Ireland is not out of the woods by a long way as political instability now threatens the broken country.
After a day of bitter protests, insults, a split in the government coalition over the agreement to be bailed out with up to 90 billion euros of aid from the ECB, IMF and EU (plus Britain and Sweden), the government hovered on the edge of collapse.
The news saw markets crumple with Irish bank shares dropping 20% (from very little to next to nothing).
Shares aklso fell in Portugal and Spain; Portugal’s main stock market index fell 2.2% a day ahead of a general strike, and Spain’s dropped 3% as bank shares were sold off heavily.
The news of the split is scaring the rest of Europe.
Spain had a poor bond auction and its cost of borrowing rose to a record over germany’s rate. in fact Spain is now paying more for three months money than germany pays on five year bonds, a sign of the elevated concerns in the euromarkets.
Portugal’s budget deficit widened and Greece got a progress payment from its rescue fund, but was told to cut deeper and do more to raise tax revenues before another review early in 2011.
It’s no wonder. According to figures from the Bank of International Settlements, European banks held $US500 billion of Irish assets at the end of June.
The UK had $US150 billion, with Spanish and Portuguese banks about $US 33 billion. Germany banks had nearly $140 billion.
So there is a horrible contagion effect just waiting to be ignited.
In the eurozone overall, more than 2 trillion euros in sovereign debt issued by Greece, Ireland, Spain and Portugal is held largely by German, French and British banks and in local banks and pension funds. In all cases unknown amounts of bank, high grade corporate and sovereign debt have been pledged by banks in each country to their own central banks or the European Central Banks in exchange for short term loans.
It is messy and the whole edifice is now being threatened by the quick move in Ireland from a funding debacle and crisis into a political crisis and election campaign.
Prime Minister Brian Cowen said he would dissolve the government after passage of the country’s crucial 2011 budget early in December.
He was forced into the announcement after a day that saw The Greens and two independents (sound familiar?) split from his government, demonstrators try and storm the parliament in Dublin and Moody’s rating group slash the country’s credit standing.
Mr Cowen appealed to the opposition and other parties to pass the budget, saying the bailout will only happen if the budget is approved by parliament.
Some members of his own party are said to be plotting his removal in the next few days, which would damage the prospects of a bailout.
The developments will terrify the already nervous financial markets (especially bonds and banks) in and outside the eurozone.
Proportionally Ireland’s package will reach to around 60% of gross domestic product, compared with 47% for Greece.
It’s the banks that have brought Ireland down, their managers, boards, the dud regulators and venal businessmen and clients.
Now there’s every chance Mr Cowen’s government will be thrashed in the poll and the new government might not be so eager to endorse the rescue package, even if it is agreed to.
The poll will put pressure on the Irish government, the IMF, EU and European Central bank to get signed a bailout deal before the end of the year.
The new budget with further cuts (6 billion euros of cuts for 2011 alone) and possible extra capital for the broken banks will be a central part of that agreement.
Should it be passed and hold, it might be enough to calm markets until the election. But that is no certainty.
The budget and its cuts will make sure the Irish economy contracts again in 2011, despite some good news.
Ireland’s current unemployment rate is 13.6%, second only to Spain’s and yet despite this, manufacturing output is actually rising as exports rise and imports fall.
The irony is that sometime in 2011, Ireland might be recording trade surpluses, while the domestic economy is crushed by another round of cuts.
But Mr Cowen looks like joining the former leadership of Iceland (broke but outside the eurozone and the first sovereign casualty of the GFC) and UK Labour Prime Minister Gordon Brown and his government, in becoming victims of the GFC and its aftermath.
Analysts warn that Portugal and Spain, which are both pushing through unpopular budget cuts, may soon face an uncomfortable choice: punishment by financial markets or by an angry electorate annoyed by prolonged economic hardship, and the realisation of no improvement for years top come.
But like Ireland and Iceland, the people of Spain and Portugal have a lot of blame on their shoulders, as well as governments, banks and the institutions that were supposed to keep things in check, central banks and regulators, and parliamentary committees.
Of the next two possible victims, Portugal is less deserving of pain than Spain which enjoyed a decade of property speculation and growth and allowed banks large and small, but especially the domestic savings banks, to plunge into the boom without due regard for prudent lending or the future.
Italy won’t be exempt, Prime Minister Berlusconi is under enormous pressure to call new elections early in 2011 to try and sort out a growing political impasse.
