Die Märkte sind vom groß gepriesenen Irland-Rettungspakt nicht überzeugt. Zuviel Glaubwürdigkeitsverlust der EU in so kurzer Zeit. Die Bedingungen für Irland sind nicht dazu angetan, seine drohende Zahlungsunfähigkeit zu verhindern. Auch der (This is indeed a major change from the original proposals. Once you allow for negotiations, we are essentially in a situation as we are in today, where politicians will meet to discuss what to do, and risk-averse as they are, they will find it easier to agree a bailout, than a default).
Breakingviews said in an initial comment that the chances that this deal prevents contagion are small. Portugal has a small chance if it were to stick to its fiscal plan, and the ECB keeps funding its banks. The problem is the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bailin rules. And if Portuguese yields don’t come down soon, attention will focus on Spain. More bailouts will be on the way.
Lex at the FT quotes an interesting observation from Barclays Capital. The problem in Ireland is of course a banking system that is too large to save. Yet in terms of percentage of GDP, the banking sectors in the Netherlands, Belgium, Spain and the UK are larger.
Our comment: The success of the programme will depend crucically on the market reactions. Here you can see a snapshot of the bond markets this morning, as compared to Friday morning. The yield spread – the measure of risk is unchanged in the case of Ireland and Spain, and it is marginally low for Greece and Portugal. But the spread is only a difference. German yields themselves rose further, to 2.76% this morning, which reflects market concerns about the bailout burden on Germany, but without alleviating the concerns about default risk in the periphery. It is a kind of the worst of both worlds scenarios. This is an exceptionally bad reaction to the deal, especially as a lot of questions are now answered. To us, this suggests that the markets are concerned about Ireland’s fundamental solvency, something no bailout package can ever address. And we cannot see how interest rates at 6% are consistent with solvency.
Forex and bonds.
From Reuters this morning. Euro weakens further. Bonds move sideways
Before and after: Not much change
10-year sovereign spreads
Euro bilateral exchange rates:
Wolfgang Munchau on what the eurozone should do now
It would be best not having to start from here. But as there is no choice, Wolfgang Munchau makes a set of proposals in his FT column on the steps that would be sufficient to take us out of the crisis. The first would be to restructure the debt of Ireland, Greece and Portugal, down to a level consistence with solvency under some realistic post-crisis growth rates. The second would be to transform the EFSF into a pan-European bank restructuring mechanism, through which banks are recapitalised and downsized. This would only work if the EFSF was endowed with sufficient powers to close down banks. And third, the remaining sovereign debt should be pooled into a single European bond. The important part of this proposal is the separation of sovereign and financial debt. He says the chances that the EU will do anything like this are close to zero.