Ireland bailed out. Who’s next?
Currencies Direct November 29th 2010 - 2 minute read
So we now know the gory details. First, the main points: the Irish bailout of EUR85 billion will be made up of external support from the IMF and EFSF of EUR67.5 billion and domestic funds of EUR17.5 billion. The Irish contribution comes from the now decimated National Pension Reserve Fund with the UK making a bilateral loan of EUR3.8 billion as well as contributing to the IMF funds (and you thought the money saved in recent round of UK spending cuts was used for paying down our own debt…). The effective interest rate that the Irish will pay on the loan is reported at 5.8% according to the official document, but private calculations have put the figure closer to 7.25% and this will lead to an astonishing 20 per cent of Irish tax revenues servicing the debt by 2014 according to calculations. The main controversy is the news that senior bond holders in the Irish banks will received no haircut on their holdings – no doubt due to contagion fears as investors dump bank bonds in the event of any short back and sides – and the banks are estimated to need an extra EUR8bn to get core Tier One capital to at least 12 per cent.
And come up for breath. More than three quarters of Eurozone government debt is held by Eurozone members, mostly financial institutions so you can see why this package wants to protect senior debt holders, but politically there is huge pressure to make sure that tax payers do not shoulder the whole burden and write downs on bond holdings in the future cannot be ruled out. Inevitably the Euro continues to fall against the USD which continues to perform well in the face of heightened uncertainty.
Sterling has also opened the week on the back foot as UK institutions are reckoned to be the most financially exposed to the Irish, particularly RBS through Ulster Bank. UK House prices have continued to fall for the fifth month in row, but mortgage approvals came in slightly ahead of forecast. There will need to be a much larger turn around in approvals for it to have any significant impact on house prices in a falling market. This week is a light one for Sterling data which the only figures of note UK PMI on Wednesday and further house price figures on Friday.
The Dollar trades at a two month high against the Euro and is looking at its first monthly gain versus the Yen since April. In a week which will probably prove to be highly embarrassing for the US after 250,000 classified diplomatic cables are released by media around the world, we have ISM manufacturing, consumer confidence and non farm payrolls to look forward to. But not as much as those cables. According to reports, the cables will reveal disparaging remarks about Gordon Brown and David Cameron, my bet is that the UK public will probably agree with whatever is said.