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Irish bailout could fail to halt run on weaker banks, managers warn
by Matthew Goodburn on Nov 22, 2010 at 14:45
Jupiter Corporate bond manager John Hamilton is warning that the EU may be powerless to stop a potential run from banks in peripheral EU countries to those in core countries, despite it agreeing a bailout package for Ireland.
Despite the EU setting up the European Financial Stability Fund (EFSF) following the Greek debt crisis earlier this year making it more proactive in dealing with sovereign debt crises like Greece or Ireland, he thinks the European Central Bank (ECB) may have to step in to stabilise bond markets in countries such as Portugal.
He said: 'The EU will need to find a way to halt this potential run on weaker banks, but it may struggle. The passage of euros from weak to strong banks is no respector of national boundaries. Nonetheless, we may see the ECB intervene to stabilise bond markets in countries such as Portugal to stop any kind of nervousness from taking hold.'
Hamilton (above) thinks the main problem remains the lack of a unified fiscal structure within the eurozone and expects the continued existence of the euro to be put in doubt.
'Ireland’s bailout package may shore up the currency for now, but cannot provide a long term solution, especially if contagion does spread to Portugal. Investor focus would then turn to its larger neighbour, Spain. Were this to happen the German desire to make the euro in the image of the deutschmark would look fanciful and the political and financial implications of maintaining the currency union might prove insurmountable.'
'Early indications suggest a rescue package of around €80bn-€90bn, including a possible bi-lateral facility from the UK. As part of the plan, the banks will be restructured to aid their transition back to commercial viability.
Brooks McDonald investment director Gareth Howlett (pictured below) says the move shows the triumph of politics over economics but thinks it is merely a case of 'crisis postponed' for the eurozone sovereign debt issue.
He told Citywire: 'The lessons from Greece and Ireland is that politics trumps economics as far as the euro is concerned. They will spend whatever it takes and they will print virtually unlimited amount of money in order to stop weaker members of the eurozone being picked off like strugglers in a convoy and they have the firepower to do that.
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