A financial rescue for Ireland: A weak hand played out
Posted by John Malloy on 11/22/2010
AT THE height of the banking crisis two years ago, Ireland’s government thought it was calling the market’s bluff when it rashly promised to back all of the debts accumulated by its overheated banking sector. Stand firm, and the speculators will fold, was the wisdom of the day. As it turns out, it was the government itself that had the weaker hand, and now its bluff has been called. Having tried valiantly to restore stability to the public finances through impressively harsh austerity measures, the Irish government has been dragged down by the sheer weight of the bad loans on the balance-sheets of its banks.
On November 21st, having abandoned its earlier insistence that it was not in need of a bail-out, the Irish government agreed to ask for help from its European neighbours. Its request came after a tumultuous two weeks in which the trade in Irish government bonds and those of some other European states almost dried up, and the cost of borrowing surged to unsustainable levels.
The government had argued that it had little immediate need of an emergency facility, since it had played it safe and borrowed enough on the bond markets earlier this year to tide it over until June 2011 or so. It was hoping that a new budget containing further spending cuts, to be announced in early December, would reassure investors that its house was in order, bringing down its borrowing costs and allowing it to muddle through without help.
But that choice was denied to it. The European Commission and the other euro-area countries pressed the Irish government to accept a rescue package because they were worried at signs of contagion spreading through the bond markets to sovereign debtors like Portugal, Spain and Italy. The European Central Bank also pressed Ireland to ask for aid because of its concerns that its own exposure to Irish banks would keep increasing as depositors and other lenders withdrew money from them.
via A financial rescue for Ireland: A weak hand played out | The Economist.
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