Saturday 25 October 2014

Shane Ross: A game of two have-nots

Shane Ross

Published 17/06/2012 | 05:00

WHY did Enda not jet out to Poland for the battle of the bankrupts?

The soccer match between Ireland and Spain would have been an ideal occasion for the Taoiseach to meet his fellow bailout victim, Spain's Prime Minister, Mariano Rajoy.

Rajoy took time off from the maelstrom in Madrid to arrive in the stadium in Gdansk. Enda was too busy at home. It would have been useful for him to compare bailout notes with Mariano.

Instead, he despatched Minister for Sport Leo Varadkar -- a man not unfamiliar with own goals -- to the soccer match. Varadkar travelled on the same Ryanair flight as I did, although he was wisely sitting at the emergency exit. No one could blame him for being ultra-careful, as he had a bit of a spat with Michael O'Leary earlier this year when the airline's chief executive accused him of "rearranging the chairs on the Titanic" by keeping Shannon in public ownership.

Leo's first own goal as a minister was back in the early days when he stated his honest belief that Ireland would need a second bailout. Rajoy will surely have been fascinated to hear Leo's views on second bailouts as Spain will soon be jumping the queue, seeking more money from Europe to support its economy -- as opposed to its banks.

Ireland and Spain have enough problems in common for their premiers to have made a special effort to meet. Enda should have grasped the nettle.

There is havoc in Europe, nothing less. If the Greek elections fail to give a conclusive result today, or indeed the lunatic left and the extreme right win pivotal positions, the outlook for Europe could be cataclysmic. Yet a familiar aura of complacency seems to have grabbed European leaders. It will all be all right on the night at the European summit at the end of June.

It won't. This time last week a deal was struck to rescue Spain. European leaders, including the prime ministers of Spain and Ireland, greeted it as bringing "credibility" and "stability" to the euro.

By Monday evening, the Spanish solution was unravelling. After a short rally, the euro was in full retreat. All last week, in a derisory market response to the "solution", yields on Spanish bonds rose. The market signalled that it would not be lending to Spain.

The theory behind the Spanish bailout was simple: rescue the banks alone; sovereign Spain would be spared from humiliation or conditions; Spain would not be compelled to hold its taxpayers accountable. That model meant that Spain -- the state -- would be free go to the bond markets for its refinancing. The banks would be ring-fenced. Bingo.

The markets rubbished this sleight-of-hand. The government had backed the package through a third-party vehicle. At the end of the day, the people's pockets would again be on the line. So dealers dumped Spanish bonds. Yields rocketed above 7 per cent. Spain will be forced to return to the mercies of Europe, as the bond markets close ranks against Mariano.

So there was plenty for fellow sinners Enda and Mariano to talk about last Thursday.

Unfortunately, even as the match was being played on Thursday night, Italy -- the third bankrupt European nation in the same soccer group of four -- was denying that it needed a bailout. Now where did we hear that before? In Ireland, in Portugal and in Spain. The more the Italians deny it, the faster the nation's bond yields soar. The markets are taking a contrary view. They believe that Italy needs help. Bonds yields have risen higher than they were before Berlusconi was removed.

Italy is beyond help. Its debt is too big for any rescue fund. If Italy cannot borrow in the bond markets, the game is up. The euro will collapse.

All the dominos are falling in order. Greece, Ireland, Portugal, Spain, Cyprus and finally Italy, the danger country that dare not speak its name.

Fudge follows fudge. Spain is the latest failure. Italy and Europe are in denial about the next domino. Within weeks -- if Europe is true to form -- we will probably see an attempt at part-funding for Italy. By that time the Greek crisis may have erupted, Spain will be seeking money for the Exchequer as well as the banks, little Cyprus will be on the receiving end of a package, Ireland will openly admit that we will need further funds next year. Leo will be proven right.

The solution for the rest of Europe is clearer by the day. Angela Merkel must pay for everyone. Last week that little fantasy began to worry the markets more than any other. The staggering sight of German bond yields -- the safest haven in Europe -- rising must have stirred the goose pimples on the skin of every European leader. The markets had looked at the precipice. For the first time ever, they saw Angela Merkel falling over it.

Germany was no longer as safe as before. The constant code from other European nations that Germany should pay their bills had finally spooked global bond dealers. Angela was saying No to eurobonds. Angela was saying No to a banking union. Angela was saying No to a "transfer union", the latest little idea suggesting that big nations transfer funds to poorer states. Angela is still making conciliatory noises, but she knows: all the solutions suggested mean Germany picking up the tab. The tab is getting bigger.

The market reaction is simple. If the mighty Angela does not have the resources to fund the malingerers, the euro could be doomed. If Greece descends into economic chaos and exits the euro after today's elections and Italy cannot fund its debt, it will be decision time for Germany.

Decision time means Germany either funding the debt or departing the euro. The bond markets see both options as bear signals for German bonds. Angela Merkel is beginning to be squeezed by internal political pressures as well as her spendthrift European colleagues. Francois Hollande, President of France, is playing a high-risk game. Last week he breached protocol by receiving a delegation from Angela's Social Democratic opponents in the Bundestag, before welcoming herself to Paris. She may not be miffed by diplomatic snubs, but she may be less enthusiastic about new European alliances being formed by Hollande in an effort to loosen her grip on Europe.

Merkel faces an election next year with Germans in no mood for concessions on austerity to other nations. Even her Social Democratic opponents do not support large transfers of German funds to Greece, Ireland, Portugal and Spain. Italy would be a bridge too far.

If Merkel agrees to a further fudge to finance Italy after a Greek fiasco, German bonds will lose their safe haven status. If she does not, she will have to consider a more radical solution.

As we contemplate the Greek election results today, there can be little doubt that back in Berlin, the midnight oil is being burnt considering the make-up of a new eurozone. Merkel will be considering which evil is worse: retain the present malaise as paymaster of a Europe that refuses to reform, or take the plunge into a limited eurozone, a two-tier Europe.

That is why Enda Kenny should have been a spectator at the battle of the bankrupts, the game between Spain and Ireland. If a two-tier Europe emerges, neither Spain nor Ireland will be in the first tier. Both are in the rele- gation zone.

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