eurozone is really sustainable.

The unholy alliance of politicians and banks believed the fairytale that Ireland could simply hand sovereignty over monetary policy to the ECB in exchange for growth and German-style stability. It was their poor decisions which also contributed to the economy overheating and a bailout should not be allowed to paper over their role in the crisis.

As Cameron said today,

"I don't want to make life difficult for the Irish at a time when they are trying to take difficult decisions about their own economy but they did have a consumer boom, property boom, badly-regulated banks...

"They added to that the issue of euro membership - I always think the great lesson from the Exchange Rate Mechanism is that the Euro is the Exchange Rate Mechanism without an exit, and that is the problem."

The eurozone's monetary policy was and is going to be unsuitable for Ireland for the foreseeable future and the fate of many Irish citizens' economic futures now lies largely in the hands of others. Maybe it's time to consider the exit?