HowWealthWorks.com

[Suresh]

Ireland cannot count on a country-specific bailout from the European Central Bank.

Worse, Ireland cannot pay the debt servicing costs on sovereign debt sufficient to pay for the bailout of its own country's bank losses. Also, Ireland cannot issue an appropriate amount of sovereign debt and then devalue its currency to reduce the cost of the sovereign debt. Debt default appears to be the only option.

UPDATE 18 FEBRUARY 2009: Apparently, Article 100.2 of the Maastricht Treaty allows for aid to EU countries facing "exceptional occurrences beyond its control." So, I guess the question then becomes: "how many countries can Germany afford to bail out?"
_____________________________________________________________
Los Angeles Times: Is Ireland the next big bomb in the global debt crisis?
...
"Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector," Britain’s Sunday Times reported.

In the credit-default-swap market, the cost to insure $10 million in Irish sovereign debt against default jumped to $377,000 on Friday, up from $262,000 at the end of January and just $24,000 a year ago, MarketWatch.com reported.

The Times noted that pledges made by Ireland to support its crumbled banking sector amount to 220% of the country’s annual economic output. Loans outstanding at Irish banks are more than 11 times the size of the economy.

Ireland still has a "Aaa" credit rating from Moody’s Investors Service, but the rating was placed on "negative outlook" last month, meaning it’s at risk of a downgrade.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

WSJ MarketBeat: March of the Pigs
...
Ireland’s credit default swaps were the most hard-hit Tuesday, rising to a cost of more than $400,000 to insure $10 million in bonds against default, according to Markit Group in London — compared with a cost of about $177,000 two months ago. Those levels surpass those of countries already downgraded by ratings agencies, such as Greece ($275,000) and Spain ($168,000).
...
But the expectation among some analysts is that Ireland, Spain or another country will not be left to wither, and will instead be rescued in some way by the stronger economies in the region — the implication being an intervention by Germany. Bond yields in that country have underperformed U.S. bonds, and while both rallied Tuesday as investors fled equities for safer bonds, Constantin Gurdgiev, lecturer in finance at Trinity College in Dublin, believes German bond yields will eventually feel the weight of the financial concerns hitting the “pigs.”
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

The premium on a 5-year Greek CDS hit another high.


_______________________________________________________________
FT Alphaville: Dεfαult risk
...
A CDS curio for you on Friday: in addition to hitting another record high, the term structure of Greek CDS has inverted, indicating that the market now believes there’s a higher probability of a default in the short-term than in the longer term.

It’s quite a change from just a week ago, as you can see from the below:


_____________________________________________________________
Financial Times: Europe cannot afford a Greek default
...
If the eurozone fails to support Greece or makes the terms of any bail-out politically impossible for the country’s authorities to meet, Greece could default on its sovereign debt. The eurozone would then face a big problem. The financial markets would quickly turn their attention to other euro bloc economies with unsustainable fiscal positions and poor growth prospects. Italy, Spain and Portugal would find themselves paying dramatically higher borrowing costs, raising the likelihood of further fiscal crises.
...
Moreover, if a eurozone member defaults, the risk of it leaving the currency union cannot be completely discounted. If Greece defaulted and remained in the eurozone it would still be deeply uncompetitive. The Greek government would still find it difficult to tap financial markets on affordable terms, because investors would be sceptical about growth prospects. Leaving the eurozone and devaluing would be very high risk but provide a route back to growth, at least short-term, and that could prove a political necessity. A partial unravelling of the eurozone would do the EU incalculable damage.
...
Germany (and other members running big structural current account surpluses) also need to accept they are part of the problem. It makes little sense to argue that weaker member states should try to emulate Germany. A big reason for the relative strength of Germany’s public finances is the size of the country’s trade surplus with the other eurozone economies. But this is hardly something all eurozone states can aspire to: one country’s surplus is another’s deficit.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

FT Alphaville: Europe’s ‘Asian crisis’ moment coming up?

If it’s possible to add drama to the crisis over Greek bonds, Hong Kong-based research house Gavekal ... says: