Saturday 25 November 2017

The end may well be nigh but it is anything but clear

Q & A

Thomas Molloy

Thomas Molloy

Q: Well, what happened?

A: Germany tried to sell bonds worth €6bn but couldn't find buyers for 35pc of the bonds. People are pretty shocked.

Q: Mein Gott! That sounds like the fourth rider of the Apocalypse just rode into sight. Surely this will bring Frau Merkel to her senses?

A: You may be jumping the gun on both counts. Failed bond auctions are fairly common in Germany although this one is much bigger than normal. The question is why did it fail? There are a few scenarios.

Q: Well, give me an optimistic scenario.

A: The really optimistic one is that this is just a blip. People have been buying German bonds like mad lately and everybody now has enough.

Q: Sounds a bit flimsy to me. Any other suggestions?

A: The market may have concluded that some sort of debt-sharing mechanism, also known as euro bonds, is inevitable. This would be good for Ireland in the short term and bad for Germany. Nobody is likely to buy German bonds if they feel Berlin is about to take on the debt burden of countries like Greece and Ireland.

Q: But Frau Merkel says that this won't happen.

A: True, but just about everybody else, including the European Commission, wants it to happen. There is a real belief that we are now close to an end game which will see Germany agree to guarantee our debt in return for a new EU treaty that gives much greater powers to the commission to force countries to stick to their budgets.

Q: But Kenny and Noonan keep telling us there won't be another referendum.

A: Everybody is going to have break their word if we are to get a convincing solution. The eurozone crisis has been created by politicians painting themselves into corners. Everybody is going to have walk over the paint and get a little messy.

Q: And the pessimistic scenario?

A: That this is the beginning of the end for the euro and the eurozone.

Q: That sounds serious. Why now? What's different to last week or last month?

A: The very core of the eurozone has been under fire for a fortnight. France, Finland and Holland have also seen their bond yields rise in the last few weeks. It is becoming clearer by the day that Europe is slipping back into recession. There were new figures yesterday on the manufacturing sector in Europe which were frankly terrifying.

Q: All this talk of optimistic and pessimistic scenarios is just a way of hedging your bets. What do you really think will happen?

A: If I were a betting man, I'd bet that Germany will agree within weeks to some sort of mechanism that will allow the European Central Bank and Germany to guarantee other countries' debts in return for much stricter budget oversight My guess is that the Government will try to slip through the changes in the Dail. It may well be challenged in the courts but the Lisbon Treaty seems to allow the Government to make significant changes without consulting the people. Something tells me that they don't want to consult the people just now.

Irish Independent

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