November 25, 2010
ON NOVEMBER 21st the Irish government at last gave in. It yielded to pressure from its European Union counterparts to seek an emergency bail-out from the EU and the IMF that may amount to as much as €85 billion ($115 billion). In May, when the Greek government secured a €110 billion bail-out and a joint EU/IMF fund worth a stonking €750 billion was put in place, investors believed and the markets rallied. Not this time. Bond yields in Ireland dropped back to 7.93%, but rose to 4.75% in Spain and 11.75% in Greece.
Why? In short, because rescues need a bit of “shock and awe” to convince investors. The bond markets must be startled by the size of the package, persuaded that the authorities will do whatever is needed—and not be invited to doubt it by talk of making investors foot part of the bill in future. They also have to believe that a country’s difficulties concern liquidity (ie, they can repay debt eventually) not solvency (ie, they can’t).
In this case the markets felt starved of detail, and bothered by German insistence that private investors must bear part of the burden. They worried whether Ireland, having looked dodgy for so long, could cope with this politically, could ever regain investors’ trust, and would ever be able to repay its debts. And, not least, they agonised about where in the euro zone contagion might spread to next.
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