Wednesday, November 24, 2010
Tap of the mernin' to ye
This blogger has a couple of thoughts on the Irish crisis.
Fact is, as hinted at recently, prima facie, it's much more attractive for Ireland to default. It's write-down now or zombify yourself through more debt and internal deflation.
This is pretty obvious and the Irish people may therefore be in a position to force their government to do it.
If the Irish default, expect carnage in the euro, a rocketing $US and the reversal of the global reflation trade around emerging markets and commodities. There'll be so much uncertainty about the other European nations' debt, as well as which banks are in the firing line along the daisy chain of derivative losses, that we'll be in a full-blown global panic before you can yell craic!
This is why in actuality, Irish default may prove a bad idea, even for the Irish.
And that's before we even contemplate the political fallout around Irish membership of the euro. They are going to need some kind of mechanism to boot the unworthy from the currency, either temporarily or permanently. This blogger finds it difficult to believe the Irish would dump it themselves.
The other possibility is that the ECB steps in and monetises Irish debt. EuroQE. That may stabilise things for a while but it is a precedent that would then be deployed in other fringe states as markets move on Portugal and Spain. In that event, however, the euro has joined the global currency war and will still destabilise the reflation trade because the $US rises, choking off its export recovery and dampening demand for emerging market goods, as well as reversing the monetary rocket under commodities.
Bailout is the only benign outcome for global growth and rising markets.
(Except iron ore of course which only ever goes up)