Monday 20 November 2017

Q&A: What the worsening debt woes really mean for Ireland. . .

George Garvey

With Italy now in the firing line, the eurozone debt crisis just got even more serious. Will the latest escalation lead to a resolution of the crisis or will it tear single currency apart? George Garvey asks what the implications of the worsening eurozone crisis are for Ireland.

•Why is Italy now in the firing line?

With a national debt of €1.8 trillion, the equivalent of 120pc of GDP and proportionately the second highest in the eurozone after Greece, Italy was always vulnerable to market worries about its ability to service its massive debts. With Italian Prime Minister Silvio Berlusconi and his finance minister, Giulio Tremonti, at each other's throats over the latter's €40bn austerity programme, Italian 10-year bonds soared to a post-euro high of more than 6pc.

•Why does it matter if the crisis spreads to Italy?

Up to now, the biggest worry among investors had been that Spain would go belly-up and that the €750bn EU/IMF bailout fund cobbled together in May 2010 would be overwhelmed. The Italian economy is 50pc bigger than Spain's. Now the eurozone is facing the nightmare scenario of both Italy and Spain, its third and four largest economies respectively, requiring bailouts. Simultaneous Spanish and Italian debt crises could sink the single currency altogether.

•It's that serious?

Unfortunately it is. Investors are no longer buying the ad-hoc "solutions" which have been the EU and ECB's standard response ever since the crisis on the eurozone periphery first erupted in September 2008. Unless the eurozone core, basically Germany, steps up to the plate the markets are signalling that they will keep selling the bonds of the peripheral eurozone countries. This will make it impossible for Greece, Ireland and Portugal, already in bailout programmes, to return to the bond markets and will force Spain and Italy to seek bailouts.

•What steps did eurozone finance ministers take to deal with the situation at Monday's meeting?

They seem to have finally bowed to the inevitable and accepted that Greece will have to default. But with debts of "only" €340bn, less than a fifth of those of Italy, Greece is now no more than a sideshow. If Greece had been allowed to default a month ago it might have defused the crisis.

•Is there any good news for Ireland in all of this?

Actually there is. With the survival of the euro at stake, the ministers agreed there is a need for "flexibility" on the interest rates charged by the European Financial Stability Facility (EFSF), or bailout fund. This holds out the possibility that the penal 5.8pc interest rate we are paying the EFSF will be reduced. They also agreed the EFSF could buy back Ireland's bonds at a discount.

•Will Friday's meeting be sufficient to solve the crisis?

Almost certainly not. Yesterday the yields on the bonds of all the peripheral eurozone countries soared as investors dumped Italian, Spanish, Greek, Portuguese, Spanish and Irish government debt. There is now almost certain to be an emergency summit of EU heads of government this weekend. With Germany, adamant that private Greek creditors share some of the pain, it could be a very long weekend in Brussels.

Irish Independent

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Promoted Links

Also in Business