naked capitalism

As far too diffidently implied in this post on Friday, looking out for an Irish bailout over the weekend turned out to be a mug’s game. There was a splendid swirl of authoritative reports about bailout talks and rebuttals by various Irish spokesmen, sampled here. But here we are: no bailout, with the Irish government still staggering gamely on with its tiny majority, planning to present its latest slash ‘n burn budget for a vote, most likely on 7th December. Apocalypse postponed for just a little longer.

The market, the blogosphere, Twitter denizens & journalists all seemed to be working with a rerun of the Greek timeline in mind. But the Irish situation isn’t quite the same.

What few noticed, amid the changing picture on Friday, is that the Seoul volte-face clarification on bond haircuts actually gave Ireland some (possibly transient) extra negotiating leverage. The Seoul statements fends off a bank run, but puts EU politicians, particularly Angela Merkel, on the hook. But the list of impalees gets longer. The EU is keen for Ireland to take a deal, (or is it the Germans who are keen?), the IMF is saying it’s standing by, though it believes Ireland doesn’t need a bailout just yet, and we are reminded that the ECB is funding Irish banks to the tune of EUR130Bn already.

In effect, the Irish government can see that just about every significant international institution that might have a stake on the bailout is pretty much locked in already. Absent a loss of confidence in the ability of all of the above institutions to deliver on their commitments, why would there now be the sort of funding run, in Ireland, that forced European hands in the Greek crisis? And if there were to be such a loss of confidence, it wouldn’t just be Ireland that was in trouble, would it?

The bond market will be able to see all that too, and will no doubt be able to reflect, with some satisfaction, that a couple of weeks worth of surging yields is, once more, easily enough to corral a bunch of European institutions. For the banks, these panics do take on the aspects of one-way bets. That’s Greek debt and Irish debt now de facto underwritten by Eurotaxpayers (with plenty of pain taken by the locals too, of course). Who’s next?

Update: a nice piece that I spotted just after posting, elaborating the above: how it really works, and how Merkel et al walked into it.

Well, national politicians can see the dynamics too. One of the less diplomatically timed weekend utterances was this one, by the Portuguese Foreign Affairs Minister:

A Portuguese government minister openly speculated over the weekend that his country’s economic frailties could lead to its expulsion from the euro zone, underscoring the growing fear in Europe that the continent’s debt woes may force leaders to restructure the currency bloc.

In an interview with the Portuguese weekly Expresso published Saturday, Foreign Affairs Minister Luis Amado said Portugal faces “a scenario of exit from the euro zone” if it fails to tackle its economic challenges.

“There has to be an effort by all political groups, by the institutions, to understand the gravity of the situation we’re facing,” he said.

He may be talking to Portuguese politicians, but European ones, and the markets, can hear just as clearly.

The inner workings of these these big-deficit Eurocountries can be quite different. Portugal has a chunky public debt, and poor private savings, but didn’t have a bank-annihilating RE crash; and for them, unlike Ireland, the Euro interest rate is too high. Portugal’s problem (very roughly – maybe some Portuguese commenters will chime in, most welcome if they do) is how to secure internal agreement to restructure its economy.

Neither the political problem nor the economic one will be solved in the sort of timescales that bond markets think in. So in these times, you’d have to call the Portuguese Foreign Minister’s gambit ‘high risk’; and of course it will attract Euroinstitutional attention too. In due course we will see whether anyone bites and how hard.