Another 85 billion euros flung at a hole in a paste up job, or a meaningful start on something more permanent.
While the rescue package will stabilise Ireland’s position (even as the Bank of Island attempts to wriggle free of government takeover by seeking to raise 2 billion euros to stave off the ugly day), the longer term effect of Sunday’s announcement remains very much up in the air.
And that was reflected in the way the euro moved after the package was released ahead of trading in Asian markets.
The currency jumped to as high at $US1.3345 in trading, then eased to around $1.3280 in late Asian dealings.
That was better than Friday’s two month low $US1.32 on Friday in holiday trading in New York, but it was hardly convincing.
The news helped steady markets in Asia, although the Aussie dollar traded weakly all day, ending around 96.25USc, down on the Friday close of more than 97 USc in Sydney and the New York close later in the day.
But in Europe, sharemarkets lost 1%-2.5% and in the US they lost around nearly 2% at one stage before a late rally reversed most of the losses..
Spain debt fell, driving the yield higher.
Sunday’s announcement was in several parts, the details of the bailout, the timing and then another statement on a more permanent crisis resolution mechanism.
The latter arrangement was supposed to have been debated next month by EU leaders.
It was advanced to Sunday’s meeting with a broad outline of an agreement between Germany, France and the EU to give the Irish bailout more credibility, and to try and deflect attention from who might be next to be supported (Portugal?).
Or as one analyst said, this mechanism is ‘what Europe failed to announce’ back in May when it bailed out Greece and revealed the so-called ‘shock and awe’ back up facility that had a nominal value of 750 billion euros. In reality the sum turned out to be around 440 billion (due to the overcapitalisation of the funds to win Triple AAA credit ratings).
Ireland’s bailout means the 1 billion euros it was contributing won’t now happen, small beer, but symbolic of how much has changed since May in the eurozone.
Once again it was the leaders of Germany and France that reached agreement with the EU on the broad outlines of a permanent crisis-resolution mechanism.
That agreement followed the ham-fisted statement on October 13 about post 2013 crisis resolution that seemed to imply that private bond holders of European sovereign debt could take a bath (lose money) now.
The confusion helped to force Ireland into a position where it had no option but to ask for aid as it couldn’t raise funds from the market at sensible rates of interest.
Under yesterday’s announcement, private bondholders could be made to share the burden of any future sovereign debt restructuring of a eurozone country, subject to a case-by-case evaluation "without any automaticity", according to EU officials.
That means the bonds issued to private buyers and coming due after 2013 will come with special clauses included that set out what happens.
The plan would replace the present 440 billion euro eurozone rescue fund, due to expire in 2013, with a permanent “European stabilization mechanism”.
At the same time, private creditors would be involved in any future debt rescheduling or restructuring through collective action clauses attached to eurozone government bonds after 2013 – in line with current IMF practices.
“We are applying a doctrine based the experience of the IMF at a global level,” said Jean-Claude Trichet, president of the European Central Bank.
And not before time, say commentators who remain to be convinced that this latest statement will end the speculation about whether Portugal, Spain or even Belgium or Italy might be lined up by nervous investors and sold down.
Under the Irish package, EU countries and the IMF will provide up to 85 billion euros in total, which may be drawn down over a period of up to 7½ years (not five and a half as reported yesterday). 67.5 billion will actually be provided externally, the other 17.5 billion euros will come from Irish state pension funds.
The IMF’s "lending into arrears" policy stipulates that the Fund will lend to a country that is making good-faith efforts to come to an agreement with bondholders.
The IMF favours so-called Collective Action Clauses in sovereign bonds, enabling a majority of bondholders to impose restructuring on others.
