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)

1 comment:

Septimus said...

David, I am not sure about "bailout" being the only option for the Irish.

First, there are a variety of ways of default. It doesn't have to be "Ireland will NEVER pay ANYTHING".

Second, in the interests of the health of the global financial system, a Bailout is a form of Moral Hazard. It sends the message "you can lend to any country on any T's & C's, and be sure of getting paid". Caveat Emptor needs to apply - and be applied!

Third, the Derivatives argument - the people who entered into CDS's on Irish debt did so with the knowledge that it was a bet, and there was a real chance of that bet not going their way. The people should not be held hostage to other people's bets.

Derivatives, in their present form, have been shown to be subject to manipulation & fraud. If we have to suffer short-term pain to get Derivatives onto a saner basis, so be it.

A bailout may well be just "kicking the can down the road", which can also mean a much bigger problem later.

The EU mess needs to be cleaned up, and it seems to me that, the sooner the better.