Ireland & the Eurozone: First Thoughts
What does this actually mean? In the (very) short term, some of the pressure is now off Ireland. Although in the medium term this solves nothing – no haircut on bank or government debt makes this unaffordable. The underlying problem is being ignored. By 2014 interest payments will be 20% of Irish tax revenues – there is no way to balance the budget with that kind of headwind. The cuts mean that the medium term prospects for growth look horrible.
The next obvious flash point (financially speaking) is the Budget, followed by the election. I’d be voting Labour myself, although expect Sinn Fein to do surprisingly well.
For the Eurozone as a whole the crisis is far from over. There is some immediate relief in the markets today (to be expected) but I still believe Portugal will be under pressure soon. The market reaction is hardly euphoric. We were told in May that the bailout of Greece was the end point. It bought Ireland six months. I expect Portugal’s period of “calm” to be a lot shorter.
One brighter development is reported in today’s FT – the ECB is looking at extending liquidity support for periphery banks (a necessary but not sufficient step for recovery).
Baseline scenario runs through 4 scenarios for the future of the Eurozone that are well worth a read.
In the end game, we are going to see either restructuring of debts or outright default. The banks needed to be prepared to take this hit. Following the Greek disaster 6 months ago, the EU conducted “stress tests” and decided that “everything was fine” with Eurozone banks. We need to use this breathing space to conduct real stress tests (assuming large losses on periphery exposures) and re-capitalise banks ASAP. We might not get another chance.