Far from being calmed, crisis has ratcheted to boiling point


ANALYSIS:Events of the last week have twisted economic and political feelings towards bond markets, writes DAN O'BRIEN,Economics Editor

THE BAILING out of Ireland was, among other things, designed to contain the euro zone financial crisis. It has failed to do that.

The week began with mildly positive market reaction to the formal application for bailout made by Ireland on Sunday night.

By midday on Monday, the sense that a bottom had been put under the crisis had evaporated. The remainder of the week saw a renewed and accelerating sell-off of weak euro-area government debt. Each day marked new highs in bond yields.

The only cause for comfort was some calming yesterday afternoon, even if yields merely stabilised on the highs of Thursday.

The ratchet of ever-rising yields has broken Ireland and Greece. It is very difficult now to see how Portugal can avoid the same fate. If – or much more likely when – that fate befalls the smaller of the Iberian states, there is little reason to believe that its bailing out will do anything more to calm the crisis than did the rescues of Ireland and Greece.

Europe’s economic strains are causing political strains, which in turn make containing the economic crisis more difficult. At times they have exacerbated it.

Vicious cycles are becoming visible. Frustrations are boiling over and openly critical statements by political leaders are being made of their counterparts.

Germany has been the subject of most opprobrium. Interventions by its leaders and central bankers since the start of the financial crisis have often been as damaging as they have been inexplicable.

No intervention has been as damaging or as inexplicable as Chancellor Angela Merkel’s call earlier this month to create a framework to impose losses on holders of government bonds. The statement poured petrol on the fire in the bond market.

There can be little doubt now the correct-but-appallingly-timed call triggered the panic that did it for Ireland.

If it weren’t for Germany’s demonstrated commitment to European integration over decades, one would suspect that it was working to ensure it has an exit option from the euro if its elite or public decide they can no longer bail others out.

In Ireland, there is plenty of finger-pointing and blame-apportioning. In the Department of Finance, there is fury with the Germans for fanning the flames in the bond market.

Anger at Germany is matched by that towards the European Central Bank. Two weeks ago it pulled the trigger that led to the bailing out of Ireland.

“The ECB f--ked us,” said one official matter-of-factly yesterday.

And this fury is not confined to the Government and its officials. Fine Gael’s finance spokesman, Michael Noonan, suggested that Germany was benefiting from the crisis and that the EU institutions may be imposing too great a burden on Ireland. He said, too, that he wanted to tell the European Commission that “Ireland was not a colony”.

For a member of a political party that has been as committed to the integration project as any in Europe to speak in this way is surely of some considerable significance.

It is impossible to assess the long-term implications of recent happenings as the ground underfoot continues to shake. But let’s hazard a guess: the political and administrative classes will be scarred by the trauma, humiliation and, in the eyes of some at least, the betrayal and bullying of recent weeks. The profound and wide support for deeper integration in official Ireland may well have been permanently eroded by the extraordinary events of recent weeks.

Deepening divisions and rising political tensions in Europe weaken the prospects of addressing the growing financial crisis with a co-ordinated and proportionate response.

The situation is beginning to feel like the weeks after the collapse of Lehman Brothers in September 2008. Things are on the slide. Policymakers may need some dramatic action early next week if the slide is to be halted.

It is against this backdrop that the terms of Ireland’s bailout package are being drawn up. There was already great uncertainty about those terms, owing to the severity and complexity of the banking problem. There is a need to bring certainty as soon as possible, but also a need to ensure that anything decided in Dublin does not hasten the slide.