Earlier this week, we talked about Ireland’s debt problems and how things have turned for the worse for the Celtic Tiger.
In case you have the memory of a goldfish, we mentioned its difficulty reining in its huge deficit, which recently grew to 14.4 billion EUR from 13.4 billion EUR in October. As a result, Irish bond yields, which tend to rise in order to accommodate additional risk, have hovered above 8.7%. This put its yield differential with the German bund at over 6%!
Needless to say, Ireland has been under a great amount of pressure as officials across Europe have been pushing it to ask for help in hopes of restoring confidence in the region. Ireland, in turn, has been very stubborn about accepting aid, saying it doesn’t need any help. But judging by this Thursday’s developments, the constant pressure from neighboring countries seems to be making progress– Ireland finally looks like it’s ready to buckle.
Apparently, Ireland is now in talks with officials from the ECB, European Union, and IMF about a loan package. Take note, the Irish want a loan and not a bailout.
Hah, it looks like Ireland isn’t a fan of dole outs… and rightly so! “Free money,” in the form of a bailout, gives you a bad rep (remember Greece?), and the Irish don’t want any of that. By pushing for a loan, Ireland, in a way, preserves their credibility.
Another thing you should note about the situation is that it is Ireland’s banks that are in trouble, and not its government.
Now, the details of the rescue package are still unknown but Irish Finance Minister Brian Lenihan said that the package will be focused on making a “contingency capital fund” for Ireland’s banks. To put it simply, they want to create a piggy bank (with lots of euros in it!) which troubled banks can smash and draw funds from in case of emergencies (bankruptcy).
Another option for Ireland to get more funds is to hike its corporate tax rate. The tax rate currently stands at 12.5%, significantly below the European Union’s average of 23%.
So I bet you’re now thinking, “Okay, this seems to be an important issue. What does this mean for the euro?”
Bravo, my young padawan… It is indeed an issue that every trader should be keeping an eye on. Euro zone debt concerns have become a recurring theme in the markets, and every time they emerge, the euro has paid the price. When Greece’s problems hit the airwaves late last year, we saw EUR/USD nosedive from above 1.5000 all the way down to 1.1900.
Then, after the euro recovered over the past 6 months, rumors about Ireland needing one, too, started surfacing and the pair tumbled a good 700 pips!
Still, something tells me that this has all been priced into the markets. Look at how traders responded Thursday to news that the Irish might be open to a loan – EUR/USD closed more than 100 pips higher. It seems that their openness has helped ease market tensions. After all, taking a loan could help cut the adverse contagion effects that the recent turmoil has caused upon other euro zone members.
This isn’t to say that the euro is out of the woods already. But if we do see some resolutions and coordination towards fixing this problem, we may just witness the euro stay afloat until the end of the year.
