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Simple proof from markets that bailout just isn't working

WITH the cost of insuring Irish government debt against the risk of default having soared since the beginning of the year it is now clear that the bailout isn't working and that some kind of sovereign debt default and/or restructuring now represents the only possible way out of the crisis.

This week the cost of insuring Irish government debt against default briefly climbed to 680 basis points (6.8 per cent, 100 basis points equals one per cent), an all-time high.

At that price, the markets were pricing in the likelihood that holders of Irish government debt would suffer a "haircut" of up to 34 per cent in the next five years.

After all the hoopla surrounding the November 2010 EU/IMF 'bailout' for Ireland, it is clear professional investors have run the numbers and concluded that -- apart from the German, UK and French banks who so irresponsibly lent to the Irish banks and have been repaid their senior bonds in full -- the rescue package won't work.

As a result, the cost of insuring Irish government bonds has increased by more than 120 basis points since mid-December.

To put matters in context: it now costs at least 100 basis points more to insure Irish government debt against the risk of default than it costs to insure the bonds of that rock of financial stability and probity otherwise known as Argentina.

With the markets now having concluded that some sort of Irish debt restructuring is inevitable within the next few years, it should hardly have come as any surprise that the Irish banks remain under pressure, with the latest Central Bank figures showing that emergency lending to the Irish banks increased by more than €6bn to €51bn last month.

While this was partially offset by a €4bn reduction in lending from the ECB to the Irish banks, it is clear that the exodus of deposits shows no signs of easing.

Sunday Indo Business