November 17, 2010

Ireland Teeters on Brink as Greek Deadline Nears

EU agrees to help Ireland, but uncertainty spreads over Greek plight

Ireland’s situation grows more tenuous as fears spread of default, with Ireland still insisting it does not need outside assistance and the European Union (EU) finance ministers agreeing Wednesday to prepare with the International Monetary Fund (IMF) for a bailout of the country.

Although EU ministers had agreed that the EU, the European Central Bank (ECB) and the IMF would begin talks on a bailout, they did say Ireland would have to decide for itself to accept it. In a Reuters report, Brian Cowen, Ireland’s prime minister, indicated that the country itself was not in need of assistance, but the banks might have to be rescued.

Jean-Claude Juncker, Eurogroup chairman, said that the eurozone would be defended. Sixteen nations make up the currency zone. After talks on Tuesday, Juncker said at a news conference, "The discussions that will take place between Ireland and the Commission and the ECB and the IMF will enable us to have at our disposal all the elements and instruments we need were Ireland to make a request for assistance to the EU, the IMF and the Eurogroup."

They don’t plan on waiting long to put the strategy into effect, either. Sources said that even though the plan was to focus on the Irish banks, once the mission is complete a rescue will be triggered for more than the banking sector. France’s Economy Minister Christine Lagarde said, “If you ask me whether that is a question of six months or of days, I would say we are closer to a question of days rather than six months.”

Bloomberg reported that Ireland was preparing to open its banks’ books on Thursday to the EU and IMF. The inspection is intended to decide whether Ireland can continue to work on its own to correct its problems or whether funds will be needed from the European Financial Stability Facility (EFSF). The EFSF holds $1 trillion (750 billion euros) against just such an eventuality.

Britain has said that it will support a rescue for Ireland. Previously it had kept itself out of the eurozone in an effort to keep Ireland’s troubles from spreading to the rest of the U.K. It also had not contributed to the rescue package for Greece, but George Osborne, the chancellor of the exchequer, was quoted as saying the country “stands ready to support Ireland.”

Gold fluctuated early in the day as the markets watched events unfolding over Ireland and Greece, then held steady for much of the day, according to TheStreet, after dropping 1.5% of its value on Tuesday’s selloff. Demand for gold has risen steadily, and the GLD ETF held firm despite selloffs on Friday and Tuesday as investors held their shares. As long as there is uncertainty about Ireland and those countries standing in the wings with potential problems—Spain and Portugal—gold’s gains may be scant.

Irish bonds were up, and the 10-year yield dropped to 8.16%—a drop of 8 basis points. European stocks and the euro both rose as talks continued on the potential rescue package, with stocks breaking a seven-day losing streak to come back from their worst loss in four months. Anticipation of help in the form of a bailout helped to stem fears of contagion.

However, there is still the Greek situation waiting in the wings. The countdown continues till Nov. 30, when the next tranche of funding should be released to Athens, but so far Austria is holding firm against releasing its share because of what it says is Greece’s failure to comply with its agreement.

Carl B. Weinberg, chief economist at High Frequency Economics, said in his Wednesday newsletter that Austria said Tuesday it would withhold funds at least until January “because Greece has not lived up to its fiscal commitments.” Wednesday’s news was no better: EU ministers, he said, “announced that all the governments will hold back their decision on Greece’s next cash disbursement until January.”

In response, Greece’s finance ministry issued a statement that said Athens expected the IMF board to approve the payout at its December board meeting and that ECOFIN will approve it in January. The statement also said that the delay in disbursement will not cause a problem. Weinberg pointed out that the disbursement was planned for Nov. 30 in the expectation that it would be needed by then, and wondered whether this disruption in schedule will indeed be so easily tolerated by a nation that has not been able to come up to scratch.

“A renewed Greek crisis,” he said, “will drive up risky Euroland sovereign debt yields—both absolutely and relative to Bunds—trash the euro and seize up the banking system . . . at a minimum. . . . The clock is ticking.”

To read more about the EU crisis, Ireland and the effect on bonds at AdvisorOne.com.

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