The eurozone was plunged into what EU president Herman Van Rompuy called a “survival crisis” this week as its sovereign debt problems worsened. Rapidly rising government bond yields made it increasingly difficult for troubled peripheral economies to borrow at reasonable rates. That reinforced bankruptcy fears. To limit contagion from the Irish to other peripheral sovereign debt markets, the EU urged Dublin to agree to a bailout package. It was being finalised as MoneyWeek went to press.
Chancellor George Osborne said Britain was ready to help Ireland with direct loans. These may replace Britain’s share of the European Financial Stabilisation Mechanism, a e60bn EU rescue fund. Our commitment is e8bn.
What the commentators said
Britain’s exposure to Ireland “is by no means trivial”, as Bank of England governor Mervyn King put it. British banks’ exposure is around £140bn. At around 6% of GDP, this is much larger than the figure for other peripheral economies. The worry is that yet more bank losses on Ireland are in the pipeline. Prices are falling and default rates rising in residential property, said Fullermoney.com.
But the real fear, according to Capital Economics, is indirect exposure via a eurozone in turmoil. If Ireland’s debt crisis spreads it would undermine growth across a region that takes half of Britain’s exports (Ireland takes 6%). A sharp drop in the euro against sterling would make matters much worse.
It’s “far from clear”, as Citigroup pointed out, that an Irish bail-out would take the heat off other struggling European states, such as Portugal and Greece. After all, the basic problem is the same. They all have too much debt. And their economies are shrinking or growing extremely slowly, making it harder to shrink the debt pile.
A vicious cycle looms, said David Jolly in The New York Times. The austerity required to cut deficits risks undermining the economy further. That in turn could dent tax revenues and make the fiscal problem worse. Greece and Ireland will eventually have “little choice” but to restructure their debts, said Capital Economics. Meanwhile, “it’s only a matter of time” before Spain slips back into recession, according to Ian Stannard of BNP Paribas. “That is when the spotlight will turn” to Madrid. This crisis is far from over.