Friday, September 24, 2010

Ireland faces double dip, mulls restructuring of junior bank debt - Telegraph

I'm on the road today, visiting with clients, so my post will be relatively brief.

Ireland is in trouble. Faced with massive fiscal deficits, and a busted housing boom (sound familiar?), the government came up with an austere fiscal package of tax hikes and spending cuts. Former Fed chairman Paul Volcker, among others, praised the Irish government for taking the necessary steps to address their issues - or so it seemed.

Unfortunately, the economy is not taking its medicine well, as Ambrose Evans-Pritchaird's column in the London Times discusses:

The Irish economy contracted at a 1.2pc rate in the second quarter, making Ireland the first country since the Great Recession to face a double-dip downturn.

The setback is a blow for hopes that Ireland can slowly grow its way out of debt, and may renew concerns that fiscal austerity without other forms of relief risks tipping the economy into a self-reinforcing spiral.

Unlike the U.S., however, which has the world's reserve currency, and therefore is free to borrow whatever it needs, Ireland needs to tap the international capital markets, the cost of those borrowings is rising:

Spreads on Ireland's 10-year bonds have risen to 405 basis points. Gavan Nolan from Markit said credit default swaps measuring bond risks on Irish banks are nearing the levels of Icelandic banks shortly before they defaulted two years ago, reaching 955 for Anglo Irish (senior debt), 615 for Allied Irish and 530 for Bank of Ireland.

I don't know how this whole situation plays out, but I think that U.S. policymakers should take notice of what is happening across the Atlantic.

Ireland faces double dip, mulls restructuring of junior bank debt - Telegraph