Ireland is running out of time
By Ambrose Evans-Pritchard
November 3rd, 2010
Ireland has been desperately unlucky.
The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue.
Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc.
Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke.
Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish banks.
The uber-strong euro does not help. Under the IMF’s rule of thumb, currencies should fall by 1.1pc to offset every 1pc of GDP in fiscal tightening, ceteris paribus. Given that Ireland is going through the most wrenching fiscal squeeze ever conducted in a modern economy – though Greece is catching up – it needs a devaluation to match. Instead, the euro has risen by 18pc against the dollar since June. (less in trade-weighted terms).