By: Dr. Mike Campbell
The Euro has been forced lower in recent days because of persistent market doubts about the ability of the Eurozone member Ireland to service its debts. Since there is a perception that investing in Irish bonds carries an appreciable risk, the yield on government debt has risen, meaning that the Irish must pay more to service their debt.
The fear in the bond market has spread to other highly indebted nations, Portugal, Spain and Italy where yields are also increasing. This is referred to as “contagion” within the bond market; a domino effect of uncertainty.
The Irish remain resolute that they can continue to manage their obligation until well into next year and that consequently they do not need help from the EU with funding. There has been pressure put on the Irish to accept an EU bailout simply to remove doubt and reassure the markets.
The idea is that this would significantly diminish the risk of contagion in over heavily indebted nations. Eurozone finance ministers met in Brussels yesterday and the outcome of the meeting was that the EU and Ireland would work together to draft a “potential” rescue package against the circumstance that Ireland would need to ask for help. Clearly, the Irish are unwilling to accept the stigma of a bailout and the interference in their financial affairs that this would entail, if they can help it.
The design of a “potential” rescue is clearly intended to reassure the markets that, come what may, Ireland will not fail to meet its obligations. It remains to be seen if the markets will be convinced by the move. However, the decline of the Euro has been much less marked in this round of sovereign debt jitters than was the case when Greece needed a bailout in the spring. Of course, a slightly lower Euro is good news for Eurozone exporters since it makes their products more competitive in global markets.