No Luck Be A Lady and The (Bad) Luck of the Irish

The Irish are caught in the middle of panicky capital flows and the loose rhetoric of European leaders.   PM Brian Cowen tried to calm markets after comments from German Chancellor Angela Merkel suggested that not all national debt should be covered under an EU bailout.  The panic increased after French Finance Minister Christine Lagarde seemed to back Merkel. The FT writes,

She acknowledged her stance had scared financial markets, which have punished Irish, Greek and Portuguese debt for two weeks. It was unfair for European taxpayers to finance rescues of debt-laden countries on their own, she said at the Group of 20 summit in Seoul,

“Let me put it quite simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Ms Merkel said. “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the ^Tof certain risks and not those people who have earned a lot of money from taking those risks.”

The Irish Prime Minister responded in Friday’s Irish Independent,

The Taoiseach believes that the German and French stance on the restructuring of debt caused unintended market reaction.

“It hasn’t been helpful,” he said, referring to Ms Merkel’s intervention.

“What has been said there has had, I think, an unforeseen consequence, perhaps.

“I’m not suggesting that anything was said for the purposes of causing further difficulty” he said.

However, “the consequence that the market has taken from it is to question the commitment to the repayment of debt.”

Mr Cowen said the bond markets were “behaving irrationally” and that Irish interest rates had jumped by 1pc on Wednesday for no reason.

Finance Minister Brian Lenihan also said that the bond spreads were influenced by recent “unintended” comments by “senior German figures”, which raised the possibility of sovereign defaults as part of future EU bailouts.

It’s amateur hour in Europe as Merkel & Co. don’t seem to understand the self fulfilling prophetic nature of markets.  Financial assets all about confidence in the future and the cost of restoring that confidence, as we learned in 2007-08 can be be quite expensive.  Merkel’s political concerns are understandable and we even share some of her views, but to express them in public in such a tone gives a blank check to speculators.   Maybe its personal as the Irish PM’s salary is a multiple of hers.  Nevertheless, we strongly urge that the EU consult with OECD Secretary-General, Angel Gurria, who is is the most knowledgeable person in the world on sovereign debt issues and has had years of hands on experience leading Mexico out of its debt crisis.  Buckle Up!

This entry was posted in Black Swan Watch, News, PIIGS, Sovereign Risk and tagged , , , . Bookmark the permalink.

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