Ireland’s debt crisis is back in the spotlight. Its ten-year government bond yield hit a new peak above 7.4% this week. One reason for the surge was the latest EU summit’s agreement that in future bondholders will be forced to share at least some of the cost of a state bail-out with taxpayers.
This is a “delicate juncture” at which to rattle bondholders by opening the door to haircuts, says Ambrose Evans-Pritchard in The Daily Telegraph.
The main worry is whether Ireland’s austerity plans will work. Even proposed cuts of e15bn over the next four years, double the initially mooted figure, may not be enough to get the deficit down to 3% without more austerity or higher growth, says Ben May of Capital Economics.
The broader worry is a self-perpetuating spiral of cuts lowering growth more than expected, forcing yet more cuts. And record market interest rates are making borrowing ever more expensive. Indeed, says Richard Milne in the FT, costs are rising to a level where the eurozone’s bail-out facility “may look tempting”.