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Ireland's crisis is a warning to the EU - but not its death knell

The Irish crisis has given the European Union yet another bloody nose - but rumours the project is dead are an exaggeration. 

 
Ireland's crisis is a warning to the EU - but not its death knell

The Irish crisis has given the European Union yet another bloody nose - but rumours the project is dead are an exaggeration. 

Most people will tell you it was Germany's chancellor Angela Merkel that sparked the sell-off in Irish government debt which will ultimately force European Union members to lend money to the Irish government.

The spike in the interest rates being demanded by Ireland's lenders began on October 18 when France and Germany agreed that it was time to change the rules on future government rescues.

Merkel and the German finance minister Wolfgang Schauble said that in the future investors who lend to governments should share some of the burden with taxpayers if a government cannot afford to repay its borrowing.

It is difficult to understand their timing in making this call for a change.

Investment banks and fund managers had been saying for months that the end of year budget discussions in Ireland, Greece and Portugal could be the touch paper for some market volatility.

But politicians have to work to different timetables. Maybe Merkel and French president Nicolas Sarkozy believed that unless they began the discussion now it would not be possible to get agreement by their hoped-for deadline.

Whatever the reason, the announcement sparked a sell-off in Irish government debt and then of equally debt-addled Portugal and Greece.

That forced the European Central Bank to resume its bond buying programme after a three week hiatus, calling into doubt its hopes to bring Europe off life support in the months ahead.

The EU and the International Monetary Fund have forced a deal because they are worried that without a quick solution market fears will spread to other countries.

The big fear is that eventually the markets will turn on Spain. Given the country only managed to avoid falling back into recession in the third quarter by the skin if its teeth, and its housing market remains in deep distress, it is understandable why Europe's politicians fear such a development.

But Stephen Lewis, economist at Monument Securities, points out that this is another area where the EU hasn't understood the way markets work.

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22 comments so far. Why not have your say?

NMF

Nov 18, 2010 at 13:36

The Irish crisis is a largely a subprime crisis - or based on overspeculation in property. The horror scenario is, of c ourse, that the traders notice how near GB itself is to such a scenario. There is, at all events, a lot of debt and a lot of anxiety. Germany, which never experienced a property explosion, is in the best position in Europe at the moment. I know that this is not the full story but the door is open for a property based debt crisis in Gb and a crash in the housing market

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jeff lampert

Nov 18, 2010 at 13:41

The whole financial system just does not work: it is wide open to abuse by idiots and criminals.

What I cannot comprehend is why our elected politicians continue to stick a trillion or so plaster over the banks and sovereign debt; we need to throw it all away and find something that really works in the 21st Century.

IMHO the sooner we do that the better!

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Bernard

Nov 18, 2010 at 13:45

Merkel and Sarkozy themselves are both in danger of losing their position, so they will posture and kowtow to popular concern. France is heavily invested in Greece, while German banks piled into Ireland. The reason was simple if you consider these figures from three international tables of national GDP per head at PPP in international $ in 2009

IMF

Ireland 9th 38,685

UK 19th 34,388

World Bank

Ireland 6th 41,278

UK 14th 36,496

CIA

Ireland 10th 42,200

UK 24th 35,200

Ireland was seen as a rich booming economy very attractive to big investors.

In fact it was all shadow play.

It suggests that we cannot trust these tables - a serious matter..

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John Lacy

Nov 18, 2010 at 13:49

If the EU can't stop the rot with the Irish there isn't going to be any money left to save Portugal, Italy and possibly France from going down the same route.

As an irreverent aside if they don't pay the money back can Germany acquire Greece and Ireland and sell them to the highest bidder like a repossessed property?

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nicholas gold

Nov 18, 2010 at 14:19

Why and how did we come to the analogous moment of dominoes falling? It is nothing more than a simple mathematical exercise: spend more than you earn, and sooner than later, you'll be in trouble. As more and more elements of truth dealing with our corrupt financial system are exposed, the "crises" will come thick and fast. The one factor of Keynsian economics that seems to be ignored is that "pump-priming" seems to continue full force during relatively good economic times, leading to the quandary in which we now find ourselves enmeshed.

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Medved

Nov 18, 2010 at 14:38

Bernard makes a good point.

IMHO what has to stop (and unfortunately never will) are economic experiments for political purposes by deluded (but sometimes well meaning) politicians in power.

Bolshevism/Leninism in Russia was the worst example. The European Union is another. They are all doomed to fail. We are all doomed to pay.

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Jonathan

Nov 18, 2010 at 14:41

I'm hoping the Euro will fall against the GBP so I can afford to go on holiday there.

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Keith Snell

Nov 18, 2010 at 14:49

Any rational comparison between the UK and Irish housing markets will show the UK market to be sound and currently close to static with inflation in some areas and slow decline [ low rates of deflation] in others. Ireland by comparison has entire new and part constructed estates entirely empty with no buyers at all. These are valueless properties as matters stand.

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Anonymous 1 needed this 'off the record'

Nov 18, 2010 at 15:00

For once a good article on the Irish crisis.

The property/bank crash happen in 2008, Ireland has been busy sorting it self out since then, granted Anglo Irish's position grew worse once NAMA got its teeth into it and found the loans were a shambles.

The crisis of 2010 is purely down to Germany telling the bondholders to take the pain. As a result the markets have gone mad. This bailout is to save the Eurozone not Ireland. Ireland would be better off if it just defaulted (look at the state of Russia's finances these days if you don't believe me).

Glad we're shot of it. At least until the bond holders start to properly look at the state of our finances.

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William Bishop

Nov 18, 2010 at 15:45

If the Eurozone and EU can't do a btter job of getting "ahead of the curve" relative to market expectations, they could well get into serious risk of disintegration, if they engage in a similar performance with a much bigger nation, such as Spain.

However, collapse of the eurozone project would be seen in Continental Europe generally as a stunning setback for their much-loved project of European integration, and no doubt would be resisted up to, possibly beyond, the point of no return.

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Fergus Foster

Nov 18, 2010 at 15:57

If the failing banks had been allowed to fail, as they richly deserved, would the current crises have been that much worse? Indeed, could it have been worse?

At least the banks would have received the lesson they have so far avoided. The future then may have been a little less bleak.

As it is, I have the feeling that when the dust settles they will do it all over again. After all, it has been very profitable for them, with very little observable downside.

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Gergiev

Nov 18, 2010 at 16:02

Nice one Jonathan. Maybe the EU should turn Greece and Portugal into giant timeshares, free at the point of use for EU taxpayers.

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S FOR

Nov 18, 2010 at 16:04

The problem for the UK is that the UK banks have lent the Irish Banks in the region of £140 billion, is it any wonder then that George Osborn is rushing to support the Irish Government? Default is not an option to be welcomed by either, the UK, Germany or France all with large exposures to Irish debt.

Another black hole of this size in UK finances could tip the UK over the edge as far as foreign bond holders are concerned, into the same category as the shaky European countries. Interest rates would soar and a property crisis become a certainty.

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Anonymous 1 needed this 'off the record'

Nov 18, 2010 at 16:15

Bernard, the reason why those tables are so far out is because the Irish GDP has been boosted for so long by 1) property specultion 2) foreign companies headquatering themslefs in Dublin tio avail of the 12.5% tax rate! But on the same hand our GDP is massively inflated by the city!

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Jonathan

Nov 18, 2010 at 16:23

S FOR, Where do the UK banks get £140 billion to lend to the Irish Banks? The UK government had to print money to bail out the UK banks when they ran out, so what's going on?

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S FOR

Nov 18, 2010 at 17:53

Jonathan,

Don't forget this is probably fairly long term debt which has been in place for some time. All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements.

The U.K. banks are the international lenders with the most at stake. As of March 31, the latest data available, the banks had exposure of about $222 billion to a variety of Irish institutions, according to BIS. That's about one-fourth of the world's exposure to Ireland.

German banks aren't far behind the U.K. They had a total of almost $206 billion in exposure to Ireland and France about $86 billion.

If you consider that RBS, on its own, had some £800 billion of questionable assets when bailed out by the Labour Government, it is easy to understand the sort of risks UK banks were prepared to take. And, why subsequently the Coalition Government had no alternative other than to announce sizeable cuts, since a failure to do so could have landed the UK in a not dissimilar situation to Ireland & Greece. Confidence could have been lost in the UK banking system and the ability of the UK Government to act as lender of last resort due to overburdening government debt left by their predecessors. Indeed, this still represents a real a threat if things continue to go wrong in too many places simultaneously and in a compressed time scale.

As the Chinese say "we live in interesting times"

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john

Nov 18, 2010 at 18:06

They can ponitificate forever and paper over the cracks ad nauseam but that wont disguise the fact that European economies are all in too much debt and have bloated public services that they can no longer afford. Mr market does not take prisoners and sooner or later attention will turn to Portugal , Spain , Greece and once again Ireland. Fortunately for the UK it looks as if Cameron and Osborne understand the problem and the solution.

European Politicians are living on borrowed time and as always will wriggle and squeel until given no option. Its not going to be pleasant when the crunch comes but I give them 2 -3 years at the most before the whole rotten system collapses which is why I am moving all my European investments elsewhere.

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Hotrod

Nov 18, 2010 at 21:47

Life gets tedious doesn't it. Its becoming more and more difficult for the average layman to reach logical conclusions and express an opinion based on a reasoned analysis of the facts.

In my attempt to do so, I started by trying to understand the Irish question in relation to the financial sickness which is already affecting the western world, and is fast developing into a global pandemic.

My research led me to reading material which explains how a central bank is supposed to work. Bizarre as it may seem this takes the form of a "Comic Book" which is published free of charge by the Federal Reserve Banks of America. (can be downloaded)

If only life was that simple! Any assumptions that I might have had were quickly dispelled when I glanced up at the U.S. debt clock. It is somewhat mesmerising to watch the deficits growing at mind bloggling speed. But that's not all, I followed a link to world debt clocks which digitally records the horrendous excalation of borrowed money around the globe.

So what is actually going on? Based on the facts, it would be reasonable to assume that the financial system of the free world is no more than a gigantic ponzi scheme, 50% of the populations of these countries are living "hand to mouth" and that the majority of the banks have become dysfunctional.

So what is the European Central Bank and the IMF trying to do by intervening in Ireland's affairs even before they actually asked for help?

As I see it. It is all about interest rates. As long as interest rates can be kept low, the cost of borrowed money can be contained, central banks can continue "printing" (electronically recording cash which they do not have) and the suckers who take their IOUs will keep on coming.

However the old lady of threadneedle street is beginning to get scared; she is afraid that the gnomes of Zurich will morph into doorstep loansharks!

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jeff lampert

Nov 18, 2010 at 22:16

Hotrod

I agree: Bernie Madoff was the Keynes of out time!!!

I think the bankers are just trying to keep the Ponzi scheme going a little longer, hoping something will turn up!

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Leander

Nov 19, 2010 at 00:11

Until last year Ireland was a net recipient of 'EU' money (£1 million+ a day from the U.K. alone). The club Med countries also were large beneficiaries. With money welling up out of the ground from other countries, it is no surprise they have come to a sticky end. But this largesse, taken from other countries and laundered through the EU and appearing as if the EU had donated it (it has no money, it belongs to taxpayers in the donor countries) is all in the EU plan for ever closer integration.

Then, having shackled themselves to the toytown Euro currency, their demise was fixed. Now the Irish and the others will be run directly by the EU. In the 'Celtic Tiger ' phase, Ireland needed high base rates to throttle back their economy, In contrast, Germany needed low rates to boost its then sclerotic economy. With the European bank based in Frankfurt, whose interests come first?

The Eurocrats now have the brass neck to be saying 'we have loused the whole thing up; we must have more powers'.

Now is the time to dissolve both the Euro and the EU with it

Better off out1

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Richard White

Nov 19, 2010 at 22:06

I suggest people read Jeff Randall in the Telegraph today,it tells you all you really need to know.

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William Phillips

Nov 20, 2010 at 16:48

If the European Union had been content to remain a customs-free zone with a few international agencies for matters of legitimate shared concern, such as Interpol, it would not now be facing dissolution.

That was what the British were told they were joining when they voted 2:1 for it in the Seventies.

If France and Germany want to pool their economies and currencies to stop themselves fighting one another, that's up to them. We are offshore islanders, we have other affinities and priorities-- as De Gaulle recognised when he said 'Non'.

The EU contains two inbuilt drives which have overstretched it to the point of systemic failure, like many a previous empire.

It wanted to be physically bigger and bigger, so it recruited a lot of pensioner members: basket-case economies which it thought could be brought up to speed by handouts and monetary disciplines within the Euro and the budget contribution. Carrot and stick.

And it wanted to be stronger and stronger, so its rootless multi-quisling bureaucracy in Brussels kept inventing new monetary and judicial rules to reduce the member states' freedom of action and homogenise their behaviour.

The old European Economic Community swelled like a bullfrog into this EUSSR. You cannot give virtually unaccountable, supranational politicians and their civil servants a taste of power over a continent without them wanting more and more of it. Politicians back home, like ours, often played along because they dreamed of strutting on the bigger stage that was being built, and because they could excuse their own failures by blaming EU rules for overriding their powers.

Like the original USSR-- whose refusal to address popular discontent and endemic corruption foreshadowed that of Brussels-- the EU will collapse into something smaller and more loosely federal, unless it can make us all feel safer, richer and freer for being 'European'. At present the omens are not good.

The EU cannot stand still, either. If it fails to push on to Rompuy's United States of Eurotopia, it will break up-- as the Soviet Union did when the communist millennium was seen to be an unattainable and probably undesirable fantasy.

None of the Kremlinologists foresaw in 1984 that the USSR, with its vast forces and nukes, would perish with barely a shot fired within eight years. The way it's going, the EU will die as peacefully, and perhaps as quickly. It has not even got a Gorbachev to start a last-ditch reform campaign. Eurocrats are the most arrogant, boneheaded, rotten leaders in the West.

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