Wednesday 22 November 2017


What's going on, I thought the debt crisis was over?

Not by a long shot. Terrified bond investors have spent the week selling Italian and Spanish bonds in case those countries need to be bailed out in the coming months. Unfortunately the sell-off makes it more likely they'll need those bailouts because it makes it harder for them to borrow in the markets.

But Enda Kenny's deal two weeks ago was supposed to sort things out for once and for all, no?

The package agreed by euro area heads of government included some excellent measures to calm the markets -- including making the bailout funds bigger and more flexible when a crisis like this flares up. Unfortunately, no one got around to actually implementing the changes.

Are they mad?

Maybe, politicians in most euro-area countries are on holiday so the plan was to go away and sort out the details in September. There was a view the markets would take advantage of a lull in August, too.

So, in the meantime, it all kicked off again because of the US debt crisis?

Partly, but the July deal included a commitment from lenders to share the cost of the second Greek bailout.

Everyone knew that was coming eventually, but the news Greece will start inflicting loses on bondholders this month seems to have come as a shock.

The news from the US hasn't helped either. Growth figures there have been weak, casting doubt on America's ability to grow out of the debt crisis.

The row in the US over their "debt ceiling" has also hurt confidence.

Why should that affect Italy?

Everything is connected. The US didn't default this week but is in the line of sights for a ratings downgrade. If the US is cut it will be hard for the rating agencies to justify not cutting France by a notch as well.

Unfortunately for us, and everyone in Europe, France's AAA rating plays a crucial role supporting the European bailout funds.

The rescue funds rely on guarantees from the six euro countries with AAA ratings to borrow in the markets. One fewer AAA rating would drive up bailout costs and could hamper efforts to make the rescue package big enough to bailout Italy.

So we're doomed, Italy is too big to bail out and we're looking at mass defaults and the end of the euro?

Not necessarily. Europe has some trumps up its sleeve, if political leaders are prepared to use them.

The big one is some kind of fiscal union. The euro area could agree to borrow collectively in the markets. That would drive down borrowing costs for weaker countries because taken altogether the euro countries actually make up a very strong economy. If a single "euro" bond is too extreme for some countries, the group could agree to guarantee each other's bonds with much the same effect.

The rescue funds that were beefed up in July could also be increased from €440bn to say a trillion euro as a show of strength and a commitment to funding Spain and Italy.

That's all it will take?

That's a lot. Common bonds mean a loss of sovereignty for all countries, not just those in bailouts, and it would mean higher borrowing costs -- and therefore taxes for people in the stronger economies. Imagine the reaction here if the eurozone had asked us for that in 2006? It will also take time to organise.

Is there any point, the market is selling off and the market is always right?

Not always. Three years ago markets were convinced Iceland was going to default on its government bonds. Iceland did let its banks default but never reneged on its own 'sovereign', or government, debt. That's why the country was able to return to the markets this year. Also, going purely by last night's prices , Iraq looks like a better bet to avoid default than Italy. DONAL O'DONOVAN

Irish Independent

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