Reform progress in the euro area periphery
International Trading
Fears Have Surfaced Again
The Irish Banking Sector
THE TECHNIQUE OF GIVING A GOOD MASSAGE
14 years ago
Monday, August 23, 2010
, Posted by Usman Ali Minhas at 3:14 AM
Sovereign spreads in the euro area periphery (Ireland, Greece, Spain and Portugal) have widened considerably during the past two weeks. The increase has been most pronounced for Ireland where two-year government bond spreads to Germany have jumped from 1.85% on 6 August to 3.06% on 19 August. The sharp increase can only to a lesser extent be explained by the general increase in risk aversion.
The primary cause appears to be renewed concern about the cost of saving the Irish banking sector and also about the periphery countries getting caught in a vicious circle of budget cuts and faltering growth. Spreads have widened notably for Portugal and Greece as well while the increase for Spain has been less pronounced.
First we will take a look at the cost of bailing out the Irish banking sector. Then we take stock of the progress with structural reforms, which can foster medium-term growth, and the attempt to bring public finances back on a sustainable path.
We conclude that the risk of default is small in all of the periphery countries. Our primary concern is that public support for necessary reforms may falter.
The main source of uncertainty regarding the Irish public finances is the end-cost of the bank bailout. The head of the Irish central bank, Patrick Honohan, estimates that the total cost of bailouts will be around 20 percent of GDP. However, the total cost will remain a „known-unknown‟ until the process of pricing and transferring loans to the National Asset Management Agency (NAMA) is complete and the future trajectory of the property market becomes clearer. House prices, which have fallen by 34% from the peak, haven‟t stabilised yet.
Recent market fears have been sparked by concerns that bailout costs will be even higher than what has been estimated so far. Last week it emerged that the government may need to pump more capital into nationalised Anglo Irish Bank than previously expected and Tuesday it was signalled that the cost of bailing out Irish Nationwide could rise from the EUR2.7bn already promised to the building society.
Another sign of problems brewing is that two (probably Irish) banks bid at the ECB‟s dollar liquidity providing auction last week. This is the first time there have been any bids since May, indicating that the banks could not raise dollars in the market though dollar liquidity should be plenty.
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