Those nice chaps at the IMF

Economist
November 12, 2010

The euro zone’s third-quarter GDP figures, released this morning, seemed only to highlight the theme being played out in bond markets: “core” economies are doing fine but “peripheral” countries are struggling. Germany’s economy grew by a further 0.7% in the three months to the end of September, following a record advance in the second quarter. France’s economy grew in line with the euro zone at a rate of 0.4% in the quarter. But Italy’s GDP was more sluggish, Spain’s was flat, and Greece sank deeper into recession. Only Portugal bucked the trend at the periphery—perhaps because its fiscal squeeze has only latterly been applied. The figures for Ireland won’t emerge for several weeks, which may be just as well.

One source of relief for Ireland is that bond markets are a little calmer today after a frantic week. A statement from the finance ministers of the big EU countries attending the G20 summit in Seoul helped. It said, in effect, that whatever shape a permanent resolution scheme for over-indebted countries might take, any new rules (which, it is feared, would make it easier to impose loses on private bondholders) would only apply to bonds issued after mid-2013. So please don’t panic.

Ireland’s ten-year bond yields, which had soared to around 9% this week, were below 8% by 2.10pm this afternoon; Portugal’s had fallen by around 30 basis points. Yields in Spain, Italy and Greece were down a bit, too. This modest reversal of an alarming trend will be welcome in Dublin even if Ireland could still not afford to finance itself at these sorts of rates. Luckily, for now, it doesn’t have to. It has enough cash to fund itself through the first half of next year.

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