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To Keep Investors Smiling, Resolve Irish Crisis

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Wednesday, 17 Nov 2010 03:56 PM Current | Bio | Archive

Talking about a strong statement: “We all have to work together in order to survive with the eurozone, because if we don’t survive with the eurozone, we will not survive with the European Union.”

That’s how European Council President Herman Van Rompuy warned about the possibility of an existential crisis (worst case scenario, I hope) in the eurozone.

Unfortunately, he was not alone.

In Germany, Angela Merkel, the German chancellor, also had her dire statement.

“I’m telling you, everything is at stake. If the euro fails, then Europe will fail. And with it fails the idea of European values and unity.”

No, panic is not the right word we should use, but it’s really fear that lingers in Brussels' corridors and in some European capitals. The fear is that the crisis in the eurozone — far from ebbing as many times predicted — remains acute.

Investors should remember that the European Financial Stability Facility (EFSF) can only be tapped by eurozone states in difficulty and Ireland is still fully funded until the middle of next year.

That said, Germany but also the ECB want Ireland to use the EFSF now could, and probably would, raise the euro sovereign bond prices and that would without any doubt “help” various important German financial institutions that are exposed with more than 40 billion euros ($54.08 billion) to Irish sovereign debt.

To me, everybody but especially Germany is playing with fire because tapping the EFSF now could rapidly become problematical from a legal point of view in Germany because it will substantially raise the risk that the German constitutional court’s forthcoming ruling on the EFSF will be highly restrictive.

To me, once again all this makes me think the EU’s bailout and/or support rules and actions have and are going bewildered once again and that situation is steering the euro-ship into very dangerous waters.

The most public sign of dissent came yesterday from Finnish finance Minister Jyrki Katainen.

He stated he would propose a measure that would require countries seeking a bailout to put up collateral before getting a loan from the European financial stability facility (EFSF) arguing the measure would help lower borrowing costs and get around the “no bailout” clause in the EU’s treaty.

He forgot, however, this would also make it more onerous for countries to tap the fund. But that’s not all and perhaps the most obvious sign of dissent though is coming from Ireland itself.

Although a delegation from the European Commission, the ECB and IMF is on its way to Dublin for a “short and focused discussion,” it is clear that Ireland is still unwilling to sacrifice its financial sovereignty simply to provide a bulwark for other European nations against potential contagion.

The most Ireland would seem being prepared to concede is to accept aid provided to directly support its banking system.

To me, this becomes a little bit hilarious, but nevertheless, it’s a nice try and if it works, the Irish would have scored big.

Maybe the U.K., which is not a eurozone member but nevertheless an EU member state, could give a hand to the Irish banks in context of its national interest. Strange times, aren’t they?

Over the past three years we have seen high profile examples, from Lehman Brothers to Greece, of how quickly investor confidence can collapse.

There are clear indications that investor confidence is starting to weaken again, and therefore it will be absolutely necessary the eurozone nations work together to resolve their differences and deal with this crisis quickly otherwise we could have to face very nasty surprises rather quickly.

Of course, the expected risk aversion is apparently coming back, which means dollar up and most of everything else down.

By the way, the U.S. Treasury released yesterday its monthly TICS capital flow report showing net portfolio investment into long-term securities at $81 billion in September, on consensus expectations of $62.5 billion.

The outlook for foreign demand in U.S. securities is positive given, if nothing else, the new round of sovereign troubles unfolding in Europe.

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Talking about a strong statement: We all have to work together in order to survive with the eurozone, because if we don t survive with the eurozone, we will not survive with the European Union. That s how European Council President Herman Van Rompuy warned about the...
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Wednesday, 17 Nov 2010 03:56 PM
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